Fundamentals of Management 6th Edition by Ricky Griffin

Exercise 32

Testosterone and Teamwork in Tampa Bay
One of the early milestones in the history of the Tampa Bay Devil Rays Major League Baseball (MLB) team occurred on April 23, 1998, when they beat the Texas Rangers 12-5 for their eleventh victory in the very first 19 games of their existence. Then they lost six games in a row to fall to 11-14 and never again reached.500 (sports parlance for winning as many games as you lose) during the season. Ultimately, they lost 99 games (out of 162) to finish in fifth and last place in their division. In fact, the Devil Rays never lost fewer than 91 games between 1998 and 2004 (posting a high of 106 in 2002) and only once managed to finish out of the division cellar (sports parlance for last place)-in 2004, when they achieved a team-best 91 losses to end up in fourth.
In that same year, Andrew Friedman, a former outfielder at Tulane University and a former analyst at Bear, Stearns, was living in New Jersey, selling securities by day and going online to play fantasy baseball by night. Two years later, he'd be living his fantasy as executive vice president of the Tampa Bay Devil Rays, part of an innovative leadership team trying to reverse the fortunes of the struggling team. The management team of which Friedman is a part is headed by a former executive at the investment bank Goldman Sachs and had recruited its key members from the rosters of Wall Street firms. It boasted a thorough grasp of financial markets and decades' of collective experience in leveraging fiscal know-how, but securities trading is one sort of game and baseball quite another. Could Wall Street smarts turn around a Major League Baseball team that didn't seem to have a clue?
It was a long shot, but to Stuart Sternberg, a onetime partner at both Goldman Sachs and the investment group Spear, Leeds Kellogg, it looked like a good deal. "I'm a buy-low guy," said Sternberg, who'd retired from Wall Street at the age of 43, "and if you pay the right price for something, I don't care what it is, you can't go very wrong." He certainly got the Devil Rays at the right price. In 2004, the team was valued at $152 million (29th among the 30 MLB teams), and Sternberg and five former colleagues were able to get a 48 percent share of the team for $65 million. General partner Vince Naimoli, who had obtained the MLB franchise in 1995, retained 15 percent ownership and limited partners held the rest. In 2006, Naimoli stepped aside, turning over management control to the 46-yearold Sternberg.
Having gotten his chance, how did Sternberg plan to turn the Devil Rays around? "We have to start at the top and work our way down," he announced, and immediately appointed 29-year-old Matthew Silverman, a former strategist and colleague at Goldman Sachs, as team president. Sternberg recruited veteran baseball executive Gerry Hunsicker as Senior VP of Baseball Operations, and Andrew Friedman was promoted from Director of Baseball Development to Executive VP of Baseball Operations, or General Manager. Friedman, who was also 29, would now make all baseballrelated decisions-trading players, negotiating contracts, and signing free agents. When asked why he'd placed two 29-year-old executives in such important jobs, Sternberg replied, "I think I have a good eye for the right people, which is why I'm so excited about Matt and Andrew and Gerry. Especially the two young guys, who I think are in a position to affect change in our business and the whole industry for a lot of years."
Even so, it wasn't going to be easy. "What makes this difficult," said Sternberg, "is that we're so anxious and eager to mold the franchise in the way we see it." What made it even more difficult were a few pressing practical problems. For one thing, the Devil Rays' home field, Tropicana Park, was located in St. Petersburg, Florida, at a considerable distance from the main population center in Tampa. And when fans did make the trip to the ballpark, they had to put up with a facility that wasn't particularly congenial either to baseball or to watching it. "The Trop" had been cheaply built and looked like a generic multipurpose building on the outside and a large warehouse on the inside-a far cry in 2006 from the new retro-style ballparks that were attracting record numbers of baseball fans around the country. Sternberg gave the field a $25 million facelift before the 2006 season, made another $10 million in improvements during the season, and put more money into enhancements prior to the 2007 season.
It didn't help much. In 1998, their first year, the Devil Rays had attracted 2.5 million fans-seventh best in the 14-team American League and just above the league average. The novelty, however, wore off quickly, with attendance dropping to 1.5 million the next year and never topping 1.45 million between 2000 and 2005-good for 14th best in the league in every year but one. When Sternberg took over prior to the 2006 season, one of the first things he did was announce that parking at the stadium would henceforth be free. The Devil Rays, however, finished last again in 2006, both on the field and off, drawing just 1.37 million fans, or about a million below the league average. A survey conducted by the St. Petersburg Times revealed that fewer than 30 percent of Tampaarea baseball fans regarded the Devil Rays as their favorite team.
One major problem, however, had been addressed: At least the Devil Rays were under new management. Although the free-parking initiative didn't do much to boost consumer confidence among Tampa-area fans, it did at least signal a new approach on the part of the team that would be running the franchise. When asked how his investment-banking experience would help him in his job as president of a baseball team, Silverman cited the "corporate philosophy" of Goldman Sachs: Investment banking, he said, "is a people-centric business. Goldman prided itself on customer service [and] training and employing the best people. That's what we want to apply to the Rays organization to make it better." By 2006, many Tampa fans were apparently ready for a more "people-centric" approach from the team's management. Vince Naimoli's hard-nosed style had been critical in his ability to assemble an ownership group and bring a team to the area in the late 1990s, but by 2005, just before he turned the reins over to Sternberg, it wasn't working so well in the public relations arena. Early in the 2005 season, for example, he'd reportedly got into a profanity-laced shouting match with a fan decked out in a team jersey and hat.
Naimoli's style had also alienated the other members of his ownership team. In fact, the Sternberg group had been able to buy into the team because all five of Naimoli's disgruntled general partners had sold their shares in 2004. Thus, when Andrew Friedman was asked how his experience in the securities business had prepared him to be a baseball executive, he cited teamwork at the top: At both of the firms for which he'd worked, he said, "the culture was very focused on teams-you'd have four or five people per deal. That kind of problem-solving approach is what we're trying to create here. We're more top-heavy than before," he explained, "but it's about recognizing certain people's strengths and weaknesses to build a full array in the front office." From the start, the Sternberg-Silverman-Friedman trio has been the core of the front office "array." "The slap-happy camaraderie that binds Mr. Sternberg to his two young executives," says one New York Times journalist, has "a distinct boys-club feel.... It mixes the testosterone of the Wall Street trading floor with the geekiness of those who spend an inordinate amount of time breaking down earned-run averages."
There was, however, one aspect of Naimoli's management strategy that Sternberg and his team weren't yet ready to change-at least not dramatically. From 2002 to 2005, Naimoli had managed to keep the Devil Rays' payroll the lowest among baseball's 30 teams. As we've seen, the on-field results were compatible-four straight last-place finishes-and Sternberg announced prior to the 2006 season that "our goal is to raise payroll by 10, 15, maybe as much as 20 percent a year. That's a good jump in any business." Would it be enough to compete? "I won't say I expect it to be enough," Sternberg admitted. "If we were spending $100 million, I would expect to compete." He bumped the payroll from $29.6 million in 2005 to nearly $35 million (about 18 percent) in 2006, moving the Devil Rays up a notch to the 29th-highest in baseball.
Unfortunately, the number of losses for the season also went up, from 95 to 101. For 2007, Sternberg cut payroll by more than 30 percent, or more than $10 million-from $35 million to $24 million. The Devil Rays actually won a few more games in 2007 (they lost only 96 games), but they were once again 30th in payroll. This time, however, the reduction in the team's payroll had been more a matter of strategy than desperation. Sternberg and his team had decided to trade a number of veteran (higher-salaried) players during the 2006 season and go into 2007 with younger players who fit into their future plans. The team that finished last in 2007 featured the youngest starting lineup of any major league team in nearly 25 years. Nobody on the Sternberg team was sure when the Devil Rays would be ready to contend, but one thing was certain: If the Devil Rays were to become competitive, it would be with the talented prospects, underrated role-players, and one or two affordable veterans who had for the most part been acquired by General Manager Andrew Friedman.
For the 2008 season, Sternberg had given Friedman a slightly bigger budget: After some carefully considered free-agency signings and contract extensions, the payroll had ballooned to $43 million, restoring the Devil Rays to 29th place on the MLB list. Friedman, however, figured that his $43 million was worth perhaps 40 percent more than that. How so? In an era in which a new breed of baseball executives are using financial models, data mining, and statistics-based methods to arrive at both individual and team valuations, the business of trading baseball players had for some time sounded a lot like the business of trading stocks. Friedman, however, was able to bring an experienced investment-oriented mind-set to the general manager's job. His ground rule for placing value on baseball talent, for example, came straight from Wall Street. It's called mark-tomarket accounting , and it allows a trader to value a security at its current market price, not the price that he paid for it. Take, for example, Scott Kazmir, an extremely talented left-handed pitcher whom the Devil Rays had paid $424,000 in 2007. Because he had only three full years of major league experience, the 22-year-old Kazmir, who'd made the All Star team a year earlier, was being paid at well below his market value, which Friedman calculated at somewhere around $7 million. Friedman reasons that, with a few more players like Kazmir-and the Devil Rays did in fact have a few more players like Kazmir-the disparity between his payroll and those of his higher-spending competitors isn't as wide as it seems. "I'm purely market driven," he admits. "I love players I think I can get for less than they're worth. It's positive arbitrage, the valuation asymmetry in the game."
Before the 2008 season started, Sternberg and Silverman made a few moves in the interest of marketing, changing the team's colors, uniforms, and logo and dropping the Devil from Devil Rays. "We're now the 'Rays,' " he announced, "a new and improved version of the Devil Rays." Silverman was quick to add that the changes weren't merely cosmetic (or the result of pressure from Florida religious groups): "We wanted to distance ourselves from the past and really establish that the organization was different, and sometimes it takes very visible changes-uniforms and caps and even a name change-to show everyone a lot has changed." In the front office and on the field, however, patience remained the order of the day. Referring to his bosses, Manager Joe Maddon, who'd been hired in 2005, observed that "their baseball biological clock has a lot of space at the end of it. It's not running down to the very end-there's time.... [W]hen you talk about the future with these guys, they know there is such a thing."
As it turns out, the future was a lot closer than anyone had expected. The 2008 edition of the Tampa Bay Rays engineered one of the most stunning turnarounds in baseball history. Picked by experts to finish in fifth or (at best) fourth place, the Rays won 97 games-31 more than the previous year and 27 more than they'd ever won-and finished atop the American League's Eastern Division. They had beaten out one team with a payroll of $209 million (the New York Yankees) and another with a payroll of $133 million (the Boston Red Sox) and advanced beyond the first round of the postseason playoffs by beating a team with a payroll of $121 million (the Chicago White Sox). When they defeated the Red Sox in round two, they went to the World Series, where the bubble finally burst and they were defeated by the Philadelphia Phillies ($98 million).
Because the most obvious sign of the team's newfound success had been on the field, Friedman garnered most of the attention and the encomiums from baseball people. In truth, of course, the success of the baseball model developed by the Tampa Bay management team went hand in hand with the success of its business model. "When it comes to stretching a dollar," wrote a sports columnist for the St. Petersburg Times during the 2008 postseason, "the government should be on the phone asking [Friedman] for tips. There's nothing new about looking for bargains, of course. Most small-market clubs fish in the same pond. The difference is how often Friedman seems to get it right." That's true enough from a baseball standpoint, but Friedman will be the first to point out that the key to his job is not finding the right player for the right money: It's more like finding the right asset for the right money-the player, that is, whose value can be leveraged either on the field or on the trading block, where value can be exchanged for value. That's the front office blueprint for organizational success in Tampa Bay, and Friedman, who prepared for his job by trading financial assets during the day and fantasy-baseball assets at night, sticks to that blueprint with the confidence of an investment analyst whose tools happen to include scouting reports as well as financial statements.
As the owner of a professional sports franchise, you've decided that you need a new executive team. What are the relative advantages and disadvantages of bringing in managers from outside the sports industry versus bringing in managers with experience in the industry?