A winning formula to turbulent times

When the cars lined up on the grid in Abu Dhabi for the final race of the 2010 Formula 1 Grand Prix season, motor racing fans were expecting a thrilling finale, with four drivers still in contention for the championship. Paolo Aversa, the Marie Curie Research Fellow of Strategy at Cass, was interested in the outcome for a different reason: he believes the F1 industry provides important insights into organisational innovation and corporate strategy.
All firms need to innovate in some way if they are to thrive. Many strategy experts suggest that the route to competitive advantage is via game-changing innovation that challenges orthodoxies and transforms industries. Yet recent investigation by Aversa and his co-researchers suggests that pursuing such radical change is not always the right option and can actually be detrimental to an organisation's performance.
"There is a tendency to overemphasise the importance of radical innovation. It is very important, but not in all situations," says Aversa. "We need to understand when it is beneficial."
Aversa and his co-researchers analysed data from almost three decades of F1 Grand Prix racing, and studied the relationship between innovation and performance, given different operating environments.

Changing the rules
Formula 1 was the perfect industry for the research*, says Aversa. For a start, the operating environment changes from year to year when the Fédération Internationale de l'Automobile (FIA), the governing body of F1, releases a set of rules for the following season. Changes from one season to the next usually fall within three main areas: changes to improve safety; changes to ensure that races remain entertaining; and rule changes designed to advance certain technologies - traction control, and computer-based engines are past examples - that will eventually find their way into mass-production cars.
The degree of change from one season to the next represents the level of turbulence in the industry. In some years rule changes are minimal, so the operating environment is more stable. In other years they require considerable car redesign. It is rare for teams to be able to foresee next year's changes or assess whether the new regulations will be valid for a long time or will be quickly modified. F1 teams tend to respond to these rules in two ways, says Aversa - adaptive innovation and pioneering innovation.
"Adaptive is solution-driven technological innovation that is tailored to a changing environment. So if the FIA proposes new regulations in a particular year, let's say that they reduce the size of the engines or require every team to use the same tyres, then you have to rethink the design of your car without sacrificing performance."

Changing the cars
Pioneering innovation goes beyond the minimum adaptive requirements. Instead of improving existing technology it involves new, different, and disruptive routes to better performance.
To evaluate the impact of the different types of innovation on performance, the research team assessed the data from all the F1 seasons between 1980 and 2010. "We analysed the blueprints of each car from year one to two to three and so on, and looked at how much the cars changed," says Aversa. "We coded the changes, section by section, that were required by the regulations, and those that were going beyond the regulatory requirements."
Innovation that went beyond the changes necessary to meet the FIA's new rules was classified as pioneering. The level of turbulence in the operating environment was determined by the extent of the changes required by the FIA in any one year. Performance was assessed on the results of each race, and controlled for a range of factors including different teams, drivers and team experience.
The results were surprising. In times of turbulence - radical regulation changes - pioneering innovation put the brake on performance. The more turbulent, the more pronounced the effect. The significance, suggests Aversa, is that in turbulent times companies are less able to handle pioneering change at the same time as trying to discern future trends in technology. The chances of making the right innovation are reduced.

Changing the technology
In the 2009 season, for example, the FIA announced significant changes, one of which was to allow racing teams to use a new kinetic energy recovery system (KERS).
KERS technology was not mandatory, but it offered cars temporary power boosts and, in theory, a competitive edge over rivals. Four major contenders - Ferrari, Renault, BMW and McLaren - adopted it. However, other teams, including Brawn GP and Red Bull focused on adapting to the rule changes by improving existing technology (Brawn's controversial "double diffuser" for example).
Brawn GP won both the constructor and driver championships that year, winning 6 out of the first 7 races. Together, Brawn and Red Bull won 14 out of 17 races.
So what relevance does this have outside motor racing? "These are important findings," says Aversa. "In technology industries, for example, I would say when you don't have a clear idea of the technological trajectory, it makes sense to stick with the existing one. But when the existing trajectories are fairly stable, then you can push boundaries and engage in pioneering innovation."
It's good news for corporate strategists searching for ways to overtake their rivals - and for finance directors. The next time the chief innovation officer proposes spending billions on developing a new market-conquering widget, the FD will be able to refer them to Aversa's research.
"In times of crisis, like now," says Aversa, "with some companies struggling to find the money to launch the next big thing, it turns out that the next big thing may not even be the right thing to do."

Steve Coomber is a freelance writer. He can be contacted at s.coomber@virgin.net