The Patriots, the 49ers, and one way sports is different than business

The Patriots, the 49ers, and one way sports is different than businessYou want a proven path to innovation? Find good ideas in one context, and try to apply them in a different context. The Wharton School gives us some examples:

At Reebok, the cushioning in a best-selling basketball shoe reflects technology borrowed from intravenous fluid bags. Semiconductor firm Qualcomm’s revolutionary color display technology is rooted in the microstructures of the Morpho butterfly’s wings. And at IDEO, developers designed a leak-proof water bottle using the technology from a shampoo bottle top.

It’s easy to get carried away, though. It’s important to know when ideas don’t transfer from one area to another. To make my point, I’ll compare the world of sports to the world of business.

(Nassim Taleb talks about the Ludic fallacy, or “the misuse of games to model real-life situations.” Taleb focuses on the way that probabilities in games don’t mimic probabilities in real life. But I think his point holds more broadly, encompassing the myriad ways games fail to capture real world complexities. Let’s proceed.)

The San Francisco 49ers are bad, and are more or less starting over

The 49ers are an American football team based in San Francisco. They just completed a historically bad season, finishing with 2 wins and 14 losses. They fired their head coach and general manager. In a sense, they’re rebuilding from the ground up.

Over the weekend, we learned the team’s owner hired John Lynch as the new general manager. And people were baffled

John Lynch is a former player. A very, very good one at that. He retired in 2008, and has been a television analyst ever since. But he’s never worked on the personnel side of the football business.

That’s mostly why people are baffled. General managers typically have backgrounds in scouting, or at least have some experience as an executive. Mr. Lynch has neither. And personally…I think that’s fantastic.

American football is a highly constrained marketplace

There are 32 teams in the National Football League (NFL). They play by exactly the same rules, both on the field and when it comes to team-building. They all live under a salary cap, meaning they can’t spend endlessly on players. They all select coaches and players from the same talent pool…mostly other professional teams, or college teams in some cases.

If you pay attention to football, you’ve probably heard about the parity in the NFL. Good teams become bad teams in a flash, and vice versa. About half the playoff field from one season fails to make the playoffs the following season. It’s a revolving door.

That’s helpful for bad teams. They can quickly become good. But they have to ensure they make the most of their small window of success. Because they’ll blink an eye, then they’ll be bad again. It’s a roller coaster.

Not all 32 teams ride this roller coaster. On the plus side, you have the New England Patriots. They win tons of games every season. On the minus side, you have the Cleveland Browns. They lose tons of games every season.

If we want to learn how to build a good football team, we should pay attention to the Patriots and the Browns. In the NFL, teams work against a lot of constraints, but somehow these two teams have performed outside the norm. Something is going on.

How do you build a good football team? Make different decisions than everyone else

The obvious way to build a good football team is to model the New England Patriots. They’re known for having one of the best head coaches (Bill Belichick) and one of the best quarterbacks (Tom Brady) in all of football. 

Great. So we just need to find an A+ head coach and an A+ quarterback. Well, fine…but everyone is looking for those people. Great head coaches and quarterbacks are scarce. 

Does that mean we have to rely on luck? Just hope somehow we’re first in line for their services?

I think if you really study the New England Patriots, you’ll see their competitive advantage is decision-making. They make very difficult decisions about when to let good players leave their team. They also make calculated gambles when trying to find good young players. 

In the former case, the Patriots let good players leave early. The players are still good. Other teams want them badly. The Patriots seem to calculate that the rest of the league over-values these good players. So the Patriots let these players go, and receive what they believe is disproportionate value in return. And in the aggregate, those decisions explain a sustained edge.

Is there luck involved? Certainly. They picked Tom Brady late in the college draft, and he’s brilliant. They’ve picked several more quarterbacks since then, and they’ve been mostly ho-hum players. Picking late round quarterbacks is always a gamble. The Patriots got lucky on that one.

How can the 49ers replicate the Patriots’ edge?

First, you have to believe the Patriots’ real edge is making better decisions than the rest of the league. And I think their edge is really rooted in one element: they value present and future performance differently than almost every other team.

Specifically, the Patriots value current performance less than other teams. They value future performance more. They’re willing to take small steps backward today to make huge leaps forward tomorrow.

In other words, they align with Mark Spitznagel’s philosophy in The Dao of Capital, which I’m reading right now. It’s a great book.

The Patriots take advantage of market inefficiencies. Other teams over pay for performance today. The Patriots are willing to exchange immediacy (a good player today) for an abundance of future value (typically draft picks, but some time simply more room under the salary cap). 

That brings us to the 49ers. Should the 49ers do exactly the same thing? Should they sell high on their current talent, and in return collect future optionality?

Maybe. But maybe not. I doubt that the element of timing is the only inefficiency in the American football marketplace. For the 49ers, the most important step is to find someone who is willing to mine for inefficiencies. Someone who isn’t steeped in the way that football personnel decisions are made today. That’s why the decision to hire John Lynch is so good.

The 49ers are trying to zig when everyone else is zagging

Please note that I said the decision to hire John Lynch is good. John Lynch may end up being a first rate loser of a general manager. I have no idea. But if the decision is between marching down the same hiring path as everyone else, or going in a wildly different direction…I like the different direction. Particularly for a team at the bottom of the league.

It’s not that Lynch is a wildcard just for the sake of being a wildcard. He was an incredible player. He’s been around the game forever. He’s been surrounded by other incredible players. He’s analyzed the game for 8 years after his retirement. And he has a Stanford education, which doesn’t hurt.

In other words, John Lynch knows the game. He’s not a loud-mouthed fan that has tons of opinions but no real perspective. His football credentials, at a high level, are impeccable. The gamble is whether he can translate his general football knowledge into specific team-building acumen.

He might not be able to make that translation. But from my perspective, it’s well worth the gamble. The 49ers could have followed the safe path, and hired some retread general manager. Some dude who has done the job before, and been fired before. 

Then people wouldn’t have been baffled. But the 49ers would have been locking themselves into middle of the road performance. Thinking the same way other teams think. Making decisions the way they make decisions. The hiring of John Lynch at least gives them a chance to explore new team-building territory. They have a chance of finding the next inefficiency they can exploit.

But why doesn’t better decision-making work in business?

Of course better decision-making works in business. It’s such a general concept, though, that alone it doesn’t mean too much.

I made sure the title of this post included the phrase “sports is different than business”. I want to acknowledge an important way that making huge bets differs in sports, versus business.

In sports, the team’s existence is practically never on the line. Perform poorly this year? Well, there’s always next year. Make a bad hire? Fire the person, and move along. There are only 32 teams. There is always a scarcity of NFL jobs, relative to interested job seekers.

These realities don’t translate to business. Sustained poor performance can absolutely kill a business. Maybe it becomes insolvent. Maybe it sells itself at a bargain basement price. Regardless, it no longer exists in the form it used to.

If you’re the 49ers, you can make a wild hire in John Lynch. There might be a 25% chance he becomes an A+ general manager, a 50% chance that he’s a middle of the road performer, and a 25% chance he’s a bum. If a “regular” candidate gives you 10%, 80%, 10% splits across these categories, then hiring John Lynch is a good idea.

You don’t get extra points for finishing in the middle. Everyone is competing for championships. So you want to maximize the chance whoever you bring on can become a superstar. That’s why you can (and frankly, should) place wild, high variance bets.

The same isn’t true in business. Warren Buffet famously has two rules:

  • Rule number one: Never lose money
  • Rule number two: Never forget rule number one

The idea is that, in order to thrive, businesses have to first survive. The same is true for investors. You can make a bunch of speculative bets, with enormous upside. But the risk is that you run out of money before you see the huge win. You have to stay in the game. It’s the only way to even have a chance at success.

In sports, you’re staying in the game regardless. The 49ers won’t be excommunicated from the NFL. They can make as many crazy bets as they’d like. They have an assured revenue stream, and an assured continued existence. Those constraints, plus a winner takes all reality, encourages speculation.

The business world is different. You aren’t assured of a tomorrow. You have to continue to deliver value, day after day, customer after customer, to even get a chance to play tomorrow. That puts a ceiling on how much risk you can take on. You simply can’t bet the whole company on marginal chances for incredible wealth and success. The stakes are way too high.

Pay attention when you’re crossing domains

I’ve argued above that the 49ers should take a high variance approach to team-building. They should swing for the proverbial fences. That’s why hiring John Lynch as general manager is a good decision. He gives them a better chance of finding a competitive advantage than almost any other candidate would.

We can transfer this wisdom to business. You should seek out areas of differentiation. You should mine for inefficiencies. You should find ways to advantageously break from conventional wisdom. All of these lessons translate.

What lesson doesn’t translate? That you should swing for the fences, and seek the opportunity with the most upside. In business, the risk side of the ledger is too severe. You could lose your whole company. In sports, the risk is limited. You won’t go out of business. The risk/reward balance isn’t symmetric between these two domains.

That’s the meta lesson. You always want to find ways to reuse good ideas. It’s fantastic to search for good ideas that might work in a different, unforeseen context. But know the constraints. Know the ways in which different contexts are different. Understand whether any differences threaten the viability of the ideas you’re exploring.

Enthusiasm around innovation is perfectly natural. We need to make sure to guard against unchecked enthusiasm though. It’s easy to get wedded to an idea. It’s easy to get excited, when you think you’ve stumbled across something that other people haven’t.

Make sure you understand the domains in question. Make sure you understand the meaningful constraints. Pressure test the ideas as best you can, in your head or in a risk-limited real world environment. As scientists and engineers, we owe it to ourselves, and the communities that depend on us, to ensure we properly balance risk and reward in our pursuit of innovation.

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