"We were left with the overall impression that the team wasn't trending toward being able to compete for a Stanley Cup," Capitals owner Ted Leonsis said in a news conference at the club's arena. "And that was just a clear signal and why it was time to make those changes."
McPhee's contract was up and the team announced it will not give him a new one after his 17 years as the GM, which included drafting Alex Ovechkin and Nicklas Backstrom in the first round.
Oates was fired with one season left on his three-year deal. A former star player for the Capitals, he was in his first job as an NHL head coach.
Washington finished this season with the ninth-most points in the Eastern Conference, one spot out of a playoff berth.
"You have to do something to pivot the team to be an ongoing strong team," Leonsis said. "And I just felt that new leadership at this time was needed, and let's start it with a clean slate."
Asked whether any player would be untouchable as part of upcoming changes — a chance, perhaps, for Leonsis to mention captain and top scorer Ovechkin — the owner replied: "I'm not the general manager. So If the general manager comes with something, we would listen to the general manager."
Ovechkin has won three league MVP awards and again led the NHL in scoring this season with 51 goals, but the Capitals haven't made it past the second round of the playoffs during the Russian wing's career.
Dick Patrick, the president of the Capitals, said the team already has drawn up a list of potential GM candidates.
"Typically, you'd like to have a general manager in place and have him choose a coach," Patrick said.
The Capitals reached the Stanley Cup finals in 1998, McPhee's first year on the job, and were swept by the Detroit Red Wings. Later, McPhee oversaw a "rebuild" ordered by Leonsis, including jettisoning top players with big contracts such as Jaromir Jagr.
"Let's not forget that rebuilding process was dramatic. And I watched a great executive go through really, really hard times and really rebuild that team quickly. We just didn't get there," Leonsis said. "At some point, you just have to try something different."
While McPhee eventually built a young roster filled with offensive stars, he never placed as much emphasis on constructing a rugged, defensive-minded blue line crop. He hired a succession of coaches with zero previous NHL experience running a team, including Glen Hanlon, Bruce Boudreau, Dale Hunter and Oates.
Led by Ovechkin, the Capitals produced terrific regular-season results for a half-dozen seasons, without similar success in the postseason. Four years ago, Washington won the Presidents' Trophy for having the most points during the season, then lost in the first round of the playoffs to the eighth-seeded Montreal Canadiens.
Leonsis called McPhee, who built seven division-winning teams, "a talented man, a great friend," but that it was time for "a fresh set of eyes."
The Capitals went 65-48-17 under Oates in his two seasons.
In a brief statement released via the team, Oates called it "a tremendous honor to coach the Capitals these past two seasons" and said he was "grateful for the opportunity."
In his first season in charge, which was shortened because of a labor dispute, Washington reached the playoffs with a late surge before losing in the first round to the New York Rangers in seven games.
"We were a continuously improving playoff team until we weren't. And the last two seasons showed us that we need to improve. And that's what it came down to," Leonsis said. "Dick and I said, 'We have to make that gut check. Do we have to change? And where do you start?' And you start with the coach and the general manager."
Freelancer Joey Kamide contributed to this report.
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