Rolls Royce: SWOT Analysis, Industry Analysis, and Financial Performance

This report provides a SWOT analysis, industry analysis, and financial performance of Rolls Royce. It discusses the strengths, weaknesses, opportunities, and threats of the company, along with the strategic environmental analysis. It also analyzes the financial performance of the company and provides pricing strategies recommendations.

Running head: ROLLS ROYCE
ROLLS ROYCE
Name of the Student
Name of the University
Author Note

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Executive Summary
The given report discusses the performance of the company Rolls Royce. The report is in a
structured format whereby the introduction of the report has discussed the different strengths and
weaknesses of the company followed by the strategic environmental analysis. The later half of
the report discusses the financial performance of the company followed by pricing strategies
recommendations.

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Table of Contents
No table of contents entries found.

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Introduction
Rolls Royce Holdings plc is a leading automobile company from Britain formed back in
1904. The company designs, manufactures and distributes different systems for international
companies and aviation industries. The Rolls Royce is the second largest maker of air craft
engines in the glove (Williams 2014). The company is listen in the London Stock Exchange and
is a constituent of the FTSE 100 Index. The market capitalization of $30 billion roughly and is
headquartered in London.
SWOT Analysis of the company
Strengths
The strengths of the company have been given as follows:
 Brand Image- As the company has been in business since a long period of time, the brand
image of Rolls Royce is very strong and comparatively very re- owned as and when
compared to the other companies in the similar industry.
 Quality- Rolls Royce is famous for proving quality products. Whether in the domain of
energy or in the domain of automobiles, Rolls Royce is quite famous for its quality
offerings.
 Suspension System- The suspension system used in various products of Rolls Royce is
very strong.
 Heritage- Rolls Royce has a rich cultural and a noteworthy heritage.
Weakness

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 Not a high turnover- The primary weakness of the company is that it has not been able to
engage in high turnovers. This is specially related to the automobile sector where the
income has been restricted since the last few years.
Opportunities
The opportunities available to the company are as follows:
 Aircraft engines- The Company can expand more into the aviation industry and start a
full time operations and productions of the aircraft engines (Harrison and John 2013).
 Limited editions- It can start exploring more into the limited edition products as they
assist in creating sustained demand in the country.
 China as a country- The Company can look out for ample opportunities in the country of
China. The economy is a developing one.
Threats
 Economic crisis- The global economy has not been doing that well and due to this reason,
the comp any might face problems during its growth phase (Weil, Schipper and Francis
2013).
 Emissions- The emission reduction and other policies act as a barrier.
The given report will be discussing the strategic positioning of the company using
various industry analysis tolls like Pestle analysis and Five Forces analysis. The financial
statements of the company will also be reviewed and the certain pricing strategies shall be
provided.

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Industry Analysis
In order to analyze the industrial environment of Rolls Royce, the first tool to be used is
the Michael Porters five forces. The given tool assist in the understanding of the extent of
competition present in the industry and assist the company from making long term plans. The
different components in this tool are as follows:
 potential entrants and the threat of entrants
 power of buyers
 power of suppliers
 threat of substitutes
 Competitive Rivalry
Competitive rivalry
The industry to which Rolls Royce belongs to is highly capital incentive and there exists
constant investment in advanced technology along with research and development in the given
industry. Hence, there does not exists a single manufacturer and the rivalry is thus moderate. The
competition which exists in the primary market in relation to aero engines increases considerably
as it is linked to the secondary market for the sales and services. As each company has been
trying to improve their market share, the competition is intensified in that segment. Furthermore,
the competition in the turbine engine gives rise to rivalry. The main competitors of the company
are
Power of Buyers

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The buyers of the aircrafts provided by the company are comparatively quite low and
thus act as he price makers whereby they set the engine price. As certain carriers have become
global carriers thus has considerably changed. Furthermore, in the car sector, as the company
concentrates on producing limited editions, the bargaining power of the buyers is high.
Power of suppliers
The suppliers belonging to the aero engine manufacturer have a limited power. This is
because of the number of suppliers being unlimited in number and they tend to supply all
varieties of products leading to which all suppliers are in authority. It can be observed that the
power of the smaller companies have reduced and these suppliers who are powerful in nature
belong to the electronic equipment industry (Wheelen et al. 2017).
Threat of entry
The entrance into the customized and limited edition car industry along with the aero
engine industry is very difficult. The companies generally require advanced design components
and the costs of research and developments are also comparatively very high. Furthermore, the
customers have already placed their trust on the old companies and for this reason the new
companies might find it difficult to adjust.
Threat of substitutes
There does not exist any substitute for the aero engine provided by Rolls Royce and even
the substitutes for other air transport products are minor in nature (Pervan and Kuvek 2013).
Although factors like video conferencing might reduce airline sales, however despite this air
travel is on a rise.

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Hence, from the analysis it could be stated that the given industry is highly competitive
where the buyers exert great power (Vogel and Güttel 2013). However, there are particularly
high barriers to entry and the threat of substitutes is low and this reflects that the competitors do
not share their business.
Pestle Analysis
The PESTLE analysis is a strategic management tool examining the external environment
of a business from various perspectives like Political, economic, socio cultural, technological,
legal and environmental. The PESTLE Analysis for the Rolls Royce Company has been done as
follows:
Political
The political factors can be defined as those factors which tend to function the normal
course of a business enterprise through government intervention. The government has a major
role to play in the functioning of a business and hence, these factors need to be considered
wisely. The major political factors as faced by the company are the factors like the uncertainty
caused by Brexit (Rolls-royce.com. 2018). The uncertainty caused by work place incidents and
their impact on the safety aspects of an organization also tend to have an impact on the long term
success of the organization.
Economical

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The economic factors impacting the success of the Rolls Royce largely depends on the
foreign exchange rates fluctuation which takes place in the international business market. It also
comprises of the increase in the air travel which positively affects the firm.
Socio cultural
The socio cultural actors can be defined as factors which tend to have an impact on the
buying behavior of the consumers which directly impacts the firm. Hence, the socio-cultural
factors affecting the business of Rolls Royce are the globalization and emerging economies.
Secondly, the seasonal based business operations also have an impact on the company.
Technological
It is important for an organization to understand the technological factors impacting a
business and keep up with the rate of change of the technology. The primary technological
factors affecting the business of Rolls Royce are the adaptation of ecofriendly technology and the
advancement in nuclear, energy and manufacturing technology.
Legal
The legal factors relate to the legislations being imposed by the government on the
different companies. In order to be successful a company needs to consider its legal environment
as well. The legal environment which Rolls Royce has to abide by is the Registration,
Authorization, Evaluation and restriction of Chemical (Reach) norms, bribery allegations and the
safety rules.
Environmental factors

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The environmental factors having an impact on the business of Rolls Royce comprise of
factors like the zero waste target set, minimum emissions and adoption of renewable energy like
sunshine (Hill, Jones and Schilling 2014).
Hence, if the business wants to be successful in the long run, it would be required to abide by the
factors as this will ensure, considerable success for the firm.
Market specifications
The industry in which Rolls Royce operates in is a very crucial industry and Rolls Royce
has a considerable upper hand in the European domain. The sector in which it operates which is
the auto mobile, aero engine and the energy industry provides jobs to 15 million people. The
Unites States is the highest producer of vehicles and energy products and invests largely into the
research and development sector. The European government understands that in order to remain
successful it needs to strengthen its competitiveness and invest largely into the research and
development sector thereby improving its global leadership.
Industry forecast
The market outlook of Rolls Royce for the next coming years has stated that there will be
a demand of 43500 engines being installed which is worth a whooping amount of $280 billion.
The company estimates to have 56% of the engine deliveries and is clearly a leader. The industry
and performance forecast has been based on the growth rate of the industry which is 5.1% in the
passenger domain and 6.5% in the cargo domain.

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Analysis of the Financial Statements
Analysis of the Balance Sheet
The given section will be discussing the relevant changes that were incorporated in the
Balance Sheet. The section will be discussing various items in the balance sheet and how they
have improved or suffered will be analyzed.
Cash and cash equivalents
2013-12 2014-12 2015-12 2016-12 2017-12
3990 2862 3176 2185 1404
As it can be observed from the given statements, the cash and cash equivalents have been
changing over the past few years. If the data of the year is observed the cash and cash equivalent
was 3990 GBP millions. However, over the years, there were drastic changes in the given years
and the figure ultimately came down to 1404 million GBP. It can be stated that, the company
needs to take care of its finances and it has been losing out on the cash and cash equivalents.
Current assets
2013-12 2014-12 2015-12 2016-12 2017-12
3278
3798 4494 5442 5319
As observed, the current assets which the organization has purchased has also increased
considerably. Back in the year 2013, the amount was 3278 GBP Million, and over the years it
has increased to 5319 GBP Million. Hence, the assets of the organization have increased

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considerably. This could be explained by the fact why the cash and cash equivalents have
decreased in order to purchase the assets (Zott and Amit 2013).
Non-current assets
2013-12 2014-12 2015-12 2016-12 2017-12
5811 6050 6316 7522 8337
The non-current assets of the organization have been going through an increase. This can
be said to be considerably well for the organization. In the year 2013, the amount was 5811GBP
Million but over the years, this figure improved considerably (Hahn 2013). The amount
increased and turned to 8337 GBP Million during the last year. Hence, the firm is looking out
for expansion and has been increasing its basic operations and this might be the reason why the
amount has been increasing.
Accounts payable
2013-12 2014-12 2015-12 2016-12 2017-12
182
0 1348 1397
1981
2458
The accounts payable account of the firm is a huge determinant of the financial position
of the organization (Moutinho and Vargas-Sanchez 2018). The accounts payable of the firm
should always be at the minimum level. This is because it reflects the amount the company owns
to the other parties. From a mere figure 1348 GPB Million the amount has increased to 2458
GPB million. This is not a good indication on the firm`s side.
Other current liabilities

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2013-12 2014-12 2015-12 2016-12 2017-12
6078 5976 6103 7077 8051
The non-current liabilities of the organization are an indication of what the business owes
to other suppliers and parties in a firm apart from the accounts payable. As observed from the
financial statements of the organization, if this amount has increased considerably. The figure in
2017 stands at 8051 GBP millions.
Total liabilities
2013-12 2014-12 2015-12 2016-12 2017-12
1745
8 15842 17310 23676 23835
As these figures have increased considerably, the total liabilities of the firm has increased
as well. In the year 2013, the figure was 17458 GPB millions but at the end of the five years back
in 2017, the amount was a considerable high of 23835 GPB millions.
Analysis of Income Statement
Revenue
2013-12 2014-12 2015-12 2016-12 2017-12
1219
7 10533 10459 11907
13134
As observed from the analysis of the components in the Revenue from the Income
statements, it could be observed, that although the other firms have not been on the company`s
favor, the revenue of the firm has been increasing considerably. The amount has increased from

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12197 GPB million and took a toll in 2014, 2015 and 2016 but increased again in the last
financial year.
Gross Profit
2013-12 2014-12 2015-12 2016-12 2017-12
3316 3203 3266 3048 3173
The Gross profit of the organization has been stable throughout the last five years. In
2013, the amount was 3316 GPB million and the amount has remain stable over the years and in
the last year it has been 3173 GPB million which can be labelled as quite a fair amount (Grant
2016).
Operating income
2013-12 2014-12 2015-12 2016-12 2017-12
137
5 1296 1399 -71
1156
The operating income of the organization has also been stable and remained the same
figure as it was five years back. In the year 2013, the amount was 1375 GPB million but the
amount suffered a troll in the year 2016 where the figure was negative. Lastly, in the year 2017
the amount is 1156 Gpb million.
Interest Expenses
2013-12 2014-12 2015-12 2016-12 2017-12
58 92 71 77 67

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The interest expenses of the organization have increased considerably. The amount was
58 GBP back in the year 2013 but now the amount has turned out to be to be 67 GPB in the
present year of 2017.
Net income
2013-12 2014-12 2015-12 2016-12 2017-12
1367 69 83 -4032 4207
The net income of the organization has increased considerably. In the year 2013, the
amount was 1367 GBP in the year 2013 but the amount increased to 2017 in 4207 GPB in 2017,
after going through a toll in the years in between. The company needs to ensure that the figures
are stable throughout.
Analysis of the Cash Flow Statement
Cash flow from operating activities
2013-12 2014-12 2015-12 2016-12 2017-12
2040 1301 1094 1411 1810
The cash flow from operating activities have been varying since the last few years. The
given figure was last observed to be 1810 GPB million (Frynas and Mellahi 2015). Although the
company has done considerably well since the last few years, it does possess scope for
considerable improvement (Morschett, Schramm-Klein and Zentes 2015).
Cash flow from financing activities

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2013-12 2014-12 2015-12 2016-12 2017-12
136 -468 221 -739 -70
The cash used for financial activities has not been doing comparatively well and the
figures have gone through a toll/ The Company needs to ensure that it undertakes sound
investments in order to ensure that it does well in the long run.
Cash outflow from Interest Activities
2013-12 2014-12 2015-12 2016-12 2017-12
-740 -1966 -995 -1363 -1509
The amount has been in negative and show the disoperations of the enterprise.
Ratio Analysis
Gross margin
2013-12 2014-12 2015-12 2016-12 2017-12
21.38 23.32 23.80 20.38 19.46
It can be observed that the Gross margin of the company has been decreasing since the
last five years. The ratio was 21.38 in year 2013-12 but in the year 2017, the figure turned out to
be 19.5 which is comparatively quite low (Financials.morningstar.com. 2018).
Return on equity
2013-12 2014-12 2015-12 2016-12 2017-12

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8.81 0.5 0.6 -26.96 15.15
The return on equity has been varying in the different years. It as a negative figure in
2016 but increased quite well in the year 2017.
Interest Coverage
2013-12 2014-12 2015-12 2016-12 2017-12
45.12 9.79 14.66 -45.52 87.22
The interest coverage ratio has again increased considerably in the past few years. It was
negative back in 2016, but now in the year 2017, it was 87.22
Net Margin
2013-12 2014-12 2015-12 2016-12 2017-12
8.81 0.5 0.6 -26.96 25.8
The net margin of the company has been doing well in 2017 and it is whooping figure of
25.8. This has considerably increased in the past few years.
Asset turnover
2013-12 2014-12 2015-12 2016-12 2017-12
0.67 0.62 0.61 0.59 0.54
The asset turnover rate has decreased and the company needs to improve in this aspect.

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Pricing Recommendations
The Rolls Royce is involved in two different types of businesses. The first is the energy
and aerospace engine and second is the automobile industry. Hence the pricing strategy which
has been suggested for them has been given as follows:
Premium Pricing
For the engines and other goods it offers for the airline, Rolls Royce can look out for
adopting the premium pricing strategy (Eden and Ackermann 2013). In the premium pricing
strategy, the company prices its products quite high and offers goods more expensive than its
competitors. This leads to a sustained demand on the side of the different customers and they are
already lured by the premium quality goods being provided by the company. Hence, they agree
to pay a high amount for the goods and services.
Competitive Pricing strategy
For the motor segment, the company can offer a Competitive Pricing Strategy. The
competitive pricing strategy aims to secure the market by offering goods at a lower price than
that of its competitors. For such a reason the company looks out for opportunities where they can
attract a large market share.
Conclusion
Therefore, from the given analysis it can be stated that the company has a long way to go
and improve its operations considerably. The given company has been in business for over a
decade and for this reason it has a competitive advantage in the various domains.

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However, it can be stated that the accounting and financial information about a business
is not always a correct approach to a business enterprise and the business functions on various
underlying factors other than the financial information. The accounting policies and frameworks
of different countries are different which makes it difficult for the business in order to make
comparison. Furthermore, the accounting estimates are often based on the ad hoc basis which
makes analysis and decision making very difficult. The information and analysis is made on a
personal judgement which can be biased and lastly, they can be subject to faulty information
which makes calculation wrong.
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