During the late 1990s, the payrolls of Major League Baseball (MLB) began to rise to historic levels. Teams such as the New York Yankees and Boston Red Sox started competing with each other for a limited number of highly prized players. Bidding wars for talented players such as Alex Rodriguez sent annual payrolls into the $150 million to $200 million range. Major market cities could afford to pay large salaries because of the revenues they made from ticket sales and lucrative cable contracts. But mid-market cities such as Baltimore and Oakland could not generate enough annual revenue to match the salaries of large market teams.

As teams such as the Yankees and Red Sox dominated the standings and the market for players, many critics began to complain that the structure of the system prevented midmarket to lower-market teams from competing with major market teams. While the critics were, for the most part, correct about MLB not being a level playing field, one team seemed to suggest that smaller-market teams could compete with the big boys.

The Oakland Athletics were once a big market team of sorts. In the 1980s, the team was owned by a group that spent freely on top players such as Mark McGwire and Jose Canseco. The owners didn't see the team as a money-making enterprise, but as an instrument to boost community pride. When the team changed hands in the early 1990s, the new owners did not have the resources to run the team in the same manner. With an old, decaying stadium and smaller fan base, the owners needed a new way to compete.

In 1997, they hired the former major leaguer Billy Beane as general manager (GM). At one time, Beane was one of the brightest prospects in the New York Mets system. He was referred to as a "can't miss type of player" because scouts believed that he would become a superstar. Despite his immense physical skills, Beane never achieved success in the majors. Following his mediocre baseball career, he began working in Oakland's front office before eventually becoming the GM. Beane knew that he could not employ the same tactics used by other GMs; he needed a new strategy to locate high-quality, low-priced talent to fit the constraints the owners placed on him.

At the core of Beane's strategy was the idea that most MLB teams evaluated talent improperly. From his own experience, Beane knew that most scouts evaluated prospects by simply watching games. They tended to favor young, physically impressive high school players. Most scouts didn't use a computer or statistics to evaluate players. Instead, they wanted to see how fast a player could run, how fast he could throw, and how far he could hit a ball.

Through research and statistical analysis, Beane discovered that what scouts had traditionally evaluated did not predict success in baseball. The three things they looked at were not as important as a player's on-base percentage (OBP), a measure of how often a player reaches base through hits, walks, or errors. OBP differs from the more commonly used batting average statistic by taking into consideration the ability of the batter to reach base with walks and fielders' errors as well as hits. Some players who had the traditional attributes that scouts wanted also had favorable OBPs, but many unknown players had much higher OBPs.

In 1997, Beane began to deploy the drafting strategy of picking mostly college players with high OBPs. Most of these players went unnoticed by other teams and thus were relatively cheap compared to superstars. At 21 and 23 years old, respectively, Ben Grieve and Miguel Tejada signed with the Athletics in 1997 and went on to greater success in the Major League. Grieve was the American League Rookie of the year in 1998; Miguel Tejada was a six-time All-Star and the American League's Most Valuable Player (MVP) in 2002.* When word of Beane's strategy spread to other GMs, the initial response was one of derision. However, the results speak for themselves. Since Billy Beane's second year as GM in 1999, the Athletics have averaged a winning percentage of 58 while maintaining a team salary in the bottom third quartile of MLB teams.* While the Athletics have not won a World Series during Beane's tenure, they have made the playoffs 5 out of 10 years.

In contrast, the Baltimore Orioles have been one of the most successful franchises in MLB, winning four World Series titles over the last five decades. In fact, the organization was one of the most dominant in MLB during the 1960s and 1970s, going to the postseason nearly every year. However, the team entered a decade-long slump after winning the World Series in 1983, never reaching the postseason. Many attributed the decline to the team selling its young assets in the early 1980s to obtain veteran players. Under new ownership and with few prospects, the team floundered for most of the decade, even losing their first 21 games to start the 1988 season (an MLB record).

About the same time Billy Beane came to the Athletics, the Baltimore Orioles began to pursue a new strategy. A new owner bought the team in 1993, and he was willing to open his wallet to get high-priced free agents. Rather than finding a different way to compete through strategy, Baltimore followed the lead of the Yankees and Red Sox, expanding its payroll to unsustainable levels. However, Baltimore didn't have the resources to compete head-to-head with these teams, ultimately missing out on some of the best players and spending too much on one or two prime players. While this strategy led the Orioles to the postseason for the first time in a decade in 1996 and 1997, the team lost both times to big market teams. Following the 1997 season, the team continued to acquire high-priced free agents, although to a smaller degree because of falling attendance and revenue levels. With fewer resources and an undifferentiated strategy, the team spiraled into perpetual decline. From 1998 to 2006, the team averaged a winning percentage of 44, never achieving a winning season once, while maintaining an average team salary 59% higher than the Oakland Athletics.

The success of the Oakland Athletics led to Beane's approach being chronicled in the 2003 best-selling book Moneyball: The Art of Winning an Unfair Game, which was later developed into a major motion picture starring Brad Pitt. With this exposure, more teams decided to engage in sophisticated statistical analysis in choosing players. As a result, the competitive advantage the Athletics had achieved with Beane's approach began to be diffused. Interestingly, since 2006, the Oakland Athletics have struggled to achieve a winning record.

1. What environmental and competitive factors explain the rise of the payroll for MLB players?
2. What is the role of a baseball team's GM in formulating and implementing a team's strategy?
3. Compare and contrast the strategies of the Oakland A's and the Baltimore Orioles.
4. What can corporations learn from the strategies of MLB teams?