The Law of Competitive Balance – Smart Business Advice from America’s Leading Sabermetrician

The 1983 Baseball Abstract – photo by author

 In his bestseller Moneyball, Michael Lewis introduced his readers to sabermetrics. The Google Dictionary defines sabermetrics as “the application of statistical analysis to baseball records”.  He also introduced his readers to Bill James, who began evaluating baseball through the use of innovative statistics in the late 70’s. Unlike most of the first generation of sabermetricians, James was not a statistician trying to write about baseball.  He had been an English major at the University of Kansas and was at heart, a writer who wrote passionately and well about his statistics-based theories of what caused success and failure in baseball. His Baseball Abstract series ran annually through the 1980’s and 1990’s and popularized the idea of advanced statistical analysis for many fans during that time, including me.

But while the vast majority of James’ work was esoteric to baseball, from time-to-time he would advance a theory that had broader application. One such theory came from the 1983 edition of The Baseball Abstract (a photograph of my personal copy appears above). He called it, “The Law of Competitive Balance.” The Law arose out of research James had done concerning the tendencies of teams whose win-loss records improved or declined.  He wanted to know what happened to these teams the next year. He found that about 70% of the teams that improved their record in one year would decline the next year and that 70% of the teams that declined in one year would improve in the next.  As he dug deeper into the subject he found a distinct pattern. Teams that declined made more roster changes than teams that improved. He also noticed that below average players tended to be replaced more often by teams with losing records than by teams with winning records. From these and other observations, James developed the “Law of Competitive Balance”. James described the Law this way:

“There develop over time, separate and unequal strategies adopted by winners and losers; the balance of those strategies favors the losers and thus serves constantly to narrow the difference between the two.”

Later James further clarifies:

“The essence of the difference is how the two teams view the need to make changes.”

In the article, James points out, correctly, that the Law applies to life in general. It’s just more obvious in baseball because one can track performance more easily.

If we let it, success can make decision-makers tend to hang onto the status quo. “Don’t rock the boat” or “If it ain’t broke don’t fix it” become the mantras for leaders and managers during the good times. They ignore the reality that they are planting the seeds of future trouble. Success makes it easy to ignore problems. When a team is winning, its leaders tend to overlook or minimize the issues that they are winning in spite of rather than because of.  Losing teams on the other hand work to identify and improve in these areas. Their failure makes improvement imperative.  And the improvement, if executed properly, tends to lead to success.

James had a useful example from baseball, in his case a 31-year-old shortstop with declining fielding range and a .238 batting average. (For non-fans, this is a player who is already sub-standard and is unlikely to improve).  James said this player’s professional fate would depend very much on his team’s previous year’s performance. If he played on a poor team, management would likely replace him with a young player from the minor leagues, betting on upside potential versus known sub-standard performance. If he played on a team that just missed winning their division, his team would likely trade with another team to replace him with an experienced shortstop who was already performing at a higher level than the incumbent. If he played on a championship team, however, he was likely to keep his job, with management believing that they would continue to win with him because they had won with him the previous year. Their success gave them the excuse to not deal with a true performance issue and to leave in place one of the factors that would eventually bring them down in the standings. Separate and unequal strategies.

We see this sort of thing all the time in business. Successful businesses tend to overvalue and cling to established ways of doing things. When competitors put new ways of doing business into play, these businesses tend to underestimate the potential impact until they find themselves in a much less favorable competitive position. I was involved with a company that gave away a commanding competitive position by failing to appreciate the potential impact of a much smaller competitor’s embracing the internet as a sales and marketing tool. By the time the company woke up, the competitor had nearly achieved market parity.

This leaves us with a final question. Is the “law of competitive balance” really a law? Must success bring with it inevitable decline?  James ends his essay by noting that the “law” can also define greatness.  True greatness requires setting high standards for oneself or one’s organization and defining near success as failure. He closed with a valuable example.

Great ballplayers continue to experiment, continue to try things, continue to learn before they are on the road to oblivion. What does Pete Rose (baseball’s all-time hits leader) talk about when he talks about hitting? Adjustments: move up in the box, move back in the box, choke up on the bat, go down to the knob. He is talking about not letting them drag you down. He is talking about what you have to do to defy the Law of Competitive Balance.

The late Andy Grove, longtime Chairman of Intel stated it this way, “Success breeds complacency. Complacency breeds failure. Only the paranoid survive.”

In business as in baseball, great companies refuse to sit on their laurels. They look forward and constantly try to improve. They expect lesser competitors to get stronger and strive to beat their competition to the new process or product or people that will bring about the next level of success.  They follow the loser’s strategy rather than the winner’s in order to remain a winner.

 

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