Is it Possible to Sustain a Competitive Advantage in Baseball?

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.

Comparative Advantage in Baseball

It seems a majority of teams like to play the market. This can work considering there is always the potential to find undervalued prospects, but the market is becoming increasingly efficient. By this I mean more teams are using the same valuation procedures to make transactions. For you finance people out there, you will understand this as efficient market theory. In layman's terms it means that prices of securities fully reflect all of the information available at any given time making it theoretically impossible for anyone to find an undervalued stock. This theory suggests that only executives within the company know the true value of their stock. In my own personal opinion this theory is only "sometimes" accurate. As Warren Buffet said, "The stock market is efficient until it's not." At this point the stock market of baseball is still somewhat inefficient meaning that there is still value to be had. However, as mentioned in a previous post, Moneyball 2.0, clubs are beginning to look to different strategies - besides the typical undervalued player - to create advantages and sustain success. Another example of this trend can be found in Jeff Quinton's piece, Winning by Design, where he demonstrates and proposes ways clubs are and should be using new modern management techniques to construct their organizations. I want to take the next few moments of your time to explain another way teams can continue to succeed in an increasingly efficient market.

My theory revolves around the notion of specialization and in the spirit of building teams from within. I am going to look at the positive advantages and negative outcomes and you can be the judge of whether the baseball market could support this idea. I will admit the idea is a little... out there and will not be surprised if totally found to be irrelevant, but regardless here goes.

Let me first tell you a little about the economic term comparative advantage and hopefully you will catch on to where I am going with this. Many times this term is referred to in a global context. The principle suggests that world output would increase if countries determined what goods and services they should specialize in producing. The concept goes on by claiming that countries should specialize by allocating their scarce resources to produce goods and services for which they have a cost advantage relative to other countries. This could mean that one country is more cost efficient when it comes to producing a good than another country. Take Columbia and Costa Rica for example (Sorry, Narcos kick). Both countries produce a significant amount of coffee and fruit. For the sake of the example let's say Columbia produces coffee more efficiently and Costa Rica has the efficiency advantage in fruit production. The principle of comparative advantage would say that Columbia should specialize more in producing coffee and Costa Rica should specialize in fruit and that by doing this it would optimize output. The more quality products in the market the better off everybody becomes.

Now replace the word "countries" with "baseball teams" and you will probably guess where I am going next. Using this principle in a baseball context gets tricky and like I said I am going too lay out the advantages and disadvantages. I think the best way to understand this concept is through an example. I will roll with the example we started with and replace Columbia and Costa Rica with the Cubs and Yankees (two of my favorite teams). Also for this example I will use pitchers and hitters instead of coffee and fruit. Note that in a real world setting the hitters could be broken down by position and pitchers by starter and reliever, but to simplify things I will stick with pitchers and hitters.

For this idea I am viewing the farm system of major league baseball teams in the same manner as countries. One produces some good or service the world needs and the other develops baseball players. Take a look at the matrix below. I am assuming that teams - in this case the Yankees and Cubs - already have some resources in place that make them more efficient at developing a certain type of player. This could mean the team has better pitching coaches than hitting coaches. It might have to do with the team philosophy or regiments; meaning the team workouts benefit one type of player over another. Also, it could be that the club employs amateur scouts that can better evaluate either pitchers or hitters.

These are made up numbers, but what it says is that in a given year the Yankees have the ability to bring up four major league ready hitters or one pitcher. The Cubs can bring up five major league ready hitters or 4 pitchers. I am assuming there is some level of unified certainty by each team with regards to judging whether a player is major league ready. In this case, the Cubs have the absolute advantage in producing both pitchers and hitters, but it has a comparative advantage in pitchers because it seems relatively better at grooming that type of baseball player. The Cubs are 4 times better at pitchers and only 1.25 times better at hitters.

The widest gap lies with developing pitchers. This is why the Cubs should specialize in developing pitchers leaving the Yankees to develop hitters. The economic theory - applied to baseball - would suggest that if teams applies the principle of comparative advantage, combined output will be increased in comparison with the output that would be produced if the two teams tried to become self sufficient and allocate resources to the production of both pitchers and hitters. Using this example, if the Yankees and Cubs allocate resources evenly both pitchers and catchers combine output is 7.5 major-league-ready players.

Cubs = 2p + 2.5h; Yankees = .5p + 2.5h
Output = 2.5p + 5h (= 7.5 major-league-ready ball players)

Please forgive the inaccuracy of this chart. I free-handed it.

If both teams specialized based on their comparative advantage, total market output would be 8 major-league-ready players.

Cubs = 4p + 0h; Yankees = 0p + 4h
Output = 4p + 4h (= 8 major-league-ready ball players)

I can already hear the gears grinding in some heads and people realizing that this would not directly apply to baseball. I am with you, trust me. Just follow along a bit longer and I will get to my point.

Regardless of whether this is possible in the real world - to get an idea of whether specialization and trade amongst teams would really work we must look at the production possibility frontier gradient (PPF). The gradient reflects the opportunity cost of production. In our Yankees/Cubs example it helps us understand the trade-offs of increasing focus on developing a certain type of player. Looking at the chart below, to develop +1.25 major-league-ready hitters the Cubs must give up the opportunity to produce 1 pitcher. The Yankees on the other hand only gives up .25 pitchers to produce 1 hitter. The opportunity cost of producing one major-league-ready hitter for the Yankees is -.2p (-.25/1.25) and for the Cubs it is -.8p (-1/1.25). What this is telling us is that the Yankees should develop as many hitters as it can and the Cubs should develop pitchers.

For specialization and trade to be economically more efficient the teams must have different PPF gradients which means different opportunity cost ratios. A team would have a comparative advantage only when the gradients are different. If the PPF gradients are identical, no team would have a comparative advantage. If this were the case it would not make sense to trade with teams. As we know, this is not the case since teams trade with each other regularly. In our example, it does make sense because the Yankees and Cubs would be feeding the market more ready-to-play prospects. Since every team needs hitters and pitchers it would be in the teams best interest to make mutually beneficial trades.


Why this doesn't work (exactly)

In a perfect world teams could specialize in acquiring and developing one type of player and then participate fairly in trade with the other teams. Going back to efficient market theory - as it would apply to baseball - nearly every team has access and is using all information (sabermetric, player tracking, scouting) to build and run ball clubs. Teams that once had an advantage in one or more of these categories are now finding them extremely difficult to leverage. That being said, the market is still inefficient and the system is set up to where teams rarely, if ever, want to collaborate for fear of losing inside secrets.

Another reason why applying the concept of comparative advantage would not work is because players and their development are not perfect. Even with some of the most efficient predictive models out there, each year there are players who over or under achieve. In order to understand and apply the concept to baseball there would need to be a high level of certainty about the current and future value of a player.

This brings up another criticism. Relative prices are not taken into account in the simple theory of comparative advantage. For example, if the price of hitters rises relative to pitchers, the benefit of increasing the output of hitters increases. For a team who specializes, they run the risk of building up a surplus if their pool of players becomes less valuable by no reason other than a decrease in their prices. Take the Cubs in real life. We all know they had a surplus of hitters relative to other teams. What if the player market was already saturated with this type of player? It would mean their specialization in hitters would not pay off that season at least with regards to being able to trade them.

Finally the principle of comparative advantage was formed from a simplistic two entity model. The world is more complex. Teams not only develop players they must acquire players from around the world, find better ways to use their players and it gets tough to put a value on all of those abilities. Basically what I am saying is that their are many other external costs associated with trade that comparative advantage does not take into account.

Takeaways

The fundamental theory of comparative advantage can still be said to provide 'shape' to the pattern of player development, acquisitions, and trades. Example, if you are another team and you know that the Cubs currently specialize - not necessarily developed -  in infield hitters you may want to consider - at least short term - in specializing in some other type of player. Don't get me wrong, teams will always need to maintain a minimum level of player production for all types of players, but it might not always be the most efficient route to apply every resource to acquiring and developing all types of players. This seems counter intuitive considering it is the goal of farm systems to build a well-rounded diverse group of players. However, if a team understands the market landscape they would know which type of player other teams are specializing in and use that information to build a strategy for their own player acquisitions and development. It would, at the least, give teams the ability to know the most efficient way to acquire the players they need to succeed.

This whole idea came from my belief that in the future teams will need to find other ways - besides the current "moneyball" tactics to create a competitive advantage. As it stands the current method teams use in an attempt to create advantages could be considered operational effectiveness. They are improving the efficiency of their team by means of in-game strategy (lineup optimization, defensive shifts, etc.) along with finding under-valued assets that can be considered close substitutes to well-known above average players. They use these "moneyball" tactics to optimize the performance of their team using the fewest resources possible which in business terms is loosely related to operational effectiveness. Michael Porter, famed strategist and Harvard professor, states that operational effectiveness is necessary but not sufficient with regards to creating a competitive advantage. In other words, it is not a sustainable strategy and in my opinion we are seeing this play out somewhat.

Teams are becoming little closes of each other and it will eventually be - if not already - a race down the path to mutual destruction. I believe that smart people in baseball realize this and will begin to expand their club's master plan. Understanding strategy and economics - as it can be applied to baseball - could be a new way for baseball organizations to create advantages as Jeff Quinton of Baseball Prospectus and others have suggested. I am by no means saying that the theory of comparative advantage is a strategy, but understanding concepts like this will help teams formulate strategies. However, this time team's strategies may lead to sustained advantages.

Evaluating Front Offices and Farm Systems: Part 2

Last week I tried to assemble a conceptual framework for evaluating general managers and front offices by applying a couple of economic principles to player acquisitions and departures. This week we will add a few more performance measures by looking at team draft and farm system efficiency. The overall goal is to create a dashboard of indicators that can help us understand how well a team’s front office is performing their duties in addition to the typical winning percentage and eye test measures.

Read more at Banished to the Pen.

Evaluating Front Offices and Farm Systems: Part 1

The following is a conceptual framework for what I hope becomes a model to help us baseball lovers better evaluate certain aspects of baseball organizations such as general managers effectiveness and farm system efficiency.

 This will be done in multiple posts to retain the attention of readers. My approach is driven by the simple model of the firm and the many economic principles that go along with that method. The economic fundamentals used in my research have been slightly adapted to fit the constraints of baseball. For example, instead of dollars, the WAR stat might be used to calculate a value. Also, certain economic equations break down when using them in a pure baseball sense, so alterations and in some cases new equations were needed to comply with these baseball controls. I will do my best to explain these adaptations as I go along. I must admit this was challenging and I still feel there are several areas in which my thought process might be flawed. Hopefully, with enough time and tentation I will be able to come to some meaningful conclusions. 

Read more at Banished to the Pen

See the full visualization dashboard at Underground Analytics

Creative Destruction in Baseball: A Deeper Look

In my last post I provided a brief introduction to the concept of creative destruction and how teams and players should consider embracing the principles behind it. The plan for this post is to dig a little deeper into this notion by identifying teams and players who are already reaping the benefits from embracing this mindset as well as examples of failures for not establishing this fundamental.

Read the full article at Banished to the Pen

Creative Destruction in Baseball: Intro

While watching the Angels and Blue Jays game the other day, Blue Jays broadcaster Buck Martinez mentioned that C.J. Wilson had expressed to him before the game that he had re-invented himself six times during his ten year professional career. This reminded me of a term frequently thrown around by economists and corporate leaders called creative destruction. The word sounds like an oxymoron and to a certain extent it is. However, it is a concept that teams and players should embrace especially in this presumed transition period of baseball.

Read the full article at Banished to the Pen

Updated MLB Statcast Data (July 2015)

I am pretty sure by now we all know what Statcast is, have most likely seen it in use, and (for those of us who have been listening to the BttP Podcasts) are aware of its origins. Before the season, I compiled a database of all public MLB Statcast statistics and posted it here. Since then there has been a flurry of data released which warrants an update.

MLBAM is releasing a majority of its Statcast data the same way it released the PitchF/X data, through this pretty little website: http://gd2.mlb.com/components/game/mlb/. Most of this information on this site looks like mumbo-jumbo, but do not worry. There is another, more efficient and prettier website where you can download the data for free. It goes by the name BaseballSavant.com. Darren Willman, creator of the Savant network of websites, has tapped into the MLBAM website and has graciously made all of this data easily accessible to everyone.

I took my own stab at integrating the xml files from the MLBAM website into my own database. While I was able to successfully connect to the portal and download the info, I ultimately found it much easier to just download the stats from Willmans’s website.

Read the full article at Banished to the Pen