Since Major League Baseball expanded 20 years ago, and even for many years before that, the Yankees have almost always spent the most money on their players, never falling below the second spot. To give you some idea, opening day payroll for the Yankees over the last decade has been more than $200 million each year, with the exception of 2012, when their opening day payroll was $197M.
Does being baseball’s biggest spender guarantee the best results? A quick perusal of the data kept by the army of baseball statisticians—sabermetricians as they like to be called—reveals brute force spending does not yield more wins.
Case in point: In his blockbuster book, and later blockbuster movie, Moneyball, Michael Lewis goes inside the Oakland A’s organization in an attempt to understand how the team has spent far less money, but generally won more games, over the same period. The A’s, led by Billy Beane, who ultimately became General Manager, transformed their strategy for winning. For instance, Beane and the coaching staff rejected the conventional wisdom that when a batter struck out he should “go down swinging.” The entire coaching staff had to re-educate the players only to swing at pitches they could hit—even if it meant they “went down” watching a pitch go by. These and many other changes resulted in the A’s having a better regular season win record than the Yankees 17 out of the 20 years under consideration. Yet, the A’s have only once broken the top 20 in terms of payroll; usually their payroll ranks around 27 out of 30.
In a very simple way, we can think of coaching, training, practice, drafting, etc. as a theory for how to win baseball games. While it’s not quite so simple, the implicit theory at work in the Yankees organization is that more spending means more winning, which is why the Yankees have paid north of $2M per win since 2003. Alternatively, the A’s peaked at about $900k. Considering the A’s consistently superior win-loss record, the Yankees need a better theory.
Interestingly, in our research in business, we see a similar phenomenon. Firms with more money, people, experience, etc. regularly fall to upstarts. Conventional wisdom is that this happens due to bad management or “arrogance,” but Disruptive Innovation explains that strategies (theories) for success make a much greater difference than the resources dedicated to success.
Disruptive Innovation is in fact principally a theory of competition: it tells us which firms are likely to succeed, based on the competitive environment. In a market where products and services are not yet good enough for most customers, incumbent firms will win the race for sustained profitability. In a market where mainstream customers would gladly pay less for simpler, more convenient options, incumbent firms are at a disadvantage, since their business models favor continuing business as usual. Success, then, is not due to having more resources or more experience, but due to use of the right theory.
So, why don’t the Yankees dominate Major League Baseball every year? It’s obviously not for a lack of investment. Rather, the determinant of success for any organization is its theory for winning. Put another way: good theory is more powerful than deep pockets, whether you’re playing baseball or building a business.