Business lessons from Formula One

Business leaders can learn a lot from Formula One racing. For starters, don’t hit the gas pedal on innovation too quickly, says strategic analyst, Alessandro Marino.

Marino, assistant professor at LUISS University (Italy), received his Ph.D. in strategy from the Wharton School, University of Pennsylvania. He mined 30 years’ of racing data to show this innovation-intensive industry is a goldmine for business insight. Ahead of this weekend’s Grand Prix in Austin, Texas, he provides a useful set of tools that managers of dynamic and complex organizations can reap the benefit of.

ResearchGate: How do businesses traditionally react to industry changes, and how do you recommend they react based on your lessons from the Formula One?

Marino: The conventional wisdom is that companies need to embrace change. Innovation is widely considered as a “panacea,” but in this research, my co-authors Paolo Aversa (Cass University), Luiz Mesquita (Arizona State University) and Jay Anand (Ohio State University) and I found it’s not always good to be the aggressive innovator. Teams sometimes believed that the more the rules changed, the more they had to change along with them. However, we found that in turbulent times small, incremental improvements were often better than big changes.

This strategy is beneficial because Formula One cars -- like many businesses -- are complex, interconnected systems. When regulations change drastically, radical innovations at a component level impede the whole system to work together again on a timely basis. Conversely, when the environment shifts, the best path is usually to make changes on the margins, where you can gain some efficiency without disturbing all the other parts of the system.

RG: Which specific industries and business leaders can benefit from this research, and why?

Marino: The lessons from Formula One can apply to many businesses. Many older, mature businesses are especially tempted by the siren call of nimbleness and agility, and it is often the top managers of a firm who believe that they need to change and innovate more.

But if you have a firm that has grown and prospered, you have traded innovation and constant change for efficiency and reliability.

Let me stress that the results don't mean innovation, even radical innovation, is not needed in business. But we're pushing back at the conventional wisdom that innovation is always good. Sometimes there is value in going slow.

RG: Can you provide an example of this strategy in Formula One?

Marino: The kinetic energy recovery system (KERS) is example in Formula One shows the dangers of jumping too quickly at the chance to innovate. In 2009 the FIA approved the optional adoption of this device, which could store the kinetic energy from the waste heat created by the car's brakes. Once stored in a battery, the energy could be used for acceleration. The benefits of it were intriguing, but it came with costs. For example, it added weight to the car and the driver had to learn how to use the technology correctly. Several teams jumped at the opportunity to add KERS to their cars. But at the end of the year, two teams that did not use KERS -- but instead concentrated on other, more marginal improvements -- were the ones who finished on top in the standings. You don't always get an advantage by moving first.

RG: Why is Formula 1 racing data useful for business insight?  

Marino: Formula One’s fast and fierce competitive environment is the perfect setting to study and derive managerial policies for other hyper-competitive industries. It is innovation-intensive and represents the cutting edge of the automotive industry. Further, many of the managerial decisions are observable and researchers can track any type of changes. These include variations in the technology, in the regulation, in the team composition (and their experience), and in the alliance network. Also, performance in Formula 1 is unmistakably measured by lap-times, which allow researchers to easily understand whether some decisions have been beneficial or not.

RG: Mercedes sacrificed success with the V8 engine to focus on innovation with the V6 engine a few years ago. Is that part of the reason why Lewis Hamilton is dominating the circuit now? How does this business move fit in with your research?

Marino: Mercedes (formerly the Brawn GP F1 team) won the 2009 championship thanks to incremental innovation during a year of radical regulation change. They anticipated the FIA’s future shift to smaller hybrid powertrains (from V8 to V6). As a result, they underperformed in their first years, but were more prepared to face the challenges of this rule change when it was eventually implemented. This—combined with the presence of talented drivers—allowed them to dominate the F1 circus until now.

RG: What can the Formula 1 industry learn from your research and from other businesses?

Marino: Formula One has a lot to learn. It is a field that is relatively inexperienced in terms of “coopetition” (which means cooperative strategies between competitors). Only recently F1 top teams have started to ally with minor teams to guarantee access to scout, train and trade young promising talents. Also, Formula 1’s business model is hard to sustain in the long run because it does not allow for an equal redistribution of wealth. It should learn from US-based sport series and apply systems on value distribution inspired by those environments.

Feature image courtesy of Alessandro Pautasso.