Supported by Greenhaven Road Capital, finding value off the beaten path.
Among the many educational and interesting talks at the Sloan Sports Analytics Conference 2018 was a theme; competitive advantage. When we took a deep dive into Pat Dorsey’s work on Moats and Allocators, we saw competitive advantage as increasing prices. But that’s not the first principle. I missed it. Competitive advantages are positive feedback loops.
Moats and Allocators succeed because a business generates cash that can be turned back into the business to generate more cash. Josh Wolfe called competitive advantage the most important thing in business. “What can you do or what can you assert you can do, that will scare competitors and nobody else can do? From that flows good unit economics.”
This isn’t only true for businesses. Individuals have a competitive advantage when they work like crazy, often that means things they enjoy. This doesn’t mean to follow your passion. Replace that trope with this advice from Charlie Munger, “The more you know about some topic, the more passionate you will get.”
When Bill Simmons spoke with Daryl Morey the two talked about getting started in a business. Simmons said:
“The thing that’s great about Bill James is that when people always ask ‘How do I break into this business?’ it’s always, just work harder than everybody else. Throw yourself into whatever you’re doing. Bill James is the best example of *I have an idea, I’m going all the way with it.* He’s like a lunatic with it.”
In any system, each participant has a niche they’re best suited for. The giraffe can’t be king of the jungle but it can be the best tall herbivore. Similarly, sports teams can succeed but will succeed best when they dominate their niche.
Sometimes those niches are constrained; Miami is a different city than Philadelphia. Sometimes those niches are flexible; What’s the organizational ethos?
From the Sloan talks, there were two we’ll focus on; on the court and off the court.
On the court.
“The dynamics of how you play is based on the skillset of your best players. Daryl’s best players are James Harden and Chris Paul who are terrific in isolation.” – Jalen Rose
Gregg Popovich said that he’s not in love with how the game of basketball is currently played – but said that he plays this way because it’s how you win. Similarly, the Rockets will get a competitive advantage if they play a style that meshes with their best player.
When Steve Nash was in Phoenix, Mike D’Antoni – current Rockets coach and Morey collaborator – was his coach. Nash said, “A lot of what happened in Phoenix was pretty organic. I always like to push the ball, it gave me joy.” Like the Rockets, the team played to their strengths. “Mike’s brilliance,” Nash explained, “was seeing this was going in the direction of being difficult to cover, and we would wear people out.” D’Antoni “refined it continually and gave us some principles.”
This is hard to do, in basketball or venture capital. Marc Andreessen said:
“Naturally as we go through life we accrue beliefs about how the world works, beliefs about causes and effects and beliefs about patterns that we’ve seen. I try as hard as I can to be as ruthless as possible in shedding the old beliefs and leaving them behind. They are so rarely predictive of something new.”
Shane Battier was on the front lines (frontcourt?) for this change. When he came into the league every practice started with a session on how to double-team the post. That defense was fine, but Battier’s Grizzlies often lost to Nash’s Suns.
Later when Battier was with the Rockets, the seven-seconds-or-less Suns were so confusing that Rocket’s coach Jeff Van Gundy had defenses that were nearly impossible to play. Battier’s defense shifted yet again when he started to get more information from Daryl Morey. Battier said that guarding someone like Kobe Bryant was like playing blackjack, the odds were against you but you could try to get into situations with better odds.
Battier’s NBA experiences in Memphis, Houston, and Miami distinguish the different understandings of on-court competitive advantage. Some coaches played their style. Other coaches adapted. Some organizations drafted traditional power forwards. Other organizations hired for the job.
Competitive advantage means maximizing player upside and minimizing coaches ego.
Off the court.
“What are you trying to beat the league at? Are you trying to be the best player development team (medical staff, mental performance, etc.)? Your market determines the different levers you can pull. We feel like we are a free agent designation.” – Lawrence Frank, Los Angeles Clippers
Steve Pagliuca from the Celtics said, “Continuity is critical.” Why? “It gives people flexibility. They don’t have to make short-term moves because they’re worried about being fired tomorrow.”
Pagliuca’s continuity shifted decision makers from a careerist-pov to an owner-pov. This is something Charlie Munger would be proud of:
“A lot of people running the business think like careerists. And believe me, you gotta think like a careerist to a certain extent if you’re in a career. But it also helps to look at the business strategy problems as though you are an owner. And so my advice to you is, you don’t wanna be…never get to be a careerist so much that you don’t see it from the owner’s point of view.”
Obvious, you may say, but not so fast. As Rory Sutherland noted
“There are lots of cases where you need to signal something, by making a decision – and it may be the rationality of the decision – actually prevents you from making a better decision…If I pretend everything is logical, it may not be a really good decision but if things go wrong no one can blame me, is an extraordinary form of corporate insurance.”
This is the no one got fired for buying IBM problem. Signaling, writes Robert Hanson, probably plays a larger role in our lives that we may care to admit. How attuned players are to this kind of decision-making theory we don’t know, but if they don’t see the process they’re certainly aware of the outcomes.
Another reason the Celtics attract players, “Brad Stevens,” said David Griffin “is why Kyrie wanted to be there.”
Sam Hinkie said, “Kevin Durant is only going to a situation with stunning colleagues.” This is something, he added, David Griffin didn’t have in Cleveland for a while.
Morey explained – in his podcast with Simmons – that some things are more important than others. Most important of all are the players on the team. The next tier is the city, organization, owner, and coach. Then it’s lifestyle stuff.
The best organizations will figure out where they can succeed, and then – in Sam Hinkie’s words – figure out the two or three key levers and pull like crazy.
Thanks for reading.