Setting the course of action in a dynamic environment

Setting the course of action in a dynamic environment

In one important respect the Saatchi brothers’ original vision had come to pass: marketing services was increasingly a global marketplace. Most major consumer goods and services markets were becoming consolidated at a global level, with procurement of marketing services following this trend, albeit at some lag. For example in 2006 in the UK, 15% of all client-agency advertising agreements were on a global basis, up from 11% in 2003⁵.

However, in most other respects, the landscape of the early 2000s was very different in ways that the Saatchi brothers could not have foreseen. One change was the fragmentation of communication channels. As recently as 1999, the average US citizen had spent nearly 800 hours per year watching traditional network television – 24% of their total ‘eyes and ears’ directed at consumer media. By 2006, this had fallen to 680 hours and 19% of eyes and ears (see Exhibit 6). Correspondingly, viewing of (multi-channel) satellite and cable TV had risen from 630 hours per annum to 870 hours and consumer internet had risen from sixty-five hours in 1999 to 176 hours in 2004⁶. The power of the traditional thirty-second network spot to both reach and influence the body politic was waning.

This change in consumer habits was beginning to influence marketing spending patterns profoundly (see Exhibit 7). In 1999, close to 90% of US advertising expenditure had been in the traditional media of broadcast television, broadcast radio, newspapers, magazines and outdoor. By 2009, this was forecast to fall to just under 74%, with the new media such as the internet, cable and satellite TV and product placement in films and computer games accounting for the rest⁷. Outside paid-for media, the cultural impact of things like blogging and internet communities such as myspace.com was growing. Viewed in the round, the shift was from traditional ‘mass and passive’ communication channels to ‘personal and interactive’. In the words of Rishad Tobaccowala, Chief Innovation Officer for Saatchi & Saatchi’s owner Publicis, clients and agencies ‘have been classically trained, but now we’re in a jazz age⁸.’

The consequence was a tension between a client business model which increasingly focussed on brands of scale at the local and, increasingly, global level, set against a communication landscape which was becoming fragmentary, almost individual, in its character. Many industry commentators thought that this would increasingly favour creative ideas that could travel – not just across geographies but also across media – ‘media neutral’ in the industry argot. Lovemarks and Sisomo had given Saatchi & Saatchi an intellectual stake within this dynamic. But who knew how far it might go?

The declining status of marketing – and the risks for the traditional agency

However by the turn of the millennium the brand management model was coming under pressure and the leaders of consumer goods and services companies were asking questions about the value it was creating. The disruptive change had been the growing power of the retail channel across most consumer goods categories. With growing retailer concentration came growth in private label, which had exposed the weakness in many brands. The result was stagnant profitability and low rates of organic growth for the brand owners.

In striking contrast to the faltering track record of marketing, other functions within consumer goods and services companies had responded with alacrity to the challenges posed by retailer power. The supply chain management function (often shaped by specialised consultants) had delivered major benefits and had arguably defended profitability from retailer pressure. Radical and innovative approaches to manufacturing and distribution had simultaneously lowered unit costs, reduced inventory and raised in-stock availability. This had driven real and demonstrable benefits to the bottom line – a language that supply chain managers and advisors were only too happy to speak. By contrast marketers were perceived by some CEO’s as ‘unaccountable, untouchable, slippery and expensive’⁹.

Retailer power was also forcing consumer goods and services companies to rethink their organisation models. Whereas in the past the route to market was largely a matter of arraying brands against consumer segments, confident in the belief that a largely supine retail channel would provide availability, firms now had to plot their way through a matrix with consumers and brands on the one side and retailers and categories on the other. With this changing balance of power came intensifying negotiating pressure from the retailer. Clients were therefore struggling to maintain their investment in consumer franchise-building activity in the face of relentless demands from the channel for funding of tactical price discounts, on-shelf promotions and listing fees. For large grocery suppliers in particular, trade funding was approaching the same order of magnitude as consumer franchise-building spend and was growing at a faster rate.¹⁰ Marketing and advertising were losing their prominence.

In order to cope with these changes, clients were beginning to subordinate their ‘consumer marketing’ function to a broader ‘commercial’ function with broad profit responsibility and the authority to make trade-offs between consumer and trade marketing. In a recent survey¹¹, search consultants Spencer Stuart had talked of the ‘death of the (Chief Marketing Officer) as the Chief Advertising Officer.’ One CMO quoted in the survey estimated that the traditional marketing skill set, while still important, now accounted for around 25% of his role. Another described himself as the ‘Chief Demand Creation Officer, responsible for growth.’

Compounding this changing role was the shift in the ‘high ground’ sectors within consumer marketing away from traditional fast-moving consumer goods and towards ‘customer lifetime value’ categories such as financial services and telecoms. In lifetime value categories, the identity of an individual customer could be known, enabling micro-targeting and micro-management by a diverse range of communications channels over their lifetime. These channels were less likely to be traditional media, and more likely to be direct mail, call centres, personalised web pages and e-mail. Clients in the lifetime value segment were more likely to reach for direct marketing agencies or customer relationship management (CRM) solution providers than traditional advertising agencies.

The final and interrelated phenomenon was that clients were now focusing more than ever on accountability and ‘ROI’ from their paid communications. The impact of (highly auditable) trade promotion and the ‘pay per click’ model of internet advertising was rapidly changing marketers’ expectations of what was possible. In particular, the impact of the 2001 recession on client behaviours had been profound. In the words of one analyst, ‘…instead of simply hunkering down and spending their limited media advertising budgets on traditional advertising vehicles until the storm passed, marketers took a hard look at their media spending patterns, and decided that they needed stronger measures of return on investment (ROI) in advertising and marketing campaigns¹².’ An important consequence of this was that agency remuneration increasingly featured a ‘payment by results’ component alongside the more traditional fee element. One of Saatchi & Saatchi’s key clients, Procter & Gamble, had led this trend. In the UK, by 2005 56% of agency agreements were now in this form¹³. Increasingly, clients insisted on competitive bid processes for even long established agency relationships and referred agency fees to their procurement specialists.

‘I cannot remember a time, in the 25 years or so years I have been in the industry, when clients have been so focused on cost’, said Sir Martin Sorrell, CEO of WPP, parent company to a number of Saatchi & Saatchi’s competitors¹⁴. ‘It is true we must improve our processes and eliminate waste, but can you buy ideas or our people’s creativity in such a mechanical way? …The procurement process seems to be based on the idea that what we provide is low value-added, and that because we are dependent on significant revenues from large clients, we can be squeezed. This thinking may well be flawed.’