Michael Phelps: Strategy Formulation & Implementation

MICHAEL PHELPS, NICKNAMED MP, is the most decorated Olympian of all time.
Competing in four Olympic Games, the American swimmer won 22 Olympic medals,
including 18 gold! In 2000 at the Sydney Olympics, Phelps at the age of 15 was the
youngest U.S. athlete in almost seven decades. In 2008 at the Beijing Olympics, Phelps
won an unprecedented eight gold medals, and while doing so set seven world records.
Eight short days changed Olympic history and Phelps’ life forever, making MP one of
the greatest athletes of all time. Immediately after the event, The Wall Street Journal
reported that Phelps would be likely to turn the eight gold medals into a cash-flow
stream of more than $100 million through several product and service endorsements.
Phelps did not rest on his laurels, however. In 2012 at the London Summer Olympics,
Michael Phelps added another four gold and two silver medals, elevating him to
superstardom. Phelps became an Olympic superhero against long odds. How was he
so successful?

Strategy Formulation
In his youth, MP was diagnosed with attention deficit hyperactivity disorder (ADHD).
Doctors prescribed swimming to help him release his energy. It worked! Between 2004
and 2008, Michael Phelps attended the University of Michigan, studying marketing and
management. He had already competed quite successfully in the 2004 Athens Summer
Olympics, where he won eight medals: six gold and two bronze. Right after the Athens
Games, the then-19-year-old sat down with his manager, Peter Carlisle, and his
longtime swim coach, Bob Bowman, to map out a detailed strategy for the next four
years. The explicit goal was to win nothing less than a gold medal in each of the events
in which he would compete in Beijing. Bowman was responsible for getting MP into the
necessary physical shape he needed for Beijing and nurturing the mental toughness
required to break Mark Spitz’s 36-year record of seven gold medals won in the 1972
Munich Olympic Games. Carlisle, meanwhile, conceived of a detailed strategy to launch
MP as a world superstar during the Beijing Games. While MP spent six hours a day in
the pool, Carlisle focused on exposing him to the Asian market, the largest consumer
market in the world, with a special emphasis on the Chinese consumer. MP’s wide-
ranging presence in the real world was combined with a huge exposure in the virtual
world. Phelps posts and maintains his own Facebook page, with 7.6 million “phans.” MP
is also a favorite of Twitter (1.6 million followers), YouTube, and online blogs, garnering
worldwide exposure to an extent never before achieved by an Olympian. The gradual
buildup of Phelps over a number of years enabled manager Carlisle to launch MP as a
superstar right after he won his eighth gold medal at the Beijing Games. By then, MP
had become a worldwide brand.

A successful strategy can be based on leveraging unique resources and capabilities.

Accordingly, some suggest that MP’s success can be explained by his unique physical
endowments: his long thin torso, which reduces drag; his arm span of 6 feet 7 inches
(204 cm), which is disproportionate to his 6-foot-4-inch (193 cm) height; his relatively
short legs for a person of his height; and his size-14 feet, which work like flippers due to
hypermobile ankles. While MP’s physical attributes are a necessary condition for
winning, they are not sufficient. Many other swimmers, like the Australian Ian Thorpe
(who has size-17 feet) or
the German “albatross” Michael Gross (with an arm span of 7 feet or 213 cm), also
brought extraordinary resource endowments to the swim meet. Yet neither of them won
eight gold medals in a single Olympics.

Strategy Implementation

Although Phelps was very disciplined in executing his meticulously formulated strategy
to win Olympic gold medals, this is much less true for his strategy implementation to
monetize his stardom outside the pool. Following the Beijing Olympics, a photo
published by a British tabloid showed Phelps using a bong, a device for smoking
marijuana, at a party in South Carolina. Kellogg’s immediately withdrew Phelps’
endorsement contract. After the London 2012 Olympics, Phelps (then 25) announced
his retirement from swimming. After 20 months, he announced that he would come out
of retirement. Just a few months later, however, in September 2014, Phelps was
arrested for driving under the influence (DUI). In 2004, Phelps had also been arrested
for DUI. After the second DUI arrest, Phelps received a one-year suspended jail
sentence and 18 months of supervised probation. Phelps also spent 45 days in an in-
patient rehab center for alcohol abuse in Arizona. USA Swimming, the national
governance body, suspended Phelps for 6 months from all competitions and from
representing the United States at the 2015 world championships. In the spring of 2015,
Michael Phelps announced his intention to compete at the 2016 Rio Olympics. Many
experts predict that Phelps has a good chance of winning two more gold medals. What
sponsors want to know, however, is whether the promised personal change is real,
given that Phelps has made such promises before after his first DUI and then again
when photographed smoking a marijuana pipe. Retaining a clean public image will also
be critical for Phelps because he just launched his own line of swimwear MP, designed
in collaboration with Aqua Sphere, a swimming equipment manufacturer. Phelps grew
up idolizing Michael Jordan, and his goal is to change the public image and marketing of
swimming to something akin to what Jordan accomplished with his Nike sponsorship in
basketball.

DISCUSSION QUESTIONS
1. Olympians generally do not turn into global phenomena. One reason is that they
are highlighted only every four years; e.g., not too many people follow
competitive swimming or downhill skiing outside the Olympics. How did Michael
Phelps (think Lindsey Vonn) turn into a global brand?

2. Which approach to the strategy process did Phelps, his coach, and manager
use? Why was this approach successful?

3. Phelps was embroiled in a number of controversies outside the pool. What

impact did these shortcomings have on his brand value? What do these incidents
tell you about maintaining and increasing brand value over time?
4. What does Phelps need to do if he wants to play a similar transformative role in
the marketing and sponsoring of swimming as Michael Jordan achieved in
basketball?

Trimming Fat at Whole Foods Market

WHEN FOUR YOUNG entrepreneurs opened a small natural-foods store in

Austin, Texas, in 1980, they never imagined it would one day turn into an
international
supermarket chain with stores in the United States, Canada, and the United
Kingdom. Some 35 years later, Whole Foods now has more than 420 stores,
employs more than 90,000 people, and earned $15 billion in revenue in 2015. Its
mission is to offer the finest natural and organic foods available, maintain the
highest quality standards in the grocery industry, and remain firmly committed to
sustainable agriculture. Whole Foods differentiates itself from competitors by
offering top-quality foods obtained through sustainable agriculture. This business
strategy implies that Whole Foods focuses on increasing the perceived value
created for customers, which allows it to charge a premium price. In addition to
natural and organic foods, it also offers a wide variety of prepared foods and
luxury food items, such as $400 bottles of wine.

The decision to sell high-ticket items incurs higher costs for the company
because such products require more expensive in-store displays and more highly
skilled workers, and many fresh items are perishable and require high turnover.
Moreover, sourcing natural and organic food is generally done locally, limiting
any scale advantages. Taken together, these actions reduce efficiency and drive
up costs. The rising cost structure erodes Whole Foods’ margin. Given its unique
strategic position as an upscale grocer offering natural, organic, and luxury food
items, Whole Foods enjoyed a competitive advantage during the economic boom
through early 2008. But as consumers became more budget-conscious in the
wake of the deep recession in 2008–2009, the company’s performance
deteriorated. Competitive intensity also increased markedly because basically
every supermarket chain and other retailers now offer organic food. As a result,
sales growth of existing Whole Foods stores (“same-store sales,” an important
performance metric in the grocery business) has been declining between 2013
and 2015. To make matters worse, same-store sales growth is now close to zero.
Overall, Whole Foods Market has sustained a competitive disadvantage,
underperforming not only its competitors, but also the broader market by a wide
margin (since 2014). To revitalize Whole Foods, co-founder and co-CEO John
Mackey decided to “trim fat” on two fronts: First, the supermarket chain refocused
on its mission to offer wholesome and healthy food options. In Mackey’s words,
Whole Foods’ offerings had included “a bunch of junk,” including candy. Mackey
is passionate about helping U.S. consumers overcome obesity in order to help
reduce heart disease and diabetes.
Given that, the new strategic intent at Whole Foods is to become the champion
of healthy living not only by offering natural and organic food choices, but also by
educating consumers with its new Healthy Eating initiative. Whole Foods Market
now has “Take Action Centers” in every store to educate customers on many
food-related topics such as genetic engineering, organic foods, pesticides,
sustainable agriculture. Yet, a mislabeling “scandal” in New York—city officials
found in 2015 that Whole Foods had mislabeled weights of several freshly
packaged foods such
as chicken tenders and vegetable platters, leading to overcharges of up to $15
an item—reinforced the public’s image of Whole Foods as overpriced. Mackey
made a video apology and said that this was an unfortunate but isolated incident
caused by inadvertent errors of local employees. He also emphasized that the
problems were found in only nine out of 425 stores. Second, Whole Foods is
trimming fat by reducing costs. To attract more customers who buy groceries for
an entire family or group, Whole Foods now offers volume discounts to compete
with Costco, the most successful membership chain in the United States. Whole
Foods also expanded its private-label product line, which now includes
thousands of products at lower prices. Whole Foods also launched a new store
format, “365 by Whole
Foods Market,” based on its “365 Everyday Value” private label. The 365 stores
focus exclusively on Whole Foods’ discount private labels, primarily to address
the rise of discount competitor Trader Joe’s. The risk, however, is that this
strategic initiative will cannibalize demand from the higher-end Whole Foods
Markets, rather than taking away customers from Trader Joe’s. To offer its
private-label line and volume-discount packages, Whole Foods is beginning to
rely more on low-cost suppliers and is improving its logistics system to cover
larger geographic areas more efficiently. It still plans to grow threefold in the
future and believes that the United States can profitably support some 1,200
Whole Foods stores. Larger scale
and more efficient logistics and operations should allow the company to drive
down its cost structure. It remains to be seen if Whole Foods can strengthen its
economic value creation (V – C) to yet again gain and sustain a competitive
advantage.

DISCUSSION QUESTIONS
1. Why was Whole Foods successful initially? Why has it lost its competitive
advantage and is underperforming its competitors?
2. What value driver is Whole Foods using to remain differentiated in the face of
competitors selling organic foods?
3. Given Whole Foods strategic initiatives to reduce its cost structure, does the
firm risk being “stuck in the middle”? Why or why not?
4. What other strategic initiatives should/could Whole Foods launch to more
successfully drive its business strategy?
 How the Strategy Process Kills Innovation at Microsoft

SINCE MICROSOFT LAUNCHED Windows 3.0 in 1990, it has dominated the

industry for PC operating system (OS) software with a 90 percent market share.
Microsoft’s huge installed base of Windows operating systems on PCs and its
long-term relationships with original equipment manufacturers (OEMs) such as
Dell, HP, and Lenovo create tremendous entry barriers for newcomers. Intel’s
semiconductor chips are the perfect complement to Microsoft’s operating system.
Every time Microsoft releases a new operating system, demand for Intel’s latest
microprocessor goes up, because new operating systems require more
computing
power. Because of the complementary nature of their products, Microsoft’s and
Intel’s alternating advances have created a virtuous cycle, benefiting from
network effects. The successful combination of Microsoft’s Windows and Intel’s
processors has produced the Wintel (a portmanteau of Windows and Intel)
standard in the PC industry. By 1999, Microsoft was the most valuable company
on the planet.
Zune, Microsoft’s (failed) digital media player

Fast-forward to 2015 when Microsoft released Windows 10. For the past quarter
century, Microsoft’s business model was to establish and maintain the
dominance
of the Wintel standard in the PC industry. With this standard, Microsoft made
money off consumer and business application software such as its ubiquitous
Office Suite. Microsoft remains hugely profitable: With some $94 billion in annual
revenues (in 2015), it generated over $12 billion in profits! Windows and Office
alone generate roughly half of Microsoft’s total revenues and 60 percent of
profits. The gross margin of “classic” Office is 90 percent, while the new cloud
based
Office 365 only has a 50 percent profit margin.

Although Microsoft is highly profitable, its stock price has been flat for most of the
2000s decade, trailing the tech-heavy NASDAQ-100 by a wide margin. Other
tech companies such as Google, Apple, or Amazon have created new areas of
computing from scratch, and as a consequence, their stock prices have soared.
One reason Microsoft’s stock price has been depressed for so many years is that
investors don’t have high expectations for future growth. This is because since
setting the industry standard in personal computing, Microsoft failed to
commercialize any category-defining products or services. Why? Microsoft
actually came up with some major breakthroughs, but failed to successfully
commercialize them. The root of the problem seems to lie with Microsoft’s top-
down strategy process. Ever since Windows became the industry standard in
1990, Microsoft’s strategy has been defensive: Any new product or extension
must strengthen the existing Windows-Office franchise; if not, it will be “killed.”
Here are some great products and services that Microsoft invented, but never
commercialized:

Online Search
Long before Google became the leader in online search, Microsoft had its own
working prototype of a Google forerunner, called Keywords. In 1998, the year
Google was founded, Microsoft bought the new venture LinkExchange with its
Keywords online search engine. In 2000, Microsoft shut down Keywords because
it didn’t see a viable business model in online search.

After LinkExchange engineers explained to then-CEO Steve Ballmer that

Microsoft was making a huge mistake, Ballmer said he wanted to manage
through delegation and would not reverse a decision made by managers three
levels below him. In 2003, Microsoft had a second chance to innovate in online
search. This time it had the opportunity to buy the startup Overture. Microsoft’s
top management, however, decided that the new venture was overpriced. Yahoo
ended up buying Overture and went on to dominate online search for several
years, before being eclipsed by Google.

Portable Music Player

In 2001, Apple launched the iPod, a portable music player, with which the
floundering company’s resurgence began, followed up with the launch of iTunes
Music Store with 200,000 songs at 99 cents each in 2003. It laid the foundation
of Apple’s hugely successful ecosystem combining software, hardware, and
services. In 2005, during an employee meeting, one Microsoft engineer asked
Steve Ballmer whether Microsoft should compete with Apple’s iPod and iTunes.
In a sarcastic tone, Ballmer asked the room for a show of hands, “How many
people think Microsoft is in the business of selling music?” Not surprisingly, none
of the intimidated Microsoft employees raised their hand. More than a year later,
Microsoft introduced its own digital music player, the Zune, which flopped.

Tablet Computers
Long before Apple launched the iPad in early 2010, the inventor of Microsoft’s
highly successful Xbox gaming console had developed a tablet computer called
the Courier. The Courier was a fully functioning tablet, which folded like a book
that allowed users to draw on a touchscreen, among other features.

Rather than competing against Apple, Ballmer informed the Courier team that he
was pulling the plug on the tablet computer because he decided to redirect
resources to the next version of Windows. This version’s launch was more than
two years away. To add insult to injury, it was Windows 8, Microsoft’s failed
attempt to straddle desktop and mobile computing.

In the meantime, Apple sold more than 250 million iPads. What’s more, the iPad
is instrumental in strengthening Apple’s ecosystem of tightly integrated software
and hardware combined with services. This ecosystem allows Apple to be the
world’s leader in mobile computing. One other mobile computing invention that
Microsoft killed was wearable devices such as smart watches.

Office for iPhone

As soon as Apple released the iPhone in 2007, Microsoft engineers tweaked its
PC-based Office Suite to run on the Apple mobile device. Steve Ballmer shut the
project down—he had a visceral disdain for Apple, once stomping on an iPhone
in an all-employee meeting when he saw a subordinate using the popular Apple
device—telling the group that Microsoft needed to focus its resources on
Windows 8. In the meantime, Apple garnered over $500 million in iPhone sales
since it was launched in 2007. In 2014, the average price for an iPhone was
$625.

Although Apple held only 20 percent market share in the smartphone industry, it
captured more than 90 percent of the profits. A whopping two-thirds of Apple’s
annual revenues of some $225 billion is from iPhone sales, surely sufficient to
have paid a handsome licensing fee for a Microsoft Office Suite for the iPhone.

Cloud-Based Office Software

Long before cloud-based computing took off, Microsoft developed (in 2000) a
fully functioning suite of software applications for the web including an Officetype
word-processing software called NetDocs.

This project was discontinued in 2001 because Ballmer feared that it would
cannibalize sales of the “classic” Office suite. This opened the door for Google to
offer cloud-based computing applications such as Google Docs, Google Slides,
and Google Sheets, which with Google Drive and Gmail make up the core of
Google’s cloud-based computing services. This in turn established Google
Chrome as the dominant web browser and helped Google’s Android to be the
leading mobile operating system with some 80 percent market share. In contrast,
Microsoft’s Windows has some 2 percent market share in mobile computing.

Car Software
In the early 2000s, dozens of Microsoft engineers developed—on their own time-
car software that allows drivers to use online maps, have e-mails translated to
voice and read to them, as well as play digital music. Ballmer shut the project
down, arguing that Microsoft—one of the most cash-rich companies on the planet
—could not afford another big bet at the moment. Today, Tesla Motors is as
much as a software company as it is a car company, with a market cap of some
$30 billion. Moreover, Google is proving that driverless cars (all based on
software and sensors) are viable within a few years, and promise to be a
multibillion-dollar industry.

Microsoft’s Steve Ballmer admits problems in Microsoft’s strategic management

process: “The biggest mistakes I claim I’ve been involved with are where I was
impatient—because we didn’t have a business yet in something, we should have
stayed patient.”2 Steve Ballmer, who served as Microsoft’s CEO from 2000 to
2014, was replaced by Satya Nadella. Under its new CEO, Microsoft is
attempting to reinvent itself with a new “mobile first, cloud first” strategy. It
remains to be seen if Microsoft can once again innovate successfully.

DISCUSSION QUESTIONS
1. Describe the strategic management process at Microsoft under CEO Steve
Ballmer (2000–2014). How are strategic decisions made? What are the strengths
and weaknesses of this approach? Explain in detail.
2. Although Microsoft invented some promising computing breakthroughs, and
often before competitors, why did Microsoft fail to successfully commercialize
them?
3. What recommendations would you give Microsoft CEO Satya Nadella (since
2014) to redesign Microsoft’s strategic management process in order to achieve
more successful innovation?
 Standards Battle: Which Automotive Technology Will Win?

IN THE ENVISIONED FUTURE Transition away from gasoline-powered cars,

Nissan CEO Carlos Ghosn firmly believes the next technological paradigm will be
electric motors. Ghosn calls hybrids a “halfway technology” and suggests they
will be a temporary phenomenon at best. A number of start-up companies,
including Tesla Motors in the United States and BYD Auto in China, share
Ghosn’s belief in this particular future scenario. One of the biggest impediments
to large-scale adoption of electric vehicles, however, remains the lack of
appropriate infrastructure: There are few stations where drivers can recharge
their car’s battery
when necessary. With the range of electric vehicles currently limited to some 200
miles, many consider a lack of recharging stations a serious problem (so called
“range anxiety”). Tesla Motors and others, however, are working hard to develop
a network of charging stations. By the summer of 2015, Tesla had built a network
of some 500 supercharger stations throughout the United States.

The Nissan Leaf, the world’s best-selling electric vehicle

Nissan’s Ghosn believes electric cars will account for 10 percent of global auto
sales over the next decade. In contrast, Toyota is convinced gasoline-electric
hybrids will become the next dominant technology. These different predictions
have significant influence on how much money Nissan and Toyota invest in
technology and where. Nissan builds one of its fully electric vehicles, the Leaf (an
acronym for Leading, Environmentally friendly, Affordable, Family car) at a plant
in
Smyrna, Tennessee. Toyota is expanding its R&D investments in hybrid
technology. Nissan put its money where its mouth is and has spent millions
developing its electric-car program since the late 1990s. Since it was introduced
in December 2010, the Nissan Leaf has become the best-selling electric vehicle,
with more than 180,000 units sold. Toyota, on the other hand, has already sold
some
8 million of its popular Prius cars since they were introduced in 1997. By 2020,
Toyota plans to offer hybrid technology in all its vehicles. Eventually, the
investments made by Nissan and Toyota will yield different returns, depending on
which predictions prove more accurate. An alternative outcome is that neither
hybrids nor electric cars will become the next paradigm. To add even more
uncertainty to the mix, Honda and BMW are betting on cars powered by
hydrogen fuel cells. In sum, many alternative technologies are competing to
become the winner in setting a new standard for propelling cars. This situation is
depicted in Exhibit MC18.1, where the new technologies represent a swarm of
new entries vying for dominance. Only time will tell which technology will win this
standard battle.
DISCUSSION QUESTIONS
1. Do you believe that the internal combustion engine will lose its dominant
position in the future? Why or why not? What time horizon are you looking at?
2. Which factors do you think will be most critical in setting the next industry
standard for technology in car propulsion?
3. Which companies do you think are currently best positioned to influence the
next industry standard in car-propulsion technology?
4. What would you recommend different competitors (e.g., GM, Toyota, Nissan,
and Tesla Motors) do to influence the emerging industry standard?