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Monday, October 28, 2013

The New World of Ad Agency Mergers?

On July 28th, the advertising and media world was surprised with the announcement that two giant holding companies--Omnicom and Publicis were merging. The new entity would be the largest advertising company in the world. Some 250+ agencies were involved in the merger covering including creative, media, digital, design, production, branding and public relations (I am sure that I am missing something).

The pundits got busy and people started the “welcome to our conglomerate, you’re fired” talk. Many talked about the creative clashes that would be inevitable and how when people talked “synergies” they were really saying that fewer people would be doing more work than ever to keep profits high. There is some truth in all that but if you look at what the principals said both at the announcement and since then, the merger strikes me as having little to do with advertising as we know it.

We have entered a new era that some have dubbed “Big Data.”  There is a record amount of personal information on customers that is in the hands of many giants including Google, IBM, Adobe and Oracle among others. Down the line agencies will be in a tight spot as the firms holding the massive databases can approach large marketers directly and bypass even the most sophisticated agencies. The major agency holding companies are keenly aware of this and see how vulnerable they will be or already are.

An old friend told me that the behemoths now have automated exchanges set up for tracking and placing digital media that have the look, feel and excitement of the trading rooms at Goldman Sachs and J.P.Morgan. So, with this merger, the new Omnicom-Publicis can now approach the Googles of the world with enormous orders for their new historically large client base.

So, the giants are finding a way to survive and get bigger in a rapidly changing environment. Yet what of the medium sized and smaller shops that this blog tends focus its attention? Clearly, the small fry will never have a trading room. And, their young digital media team, no matter how eager and talented they are, can never compete with the breadth of services or the terrific digital pricing that the giants can provide their clients.

Yet, mergers and acquisitions will still go forward. The result will likely be quite similar to what we have seen the last 50 years in advertising. Many, if not most, will be failures. You have seen this movie before but people who build modest sized agencies up from nothing are proud of their achievements (and rightly so) but are not used to taking orders or compromising much. So attempts to combine two different cultures almost never work. When merged mid-sized shops talk of “synergies” they are talking cost cutting which invariably means layoffs. A skilled broadcast negotiator handling $40 million in spot billing can easily handle $60 million especially if much of the new billing is in the same markets that he or she was previously buying. Staff, then, can easily be cut. The same is true is accounting, not to mention the creative teams.

To a certain degree, mergers today are often just buying time. A fellow wrote to me recently about how his money losing shop will probably merge with a slightly larger shop that is also losing money. The theory is that they can cut enough staff from both teams to make a profitable go of it as a larger company. The odds are not good but even if they do turn a profit after a huge cutting of staff, the chances are that the profit will be short lived. They need an infusion of new business or some organic growth from current clients. Without some injection of new revenue, the one time saving from the merger will dissipate quickly.

And now the big question. As digital grows, will Google et al call on the mid-sized shops clients directly? How can the little guys compete? They will not be giving Google and fellow Big Data travelers billions in revenue. Surely, there will always be boutiques who can do a splendid job of knocking out good quality work in legacy media especially in markets below the top 25. The mid-sized players, with or without mergers, will be between a rock and a hard place as digital growth accelerates.

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

Saturday, October 19, 2013

Core Competency and Ad Agencies

As I often am these days, I was at a driving range yesterday. It was a bit chilly so I had an old windbreaker on with a logo from a media property.  The gentlemen next to me kept staring at me and finally said, “Are you in advertising?” I shook hands, introduced myself, and gave him the brief “elevator speech” about my background. He told me that he was in town for a wedding and was going to take three of the groomsman out for a round of golf to pass time before the rehearsal dinner that night. And, he told me that he ran a small ad agency a long way from Baltimore.

Between swings, he asked me my thoughts about the future of media and I was quite willing to oblige. I asked him a few innocuous questions about his shop and then asked, “What would you say that your core competency is?”

He smiled and said, “Why just one? We have so many I don’t know where to start?” I cracked up but realized immediately that he was not trying to be funny and was not happy with my good natured reaction.

Let’s back up for a minute. Today, many people use the term “core competency” or more frequently “core competencies.”  The term first surfaced in a “Harvard Business Review” article back in 1990. Gary Hamel and C.K. Prahalad said that core competencies were the true source of competitive advantage in the business world. The authors made a lively case for companies to stop thinking about their many standalone businesses but rather to position and think of themselves as having a portfolio of competencies.

Hamel and Prahalad said that a core competency is something that you do better than anyone else. They said that to be authentic, a core competency had to leap three hurdles:

1) It is very difficult for a competitor to imitate
2) It provides access to a wide variety of markets
3) It adds mightily to the perceived customer benefits of the final product

The two professors stated that even the best organizations had no more than five basic competencies. If someone rattles off 20, then they do not know the meaning of the core competency concept. Or, I might add they are not telling the truth. :)

Some famous examples in the corporate world included Honda. They made arguably the best engines and power trains in the 1980’s. As a result, they had a big advantage in manufacturing and then selling generators, motorcycles, tractors, and, of course, cars. 3M (MMM) was known being experts with adhesives. Any number of innovative products came out of the Minneapolis based firm as customers recognized their competency in that arena.

The authors stressed that a well diversified corporation is similar to a big tree with its trunks and limbs as its core products. The tree’s root system was vital as it nourished the core competence. So, if one looks at the leaves, you only see the finished product of the tree (corporation). You do not see the underlying strength which is its core competence.

So, my new found friend at the driving range with the horrible duck hook may not be being honest with himself. The advertising world is going through a quick transition. More and more people and companies are getting left behind as digital grows and legacy media is at best stalled and, in most cases, shrinking in influence. Mid sized and smaller agencies may have to find their core competency or perhaps competencies and do so quickly. The days of trying to pretend to be all things to all people, even those who spend less than a few million dollars, are rapidly ending. Why do the mega-shops keep buying up specialty firms in mobile and design? Because they realize that, in some areas, they are weak and need to build up their strength or “competence” in that arena. The small fry can still provide great service, imagination and quick turnaround. They do need to narrow their focus and get really good at a few things if they are going to survive the next several years.

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

Sunday, October 13, 2013

Disintegrating Demographics

These days in Washington, DC both major American political parties are at odds over short term spending and debt issues. I follow it but think that it really avoids the real issue that faces both the U.S. and most other western nations. That issue is one of disintegrating demographics.

Populations in the West are getting older as better nutrition and medical care have increased life spans. Back in 1980, the median American was approximately 30 years of age which rose to nearly 36.5 in 2009 and is projected to be 42 by 2050 (the most dramatic change is in China where there one child policy has vaulted average age from 22 in 1980 to a possible 45 by the year 2050).

Fertility rates have also declined. There is a direct link between prosperity and declining birth rates. Also, as women continue to go to college (and finish) in record numbers, later marriage tends to translate to fewer children. In Europe, the number of children per woman has declined from 2.58 some 50 years ago to 1.30 today. This is well below the 2.1 “replacement rate” or zero population growth (ZPG) that demographers are always calculating. In the U.S, we are better off with the birth rate dropping from 3.31 to 2.04. The U.S. figure benefits from a steady entry of immigrants to our shores.

So people are living longer and having few children. This demographic shift has to have strong and negative consequences for economic growth. Historically, growth came from an increase in the workforce and in improvement in worker output better known as productivity. If our workforce shrinks due to more elderly and fewer young people, then productivity has carry the ball for growth 100% of the time.

Another factor that few people talk about is that aging populations consume increasing amounts of nursing care. Good care generally translates to more time spent per patient. That can only hinder the needed productivity growth that we discussed above.

Who is going to support the elderly? Thanks to government promises on healthcare and social security (entitlements), like it or not retirees will become an ever increasing burden on the state. Back in 1970, there were 5.3 workers per retiree in the U.S. That has dropped to 4.6 in 2010 and will be down to 2.6 in 2050 according to current projections. Other nations have it far worse. In 2050, Italy will 1.5 workers per retiree, France 1.9, and amazingly, Japan will have but 1.2. When I mentioned these stats to someone recently, they responded “what are you worried about? We are in much better shaped than those other countries.” I countered that his logic was like a person 150 pounds overweight saying that he was in better shape than someone 250 pounds overweight. One may have the coronary sooner but both were walking or waddling time-bombs. Yes, we can watch western Europe and Japan and see when the cracks appear and when crisis sets in. By then, it may be too late to right our ship.

Changes in government retirement age may be slow in coming. Everyone in the U.S. government knows that the Social Security eligibility age must be raised (the current 66 to perhaps 70 years old?). It appears that they are afraid to touch it. In 2010, former French president Nicholas Sarkozy tried to raise the retirement age from 60 to 62 and protests erupted all over the country. Note that he is now the former president.

In the U.S., the Simpson-Bowles proposals were the most responsible initiatives regarding public spending that I have seen in my lifetime. They called for raising the age for entitlements, raising certain taxes on the very upscale, and means testing both Social Security and Medicare. While not firing silver bullets, the proposals went a long way toward the long term righting of the American ship. You do not hear much about them these days but they address the most serious economic issues of our time. Some analysts whom I respect say that the liability for both Social Security and Medicare combined tops $220 trillion which really dwarfs our current topic of debate which is a $17 trillion long term debt.

Is there a silver lining to these weakening demographics for marketers? I can think of one. Legacy media like broadcast TV and radio may have a longer life. Technological change will progress but an aging population may keep some properties afloat and more profitable than some futurists can envision. Yes, we all know an 85 year old who sends lively e-mails or is a Netflix addict. Yet, many older people will stick to what they know.

Creatively, most of the messaging remains aimed at the 18-49 year olds with a big emphasis on the 25-34 demographic. This will likely shift as we graying baby boomers (born 1946-1964) drop out of the workplace for good.

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

Friday, October 4, 2013

The Importance of Discipline

Many young people ask me about what they should do for a career. Like many, I always used to say spend your 20’s testing a few things and when you find something that you love, stick with it. If you love what you are doing, it will not seem like work much of the time. Poet Robert Frost put is beautifully when he wrote, “my goal is to link my avocation with my vocation.”

As time as passed, I have realized that you need more than just love of your field. What you also need is discipline, sometimes great discipline. Many of the people who have impressed me the most over the years were not the flashy types. They were people who came in and quietly and doggedly pursued their jobs every day. Complaining was rare and they simply kept going and kept learning. Over time, they tended to get the recognition that they deserved.

This past year a student asked me at the end of a class for suggestions to get ready for a business career. I recommended that she read The Wall Street Journal every day. Some of it would be confusing at first but over time a lot would sink in. Soon you would be the best informed person in your office and become the “go to” person on many issues. She nodded and agreed to give it a try. As I looked around the room students were smiling at each other and some laughing. I asked “why pursue a business career and ignore the bible of American business.” No one replied and I received a few nervous stares. As the class broke up, I was gathering my lecture notes and erasing the blackboard (yes, I still write things on the board). I overheard two guys talking in a stage whisper. A direct quote is “Cole is an idiot. Why should anyone read The Wall Street Journal?”

Well. Perhaps I am an idiot. I am willing to bet serious money, however, that neither of two young vulgarians will ever reach the corner office. In a competitive marketplace and, an increasingly global one, the informed and well read executive is going to stand out from the crowd. So, if you have the discipline to keep working away at your knowledge of the marketplace in general and your field in particular you should do quite well especially when many of your co-workers will not.

Many young students today work out regularly. They look great. Some cut classes on occasion rather than miss their daily regimen at the gym. What they are forgetting is that their mind needs to be developed as well. Those who have the discipline to pursue their career day in and day out will be rewarded, big time.

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