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How Are the Red Sox Like a Shoe Company?

November 2004

STANFORD GRADUATE SCHOOL OF BUSINESS—What are the similarities between running a shoe company and the Boston Red Sox? According to George Foster, the professor behind sports business management classes at the Graduate School of Business and founder of the school's executive business program for the National Football League, there are plenty. Most critical are the common needs for good strategy, effective leadership, and a solid business model.

Just take a look at the NFL and the National Hockey League, Foster, the Paul L. and Phyllis Wattis Professor of Management, told an Alumni Weekend audience Oct. 23. Twenty out of 30 NHL teams are losing money, and thanks to bad leadership at both the league and player association level, the NHL is on strike this year.

"It's like a train wreck," said Foster. "This is a league that has devastating problems—lack of strategy and lack of leadership." Compare that to the NFL, which hasn't had a strike since the late 1980s and has teams bringing in an average of $160 million to $180 million of revenue annually. Even better in terms of a business model, half of that money is from television and tickets, guaranteed revenue sources. "In the NFL, you have to work hard to lose money," said Foster.

Foster told the audience he has worked with several startups hungrily looking for the next customer. He finds teams, and especially stadiums, no different. "There is a paranoia about revenue growth," said Foster, "that's more extreme in the sports industry." The Washington Redskins, for example, recently added 500 seats to their stadium even though very few of them have actual views of the field (the team installed TVs for those fans).

Working out pay also has become increasingly complex for teams. Both the National Basketball Association and the NFL negotiate a certain percentage of the gross revenue—57 percent and 64.75 percent, respectively—which goes toward player salaries. Now, however, players are demanding that the definition of the gross revenue be expanded to include profits from stadium and television contracts.

Then there's the importance of innovation. As in other businesses, some innovations fail. The Women's Soccer League plowed through $60 million before shutting down and several WNBA teams also have gone under, he said. Indeed, as in more traditional businesses, the quality of the product can make or break a sports team. Foster pointed to the NXL football league, which he called "one of the most hyped leagues ever." The quality of play was so low that the networks changed the rules of the actual game to get in more regular programming. As a result, the league seemed to collapse within two weeks.

Sports teams also have what in the business world would be a counterintuitive reaction to success. If a team is doing badly, the rest of the league joins together to try to prop it up, giving it first draft picks, for example. "North American sports have this concept of an even playing field—supporting the weakest. In business, you don't have a business losing money and all the other competitors trying to figure how to prop it up." On the flip side, if a team is doing too well—like the dominant Formula 1 sports car racing team—the league thinks of ways to handicap it rather than force the other teams to do better and compete.

Finally, there's the difference of who's at the helm. Owners buy sports teams for very disparate reasons—for the trophy aspect of owning a club, for financial gains, or to protect community assets. "It can create some unstable equilibriums," said Foster. And since most teams are privately held, there's very little known about their financial health.

—Sarah Robertson

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