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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.

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