IndyCar: The Mission

Normally, we are not big fans of mission statements here in the Republic. Revolution is, after all, about taking action.

That said, we here have learned the hard way that overturning the old order is not sufficient to bring about peace and prosperity. Without direction - a mission, if you will - citizens tend to lose their heads.

It is with this in mind that we present the beginnings of a mission statement for the Indy Racing League. It probably already has one. But the IRL would do well to remember that firms tend to be myopic, believing that their respective industries are unique and that, therefore, so, too, are the challenges they must overcome. This is seldom the case. If it were, then McKinsey, Bain, and the other high-priced consulting firms would be out of business.

Fortunately for the IRL, The Indy Idea has no delusions about its market value. The advice here is free.

So, what is the mission? What would a really successful IndyCar Series look like?

• Ridiculous profits to the Indianapolis Motor Speedway
• Undeniably awesome Month of May in Indianapolis
• Corporations competing to sponsor IndyCar teams
• Promoters competing for race dates
• Drivers aspiring to get to IndyCar and stay there
• Versus becomes a household name
• The IRL at least breaks even

Achieving these long-term goals is possible with focused strategy and meticulous execution. NASCAR (sans-culottes!) followed this route to mass market nirvana until, alas, it lost its sense of discipline. For the first time in its history, the House of France faces contraction. It is very vulnerable.

IndyCar is not positioned to take advantage. That does not mean it can't happen, but rather that it can happen only if the IRL is disciplined, determined and courageous enough to do the jobs that must be done to achieve its mission.

Roggespierre

IRL Angstadt Translator

The promised analysis is here. It shall be brief. (article linked in title above)

IRL Commercial Division President Terry Angstadt was quoted in USA Today this week. We in the Republic were glad to see that USA Today still covers IndyCar racing. However, we found Angstadt's comments somewhat depressing. Tony Kanaan, who we like very much, also contributed some nonsensical assertions.

For now we focus on Angstadt, who seemed to confirm that additional road races and international events are part and parcel of the Indy Racing League's competitive strategy. This, of course, must be false because the IRL has no competitive strategy. It takes whatever it is given by its racing team suppliers and derives from this material a corresponding schedule of plausible talking points.

Quote #1

Angstadt said: "We want to serve the markets where we feel our racing product will be well-received."

We're supposed to think: fans in these markets really like IndyCar racing.

What is true: the sanctioning fee is decent, the check is likely to clear, and the teams don't complain about coming here


Quote #2
Angstadt said: "Where can our product be successful and where can we find strong, motivated promoters?"

We're supposed to think: the IndyCar product is inherently appealing to fans in certain locations; promoters that advertise our product will naturally enjoy robust ticket sales

What is true: the teams are motivated by many factors, and providing the IRL a marketable product is not particularly high on the list; we therefore will race wherever we can get paid and continue to find venues where sparse attendance is more easily masked on TV

IndyCar Extreme Makeover Redux

This afternoon Roggespierre received a note from Saint Just, who argued that our earlier post, Extreme Makeover: IndyCar TEAM Edition, contains a fundamental flaw.

You might recall we suggested that because some drivers are worth more than others to those who buy tickets and watch on TV, IndyCar TEAM appearance money should be reallocated to account for driver popularity.

Saint-Just counters that IndyCar team owners don't want compensation based on driver value, performance value, or any other criteria other than that of showing up and putting a car on the track. The owners, Saint-Just argues, see TEAM payments as their money, and they're not interested in sharing it. Team owners apparently fear that, if driver value were used to calculate TEAM compensation, then drivers could argue that they should get a cut.

Fans do not think about such things. Rest assured, participants certainly do.

All due respect to Saint-Just, Roggespierre rejects the notion that this concern exposes a flaw in his proposed Extreme TEAM Makeover. The problem, it would appear, is that the Indy Racing League is afraid of its team owners. Fear might even be justifiable, but the scenario is hardly unusual. For example, suppliers of lithium ion batteries currently wield tremendous bargaining power over their customers. But can we say the same about IndyCar teams?

WARNING: The following is a partial analysis of the IRL's strategic position. It is likely to be dry, and to many, boring. Citizens seeking entertaining IndyCar content this evening should consult other sources. Roggespierre recommends Pressdog.com and MyNameIsIRL.com. Both are excellent. The Indy Idea will return to Revolutionary frivolity tomorrow.

With that, we commence with our analysis.

In his 1979 classic essay, Competitive Strategy, Harvard Business School professor Michael Porter identified what he called Five Forces that determine a firm's profitability. One of those forces is the bargaining power of suppliers. IndyCar team owners collectively supply the entries that compete in IRL races. They are therefore suppliers to the IndyCar Series.

Porter wrote that suppliers can exercise power over a firm. If Saint-Just is correct - and we have every reason to think that he is - then we can assume that IRL managers believe that the team owners hold a measure of power over the series. If true, then Porter would suggest that the teams might quit the series or charge higher prices - appearance fees and bonuses - in exchange for the services they furnish.

Previously, we asked whether or not IndyCar teams do in fact have this presumed power. Adopting the Porter model, they do if:

1. the teams' cost of switching to another series is relatively low
2. the inputs (to the IRL product) of each individual team are highly differentiated
3. the threat of substitute inputs (new teams) into the IRL ranks is low
4. the ratio of racing series to teams is high
5. the threat of forward integration by the teams is high
6. the threat of backward integration by the IRL and its customers is low
7. the cost of inputs furnished by teams to the IRL is high relative to the selling price the IRL gets from its customers

We use these tests to analyze the bargaining power of IndyCar teams. We shall then determine whether or not Roggespierre's proposed TEAM Makeover should be implemented. Note that this is a fundamental business decision that has nothing to do with either sales or operations. Therefore, it seems that there is no one at the IRL whose job it is to conduct analysis of this sort and to make strategic decisions that flow from it.

Nevertheless, we press on.

"Yes" indicates sources of bargaining power for the teams.
"No" indicates sources of bargaining power for the IRL.

1. Q: Are teams' cost of switching to another series relatively low? A: No. Some teams are already in other series, primarily NASCAR Cup, where the cost of additional entries is prohibitive. Any team that switches to a different series will incur a capital outlay for new equipment. Unless a sponsor or an auto manufacturer covers that cost - an unlikely scenario now that firms of all types are reducing costs in series ranging from F1, to Cup, to ALMS - switching is not a plausible option for most IRL teams.
2. Q: Are the inputs that each individual team contributes to the IRL product highly differentiated? A: No. The teams furnish commodities - race entries - that are differentiated only to the extent that some drivers are more appealing than others to those who buy tickets and watch on TV. Scuderia Ferrari is the exception, but that is Formula 1's problem.
3. Q: Is the threat of substitute inputs (new teams) relatively low? A: Yes. IndyCar equipment is cost prohibitive for prospective team owners unless they have sponsors lined up to underwrite the project.
4. Q: Is the ratio of comparable series to teams relatively high? A: No. There are four comparable spectator-supported series - Formula 1, Cup, Grand National, and IndyCar. F1 does not race in the United States and is extremely cost prohibitive. Cup teams have been consolidating for years, primarily to reduce costs via scale economies. That leaves Grand National and IndyCar. The former is dominated by Cup teams and their satellites, making the cost of entry greater than it might otherwise be.
5. Q: Is the threat of forward integration by the teams high? A: No. This was already tried. It was called CART. The teams forward integrated, forming their own series, but they didn't go all the way. Rather, they continued to leverage the value of participating in the Indianapolis 500, their largest event and one they did not control. When Tony George created the IRL, the teams' experiment in forward integration reached a crossroads: they could either abandon the strategy altogether or continue on without Indianapolis. Although they chose the latter, the teams transferred much of the financial risk to shareholders via an initial public offering of stock, by definition an exit strategy. The present economic climate, the financial condition of most teams, and the existence of the IRL under IMS control render a new adventure into forward integration a non-starter.
6. Q: Is the threat of backward integration by the IRL and its customers low? A: No. In fact, it's already happening. Vision Racing, co-owned by an IMS board member, is an example of backward integration. If another IMS board member were to start her own team, then the existing IRL teams would lose additional bargaining power. The same would be true if, say, Texas Motor Speedway started its own IRL team.
7. Q: Is the cost of inputs that teams contribute to the IRL high relative to the selling price the IRL gets from its customers? A: Yes. Herein lies the primary source of bargaining power for the present IRL teams. The supply and demand curves intersect at the point of transaction, the one at which all prospective team owners who possess both the resources and the inclination to present an entry for IRL competition are already doing so. There are only two ways to shift this point of intersection: 1) reduce the cost of entry, or 2) increase the willingness of the able and/or increase the resources of the willing. This is why the next IndyCar spec is so important. It must be inexpensive enough to attract additional team owners that do not have substantial corporate backing. This would not only increase bumping at Indianapolis and car counts at all IRL races, but also reduce the bargaining power of the individual team owners.

That's five No's and two Yes's. The IndyCar teams are not so powerful after all. It is ironic but true that the present recession lends tremendous strategic leverage to the IRL. One might believe intuitively that, because the IRL needs teams and the economy is bad, the league should therefore do whatever it takes to keep its present teams happy. But that notion is wrong. Although the economy has deprived the league of revenues, it has deprived the teams of both revenues and bargaining power. The relative gain is accrued to the IRL.

In conclusion, the present circumstances provide a rare opportunity for the IRL to impose long-term, strategic policies that will ultimately benefit all of its stakeholders. The teams might resist some imperatives, but they lack alternatives that would empower them to demand the short-term outcomes they desire.

The opportunity to arrange the playing field for the next generation of IndyCar racing is, therefore, at hand. Sadly, it seems that there is no one at the IRL who is in position to take appropriate action.

Roggespierre

IndyCar Management: Prelude to Criticism

Many citizens are apparently confused about the nature of Terry Angstadt's job with the Indy Racing League. He is a salesman, and no more. His performance is measured by the cash flows generated by the deals he cuts. The following is what we shall deem the de facto job description for Angstadt. Technically, he has additional responsibilities, but the ones that really matter to his supervisors are below.

1. Sell IRL events to race promoters


2. Sell league and series sponsorships to corporations

And that pretty much does it.

The business culture at the Indianapolis Motor Speedway has space available for only two activities: sales and operations. Strategy is incorrectly believed to be the mere combination of the two. Marketing is confused with public relations and promotion. A big Rolodex is the assumed driver of successful sales. Facilities and events management - operations, both - are institutional strengths.

The abstractions above are necessary if citizens are to recognize the constraints that limit the capabilities of IRL management. Terry Angstadt is said to oversee marketing, but this is not true. Marketing, as any undergraduate business student can tell you, begins with the Four P's, the first of which is "Product". For example, Procter & Gamble, a firm that seems to know something about marketing, calls its top decision-makers Product Managers. Conversely, at the IRL, product belongs to the Operations Division, which might or might not choose to consult Angstadt when considering product development issues.

That is why the Republic does not seek the heads of either Terry Angstadt or Brian Barnhart. Both men seem to work hard at the jobs they were hired to do. IndyCar Racing's management problems are - and going back to AAA, have always been - structural and cultural, not personal.

These unfortunate circumstances, however, seem to cause Angstadt to speak in frequent banalities, vacuities and inconsistencies. This induces much chafing among the citizens.

It happened again today, and in a national newspaper, no less. Analysis is forthcoming.

Extreme Makeover: IndyCar TEAM Edition

Roger Penske sells lots of cars. He purchases popular models from the factory, marks them up, and sells them to his customers. We assume that Mr. Penske does not pay much, if anything at all, for models his customers don't want.

Regrettably, the Indy Racing League does.

If you show up and race an IRL event with an IRL car, then the league will award you tens of thousands of dollars. Got a tomato can driving your Dallara? That's not a problem. You get paid the same appearance fee as everyone else.

Unveiled in October 2007 (transcript linked in title above), the Team Enhancement Allocation Matrix (TEAM) was conceived to ensure that enough teams show up for each IndyCar race. Admirably egalitarian, IndyCar TEAM promised an appearance reward of approximately $60,000 per race for full season entries.



Roggespierre, champion of equality for all citizens, was impressed. Danton, however, argued that much of TEAM is a colossal waste of much needed cash. After careful consideration, Roggespierre agrees that TEAM is a good candidate for an Extreme Makeover.


Danton's argument is simple: teams that show up with Danica Patrick, Paul Tracy and Helio Castroneves at the wheel are worth far more to the league than those that "hire" aristocrats who have no popular appeal. Why should the IRL compensate teams of both types equally? Teams are suppliers to the league, Danton argues, and they should be compensated according to the relative market value of the goods and services they supply. This seems reasonable.



We are talking about a "nudge" of the type that behavioral economists favor. The IRL should distribute a far, far greater percentage of appearance money to teams that employ drivers that fans want to see. Increased payments to marketable driver might also begin to address the confounding problem of homegrown IndyCar stars leaving for the riches of NASCAR (sans-culottes!)



Subjective evaluation of drivers' relative popularity would invite charges of corruption, nepotism, xenophobia, and worse. Therefore, the IRL must establish an objective mathematical TEAM compensation equation and publish it for all stakeholders. It might look something like the following.



(Kindly allow Roggespierre to really MBA this one:)


Assumptions

• Each Factor is indexed 1 to 10 according to proportionate value
• TEAM appearance money is accrued on a per race basis
• Does not include bonuses for 1st through 5th place finishers at each race

Factors
for each Team (X) per event employing Driver (Y)

1. Q = Driver (Y) Q-score per 3rd party market research firm = weight 35%
   
2. E = Driver (Y) % of Most Popular Driver Votes - at races only = weight 25%
   
3. W = Driver (Y) % of Most Popular Driver Votes - online (IndyCar, Versus) = weight 10%*
   
4. P = Championship Points earned by Team (X) with Driver (Y) = weight 30%
   

*ballot stuffing is easier online

The calculation



for each race that Team (X) employs Driver (Y)

.35Q+.25E+.1W+.3R = TEAM Points



The sum for each race would then be added together to arrive at the total TEAM Points for a given IndyCar team. Appearance fees would be distributed proportionately.


Drivers might have to adjust their community outreach activities in order to convince people to attend the races. Reading The Lorax to Mrs. Goulet's kindergarten class is a commendable and benevolent activity. However, those little derrieres are unlikely to be in the stands on race day, and even if they are, their parents will have been the ones who made the purchase decision.


Some argue that the top finishers should get more prize money, that it's unfair to reward popularity. For them, we have a saying here in the Republic: Tough Tuberculosis.

This is serious business - sex and violence and rock-n-roll and (legal) price discrimination.



The IRL needs revenue, for which it needs fans, for which it needs a product that people watch on TV when they're not watching it in person. The IRL must think of itself as a retailer, much like Target Stores or Penske Auto. Those firms require that their vendors' prices correlate with customer demand. Why should the IRL be any different?



Roggespierre