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A First Assessment of the Financial Distribution by the FOM and Performance in Formula 1

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A First Assessment of the Financial Distribution by the FOM and Performance in Formula 1 A first assessment of the financial distribution by the FOM and performance in Formula 1 Master’s thesis in Innovation and Industrial Management Graduate School University of Gothenburg Spring 2018 Author Linda Waern Supervisor Evangelos Bourelos Acknowledgments There are several key individuals that I would like to thank for making this thesis possible. Firstly, a special thanks to the respondent in this thesis, from whom the study received valuable input which allowed for a deeper understanding of the sport. Secondly, I would like to thank my supervisor Dr. Evangelos Bourelos for his excellent support and interest in this thesis. His feedback empowered me to move forward in difficult situations and enabled a good finished result. Lastly, I would like to thank family and friends for their wonderful support. They have encouraged and helped me immensely during this fantastic journey. Thank you! Gothenburg 2018-06-01 Abstract Formula 1 is known to be an exclusive and expensive sport where only the best of the best in motorsport is competing. There are currently ten constructors competing, but the Formula 1 faces financial difficulties where more and more teams find it hard to finance their participation in the sport. The Formula 1 uses an extremely uneven distribution of the prize money between the teams and this thesis aims to assess the relation between the financial distribution and the performance of the Formula 1. The research question used is: To what extent is the prize money distributed by FOM affecting the teams and their performance? There is furthermore a discussion of potential correlations between the money distributed by the Formula One Management (FOM), and the teams’ performances the next year. To answer the research question, this thesis uses a multiple case study of three teams in particular. An interview has furthermore been conducted to establish the main problems the sport is facing with the current financial system. What the study found was that there indeed is a big gap between the best payed and the worst payed team within Formula 1 and that it is not always the winning team that receive most payment due to additional bonuses. The study furthermore found that there is a strong correlation between the pay-outs and the teams position at the end of the year. Moreover, the study concludes that there must be an incentive to compete, and win, for the sport to be sustainable as well as entertaining for the fans to watch. The current situation is feared to be unsustainable for the sport and that the management must find a new solution to the financial difficulties within the sport. Tournament theory is suggested as a possible solution if implemented correctly but the Formula 1 must choose whether they should support a few particular teams or intensify the competition and thereby try to create closer racing and an even more exciting sport. Key words: Formula 1, prize money, tournament theory, sports performance, sports management, bonuses Concepts and definitions FOM: Formula One Management, one part of the old Formula One Group. They were the commercial owner of Formula 1 and oversaw the prize money distribution. FIA: Fédération Internationale de l’Automobile, oversees both the sporting regulations as well as the safety and technical regulations of the car. Team Principal: The team boss, has the highest power within the team and full disclosure of the sport. Grand Prix: Each race in Formula 1 is called a Formula 1 Grand Prix. Points: The points are distributed to the 10 best placed drivers and their teams after each Grand Prix. The winner receives 25p followed by a sliding scale (18p/15p/12p/10p/8p/6p/4p/2p/1p). Drivers that finish outside of top 10 receives 0 points. Constructor’s Championship: The team with the most points at the end of the season collected through all of the Grand Prix wins the Constructor’s championship. Driver’s Championship: The driver with the most points at the end of the season collected through all of the Grand Prix wins the Driver’s championship Table of Contents Acknowledgments ................................................................................................................................... 2 Abstract ................................................................................................................................................... 3 Concepts and definitions ......................................................................................................................... 4 1. Introduction ..................................................................................................................................... 8 1.1 Background ................................................................................................................................. 8 1.2 Formula 1 .................................................................................................................................. 11 1.3 Fédération Internationale de l'Automobile, FIA ....................................................................... 11 1.3.1 Concorde agreement ..................................................................................................... 12 1.4 The Formula One Group ........................................................................................................... 12 1.5 Formula One Constructors ....................................................................................................... 13 1.6 Problem discussion ................................................................................................................... 13 1.7 Purpose of the study and research question ........................................................................... 16 2. Literature review ........................................................................................................................... 17 2.1 Exchange relationships ............................................................................................................. 17 2.2 Trajectories and discontinuities in technological evolutions ................................................... 18 2.3 Competitive advantage within high-tech industries ................................................................ 18 2.4 Competition and incentives to innovate .................................................................................. 19 2.5 Business models ....................................................................................................................... 20 2.6 Sports management ................................................................................................................. 21 2.7 Tournament theory .................................................................................................................. 23 3. Methodology ................................................................................................................................. 25 3.1 Research approach ................................................................................................................... 25 3.2 Collecting empirical data .......................................................................................................... 25 3.3 Interviews ................................................................................................................................. 26 3.4 Literature review ...................................................................................................................... 26 3.5 Analysing the data .................................................................................................................... 27 3.6 Validity, reliability, replicability, objectivity and causality ....................................................... 27 3.6.1 Validity ........................................................................................................................... 27 3.6.2 Reliability ....................................................................................................................... 27 3.6.3 Replicability ................................................................................................................... 27 3.6.4 Objectivity ..................................................................................................................... 28 3.6.5 Causality ........................................................................................................................ 28 3.7 Research Ethics ......................................................................................................................... 28 4. Empirics ......................................................................................................................................... 29 4.1 Interview ................................................................................................................................... 29 4.2 Ferrari ....................................................................................................................................... 31 4.2.1 History ........................................................................................................................... 31 4.2.2 Sporting performance ................................................................................................... 32 4.2.3 Financial performance ................................................................................................... 33 4.3 Red Bull Racing ........................................................................................................................
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