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Globalization and Advertising

Back in March 2005, I was sitting in my office one nice morning grinding out a letter to a difficult client. I stopped to take a phone call ...

Tuesday, June 21, 2016

The 80:20 Rule

Unless you are a newcomer to the business world, you have experienced, thought about, or been part of the 80:20 principle.

It first surfaced way back in 1896 when Vilfredo Pareto, an Italian economist, published a paper at the University of Lausanne. Pareto’s research illustrated that 80% of Italy’s land was owned by 20% of the population (and you thought income inequality was a new issue! Nope, remember Karl Marx). Pareto kept digging and found that across countries similar patterns existed. As late as 1989, looking at global GDP by quintile, the top 20% (quintile) produced 82.1% of the economic handle.

After World War II, a few others led by philologist George K. Aipf, picked up the Pareto mantle and the 80:20 principle was found to be widespread and some soon called it the “principle of least effort.”

The following items were often observed across the world:

--20% of employees were responsible for 80% of corporate output.

--80% of sales came from 20% of clients

--80% of profits came from 20% of customers

--In bookstores, 80% of sales came from 20% of titles

As more people examined it, the 80:20 principle started to creep in to management science or quasi-science. Some entrepreneurs failed as they did not leave tasks to others that they did not do well. They should have focused on the 20% at which they excelled.  The mantra was to work harder on elements that work harder for you and ultimately focus energy on what you enjoy.

Big companies often shed brands or divisions that were not profitable. Conglomerates often did not work out well so chieftains sold off the least profitable or most difficult areas and became stronger organizations.

Asking a few ad agency chiefs about 80:20 was interesting. Here are the two best comments:

--“No one wants to resign business unless the clients are complete bastards. Over the last few years, I saw 80:20 clearly in our P&L’s. So we have asked for big increases in compensation from a few clients. If they refused, we resigned them. We are a bit smaller but more profitable during a challenging time for shops our size. I wish that I had done this 10 years earlier but it takes guts.”

--“When you contacted me, I was afraid to answer but my partners urged me to tell the truth. Candidly, if we could start over tomorrow, we might only keep the 20% of our staff that is still growing and contributing a great deal. I think that if I were totally honest, I just might fire myself. It stuns me how 80:20 applies in so many areas.”

Recently, I had an experience with 80:20 that shook me to the core. I looked at my stock trading since 1973. Even a persnickety statistician would consider that to be a longitudinal study. And, my findings? You guessed it. Some 79.4% of my gains came from 20% of my holdings. Eerie, but true.

The 80:20 principle is alive and well!

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Sunday, June 12, 2016

Is Your Firm A Learning Organization?

In the last 15 years all of us have clearly learned one thing--the world is speeding up and, as even frontier markets get wired, people are getting more demanding or spoiled. They want precisely what THEY want and they want it now, not in the future. As the pace of change continues to accelerate, all companies, but especially those in communication, have to adapt and change or perish. A firm has to continually improve across all departments and you need to rethink your goals. Yet, what is a company? It is essentially its people and people only change when they are learning new things and shifting behaviors. As one person wrote to me, “Learning is the capital of the future” (More about that later).

About 25 years ago, Peter Senge of MIT wrote a book called THE FIFTH DISCIPLINE: THE ART AND PRACTICE OF THE LEARNING ORGANIZATION. His thesis was that it was not merely individuals but the organization itself which has to learn and keep learning to stay current. He described learning organizations as “organizations where people continually expand their capacity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are continually learning to see the whole together.” Sounds fabulous, huh?

Does anyone truly do it? Well, as is often the case, theorists such as Senge were more than a bit ahead of their time. Today, in 2016, I would argue that being a learning organization is crucial for the growth and even survival of many media entities and small to medium sized advertising agencies.

Did you ever ask anyone or observe what it is to be part of a great business team? Maybe even a well run department within a larger firm? To me, it always seem to hinge around an open environment for ideas and that people feel that they are doing something meaningful.

Senge identified things with a bit more precision that that. Disciplines needed in a learning organization include:

1) Systems Thinking--this is simply saying that what you do is interrelated and what you do can effect others and have long term effects. All too often I observed people 100% concerned with their own job, job security or department. No one looked at the big picture--people focused on their own “silo” or “sandbox.” Long term it hurt growth and the overall environment of the company.

2) Personal Mastery--here Senge says one lives life from a creative rather than reactive standpoint. These people are still learning and hungry for it. There are no “fat old men on tenure” who are coasting. Curiosity reigns. This is much easier said than done especially in a service organization.

3) Building A Shared Vision--teams learn to think insightfully and there is an “operational trust” among executives. There is dialog that is far more open than most organizations.

4) Leadership--autocrats need not apply. These men and women need to be teachers but not owners of the corporate vision.

About 10 years ago, I began to see the term learning organization pop up in the chairman’s letter in annual reports and corporate mission statements. I sometimes laughed out loud if I knew the group was run by a narrow minded tyrant. To me, Senge’s idea is one whose time has come. If not, many organizations we know will be swept away or much weaker over the next decade.

Finally, I mentioned that someone had written to me when I canvassed some panel members about this topic that “learning is the capital of the future.” Impressed, I asked if it were his original phrase. He said no and challenged me to find it. After some Inspector  Clouseau style research, I believe it was coined by British business writer Edward Russell-Walling. His articles on Senge are well worth your time if you do not want to plow through the original “Learning Organization” text.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a comment on the blog.

Saturday, June 4, 2016

Tell Them What They Want To Hear?

It has often been said in the American business world that the way to survive is to tell management “what it wants to hear.” The late Chris Argyris (1923-2013) questioned that view often in his long career. Of all his books on organizational science, my favorite was ORGANIZATION AND INNOVATION.

In brief, Argyris said that there were two types of companies which he labeled Model I and Model II.  He stated that in Model I firms people only said things aloud in meetings that were felt to be appropriate to company culture. Confrontation was avoided at all costs. If an employee felt that he or she would be penalized in some way for candor, or might embarrass someone or announce bad news in a session, they usually would keep quiet, soft-pedal the issue or even lie. By doing so, top management gets knowledge that he categorized as invalid and many errors could not be corrected. Argyris felt strongly that if an organization was to learn, then finding and correcting errors was what it was all about.

Everywhere that I have worked in my career, superiors always said, “Tell me anything. My door is always open.” Think about it yourself and I am certain that most of you have heard the same thing. Did you act on it literally?

It is very hard to find an executive in almost any industry who is not at least minimally defensive about criticisms from an employee. After a period of years goes by and a relationship develops, most of us have learned where they can go and where they avoid comment. I made it a point never to call someone out in a meeting in front of peers. Stronger comments were always better one on one and even then, it was difficult at times. This week I just finished THE MURDER OF LEHMAN BROTHERS (Brick Tower Press, 2009) in which Joseph Tibman (a pen name for a former investor banker at Lehman) talked about how Lehman Brothers CEO Dick Fuld was always insulated from bad news right until the end of the company’s existence. Clearly, they were a Model I firm.

Model II companies, according to Argyris, have somehow found a way to express issues. People are not afraid to raise conflicting views and their is actual encouragement of challenging publicly even what the CEO has to say. Problems can be dealt with even when you are pretty far down the road on a project. Argyris says there are only a handful of Model II companies out there. He wrote that in 1965 and I bet it is still largely true today.

Where do Model II companies exist? Startups, particularly in tech, would likely head the list. I have seen and heard of it in small professional practices in law, medicine and financial planning and analysis. Everyone is experienced and fairly secure. Family businesses sometimes operate on Model II. As one person said to me, “Yes, we argue, disagree and fight. But, at the end of the day we still love each other and we are all owners.”

Does it work in the media world? A sales staff may have it if it is not too large. Everyone is under pressure to perform so the sales chief is not the villain--the bean counters at headquarters are. So, people are often apt to speak up about sales tactics or who to pursue for new business. Ad agencies? Maybe a few start-up digital shops are Model II but generally candor is found in private conversations at long standing agencies among senior management who are financially secure.

The late Andy Grove of Intel once famously said, “Only the paranoid survive.” It always gets a laugh when it is brought up but today in many firms, particularly advertising agencies there is a crying need to move toward a Model II culture.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Sunday, May 29, 2016

The Uncertain Future of New Brands

For the last few decades, brands have been a very important facet of our U.S. economy.  There was a time when it appeared that generics and store brands would dominate things but brands bounced back in many categories and grew even stronger.

At first the message was that brands must be warm and friendly and then it morphed in to an era that posited that one must have a relationship with their favorite brands. All that appears to be going away according to the futurists out there. It is difficult to argue with them as we appear to be going in to a “personal data economy.”

In previous postings in MR, I have discussed how the Internet of Things, Big Data and on line shopping lead by Amazon.com are turning the media, advertising and marketing worlds upside down. Truly, we are in a transformational era that may well speed up a new economic system and perhaps even social system.

The advent of accelerating technology has changed the way we shop and how we are persuaded what to buy. Many cling to the concept of emotional storytelling remaining the key to consumer communication but I am growing increasingly skeptical of that idea. As online shopping grows, smart data, if you will, should take center stage in many purchasing decisions. Some are forecasting a huge decline in the importance of grocery stores especially in high income, densely populated areas (i.e., Manhattan) in the years to come as many will order their food and other sundries on line or with the help of their “Smart Fridge” that signals when certain items are running low in the household.

Generally, I have found that seismic change takes longer than futurists forecast as consumers, or many of them, tend to lag technology. Millennials, however, are so tech savvy that they are likely to embrace technological advances far more quickly than any previous generation has to date.

So, what does this mean? I return to a theme that I have tried to articulate in several MR posts over the last few years. Established and firmly entrenched brands have to have a tremendous advantage over new products. In an era where commercial avoidance will continue to grow especially among the well educated and affluent, many automatic orders of groceries and personal care products will likely take place with the overwhelming preference going to established brands. Other than in fashion, where trends often seem bubble up quickly without much traditional marketing support, established players will have a huge advantage over newcomers who may not be as well funded as the deep pocketed giants.

Yes, there will be new players who will break through and somehow upset all precedent and succeed. Not to sound cynical but I would bet that they will be bought out by major players in their category if they grow fast and build market share quickly. A billion dollars remains a sizable amount of money and few entrepreneurs will be able to resist a generous buyout.

So, as the retail world unravels or shifts look for the big producers to get larger and even more powerful. Social media is great but it likely cannot level the playing field enough for newcomers to break through and grab big shares from the global giants.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Sunday, May 15, 2016

The Dangers of Advertising Agency Diversification

Today, in the financial world, you often hear the clarion call for proper diversification. That is why index funds, which buy the entire market, are so popular. Many fees are tiny and risked is reduced by buying an entire market rather than trying to ferret out individual winners. The proverb to back it up is “Don’t put all of your eggs in one basket.” On the other side of the coin, steel magnate Andrew Carnegie once said, “Put all of your eggs in one basket, but watch that basket.”

Interestingly, if you look at billionaires, Gates, Zuckerberg, Murdoch and a few others, they tended to find success by focusing on one product or category. A notable exception to this is Warren Buffett and Charlie Munger of Berkshire Hathaway who run a conglomerate but do not see themselves as managers so much as allocators of capital.

Way back in the 1960’s when I first began to study businesses, conglomerates were the coming thing. Harold Geneen’s ITT put together a collection of companies as disparate as Avis, Continental Baking, The Hartford (insurance) and Sheraton Hotels. TIME magazine ran a cover story on “Jim Ling, The Merger King” who had cobbled together a motley assortment of companies under one roof. It ended badly for him.

Sometime in the 1980’s, these diversified companies began disposing of unprofitable businesses. The focus was more on concentration. The argument that if you owned companies in non-related industries protected you from the ups and downs of an industry was true but Wall Street and shareholders were not enchanted and corporate headquarters became top heavy with too many employees. Today, when companies speak of diversification it is often line extensions of their winning brands or adding new products to their existing markets.

The concept of diversification is a topic that I am getting a great deal of mail about from owners of small and medium sized ad agencies. With all the new platforms emerging in the media world, these shops of modest size are feeling some heat. How can they compete going forward? Many became involved with digital after the train left the station. Others still tout their online or mobile “whiz” employee at new business sessions. For clients who are new to advertising or of a very modest size, it may work. Yet, move up in size and there is an extreme disadvantage.

The major mega-agencies, WPP, Omnicom, Interpublic, and Publicas are deeply embedded in diversification. When a new platform or medium emerges, they have the deep pockets to buy either the leader outright or raid key talent and soon have a viable presence in that space. And, you can bet that is what they will be doing for years to come.

What can the smaller guys do? Tom Malone, management guru at MIT, said a decade ago, “All good diversification builds on competitive advantages in core businesses.” Okay, but what does a mid-sized or small shop have to offer other than personalized service? Their online rates are totally outclassed by the exchanges and their online or mobile whizkid cannot possibly work a full day on agency business and still monitor changes in the field effectively.

Those who say that they have a group of small “companies” with one or two staffers in Public Relations, Mobile, Online, or Emerging Media may look and sound good but they are often not just fooling prospects but are also fooling themselves. Some sort of affiliate relationship with a speciality shop of an advertising behemoth, seems to be a workable solution to their obvious gaps in specialization.

If they abandon the absurd fiction of being truly diversified and stick to their circle of competence, they may evolve in to a survivor as many of their size are swept away in the years to come.

Should you wish to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Tuesday, May 10, 2016

The Competitive Environment for Advertising Agencies

Back in 1980, Michael Porter wrote a book now famous in certain circles called COMPETITIVE STRATEGY: TECHNIQUES FOR ANALYZING INDUSTRIES AND COMPETITORS. I devoured it, gave it to my boss who said he was dying to read it, and it sat on his desk for three years unopened. One day I found it in his wastebasket but said nothing. Porter’s thesis is more timely than ever, so after 36 years, it might be a good moment to share my thoughts with you.

The basic point was that what we think of as competition--direct competition, is only one part of the total landscape. He identified five forces and only one, internal rivalry in the industry, was always evident, but the remaining four came from the outside.

The five forces were:

1) Competitive rivalry among existing players--this is where most advertising agencies put 90% of their focus and nearly 100% of their frustration.

2) The bargaining power of suppliers.

3) The bargaining power of customers--why is Integrated Marketing Communications taking hold and advertising a declining segment of the marketing mix? It can be explained in two words--Wal-Mart and Target. Power shifted over last quarter century from manufacturers to retailers. Wal-Mart wanted you to lower their price rather than accept massive advertising support. And now, on-line retailers, led obviously by Amazon.com, are reshaping the retail landscape and perhaps destroying conventional retail. So a few large buyers are dominating things.

4) Threat of new entrants--in a free market, any profitable market will attract new players making the overall industry less profitable. Warren Buffett and Charlie Munger of Berkshire Hathaway have looked for companies with “moats” around them. They buy companies with high investment or fixed costs, or utility franchises or those with very high switching costs for customers. How many manufacturers can take on Boeing in aircraft manufacture when the cost of entry is in the billions? Ad agencies are different. A few disgruntled employees can quit, rent some office space or use a kitchen table and start a shop. The threat of new entrants is always there.

5) Threat of substitutes--if brand loyalty or switching costs are high, a manufacturer is protected somewhat. Otherwise, look out!

As we look at today’s advertising agency environment, it is not an exaggeration to say that this may be the most difficult period ever to grow your agency business.

I talked and had lively e-mail exchanges with a number of agency principals largely in the U.S. Here are some of their comments (obscenities deleted):

--Mid-Sized agency partner--we have a great deal of pride about our ability to keep up with changes. Two years ago, we hired a young art director. He impressed all of us but in each interview around the shop he kept pressing all of us on our digital capability. He signed on and was a big hit internally and especially so with clients. After seven months, he came to me and resigned. When I asked him why he said (paraphrase), “You guys lied to me. It is crazy to tell people you are up to speed on digital. You may fool most of your current clients, but not me. I am out of here.” We all wrote him off as an angry young man and kept our heads down and continued to march. A year later a bright young intern joined us. The kid was on fire with ideas and seemed to read everything about the industry in his free time. He peppered us with articles, blog posts, and a few new marketing books. After 90 days, my partner and I offered him a job. He laughed and said, “No way. I have learned nothing here. You are nice people but you are at least five years behind most agencies your size. I am heading for NYC.” A month later, a young copywriter of ours told us that the young intern had landed a job at a mega-shop in New York and seems to be doing great. The two young people were a wake-up call for us. If we simply talk to each other and unsophisticated clients, we do not know how far out of the loop that we really are. We are trying to recruit staffers from larger shops and are sending key people to industry conferences. Can we ever catch up?

--Small agency owner (12-15 staffers)--"when we pitch new business now, we are stunned to find much larger shops chasing the nickels and dimes some of these small advertisers are offering. A beach community tourist board had 12 finalists. We could only offer serious attention from me and the whole staff. Competitors had departments twice as large as my whole shop.”

--Mid-Sized CFO--"we tried incentive based compensation some years back . We got clobbered as the Great Recession made it hard to sell anything. Also, one client, privately held, appeared to lie to us. His staff said we were great but he said sales were flat and our bonus was tiny so we resigned it.”

--Mid-Sized Creative Chief--"our competition lies all the time. Our media director and I keep fighting for more staff. How can we possibly do due diligence on all the platforms that we need to cover for a campaign? When we ask for an increase in fees, existing clients usually say no despite agreeing that we have more work to do than years ago. In competitive shootouts, someone always lowballs us (and others) and say that they can do it all for a few hundred thousand less. It always ends badly for the client and they switch shops. Meanwhile, we lose some good opportunities.”

--Anonymous Ad Agency Owner--"we try to upgrade staff and facilities but we are outclassed right and left. Fifteen years ago, we could pitch a big piece of business and our TV executions could compete with the big boys and girls. They might let us buy media in some spot markets and a mega-shop’s buying service would do the network TV negotiation. Now, we are light years behind in digital and I cannot afford to pay young talent what they deserve. So, our client roster is getting less and less sophisticated. The young kids hate it. One told me as he left that working here was like working at an assembly line at GM. The people were pleasant but the work was the same with nothing new coming on board. I did not dispute what he said.”

So, the atmosphere is tough out there and may get worse. It is difficult to analyze your competition when you do not have their tools or they are unethical.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.

Friday, April 29, 2016

The Grit Factor in Business

Over the last few years, there has been much made of “grit” as being an important factor in an individual’s success. Psychologist Angela Duckworth of the University of Pennsylvania defines psychological grit as “perseverance and passion for long term goals.”

For years, we have talked about athletes or soldiers with grit. Now, it is taking a more prominent place in discussion of the business world. Success books have often touted IQ, natural talent and social intelligence as keys to success. Yet, people with grit appear to be different. They somehow find a way to create their own future regardless of obstacles.

The world is full of talented people. Yet, few really succeed. Many have great promise and an almost instinctive skill at certain fields. They are not lazy but do not throw themselves headlong in to the project. To me, they just do not love it enough and are not willing to devote the time and energy to break through the pack and stand out.

Grit is what sets many successful people apart in the business world. The best definition that I have seen from several sources is: “Grit is the tendency to sustain interest in an effort toward very long-term goals. It equips individuals to pursue especially challenging aims over years and even decades.”

People with grit seem to be content to pursue something against all odds. They seem to love what they are doing, do not complain and are flexible when setbacks occur. Senior managers often tell me that their favorite employees are those with grit. You cannot spot that in interviews--it shows itself on the job and may take a while to make itself evident. Some years back, I was involved in a new business pitch that involved three offices of a company. We worked like hell to put together a great pitch and it was genuinely good. The business went elsewhere. One of my colleagues, whom many would consider a tough guy, was depressed for weeks. Another associate, told me after a beer, “Okay, we did not get it. Next month, we have prospect X.” Several days later, we all met in tough guy’s office. He was still ranting about the lost business. As we left, my gritty partner said, “Can you believe how Mr. Big is still sucking his thumb over the loss. Let’s move on.” And, we did!

People with grit are fierce competitors. My best example from sports is the legendary golfer, Ben Hogan. He came from a tough background in Texas. Allegedly, his father committed suicide in front of eight year old Ben. Many said that made him quiet and introspective. A small man, he struggled to make it on the PGA Tour. He had an incurable hook and had to crawl back in shame to Fort Worth three times flat-broke after unsuccessful attempts to make a living as a pro golfer. Finally, after more practice than anyone in his era, he straightened out his drives and began to win. Then, a tragic car accident almost cost him his life. Doctors initially doubted that he would walk again. That did not stop Ben. He came back to win a total of nine PGA majors and, in 1953, he won the Masters, British Open and the US Open. Walking was painful but he never gave up. When asked what his secret was, he said simply, “It is in the dirt.” In other words, practice. Late in his life I saw a TV interview where he said he just loved to practice.

Some have grit and quietly have great success. I met a man over 30 years ago who asked me about my philosophy of investing. We talked over a long lunch. He told me that he purchased utilities--electric, gas, water and telephone. His rules were only buy those that raise their dividends each year and only add when their price has dropped 20% or more. He told me years later that he stopped talking to people about it as they told him he was too conservative. Well, he missed the dot.com crash and even in the 2008-2009 debacle, his dividend income continued to rise. Today, he sits on a mini-empire of utilities and sleeps soundly. You will never see his name in the press as he does not own more than 5% of any publicly traded company. He lives in modest elegance but is low key about everything he does. He stubbornly stayed the course for three decades and besides his wife, the IRS, and a few friends such as I, no one knows of his spectacular success.

The day we first had lunch, he asked me what my favorite book was. I was mildly embarrassed and told him that it was “The Little Engine that Could.” He laughed and said “I like that one, too, but my favorite is The Tortoise and the Hare.”

If you meet someone or hire something who has authentic grit, follow them. You are very likely to benefit.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com