Is it Possible to Sustain a Competitive Advantage in Baseball?

Monday, January 11, 2016

During this off-season I have been thinking a lot about why it appears major league teams can't perpetuate success once they have experienced it. By success, I mean making it to the playoffs. There are teams that do it, but it is rare. Why can't teams seem to make it to the playoffs multiple years in a row? Some of it has to do with the size of the team's payroll, but there are many playoff streak instances in history where this was not the case.



The chart below displays the longest playoff streaks in baseball history post 1968. Pleases note, I chose to only look at seasons after 1968 because it wasn't until 1969 when the modern playoff system was implemented. During that time, 17 different franchises made the playoffs at least 3 seasons in a row - 28 total streaks of 3 playoff appearances or more considering some franchises, like the Yankees, enjoyed multiple playoff runs. There are only nine playoff streaks of four or more seasons in a row.

The point of this chart is to show you the outliers. From 1969 on, there were always at least 4 teams in the playoffs and from 1981 on there were always at least 8 total. This means the vast majority of teams who make the playoffs do not go on to preserve prosperity. They can't string multiple playoff appearances together. Why is this the case?

The short answer is, over the years a majority of teams - with the exception of a few - have not been able to deploy methods and approaches that cannot be duplicated by other teams. For instance, the Oakland A's were one of the first teams to begin using sabermetrics to help them compete against teams who in the past had essentially been able buy their way to the top. The analytic scheme worked, but over the years these same statistical principles began to be used by many teams. Now, even teams that the stat world considers to be anti-saber have at least a small quantitative department.

In my last post I briefly mentioned that "moneyball" tactics could be considered operational effectiveness and that success brought on by using these tactics are unsustainable. I borrowed the term operational effectiveness from Michael Porter, famed strategist and Harvard professor. He used the term when referring to certain management tools - such as six sigma or total quality managment - used by companies in their quest for productivity. Porter contends that operational effectiveness is necessary, but not sufficient when it comes to creating a competitive advantage. Porter is saying that companies cannot rely on using six sigma or TQM as a way to sustain an advantage over the competition. The techniques are imitable by other companies and therefore any advantage that they bring will only last a short time. I am saying that baseball teams cannot rely on using sabermetrics as a way to sustain an advantage over the competition. All teams will begin to look the same. However, it doesn't take the whole league using advanced analytics for the advantages of using them to wash away. The MLB playoff bracket has ten open spots for teams to fill. Even 11 or 12 teams using sabermetrics - evenly distributed between the NL and AL - cause the previous competitive advantage of using these advanced stats to disappear. The sustainability is lost.

Looking at the chart above, it would seem that sustaining a competitive advantage in baseball is possible, but very hard to do. Some teams - while their intentions are valid - are not going about implementing strategies that bring about sustainable advantages. My goal is to create a conceptual framework for teams looking for continuous success. I am going to borrow ideas from Jay Barney, business professor at the University of Utah, to help me explain the framework.

I have been throwing around the phrase competitive advantage and while I am sure most of you have a good idea as to what it means I will define it according to Barney's view. A competitive advantage is when a business is implementing a value creating strategy not simultaneously being implemented by a competitor. In baseball this can mean nearly the same thing. For example, a team using sabermetrics to help them value players can and is being done by more than one team. That being said, there may be other resources being used by one team that is not being used by all of the others thus giving that team the possibility of creating a competitive advantage.

Generating a competitive advantage is great, but we are seeking sustainability. In order for a competitive advantage to be sustainable, firms - or in our case baseball teams - must be unable to replicate. An example would be the Royals bullpen strategy. Using three different closer-type relievers for innings seven, eight, and nine can and is now being duplicated by other teams. The strategy alone is not sustainable. What is sustainable is the resources used - Herrera, Davis, and Holland. These are three of the best relievers in the game. In any given year there are three relievers that are statistically the very best. Conceivably, if a team acquired those three relievers then they would have the necessary resources for building a sustained advantage. It is the resources that I contend are the key to a team being able to prolong success.

According to Barney, resources are all assets, capabilities, organizational processes, firm attributes, information, and knowledge controlled by a firm that enable it to conceive and implement strategies that improve its efficiency and effectiveness. These resources while numerous can be classified into three main categories: physical capital resources, human capital resources, and organizational capital resources. Listed below are these three resource categories with baseball examples.

1. Physical capital resources
  • Technology used within the baseball operations department
  • Geographic location of major league team, minor league teams, and academies.
  • Access to prospect centers (ie. states, regions, countries player pools)
2. Human capital resources
  • Training of players, managers, and front office personnel
  • Experience of players, managers, and front office personnel
  • Judgement of players, managers, and front office personnel
3. Organizational capital resources
  • Teams' formal reporting structure
  • Teams' formal and informal planning (strategy)
  • Teams informal relations among groups within and between other teams
These three main resources, and the many that fall under their heading, will always give teams the potential to create a competitive advantage if they contain four crucial attributes. Before I get into those attributes I need to mention another major qualifier for the the resource-based framework to be applied properly. For a team to be able to sustain a competitive advantage and in turn string together multiple playoff runs, the baseball industry must be heterogeneous. If all teams contain the same resources then logically no one could create an advantage based on this model. Luckily, baseball teams most certainly contain unique resources and I do not see this changing anytime soon. Ok, back to the four attributes that a resource must hold for it to have the potential to generate a sustainable advantage for the team.

First, the resource must be valuable, in the sense it exploits opportunities and neutralizes threats to the team's environment. Take the resource of human capital. Using this logic a team could hire very experienced front office personnel and take advantage of their wisdom in assembling a team. At the same time, if the front office is truly a cut above the rest, then their proprietary knowledge would also neutralize any threat from competing teams. Other teams could not hire employees that matched the front office's level of experience and judgement. Another example comes with the resource(s) of organizational capital. For instance - and this is completely hypothetical - a team could set up a network of academies and scouts in Russia and establish relationships that would give them a first mover advantage. This would exploit opportunities and neutralize threats if along with this resource the team were to hire or train scouts that could build unique relationships with prospects, their coaches, and managers.

Second, the resource must be imperfectly imitable. To be imperfectly imitable the resource must meet three criteria. One - the ability of the team to obtain the resource is dependent upon unique historical conditions. Think about how the collective bargaining agreement has changed over the years. At one time teams had a lot more power than the players. Let's say a resource (player) was obtained by an organization during a period when teams had more power than the players thus making the contract more advantageous for the team. Let's also say this player was a superstar and that he gave his team a great advantage on the field. A few years later a new agreement comes out giving more power to the players, but the superstar has already signed a contract with the team before that new agreement. In this case, history was on the side of the team who acquired the superstar. Other teams would not have the same advantage after the agreement was changed. They could not sign a similar caliber player for the same inflation adjusted rate as the team who signed the superstar during the time of the old agreement.

Two - the link between the resource possessed and the team's sustained advantage is casually ambiguous. This would exist when the resource controlled is not understood or only slightly understood. In Lehman's terms this is the "it" factor that no one can put their finger on. This may be accomplished intentionally by a team or it may come about by accident. An example would be the Cardinals recent success. We know they have had some good players, but there also seems to be something going on behind the scenes - unavailable to the public - that has led to their continued winning ways. Maybe the entire strategy or process of the Cardinals is so complex that others can't rap their head around it. The key here is that other teams cannot replicate their strategy because they can't understand how they have done it. In my opinion, this sub-attribute crucial to baseball team's sustaining success.

Three - the resource generating the team's advantage is socially complex. For example, the ball club may have superior interpersonal relationships between managers and front office staff. Also, the club may have a better reputation with prospect regions meaning one team is looked at as a better organization to play for over the others. Maybe all of the prospects in Panama see the Red Sox as the best team to play for and would be willing to make trade-offs in order to sign with them. Another example could have to do with the technology used by front offices. Teams may possess the same technology, but only one may be able to use it's complex social resources (scouts, managers, etc.) to harness it. Think about the problems with Dipoto and Scioscia in Anaheim. The Angels were clearly not able to successfully utilize the technology throughout the entire organization.

Third, for a resource to have the potential to sustain a competitive advantage for a team it must be rare among current and potential competition. An obvious example of this are drafted players that turn out to be superstars. These types of players are scarce and shows you just how important that drafting talent is to the sustainability of organizational success. However the notion of substitutes comes into play here and brings us to the final attribute a resource must possess to have the potential to help a team sustain a competitive advantage.

Forth, there cannot be strategically equivalent substitutes to the resource. If other teams can create close substitutes of having a superstar then the resource (superstar) will not be able to sustain an advantage for his team. This doesn't have to be limited to just one player either. If a team has three or four superstars on their team, but another team is able to use substitutes to match the capabilities then those superstars would not be a source of sustainability. They may lead to short term success, but if another team can duplicate that success by manipulating a different set of resources than the superstars cannot create sustained success. This may be confusing so I will use a very easy example. In 2002, the Oakland A's - using advanced statistics - were able to outperform teams who possessed considerably better individual talent aka superstars. In that year, it was proven that the Yankees superstar players could be substituted for an optimized roster of average to slightly above average players. Around the time the Angels fired Dipoto, Scioscia may have thought that his close knit highly experience management team was a close substitute for the use of Dipoto's analytics department. In some respects he might have been right. I am by no means saying that a team should not use sabermetrics, but that there could be a substitute - that is very different - that produces similar results. In my opinion, a baseball organization with a close knit highly experienced management team that also embraces and uses a unique and intelligent analytics department would have an advantage over a team like what Mike Scioscia presumably envisioned.

If team's truly hold the ability to create a formula that can sustain winning, it is my belief that the key lies within the resources of the entire organization. How team's uses their resources is just as important. I laid out four attributes that a resource must hold in order for it to have the ability to create a sustainable advantage. As you can see - and I assume already suspected - this is very hard to produce. In fact, according to the chart it has only been done a few times in history and - depending on how you are judging - the Yankees are really the only ones to do this frequently throughout history. One might say this is unfair because the Yankees typically have the higher payroll. This is true, but money is very much a resource and a team who controls that particular resource is able to deploy additional resources unavailable to teams without the said resource. This is a harsh reality for some teams, but it has been proven in the past that in baseball their are close substitutes to having money. If there wasn't then the Yankees and Red Sox would win every year.

I hope everyone understands what I was trying to accomplish here. Mostly I wanted to take a high-level approach to constructing a strategy for teams. It may not be enough in the future to simply be good at sabermetrics. If nothing else, it should be clear why it is so difficult for teams to win year in and year out. Correct resources must be decided upon by team's to be used in their overall strategy (ones that contain the four attributes). Those resources must be distributed almost perfectly and then in some cases a good deal of luck is involved. The resource-based framework is not the only form of strategy, but in my mind it could work if applied in baseball.

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