The Co-existence of Competing Business
Models: Revisiting McNamara et al
.
’s
Proposition of Multiple Stable Business
Models
Student: Alejandrina Mercado Olivares/ Student № 11087226/
University of Amsterdam, Faculty of Economics and Business MSc
.
in Business Administration – Strategy TrackSupervisor: Dr
.
Stephan Von Delft Final Version: 24th of June 2016Statement of originality
This document is written by Student Alejandrina Mercado Olivares who
declares to take full responsibility for the contents of this document
.
I declare that the text and the work presented in this document is original
and that no sources other than those mentioned in the text and its
references have been used in creating it
.
The Faculty of Economics and Business is responsible solely for the
ABSTRACT
This paper revisits McNamara et al
.
’s (2013) study proposition of multiple business models coexisting in one industry and industry recipes in an attempt to corroborate their results and add cumulative knowledge to the subject.
A total of four teams are analysed for 6 consecutive seasons in the Premier League.
Based on the acquisition of talent on one hand and internal development of share experiences on the other four business model typologies and propositions are presented.
Results show – in line with the original study – that alternative models can co-exist in a competitive market.
They also show that a performance decline when changing from one business model to another will occur, this decline can be temporary unless the club does not follow through and is not able to complete the transition.
If the club is able to resist the transition, the potential reward is high value creation and moderate to high value appropriation.
Most importantly it demonstrates that certain resource and capabilities configuration can be associated with success on the field (value creation for costumers) and with a higher financial performance (value appropriation for the firm).
Table of contents
ABSTRACT ... 3 1.
Introduction ... 5 2.
Theoretical background ... 8 2.
1 Business models ... 8 2.
2 Replicating studies ... 9 3.
Industry Overview ... 12 3.
1 Football in England ... 123
.
2 Industry Recipe and Individual Talent ... 133
.
3.
Collective mind set – Value Creation ... 163
.
4 Revenue Streams – Value Appropriation ... 173
.
5 Business Model Typologies ... 19Business Model 1: B players, inexperienced ... 20
Business Model 2: B players, experienced ... 21
Business model 3: A players, experienced ... 22
Business model 4: A players, inexperienced ... 22
4
.
Analysis and results ... 254
.
1 Data Collection ... 254
.
2 Measures and Variables ... 264
.
3 Results ... 29Comparing business models ... 33
5
.
Discussion ... 356
.
Conclusion ... 391. Introduction
Formulating and implementing a strategy that will not only create value for costumers but will also allow firms to capture this value in form of profits for the firm is one of the central problems for managers
.
Firms have limited resources and they need to make strategic decisions to determine the extent to which they prioritize one over the other (Mizik & Jacobson, 2003).
So managers need to balance creating value for costumers on the one hand and capturing profits for the firm on the other hand.
To determine which activity to prioritize, managers need to know and understand the different range of resources and capabilities they have that can help them with this task.
However, they also need to reduce theuncertainties in the outcomes of choosing one activity over the other
.
This study delves into the relationship between value creation and value appropriation for firms and explores some pathways or trade-offs when choosing one over the other.
I will revisit McNamara et al.
’s (2013) study proposition of multiple business models coexisting in one industry and industry recipes in an attempt to corroborate their results and add cumulative knowledge to the subject.
A business model is a system that focuses on a set of activities which firms use to create value for their stakeholders as well as deliver value to their customers (Teece, 2010)
.
An industry recipe is what aids management of strategicuncertainties, because it is the shared knowledge of the industry that is taken as familiar or as professional common sense (Spender, 1989)
.
Replication studies have been set aside in the managerial field, as novelty is prioritized, researches try not to replicate due to the fact that non-results are not being published, which goes against the foundation of cumulative knowledge (Bettis, Ethiraj, Gambardella, Helfat, & Mitchell, 2015; Hubbard, Vetter, & Little, 1998)
.
The aim of this study is to break the stigma of replication in the managerial field by analysing the different business models that are used in the football industry and the value they create and appropriate by replicating as closely as possible McNamara et al.
(2013).
As they did, the focus of this thesis will be on the use of business models in the football industry.
Little research has been done on this specific topic and empirical data has so far been limited by the above-mentioned research.
By conducting analysis and research that is comparable to the results discussed by McNamara et al.
(2013) I will add empiricalgeneralization to this topic, which is one of the key elements of science (Hubbart et al
.
, 1988).
McNamara et al
.
(2013) identify essential dimensions of success in the football industry from where they are able to generate four business model typologies, expecting them to be stable configurations.
A business model is considered stable when it has the ability to generate both value for the costumers and an adequate financial return for the firm (club) (McNamara et al.
, 2013).
If the model cannot carry out a financial return relative to the industry benchmarkfor the firm, it is not considered stable
.
They also address the issues and risks involved when transitioning from one business model typology to another.
The study then helps managers weigh their possibilities when making strategic decisions about choosing the “business model through which the firm will compete in the marketplace” (Casadesus-Masanell & Ricart, 2010, p.
196).
Managers in other industries might also profit from exploring similarconfigurations of individual talent and gained shared team experience through business models such as those presented here
.
To be able to compare results from this thesis with the results of
McNamara et al
.
(2013), I will conduct the analysis with the same measurement instruments, main hypothesis and evaluation method.
In order to replicate the study I will conduct the analysis with a data set from different seasons (2009-2014) for four different clubs from the Premier League.
The paper is structured as follows: I will first offer an analysis of business model literature, followed by a broad view on the importance of replicating studies and an overview of the industry
.
Secondly, I will go into more detail on McNamara et al.
’s (2013) four model typologies presenting four propositions and a main hypothesis based on the current literature and their results.
Thirdly, I will present the analysis and results.
Finally, I will discuss the significance of my findings, followed by some concluding thoughts.
2. Theoretical background
2.1 Business models
“The essence of a business model is in defining the manner by which the enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit” (Teece, 2010, p
.
172).
The business model term became customary in the mid-1990’s with the arrival of the internet and exploded between 1995 and 2010 (Zott, Amit, & Massa, 2011).
Its use was widespread with the appearance of the personal computer and the spread sheet considering that both tools helped managers model the behaviour of a business (Magretta, 2002).
However, it cannot be seen as a spread sheet or computer model but rather as a conceptual model of the business (Teece, 2010).
It is believed an organization will thrive if managers have a good understanding of how business models work (Casadesus-Masanell & Ricart, 2010).
The term is mainly used when trying to address three phenomena: “(1) e-business and the use of information technology in organizations; (2) strategic issues, such as value creation, competitive advantage, and firm performance; and (3) innovation and
technology management
.
” (Zott et al.
, 2011, p.
1020).
Shafer et al (2005) classified the term into four similar categories: (1) strategic choices, (2) the value network, (3) creating value and (4) capturing value.
Unlike other studies performed before that focus only on value creation (Magretta, 2002) or only on value appropriation (Zott & Amit, 2008) and following emerging literature, the different business model typologies will serve as a unit of
analysis and will help explain not only how the firm creates value but also how it is captured (Zott et al
.
, 2011).
Taking on McNamara et al.
(2013), this can be done by using a longitudinal cross-sectional analysis that will allow to test the association between the components of business model typologies in combination with value creation and appropriation.
The data set collected will allow to notice the impact value creation and value appropriation have when changing from one business model typology to the other, without details of the process of business model transformation itself (McNamara et al
.
, 2013).
Other studies have addressed the issue of different business models within an industry (e.
g.
Grundy, 2004), but the empirical question of this analysis is if those business models can co-exist in one industry as stable configurations.
2.2 Replicating studies
Since 1998, Hubbart et al
.
, have stated that the replication of studies should be encouraged rather than denigrated as it allows demonstrating that something is really there.
When results can be confirmed, it clarifies the implication of the results therefore, enriching knowledge.
Currently repeatability of studies is still discussed as the fields of biomedical science and psychology face challenges when using and interpreting statistics originated from replications; strategic management is also facing problems with the impossibility of replication studies under current institutional norms (Bettis et al.
, 2015).
The core of quantitative empirical research in strategic management derives from Null Hypothesis Significant Tests (NHSTs) (Bettis et al
.
, 2015).
The essence of NHST’s is the p-value despite not giving actual information regarding the reliability of theresearch as is commonly believed (Branch, 2014)
.
The probability of encountering a result in a particular sample yields from the p-value (Bettis et al.
, 2015).
A significant p-value coefficient in one study establishes initial confirming evidence; a replication can approve or disconfirm such evidence and help further develop cumulative knowledge on a specific subject (Bettis et al
.
, 2015).
However, if a p-value is not statistically significant, it is considered a “non-result”, therefore the study will most likely not be published consequently limiting the development of cumulative knowledge (Bettis et al.
, 2015; Hubbart et al.
, 1988).
Even though replication can increase certainty, novelty is prioritized over replication, leaving researchers with little incentives to do so (Open Science
Collaboration, 2015)
.
In the field of psychology this phenomenon is called “replicability crisis” (Mishra, Lalumière & Williams, 2016).
Business disciplines also suffer from little replication even though confirming or disconfirming results is essential when developing theories (Hubbart et al.
, 1998; Brandt, IJzerman, Dijksterhuis, Farach, Geller, Giner-Sorolla & van’t Veer 2014).
To aid this replication is encouraged in the managerial field and top-pier journals like the Strategic Management Journal are starting to publish replication studies as well as non-result studies (Bettis et al.
, 2015).
Replication studies can be implemented with or without extensions
.
For the purpose of this paper the replication will be carried out with extensions (Hubbard &Amstrong, 1994)
.
A replication study with extensions aims to evaluate thegeneralizability of early findings by using the same conceptual relationships as the original study but at the same time altering some aspects of the initial design (Hubbard & Amstrong, 1994)
.
Although replication studies without extensions are important for establishing reliability and validity of empirical findings, the ones with extensions make further contributions (Amir & Sharon, 1990; Rosenthal 1990).
This paper seeks to address this gap in the literature by replicating and examining the strength of McNamara et al
.
’s (2013) study using sample data in the same industry the authors did.
If the results are statistically significant they will add cumulative knowledge on the subject, although, if they are not, the results will not disprove the original study.
A single replication without statistical significance will only add or establish disconfirming evidence without invalidating the original results (Bettis et al.
, 2015).
3. Industry Overview
3.1 Football in England
The governing body of the English Football was created in 1863 for the need to create a definitive code of rules for the game mainly for inter-school matches (Harvey, 2005)
.
It was not until the creation of the FA Cup in 1871 that things changed drasticall; clubs realized the potential to generate income from selling match tickets, competition grew and clubs were offering players financial incentives to play (Buraimo, Simmons, & Szymanski, 2006).
In 1885 professional football was legalized, with this law came the expansion of commercialization of football clubs and in 1888 the Football League was created being the world’s original “league” competition (Buraimo et al
.
, 2006; Shaw, n.
d.
).
The Football League was divided into four divisions and without exerting control over the club’s finance conducts they restricted the financial returns they could offer shareholders and required clubs to provide annual financial information (Buraimo et al
.
, 2006).
There was a lot of tension between the FA who did not want to commercialize the sport, the Football League who was generating income through sponsorship andtelevision deals, and the clubs which resulted with the First Division resigning from the Football League in 1992 and creating the Premier League (now Barclays Premier League) (Buraimo et al
.
, 2006; Shaw, n.
d.
).
The creation of Barclays Premier League (PL) allowed teams to negotiate their own television contracts, giving them more income to compete with other European
Clubs; these contracts “eventually cement the stature of the Premier League as one of the top leagues of the world” (Nauright & Ramfjord, 2010, p
.
430).
The PL is now England’s top football league system; it is self-regulated and uses the Premier League Handbook (updated at the beginning of each season) as a contract covering every aspect of the clubs operation towards one another and their fans (The Football Association Premier League Limited, 2015)
.
It is made up of 20 teams; they can make their own financial decisions regarding income expenses, directors and executive designation and according to the latest Handbook submit their accounts annually, including disclosing payments made to agents.
The creation of the PL allowed clubs to move from the traditional base into a more complex set of business activities acquiring revenues from sponsorships,
advertisements, television and merchandise (Grundy, 1998)
.
Changes in the way the PL is organized and commercialized have made clubs attractive to international investors and many of them have floated to become public companies (Leach & Szymanski, 2015; Nauright & Ramfjord, 2010).
3.2 Industry Recipe and Individual Talent
McNamara et al
.
(2013) use business models and industry recipes ascomplementary tools to help managers face uncertainties when selecting a strategy that will capture (appropriate) value for the firm and create value for the costumers
.
The basis for an industry recipe is the “shared knowledge base that those socialized into an industry take as familiar professional common sense” (Spender, 1989, p.
63).
The original studyrefers to the recipe that applies for the PL and terms it the “talent-based recipe”, central to this recipe is the talent of the players as well as the accumulated shared team experience
.
The core assumption of the talent-based recipe originates from Chambers, Foulton, Handfield-Jones, Hankin and Michaels III (1998), where talent is a scarce resource and the very best are increasingly hard to recruit and retain.
A shortage of talent impacts the ability of firms to create and appropriate value in a negative way (Chambers et al.
, 1998).
The best 10 to 20% employees are referred to as “A players” or “A Level” talent (Axelrod, Handfield- Jones and Welsh, 2001; Beechler & Woodward, 2009)
.
The firm that is able to capture and retain the highest quality of talent will be the one procuring competitive success (McNamara et al.
, 2013).
If a company manages the A players successfully it raises operational productivity, profit and sales revenue to a higher level than when it only uses average performers (Axelrod et al.
, 2001).
In the setting of a team-based sport, the deployment of human resources is going to be higher than physical ones when executing a strategy (McNamara et al
.
, 2013).
The Premier League (PL) has two windows for hiring players; one is during the summer and the other during the winter.
The summer season is especially important because it mirrors the Union of European Football Associations (UEFA) deadline for registering players for all its competitions.
The PL current transfer dates are aligned with the majority ofEuropean countries allowing for a global marketplace to take place (The Football
Association Premier League Limited, 2015)
.
In view of superior talent being a source of competitive advantage, a lot of companies are willing to pay whatever it takes to obtainsuch talent, and this behaviour is especially visible in the football industry (Chambers et al
.
, 1998).
Research has shown that paying an additional 40% for an A player could produce a return of 100% or more in a single year (Axelrod et al
.
, 2001).
Which could explain why clubs are willing to spend so much money in one single transfer.
A shortage of top talent impacts a firm’s ability to create or appropriate higher value negatively as top talent is assumed to be more productive in solving business problems and more attractive for costumers (Chambers et al.
, 1998).
However, if only a small percentage of employees are A players a company cannot afford to ignore B players (Beechler & Woodward, 2009).
To attend this issue in the PL, teams not only acquire B players from other clubs but they also have their own football Academies where they produce youth talent
.
It is important to account for youth talent because it can become an important source of value creation as performance varies over time and a B player can eventually become an A player (Pfeffer and Sutton, 2000)
.
In an effort to incentive teams to use players that are developed within the English League system, the home-grown player rule was created at the beginning of the 2010/2011 season..
With this rule, teams can only register 25 players over the age of 21 for the season’s first team matches.
Of the 25 players, no more than 17 can be foreign.
This means at least 8 players need to be home grown.
The PL defines a home-grown player as a player who: (1) is 21 or older on January 1st of the year in which the season begins and (2) spent three years between the
ages of 16 and 21 with a team in the English football League system
.
Teams then, are expected to have A and B talent in the squad.
Assuming the transfer market for players is semi-efficient then, the one’s with predominant A talent players will be the ones with higher anticipated productivity.
3
.
3.
Collective mind set – Value Creation
During a match the activities of the players are interdependent, yet another reason why teams cannot solely rely on individual talent
.
Players need to work together on shared tasks, and as they become more familiar with the skills of other players and through the repeated process of working together they develop shared team experience (McNamara et al.
, 2013).
The teams will be considered as efficient means by which knowledge is created and transferred as previously viewed by other studies (e.
g.
Grant, 1996).
By cooperating and interacting with each other, team members acquireinformation or knowledge (Lynn, 1998)
.
Another important dimension of the talent-based recipe is that “competitive success is also a function of the development of firm specific knowledge” (McNamara et al.
, 2013, p.
476).
Individuals develop a common consistency through repeated interactions and internal learning activities, by which they transfer knowledge and increase the understanding of a situation and their shared experience, improving the quality and efficiency of their work (Huang, Lai, Kao & Sung, 2014; Kogut & Zander 1993).
When team members are able to anticipate the action of another member a collective mindset is created, facilitating integration and coordination of theindividual talents so when a team obtains knowledge it allows it to adapt and to improve the firm’s performance (Huang et al
.
, 2014; Weick and Roberts, 1993).
Performance for teams is measured as winning games by McNamara et al
.
(2013), which is why in this study points per season are a proxy for value creation.
The more a team plays together, the more knowledge, collective mindset and shared team experience will be created, and performance should increase over time allowing the team to have more points at the end of the season.
The better they do during the season the more value they create for the costumers (fans).
3.3 Revenue Streams – Value Appropriation
Value creation alone is not enough to attain financial success
.
The firm also needs to be able to appropriate some of the value created in the form of profits (Mizik &Jacobson, 2003)
.
Clubs report revenues through three principal sectors: broadcasting (domestic and overseas), commercial and match day (Arsenal Holdings PLC, 2010).
Broadcasting revenue comes from the distribution and broadcasting of live content through commercial partners.
The league is currently broadcasted in 185 countries making it the most watched league in the world (The Football Association Premier League Limited, 2015).
The most equitable revenue distribution in Europe takes place in the PL; the league has a ratio of top to bottom earning clubs at 1
.
53:1 (The Football AssociationPremier League Limited, 2015)
.
Based on an agreement by the founder members of the PL broadcasting revenue is distributed as follows:• 50% of United Kingdom (UK) and 100% of the international broadcasting revenue is split equally among the 20 clubs;
• 25% of UK broadcasting revenue is paid as “Prize Money” awarded depending by the final league position (merit payments);
• 25% of UK broadcasting revenue is paid in Facility Fees each time a clubs game is broadcasted live
Table 1 shows the final positions of the clubs (that will be used for analysis in this paper) in the PL as well as the value of the central income payments made in the 2014/15 season
.
Table 1: Payments to clubs (total may not sum due to rounded figures)
Club Points Equal Share Payments Facility Fees Merit Payment Total Payment Manchester City 79 £54
.
1m £20.
7m £23.
7m £98.
5mArsenal 75 £54
.
1m £20.
0m £22.
4m £96.
5mEverton 47 £54
.
1m £14.
0m £12.
4m £80.
6mAston Villa 38 £54
.
1m £9.
5m £5.
0m £68.
6mThe commercial sector is the way the club is able to monetize their brand, this includes sponsorship, retail, merchandising, apparel and product licensing
.
Merchandising revenue is a fast growing source but, as it happens in every competing market, some clubs exploit their brand more successfully than others (Grundy, 2004)
.
Match day revenue is acquired through the sale of tickets for the venue, in the 2014/15 season 13
.
7 million seats were sold (The Football Association Premier League Limited, 2015).
Although this analysis is only focused on the PL, clubs in the UK also participate in the FA and Capital one cups as well as the Champions League (top 4 teams from the previous season)
.
From these tournaments, clubs are able to get additional revenues from prize money, television rights and gate receipts.
The FA Cup starts paying prize money to clubs from very early qualification rounds, they also get paid when losing in the semi-finals or semi-finals and get as much as £3.
4 million if they win it, excluding broadcasting and match day (Deloitte, 2012).
For the Champions league in 2014 each club is entitled to a minimum payment of €8.
6m for participating, as well as €1m for every win or €0.
5m for every draw, the winner got €10.
6m (UEFA Champions League, 2015).
3.4 Business Model Typologies
The following is a reproduction of the business model typologies as McNamara et al
.
(2013) presented in their study, all of which are considered stable modelconfigurations
.
From this model four propositions are presented as well as a mainhypothesis based on the literature reviewed above and the results obtained in the original study
.
This model measures internal accumulated shared experienced and external market value of talent.
As presented in Figure 1 a combination of these two items will derive in four different model typologies.
For models one and two, clubs do not make significant investment in talent so they end up with mostly low talented players (B class)
.
Unlike models three and four, clubs invest mostly in external talent, which makes them end up with a majority of top talented players (A class).
Additionally, clubs are able to decide which policy they will assume towards building accumulated shared team experience.
Business Model 1: B players, inexperienced
In this business model the club invests in B team talent and adopts a low team sharing experience policy
.
If a club does not have talented players and lacks collective experience, it is not expected of them to do well on the pitch (measured as points at theend of the season)
.
The team is not performing effectively so value appropriation is expected to be low.
As explained above, broadcasting payments are lower if the team does not do well during the season, which may affect the club’s financial performance.
However, because of the league policies they will still receive payments.
A club does not lose all its fans if it does not do well on a season, so match day and commercial revenue are expected to be affected as well as broadcasting payments but they are still existent.
Value appropriation then, is expected to be moderate
.
In view of this the following is expected:Proposition 1: Clubs following a Type B talent, low shared experience business model, will generate both low value creation, measured as points at the end of the season, and moderate value appropriation, measured as return on sales
.
Business Model 2: B players, experienced
Although for this model the club is still not investing in top talent it is investing in team experience
.
The club targets its efforts in developing a collective squad mindset with the B talent it has.
As the squad integrates and coordinates its efforts the team works in a more coherent way.
Over time, players understand each other’s capabilities and work together as a team.
Despite the shared experience the lack of A talent players makes it difficult for teams to compete against other clubs.
Due to this, value creation is also expected to be low.
Considering the team, without always ranking in the top spots, does well as a unit it will also do well generating broadcasting earnings on top of producingcommercial and match day earnings
.
These results translate into high value appropriation for the club.
Consequently the following is expected:Proposition 2: Clubs following a Type B talent, high-shared team experience business model, will generate low value creation, measured as points at the end of the season, and high value appropriation, measured as return on sales
.
Business model 3: A players, experienced
In this, model the club not only invests in A class talent but also in high team experience
.
With top talent and high-shared experience it is rational to expect the team to perform well on the field, which is why, it is the most popular for the costumers (fans).
This, in return will increase value creation as well as value capture.
If the club is amongst the top teams, it will earn more money for broadcasting, and it will have a highcommercial and match day revenue due to the bigger fan base
.
This financialdevelopment will make up for the investment clubs make for acquiring higher talented players (A class)
.
Considering the aforementioned, the following is expected:Proposition 3: Clubs following a Type A talent, high-shared team experience business model, will generate high value creation, measured as points at the end of the season, and high value appropriation, measured as return on sales
.
Business model 4: A players, inexperienced
For this last model it is also expected that the club invests in higher talented players but they do not invest in high-shared team experience
.
Therefore, players will lack understanding of each other’s capabilities, which does not allow them to integrate as well as a team.
Not fostering shared experiences will be detrimental to the club’ssituation, as the team will struggle to win games
.
Considering the team has A class talent, value creation will be moderate.
In view of the club having A class talent, customers (fans) will expect superior performance and they will not be willing to invest if they do not see results on the pitch.
In view of this, value appropriation will be very low.
Considering the above the following is expected:Proposition 4: Clubs following a Type A talent, low shared team experience business model, will generate moderate value creation, measured as points at the end of the season, and very low value appropriation, measured as return on sales
.
In light of these relationships summarized in figure 1 McNamara et al
.
(2013) present an omnibus hypothesis:Main Hypothesis: Alternative business model types will differ both in terms of value creation for costumers and value appropriation for the firms that adopt them
.
Be as it may clubs do not necessarily need to stay with one business model and can move from one to the other as an effort to improve either value creation, value appropriation or both
.
Nonetheless, managers need to consider that doing so involves an uncertain transitional state.
The propositions were modified according to the results from the original study considering the same results are expected for this study
.
The main hypothesis remains intact in view of McNamara el al.
(2013) confirming it.
4. Analysis and results
4.1 Data Collection
For the empirical analysis I gathered data from 6 seasons (2009-2014) and 4 teams of the English PL
.
The inclusion of earlier seasons was not possible due to the fact that the data was only publicly available from the 2009/10 season onwards.
Information on individual appearances per season and minutes played per game was retrieved from the official PL website and from an English website (whoscored.
com) of statistics provided by Optra Sports.
Players carriers and transfer value was collected from a German soccer website (www.
transfermarkt.
co.
uk) as previously used in other studies (e.
g.
Weimar & Wicker, 2014).
Financial information such as profit and return on sales was retrieved from the club’s annual reports and information made public via their official websites.
The final sample had to be reduced to 4 teams to assure none of the teams analysed was relegated from the PL during the seasons that were considered
.
Further adjustments were made when measuring player value due to youth talent being promoted from the club’s football academies to the first team, loans, swaps and undisclosed transfer fees.
4.2 Measures and Variables
The variables are summarized in Table 2 in line with McNamara et al
.
(2013) study.
Table 2: Definition of variables
Variable Description
I
.
Value CreationPoints
The number of points a club gains at the end of each season
.
Each team plays 38 games per season, they receive 3 points for winning, 1 for draws and 0 for losing.
II
.
Value Appropriation Return on SalesAnnual profits divided by total annual sales per club as previously used in other papers (Combs, et al
.
, 2005; Durand et al.
, 2008).
III
.
Player Talent (A or B player)Players Value (£)
Measured by obtaining an average of player’s value using the transfer fee paid from one club to another to acquire a player
.
From that low and high talent market values are constructed by splitting the series at its median value.
IV
.
Business Model TypologiesB players, inexperienced Below median player value and below median shared team experience
.
B players, experienced Below median player value and above median shared team experience
.
A players, inexperienced Above median player value and below median shared team experience
.
A players, experienced Above median player value and above median shared team experience
.
While McNamara et al
.
(2013) used a panel data of all the football clubs that appeared in the English Premier League (now Barclay Premier League) from 1993 to 2004 my panel data will be from 2009 to 2014 focusing on 4 clubs from the same league.
The teams selected are Arsenal, Aston Villa, Everton and Manchester City due to the public available information of all the clubs. As stated before the team that wins more games (ranks better) at the end of the season is the one that has created more value
.
Out of 20 teams that are in the competition each season Table 2 shows how many points each of the selected teams gained.
Traditionally a total of 40 points are needed in order for a team to avoid relegation.
However, over the last 10 years an average of 34.
9 points was enough to keep a team from being relegated (Premier League, 2015).
B players,inexperienced model is used as the baseline, it also controls for promoting firms (teams) and confirms that both talent A business models outperform the baseline B talent
.
Table 3: Premier League Points per Season
2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
Arsenal (75) (68) (70) (73) (79) (75)
Aston Villa (64) (48) (38) (41) (38) (38)
Everton (61) (54) (56) (63) (72) (47)
Manchester City (67) (71) (89) (78) (86) (79) Source: Barclays Premier League official website
In terms of value appropriation the comparison between clubs was made dividing their profit before interest and taxation by the turnover of the season
.
Profit before interest and taxation is used so the impact of player sales is present in the financialcomparison
.
Turnover of the club includes match day, broadcasting and commercial revenues, and it represents the income receivable from football and related commercial activities.
Match day and broadcasting revenues are recognized over the duration of the football season, and commercial revenue is recognized over the duration of the respective contract.
For some clubs the football segment is not the only business activity of the company however, other businesses are not taken into consideration when evaluating the financial performance of the team.
The player’s data set consists of all the players registered by the teams in the official PL website for each of the seasons that are analysed
.
“Player talent is measured as the publically available price paid by one club to another for any player that was employed by a rival club at the time of being hired” (McNamara et al.
, 2013, p.
481).
Following the definition, to calculate players value, all youth players, swaps, loans and undisclosed amounts were excluded for the sample.
Youth players arrive to the first team through the club’s academy so no price was paid to another club for them.
Players with a disclosed loan fee are considered, as there is a price paid to another club however, clubs are not subject to pay a fee for all loans or swaps.
Nonetheless they can negotiate with the other club to pay just the salary of the player for the season (Premier League Hand Book, 2015-2016).
The definition of player value leaves aside players salary, for that reason players with undisclosed loans fees and swaps are not contemplated in the analysis
.
If the amount of the transfer fee is not disclosed the players are also excluded from the analysis.
In view of not having a price paid to another club there is no real value to be used, but using a zero would bring down the average for players value and affect the results
.
On the other hand youth players, loans, swaps or undisclosed amounts status are considered for shared team experience.
This construct measures the average of actual playing minutes a player has with his squad and that number is not affected by how much a club paid for them.
Business model typologies are calculated per team per season to determine difference of means and also per team considering all the seasons to determine the business model that a club uses in a certain season
.
This analysis helps explore the distinction between a constant and changed business model as well as their performance and impact for the clubs.
A business model is labelled as constant if the club uses that business model for more than one year, otherwise it is labelled as a changed business model.
4.3 Results
An overview of the results can be seen in Table 4 where a comparison is made between the expected and the actual results according to the 4 propositions
.
Figure 2 shows which business model each team used per season.
Table 4
.
Results
McNamara et al
.
’s results Results of this study Proposition 1 Low value creation, moderatevalue appropriation
Low value creation, moderate value appropriation
Proposition 2 Low value creation, high value appropriation
Low value creation, high value appropriation
Proposition 3 High value creation, high value appropriation
High value creation, moderate value appropriation
.
Proposition 4 Moderate value creation, very low value appropriation
Moderate value creation, very low value appropriation
Figure 2 Business Model change per team, 2009-2014
0 1 2 3 4 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 Arsenal Aston Villa Everton Manchester City
Looking at the first proposition that focuses on business model 1, where the team has a majority of B talent players with a low-shared team experience, the expected results were obtained
.
This means that clubs that use business model 1, have low value creation, measured as points at the end of the season as well as moderate value appropriation, measured as return on sales.
From the results obtained in this thesis, the conclusion can be drawn that these results support and strengthen the results of McNamara et al.
(2013).
The second proposition states that clubs that have a team with the majority of B talent players, but with high shared team experience will have low value creation in terms of points at the end of the season and high value appropriation in terms of returns on sales
.
These expected results are supported by the analysis done in this thesis.
Also these results strengthen the results of McNamara et al.
(2013).
For clubs that follow business model 3, and have a team with the majority of A talent players and high shared team experience, a high value creation and high value appropriation, is expected
.
The results for the value creation, as seen in table 5, are in line with the expected results, showing high value creation.
The results for the valueappropriation, as seen in table 6, are different than the expected results
.
The value appropriation only shows a moderate value, and not the high value that was expected.
This means that this result contradicts the results of the study of McNamara et al.
, (2013).
This can be due to the fact that both the study of McNamara et al
.
, (2013) and this study consist of a limited sample size.
With a small sample size significant results areharder to obtain, thus no hard conclusions can be drawn when looking at the level of value appropriation for this business model
.
Table 5: Value Creation: league points in season Business Model n Mean Points Standard Error
B players, inexperienced difference of means B players, experienced difference of means A players, inexperienced difference of means Model 1: B players, inexperienced
Constant Business Model 2 59
.
5 12 Changed BM this year 6 63 5.
4 Model 2: B players,experienced
Constant Business Model 4 57 11
.
04 2,5 Changed BM this year 3 61.
67 4.
1 1.
33 Model 4: A players,inexperienced
Constant Business Model 2 69 2 -9
.
5 -12 Changed BM this year 1 48 n/a 15¤ 13.
67¤ Model 3: A players,experienced
Constant Business Model 4 83 2
.
68 -23,5* -26R -14*Changed BM this year 2 51 13 12 10
.
67 -3¤*p <
.
05, **p <.
01, ***p <.
001, Rp<.
10.
Significance assessed using 2-tailed t-test.
¤Unable to calculate significance due to n=1
The last proposition expects that business model 4, a team with the majority of A talent players, but with low shared team experience, will generate moderate value
creation, measured as points at the end of the season and very low value appropriation, measured as return on sales
.
When looking at both table 4 and 5, the conclusion is that the results are similar to the expected results.
This means that the results on thisproposition are similar to previous results and thus supporting the research of McNamara et al
.
(2013)Table 6: Value Appropriation: return on sales
Business Model n Points Mean Standard Error
B players, inexperienced difference of means B players, experienced difference of means A players, inexperienced difference of means
Model 1: B players, inexperienced
Constant Business Model 2 -0
.
115 0.
125 Changed BM this year 6
-0
.
1317 0.
153Model 2: B players, experienced
Constant Business Model 4 -0
.
015 0.
14448 -0.
1 Changed BM this year 3 -0.
4 0.
20518 0.
2683Model 4: A players, inexperienced
Constant Business Model 2 -1
.
085 0.
155 0.
97* 1.
07* Changed BM this year 1 -0.
02 n/a -0.
1117¤ -0.
38¤Model 3: A players, experienced
Constant Business Model 4 -0
.
145 0.
09526 0.
03 0.
13 -0.
94** Changed BM this year 2 -0.
02 0.
04 -0.
1117 -0.
38 0¤ *p <.
05, **p <.
01, ***p <.
001, Rp<.
10.
Significance assessed using 2-tailed t-test.
¤Unable to calculate significance due to n=1
Comparing business models
Although the significance is not as strong as in the original study, in line with the main hypothesis, the results show a difference within business model types in terms of value creation for costumers and for the firms (clubs) that adopt them
.
In terms of value creation as observed in table 5 and in line with what was reported by McNamara et al.
(2013) there is a significant difference between the business models of (1) B players,inexperienced - A players, experience, (2) B players, experienced – A players experienced and (3) A players inexperienced - A players experienced
.
Table 6 is also in line with McNamara et al
.
(2013) and shows a significant difference between the business models of (1) B players, inexperienced – A players, inexperienced, (2) B players, experienced – A players inexperienced and (3) Ainexperienced – A players, experienced
.
Even with the alteration of some aspects of the initial design, mainly the sample size, I was able to confirm initial findings clarifying the implication of previous results.
5. Discussion
The results obtained are not only in line with the theory but also with the results of McNamara et al
.
(2013).
Their significant p-values established initial confirming evidence, getting similar results acknowledges such evidence and helps further development of cumulative knowledge (Bettis et al.
, 2015).
The analysis further demonstrates that more than one stable business model configuration is possible within an industry even though they are not as stable as it was initially expected, also in line with the original study.
A club cannot always have high-shared team experience; players retiring, changing to other clubs or youth players incorporating to the first team, make it impossible for clubs to maintain high levels of experience or talent for long periods of time
.
For the aforementioned, the two business models with below median shared team experience can be considered as transitional models.
It was expressed at the beginning of the paper that transitioning from one business model to another created uncertainty of the outcome during the transitional state.
By gathering statistically significant results, similar to McNamara et al.
(2013), this study reduces the transitional state uncertainty and contributes to managers by showing to some extent, a visible path of what will occur when moving from one business model to another in this setting.
This study shows that the starting and ending point of the transition is paramount on determining how much value creation and appropriation will be affected.
Firms have a trade-off between value creation and value appropriation and it is difficult to achieve a right balance (Mizik & Jacobson 2003).
This trade-offs are not without risk and a precipitous decline couldoccur, in the context of this study a higher decline occurs when transitioning from business model 2 (B players, experienced) to business model 3 (A players, experience) because the club needs to transition first through business model 4 (A players,
inexperienced)
.
During this transition, value appropriation will shift from high to very low before it goes up again; meanwhile value creation will move from low to moderate and finally to high.
There is a trade-off between value creation and value appropriation that the manager needs to be aware off when making strategic choices, because the transitional state could be too costly.
As expected, the highest outcomes are achieved through the third business model, when the firm is concerned with maintaining high levels of accumulated team experience and on-field performance (winning games)
.
It was previously stated that all clubs want to use business model 3 considering it generates the highest rewards but results of this study show that a team generates similar financial returns regardless of A or B player talent when team shared experience is high so the club has the option of not being concerned with on-field performance.
Figure 2 shows what type of business model each club had per season and how they transitioned between business models
.
In the figure (2) it can be observed that Manchester City is the only club that clearly follows a transition pattern being for two seasons with business model 4 (A talent, inexperienced) and transitioning into business model 3 (A talent, experienced) for the last three seasons.
Studying the club’s previous seasons to determine how many seasons it took to transition from business model 2 to 4and how much did it struggle could be very interesting given that the seasons covered here only account for the shift between business model 4 to 3
.
Arsenal and Everton show no clear interest on using business model 3, they do however, shift between business model 1 (B talent, inexperience) to business model 2 (B talent, experience)
.
In both of these cases the configuration is not as stable as initially expected, being clearly observable that they switch between business models.
The rational decision would be for them to stay as long as possible with business model 2 (assuming business model 3 is not something they want) but only Arsenal shows a higher interest in team shared experience policies.
Although both clubs are constantly moving from one business model to another, these results are not all that rare considering they remain with B type talent
.
What would be considered a strange (or unfeasible) behaviour would be for them to go from B to A type talent and vice versa continually from one year to another.
Both clubs get similar amount of points during the six seasons, in line with the low value creation results for business model 1 and 2.
The difference comes when analysing their annual statements.
According to Arsenal’s chairman, the club only spends money (especially on players) when they have it in order to maintain financial health
.
After the 2010/11 season with business model number 2 the club spent £49.
11m on new players, 96% higher than the previous season due to the value they were able to appropriate.
During the seasons using business model 2 the reports also announce the club renewing the majority of the players contract in an attempt to retain the core of the team and investing in young talent to have a mix of youth and experience in the team.
After two seasons of successfullyusing business model 2 (2012/13 and 2013/14) the team returned to a transitional business model
.
One explanation for this could be attributed to the World Cup in the summer of 2014.
Due to the team improved financial position they were able to buy 3 new players based on their performance during the World Cup and secured one young player.
All these players became regulars on the first squad and in a sport where 11 players are on the field it had an impact on shared team experience.
Further analysis into the next seasons would be interesting to see if Arsenal gained shared team experience for the following season moving again into business model 2.
The behavior of Aston Villa is very interesting as they clearly move from the more desired business model 3 to business model 2
.
This change in business model continues to yield high value appropriation but shows the team is not that concerned with value creation.
This shift shows the transitional path from business model 3 to 1 to finally a constant business model 2.
The results obtained give clubs some sort of security that while they transition between experience business models they could continue to have high financial performance although they will be low on value creation
.
Nonetheless, value creation (league points) still needs to be considered and teams cannot take it for granted as acquiring very little points during the season could lead to relegation from the PL and from other European competitions.
Further analysis considering more years and teams can be helpful in understanding why clubs do not want or cannot maintain their business model 3 as Manchester City did.
6. Conclusion
As stated before, novelty should not be prioritized over replication so cumulative knowledge on a specific subject can be obtained
.
The aim of this study was to replicate McNamara et al.
’s (2013) study using the same industry and league but with a smaller sample to be able to evaluate the generalizability of their findings by confirming their results and enriching knowledge on the subject.
It was demonstrated again that more than one stable business model configuration is possible within an industry even though they are not as stable as previously thought.
The analysis also supports their findings, showing that the best financial performance is obtained when a club keeps high levels of team shared experience regardless of individual talent
.
However, it is important to consider that this argument might not be true for the entire industry taking into account that the PL has the most equitable revenue distribution in Europe.
With the increased certainty that this replication gives the same analysis could be applied to different leagues where perhaps different results on financial performance (when maintaining high levels of shared experience) can be found (e.
g.
La Liga in Spain).
High shared experience business models are notexpected to last long periods of time as changes in players will exist, in this study one club (Manchester City) is able to maintain a stable business model for three years within the limited time period
.
McNamara et al.
(2013) are able to construct a higher set of data (years), but they do not separate their results by club’s names (only by business model types) making it impossible to determine which one was able to maintain their business model and for how many years.
Further study on this topic would be interesting to helpdetermine what is the longest period of time a club can maintain a business model, particularly number 3, as it is the one creating the most value for costumers and appropriating the most value for the firm
.
With the use of four business model typologies a further understanding of
business model concepts was added to the current literature in talent-based industries
.
By confirming the idea of more than one stable business model within the industry clubs can differentiate themselves from each other while knowing what kind of results to expect in terms of value appropriation and value creation.
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