Certain resources and competencies are required for the Formula One team in order to be successful and able to compete can be seen in the light of the unique and rapidly evolving context of Formula One. F1 is a very competitive industry in a rapidly changing environment, which can be defined using Porter’s five forces analysis (Appendix A). Key resources in F1 are both tangible and intangible and can be considered under the following broad categories:
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Physical Resources:
The car and its components, such as engines, gearboxes and chassis are vital resources but the technological advancement impacts its ability to win races. Test tracks are also important physical resources in the competitive environment as well as ability to test cars; the location of these tracks may also be an important factor. Research and development facilities are vital asset due to technological advancement and knowledge gain as well as the factory itself.
Financial Resources:
High start-up and continued running costs associated with the sport, leads to the need for large capital investments, for example medium-sized constructor needs £ 30 – £ 50 million capital investment as a basis for being competitive. Team’s get funding through a combination of sponsorships – a lucrative sponsorship deal can help improve the team’s level of performance through a cash injection alone. Sports fans are a great resource, as they act as a huge public funding of Formula One. Currently, the tickets cost more than £ 330 per race and VIP access £ 1700th Revenue also offers cash prizes to win the championship points and through shareholders within each constructor.
Human Resources:
Team Principles is essential for any constructor team. In the beginning the team was owned and led by the founding partners, but as time has moved on the emphasis has shifted to managers and their ability to run the team in a business manner. Intangible skills and knowledge source is extremely important for F1 because of the highly competitive environment. For success a team needs certain level of experience and knowledge either developed over time, or recruited from elsewhere. To acquire this knowledge and expertise is very expensive and requires investment in staff, as well as technologies. Such benefits are provided by the knowledge of key employees, including designers, engineers and drivers. Drivers are the main human resources important attributes of the driver include ability to drive fast, strategic thinking during the race, good communication and motivational skills.
Intellectual Capital:
Although patents are not allowed to F1, intellectual capital includes team’s brand and reputation – is widely used to acquire finances. A key brand in F1 is the Maranello Red used by Ferrari team. Complex business systems are necessary for F1 teams to manage large amount of data that flows in the organization.
These resources do not reach their potential solely on their existence, the way they are managed, deployed or used, it is essential to understand their strategic capabilities. To be on the F1 grid, and in order to compete in the market, opportunities gained by applying the above resources must reach a threshold level.
The F1 constructors generally function at the peak of resource utilisation and, therefore they can manage resources very efficiently and effectively. Thus, almost every resource that becomes a opportunity for competitive advantage is converted into a competency for competitive advantage.
Internal strategic capability allows a successful strategy and is essential for survival and success (Johnson et al, 1998). Gaining a competitive advantage includes adjusting of these capabilities, for example, acquiring improvements and advancements, such as technology, creates new opportunities. Stretching and exploiting strategic capabilities, in such a way that they cannot be imitated by the competitors, will result in providing of competitive advantage. Although such advantageous strategic technological capabilities were required by constructors in order to achieve competitive advantage, they also became a key factor in the introduction of increased legislation aimed at reducing uncertainty and increasing competition, such as the introduction of generic tyres.
The factors responsible for the success of the Ferrari team in the mid 70’s can be considered through analysis of the organisations core competencies, a competitive advantage which is usually a result of “collective learning processes” and are manifested in business and activities and processes. Hafeez (2002) suggest that the core competencies are those unique capabilities of the company, which usually span over multiple products or markets.
Ferrari’s success in the mid-1970s
Ferrari was the dominant Formula One Constructor’s Championship in the mid 1970’s. Many approaches can be used to determine competitive advantage; the reasons for Ferrari’s dominance can be identified. Some approaches to identify competitive advantage are explained below:
Porter’s (1980) five forces model helps to position (Appendix 1) a company in the best way to face competition. This model helps to understand the industry and the competition therefore strategy can be formulated according to that. Carl Shapiro’s (1989) approach is based on making competitive companies act in ways that are not productive. This theory can only be used where all competitors are closely placed. Barney’s (1995) resource based approach believes that competitive advantage is due to unique resources available to the company and their strategic capability is based on it. He suggests that it order to understand how to the company can gain competitive advantage, firstly company needs to understand their internal strengths and weaknesses. Barney’s (1995) approach is based on SWOT (Strengths, weaknesses, Opportunities and Threats) analysis. Barney’s (1995) approach implicates that only those companies that use their internal strengths to make use of the available external opportunities can gain competitive advantage. Company’s internal strengths and weaknesses can be understood by:
Continuously checking whether resources and capabilities of a company help it in the changing environment.
Checking whether these capabilities and resources are unique in any way to the company.
Understanding how difficult for others to imitate the resources and capabilities of the company.
Checking if the company’s processes make use of the resources and capabilities effectively and efficiently.
Teece (1997) suggests that dynamic capabilities provide competitive advantage. Dynamic is used meaning company’s ability to renew resources in order to achieve consistence with the changing environment. According to Teece (1997) dynamic capabilities of a company depend on its internal processes, position in the industry and strategy. Processes mean the way things are done in the company, position means the technology, assets and customer base the company has, strategy means the ways available to the company to do things. These dynamic capabilities of the company lead to competitive advantage. Porter (2004) introduced the concept of value chain to determine competitive advantage. Model was based on identifying the primary and secondary activities of the company. Primary activities include logistics, operations, outbound logistics, marketing and sales and service. Secondary activities include company infrastructure, human resource management, technology development and procurement. It then identifies activities that are unique to the company in relation to the competition. Arguments are provided by Spanos and Lioukas (2001) that Porter’s value chain is based on external factors of competition and ignore the vital internal resources and capabilities of the company. Rumelt (1984) also argues that strategy of a company 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 itself may not be benefit the company.
From the various views presented above it can be seen that Barney’s (1995) approach, based on identifying and focusing on unique resources and capabilities of the company, based on SWOT analysis, is more relevant in analysing competitive advantage in Formula One.
Using SWOT analysis (Appendix 2) we can identify that one of the strengths of Ferrari was their use of specific knowledge as a source of competitive advantage. This knowledge means skills, resources and knowledge related to particular parts of a whole system. For example, in Formula One it means technical and design skills related to certain parts of the car, such as engine, chassis and gearbox. The Ferrari 12-cylinder engine and 312-T car was a result of that knowledge. In 1975, Ferrari designed a new car 312T, which had a powerful 12-cylinder engine, wide low body, and a revolutionary transverse gearbox. All these components improved overall balance and handling of the car. 312T had a unique chassis, engine and gearbox combination, which could not be matched by the any combination of any other competitor at the time. The knowledge behind this car and specific parts could be easily understood by competition, but could not be easily transferred because it was based on company specific component knowledge and because it didn’t fit in with the systems of other manufacturers. Much of Ferrari’s success during the period of the mid-1970’s can be attributed to the ability to build their race cars at the Maranello site without the need to outsource for parts. This created centralisation of knowledge and expertise, as well as the ability to transfer knowledge between departments without leakage.
The other strength that was the reason for Ferrari’s success was the use of architectural knowledge as a competitive advantage. This knowledge considers the whole system and the interaction between component knowledge of its various parts (Matusik and Hill, 1998). It is very much difficult to transfer architectural knowledge from one organisation to the other, because it is distinct for each organisation and has been developed over time. The highly efficient practices introduced by Montezemolo were the architectural knowledge. Montezemola ensured that each team would concentrate on a specific task, such as, chassis, gearbox, engine and suspension. This helped avoiding conflicts and in getting a great car to be made. The system of having separate teams concentrating on a specific task to avoid conflicts was also a part of architectural knowledge. Architectural knowledge also helps in determining organisations ability to acquire new knowledge. (Zahra and George, 2002).
Human resource management was another strength, which increased the competitive advantage in Ferrari’s success, as Montezemola recruited Nicki Lauda, who had the ability to communicate effectively with the technical team. Other contribution to Ferrari’s strengths were the unique resources that it had at its disposal, like its Maranello factory where it made its own engines and the test track in Fiorano, which was one of the most advanced and sophisticated test tracks in the world, which enabled testing and development of new cars. All these strengths were the reason for Ferrari’s dominance in the 1970’s.
Reasons for Ferrari not being able to sustain their success in given period
Using SWOT analysis we can see that one of the major weaknesses of Ferrari constructor team, for which they were not able to maintain their competitive advantage, was their lack of dynamic capabilities. Dynamic capabilities refer to companies’ ability to adapt their competencies to the changing times and changing industry environment. Ferrari needed the dynamic competencies in order to create newer cars, which were faster, had better balance and had great aerodynamic attributes. Penrose (1959) and Teece (1982) suggest that, in order to sustain competitive advantage, companies will need to utilise their company specific capabilities as well as develop new ones. Henderson and Clark, (1990) argue that deeply ingrained ideas of architectural knowledge prevent the organisation from gaining new knowledge.
Ferrari was overtly cohesive and resisted change in 1978 when the ‘ground effect’ technology was developed. Enzo Ferrari’s autocratic leadership style lead to a political environment, causing rivalry and confusion. Good management is of paramount importance in any industrial context and this was proved by the turnaround in Ferrari’s fortunes achieved by Luca di Montezemolo’s restructuring. Even more, in 1977, Niki Lauda ended his partnership with Ferrari. This was a major blow for the team as Lauda had the ability to translate what he wanted in the car to the technical team.
Possibilities to Ferrari to sustain competitive advantage
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 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 on unique activities in relation to competition. Hence, it can be concluded that it is vital for the company to consider both company specific unique resources and capabilities and to develop activities that are unique in relation to competition while developing strategy, in order to sustain competitive advantage. Capabilities that are not transparent, that cannot be easily imitated by competitors, that are not easily transferable and those that last a long time works as significant sources of long-term competitive advantage (Grant, 1991). Walker, (2007), suggests that in order to sustain competitive advantage company must use tactics both offensive and defensive. Offence involves working towards domination over competition and defence involves taking required steps to maintain number one position in the industry.
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 companies are a source of sustained competitive advantage. Hence it can be said that from all the racing constructors at the given time period only Ferrari made their own engines and other parts, thus they could integrate the parts much better than the competition. This was another opportunity for Ferrari to use this capability as a long-term competitive advantage and helped extend their period of dominance.
Conclusion
From the study of the periods of dominance of various Formula One constructors, it is evident that each of the constructors had individual strengths, which differentiated them from competitors and could have been used as their core competencies. In order to develop dynamic capabilities to stay ahead of the competition, they need to increase their focus on their unique resources and capabilities and develop unique activities that would be hard to imitate by the competitors, to gain competitive advantage. Success in this competitive industry is dependent on a high variety of factors like the drivers, the management, the cars etc. Therefore, the constructors need to continuously improve their cars and retain their best drivers, in order to succeed.
Of all teams described in the case study Ferrari in mid-70’s stands out as the company which created greatest competitive advantage through unique resources which were available to the company at the time (Maranello factory, test track etc.), team culture created over the years, knowledge that was gathered and applied to create superior products (engines, chasis, gearboxes etc.) and getting the right people in the right places (Montezemola, Nicki Lauda) . All this factors mentioned above contributed to dominance of the Ferrari in the mid 70’s.
Appendix One
Porter’s five forces
Threat of New Entrants: Low
High start up cost
Excessive running cost
High level of resources required.
Bargaining Power of Suppliers: High
The primary suppliers of F1 constructors have a lot of power. So much so that in a few instances, suppliers have been the cause of the end of the period of dominance of some constructors.
Competitive Rivalry within the Industry: High
Formula One is, like any other sport, a highly competitive industry. Each constructor places emphasis in different capacities on a number of variables.
Bargaining Power of Buyers: High
The buyers in F1 enjoy high power. They play a vital role in the popularity of the sport as well as a considerable contribution to the funds for various teams.
Threat of Substitutes: High
All the other popular racing and sporting events can be considered to be a threat for F1 as they may take away resources such as money, drivers, sponsors etc.
Appendix two
SWOT Analysis Ferrari mid 70’s
Strengths
Weaknesses
Innovation
Technical and design skills
Unique resources
Lack of dynamic capabilities
Inability to change
Autocratic CEO
Opportunities
Threats
develop dynamic capabilities
adopt new technologies developed by others manufacturers
Rapid technological change
Regulations
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