This is an interesting situation.
On the one hand I can somewhat understand a coach who believes his team has very little chance of winning a tournament to use this year's participation to improved the girls' skills for next year's tournament.
On the other hand, there have been plenty of times that the underdog team, that no one gave much of a chance, has gone on to win a tournament, and probably the only person guaranteed to be with the team next year is the coach, so sacrificing any chance of this team's chances of winning for a better chance to win next year doesn't, to me, seem right.
Yes, a large part of the job of any coach who is involved with youth sports, is to teach the kids how to play, and at certain levels, under certain circumstances I think it's appropriate to potentially sacrifice the chance of winning to involve all the players on the team in the experience of the game. You are not describing such a level or such circumstances however.
Isn't winning games the purpose for individual players learning and improving their skills?
I suppose you could define "winning" in terms of individual performance (Player A scored X amount of points, Player B handed out X amount of assists, Player C had a really fun time), but a huge benefit of sports is the team experience: working together to achieve a common goal. The overall success of the team should be more important than how many points Player A scored or how much Player C enjoyed the experience.
Winning is the primary goal of any game. If not, the activity is merely physical exercise. We should be teaching our children to aim for and work towards achieving goals, and in sports there is the added benefit of having this lesson taught and realized in a team setting.
Interestingly enough, it doesn't seem like your daughter's coach is caught up in the "everyone should feel like a winner!" school of thought, and it appears that he is trying to improve the team's chance of winning, but if they are always playing older girls, and he is always substituting so the whole roster can improve, when does he intend to put this improvement towards it's logical end...winning?