Sunday, July 18, 2004

Kintetsu Buffaloes: Japan's P.L. Co-Doormat
Could Be a Vanguard for New Business Model  

Like many North American industries, Japanese professional baseball is melting down under the pressures of the current mutant model for globalization.

The league has lost some of its marquee players to the U.S., as well as some other talent. That's diluted some of the on-field talent concentration.

In this very nationalistic country, the emotional effect has eroded a little loyalty to their baseball. Many of these migrated monsters (such as Godzilla) prove only that Japan's very best are not the very best on the world stage. Godzilla's PRO+ is currently about 115, meaning offensively, Japan's current very best slugger is about 15% better than the average hitter in the American League, about 8% better than the average outfielder, and as of today, the 36th best batter in MLB according to OPS rankings. Good, but not all-star caliber. Godzilla is still adapting, and as an intelligent player, we can guess he will continue to improve as he learns more, but if Barry Bonds started playing in a league, say the Cuban league, and they pitched to him and he hit .285 with 22 home runs, it would cast a smudge on our sense of ourselves in the same way.

That effect is magnified I think because Japan as an economy has taken a back seat to many others in their region, making the loss of this other source of pride (once) more painful.

ASIDE: I don't think Japan's leagues are suffering, because one of their teams is named for Warriors Who Fight Ham. While I have cut back on my ham consumption because of the nitrates and fat, I like the stuff, and cannot imagine feeling so adversarial towards it that I would actually want to initiate an active conflict with it. Any society that chooses to fight ham probably has less attention left over for more important things.

Japan's baseball leagues seem to be in a fallow period, with a couple of teams that are hemorrhaging money, the Orix Blue Wave and the Kintetsu Buffaloes talking about merging to try to have one of the two co-doormats survive. (the Buffaloes, by the way, have a Pythagorean runs-scored/runs-allowed ratio that indicates they're playing roughly .500 baseball, though their record is about 5 games under that.

Thanks to Baseball Primer, I read this story on the National Post's site about the internet entrepreneur who wants to buy the Buffaloes to try to save them as a franchise. The entrepreneur, Takafumi Horie, wants to experiment with a lot of changes:

"Baseball is by far the most popular sport in Japan," the 31-year-old Horie said in a recent interview. "You have to find ways to tap into that popularity and I'm confident I can do that."

With escalating player salaries and lagging attendance, the Osaka-based Buffaloes were losing $36 million US a year. On June 13, they announced a plan to merge with the Orix BlueWave, another Pacific League team struggling at the gate and with the bottom line.

Japan's 10-year economic slowdown and the steady trickle of marquee players like Hideki Matsui to the major leagues has also contributed to the financial woes of many teams, but Horie thinks he can turn the Buffaloes around. Horie is not intimidated by the sorry state of Kintetsu's finances and points out that some teams, like the defending Japan Series champion Daiei Hawks, are able to draw large crowds to their home stadium.

"It's like any other venture business," said Horie. "You need strong cost performance analysis, more creative marketing strategies and doing things like offering stock options to players and fans." [emphasis mine]

More creative marketing is almost always a winner, especially in an industry that's ossified and more especially in an industry that's lost its confidence, as Japanese baseball seems to have.

But the crown jewel of the Horie proposals is player and fan ownership. In MLB, active player ownership interest in any team is explicitly banned. It's odd, because businesses with significant employee ownership perform 2 - 3% better than parallel business without employee ownership, and that companies with both employee ownership and participative management (the employee owners are encouraged to behave like owners) perform about 11% better on average than their peers. The National Center for Employee Ownership site has a lot of study data on this powerful phenomenon. You can go to this link to read the full text of what I excerpt below:

ESOPs and Corporate Growth

A 2000 study by Joseph Blasi and Douglas Kruse at Rutgers University found that ESOP companies grow 2.3% to 2.4% faster than would have been expected without an ESOP for sales, employment, and sales per employee. The study looked at all ESOP plans set up between 1988 and 1994 for which data was available. A 1987 NCEO study of 45 ESOP and 225 non-ESOP companies found that companies that combine employee ownership with a participative management style grow 8% to 11% per year faster than they would otherwise have been expected to grow based on how they had performed before these plans. Subsequent studies by the General Accounting Office and by academics in Washington State and New York found the same relationship. A 1999 study for Hewitt Associates by Hamid Mehran of Northwestern University found that the returns on assets for 382 publicly traded ESOP companies was 2.7% per year greater than what a model of their predicted performance would have been.

Studies on participative management alone find a small positive impact on performance, but not nearly enough to explain the synergy between ownership and participation these other studies have found.


You don't need an economist to tell you why this works, but if you have any doubts about it, think through some baseball examples. If the players had ownership stakes in their team, would happen if/when:

  • A manager tried to over-use a pitcher in a way that could threaten his career?
  • A teammate used an injury to sandbag?
  • A teammate tried to come back from an injury too soon?

Owners treat assets to balance the needs of current success and long-term returns. Employee ownership stake and employee management participation are engines that energize the magic of capitalism.

Free marketeers and other anti-capitalist cynics can create a straw-man out of this model -- players voting on every in-game or front-office move, major league players refusing to let minor leaguers come up because they can protect their own positions through ownership rights, but that would be false and worse, naive. These factors potentially exist in corporate organizations, too, and these realities are very rare.

Beyond baseball, this model works wonders. I've seen it myself, and the data support the conclusions my experiences drove me to. The gravitational field that makes it work wonders is universal, though the results aren't. If you have the wrong employees, either with life experiences that make them me-firsters or just immature, it can create more friction than the status quo corporate model. But you can always experiment with profit sharing as a halfway measure; you will quickly find out who is inspired by the responsibilities of ownership and who just takes it as a licence to try to bully others or act like a trust-fund kid. Those latter employees, by the way, tend not to be of great use in any corporate model.

Eleven percent better returns -- that's like 8 more wins a season for a Major League team, enough to make the difference for some between third place and first place.

What can you do to take advantage of this energizing principle? Why not start thinking about it now?

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