89-Function Innovation in a Service Industry

When we think of disruptors in an industry (we call these companies Next Leaders), we usually envision an attack from below, the disruptor offering something better for a lower price to a segment of the market. Examples include Amazon, Uber, Netflix and Google in the office suite market. Here is a Next Leader who attacked from above and overwhelmed an industry.

Posted 3/19/09

The advertising industry is suffering along with the rest of us. As marketers in all industries retrench and cut costs, advertising agencies are feeling a margin squeeze. They are looking around for new services that might distinguish them from their competitors and enable them to gain share in a declining market. Some of these new services are Function innovations. (See the Perspective, “How Customers Buy” on StrategyStreet.com.) A Function, in our terminology, refers to the characteristics of the product that affect the way it is used by the customers.

Function innovations are powerful in customer economics but, perversely, may not create an industry winner. The reason is that many competitors will tend to copy successful Function innovations. These innovations are easy to see and reverse engineer, hence, easy to copy.

A new Function must remain unique in order for a customer to make a buying decision based on the supplier offering the new Function. (See the Perspective, “When to Compete on Features” on StrategyStreet.com.) There are three typical patterns that enable a new Function to remain unique:

• A legal or regulatory barrier such as a patent.

• Competitor economics which prevent or discourage a competitor from investing in the innovation.

• A need for external verification that the Function works and is worthwhile.

Interpublic Group’s Deutsch LA invested $60,000 in a research initiative. They interviewed more than 150 consumers to determine how the average consumer was responding to the bleak economy. Deutsch LA named this research study “America’s Wallet.” The company used this Function innovation creatively. First, it brought the findings to bear on its existing clients. This cemented their relationship with the existing clients and probably helped them gain additional work from these the clients as well. Then the company took its findings to clients that it was not currently serving. The study was interesting enough that some clients did come on board and grant Deutsch LA new work.

What has made this Function innovation successful? In this case, the Deutsch LA’s innovation remained unique using all three patterns that typically keep a Function unique:

• Legal barriers: The “America’s Wallet” product is copywritten and unique.

• Competitor economics: The Function innovation was costly and time consuming to Deutsch LA. Other agencies have been slow to copy this innovation in this recessionary market.

• The need for external verification: One new client who came on board due to the “America’s Wallet” product stated in a public forum that this product was really helpful. The product has a bit of buzz.

Congratulations to Interpublic Group’s Deutsch LA for a successful Function innovation.

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Update 2022:

This Function innovation certainly helped Deutsche LA but had relatively little effect on the broader market for advertising. The surprising winner in advertising over the last several years has been a company that was not part of the original “Big Four”.

Deutsch LA remains an independent marketing communications agency and part of the Interpublic Group of companies.  The agency also operates Steelhead Productions, a video production company that creates television commercials, digital branded content, and episodic entertainment.  The agency focuses on entertainment, tech and culture.

The advertising world has been dominated by the “Big Four” agencies: WPP, Omnicom, Publicis Group, and Interpublic Group of Companies.  There was a significant addition to these top 4 companies by 2019.  Here are the top 5 advertising agency groups worldwide, ranked by 2019 revenues: WPP at $16.9 billion, Omnicom at $15 billion, Publicis at $12.3 billion, Accenture Interactive at $10.3 billion, Interpublic Group at $10.2 billion.

Accenture Interactive, now called Accenture Song, used over 40 acquisitions to create what has become the world’s largest digital agency network. The company has grown its market share by creating a unique Function in its digital capability and excellent Reliability with its broad reach and size. It has stolen a march on its competition by being early to recognize the impact of technology on its clients and then building a unique technology capability to serve them in this new environment.  Making these acquisitions work by holding the acquired customers and integrating the services offered by the many acquired firms was a mighty and difficult task. See HERE and HERE for more thoughts on acquisitions.

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Update 4/26

It’s 2013, early in online commerce. Still, Very Large and Large corporate customers were seeing growth in digitization. These customers were shifting their marketing budgets toward digital, data and experience. They needed integrated solutions including creative talent, data availability and technology competence rather than traditional ad campaigns. Accenture saw this as well and knew it presented them an opportunity. Advertising agencies, who might be expected to help as commerce moved online, were relatively small, and constrained both financially and operationally in this emerging environment. Accenture decided to enter their market, using acquisitions to build capability. In 2016, Accenture had 6% of the total revenues of the top 5 agencies. Today, Accenture leads the market. Two of the top five agencies lost massive amounts of market share. Surprisingly, though, two continued to hold share and to prosper.

The last 10 years have produced massive changes in advertising and how it is delivered. In 2016, the top four advertising agencies held about 94% of the revenues of the leading five agencies. WPP led with 35% share, followed by Omnicom at 27%, Publicis at 20% and Dentsu with 12%. These agencies provided their CMO clients with creative talent, media buys and production. Agencies were built for advertising campaign cycles, and project-based creative work using high variance talent models. However, they offered little technology to bring to their clients as marketing and sales migrated online. They provided many marketing services through separate wholly-owned companies who might not coordinate their work with one another. Their margins were under pressure while activist investors demanded better returns. Their debt levels were high. By 2026, Accenture became the industry’s clear leader among top firms offering advertising services. WPP and Omnicom lost 30% or more of their market shares among the top five competitors. Surprisingly, Publicis and Dentsu maintained or increased their shares. How did this happen?

Accenture overwhelmed traditional advertising services from the top down. Accenture brought Function, Reliability and Convenience advantages to its competition with the advertising agencies. Accenture spent several billion dollars acquiring world-class creative, design, commerce and analytics firms. The firm offered a unique new Value proposition. The consulting firm was a global leader in technologies required for online commerce (Function). It was adept at integrating these technologies to make them work well for their clients (Function). Accenture could deliver services at massive global scale with its several hundred thousand employees (Function). The firm was well known and trusted by CEOs, COOs and CFOs, policymaking leaders of their client firms (Reliability) as having capabilities to fix big business problems. It offered a unified brand, unified delivery model and single point of contact to its Very Large and Large customers (Convenience). Accenture complemented these unique benefits with world-class creative talent obtained through its acquisitions. Accenture addressed the entire customer experience. Accenture was a Transformer Next Leader in the industry.

Why couldn’t the competing agencies stop Accenture? They simply were not built for that level of competition. Accenture did not create another advertising agency. It created something much bigger. The agencies lacked engineers and technology. They could not afford acquisitions nor the massive budgets integrating technologies demanded because they were financially constrained. Their services were less well integrated. Nor were they well known at the top levels of their client management groups.

Publicis and Dentsu survived and prospered as Accenture gained market share. They succeeded because they had their own unique Function benefits to insulate them from competitive shock. They are leaders in data, media scale and their own proprietary technologies. Publicis also offered Convenience in a single point of contact for its clients and Price benefits in media buying.

These two companies control giant first-party databases of real customers (Function). They have created identity graphs, large databases that combine multiple pieces of information about a consumer into one unified record. These identity graphs improve marketing return on investment and reduce wasted marketing expenses. Publicis owned Epsilon, which it acquired.  This company knows and tracks consumers across devices, emails, purchases and loyalty programs, verified information on millions of consumers. Dentsu owns Merkle, another giant identity and data company, which it acquired as well. Merkle specializes in people-based marketing. It is very good at creating ads that drive measurable results, such as clicks, sales, and sign-ups. It turns data into actual marketing actions.

Publicis improved its Convenience and Price benefits as well. The company reorganized several years ago employing the theme “Power of One.”  Using this terminology, it promised its clients one team, one P&L, one source of data and one technology stack. Publicis Media buys tens of billions of dollars of ad space every year. No one compares with them in their ability to pass their lower costs on to their clients in a lower Price.

Each successful company offers unique benefits. Accenture solves a much bigger problem than advertising. Publicis and Dentsu provide unique customer identification. Publicis provides efficient ad purchases. There is only modest overlap among these competing benefits.

What might the future hold? Accenture is the future. They have shown how it can be done. Deloitte entered the industry in 2012 and seems to be following the same strategy Accenture used. Deloitte has evolved into a very large and successful competitor in its own right. What about the agencies? Given their limited scale, it appears that they would most easily thrive as part of a much larger organization, someone like Accenture or Deloitte.

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