Russell Hotten, in his book titled 'Formula One'[1], quite aptly starts with the following line, 'Formula One is where sport meets technology for the business of entertainment'.

• MEDIA & CUSTOMERS

Now that we have understood who the key players in the industry are and what their likely influence on the industry is, we can go about analysing what the key forces are that act on this operating environment.

Operating Environment Analysis

Political/ Legal

• Ban on tobacco advertising by constant pressure from pressure groups implies that constructors have to look for alternative sponsors. F1 and cigarette manufacturers have had a special relationship of nearly 30 years now that began with the landmark deal between Lotus and John Player cigarettes in 1968. Their synergy is quite understandable. On one side is a sport that requires vast amounts of money for research & development. On the other is a cash-rich industry facing tighter restrictions on how it can advertise itself. In many countries F1 is the tobacco industry’s last link with television, and the sport is certainly its last global market platform. Losing this could hurt both the industries drastically.

Economic

• Income levels of consumers – higher income level implies greater disposable income to be spent on leisure or recreational activities
• Investment – The £25-30 million required for investment in research, development and testing of cars generally comes from sponsors who are willing to invest such vast sums of their capital for marketing purposes
• Alliances & partnerships – This has been the general economic and business trend of merging, partnerships and joint ventures. The F1 industry sees a lot of this with their alliances and partnerships with their various sponsors. The Williams F1 team itself has partnerships with BMW, hp, Castrol, Allianz, FedEx, Accenture, Michelin, Petrobras, Reuters and 7Up to either supply the team with the engine, lubricants, IT technology or even as equity holders in the firm.

Social/Cultural

• Consumer values & attitudes – underlying consumer beliefs and attitude towards high-powered sport and entertainment is quite an important factor when assessing the influences on this market. After all, the industry revolves around the audience because that is whom the sponsors are hoping to reach.  
• High disposable income, increased leisure time, increased health consciousness – cause individuals to move towards recreational activities that allow greater physical involvement, e.g. golf, tennis, jogging, spas, travel, etc. Thus, in the future, it may imply a general move away from watching sports at home to customers actually physically involving themselves sin some sort of sporting activity, if not as technical
• Aging population of developed countries – rising proportion of individuals above the age of 45 in the European Union may imply a shift from such fast action sporting entertainment to other forms of sports and entertainment that are more mild and appropriate for the mature segment.

Technological

• Computer and software aided design – increased development of technologies related to the same will help improve the development & testing of components and racing cars, thus speeding up the innovations in motorsport.
• Internet as a marketing tool  – F1 is a international industry and the internet is an international medium for marketing; creating awareness regarding the sports, it history and the latest happenings; developing and enhancing company image; and building customer loyalty by building online relationships Although this tool is currently being used to market teams and the actual races, there is vast opportunity here to exploit its potential to feature online racing meets and so forth.

All these mentioned environmental influences affect all firms operating within this & other related industries. We can use the Porter’s Five Forces model to further analyse the competitive forces that influence the industry.

Industry Analysis (Porter’s Five Forces)

Threat of new entrants

The capital investment required for equipment, facilities, qualified engineers, drivers and the constant research and development is massive. An estimated capital investment of £25-30 million is required to set up a competitive research facility equipped for the development and testing of racecars.

This should generally imply high barriers to entry but this is not always the case. For companies that have the required finances can easily enter the industry by using their financial resources to built state of the art facilities, attract the best engineers/ technicians to design and develop a fast and reliable car, talented drivers and hire a competent management team.

Most commonly other automotive companies such as Toyota, Honda, Fiat and Ford, have the resources to easily enter the industry and intensify the competition level within the industry. For example, the Stewart grand prix team was formed in 1996 with the financial backing of Ford motors in order to compete in F1 racing. Threat of new entrants is therefore relatively high and so is the level of competition within the industry.

Bargaining power of suppliers

Majority of the constructors buy in their central components such as engines, brakes, gears, etc from suppliers like Ford and Honda. Bargaining power of these suppliers is high as switching costs for them are low. They move on from one buyer to another depending on the performance of the constructor, company goals and objectives, and in many cases they may supply to more than once buyer. Component manufacturers always want to be linked with the winning teams because this boosts their own image and reliability and efficiency of their parts. For example,

• In 1987 Honda withdrew from its contract with Williams due to concerns over the team’s future after the accident of Frank Williams and started supplying to Lotus,
• Honda withdrew from its exclusive engine supply contract with McLaren once its organizational objectives were fulfilled,
• And Renault, in their objective to dominate the industry, started supplying to Benetton whilst already supplying to the Williams team

In case of F1, racing drivers and engineering technicians may also be considered as suppliers as they provide the constructor with their talent and expertise. They too, like the suppliers of components, have considerable power as they can easily switch from one team to another as competitors are always working towards attracting the best engineers and drivers in the circuit.

Therefore the bargaining power of the suppliers is relatively higher, once again implying a high competitive force rising from there.  

Bargaining power of buyers

Buyers, or as mentioned earlier, the customers in this industry are the spectators or the TV audience that watch and enjoy the sport. The bargaining power of buyers can be considered relatively high as they can easily move from one form of motor racing to another or from one sort of entertainment, sports or recreational activity to another without the involvement of a great deal of switching costs. In today’s age of satellite TV, the mass market has a wide variety of choice in not just the type of channels but even in those dedicated solely to sport. For example, sport channels range from BBC Sport, Fox Sports, Dubai Sports Channel, AD Sports, Orbit ESPN Sports, DD Sport and so on.

This lack of consumer loyalty implies that the rivals within the industry have to be highly competitive in order to create, maintain and enhance their buyer’s interest within the sport in order for them to thrive. Therefore making it essential for them to follow closely consumer demographics, culture, lifestyle, values, and so on. F1 constructors have understood this and have tried to build loyal customers by offering them a chance to be a part of their F1 team by selling them F1 memorabilia such as T-shirts, mgs, sunglasses and even lighters.

Threat of substitutes

As mentioned above the consumer’s switching costs are low and there is lack of customer loyalty, hence implying that the threat of substitutes is relatively high. Direct competition would result from other high-powered sporting entertainment whether it be cross-country racing, motorbike racing or even high adventure sports such as white water rafting, dirt bikes and so forth. Indirect competition, on the other hand, is probably most difficult to categorise as it could rise for any other form of entertainment whether it be going to the movies, shopping, travelling and so on.

Industry rivalry

The industry mainly consists of ten to twelve firms at any one time. The competitors offer similar products, i.e. fast action entertainment to consumers. They are often of equal size working towards a similar strategic objective of seeking dominance in the industry by winning the constructor’s cup. The pace of change and the basis of competition are constantly changing within the industry with a new and improved racing car being introduced every year by each competitor (i.e. shorter product life cycle). This implies that the intensity of rivalry is high within the industry, making it extremely competitive.

The above analysis paints quite a grim picture for any firm that may consider entering the industry. However unattractive the industry may seem, the profits and lucrative amounts of money involved are reason enough for firms like Honda, Toyota and Ford entering in spite of intense competitive position held by the industry leaders such as Ferrari, McLaren and Williams.

                                           

Key Industry Resources & Competencies Required

As evident from the above analysis, F1 is an extremely competitive industry with a new car being introduced every year in order to win the constructor’s championship cup. There is a lot to be learnt about making it ‘big’ in this industry by observing strategies used by the big players in the industry. By analysing their cases, we can quite competently categorise the main competencies and resources required in order to be successful as a F1 team, as being,

• The ability to either manufacture or source the best in design, development and testing equipment & facilities
• Highly skilled, creative and innovative technical engineering staff
• Talented drivers who are capable of liasing with the design team to come up with the best car
• Technical staff working together with each other, without the existence of any form of internal rivalry or politics, to form the best car and racing strategy
• Sophisticated marketing department to secure and maintain relationships with sponsors, components and systems support with various related & non related organizations
• Effective leadership, negotiation and relationship management skills of company or team head

The pace of change and the basis of competition within this industry are constantly changing and no team has been able to dominate the industry for more than four consecutive years.  Each of the above components are essential in order to form a winning combination and the reason why players have been unable to sustain their dominance is primarily due to the imbalance between the above.

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Recommendations & Conclusions

From our understanding of the F1 industry and its operations, we can conclude our discussion by highlighting certain aspects related to improvement ideas, opportunities, threats and uncertainties that exist within the industry.

Improvement Ideas

• Inconsistency in teams with members switching frequently from one constructor to another taking with them corporate secrets, in terms of company mission, objectives, technological data, etc needs to be improved by probably pressurising the FIA to issue a regulatory warning that drivers and technicians must not work for a competitor firm for at least one year after leaving one firm.
• Dependence on single suppliers of integral components such as engines, leads to increased supplier power as the supplier may switch to other constructors at its will. This too can be improved by using backward integration to ensure self-sufficiency in components such as what Ferrari did by making its own engines.
• Takeover and alliances may cause restructuring of existing organization, leading to a change in mission, goals and objectives and a greater pressure to provide results. Hence, although an attractive way to merge resources and profits, mergers and takeovers should not be seen as a strategic option to grow.

Opportunities

• Technological advancements in the design, development and testing of cars and components with the use of computer aided & digital technology is a field that still has opportunity to be further exploited. New technology is being introduced every day and any company firm that invests heavily in R&D is sure to be rewarded amply for its innovations.
• Internet technology to be exploited as a marketing tool for advertising to a greater audience, building relationships and improving customer loyalty.
• Online newsletters and websites can be maintained in order to educate and inform the audience regarding the sport and the ensure that their interest is maintained and enhanced and thus also increasing penetration into the untapped customer segments who are currently unaware of this sport.

Threats

• Legal constraints – government and FIA standards, rules and regulations regarding testing and safety of cars
• Ban on tobacco advertising leading to search of other sponsors
• Social / cultural shift towards less dangerous sports – due to the tragic accidents and deaths of drivers during test drives and races, audience interest may shift to other sports or other forms of entertainment

Uncertainties

• Accidents, such as the untimely death of racing superstars such as Lauda and Senna, are probably one of the most uncertain aspects of this sport which is sure to cause dampening of spirits within the industry
• Other uncertainties exist due to the constant dynamic environment that regulates this industry such as the switching of loyalties of sponsors, technicians, designers and even drivers.                                                                                            

Future Scenarios

Optimistic Scenarios

• Technological advancements may aid in the development of faster more reliable cars
• FIA set higher standards of entry into the industry, leading to increased barriers to entry. Therefore limiting the competition within the industry, which may be positive for the existing players within the industry as the threat of new entrants is reduced.
• Internet Technology – used for enhancing image, creating and maintaining relationships and building brand loyalty
• Internet Technology – used for the purchase of component parts, helping reduce dependence on single supplier as it may prove to be a quick source of supplies from across the globe
• Diversification in to other less sophisticated Formula racing, i.e. Formula 3, Formula 3000

 

Pessimistic Scenarios

• Social/Cultural shift towards less dangerous sporting and recreational activities
• Continued inconsistency in team members due to inability to maintain long term relationships with suppliers, technicians and drivers, resulting in continued inconsistency in performance and lack of industry domination

 

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