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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

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