Hollywood Economics

I'm a big fan of the television show The Wire, which aired on HBO between 2002 and 2008.  It's a gritty police drama, by which I mean that every fourth word is profane.  If you watch it, wait til after your kids are asleep.

Stringer Bell (played by Idris Elba) is a terrific character who's the #2 man in a big Baltimore drug gang.  He's unusual for a druglord in that he wants nothing more than to be a legit businessman, and he's hoping to use his drug profits to invest in legal businesses that he can run after he retires from selling dope.  There's a great scene in Season 1 where the cops are tailing Bell as he drives to the local community college.  He heads into class where the professor delivers a lecture on demand elasticity.   Later, Bell walks into a copy shop that's he's purchased as part of his plan to go legit, and notices that his employees --- who appear to have been hired from the neighborhood based on criteria other than experience or skill at managing a copy shop --- seem not to be pushing very hard in the direction of superior customer service.

Bell expresses his displeasure, as follows:

Yo, you know what we got here?  We got an elastic product.  You know what that means?  That means when people can go elsewhere to get their printing and copying done, they goin' do it.  You acting like we got an inelastic product and we don't.  Now, I want this to run like a true (gosh-darn) business.  Not no front.  Not no (other stuff).  

Gritty, as I indicated.

As with all Hollywood Economics, however, they don't get it quite exactly right.  (It's not nearly as bad as the economics disaster that is A Beautiful Mind....)  On the outside of the classroom door that Bell enters at the CC, a sign reads "Introduction to Macroeconomics."  Demand elasticity is a *micro* topic, but close enough I guess.

Moneyball

Best.

Movie.

Ever!

And no, it's not because Brad Pitt is so dreamy.

I like baseball, and people would maybe say this is a movie about baseball.  I like statistics too, and people would maybe say this is a movie about that.

But it ain't about that; this is a movie about management and strategy, and that's why it's so great.  I'll get to the management part in a later post; let's talk about strategy.

(And I'm going to assume you've seen it; if not, stop reading and go watch!)

I was giving a talk about strategy at the Governor's Utah Economic Summit a few weeks ago, and started by asking whether people had seen the movie, and if so, whether they thought the Oakland A's strategy --- essentially using innovative analysis to identify players whose contributions to on-field success were undervalued by the labor market --- was a success.  The movie shows that the A's did, indeed, have a couple of very good seasons in the early 2000s, and so the audience mostly concluded that this was a successful strategy.

But the great thing about this movie is that this is a strategy that failed.  And I think understanding why can help businesspeople understand what strategy is, and what a good one looks like.

In my view, the Big Question of Strategy is this:  How can a firm deliver long-run superior performance?  How can we do what General Electric did in the 1980s and 1990s?  Or what Apple has done over the past 10 years?  

This is a hard problem because markets work against you.  Turning short-run success into long-run advantage is difficult because rivals can so often just copy you.  Or worse, take your ideas and improve upon them.

This is exactly what happened to the Oakland A's.  The team's ideas were amazingly good.  The A's achieved their goals and topped their rivals.  For about two years.  But then...  The rivals took note.  They saw that the source of the A's success was in their front office and the people who analyzed the players.  Rivals started to copy their methods, poach their talent, and generally compete for the same players that the A's had been after.  And there was really nothing the A's could do about this.  Their advantage quickly dissipated, and the team has been mostly medium-ish over the last few years.

The business world has dozens and dozens of examples of innovators, like the A's, who were unable to convert short-term success into long-run advantage.  (Do you remember Myspace?  Yahoo?)  The moral of the story is this:  A plan for long-run competitive advantage has to be built around things that rivals can't easily copy.  The A's were likely doomed from the start, and that's why the Moneyball story fails as a strategy.

To be clear, I'm not saying the A's made a mistake by pursuing this innovation; the team was clearly better off having a couple of great seasons than not having that success.  But when you're presented with options about what direction to take your firm and your career, it's important to keep in mind the impact of future competition on your ability to sustain performance.  And if you can get to places where competitors will have trouble following... those are the great strategies.  (It's a bit easier said than done.)

More on the "management" side of things, upcoming...