Why Madison Avenue is in crisis

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In the 1990s, the advertising industry began to consolidate from a handful of independent shops into a handful of gigantic conglomerates. By 2004, six ad firms: Omnicom, WPP, the Interpublic Group, Grey Global, Havas and Publicus, controlled 60 percent of advertising spending worldwide. The reason the holding model evolved was simple - it provided a way for the industry to grow without running afoul of one of the advertising industry's most important taboos: No individual firm could serve competing clients at the same time.

Despite its tremendous market power, today Madison Avenue finds itself woefully behind the times and highly vulnerable to disruptive forms of marketing, especially search-driven marketing. Its thinking about interactive media, particularly search media, is defensive and reactive, the way it buys media is simplistic and archaic, and its inability to think beyond the traditional 30-second spot model is practically shameful. How could an industry that traditionally has considered creative and innovative thinking to be the coin of its realm have so badly failed to adapt its practices to the Internet-powered media revolution?

A few years ago, Harvard professor Clayton M. Christenson wrote an influential book called "The Innovator's Dilemma" (Harvard, 1997-2003) which analyzed how even great companies could fail to master disruptive change. Mr. Christenson studied hardware companies in industries subject to rapid changes, both sustaining and disruptive, and made important conclusions some of which directly apply to what is now happening in the world of advertising:

1. Small Markets Don't Solve the Growth Needs of Large Companies

Successful companies (such as the ad industry's vast holding companies) have become successful because they have skillfully identified those markets, which offer the greatest profit margins while leaving the crumbs to lesser firms. Pitched battles are fought between these agencies to acquire and retain large accounts such as P&G, Coke, Wal-Mart and the U.S. Army, because that's where the advertising tonnage is going to be, and ad agencies collect a significant percentage of their revenue by charging fees against a percentage of media spend.

By focusing their attention on these large accounts, they concentrate their best resources where it will do the most good for their shareholders. Unfortunately, this means that they are naturally not very interested in advertising markets that might be small today but may be huge in five years.

2. An Organization's Capabilities Define its Disabilities

Mr. Christenson breaks down the capabilities of any organization into processes (the means by which inputs are translated into more valuable outputs) and values (the criteria used by managers to create priorities). It is unquestionable that there are many bright people working in the mainstream world of advertising today who realize that the Internet and other computer-based communications technologies are disruptive, and have done their utmost to evangelize (both inside and outside the organization) the need to develop a suitable approach toward it.

But as Mr. Christenson notes, the processes of any organization are much less amenable to change. The inability to change processes, which have evolved over a long period of time, can hamstring an organization even though its people realize that change is necessary.

In the advertising industry, inflexible or hard-to-change processes include the media-buying process itself, which rewards the agency for spending all of the client's money, not just the part that would be most effective, and the traditional creative processes, which are biased towards the 30-second spot.

In the advertising industry certain processes, including the "clout" achievable by media buying divisions being able to use large client budgets to achieve economies of scale in the buying process, have contributed to this industry now being populated by large, relatively slow-moving conglomerates.

While "bigger is better" provided distinct advantages in the past, the traditional advantages offered by the holding company model may be offset and negated by the need to move very quickly in response to the ever-multiplying media and media models characteristic of today's media environment.

In all of these cases, the very same processes that made a given company successful can doom it when faced with disruptive change. Unfortunately, it matters very little that executives aboard companies being attacked by disruptive technologies fully realize that their enterprises are at risk or possess the values required to create a turnabout.

The real problem exists in evolving appropriate processes. It is here that even companies with the best intentions fail. While Madison Avenue's agency professionals are fond of touting the strengths of their unique culture, pointing repeatedly to "thought leaders" and "creative geniuses" with "big ideas" capable of "changing the culture," these qualities are not the same as those required to build a system which actually drives inefficiencies out of tradition-bound, archaic systems. As one commentator neatly put it, "if Madison Avenue can't build it, then Silicon Valley will."

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