In sports such as football, rugby, and basketball it is often better to commit a foul rather than giving the other team the opportunity to score. Photo / AFP
In sports such as football, rugby, and basketball it is often better to commit a foul rather than giving the other team the opportunity to score. Photo / AFP
As we play host to the biggest football tournament ever to hit these shores, Massey University Economics Professor Christoph Schumacher and Masters student Nigel Espie have a look at what football can teach business.
Football and business both involve situations when a team or company is on the defensive. In the context of business, this may involve a competitor releasing a new product, advertising aggressively, or gaining market share.
In football, being on the defensive often means the opposing team is on the verge of scoring a goal. The decisions facing footballers and companies when they are on the back foot are shaped by many things, including ethics, incentives and penalties.
In sports such as football, rugby, and basketball it is often better to commit a foul rather than giving the other team the opportunity to score. Wayne Rooney and Luis Suárez are two world class footballers that have both been sent off in playoff matches during a FIFA World Cup. While the red cards received by these players certainly went against the spirit of the game, another question might be whether the fouls committed were in the best interest of their teams.
To determine when a player has an incentive to commit a foul, Dutch researchers collected data from 340 Dutch football games in which only one player received a red card. The purpose of the research was not to advocate foul play. Rather, it was to evaluate from a statistical perspective when a player should risk being sent off in order to deny a clear goal-scoring opportunity.
Players need to consider two key factors when committing a foul: the time within the match and the likelihood of the other team scoring a goal if the foul is not committed. Having ten players on the pitch reduces the expected number of goals that team will score while it increases the expected number of goals for the other team. And the earlier the red card, the worse this becomes for the team with ten players.
Wayne Rooney's red card in the 2006 World Cup quarter final against Portugal came in the 61st minute, leaving approximately one-third of the game remaining. Conversely, Luis Suárez's red card in the 2010 World Cup quarter final against Ghana occurred in the 122nd minute in extended overtime.
Wayne Rooney's red card in the 2006 World Cup quarter final against Portugal were not in his team's best interests. Photo / AP
Meanwhile, as the likelihood of the other team scoring increases, committing a foul becomes progressively more worthwhile. Since penalty shots are made approximately 85 per cent of the time, it is rarely beneficial to commit a professional foul in the penalty box, unless the opposing team is almost certain to score.
Wayne Rooney's professional foul against Portugal occurred in the middle of the field in a relatively subdued period of play. The English team had strong numbers defending their goal at the time of the offence, meaning that there was almost no chance that Portugal would score if Rooney had not committed the foul. However, Luis Suárez's red card against Ghana involved Suárez using his hand to swat away a ball right in front of the goal. Without the intervention from Suárez, Ghana would have almost certainly scored.
When seen in this light, it becomes clear that Wayne Rooney's actions were not in his team's best interests. Conversely, while Luis Suárez's hand ball in the 2010 World Cup quarterfinal against Ghana certainly went against the spirit of the game, it is easy to see why he committed this professional foul on statistical grounds.
Company executives, like football players, also have to decide how to act when they are on the defensive. Even with the right expertise, ample capitalisation, and good market conditions, the entrance of a new competitor or the resurgence of existing competition can threaten a company's market share. The company then has to decide whether to simply strengthen its defence or tackle the opposition and risk a red card.
A defensive move could be to raise barriers to entry, which creates an economic moat around a company's business so that it has a solid defence for its competition. Two ways companies can establish barriers to entry are through product differentiation and switching costs.
Through differentiating a company's products from those of competitors, a company has the potential to develop brand loyalty among its consumers. However, for product differentiation to be effective, a company's products do not necessarily have to be markedly different from competitors' products.
An example of this can be seen by evaluating two of the most fundamentally similar, yet differentiated, products on the planet - Coca-Cola and Pepsi. Although Coca-Cola and Pepsi are in essence just different brands of cola soft drink, strategic marketing by both companies has created the perception that these products are markedly different. As a result, both companies have developed products that are worshiped by cult-like followings of consumers despite the products being innately similar.
Switching costs involve the expenses, inconvenience, and new learning that consumers would be required to make if they were to start purchasing another product. Perhaps the best example of a company that has developed large barriers to entry through high switching costs is Apple.
A company that has developed large barriers to entry through high switching costs is Apple. Photo / AP
The Apple ecosystem, which involves products such as the iPad, MacBook, iPhone, iTunes and iPod, is intricately related. All of these products operate on Apple's iOS operating system, which differs greatly from the operating systems of competitors' products and all of these products and their respective files can be managed with Apple's iCloud. As a result, existing Apple users are often so invested in the company's products that competitors would need to offer crazy discounts for Apple users to consider changing products.
In the 2010 World Cup game against Ghana, Luis Suárez deliberately used his hands to swat a ball destined for the net. He was red-carded but his foul helped his team to win the match. Business, like football players, will also occasionally break the rules intentionally if it means a better chance of making money.
At the end of May, six overseas banks were ordered by US and UK authorities to pay US$5.6 billion for foreign exchange rate manipulation. Traders representing the banks would meet in chatrooms to manipulate currency benchmarks used to peg foreign exchange orders from corporate clients. The manipulation resulted in the banks making money at the expense of these clients.
These traders certainly knew that colossal fines would occur if their collusive behaviour was uncovered but they proceeded anyway. Why? Because, just like for Luis Suárez, the incentives were right.
On average, US$5.3 trillion worth of currency is traded on the forex market daily. Whilst US$5.6 billion may seem like a big fine, it is miniscule compared to the potential profits these traders could have made if their behaviour had gone unnoticed for years.
But red card-worthy business behaviour not only happens overseas. In 2000 the Auckland High Court ordered Caltex New Zealand Limited, Mobil Oil New Zealand Limited and Shell New Zealand Limited to pay penalties totalling $1.175 million for breaching the Commerce Act by price fixing. And come Easter, we regularly see individual companies defying the Easter trading laws as the additional profit outweighs the fines they have to pay.
In football, no match should be won as a result of a player deliberately committing a foul. Similarly, illegal behaviour in business should not be rewarded with a positive financial return. Businesses and footballers will continue to deliberately commit fouls until such a time that the incentives change.
In football, perhaps the referee should be able to award a penalty goal in situations when a foul prevents a certain goal from being scored. In business, the severity of fines needs to be substantial enough that businesses have a large disincentive to break the rules.
Christoph Schumacher is a Professor of Innovation and Economics and Nigel Espie is a Masters student at Massey University.
