Thursday, September 3, 2009

Take the Subway: IndyCar Cost Leadership

The Committee of Public Safety today took delivery of a note from a loyal citizen. His comments bring to light a worthy argument regarding alternative strategies that would make IndyCar racing competitive in the marketplace.

Previously, Roggespierre wrote that NASCAR (sans-culottes!) has demonstrated that ample consumer demand exists for U.S. oval racers. Therefore, the IRL should furnish U.S. oval racers.
Citizen John provides a counter-argument that bears repeating.

"The market demands Big Macs also, but that doesn't mean you can establish
a competitive advantage in that marketplace by providing what the market
demands." - Citizen John

We agree. Imitation does not yield competitive advantage. We know this because we suffered along with John Amos's character in Coming to America. An independent fast-food entrepreneur, he could not fathom why customers refused to give up the Big Mac in favor his offering, the Big Mic.

Strategic Alternatives

Citizen John favors a differentiation strategy to achieve competitive advantage.

"One tactic is to look beyond your category to the larger category of your
business and your competitor's business, and develop a position where your
competitor can't efficiently compete against you. So instead of providing Big
Macs, essentially do what Subway did: they created a
category and filled it within the larger fast food category that the market
leader couldn't compete with." - Citizen John

This is a classic example of the product differentiation competitive strategy. Citizen John recommended that the IRL position itself in the broader sports entertainment category rather than the traditional motorsports market segment.

We prefer a different strategic alternative because the IRL is a subsidiary of the Indianapolis Motor Speedway Corp, a firm that, in our humble opinion, is entrenched by default in the narrower motorsports category. In our view, the lone viable alternative that remains is that of low cost leadership. John Amos should have cut costs and offered the Big Mic at a competitive price. The IRL is no different.

Take the Subway: IndyCar Cost Leadership

From its inception, NASCAR (sans-culottes!) positioned itself as the low cost competitor in major U.S. motorsports. But the Cup Series' exponential growth since the early 1990s has resulted in abandonment of that position. You simply can not be the low cost leader when championship caliber teams require annual sponsorship revenue of approximately $18 million per car.

Consequently, a secondary market has evolved for NASCAR Cup sponsorship. It is ironic that one of the participants in this market is Subway, primary sponsor for Carl Edwards' Roush Racing Ford at three races this season.

We would prefer that Subway sponsor an IndyCar team for the entire season. But that will not happen until the IRL gets its cost structure under control. We have determined that a championship caliber IndyCar team is worth 6.51% of the total value of a similar team, such as Edwards' Roush Racing team, in NASCAR Cup. Three Cup races are equal to 8.82% of the Cup season. Because 8.82% is greater than 6.51%, we must concede that Subway made the right decision. Three Cup races are worth more than 17 IndyCar races.

If IndyCar slashes its costs until they are equal to the product's market value, then the series and its teams will be able to offer sponsorship opportunities that are simultaneously equal in value and exponentially lower in price than those offered by NASCAR Cup and its teams.

That is competitive advantage. Sorry, Carl, but that pretty yellow paint scheme is going on an IndyCar for a full season of racing!

We thank Citizen John for his comments and invite others to submit similarly worthy ideas.

On behalf of the Committee of Public Safety



  1. "If IndyCar slashes its costs until they are equal to the product's market value, then the series and its teams will be able to offer sponsorship opportunities that are simultaneously equal in value and exponentially lower in price than those offered by NASCAR Cup and its teams."

    Well stated. I suppose we could look at the whole sponsor/rating equation as a CPP (cost-per-point), assigning a NASCAR CPP and an ICS CPP to determine value, but I still think we'd be lacking a competitive advantage from a marketing perspective. A couple ideas come to mind:

    1) Stars not genre - I have this theory that racing as an entertainment genre has lost it's pulling power in a way analogous with Westerns as a television genre losing their pulling power in the modern marketplace. I haven't heard about remakes of Gunsmoke, Rawhide, et al making a comeback any time soon even though at one time they were almost guaranteed some level of success. However, a remake of say The Rifleman starring Brad Pitt, would almost certainly be successful.

    2) Suspense - Another area the ICS could improve on is building the tension throughout the season reaching some sort of climax at the end; there's a reason beyond the episodes why shows like Survivor prosper. NASCAR with their chase and the PGA with the FedEx Cup come to mind, but they're lacking. Not that it would ever happen, but imagine if only the top 12 in points could enter the Indy 500. Doing something to that 'effect' would make each race, crash, finishing position, etc., throughout the season all the more important and consequential. Actually, there's nothing stopping them from running a top 12 and race winners only race at the Brickyard on Labor Day to decide the championship (in addition to the 500 of course), although I'm sure some would argue it would take away from the 500's stature.

    So leaving the actual racing (genre) aside, I'd ask if reducing costs would result in the emergence of 'stars' and create 'suspense.' Doing so would create a competitive marketing advantage in the marketplace the current model is lacking. IMO, of course.


  2. I like John's ideas but with a different twist. Run the Indy 500 as the last race of the season. To do so, you would need to start the season in August or September and run through the winter. There are probably enough warm-weather destinations to make this practical. If they had winter races in Homestead, Phoenix, Brazil, Texas, and wherever else on the schedule is warm enough they could keep it going throughout the year. There would even be a benefit of racing when all other series are not.

    That way you could have your championship buildup come to a climax at the biggest race in the world, the Indy 500, without risking diluting it. In fact, it would elevate it.

    Yes, this could be a scheduling nightmare, but I think it is doable.