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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 Berkshrie 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

Friday, April 8, 2016

Agency Overtime Woes?

A week ago, April 1st, THE WALL STREET JOURNAL published an article discussing the new policy set to be released by the Labor Department that would require businesses to pay overtime to any workers time over 40 hours/week if their salaries were less than $50,440 per year. It was hoped that the change would go in to effect in July.

The current limit is $23,660 per year. According to the American Association of Advertising Agencies some 25% of ad agency employees make less than $50,400 per year. That got my attention. So, I sent out an e-mail on the 2nd to a number of small and mid-sized agency principals asking for their reaction to the proposed change. Several of them forwarded both the Journal article and my question to friends or associates who also ran shops.

The results were striking and, with their permission under the cloak of anonymity, here are some selected comments:

1) “It is bad enough that Bernie Sanders is running around the US calling for an immediate $15 per hour wage for all employees. He does not realize that some small businesses simply cannot do it. If McDonald’s does it, they would have to tack on much higher prices. At least others who favor a minimum wage hike want to do it gradually. I am all for helping lower paid employees. To go from pay overtime to those earning less than $23,660 up to those under $50,400 in one step is something that we cannot adjust to overnight. Phase it in over several years and we can live with it.”

2) “Our CFO said ignore it until someone calls us on it. That is crazy. We cannot ignore a federal dictate. I am sorting through how we could manage it. It is very tricky.”

3) “Don, you and I have talked for years about how agencies pay starvation wages at first, work people like hell, and then reward them after a few years. We all know that roughly one third of newcomers quit and go in to another industry, one third are not up to it and we ask/tell them to leave, and one third love it and make a career of it. Why do I have to pay extra to people who will not stay with us?

4) “We have a young creative who seems to have that spark that we love to see in spades. His problem is that he is B.S. artist par excellence. He is new to town (a mid-sized one), knows no one so his whole life revolves around the shop. Each day he bounces around and talks to almost everyone in the agency. Around 3-4 pm, he settles down and gets to work. Often he stays to 8-9 pm. Our creative chief finds him annoying but he does appear to have real talent. I am paying him $36,000 now. If this guideline goes in to effect, I do not want to jump him to $50,000 immediately. Maybe take him up to $40,000. Yet he will claim that he is putting in 15 or more overtime hours per week. What he needs is a girlfriend. :)

5) “A young lady on our team is very accurate in all she does. The issue is that she works at a snail’s pace. She never leaves at 5:30. Most nights she is there an extra two hours. When our management comes in on weekends to work on new business, she is often there for a few more hours. It is not that she lacks intelligence. She just does EVERYTHING very deliberately. Candidly, she is not worth $50,000+ at this time. Were we to pay her overtime, she might make $60,000. I am not sure how to deal with this”.

Others used pretty strong language to say that people would work slowly or play on their computers a bit to earn the overtime. One mentioned that “clubhouse lawyers” (every firm has at least one) will tell people to pad their hours to earn more.

What do you think? Working at an ad agency IS different from most types of businesses. I recall witnessing creatives who appeared to look out the window all day deliver breakthrough executions time after time. It is not the same thing as working behind a fast food counter or any type of retail or industrial operation.

What do you think?

If you would like to respond directly, you may post a message on the blog or e-mail me at doncolemedia@gmail.com

Sunday, March 27, 2016

Denial In The Media World

Several years ago, I was scheduled to meet a friend at a local golf course. We got our signals crossed and he did not show up. The starter at the course paired me up with a threesome and I teed off 12 minutes after my appointed time. I was assigned to a golf car with a 77 year old gentlemen.

The fellow was pleasant and courteous but was having a terrible time. His tee shots barely dribbled down the fairway. After three holes he told me that maybe he should quit the game after 60 years of enjoyment. I looked down and saw the ball that he was playing. It was a top of the line Titleist and was the same that was used by touring pros.

When we arrived at tee box #4, I asked my new friend to humor me. “Try teeing off with the ball that I am using.” He was gracious and agreed but was a big grudging about it. His ball rocketed down the fairway, straight as a string, about 170 yards. He told me the ball must be illegal. I smiled and told him that it was designed for senior players with a much slower swing speed than the top 100 players in the world. After the round, I had a new best friend and gave him a dozen of the senior friendly balls out of the trunk of my car. He waxed poetic and said that I had given not just his golf game but his whole existence a new lease on life.

The aging golfer was a good man. Yet, he was in denial. He was not 30 anymore. In order to stay in the game, he needed to adapt to the current conditions--his aging body. I am finding the same thing true with the attitudes of many people in the communications business.

My last blog post in Media Realism (MR) was entitled “The Internet of Things and Marketing.” I received an inordinate amount of mail on it. A few wrote that they liked it and agreed, a plurality said that they had never thought about it but would, and a few were furious.

One fellow told me the following (obscenities deleted so I had to add a few words to put together a coherent sentence): “Cole, you are an idiot and you have always been an idiot. For 35 years, you have talked about the future of media and here I am still standing and making a living in this business. I will never read your stupid MR blog again.”

This guy and many others told me in the early ’80’s that cable TV would NEVER emerge as viable advertising medium. Fast forward to the late ’90’s and they said the same thing about the Internet. Over the last few years this same character and fellow travelers said social media was a fad that would soon implode and mobile advertising will never catch on with the public.

Okay. To be fair, no salesperson who makes his or her living from a conventional medium is going to say to a prospect that his station or publication is toast. And, the angry man described above has made a decent living in broadcast sales for decades and will likely make it to retirement. At the same time, he and many others need to face reality.

A TV station general manager put it to me this way-- “Sometimes, I meet with a young media executive at an agency who tells me it is game over for guys like me. Well, it is not. We are now doing well due to strong auto advertising this year plus we should benefit from a hotly contested US Senate race this fall. At the same time, we are taking advertisers and pleased to get them that we would never have considered 15 years ago. Our profit margins are still good compared to most industries but half of what they were in the mid-1990’s. We are not finished but will likely morph in to something else several years from now. I like your idea of local TV becoming more of a direct response medium with many multi-platform interactions.” That guy GETS it. He still drops off the gold in NYC but is changing his approaches and attitudes as media usage evolves.

The great Bill Bernbach of Doyle Dane Bernbach once said back in the ’70’s that “when you are through changing, you are through.”  That sums it up for me.

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

Tuesday, March 15, 2016

The Internet of Things and Marketing

By now, virtually all of you have heard about the Internet of Things and how it is changing our lives for the better. Have you, however, thought seriously about what it might do to marketing and advertising over the next five to ten years?

What is the Internet of Things (IOT)? Simply put, IOT is the network of a wide variety of physical objects that are embedded with software, sensors, electronics and, very importantly, network connectivity. These devices, some 50 billion of them soon, are able to collect and SHARE data. You use many of these items but are probably not aware of them.

I first heard the term used directly around 2008 at a conference where someone was telling us over a drink how a friend’s daughter called her dad in France who, with a few codes on his phone, opened the door of his Connecticut home and shut off the burglar alarm before she entered. Kevin Ashton, then of Procter & Gamble is widely attributed to coining the term in a 1999 speech. A few years ago my generous children bought Dad a Fitbit for his birthday. It tracks my every step, reports to my personal devices and every week gives me a summary of how much I have moved each day. It is now rare for me to do less than 10,000 steps a day (doctor’s suggestion) and prods me to get out of bed and take a 45 minute stroll prior to my morning coffee.

The applications are amazing and deep. Most of the play goes to locking your home or opening your car from afar or turning off an iron that you might have left on before leaving the house. Construction leaders see it as a huge leap forward. They use new terms such as “smart cement” which means that bridges, levees, and roads will have sensors in them that monitor cracks or stresses and send such warnings early so that action can be taken. Builders who do not build to spec had better be wary.

When I asked a few people about how this will affect us in the marketing/advertising arena, they dismissed it as not a factor. I am not so sure. A few of you have to have heard of the “smart fridge” in new “smart homes” that are being developed. It will alert you when you are running low on milk, butter, beer, yogurt, eggs, and other essentials. You could merely hit the re-order button and the next time your home delivery of groceries arrives, such items will be in your shopping bag. True, not everyone will have a smart fridge in 5-10 years but many upscale types will.

This has to help established brands and block out newcomers to a certain degree. Also, brands will not have to spend as much as on broad based advertising as they will able to do pin-point targeting on steroids using some application of the IOT.

Marketing automation vendor and leader Marketo describes IOT's impact as follows: "the connectivity of our digital devices that provides endless opportunities for brands to listen to and respond to the needs of their customers...with the right message at the right time on the right device."

Conventional media has to take something of a hit from this. One could cut their network TV budget by 30% but still hit key prospects and users dropping millions to the bottom line.  Financial analysts claim that the IOT represents a business opportunity in excess of $20 trillion over the next five years. Many companies and brands will be lifted by this remarkable technology but I cannot see legacy media being one of them.

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

Saturday, March 5, 2016

Block Out All The Noise!

Lately, I have been getting an unusual number of shrill e-mails and online offerings from financial Cassandras. Headlines include or are similar to: “Dow Jones Industrial Average to fall 80% this year, Gold is on the verge of a historic up-move, Social Security to go broke in 2016, Oil set to crash to $10 a barrel.” You get the idea as I bet many of your are also receiving such panicky pronouncements. Now, like any thinking person, I am a bit uneasy about the global economy in 2016. Yet, even though I firmly believe and have observed that markets tend to go to extremes, these headlines are unlikely to come true. With the growth of communications, particularly online platforms, we are inundated with too much information along with wild speculation.

A few weeks ago, I was watching a business channel and an amazingly successful billionaire hedge fund manager was being interviewed. When asked how he was able to be so decisive (and successful) in a rumor filled world, he answered, “I just block out all the noise.”

By remarkable coincidence, the next day I received an e-mail and a telephone call from a semi-retired media strategist (do we ever fully retire?) whom I have long considered to be one of the top five in the business. For over 35 years, I have always admired how he was constantly testing new concepts such as cable in the 80’s and the internet in the late 90’s yet he never wasted client money by placing large bets in emerging media too soon. When I asked him how he was always so sure of his touch his response was a self-effacing--“Simple. I just blocked out all the noise.” The guy is a genius and is being a bit modest.

Both of these industry leaders make an important point, however. When making decisions regarding allocating resources, be it a client’s money or that of investors, you always want to be data driven but rumors and information of questionable accuracy or importance are always front and center. It takes a steely resolve, even courage, to ignore the chatter or conventional thinking. I have spent 40+ years trying to learn to do it.

Finally, I was at the dentist on Tuesday morning. While waiting for my six month check-up, I read a copy of a year old issue of FORTUNE magazine. Tim Cook, of Apple, was talking about how he managed the tech giant and also tried to fill the epic shoes of Steve Jobs. His simple answer was, you guessed it, “I block out all the noise.”

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