What lessons can we learn from the financing of Formula 1?

F1 car
By Eleanor O'Neill, Student Blog

1 May 2017

When Liberty Media took over global business and brand Formula 1 their acquisition included $4.1bn of existing F1 debt, a major rebrand and the appointment of a new chairman and CEO. How can we apply the concerns of high-octane racing to the business skills of a CA?

As developments continue, BBC podcast Business Daily talked to key figures from the sport to find out what F1 teams consider to be business strategy priorities for the future.

Listen to the podcast

Diversification: Business Management

The technology developed for race cars often finds its way into a whole range of businesses, appliances and household products. For example, KPMG applied McLaren expertise to the audit process.

Claire Williams, Deputy Team Principal of Williams Grand Prix Engineering Limited, explained: "The F1 team is very much at the heart of what we do, it's our core. Racing is in our DNA, it's what we love. But we have branched out, diversified and created another Williams business called Williams Advanced Engineering.

"It effectively takes the technologies we develop in Formula 1 and commercialises them. That revenue stream will, one day, be extremely important to us."

As you will learn in Business Management, diversifying the interests of a business can be risky, particularly when entering an entirely new market. However, association with a credible brand such as F1 suggests a standard of excellence for building a new customer base.

For small enterprises, the ability to pursue related diversification can be a powerful support model to the main business.

Small team visibility and Porter's forces

Inequality has reportedly been a problem in motorsport with independent teams feeling blocked from many of the privileges that are available to Ferrari and Red Bull, for example. Much in the same way that small firms could feel dwarfed by the competition of international conglomerates, this presents an interesting premise for Porter's five forces of analysis.

With particular reference to the factors of industry rivalry and the threat of (or in this case lack of) new entrants, this kind of 'privilege' could be seen as detrimental to the market as a whole.

In F1, Monisha Kaltenborn, CEO & Team Principal of Sauber Motorsport, was part of a group who filed a complaint with the European Commission in 2015 regarding allegedly unfair governance and income-distribution systems.

Pointing out the importance of fair competition, she said: "We currently have a system with certain privileged payments where there's not really any clear reason to it except for 'you are the team you are'. There are certain payments that we could never get, even if we were to become a double world champion.

"We small teams are the backbone of Formula 1. If you look at all these teams with the big manufacturer names today, somewhere they started off as a private team. And we've seen in the history of F1 how manufacturers come and go, but we stay because this is our core business."

Customer engagement

For the sport as a whole (and in business), enticing a new generation of fans is an escalating issue. Finding a way to engage, and in some cases, revive the F1 audience, is one of the key challenges facing Liberty Media.

Grand Prix management consultant, Ian Phillips, commented that even his 13-year-old son would not watch more than one lap of a race. A high level of disinterest in the industry is disquieting as, particularly in sports, fans are stakeholders in the brands of each team and competitor.

Ian commented: "The fundamental goal is to make the sport more exciting. That's not something that the new owners are going to be able to do until they have forged a relationship with the governing body, the Federation Internationale de l'Automobile (FIA), because they make the rules."

Customer engagement is equally important across the business sector. A strong reliance on brand loyalty and customer investment gives a unique level of bargaining power to the buyer which, according to Porter's, puts businesses under immense pressure.


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