Video: Monday, 14 October 2019
Several manufacturers make substantial investments to compete in sports contests, using the gear they develop and market. For example, the car manufacturer Daimler invests around $200 million annually in its Mercedes-AMG Petronas Motorsport team’s participation in the Formula One Championship. However, no systematic analysis of the returns from such investments exists. A research team consisting of Yvonne van Everdingen from Rotterdam School of Management, Erasmus University (RSM), and Vijay Hariharan and Stefan Stremersch from Erasmus School of Economics, Erasmus University studied whether such investments lead to an increase in the firm’s innovation and sales performance, which the researchers call the innovation and branding effects respectively. The research showed that research-intense (compared with advertising-intense) gear manufacturers have more to gain from competing in sports contests.
The research team focused on cases in which sports gear manufacturers move beyond sponsorship to take part in sporting competitions as a contestant by creating and running their own competitive team, such as Daimler’s Mercedes-AMG Formula One team. Other examples of gear manufacturers that go beyond sponsorship and invest in sport championships for innovating and branding purposes include: bike manufacturer Trek, which invests $14 million annually in its Trek-Segafredo team, which competes in the UCI World Tour; and ski manufacturer Atomic, which invests around $9 million annually in its own team in the FIS Alpine Skiing World Cup. All these companies use these sports competitions not only for their unique branding and advertising opportunities (i.e., the potential for branding), but also to develop and test new technologies that later on can be transferred to the commercial market (i.e., the potential for innovation).
For example Mercedes- AMG uses the F1 technology for street cars, according to Mercedes: “the two-seater Mercedes-AMG Project ONE will transfer the latest and most efficient Formula 1 hybrid technology almost one to one from the track to the street for the first time”.
Competing firms invest varying and large amounts in sport contests and achieve varying levels of success, which may affect their innovation and branding returns. The allocation of resources to competitive sport is likely to be dependent on the firm’s investment in other areas, of which R&D and advertising seem most relevant, considering the innovating and branding returns of competing in sports contests. Yvonne explains: “This made us want to investigate to what extent sports gear manufacturers taking part in competitions gain positive outcomes for innovating, branding, or both, and if these outcomes are contingent on the gear manufacturer’s R&D and advertising spending.”
Yvonne: “We constructed a novel data set on car manufacturers’ participation, spending, and performance in the F1 World Championship. The sample comprised nine manufacturers that competed in F1 at some point during 2000-2015.”
To examine the effect of participation between contestants and non-contestants, we included seven car manufacturers that did not compete in F1 during our sample period. To examine the innovating effect, we supplemented F1 data with information about these manufacturers’ R&D spending and innovation performance, measured in terms of patent citations. To investigate the branding effect, we collected data on researched brands’ advertising spending and sales performance or in other words, the number of new vehicle registrations in France, Germany, Italy, Spain, and the UK.”
According to Dr Yvonne van Everdingen, the research revealed that competing in F1 generates a significantly positive effect on innovation, but it benefits only those manufacturers that spend at least €3.8 billion annually on R&D (e.g., Daimler and Honda). This effect is not found for manufacturers such as Fiat or Renault that spend less than this amount on R&D. Thus, if manufacturers decide to invest in F1 to enhance their innovation performance, i.e., to enhance the number and impact of patents for new and unique technology they hold, then they must complement it with an R&D budget that matches the €3.8 billion spend of Daimler or Honda to fully exploit the innovation potential offered by competing in F1.
Additionally, the research showed that brands with low advertising budgets obtain greater branding returns in form of sales performance from competing in sports contests than those with high advertising budgets. While all brands in the sample obtain positive branding returns from participating and increasing their spending in F1, the branding returns of competing in F1 are greatest for brands that have the lowest comparable advertising spend (e.g., Ferrari, Jaguar, or Lotus). And, only brands that spend less than €10.6 million in monthly advertising benefit from improving their performance in F1.
These findings are particularly relevant for managers and analysts in the automotive industry, including suppliers of parts and components, but also for other sports gear manufacturers for which competing is a relevant consideration (e.g., motorsports, cycling, tennis, and skiing). They can use this information to assess the potential economic outcomes of competing. What’s more, these findings may guide sports gear manufacturers as they consider the trade-offs between allocating budget for competing, R&D, and advertising.
Rotterdam School of Management (RSM)
Erasmus School of Economics (ESE)
Erasmus School of Economics (ESE)
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