Competing In Turbulent Environments: Lessons from Formula One

Formula One has always been about more than just the racing. Its development from small, basic machines carting around tracks in the middle of nowhere, to the futuristic, hybrid powered turbo charged hyper-machines being steered around expansive circuits in the busiest and brightest of locations is abundantly clear. 

As an industry, its worth, over $4 billion, far surpasses that of any competitor (GP2 is worth the equivalent of $300 million). As the pinnacle of open-wheel racing, the phenomenon attracts investment from far and wide, but it’s not a given that Formula One is a successful business at it could be. Off the back of a global financial crisis, though, Formula One remarkably keeps turning a profit.

Christian Sylt, co-author of “Formula Money”, attributes these successes to the money generated by having races in emerging markets. “$500 million is generated from the circuits, with many contracts including clauses that increase the rates 10% annually,” Sylt says. 

With the teams not agreeing to race more than 20 times a season, there is pressure to suck as much money out of every even as possible. This is why, Sylt states, that more and more races were taken: “Into emerging markets, as it provides a good way to drive tourism for that country, and make you look credible as a sporting nation.”

However, Joe Saward, F1 blogger, described Formula One, as a business, “dysfunctional”. The business model is “not diverse enough,” he says, “Technology should be used to explore other sectors; many of the costs of Formula One don’t produce value for the fans that pay to watch the spectacle.” 

The clear objective of Formula One is to win. To do that, the teams need to have the fastest car, it is that simple. Saward says that “it is about knowing that every penny spent” achieves that objective.

Despite Saward’s criticisms, there is some evidence that the vast amount of money pumped into developing technology within Formula One does reach into everyday life, varying the business model. Paolo Aversa, Cass Business School’s Marie Curie Research Fellow at the faculty of management, points to the fact that in healthcare, Formula One’s contribution is striking.

“ECU’s developed from Formula One cars are used to monitor heart patients at Birmingham children’s hospital,” Aversa states. “Also, Formula One technology has been adapted to stream data from ambulances to hospitals so doctors can begin the diagnosis procedure en route to hospital.”

According to Nick Fry, former CEO of Mercedes Grand Prix, the Formula One business isn’t just about having more money either. “You have to have the right people, the best people. Never stand in the way of them,” he said. From any business, it is clear that the most successful have strong leadership and the correct people in the highest placed jobs, in order to maximise potential and growth.

 This parallel is displayed vividly in Formula One, with Dr Amanda Goodall, senior lecturer in management at Cass business school, saying “Formula One teams managed by former drivers or mechanics had a 16% higher chance of wins and podiums than those without.” Despite this making sense on paper, the reality sometimes does not fit the mould. Jackie Stewart and Alain Prost were fantastic racers, but their respective teams (named after their surnames) did not fare well at all, with Stewart Grand Prix being sold to Ford after amassing only one win in three seasons, and Prost Grand Prix going bankrupt after five seasons and no wins.

Money still plays a role in the growth of Formula One as a business, however. It can be a mixed bag though. Teams need sponsorship to help increase revenue and develop the cars more ably, whereas sponsoring Formula One as a business is far-more risk free. Therefore, it leaves teams that don’t compete at the sharp end of the constructer’s championship at risk of having a lack of funding. 

This is most recently evidenced by the increase in drivers being hired by teams due to the money they can bring in via sponsors, rather than their ability to win races. Pastor Maldonado, for example, left Williams (where he was generally regarded as a liability) to move to Lotus, who were in desperate need of funding for the 2014 season. Despite there being more “qualified” drivers available; Lotus took the driver that could bring in the most revenue. Needless to say, Maldonado, to date, still has not scored a single point in the 2014 season. 

This need for funding puts teams in direct conflict with their primary objective, says Sylt: “To try and win races.” Saward agrees with Sylt’s point, stating that due to the financial restrictions of the teams competing; only “two teams on the grid exist purely to go racing.”

As for the future, Formula One still wants to carry on expanding and increasing its exposure. 2014 sees Russia hosting a race for the first time in Sochi, the same venue as the Winter Olympics, and South Africa might return to the calendar for the first time since 1993. The increased focus on the spectacle outside the car does run the risk of alienating those who prefer the “classic” races of Monza and Monaco, but Formula One has long taken the view that expansion must come first if, as a business, it is to thrive.