CA EXA Mre| Pater Catv Thi which ee Centred on the global advertising industry rise oo Strategic dilemmas driven by the logical ‘Spending in developing economies, techno for ag OnverBence and pressures from major advertisers ees ‘compensation. Strategy in this industry 'S Dlored in The Strategy Experience simulation (http://www. mystrategylab.com/strategy-experience). In the second decade of the new millennium, advertising agencies faced a number of unanticipated challenges. Traditional markets and industry operating methods, developed largely in North America and Western Europe following the rise of consumer spending power in the twentieth century, were being radically reappraised. The industry was subject to game-changing forces from the so-called ‘digital revolution’ with the entry of search companies like Google and Yahoo as rivals for advertising budgets. Changing patterns in global consumer markets have impacted on both industry dynamics and structure. Budgets being spent through traditional advertising agencies were being squeezed as industry rivalry intensified. Overview of the advertising industry Traditionally, the business objective of advertising agen- cies is to target a specific audience on behalf of clients with a message that encourages them to try a product or service and ultimately purchase it. This is done largely through the concept of a brand being communicated via media channels. Brands allow consumers to differentiate between products and services and it is the job of the advertising agency to position the brand so that it is associated with functions and attributes which are valued by target consumers. These brands may be consumer brands (e.g. Coca-Cola, Nike and Mercedes Benz) or business-to-business (B2B) brands (e.g. IBM, Airbus Industrie and KPMG). Some brands target both consumers and businesses (e.g. Microsoft and Apple). ‘As well as private-sector brand companies, govern- ments spend heavily to advertise public-sector services ti SE | Global forces and the 20° fluence i og to influence equcation rink and drve"). F Mavertising Dudge | grou rament MC 6, political Bou, gover 2. chat profit organisation, ner OEE attract {UNAS ing arenes Of SUE, ; 3 per cent . imately : prox unt for PI rd gually laced i” sled «J se advertising agen ‘tisements oa by an i : a internet brand company: thus the ‘i fie tient company eMPIOYS th ge, skills, reat ‘ i Jo its knowl use Mvertising and marketing rot client's brands. Clients tag 3 harged according to the time sper iments plus a commission base If of cli ‘on the media and services bought on aa i: en eae in cen yout Rea Coca-Cola and Procter & Gamble have been moving ava from this compensation model to 2 ‘value’ OF results hosed model based on a number of metrics, !Acludn growth in sales and market ‘share. advertising agency '° and experience t0 drive consumption tionally have been © on creating the advertise! Growth in the advertising industry Money spent on advertising has increased dramatical over the past two decades and is estimated in 20 at over $165 billion (€127 bn, £102 bn) in the USA $483 billion worldwide. While there might be a in recessionary years, it is predicted that spending advertising will exceed $560 billion globally by 201 Over 2011-12, the Dow Jones stock price index for American media agencies sector (of which the | advertising agencies are the largest members) rose 15 per cent ahead of the New York Stock ‘Exc! average (sources: bigcharts.com and dowjones.com). The industry is shifting its focus as emerging drive revenues from geographic sectors that would have been significant 5 to 10 years ago, suchBRIC countries and Middle East and North Africa. This shift has seen the emergence of agencies specialising in Islamic marketing, characterised by a strong ethical responsibility to consumers. Future trends indicate the strong emergence of consumer brands in areas of the world where sophisticated consumers with brand awareness are currently in the minority. (See Table 1.) In terms of industry sectors, seven of the top 20 global advertisers are car manufacturers. However, the two major fmeg (fast-moving consumer goods) pro- ducers Procter & Gamble and Nestlé hold the two top spots for global advertising spend. Healthcare and beauty, telecommunications companies, food and beverage manufacturers, retailers and the entertainment industry are all featured in the top 20 global advertisers. The top 100 advertisers account for nearly 50 per cent of the measured global advertising economy. Competition in the advertising industry ‘Agencies come in all sizes and include everything from fone- or two-person ‘boutique’ operations (which rely mostly on freelance outsourced talent to perform most functions), small to medium-sized agencies, large inde- pendents to multinational, multi-agency conglomerates ‘employing over 150,000 people. The industry has gone through a period of increasing concentration through GLOBAL FORCES AND THE ADVERTISING INDUSTRY 65 acquisition thereby creating multi-agency conglomerates such as those listed in Table 2. While these conglomer- ates are mainly headquartered in London, New York and, Paris, they operate globally. Large multi-agency conglomerates compete on the basis of the quality of their creative teams (as indicated by industry awards), the ability to buy media more cost- effectively, market knowledge, global reach and breadth and range of services. Some agency groups have integ- rated vertically into higher-margin marketing services. Omnicom, through its Diversified Agency Services, has acquired printing services and telemarketing/customer care companies. Other agency groups have vertically integrated to lesser or greater degrees. Mid-sized and smaller boutique advertising agencies compete by delivering value-added services through in- depth knowledge of specific market sectors, specialised services such as digital and by building a reputation for innovative and ground-breaking creative advertising/ ‘marketing campaigns. However, they might be more reliant on out sourced creative suppliers than larger agencies. Many small specialist agencies are founded by former ‘employees of large agencies, such as the breakaway from Young & Rubicam to form the agency Adam + Eve. In turn, smaller specialist agencies are often acquired by the large multi-agency conglomerates in order to acquire specific capabilities to target new sectors or markets or Table 1 Advertising expenditure by region. Major media (newspapers, magazines, television, radio, cinema, outdoor, internet) (US$ million, currency conversion at 2009 average rates) 2009 2010 2011 2012 2013 N America 156,556 160,386 164,516 169,277 175,024 W Europe 100,143 104,225 107,520, 111,300 114,712 Asia Pacific 99,746 106,021 113/345, 122,000 130,711 C&E Europe 25,402 27,095 29,243 32,284 35.514 Latin America 25,711 29,315 31,673 34,082 36,836 Arica/ME/ROW 21,220 22,654 24,150 25,94) 28,088 World 428,778 449,696 470,447 494,884 520,841 ‘Source: ZenithOptimedia, September 2012. Table 2 Top five multi-agency conglomerates: 2011, by revenue, profit before interest and tax, number of employees and agency brands Group name Revenue PaiT Employees Advertising agency brands WeP (UK) £10.2bn —£1.429 bn 158,000 JWT, Grey, Ogilvy, Y&R Omnicom (US) $13.9 bn $952 m 70,600 BDO, DDB, TBWA Publicis Groupe (France) €5.8 bn €600 m 53,807 Leo Burnett, Saatchi & Saatchi, Publicis, BBH IPG (US) $7.0 bn $520 m 43,500 McCann Erickson, FCB, Lowe & Partners Havas Worldwide (France) €1.65 bn €220 m 15,186 Havas Conseil Source: Ad Age, Omnicom, WPP, Publicis Groupe, IPG, Havas.66 CHAPTER 2 THE ENVIRONMENT provide additional services to existing clients, like WPP's acquisition of a majority stake in the smaller ideas and innovation agency AKQA for $540 m ‘to prepare for a more digital future’. Recent years have seen new competition in this industry as search companies such as Google, Yahoo and Microsoft Bing begin to exploit their ability to interact with and gain information about millions of potential consumers of branded products. Sir Martin Sorrell, CEO of WPP, the world's largest advertising and marketing services group, has pointed out that Google will rival his agency's relationships with the biggest traditional media corporations such as TV, newspaper and magazine and possibly even become a rival for the relationships with WPP’s clients. WPP ‘group spent more than $2 bn with Google in 2012 (over double the $850 m the group spent on the internet company just four years previously) and $400 m with Facebook. Sorrell calls Google a ‘frenemy' - the combi- nation of ‘friend’ and ‘enemy’. Google is a ‘friend’ where it allows WPP to place targeted advertising based on Google analytics and an ‘enemy’ where it does not share these analytics with the agency and becomes a potential competitor for the customer insight and advertising traditionally created by WPP. With the development of the internet and online search advertising, a new breed of interactive digital media agencies, of which AKA is an example, estab- lished themselves in the digital space before traditional advertising agencies fully embraced the internet. These agencies differentiate themselves by offering a mix of web design/development, search engine marketing, inter- net advertising/marketing, or e-business/e-commerce consulting. They are classified as ‘agencies’ because they create digital media campaigns and implement media purchases of ads on behalf of clients on social networking and community sites such as MySpace, Facebook, YouTube and other digital media. Online advertising budgets are increasing faster than other traditional advertising media as search companies like Google generate revenues from paid search as advertisers discover that targeted ads online are highly effective (see Table 3). By mid-2011 Google had a 40 per cent market share of the $31 bn spent on online advertising in the USA, with Facebook also increasing its share. The disruptive change in the advertising industry at the beginning of the twenty-first century started with the internet. Many industry experts believe that conver- gence of internet, TV, smart phones, tablets and laptop computers is inevitable, which in turn will have a further Table 3 Advertising expenditure by medium (4 million, currency conversion at 2009 average ates) 2009 201020112012, ty Newspapers 97,237 94,199 93,019 92,309 Magazines 43/844 43,184 42,644 42.372 ee Television 165,260 180,280 191,198 202,380 213%, Radio 31,855 31,979 32,580 33,815 2138) Cinema 2104 2,258 2,393 2,538 “5% Outdoor 28,120 29,319 30,945 32,821 3481 Internet 54,209 61,884 70,518 80,672 9) 3 Total 422,629 443,103 463,297 486,898 51) ie ‘Note: The totals in Table 3 are lower than in Table 1, since that ty = includes advertising expenditure for a few countries where itis not itemised by medium. ‘Source: ZenithOptimedia, September 2012. major impact on the advertising industry. Adverts, ‘on mobile devices, such as smart phones and tablet, is still in its infancy but accounted for 8 per cent of aj search advertising in the last quarter of 2011 ang is forecast to reach 15 per cent by 2016, which has attracted Google to make acquisitions in this sector. Factors that have driven competitive advantage to date may not be relevant to competitive advantage in the future. Traditionally this industry has embodied the idea of creativity as the vital differentiator between the best and the mediocre. Individuals have often been at the heart of this creativity. With the emergence of Google, Yahoo, Facebook and Bing, influencing and changing the media by which advertising messages are being delivered, a key question is whether creativity will be more or less important in the future, in relation to breadth of services and global reach. Sources and references ZenithOptimedia, September 2012; Advertising Age: Omnicom Group http:/twww.omnicomgroup.com; WPP Group http:/iwww.wpp.com; Publicis http:/www.publicisgroupe.com; Interpublic Group of Companies htp:/iwww.interpublic.com; Havas Conseils. http://www havas.com! hhavas-dynien/; httpsllwwwfinancialcontent.com. See also The Strategy Experience: the Strategy Simulation designed for Exploring Strateay hitpuwww. mystrategylab.convstrategy-experience. Questions 1 Carry out a PESTEL analysis of the advertising industry in 2012, with particular attention to megatrends, inflexion points and weak signals. Carry out a five forces analysis of the advertising industry in 2012. Which forces are becoming more negative or positive for the major advertising agencies?