Business Lessons from Moneyball – Another Look

With the 2014 Major League Baseball season underway, hope springs eternal that your favorite team will still be playing during October and hopefully win the World Series. Michael Lewis’ 2003 book (and subsequent movie with Brad Pitt and Jonah Hill) Moneyball: The Art of Winning an Unfair Game highlights the strategies used by the Oakland Athletics, an underfunded small to medium market team, to compete with the “big boys” of baseball.

To put things in perspective, the A’s play in Oakland, California. (considered a medium sized market with about 7.5 million residents) and had a payroll of just over $40 million in 2002. Compare that to the “big boys” like the Yankees, with a 2002 payroll of $125 million and a market size of 20+ million.

Just exactly how could the A’s even think about competing with the Yankees, Mets or some other big market team? They challenged the assumption that a bigger payroll leads to better players, which leads to a better chance of winning the Commissioner’s Trophy.

But how valid was this assumption? Are all the better players more expensive? Are there players just as good who could be had for a fraction of the big name players with big contracts? What assumptions in your business universe need to be challenged in order to survive and thrive in today’s marketplace?

moneyball picture_1Here a just a few business lessons we can all learn from Billy Beane and the Oakland Athletics.

Business Lesson #1: Understand causal relationships and adjust your thinking

Call it big data analysis, data mining or any of the other fancy terms you want to use, but the bottom line is that you must understand the causes and effects of the business environment and how to adjust to those relationships to achieve the goals of your organization. This is exactly the approach taken by Billy Beane, the Oakland A’s general manager. He understood the relationship between the number of runs scored and the probability of winning. He also understood that the number of runs scored is proportional to the number of players who reached base. Billy turned to an expanded set of metrics beyond the ones typically used to evaluate a player (batting average, number of home runs, etc.). As an example, he used the metric “On Base Percentage”, aka OBP. OBP measures, you guessed it, the percentage of time a player reaches base, regardless of how. OBP takes into account hits, walks, fielding errors by the opposition, etc. The bottom line is it’s better to be standing on one of the bases instead of walking back to the dugout after your turn at the plate.  Billy, and his staff, turned their thinking from “Can he hit?” which is measured by batting average to “Can he get on base?” which is measured by OBP. What are the cause and effects in your business and how do you need to change your thinking to align with those relationships?

Business Lesson #2: Buy wins, not players

The goal in most businesses is to make money and hopefully a lot of it. Today’s environment of tight budgets, tough to come by revenue streams and downward pressure on prices that consumers are willing to pay makes for quite the proverbial headwind. Today’s environment is much different than just a few years ago when money flowed freely and just about every business was growing. To overcome this headwind, consider changing your tactics when recruiting and hiring. Consider hiring a less experienced (and hence usually less expensive) resource over a grizzled veteran, if possible. However, because hiring is expensive, making the right hire of a less experienced person has its risks. To minimize these risks, determine exactly what you want the person to do and what that person should grow in to in a few years. Hire people with raw talent and a propensity to get things done. Don’t be resistant to recruiting people who are early in their careers. You are looking for the future stars, because the current stars may just be too expensive. As an example, hire a passionate customer support person, with a plan to make that person the head of the support department down the road. Billy Beane implemented the mindset of “buying wins” by signing undervalued players that fit well into the cause side of the cause and effect relationship for winning games. What does your team look like right now? Is it loaded with a bunch of high $ superstars? Is the market buying cheaper resources for specific tasks over a general expert? Consider the market demands when the next hiring opportunity arises.

Business Lesson #3: Being first matters, but staying ahead is what really matters

The Oakland A’s were one of the first (if not the first) to take advantage of a big data view of baseball and the benefits of what it could reveal. Because of being first, the team had an edge over the competition, and it led them on a winning streak. Between 2000 and 2003, they won the American League West Division 3 out of the 4 years and made the playoffs all 4 years. From 2004 through 2011, they made the playoff only once, doing so by winning the AL West Division title. The old financial industry adage of “past performance doesn’t guarantee future results” comes to mind here. When other teams started using the same (or a similar) method to build their lineups, the Oakland A’s lost their competitive edge. With that in mind, businesses should take advantage of any first-to-the market leads they catch, stay focused and race as far ahead as possible, making it difficult for rivals to catch up. But evidently all is not lost for A’s fans. Billy Beane has evidently figured out another competitive advantage. Under Beane’s leadership, the A’s won the AL West in both 2012 and 2013 and are currently in 1st place in the young 2014 season (only about 20% of the games have been played at the time of this post). Exactly what that competitive advantage is might just be the subject of another Michael Lewis book. I guess we will all just wait and see. Take advantage of any first-to-market opportunities you can, then stay out in front as much as possible.

 

P.S.- For another good perspective on big data in baseball, pick up a copy of Nate Silver’s book, The Signal and the Noise : Why So Many Predictions Fail – but Some Don’t

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Tim Monroe