The bid to host the Olympics has become increasingly competitive in recent years. Today, the Olympics is more than a mere sporting event. It also serves as a grand international gathering. But was it as popular as today? The answer is negative.
Just over two decades ago, the Olympic Games were a mere sporting event with little influence and public interest. The host city of the 1984 Olympics was decided in 1977. In fact, Los Angeles was the only bidding city. Having no other options, the International Olympics Committee (IOC) not only granted the games to Los Angeles, but also promised in the contract to cover any loss from the event.
Financial disaster used to be a recurring theme throughout the Olympics Games' history. The 1972 Munich Games suffered a loss of nearly 700 million Deutschmark, while the 1976 Montreal Games was struck by a loss of almost $1 billion. In the 1990s when I went to Canada for further study, I was told by the locals that they were still paying the bill for the 1976 Games. The 1980 Moscow Games were said to suffer a similar huge loss, although no detailed statistics were provided.
It was not until in the 1990s that the destiny of the Olympics had been fundamentally changed. Since 1992, the bid for the Olympics has become so competitive, with at least five applicant countries for each games, that a number of countries are alleged to resort to bribery to win the bid. The question rises - how does the change take place? Why was the Olympics treated so differently before and after the 1990s?
The answer lies in the phenomenal achievement of the 1984 Los Angeles Games, which for the first time in the history made a huge profit of over $ 200 million! How did Los Angeles make the games a viable proposition and a marvelous business success?
The man behind the L.A. Games is Peter Uberroth. He understood that there seemed to be only two ways to get out of the red: create new revenue streams and reduce cost. A variety of funding tools had been adopted along the years of evolution of the Olympics, such as selling tickets, selling broadcasting rights and soliciting corporate sponsorship. Uberroth understood that he had to use the same tools in a more creative way to ensure profitability.
Eliminating Information Asymmetry
Take for example the bid for TV rights. In the previous Games, the organiser usually invited several leading broadcasting companies to the bid and the one who made the highest offer won the bid. But one problem was hidden beneath this seemingly reasonable method: when the bidders and the biddee made different value-judgments of the same bidding project, the bidding price would end up disappointingly low. To Uberroth's knowledge, the U.S. public was traditionally less interested in the Olympics than in games such as football, baseball and basketball. The limited size of audience, therefore, would make TV companies reluctant to offer a better price. But being so confident that he was capable of running a gripping Games and attract an abundant audience, Uberroth believed that TV rights were worth a good price. How did he solve this paradox? The key is segmentation differentiated pricing. He divided the final turning-up number of the audience into several groups. The programmes with the smallest audience (e.g. less than 50 million) would sell at the lowest price, whereas the medium size (e.g. between 100 million to 150 million) at the medium price and the largest (e.g. more than 150 million) at the highest price. The TV company wouldn't mind paying more for a larger audience, since more people watching TV meant more profits from selling more TV adverts. This brand-new game rule required that Uberroth try his best to produce an engaging sporting event to draw in as many viewers as possible. The larger the audience, the higher the fee for TV rights.
To achieve this, Uberroth implemented a series of steps, such as offering free participation to more countries and athletes for more exciting performances and involving ordinary local people in the operation to enhance the Olympics' reputation among the U.S. public, etc. It turned out that this Olympic Games became the most successful sporting games in U.S. history, with a record-breaking number of viewers and over $200 million in revenue from TV rights fees.
Also, Uberroth recognised that merely selling TV rights would not be sufficient for funding the Games, because TV was not yet universally used in early 1980s, especially in under-developed countries. For example, many Chinese went to their workplaces to watch the TV coverage of the Games, since they had no TV sets at home. Radio broadcasting, instead, was quite popular in those days. Uberroth wisely sold radio rights and earned tens of millions of dollars.
"Creating" Scarcity
Sponsors had been involved in the Olympics for decades. Before the L.A. Games, it was widely accepted that the more sponsors the better. There were 168 sponsors in the 1976 Montreal Games, 200 in the 1980 Moscow Games and 381 in the 1980 Winter Olympics in Lake Placid, U.S. (Before the 1990s, the Winter and Summer Games were held in the same year). In this last case of the Lake Placid Games, how much funding did the Games obtain from 381 sponsors? Less than $10 million! As a matter of fact, no single Games before the L.A. Games secured funding of more than $10 million. Although hundreds of sponsors funded each Games. This policy of "anyone who would like to join is welcomed" undervalued the sponsorship and therefore the sponsors did not desire to pay more.
It dawned on Uberroth that only when the sponsors were convinced of the profitability of sponsorship would the Games get more funding. Value would rise with scarcity. If the opportunities became rare, corporate competition would then be generated and the true value of the Olympics sponsorship would be materialised. So, he reduced the number of sponsors by allowing only one sponsor from each industry. The threshold price he charged for sponsorship was $4 million.
Being a patriotic American, Uberroth was more inclined to have the sponsorship of American corporations and to promote their brands. He turned to Kodak, hoping that the company would be the exclusive sponsor from the film industry. However, having already taken over 90% of the U.S. market share, Kodak was not convinced of the prospect of earning more market share by investing $4 million. It rather bet on $1 million. The negotiation failed.
It was Fuji of Japan that took prompt action after hearing about the offer. Fuji, in those days, had a meager 3% market share in the U.S. and therefore was very concerned about its market expansion there. After a brief talk with Uberroth, Fuji made a quick decision to pay the sponsorship fee of $4 million and offered an additional gift of photo films worth $3 million. The sponsorship in the L.A. Olympics provided Fuji an opportunity to stand among the world business giants, like Coca Cola and IBM. It resulted in the effective promotion of the Fuji brand and a sharp rise of its U.S. market share to 6% within a fairly short time.
Kodak, on the other hand, soon realised their folly and has become the exclusive film sponsor in every single Olympics since 1985.
The case demonstrates that apart from assessing the profits of an action (i.e., the regular analysis of input and output), an enterprise has to take into consideration the harms of an "inaction", an action its rival takes instead. In other words, in the process of decision-making, an enterprise should not only maximise the profit, but also minimise the harms. In the case of Kodak, ignoring the latter offered Fuji the best chance to win. In this sense, the starting-point in the strategy-planning for any company is to minimise the harms.
In summary, Uberroth "created" scarcity to lift the bar for sponsorship entry, which eventually increased the value of the Olympics sponsorship. As a result, the L.A. Games raised funding of $180 million from 35 sponsors.
More Innovations
The Torch Relay is an important part of the Olympic Games. Before the 1984 L.A. Games, the relay participants were exclusively athletes and celebrities. While keeping this tradition, Uberroth managed to involve many more ordinary US citizens. There were only two requirements for torch relay participants: First, they needed to have sound enough health for a one-mile run. Second, they would be charged $3,000. Numerous people from throughout the country were qualified for the job and joined in the relay when the torch was passed from town to town, city to city. The event thus became a phenomenon, attracting the attention of many households and local media. Cleverly in this way, the Games were advertised free of charge, their reputation and popularity enjoyed a sharp rise, and the approach generated the extra benefit of tens of millions of dollars.
While tapping as many new sources as possible, Uberroth did his best to control the costs. Throughout the L.A. Games, only 3 tickets were respectively sent as gifts to Mr. Samaranch, President of the IOC, President Reagan, and the Mayor of Los Angeles.
As few as two sports venues were newly built specifically for the L.A. Games. The rest of the venues used by the Games were either rented or remodeled.
Another example of cost control was the practice of recruiting a huge number of volunteers. The two-week-long event involved over ten thousand staff, half of whom were volunteers, including Uberroth. Tens of thousands of dollars were then spared.
These new funding methods and cost-reducing measures finally transformed the Olympic Games from a financial failure to a major business success. The Games has become more and more popular ever since.
The core of marketing is to create value for the customer. In this sense, marketing is a process of value-creation. To profit from a business, the organisation has to create value for the customer and then to share part of the profits by leveraging the price. What Uberroth did was exactly that; creating multiple values for all participants, including TV companies and sponsors, and then securing a good price to achieve the "win-win".
Enlightened by Uberroth
The phenomenal accomplishment of the 1984 L.A. Games served to enlighten the IOC. They followed it up by making new strategies focusing on how to create more value for the customers (for example, the sponsors). The more value they could create, the more sponsor fees they would get. Against this background, TOPS (The Olympics Partner Programme) was born.
The Olympic Summer Games and Winter Games were originally held in the same year. So close together in timing, they actually hindered the brand promotion of the corporations. Having identified this problem, the IOC decided to separate them by a two-year interval. Traditionally, all potential sponsors had to negotiate with the Olympics Committees of each participating country, which consumed significant time and energy. With TOP, they negotiated with a single party -- the IOC. TOP successfully expanded the scope of the game: the time span was extended from one year to four years and the geographical scope was expanded from one country to the globe. Expansion of the game led to the increasing of value.
Additionally, because of the growth of TV usage, the number of TV viewers of the Olympics has been increasing greatly. As a result, the transmission and adverts fees of the Olympics are soaring even higher. In the meantime, economic globalisation makes it increasingly important for multinational companies to find a good channel to promote their brands throughout the world. The Olympics Sponsorship is one way to achieve this. In conclusion: the marketing of the Olympics successfully keeps up with the global trend.
Chinese Companies: Competition and More Copetition
Chinese companies in various industries have much to learn from the marketing strategy of the Olympics.
The business competition in today's China has gone to an extreme. Price wars and malicious competition are frequently seen. For example, Chongqing is a motorcycle manufacturing base with large revenues from the industry. But struck by the regular price wars, one motorcycle can only sell at RMB50 right now. The same thing happened in the pharmaceutical industry. In Zhejiang, there is a listed pharmaceutical firm who produces a vitamin medicine product taking 22% global market value. Another privately owned company next-door to it boasts 18% international market share with the same product. That is to say, these two companies together enjoy 40% global market share. Instead of cooperating closely to bring out more profits for both, they engage themselves in a fierce price war globally, which led to a 70% drop in the exporting price of the vitamin medicine they manufactured.
Whatever size a corporation, it can never take care of every single step in the whole process of value-creation. On the contrary, it must collaborate with many more participants, including suppliers, manufacturers of complementary products and even competitors, so as to produce higher value for the customers. The relationship between companies should go beyond competition and head for more cooperation.
Overseas companies have internalised this wisdom. Take for instance Coca-Cola and Pepsi-Cola, who are traditionally rivals. Though their products contain very little technology content, they have both evolved for over a hundred years. According to a finding by the famous "60 Minutes", during 52 successive weeks, Coca-Cola and Pepsi-Cola respectively dropped 26 FSCIs (Freestanding Coupon Inserts). Yet, they never did it within the same week, which is obviously the result of a tacit agreement between the two. Without this mutual co-ordination, the probability is 4x10-15, in other words, it would have been impossible. Now, Coca-Cola is the top brand globally, with a high equity of $70 billion.
In a mature industry like carbonated drinks, Coca-Cola and Pepsi-Cola found opportunities to co-operate. In China's rapidly growing market, Chinese companies have no reason to refuse cooperation. Co-operation will help them to straighten and expand the market, whereas competition will enable them to occupy their own portion of this enlarged market.
Take the Chinese dairy industry for example. In recent years, MENGNIU Dairy has been noted for its huge momentum and great success. Is its victory established upon the defeat of its rivals? Not at all. In fact, Yili Dairy (the rival company of MENGNIU) has done better in the last year and Mr. Pan Gang, Chairman of the Board of, Yili, as well as CEIBS' alumnus, is awarded "CCTV 2005 Business Figures" for his excellent work in Yili. Another CEIBS alumna, Ms. Wang Jiafen, Chairman of Shanghai Bright Dairy & Food Co., Ltd, also has been leading her company to achieve a steady growth in recent years. Despite the pace of development of China's dairy industry, there is still great potential for growth. Compared to milk consumption of 90 kilograms per capita internationally, China has an annual consumption rate of only 10 kilograms per capita, which means the industry has another twenty years to grow further.
The dairy industry is not an individual case. As a matter of fact, many consumer goods industries have similar growth potential, which also provides more opportunities for the development of the industrial goods sectors. The fast expansion of industries will naturally produce a bigger market pie and will generate more possibilities of corporate collaboration. It can be estimated that positive competition and co-operation will enable Chinese companies to make the best of the economic growth in the years to come and to expand and strengthen their businesses as much as possible. Then, they are well prepared to go global.
(The author is Professor of Marketing at CEIBS.
The article, based on Prof. Zhou's speech, is originally in Chinese. The English version is prepared by Cherry Zhong and Snow Zhou. )
