Unfortunately, in the digital world that can be disadvantage.  When you have not only employees to pay, but loyal audiences and advertisers to keep happy, you’re going to be less aggressive than digital upstarts whose profitability is years ahead, if ever.

However, media incumbents can do a much better job than they’re doing.  Here are some ways to make that happen:

Disregard the Myths about Traditional Media in the Digital World

One of the biggest obstacles to overcome is the myths that exciting new digital moguls like to tell and journalists like to repeat when they lack a real story.

Myth #1: They don’t understand the Digital Opportunity. Media executives tend to be intelligent and well informed.  It is folly to believe that they could miss the daily headlines and exploding valuations surrounding Digital Media.

Ask any media CEO and he/she will tell you that digital is a major priority, list multiple initiatives and affirm his/her commitment to the digital revolution.  Of course, they will agree that traditional media doesn’t take digital media seriously enough, but they mean other companies, not them!

Myth #2: They don’t invest in Digital. Nothing can be further from the truth.  Whether they invest well is another question, but media giants put big money behind both internal initiatives and acquisitions.

From Time Warner’s ill-fated acquisition of AOL to News Corp’s MySpace buyout to thousands of smaller, more successful initiatives (especially those of Conde Nast), media moguls are ready to take big risks and put big money behind them.

Moreover, some legacy media companies have developed impressive technology.  I can’t think of any stand alone content site that has anything close to the functionality of the New York Times, CNN, or BBC.  They obviously invested in some very good development people and technology.

As I pointed out in this article, technology isn’t the problem, getting full value out of their investment is.

Myth #3: Mainstream media ignore their audience. There is probably no other industry as responsive to their consumer as the media industry.

Every major media supports regular, and in some cases daily, audience monitoring.  Qualitative focus groups are regularly held, content is tested and audiences are encouraged to participate.  Numbers are sliced and diced, argued and agonized over.

In fact, understanding audiences in one area where digital media companies are far behind traditional media.  It is often cited by advertisers as a reason they don’t invest more in digital.

Overcome Structural Rigidity

Legacy media companies, generally speaking, do understand the problems and opportunities that the new, digital world presents.  The problem lies not with talent, for no industry is as creative or innovative as the Media Industry.

Rather the problem lies in their organizational structures, which were set up for a slower, analog environment which required much more planning and investment.  Over the years, structures have been built up to produce big hits and contain the damage of occasional bombs.

Digital development, on the other hand, is mostly about small initiatives that grow into big ones.  You have to be comfortable with failing small, cheap and often.  Media incumbents need less gatekeepers and more evangelists.

The Way Forward

As I wrote before, the economics of digital are significantly different than analog, especially with regard to transaction costs and externalities.

Integration: One problem that needs to be solved is that today’s media people are actually too good at what they do.  Probably the most difficult and complex thing to do in the media is shoot film.  Even for a 30 second TV spot, there can be over 100 people on the set (and sometimes a lot more).

The reason they can perform so well under such adverse conditions is that standards have been built up over time.  In the new digital world, there are relatively few standards and people don’t know how to do their jobs as well.  Moreover, they know each other’s jobs even less.

This new reality requires a different kind of organization.  Smaller, more cross-functional teams need to be built so that problems can be worked out on the spot. Strategy and implementation need to be done simultaneously.

There are few rules to follow, so talented people have to figure out how to work together on the front lines not just at the senior level.

Walls need to be broken down and turf wars need to be abandoned. This holds especially for the deep chasm between the business and creative sides of the business.

Small Scale Initiatives: Media companies are faced with a large scale problem, so it’s understandable that they try to come up with large scale solutions.  Invariably, they end up with large scale failures.

Digital Media is still new and nobody really knows how to do it all that well.  Creativity researchers say that it takes ten years to acquire the skills needed to be really great at something.  Who has really truly had that ten years of hard practice in digital?  Very few.

What is required is more small scale efforts and more experimentation with less senior level involvement.  That requires smaller, more flexible budgeting.  It’s much easier to scale up than it is to scale down.

Empowerment: There is really no way to know beforehand what will be successful.  In the Digital World, implementation is strategy and it has to be done on the ground level.  If you have to hold a board meeting to make every decision, you will be too slow.

This last point is probably the most difficult, because it requires senior management to take a back seat.  Senior people are, almost by definition, ambitious and therefore like to direct strategy.  However, they will have to learn to channel their efforts into creating the right environment for success rather than making the prescient product strategy decisions.

What traditional media companies need most is to realize many of the practices that made them successful in the past will be liabilities in the future.  Planning cycles will need to be drastically shortened; large, creative egos will have to be held in check; and “greenlighting” will need to be done much further down on the organization chart.

Big digital success comes in small packages.

- Greg

In the fast moving, hypercompetitive inflection point that is business today, only the strong will survive.  You need to get with the program or get eaten alive.

There are a lot of metaphor mixing, self proclaimed gurus out there to guide your way.  You can do yourself a world of good by listening to what they have to say and then doing the opposite.

Here are six ways to spot them:

I’m So Beautiful!

As my good friend Cheryl Andonian points out, most false gurus are self appointed.  They describe themselves as with terms such as “visionary,” “expert” and “thought leader” on their LinkedIn profiles.

I had one guy come to my site, make a grossly misinformed comment and then direct me to his “award winning site.”  I went there and found that he has a preference for fluorescent pink fonts and no comments or retweets. He also writes books that he describes as “best selling” and “award winning.”  (They’re not.)

In his description of himself, he said that he “gets up some people’s nose.”  No kidding!

Everything Has Changed!

At the dawn of the internet age, the popular TV show 60 Minutes had a new media guru on who said something to the effect of “I’m in the business of putting you out of business.”

I don’t know what ever happened to the guy nor do I remember his name, but 60 minutes is still a top 20 show and the owner, CBS, made over $200 million in net income and $13 billion in revenues last year, at the height of the crises.

False gurus also have the annoying habit of asserting that everybody is coming around to their way of thinking, except for the ones who haven’t “gotten it yet.”  They say things like, “it’s all about the conversation” as if nobody has anything better to do than interact with every brand they are considering.

As Neicole Crepeau points out in a very well documented article, the vast majority of consumers do not want to have a conversation with a business (I guess they have friends).

Checking Facts is a Waste of Time

Once an ego gets big enough, facts seem to become irrelevant. Why do the hard work of research if you already know everything?

Chris Brogan and Julien Smith, in their book Trust Agents, tell us to “stop doing your own books and research.”  That’s for little people, I guess.  Being a guru is about getting the message out there.  Presumably, it doesn’t matter what the message is as long as long as you find your “tribe.”

When I first started blogging, I noticed a post by Erik Qualman taking Boeing to task for an ad campaign that didn’t make sense to him.  He didn’t know what the brief was, nor was he privy to the results, but nevertheless just assumed that Boeing was in error.

Qualman, who has never managed a brand himself, would tell them how to do it right, because, in his words, they “just weren’t cutting it.”

My Experience is Global

Probably the most irksome habit of false gurus is confusing the anecdotal with the universal.  I guess if you don’t check facts, then first hand experience is all you have to go on.

Unfortunately, a world of six billion people tends to be a messy place.  As I wrote in my response to Qualman, once you get out into the world a little bit, you start to realize that local environments differ widely. (to be fair,  Qualman was very gracious in his response to me.)

People in different places value different things.  In some places life is dear, in others it is cheap.  Some people value their health, others money, still others status.  Everybody wants something, but it’s usually something different.

If you have a story, tell it to your mother.  Don’t assume that your story is my story or that it has some kind of cosmic significance.

I’ve Done Nothing, but Know Everything

Another thing that caught my eye in Trust Agents was that Brogan took great pride in the fact that he could work out of a coffee shop.  I admit, it sounds nice.  Unless, of course, you have a business to run, staff to manage and train or any real responsibility to solve problems of any significance.

Interestingly, Brogan and Smith do give very good blogging tips in their book, a subject in which they clearly do have experience and expertise.  Unfortunately, knowledge in one area doesn’t automatically transfer to others.

I must admit, though, Brogan, Smith and Qualman are small beer when compared to the biggest sham artists of all: Al Ries and Jack Trout, who describe themselves on their web sites respectively as “legendary marketing strategist” and the “world’s foremost marketing strategist.”

They have written a host of best selling books, get astronomical speaking fees and according their web sites, have been profiled in every major media outlet imaginable.  The only thing they haven’t done is actually build or manage a brand.

I guess that actually making a contribution, like checking facts, is a waste of time for self professed marketing geniuses.

It’s all so Simple!

Why does anybody listen to false gurus?  Because they promise a simpler, easier way of doing things.  I guess things are simple if you don’t have to check facts, manage staff, deal with real world problems or fight off vigorous competition trying to thwart you at every step.

Why go through mountains of data, perform statistical regressions, design mind numbing logical algorithms or lay awake nights trying worrying about how to make the payroll if you can earn a living telling people to ignore life’s cumbersome realities?  False gurus are, in effect, cargo cult marketers for whom ideas transcend facts.

Being good at anything isn’t easy.  It takes years of hard work, stupid mistakes and all of the trials and tribulations that come with the constant struggle to get better at what you do.  That’s why there are so few really competent people.  It’s not easy, but very, very hard.

With that said, if you still aren’t convinced and would like to know a simple, easy way to get rich in online media, just send $10.00 to www.digitaltonto.com.

($9.99 for those who are wearing a “I LOVE TONTO” t-shirt – this week only!)

- Greg

That’s why I was so disheartened when I saw a Forrester report made available on LinkedIn a while back.  What I found was a noxious blend of shoddy methodology and inane conclusions that were reminiscent of the Arthur Anderson – Enron debacle.

The report, US Interactive Marketing Forecast 2009-2014 (pdf), provides an Executive Summary with conclusions and then a more in depth analysis of the findings including actual data collected, which, theoretically the conclusions are supposed to be based on.

Unfortunately, that doesn’t seem to be the case.  What I found was mostly unfounded conjecture.

What the Executive Summary says

The headline of the report is “Interactive Media Will Cannibalize Traditional Media,” which is supported by five factors which they uncovered as the “dug into” marketing budgets.

Poor Economic Conditions: Apparently as they surveyed marketing professionals they found that many companies were experiencing adverse economic circumstances.  Forrester surmised that the vast superiority of interactive media under such conditions would entice marketers to more than double their interactive spend to $55 billion by 2014.

That’s a compound rate of about 15%.  ZenithOptimedia, which is the primary source for such data, actually estimates a little faster growth historically, but there’s nothing wrong with being conservative. No problem so far.

Increasingly Interactive Customer Relationships: They found that 42% of online adults and 55% of online youth want to engage brands through social applications (and presumably 58% of online adults and 45% of online youth either don’t or aren’t all that crazy about it).

More Strategic Marketing Organizations: They found that more than 40% of marketers they surveyed consider marketing the “strategic leader in their organizations” and that will give them more power to call the shots.

Nothing is said about the others who just show up for work and don’t get to say much (one assumes more than 50%). Is that an increase?

Moribund Print Inventory: Through further digging, they found that print media has seen better days.  They specifically point out that Conde Nast has closed some minor magazines, but don’t seem so enthusiastic about bringing up the woes of major web sites such as MySpace and Friendster.

Proof That Interactive Works: They found that even “laggard industries” are learning that interactive media can increase their sales.  They then point to two examples: Telecom and the Cornell University Business School, which I guess are the aforementioned laggards because they give no other instances.

What The Report Actually Says

“We didn’t control our sample”: First of all, it’s questionable whether the report actually says anything at all.  It was based on a survey of 204 marketing representatives, a sample size most commonly used by trade publications to show advertisers that somebody actually reads their publication (usually without much success).

A sample of 204 respondents gives a total sample error of 7% (± 3.5%) for the entire survey.  For individual responses, that error soars.  For instance, if they get a response from 10% of the sample (20 people) the total sample error would be 22%.  That relegates the accuracy of the study to something like “I heard a few guys talking and they said…”

Beyond the numbers, there is ample reason to assume the sample isn’t representative as the survey was distributed on LinkedIn, so we can assume anybody responding would be at least somewhat predisposed to digital marketing.

The only companies they mention by name are heavily weighted to technology companies.  Moreover, a sample where less than half of CMO’s consider themselves strategic leaders doesn’t show a high representation of marketing intensive companies.

“We define “traditional media” differently than most people”: There is also a bit of semantic confusion about what they mean when they say “traditional media.”

To the question, “Which of the following traditional media budgets will you decrease in order to fund increased interactive marketing?” they got the following responses.

Direct Mail: 40%

Newspapers: 35%

Magazines: 28%

TV: 12%

Yellow Pages: 11%

Outdoor: 9%

Radio: 8%

Telemarketing: 7%

So when they say “traditional media” they are weighting direct mail very heavily in the mix (I was under the distinct impression that it, along with telemarketing and yellow pages, was direct marketing).

Beyond that, newspapers continue to decline, magazines take a hit and most other media aren’t affected much at all, even with a skewed survey.  Also, I wrote previously, there is good reason to believe that the decline in magazine advertising is cyclical more than structural.

So when they say “traditional media will be cannibalized,” they mean mostly direct mail and newspapers.

We like to give advice about things that we know nothing about: The report finishes with some further outlandish statements.  For instance, they cite Razorfish, which was recently bought by Publicis, as an example why companies like traditional ad agencies like Publicis will decline.

They also suggest that Apple, with its sky high margins, should follow Microsoft and acquire a web portal.  So it seems that Forrester is not content to be an objective research agency, but have ambitions to be an investment banker as well.

They say that they have their “fingers crossed” for Apple.  I’m sure Apple appreciates the sentiment.

The Arthur Andersen Model

I should mention again here that I don’t believe this report is indicative of Forrester’s work as a whole.  I’ve seen other Forrester studies that were excellent.  However, that they deigned to put their brand on such shoddy work is troubling.

A research company, like a financial auditor, lives on its credibility.  The object of this report isn’t to inform, but either to persuade or to please a client (which I assume is LinkedIn).  That’s a problem and Forrester, which is a competent company, should know better. A research company should be an auditor, not a cheerleader.

Maybe interactive media will cannibalize traditional media (although outside of newspapers, it hasn’t happened yet).  It’s also not out of the realm of possibility that revenues will grow to $55 billion. I, for one, would be perfectly happy if both propositions were true.

However, that isn’t the point.  Conjecture shouldn’t be dressed up as objective research.  Further, objective observers should not “cross fingers” for anyone.

An Imaginary War

Perhaps most troubling is the undertone of the report, which propagates the myth that digital media is locked into a battle to the death with media incumbents.  Since the dawn of the internet, both have prospered and continue to converge.

The question isn’t whether old media companies will die (most won’t), but which interactive companies will survive.  As MySpace and Friendster show, yesterday’s rising star can easily turn into tomorrow’s whipping boy.

The digital media industry thrives on investment, not profits.  Irreverence isn’t a balance sheet item. You can’t eat it, wear it or live in it.  In order to become a viable, profitable business digital media needs to grow up.

The following is a partial list of outstanding issues.

5 Problems Digital Media Needs to Solve

Prove Results Beyond Direct Response: Interactive media has proven as a highly efficient direct response vehicle, but not an effective brand builder.  Companies such as Apple, Nike and Chanel are able to demand huge premiums because they own brands that people trust.

Lacking the capability to service brands is an enormous lapse that digital media need to overcome.

Understand Effective Frequency: As I’ve said before, the ability to control frequency is an enormous advantage for digital media.  However, digital planners have very little understanding of how many times a consumer should see an ad for it to be effective.

Information is worthless if you can’t use it, so being able to dictate, rather than estimate frequency levels is a missed opportunity.

Understand Targets: In traditional media, a target is essentially a preference.  If you say you want to reach adults 18-24, you mean that they’re more desirable than other people.  You try to weight your campaign to some groups without totally excluding others.

In digital media, targets are absolute.  You reach only your target and nobody else.  Unfortunately, that’s a problem.  There’s no sense in a media target that’s more precise than the viable market.  Moreover, as I’ve previously pointed out, targeting “influentials” is a dubious undertaking.

Know Your Consumers: Ironically, one of the things holding digital media back is a lack of data about who uses it.  Traditional media have a wealth of psychographic and product consumption data concerning their audience.  This is another area where interactive media needs to improve.

Know Your Clients: After nearly 15 years, marketers still choose to spend roughly 90% of their budgets outside of digital media.  Any serious analysis would conclude that the vast majority of ad dollars will go to traditional media for decades to come.  By that time, things will have converged so much that present definitions won’t make any sense anyway.

The best interactive companies understand these points very well (Google especially).  Unfortunately, most don’t, which is why there has been so little progress and an excess of hubris.

Forrester, as a respected research company, should be working to improve the industry, not giving foolish arrogance the illusion of substance.

- Greg

Terms like open source and crowdsourcing have entered the lexicon and formed fanatically engaged advocates.  There have also been impressive successes, like the Firefox internet browser the Apache web server project.  However, much like people, crowds can be foolish as well as wise.

The ability to make distinctions between smart and dumb crowds can be the difference between a runaway success and unequivocal disaster.

Crowd Failures

Everybody knows the danger of an angry mob, but the stupidity of crowds is not limited to drunken rabble.  Large numbers of highly intelligent people can exhibit behavior that is far more damaging than a few hours of vigorous rock throwing ever could.

Market Failures: From Tulip Mania to the Great Depression to the latest financial crises, markets have a way of getting out of control.  During the boom, pundits find highly plausible reasons for the party to go on.  New technology, globalization, whatever… Someone is always ready to give an explanation.

Asset values soar, fortunes are made and everybody is a genius.  When the inevitable crash comes, pundits (often the very same people) are there again to explain how they knew it all along.

Moreover, the pundits tell us with a solemn and foreboding tone, things can be expected to worsen. Our best days are now forever behind us.  Asset prices then become irrationally undervalued, at least until the next boom (which again, many will rush to retroactively predict).

The Millennium Bridge: In 2000, the Millennium Bridge opened in London with great fanfare.  However, as soon as people started to walk across it started to sway wildly.  What was supposed to have been a great celebration instantly turned into a nightmare.

What had happened was that that, for whatever reason, the bridge rocked a bit and people on the bridge tried to keep their balance.  When they did that, they created momentum in the opposite direction.  That of course, forced even more people to put their weight on the opposite foot.

On it went, from left to right, right to left.  As people moved their weight to keep the balance the bridge continued to sway.  The bridge was closed for two years until design modifications could be implemented that would correct for the stupidity of corwds.

The Winners Curse: Auctions often result in overvaluation.  The best bid is the highest, not the closest to the actual value of the asset, so irrational behavior is encouraged.  That’s the winner’s curse.  It is especially prevalent in telecom spectrum auctions and high profile corporate acquisitions.

It seems that the dumbest crowds of all come with advanced degrees.

The Independence Condition

All three examples above have something important in common: interdependence.  That’s what creates the feedback that makes a crowd dumb.  Although we are individuals, we actually very rarely act independently.  We plan our route to work to avoid traffic, try to be a team player at work, tend to watch movies that are popular, etc.

This is actually a very big problem, since virtually all of business statistics are built on the independence assumption of a bell curve.  Human behavior is not like a coin flip, what one person does will influence the decision of others.  George Soros calls this principle reflexivity, and he has made billions betting against it.

The essential condition of any wise crowd is that it remains truly an aggregation of independent actions.  With an increasingly interconnected and codependent world, crowds are likely to get dumber, not smarter.  As the stakes grow bigger, the potential repercussions become more even more daunting.

Guidelines for a Wise Crowd

Moderation: The best crowds, such as Wikipedia, Mozilla, etc. are actively moderated.  Open source communities generate lots of ideas, but someone is still minding the store.

Install Circuit Breakers:  After the stock market crash of 1987, stock exchanges created mechanisms to immediately stop trading if the market drops by a certain percentage.  You can read more about circuit breakers here.

If you want to keep a crowd wise, protect it from its own stupidity.  You need to have a plan to disrupt deleterious feedback loops.

Good Sense: If everybody else jumps off the Brooklyn Bridge, it doesn’t mean you have to. We usually know when the crowd is doing something stupid.  Watch out for phases like, “It’ll be different this time” or “This is a new era” or (especially) “it’s a once in a lifetime opportunity.”

There is nothing magical about crowds, except they have the potential to absolve us of responsibility.  Many who are jumping on the crowdsourcing bandwagon do so not independently, but by running with the crowd.

And the crowd is always something to bet against.

- Greg

Unlike other professional services, ad agencies are constantly under price pressure.  Consequently, shrinking margins have led to intense consolidation.  The industry today is dominated by a handful of vast holding companies that offer every service imaginable, yet still struggle with profitability.

Despite their huge market share and broad scope, the combined value of these corporations is less than $30 billion – a mere trifle compared to what is probably a trillion dollar global market for marketing services.

The industry is not doomed, but as consolidation has neared its limit, a new model needs to emerge if the industry is to prosper.

“Good Enough” Commodities

Clayton Christensen, in his book The Innovator’s Dilemma, provides a useful model for understanding the industry’s woes.  He points out that once consumers are satisfied with industry performance, they are only willing to pay commodity prices.

Innovative industries. , on the other hand, thrive where performance is not good enough. Being just a little bit better has enormous value when quality is an issue.   When it isn’t, price becomes the primary differentiator.

A good example is the computer industry.  Once processor speed became fast enough, it ceased to be an effective selling point.  In the 1990’s, Dell computer thrived not because of product performance, but because of price, convenience and service.

Ad agencies need to perform everyday.  Familiarity not only breeds contempt, but also intense fee negotiations.  There is a vast pool of very talented people created by decades of “good enough” performance. The industry does not suffer from a lack of proficiency, but its excess.

In order to gain some insight into the problem, let’s look at some other professional services who command the fee levels that the agency world covets.

Management Consulting

Companies like McKinsey and Bain specialize in the realm of “not good enough.”  They take on projects that companies are unwilling or unable to do themselves.  They are able to generate vast fees for finite projects that have a beginning and an end. Sometimes they have specialized knowledge in the project area, but often they don’t.

Other companies specialize in restructurings.  When a business hits the rocks, investors are more than happy to bring in a 3^rd party.  Management is suspect and an outsider with no internal loyalties can slash and burn like no insider can.  There’s huge money at stake, so fees don’t endure much scrutiny.

In both cases, a one-time expense, even a big one, can be amortized financially almost as if it was a capital asset.  Conversely, ongoing service inevitably becomes a procurement issue. Even a small fee reduction will flow nicely through a five year financial model.

Accounting, Auditing and Legal Services

Accounting firms, like advertising agencies, provide an ongoing service that is “good enough.”  There is a vast pool of qualified professionals and innovation is incremental.  According to Christensen’s model, they should also be priced as a commodity.

However, there is a crucial difference.  Accounting and auditing are legally mandated functions.  Moreover, accountants need to be certified.  Both of these facts make the negotiating positions of accounting firms vastly superior to ad agencies.

Corporations who think nothing of putting their ad business out to pitch on a regular basis would not do so with their accounting or law firm. A corporation who switches ad agencies is often seen hard driving and cost conscious; one who changes auditors often raises red flags and sees its market value plummet.

Law firms, on the other hand, are a “port in a storm.”  You go to them when you are in trouble.  When you need them, negotiating their fee is the last thing on your mind.  Human nature being what it is, we will always pay more to assuage fear than to engender hope.

Financial Planning

Another analogous industry is financial planning.  Skilled practitioners are contracted to manage money, much like media agencies.  They do so for commissions that are usually between 1% and 2% (hedge funds and venture capital firms who manage money more actively also get success fees).

Yet again, there is a crucial difference.  Financial management has enormous economies of scale. It’s not much harder to buy a $100 million dollar security than it is to buy a $1 million dollar security.  Big funds buy big assets.

Ad agencies, on the other hand, do not enjoy economies of scale to the same extent.  They still need to buy individual TV spots, ad pages etc.  Campaigns have specific objectives and need to be bought individually.  They can’t be lumped together.

IBM and Free Newspapers

While marketers do not enjoy the natural benefits of other disciplines, much can be learned from industries outside professional services.

In 1993, Lou Gerstner arrived at IBM, a company with a great legacy and tons of red ink.  He realized that the vast scope of the business gave them unique insight into technology and developed a great high-margin business in consulting services.  By mining internal information he created a whole that was immensely more valuable than the sum of its parts.

Free newspapers employ a similar strategy.  On the daily edition, they break even at best.  Daily newspapers are a losing proposition.  However, they do reach a lot of people and money can be made through high margin weekly supplements.

The result was the second fastest growing medium (behind digital) of the last decade, although the industry has had some problems since the onset of the financial crises.

In both cases, low margin, commoditized businesses were used as a substrate to create highly profitable products.  It’s not a “freemium” model, but it’s a similar idea.

The Way Forward

The advertising holding companies do seem to realize the value of high-end consultancy services.  They all have built up impressive capabilities in econometrics, non-standard promotions, brand and new media consultancy, etc.  However, integration remains poor and therefore the bottom line impact is minimized.

The same problem continues to drive industry profit levels. Sooner or later,ongoing strategic consulting becomes a commodity business. The inevitable result will always be escalating demands and shrinking margins.

Project based consulting, however, is a time tested, winning strategy.  Services based on the street level data accumulated though regular service combined with highly skilled advice and one-time fees could be the industry’s salvation. While it won’t change annual negotiations, short term projects with sky high margins can change the overall profit picture.

To achieve this, agency networks need to de-balkanize and skill levels need to be raised.  Front line personnel should be encouraged to spend time in a variety of divisions to encourage cross-pollination, discourage group-think and minimize the ridiculous interdisciplinary rivalry that the industry has raised to an art form.  Sabbatical and graduate study programs also need to be adopted.

The only alternative is…well…there really isn’t one.

- Greg

Building a powerful brand isn’t easy by a long shot, but there are some key principles that can guide you on your way.

1. Find a Job

Clayton Christensen makes the point that customers “hire” a product to do a “job” and I think that’s a great place to start.  Conventional marketing segmentation focuses on how a product fills the needs of the company that makes it rather than the consumer who is supposed to buy it.

We often talk about “categories” and “price points,” but those are not needs that consumers (businesses) need to fulfill.  Store bought cosmetics compete with beauty salons, tax software competes with accountants, robots compete with cheap labor, etc.

Some companies have been able to disrupt industries, create new categories and build great brands by finding new ways to do jobs for consumers.

Southwest Airlines didn’t try to segment airline business; they found a new way to do the job of getting people from Point A to Point B.  ESPN dominates the marketplace by doing the job of providing sports information, regardless of media platform.

As I’ve  pointed out before, new trends arise when we can find new problems to solve , new jobs to be done.  Trying to predict “the next big thing” by extrapolating current ones often misses the mark.

2. Make (and keep) Promises

Phillip Kotler, who many credit with creating modern brand management,  says that a brand is, in its essence, a promise.

This becomes clear when you enter a world with an absence of brand promises, like I did in the 90’s when I first starting working in post-communist Europe.  Brands were somewhat new and so were brand promises.

In the old system, goods were scarce and the women (it was almost always a woman) who ran the stores had real power.  If they had something, everybody wanted it – no matter what it was.  Usually they didn’t have what anything and would tell you “Nie ma!” (it’s not here) and go back to ignoring you.

It was common to find meat or cheese that was well past the due date and rancid.  When confronted with a spoiled product, the woman behind the counter would just shrug and throw it back on the pile.

After a few bouts of food poisoning, I learned to appreciate the promises of fast food brands.  They don’t promise much, just quick service and minimal quality at an affordable price, but they keep their promises.  If even one location fails to live up to the promise, it puts the whole multi-billion dollar brand at risk.

That’s the power of a brand.

3. Promote!

No matter what the product is, people have to know about it if they are going to buy it.  While there are some important exceptions (i.e. Google), as a rule the world’s greatest brands have been built through vigorous promotion.

Effective promotion has three elements: a strong brand message, efficiency and repetition.

Brand Message: Regular readers of this site know that emotions are essential to a good brand message.  The emotional center of our brain alerts us that something is important and encourages us to remember what our senses take in.

However, emotions just open the door.  There must be a rational component as well.  A good brand message also needs to promise to do an important job.  Emotions can create desire, but when the time comes to open their wallets, rationality comes to the fore. Many people want a Ferrari, few buy one.

Efficiency: No matter what the brand message is, it’s not going to be effective unless consumers actually see and hear it.  Mass media persists because it allows us to find the right people at the right price and lets us reach a lot of them very quickly.

Repetition: When I was a child, my mother used to point out that she had to ask me 100 times when she wanted me to do something.  Now that I’m an adult, not much has actually changed except it’s my wife who has to ask me 100 times.

We remember things through repetition.  Every time we use a synapse, it strengthens. Emotions can give the process a jolt, but chances are that it will take a number of exposures before a consumer will remember our brand and continued exposure to stay top of mind.

4. Join the Conversation

Word of mouth was always important, but now with the success of social media we can do a whole lot more about it.  Network Theory pioneer Duncan Watts is advocating an idea called Big Seed Marketing (pdf) which extends mass media through the use of social media.

Another good use of social media is listening.  Many companies do, and all should, monitor what people are saying about how their brands are keeping their promises.  Moreover, social sites like twitter can also be used effectively to contact directly with customers who are having problems and fix them.

5. Track

Often, the most neglected element of brand building is tracking. Most industries have standard research available and research companies like Millward Brown offer custom tracking surveys.  This data can be plotted against promotional activity to see what’s working and what’s not.

It’s also a good idea to talk directly to consumers, through focus groups and corporate sponsored events.  In order to develop a strategy for where you want to take your brand, you first need to know where you are and that’s a lot harder than it sounds.

So there you have it: A strong brand in 5 (not so easy) steps.  I hope this has been helpful and would love to hear your comments.

- Greg

Digital technology can be both a blessing and a curse.  While the new possibilities are fantastic and great efficiencies can be gained, organizations often need to be restructured in order to take advantage of them.

Finding the right digital structure can be confusing.  The key is to understand what role new technology is to play in your business.  Sometimes we use digital technology to make us more efficient and sometimes we use it to create value.  It’s very hard to do both.

To see how that affects how we should use technology, we first need to understand what organizations actually do.

What Does a Firm Do?

Why do businesses allow other companies to profit from them?  Why hire people and incur overhead costs instead of using independent contractors?  How should companies decide what they will do and what they won’t?

Nobel Laureate Ronald Coase asked these questions in his 1937 paper The Nature of the Firm, which is still influential to this day.

What he found was that the answer had to do with transaction costs and externalities.  Hiring outside contractors incurs search and information costs that can offset the increased overhead of organizing people internally.  Moreover, there is information gained by doing things internally, which has a value.

On the other hand, the costs of organizing work are substantial.  So a firm needs to stay small enough to operate efficiently and the value of the trade information gained must be greater than the cost to attain it.

Successful companies need to find a balance.  If a firm tries to do too much, the organizational costs will exceed the benefits of producing internally.  Conversely, if everything is outsourced, there is no value created.

Digital Organization Myths

Many believed that the rise of digital technology would mean the decline of firms and the rise of virtual organizations.  If everybody could work anywhere, anytime, why would companies hire people and why would people want to work in an office?

In fact, as Richard Florida points out, the opposite is happening.  People, especially highly skilled people, increasingly congregate in the same places.  The world is spiky (pdf) and getting more so.

While manufacturing is increasingly outsourced around the world, hi-tech firms tend to be located close to each other.  Technology seems to enable distance for everybody except those that produce it.

It seems that the value of information floating around in corporate hallways and cafes is greater than organization costs and that highly skilled people are so valuable that it’s more than worth it to keep them on salary.  Moreover, the value of their collaboration makes it efficient to maintain an office with amenities.

Digital Organization in the Media Business

Nowhere is the value of information more pertinent than in the media businesses.  Previously, I was running a large integrated media company that had major print and internet operations.  How we used digital technology affected how each business needed to be run.

In the print business, we used digital technology to create efficiency.  The real value of a print business is in the content, only human beings can do that..  Much of the production work can be outsourced with a minimum of transaction costs.

Desktop publishing has revolutionized how the publishing business is organized.  Standards are well established and producing a product is not only cheaper, it takes less technical expertise.

However, digital technology was at the core of our internet business and transaction costs were substantial.

We ran two separate proprietary platforms that required specific knowledge.  When we hired a new developer, or even had one switch platforms, it would take a few months for him to learn the new platform, regardless of technical expertise.  Every time we tried to outsource it was a disaster.

The contrast is stark.  When you use technology to innovate, the value of information tends to exceed the increased transaction costs of developing internal processes.

Standard vs. Proprietary Solutions

The crucial question is: What are you leveraging digital technology to do?  Create efficiency or build value?

The answer lies in standards.  If there is a usable standard, there is little value in proprietary information.  However, because digital technology is so pervasive even that simple rule can be confusing.

Core Value Proposition: How will digital technology affect what you offer?  Some businesses can use digital technology to do the same thing faster and cheaper.  Others can create more value through new services.

If you want to create value using digital technology, its best invest in proprietary systems and processes.  If not, a standard solution will be more efficient.

Expertise: Does the new technology entail a net increase or decrease in technical skill?  In the media example above, desktop publishing brought a net decrease in the overall expertise required to publish and therefore created efficiencies while the web business required building new skills.

New technology makes some skills obsolete and standards are more efficient.  However, if you expect to innovate with technology you will have to learn new skills and standard solutions should be adopted with caution.  You could end up missing a crucial piece of the value chain.

Security: Web sites can be particularly problematic if they are connected to databases that are proprietary or will be proprietary in the future.  Standard web solutions are easy to implement, but also easy to hack.

Many companies start out with a simple web site and then start building marketing and e-commerce databases on them later.  3^rd part or open source components can leave security holes that put that information at risk.

Sometimes even adding mundane functionality such as a user forum can leave proprietary information exposed.

How To Leverage Digital Technology

Digital technology creates an ongoing dilemma for every firm.  Many successful, even dominant companies have found their business models disrupted by faster and cheaper digital players (newspapers are a prime example).

Moreover, the questions of core value, expertise and security are not always clear cut.  A good answer today can be a bad one tomorrow.  In the end every firm needs to decide for themselves.

And it is not a decision to be taken lightly.

- Greg

Business development people often try to improve their sales prospects by approaching the “decision maker.”  Usually this means “going straight to the top” and speaking directly to the “man in charge.”  Why waste time with underlings and formalities?

In reality, this is rarely successful and usually does more harm than good.  Not only is the so called “decision maker” unlikely to be sold, a clumsy approach is very likely to poison the well and decrease the likelihood of an eventual sale.

Many people stumble with this early in their career.  The ego trip by passing mere mortals on an express trip to corporate Mount Olympus is more than most can resist.  Some people never actually learn.

In any case, if you want to affect outcomes, you need to insert yourself inside the decision making structure, not try to circumvent it.  Fortunately, there are some well researched principles that can guide you on your way to sales success.

A Personal Story

Early on in my career I was working on a desk that traded natural gas financial derivatives.  I wanted to catch a “whale” – a big trader who would make me millions in commissions and make me a rising star.

Unfortunately, I soon found that grizzly oil and gas traders were less than enthusiastic about talking to freshly minted brokers in New York.  One in particular used to growl at me every time I talked to him.  I had no idea how to win over a guy who clearly couldn’t stand me.

One day an older trader took me aside and suggested: “Talk to the junior trader.  If you can build a relationship with him, his boss will respect it.”

I took his advice and it worked.  The junior trader was much more eager to talk to me and I even made some decent size trades with him.  Moreover, when he went on vacation, I found his boss downright friendly and willing to accommodate me.

A Study in Conformity

Look at the picture below.  Which of the lines on the right is the same length as the line on the left?

What if I told you it was A?  Would you believe me?

How about if you were in a room with ten other people and you were the only one who didn’t think it was A?

Experiments performed by Solomon Asch in the 1950’s showed that when confronted with a majority opinion, people would give answers which they knew to be wrong.  The majority not only rules, it influences.

No matter who has formal responsibility for a decision, opinions usually form out of a group dynamic.  Even when you can get a “big boss” to agree to your proposal, you will find that it gets side tracked if others in the organization are opposed to your initiative.

Why Organization Charts are Maps to Nowhere

Top executives, like anyone else,  are  greatly influenced by the opinions of those around them.  There are a lot more employees than managers, so significant power often resides lower down on the organization chart.  In most cases, the lunatics really do run the asylum.

Successful salespeople know that influence on a purchase decision can be subtle. Whether the prospect is an ordinary consumer or an organization, approval and advice is usually sought from others.

Moreover, ecosystems of influence can be complex.  A woman might seek advice from one support network for a shade of lipstick and another on how to choose an accounting firm for her company and still another for a doctor for her family.

Fortunately, a lot of research has been done that has yielded valuable insights into how networks of relationships work and how people are influenced.

Seeking Out Influence

To understand how decisions are made, it is crucial to understand the social networks that produce them.  The following description is adapted from Orgnet, a management consultancy that specializes in analyzing organizations.

Connectors: The technical term is “Degree Centrality, but basically these are people who interact with lots of others in the organization.  Some times they are outgoing, the life of the party.  In other cases, they are just quietly helpful, the office “den mother” who everybody confides in.

In the above example, Diane is very likely to know quite a bit that goes on.  Moreover, she probably plays a big role in shaping opinions around the office.  Unfortunately, many managers are like Jane.  They might have a lot of authority to make decisions, but surprisingly little role in what actually happens.

Gatekeepers: Heather might not be the life of the party, but her opinion carries a lot of weight.  No matter how charming Diane might be, she will have to go through Heather to get to Ike or Jane.  She doesn’t have a lot of connections herself, but she occupies a crucial place in the network and functions as a gatekeeper.

Closeness: Fernando and Garth don’t have as many connections as Diane and aren’t as well positioned as Heather, but they have fairly easy access to everyone in the network. Smokers in offices would tend to have a high closeness scores.  Their influence is subtle, yet pervasive.  If you want to spread a rumor, tell a smoker.

So if you wanted to get your story told, who would you tell it to:  Diane, Heather, Fernando or Garth?  The truth is that it can be any of those or even someone else like Ed or Carol.  What’s most important is that you maximize your penetration into the network as a whole, not any particular person in it.  Once again, the majority doesn’t just rule, it influences as well.

The nice thing about a network is that it can be entered from anywhere.  As you begin to learn how it works better, you can work it more efficiently.  However, by making blind assumptions about who matters and who doesn’t you are more likely to make yourself a pariah than to successfully exert influence.

Those who seek to go “straight to the top” often find themselves stuck on bottom.

- Greg

The marketing world is changing as never before.  The backslapping, clubby culture of Madison Ave. is being transformed in a world of bytes, databases and algorithms that is increasingly ruled by geeks rather than suits.

The old order is gone but the new order has yet to arrive.  The fate of marketing services companies is still an open question.

To get an idea of where we’re going, it makes some sense to look back and see how we got here.  The best place to start is the financial revolution that preceded the present marketing upheaval.

The Financial Revolution

In the midst of a global financial crisis, it’s easy to lose sight of the enormous progress that was made in the financial industry in the 70’s and 80’s.  A genteel, stodgy industry was transformed into a hi-tech marketplace.

The banking industry was characterized as an industry of 3-5-3.  Fine old men would borrow at 3%, lend at 5% and be on the golf course by 3:00 in the afternoon.  Stockbrokers solicited clients more through personal relationships than by touting performance.

The revolution was largely an American one and it was created by a confluence of seemingly unrelated events in the US during the early 1970’s.

A New Market: In April, 1973, the Chicago Board of Trade opened a floor for trading stock options.  Investors could purchase the right to buy or sell the underlying asset without actually having to buy the stock.

In effect, it was like buying a form of insurance.  If you owned a stock you could lock in the price by paying a “premium.”  If the stock went down you wouldn’t lose, but if it went up you could still gain.  Of course, you could also not buy the stock at all and just bet on the price.

A Pricing Model: Coincidently, one month after the exchange opened the Black-Scholes pricing model was published which used a differential equation to determine the value of financial options.

Previously, there was no known method of determining a fair price.

The achievement deemed so important that the authors of the model won the Nobel Prize for Economics in 1997

Computing Power: It was also at around the same time when programmable pocket computers came on the market.  The Black- Scholes pricing model was too complex for traders to calculate prices in their head, the new devices were small enough to use on the trading floor.

It didn’t take long for Wall Street to become Silicon Valley’s biggest customer.

The Moon Landing: The 1969 moon landing effectively ended the Apollo program at NASA and created a glut of quantitatively talented people.  Seeing the advantage of powerful mathematics on the trading floor, the financial industry was eager to transform the rocket scientists into financial engineers that they called quants.

It wasn’t long before every investment bank had its own team of quants busy creating complex models and new financial instruments.  The world of finance was transformed.

The Marketing Revolution

The marketing world has been transformed by technology as well.  What used to be a business of ideas is increasingly one ruled by numbers.

In the 70’s and 80’s the cable industry broke up the large network TV audiences into smaller, more targeted niches.  The emergence of the web in 90’s brought even greater fragmentation.  Increasingly, advertising has become less about what you say and more about finding the right people to say it to.

The new marketing world has also been changed by computer technology.  When I started out in the media business, expensive mainframe computers were still used to crunch audience numbers.  Today, even large expenditure databases can be run on a cheap laptop.

TV buyers soon saw the emergence of their own version of Black Scholes.  Computer programs called “optimizers” helped them massage coverage curves into just the right shape to deliver campaign goals efficiently, much like the Wall Street quants shaped financial products.

Today, no new business pitch is complete without a section about the agency’s proprietary tools that take in mountains of data and spit out slick graphs that will tell the client exactly where the money should go.

The Missing Piece

The marketing revolution is similar to the financial revolution that preceded it in that they both are dependent on powerful computer technology and sophisticated mathematical models.  However, for the marketing industry, this similarity begs an important question:

Where are the quants?

They exist, for sure.  Big holding companies like Interpublic, Omnicom and Publicis have econometric divisions that can build expensive bespoke models for clients.  However, these divisions are considered special and are therefore integrated into core operations.

As I’ve pointed out before on this site, mathematical skills among marketing professionals remain atrocious and don’t show much sign of improving.

How Much Will Google Own?

When profits disappear, industries consolidate and that’s precisely what has happened with marketing services.

Although companies who look seek service from marketing professionals have a wide array of brands to choose from, in actuality those brands are largely owned by four large holding companies.

A quick look at a chart prepared by advertising age graphically shows the stunning array of services and enormous market share that these firms possess.

With a little more checking, it’s not too hard to estimate the total market value for all four of these behemoths combined is less than $30 billion compared to $180 billion for Google.  It is quite possible, if not probable, that Google is worth more than all marketing services companies in the world combined!

And it’s not just Google.  Look at some media company valuations:

Disney: $55 Billion

Time Warner – $36 Billion

Viacom- $20 Billion

Yahoo: $20 Billion

Total: $131 Billion

These companies don’t have any where near the market footprint of the marketing behemoths, but are worth far more.  What kind of clout does the marketing services industry have today?  Will it be less or more in a decade?

The Future of Marketing Services

Now we can see why the “Mad Men” are so mad.  While their industry is being transformed and everybody else is getting rich, they live in a world of diminished expectations and shrinking fees.

The problem is serious but the solution is simple:

Get some quants.

- Greg

What’s the difference between a great brand and a silly slogan?

A powerful brand is incredibly valuable.  Interbrand estimates that a successful brand can be worth tens of billions of dollars.  That’s far too much money to be attributed to nice words or cool colors. What makes a brand valuable is the promises it makes and keeps.

Here are some examples of great brands that win through making and keeping their promises.

Apple Computer

Apple promises to make the machine work with the man.  We love Apple products because they are made for us.  Once you buy an iPod you never want to use another MP3 player.

Apple doesn’t depend on ideas that are wholly original. All of their breakthrough products like the Macintosh, the iPod and the iPhone have been followers, not first movers.  They invent surprisingly little new technology.  The categories they enter have stiff competition, Apple just beats them at their own game.

What Apple does is agonize over every small detail until their products work flawlessly. A thousand engineers working on a million things that most of us will never notice, but are essentially to delivering a superior product.  This is a promise that they keep everyday.

Many people have criticized Apple’s new iPad because it is, essentially, a lager version of the iTouch.  Yet, it keeps all of Apple’s promises.  It’s fun, tactile, easy to use and, as I’ve written before, the Apple iPad will most likely be a success.

Disney

Walt Disney stands for wholesome entertainment filled worth magic and wonder.  It is an incredibly valuable brand that has stood the test of time.

Some marketing guru somewhere probably thinks that it would be a great idea to earn more value out of the Disney brand by extending it to include different categories. Why not have “Disney Sports” or attach the Disney name to movies for grown ups.

The Disney brand has endured because they know that when you extend a brand you risk diluting its promise. ESPN, Miramax and Touchstone pictures are different brands with different promises and the company benefits from them all (Disney owns them).

McDonald’s

McDonald’s promises a minimal standard of quality combined with great service and convenience.  Go anywhere in the world and you can expect to see full McDonald’s restaurants. (And after a couple bouts of food poisoning I’ve had in some of the rougher places in the world, the McDonald’s brand can be an incredibly welcome sight).

McDonald’s promises to keep their standards uniform everyday, anywhere on the planet. They have gone to enormous lengths to keep that promise.  Their corporate university trains an amazing global network of executives that meet and are constantly exchanging ideas on how to improve processes and gain efficiencies.

Every supplier in every country is vetted and inspected regularly and every no detail is left to chance.  For instance, there are only a few photographers in the world who are authorized to take pictures of McDonald’s food for marketing campaigns.  It is their constant attention to detail that allows them to keep their promises in 119 countries around the world.

A Simple Equation

Brands are not built through gimmicks or sleight of hand.  The consumer can not be fooled for long.  Great companies build great brands by valuing their customers and wanting to make their lives better in some way.

In the end, despite all the gimmicks and tricks that gurus use to sell books and seminars, it comes down to one simple equation:

Brand Value = the value of promises kept.

Everything else is just optimizing efficiency.

- Greg