Michael Phelps: Strategy Formulation & Implementation

MICHAEL PHELPS, NICKNAMED MP, is the most decorated Olympian of all time.
Competing in four Olympic Games,1 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?