Thursday, May 18, 2006

The Washington Nationals' Eye on the Ball...The Wrong Ball  

As Peter Drucker frequently observed, big organizations sometimes forget exactly what business they're in...they mistake means with ends. Pony League batting coaches always told kids "Keep yer eye on the ball," but that advice usually doesn't work when there are multiple balls comin' at you. Baseball has a current-events example that really informs this challenge beyond baseball itself.

When Major League Baseball chose the buyer for the sale of their league-owned Washington Nationals earlier this month, the Theodore Lerner family, the official line on why they were chosen from among the many suitors were: (1) they were local, (2) the owners were a family, and (3) they had as part of their offer Stan Kasten, one of the authors of the Atlanta Braves total dominance during his 1991-2003 tenure [75 more wins than any other franchise] as that franchise's president. Reasons (1) and (3) are great reasons, (2) is random, neither good nor bad...choosing a group because they have family management -- like the Unspeakably Frelled ownership group of the Kansas City Royals or the Roller Derby of the Mind owners of the Los Angeles Dodgers -- neither lends a baseball franchise to operate more or less successfully. I think the implicit, not usually-mentioned (4) is Federal Government ties and back-scratching. A few of the buyers' groups had better ties with the Federal influencers, and these were the ones that made it late into discussion, along with a couple of beards to convince the rubes that being inside the Feds' circle wasn't mandatory.

I think, however, there's a prime mover in the decision, and one not covered in the general reporting.

I think the Lerners were chosen because baseball viewed this as not so much being a baseball decision or a baseball-business decision as it it a real estate development & Federal politics decision. Because in the end, the physical stadium ($611 MM if there are no overruns) is worth a lot more than the team itself (team was just sold for $450 MM, so we can presume that as a rough valuation). And the physical stadium is an essential piece, what I call an "anchor", for a grandiose billion-dollar real estate development project (eminent domain alone was ~$100 MM). I believe it was the Lerners' Fed connections, local political connections, experience working with the contractors and general knowledge of how to work with/within/over a billion-dollar development project, a very specialized skill. If the project goes well and the Lerners' acumen lubricates the process and correct interested parties' interests, MLB as a whole, and its political fortunes, will benefit greatly.

This not-so-hidden agenda, though is neither a benefit to the team itself nor a cost. The downside potential is attention divided. Yes, Kasten is a total winner, probably rivalled among his team president peers only by the Padres' Sandy Alderson, I suspect. But unless he has full authority to execute or delegate on everything baseball, everything customer service, everything operational, it looks to me like MLB's eye and the Lerners' eye will be on the wrong ball...that is, not the core mission, but the delicious, profitable, glittery sideline.

And when glittery sidelines capture the imagination, the core mission, more often than not, suffers.

This happens so often it's hard to pick out a single "best" example. Manufacturers of hard goods that have financing divisions find they get through inflationary hard times more easily with financing operations for their equipment. They then start to count on the financing (not the product) to make money. Banks that edge into the black on service charges & arcane penalties instead of interest on loans at reported rates.

My favorite example is the Current Passion of Collapsing Business: customer rebates. It starts as a marketing expense, someone clever realizes that if the sellers applies some practices most people would consider unethical, it turns into free advertising.

The poster child for this is SanDisk, Inc., whose main product is flash memory, hardware that stores data in a compact manner.

Yes, all vendors who use rebates know that there's fallout all along the program. While ~90% of the people who see the ad showing the price-with-rebate-deducted and intend to buy the product as a result fully intend to get the rebate, some will forget soon after the purchase. Others will never try to collect because they lose some essential piece of paperwork they needed (or didn't get it from the retailer in the first place). Others will never try to collect because once they get a rebate check, they lose it before they cash it or let it sit on a pile too long before they remember to.

So just because a vendor is applying a rebate doesn't mean the customers who buy the product as a result will all collect it. That's a given in the trade. But if you can believe the tidal wave of woe-filled responses reported to the leading information-sharing tool for technology-related scams, SanDisk, Inc. seems to be unsatisfied with the usual fallout rate, but is working full-tilt to accelerate the dropout rate.

The leading information-sharing tool for technology-related scams is Ed Foster's Gripe Line, and the SanDisk scam-a-ganza allegations are reported here. Go read the whole thing (and if you ever buy any tech gear, you should bookmark Ed "The Medium Train" Foster's site); the follow-up comments to this post alone are worth more than all the flash memory in the world. Some of the better bits buyers reported:

  • SanDisk rejects a form because they say it was outside the offer dates even though it was within the offer dates.
  • You finally get tSanDisk on the phone because they've had your paperwork so long and they apologize and say they'll get to it but don't.
  • SanDisk advertises a $40 rebate that's really a $20 rebate and don't stand by their ad.
  • SanDisk apparently lets requests idle and doesn't move the process along unless their customer (now really a creditor) checks up on-line for it.
  • They apparently "monetize" complaints by putting the creditor's contact info into a marketing database so they can pitch them special offers (is that just the ginchiest?).

At all stages of the process, slowing a step will lead people to forget or to run a quick benefit/cost analysis of rebate amount/additional-time-to-invest and drop out of the engagement. SanDisk and the many others that make a craft out of managing rebates this way have very solid research that indicates which of their behaviors will thin out returns and to roughly what degree. They also know that unless the average buyer hears that others have been scammed the same way, that buyer will usually fall for the rebate scam again. Unless the tsunami of complaints reach a PatRobertson-ian force (doesn't it take a lot of courage to predict big storms when all the meteorologists have predicted them for a year?), it doesn't matter much, but if it does, and in this case it has, the benefit/cost of this kind of behavior stays high enough to pursue. But this is an affliction that can be fatal -- if it goes past a certain Flipping Point, there's no benefit so high it can outweigh the cost, and the perpetrators don't know it until its too late because they've fallen in love with the glittery sideline and forgotten the core mission.

Within a few months, it's likely SanDisk won't be remembered as a supplier of creative memory solutions, it won't be remembered as the outfield-wall advertiser for the Oakland A's. They'll be remembered like the last decade's fall-in-love-with-the-sideline-ignore-the-mission company, Enron is, as a company that so fell in love with the finance angle, it only paid enough attention to the actual energy business to continue to do the financial ledger-de-main.

Like a team that wins a couple of games a year with a delayed double steal thinking it can ride delayed double steals to a pennant and stops taking batting practice, the SanDisks of the world get Shanghai-ed by their sidelines until the sideline becomes the mission.

It will be interesting to see if Stan Kasten can keep ownership focused "enough" on the team's core mission to get the resources and attention he'll need from them to make this red-capped foster child a winner. I wish him luck. And I'd love to see the hard numbers the business analysts at SanDisk have collected on which scam-like behaviors knock out what percent of their remaining creditors.

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