86-Function Innovation in a Service Industry

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 copywrited 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.

Posted 3/19/09

Update:

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.

8/22

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THE SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.