MEMO DATE: November 11, 2012 TO: Dr. Cheryl Powers, Instructor Business Communications, Minnesota School of Business FROM: Rhonda DeRosa Melissa Gelder Sherry Stevens Kayla Huberty Scott Miller Virtual Team, Business….
Formula 1 Constructors
Introduction The Formula One World Championship was started in 1951 by private sportspersons. Today, Formula One is the world’s biggest motor sports event and is arguably the second most popular sport in the world. It consists of ten teams, with two cars each, contesting a 17-race series. It involves two titles, the Driver’s Championship and the Constructors Championship. Formula One today is a highly dependent on technology (Denison and Henderson, 2004). This article will discuss the resources, capabilities and attributes required by Formula One constructors.
This article will also analyse the reasons for the dominance of different constructors during different periods, by using one of the methods of identifying competitive advantage. It will analyse the reasons behind their inability to sustain their dominance and also suggest ways by which these constructors could have sustained their competitive advantage. “A firm is said to have competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors. (Barney, 1991:99) Resources, capabilities and attributes required by Formula One Resources can be classified as financial, physical, human, technological and organisational (Grant, 1991). The financial resources required by Formula One constructors are vast (close to $1 bn), the human resources required are a staff of around 450-800. They need highly qualified staff like race engineers, designers, aerodynamicists, composite experts and system specialists. They require physical resources including their own testing and development equipment like wind tunnels, test tracks and other equipment.
They also need to constantly change their strategies to counter strategies of the other teams. All the teams and members need to work as a cohesive unit. Based on Porter (2004) we can identify factors important for competitive advantage in the Formula One industry. Technology development is crucial to competitive advantage in the racing industry. Technology development involves steps to improve the racing car in aspects like power, stability and drag. It involves steps like research, product design and servicing procedures.
Human resource management is also key to competitive advantage in the racing industry. Human resource management involves activities like recruitment, training, and development of employees. In Formula One human resource management involves choosing the right drivers, engineers and designers who are expertds in their fields and also good team players. It also involves training new drivers, engineers and designers and keeping them satisfied and motivated so that they don’t leave and join other competitors. Firm infrastructure involves activities like general management, planning, finance and accounting.
This can also be an important source of competitive advantage as management and planning are crucial to success in the racing industry. Value linkages are also an important source of competitive advantage in the racing industry. Linkages can be both internal and external. Internal linkages include co-ordination between various departments within the firm like the design team, racing team and the technical team. External linkages include co-operation and co-ordination with component suppliers and sponsors(Porter, 2004). Attributes are qualities or skills possessed by constructors.
Attributes include trust, relationships, history and management structure within a firm (Barney, 1995). These skills relate to ways in which they do things. These skills and qualities are not easily transferable, as they cannot be easily copied. These skills and qualities are generally developed over a long period of time. Formula one constructors require attributes like knowledge, experience and flair for innovation. A firm’s capabilities are based on the resources it has. Capability means the ability of a firm to perform certain tasks based on the resources it has.
Capability is created by the integration of many key resources and attributes. Resources and attributes alone do not lead to competitive advantage, but capabilities are a source of competitive advantage. The key resources of an organisation need to be identified, and capabilities, due to a combination of particular resources that need to be identified. Capabilities involve efficient interaction between people and other resources. Formula One Constructors require engine manufacturing, car design and technological capabilities. Key capabilities are those that are not shared by the firm’s competitors.
Strategy of an organisation has to be based on its resources and key capabilities to gain a competitive advantage (Grant, 1991). For example, Ferrari had the unique capability of manufacturing engines, which its other competitors did not have. Hamel and Prahalad, (1990) describe key capabilities, which lead to competitive advantage as ‘core competencies’. Ferrari’s success in the mid 1970s Ferrari was the dominant Formula One Constructor’s Championship in the mid 1970’s. Using one of the many approaches to determine competitive advantage, the reasons for Ferrari’s dominance can be identified.
Some approaches to determine competitive advantage are explained below: Porter’s (1980) five forces model helps to position a firm in the best way to tackle competitors. This model helps in understanding the competition and formulating strategy accordingly. Carl Shapiro’s (1989) approach is based on making competitive firms act in unproductive ways. This theory can only be used where competitors are closely placed. Barney’s (1995) resource based approach believes that competitive advantage is due to unique resources. The capability of the firm is based on its unique resources.
He suggests that it is important to understand the firm’s internal strengths and weaknesses to understand how exactly competitive advantage can be gained. Barney’s (1995) approach is based on SWOT (Strengths, weaknesses, Opportunities and Threats) analysis. Barney’s (1995) approach implies that only those firms that use their internal strengths to make use of the available opportunities gain competitive advantage. Strengths and weaknesses can be understood by 1. Continuously checking whether resources and capabilities of a firm help it in the changing environment. 2.
Checking whether these capabilities and resources are unique to the firm. 3. Understanding if the resources and capabilities of the firm are difficult to imitate. 4. Checking if the firm’s processes make use of the resources and capabilities effectively. Teece (1997) suggests that dynamic capabilities are a source of competitive advantage. “Dynamic refers to capacity to renew resources so as to achieve congruence with the changing business environment. ” (Teece et. al, 1997:515). According to Teece (1997) dynamic capabilities of a firm depend on its processes, position and path.
Processes mean the way things are done in the firm, position means the technology, assets and customer base the firm has, path means the ways available to the firm to do things. These dynamic capabilities of the firm lead to competitive advantage. Porter (2004) introduced the concept of value chain to determine competitive advantage. It was based on identifying the primary and secondary activities of the firm. Primary activities include activities like inbound logistics, operations, outbound logistics, marketing and sales and service.
Secondary activities include firm infrastructure, human resource management, technology development and procurement. It then identifies and separates activities that are unique strengths of the firm in relation to the competition. Spanos and Lioukas (2001) argue that Porter’s value chain is based on external factors of competition and ignores the crucial internal resources and capabilities of the firm. Rumelt (1984) also argues that strategy of a firm should be based on its unique resources and capabilities.
McWilliams and Smart (1993) argue that Porter’s value chain theory lead managers the wrong way by suggesting to develop unique activities based on the resources, even though the activities may not be beneficial to the firm. From the various views it can be seen that Barney’s (1995) approach, based on identifying and focusing on unique resources and capabilities, based on SWOT analysis, is more relevant in analysing competitive advantage in Formula One. Using SWOT analysis we can identify that one of the strengths of Ferrari was the use of component knowledge as a source of competitive advantage.
Component knowledge means skills, resources and knowledge related to particular parts of a system. For example, in Formula One it means technical and design skills related to engine, chassis and gearbox. (Pinch et al, 2003). The Ferrari 12-cylinder engine and 312-T car was a result of component knowledge. In 1975, Ferrari designed a new car 312T, which had a wide low body, powerful 12-cylinder engine and a revolutionary transverse gearbox. All these improved the balance and handling of the car. 312T had a chassis, engine and gearbox combination, which could not be matched by the engine, gearbox combination of the competing cars(Johnson, G et. l, 2008). The component knowledge behind this engine and car could be easily understood, but could not be easily transferred because it was based on firm specific component knowledge and because it didn’t fit in with the systems of other manufacturers; hence it was not used widely. The other strength that was the reason for Ferrari’s success was the use of architectural knowledge as a competitive advantage. Architectural knowledge considers the whole system and the interaction between component knowledge of its various parts (Matusik and Hill, 1998).
It is difficult to transfer architectural knowledge between organisations because it is distinct for each organisation and develops over time. The highly efficient practices introduced by Montezemolo were the architectural knowledge of Ferrari. Montezemola ensured that each team concentrated on a specific task, for example, chassis, gearbox, engine and suspension. This helped avoid conflicts and helped in getting a great car made. The system of having each team concentrating on a specific task to avoid conflicts was also a part of architectural knowledge of Ferrari.
Architectural knowledge also helps in determining the ability of organisations to acquire new knowledge. (Zahra and George, 2002). Human resource management was another strength, which was a factor of competitive advantage in Ferrari’s success, as Montezemola recruited the right driver in Nicki Lauda, who could communicate effectively with the technical team. Another of Ferrari’s strengths were the unique resources that it had, like its Maranello factory where it made its own engines and the test track in Fiorano, which is one of the most advanced and sophisticated test tracks in the world, which enabled it to test and develop cars.
All these strengths were the reason for Ferrari’s dominance in the 1970’s. McLaren’s domination in the late-1980’s In September 1980 Dennis was appointed as the team principal. Dennis bought in Barnard as a car designer. Barnard had ideas of making the racing car chassis of carbon fibre, instead of metal. Barnard left in 1986 but a lot of progress in car design had been made by then. By SWOT analysis we can identify the strengths of McLaren, which endowed it with competitive advantage. One of McLaren’s strengths during this period was the efficient and disciplined way in which the organisation was run.
They prepared carefully for all the races. Many elements that contributed to McLaren’s success are still unknown. This is an example of architectural knowledge being used for competitive advantage. (Pinch et. al, 2003). Good human resource management can be seen to be another strength, which was the reason for McLaren’s success as McLaren had the right people for the job in Dennis and Barnard. Dennis had good managerial skills while Barnard had highly innovative design skills. Dennis, in turn, recruited the best drivers in Senna and Prost, who were crucial to McLaren’s success.
Senna was fast and determined whereas Prost was fast and good at tactics. Another of McLaren’s strengths was the use of external linkages of value chain as a competitive advantage, by its collaboration with Honda for engines. All these strengths helped McLaren dominate F1 from 1988 to 1991. Williams’ success in the mid 1990’s Williams developed on the ideas of ground effect, carbon composite monocoque, semi-automatic gearbox and active suspension. Williams considered the driver to be only part of the system.
Using SWOT analysis we can determine that one of the strengths of the Williams team can be attributed to use of cluster level architectural knowledge as a source of competitive advantage. Cluster level architectural knowledge refers to knowledge shared by groups of organisations in a particular geographical area. Cluster level architectural knowledge also involves common ways of thinking and habits among organisations in the cluster. Hence it becomes difficult for organisations outside the cluster to copy the technologies developed in the cluster.
An example of cluster level architectural knowledge can be seen in UK’s ‘Motorsport Valley’. Many technologies used in Formula One cars have been developed here, for example, the use of carbon composite materials, traction controls and active suspension systems (Henry and Pinch, 1999). Brown and Duguid (2001) argue that component knowledge is the ‘cargo’ that is moved around on the ‘rails’ of cluster level architectural knowledge. The ‘Ground effects’ technology was developed in Motorsport Valley and was first used by Lotus.
The Williams team that was in the same area was the one that applied the ‘ground effects’ technology efficiently. Thus, all the technologies developed in the ‘Motorsport Valley’ were transferred to and adopted by Williams, this contributed greatly to its success. (Pinch et. al, 2003). Thus it can be seen that Williams developed strong and unique capabilities in the designing of the car body, chassis and gearbox. Human resource management was another strength, which also acted as a source of competitive advantage. Frank Williams was the founder of Williams and he appointed Patrick Head as the Technical Director.
The attributes of entrepreneurial energy and technical excellence helped them to succeed. Patrick Head appointed good drivers like Senna and Prost. Another strength of Williams was their external linkages. Their linkage with Renault helped them use the powerful and reliable Renault engine, which complemented their FW15 chassis. All these strengths that acted as sources of competitive advantage led to William’s domination from 1992 to 1994. Ferrari’s return to winning ways after 1999 Montezemela was brought back to Ferrari, as CEO in 1992. He set up a new design department with 50 people.
Ferrari’s focus shifted from engine to integration of main parts. The strengths of Ferrari, identified using SWOT analysis, was that value linkages (Porter, 2004), both externally and internally became a source of competitive advantage for Ferrari. Internal linkages were the co-operation between the departments manufacturing engine, chassis and the aerodynamics department. These were crucial in integrating all components of the car efficiently. External linkages were the collaboration with Bridgestone for making customised tyres for Ferrari and with Shell for financial and technical support.
Another strength identified was good human resource management, which also acted as a competitive advantage by Ferrari’s appointment of Montezemela as chief executive and Schumacher as the driver. Ferrari recruited Schumacher in 1996, who was a great driver and motivator. He communicated well with the engine technicians. The core competency (Hamel and Prahalad, 1990) of Ferrari was the capability of manufacturing powerful engines. Since Ferrari manufactured its own engines they were able to integrate engine, chassis and aerodynamics early in the process. This was the most significant and unique strength of Ferrari.
All these factors helped Ferrari win the constructors championship in 1999, after a gap of 12 years. Reasons for Ferrari, McLaren and the Williams teams not being able to sustain their success Using SWOT analysis we can see that one of the major weaknesses of Ferrari, due to which they could not sustain their success, was their lack of dynamic capabilities. Dynamic capabilities mean the ability of firms to adapt their competencies to the changing times and changing external environment. Ferrari needed the dynamic capability to create newer cars, which were more powerful, had better balance and had great aerodynamic properties.
Penrose (1959) and Teece (1982) were the first to suggest that, to sustain competitive advantage, firms will need to utilise their firm specific capabilities and also develop new capabilities. Deeply ingrained ideas of architectural knowledge prevent the organisation from acquiring new knowledge. (Henderson and Clark, 1990). Another weakness of Ferrari was their strongly ingrained architectural knowledge that prevented them from initially accepting the ground effects technology, as it was concentrating only on engine design. (Pinch et. al, 2003). Lack of dynamic capabilities to adopt the ground ffects technology and bad human resource management that led to loss of Nicki Lauda from Ferrari, were major reasons due to which Ferrari was unable to maintain its success after 1979. One of the weaknesses of McLaren, identified by SWOT analysis, due to which they were unable to maintain their competitive advantage, was the pulling out of Honda from Formula One. McLaren were not prepared for this and did not have any other good engines to replace Honda. Thus the lack of ability to maintain external linkages as a source of competitive advantage was the one of the reasons for the failure of McLaren.
The other significant weakness identified was their not continuing to use human resource management as a source of competitive advantage. The loss of Senna to Williams in 1993 was a big blow to McLaren and they had not developed any new drivers to replace him. The main weakness that was the reason for the decline of Williams was the use of technologies developed by them by other competitors, like Benetton. Their competitors easily replicated their component knowledge. Since their capabilities could be easily copied they could not maintain competitive advantage in the long term.
The death of Senna in an accident left Williams without a good driver. Another weakness was the lack of dynamic capabilities that led to their not having a good replacement for Senna. Renault’s decision to supply engines to Benetton also meant loss of competitive advantage. The inability of Williams to maintain external linkages as a source of competitive advantage was another weakness identified. The main weakness that was the reason for the decline of Ferrari after 2004 was they were not able to adapt their capabilities and external linkages to the changed rules.
The strategies that could have been developed by each of these teams to further sustain their period of dominance. Spanos and Lioukas (2001) and Wenerfelt (1984) suggest that Porter’s value chain and the Resource based view are complementary and considering both together can help in sustaining competitive advantage. But from empirical studies conducted by Spanos and Lioukas (2001) it was found that focusing on unique resources and capabilities was more beneficial in sustaining competitive advantage than focusing unique activities in relation to competition.
Thus it can be concluded that it is important to consider both your firm specific unique resources and capabilities and to develop activities that are unique in relation to competition in developing strategy, to sustain competitive advantage. Capabilities that are not easily transferable, that cannot be easily copied, that are not transparent and those that last a long time act as significant sources of long-term competitive advantage (Grant, 1991). Walker, (2007), suggests that to sustain competitive advantage a firm must use tactics of offence and defence.
Offence involves working towards dominating the competition and defence involves taking steps to maintain the dominant position. Ferrari could have continued their dominance from the 1970’s if they had used opportunities identified using SWOT analysis to develop dynamic capabilities to adopt new technologies like ‘ground effects’ and to recruit other good drivers to replace Nicki Lauda. Miller (2003) suggests that the differences between firms are a source of sustained competitive advantage.
Hence it can be said since from all the racing constructors only Ferrari made their own engines and other parts, they could integrate the parts much better. This was another opportunity for Ferrari to use this capability as a long-term competitive advantage and helped extend their period of dominance. McLaren could have used opportunities identified to maintain external linkages as a source of competitive advantage by persuading Honda against quitting Formula One or by developing other external linkages for supplying engines, as a replacement for Honda. They needed to develop dynamic capabilities to have good alternative drivers for Senna.
Teece et. al (1997) suggests that competitive advantage can be sustained by improving efficiency. Hence, considering this theory McLaren could sustain their competitive advantage by improving their efficiencies continuously. Williams could have used the opportunities identified to develop strong architectural knowledge, which would not have been easily replicated by their competitors. The fact that all new technologies like ground effect, active suspension and semi-automatic gearbox were first developed by Williams was the differentiating factor from other racing constructors.
Hence by Miller (2003)’s theory Williams needed to use that capability to sustain their competitive advantage. They needed to develop their innovative capabilities in a way that they could not be easily copied. They also needed to develop dynamic capabilities, in terms of other drivers, so that they had a replacement for Senna. To sustain competitive advantage after 2004, Ferrari needed to have dynamic capabilities, which would help adapt their capabilities to the new rules. Conclusion
From the study of the periods of dominance of various Formula One constructors, it can be concluded that each of the constructors had individual strengths, which they could have used as their core competencies and developed dynamic capabilities to be ahead of the competition. They need to focus on their unique resources, capabilities and develop unique activities, in relation to the competition, to gain competitive advantage. Success in Formula One is dependent on a variety of factors like the cars, the drivers, the management etc. Hence the constructors need to continuously improve their cars and retain their good drivers, to succeed.