New Study Uses Formula 1 Racing To Show How Business Leaders Pinpoint Problems
When companies hit a rough patch, managers race to figure out why they’re underperforming. But today’s businesses involve increasingly complex systems with endless moving parts; so how do they pinpoint the weak links?
To find out, researchers at the UBC Sauder School of Business and INSEAD turned to one of the most performance-driven businesses on the planet: Formula 1 racing. And what they found is the racing world’s top managers look over the fence to their competitors. Unlike other sports, success or failure in Formula 1 doesn’t only come down to the skill of its drivers; the cars themselves are feats of automotive engineering, and the companies behind those cars, in turn, have to operate like well-oiled machines.
As a result, Formula 1 managers are constantly forced to determine whether the suppliers they rely on are speeding up or slowing their success, and whether they should stick with those suppliers or hit the brakes. The problem is, when the components, services and systems are highly specialized, as they are in countless modern businesses, diagnosing exactly what’s causing the slowdown can be tough.
“Think of an organization as a really complex piece of machinery, like a computer or a jet engine with thousands of moving parts that are interconnected in different ways,” explains UBC Sauder assistant professor and study coauthor David Clough. “If there’s a problem it can cascade through the business and have consequences in quite distant parts of the organization. So, it’s difficult to get an impression of which component is at fault.”
For the new study, titled Tie Dissolution in Market Networks: A Theory of Vicarious Performance Feedback, Clough and his coauthor Henning Piezunka, an assistant professor at INSEAD, examined 33 years of data from Formula 1, and specifically, how leaders reacted when the business went off track. They also interviewed dozens of Formula 1 professionals.
First, the researchers confirmed a bias that runs through the business world: if something goes wrong, business leaders tend to blame an external supplier, not their own team. (If something goes well, they tend to credit themselves and their team.) “After a year in which their performance is below their track record, they are more likely to dissolve their ties with their existing engine supplier and go and find a new one,” says Clough, who adds that when performance drops below a specific level, managers start demanding answers. At that point, they often look to competitors who are using the same engine supplier.
“If they find the other firms using the same engine supplier also suffered a similar drop in performance, to them that’s a really good signal that the supplier is to blame,” says Clough, pointing out the engine supplier may have nothing to do with the problem. And when they’re blaming the supplier for the bad year’s performance, they’re much less likely to make a change to their lineup of drivers.”
Clough says he and his colleagues looked at Formula 1 specifically because of the tension between competition and collaboration, the razor-thin margins of error, and the reliance on cutting-edge technology. “F1 cars are somewhere between high-performance sports cars and aircraft,” says Clough. “In their design, they’re often using the forefront of manufacturing processes, the forefront of material science, and they’re employing some of the best engineers in the world.”
The findings could help managers better understand their own tendencies when trying to explain reduced performance. They could also be helpful for suppliers — even ones that have nothing to do with a company’s downturn.
“From the supplier’s perspective, it’s going to be really important to keep track of your key customers’ performance level, because if the performance drops, even if it isn’t down to you, they may blame you for it,” says Clough, who admits he wasn’t a Formula 1 fan before the study, but now has a greater appreciation. “And it would be a good time for your boss to increase client retention activities — especially if you have more than one client who drops below their track record, because other clients might notice and start questioning your capability.”