Organizing for Advertising and Promotion: Role of Ad Agencies

To understand how companies organize for advertising and other aspects of integrated marketing communications. To evaluate the advantages and disadvantages of the various ways companies organize for advertising and promotion. To understand the role of advertising agencies and the services they perform as well as the various types of agencies and media specialist companies. To examine methods for selecting, compensating, and evaluating advertising agencies.

To explain the role and functions of specialized marketing communications organizations. To examine various perspectives on the use of integrated services and responsibilities of advertisers versus agencies. LO2 LO3 LO4 LO5 LO6 3 Organizing for Advertising and Promotion: The Role of Ad Agencies and Other Marketing Communication Organizations UNDER ARMOUR PROTECTS ITS HOUSE BY STAYING IN-HOUSE Adidas, Puma, and Reebok are well known brand names in the athletic shoe and apparel business and have one thing in common.

They have all been trying to keep pace with Nike, the Beaverton, Oregon, based company which has global sales of nearly $20 billion and whose swoosh has become the most pervasive logo in sports. However, when asked to name the competitor that has the most realistic chance of challenging Nike, many industry analysts do not mention adidas (which now owns Reebok) or Puma, both of which have been competing against Nike for decades. Instead they point to Under Armour, the young Baltimore-based company that many have already nicknamed “the next Nike. Under Armour (UA) was founded in 1996 by Kevin Plank, a former Maryland football player, who began by selling compression clothing that could “wick” sweat away from the body to college sports teams out of the trunk of his car. In 2005 the company went public and its stock nearly doubled the first day it was traded. Under Armour has averaged nearly 60 percent annual growth and had sales of $725 million in 2009. Under Armour achieved initial success by focusing on niche markets that the big boys overlooked.

The initial product—a line of tight-fitting T-shirts made of a synthetic compression fabric—targeted professional athletes and fitness buffs, offering them a way to stay cool and dry during workouts and games. The product line has been expanded to serve a variety of sports and activities markets including running, football, baseball, soccer, lacrosse, hunting, and snow sports. Under Armour became very successful through strong branding and product positioning, quality products, and dynamic advertising.

The company developed a unique brand identity through its TV advertising campaign, which began in 2003 and used the theme “Protect This House. ” The commercials featured a football squad huddled around Eric “Big E” Ogbogu, one of Kevin Plank’s former teammates at the University of Maryland, who was playing for the Dallas Cowboys when the commercial was shot. The spots show Ogbogu and a number of other well-conditioned athletes working out while wearing Under Armour and end with him standing in the middle of a huddle of the players and shouting “We must protect this house! as if his life depended on it. “The goal was to create a spot that would live longer than its 30 seconds on the air,” according to Steve Battista, Under Armour’s Vice President, Brand. This goal was definitely accomplished as the tagline has become a symbol of what Under Armour stands for as a brand and the company continues to use it in much of its advertising. Building on its strong brand reputation, Under Armour made a strategic decision to expand into the football cleat market in 2006.

To launch the new product line in this highly competitive market, the company’s in-house agency developed the “Click-Clack campaign which engaged viewers with the sound of football cleats in the tunnel as players head onto the field. While there was no direct mention of Under Armour cleats in the initial spots, the statement “I think they hear us coming,” was a message to consumers, as well as the competition, that Under Armour was entering the market. In 2008 Under Armour moved into another segment of the athletic equipment market by launching a new line of high performance cross training shoes, its first foray into noncleated footwear.

To introduce the New Proto line, Under Armour ran a commercial on the 2008 Super Bowl telecast which included nearly two dozen high profile male and female athletes and was done in its typical intense style. The New Proto shoes outperformed Nike’s new SPARQ cross trainer line, which was backed by a major ad campaign that included a tagline taking a barb at Under Armour (“My better is better than your better”). Under Armour also has its sights set on running and basketball shoes which are the two largest categories of the athletic footwear market.

In 2009 Under Armour launched a new line of running shoes where it competes against Nike and adidas as well as other strong brands such as New Balance, Asics, and Saucony. It is also expected that the company will soon enter the basketball shoe market as it already has Brandon Jennings, one of the up and coming stars in the NBA, wearing Under Armour shoes. Analysts note that a major reason why Under Armour may be able to challenge Nike is because the two companies have very similar corporate cultures.

Both companies are dedicated to serving athletes, have a focus on product innovation, and a strong brand mentality. An analyst at the market research firm SportsOneSource notes that “the real genius of both companies was in creating a strong brand and protecting it. ” While Nike is still viewed as the strongest athletic brand in the United States, Under Armour is very popular among teens and young adults indicating that the younger generation is adopting Under Armour as its own brand. One way Under Armour differs from Nike, as well as most of it other competitors, is that rather han using an outside agency to handle its advertising and other type of integrated marketing communications, the company prefers to keep it all in-house. For more than 20 years all of Nike’s advertising was handled by Wieden1Kennedy, which began as a small agency in Portland and grew with the success of its largest and best known client. Nike still uses W+K but has expanded the roster of agencies with which it works as it looks for marketing communication firms with interactive, digital, and community building capabilities that transcend traditional media advertising.

Under Armour has chosen to go a different route as the company has its own brand team that has handled all of it creative work and media buying in-house since the company was founded. The team includes a creative director, advertising director, interactive art director, and a score of talented designers and marketing minds that help plan and create all of Under Armour’s marketing communications. The company has outsourced the production work for some of its commercials and also has used the Deutsch agency to handle some of its public relations.

Recently Under Amour considered hiring an outside agency to handle some of the IMC efforts for its expanding women’s line and went through an agency review process. Under Armour has definitely made it to the big leagues and now that it is there, the competition will get more intense as they battle Nike, adidas, Reebok and others for market share. However, Under Armour plans to stick to its game plan and continue to deliver its iconic message, “We Must Protect This House! ” by staying in-house.

Sources: Jeremy Mullman, “Under Armour Seeks Agency to Work on Growing Women’s Line,” Advertising Age, August 31, 2009; http://adage. com/print? article_id=138703; Sean Gregory, “Under Armour’s Big Step,” May 26, 2008, p. 44; Terry Lefton, “The Contender, Sports Business Journal,” May, 5, 2008, pp. 1,18; Steve Battista, “True Confessions of a Super Bowl Ad Virgin,” Advertising Age, February 4, 2008, p. 44. Developing and implementing an integrated marketing communications program is usually a complex and detailed process involving the efforts of many persons.

As consumers, we generally give little thought to the individuals or organizations that create the clever advertisements that capture our attention, the Web sites we visit, or the contests and sweepstakes we hope to win. But for those involved in the marketing process, it is important to understand the nature of the industry and the structure and functions of the organizations involved. As discussed in the first two chapters, the advertising and promotions business is changing as marketers search for better ways to communicate with their customers.

These changes are impacting the way marketers organize for marketing communications, as well as their relationships with advertising agencies and other communication specialists. 68 Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION Advertiser (client) Advertising agency Media organizations Marketing communication specialist organizations Direct-marketing agencies Sales promotion agencies Interactive agencies Public relations firms Collateral services CHAPTER 3 FIGURE 3–1 Participants in the integrated Marketing Communications Process

This chapter examines the various organizations that participate in the IMC process, their roles and responsibilities, and their relationship to one another. We discuss how companies organize internally for advertising and promotion. For most companies, advertising is planned and executed by an outside ad agency. Many large agencies offer a variety of other IMC capabilities, including public relations, Internet/ interactive, sales promotion, and direct marketing. Thus, we will devote particular attention to the ad agency’s role and the overall relationship between company and agency.

Other participants in the promotional process (such as direct-marketing, sales promotion, and interactive agencies and public relations firms) are becoming increasingly important as more companies take an integrated marketing communications approach to promotion. We examine the role of these specialized marketing communications organizations in the promotional process as well. The chapter concludes with a discussion of whether marketers are best served by using the integrated services of one large agency or the separate services of a variety of communications specialists.

PARTICIPANTS IN THE INTEGRATED MARKETING COMMUNICATIONS PROCESS: AN OVERVIEW Before discussing the specifics of the industry, we’ll provide an overview of the entire system and identify some of the players. As shown in Figure 3–1, participants in the integrated marketing communications process can be divided into five major groups: the advertiser (or client), advertising agencies, media organizations, specialized communication services, and collateral services. Each group has specific roles in the promotional process.

The advertisers, or clients, are the key participants in the process. They have the products, services, or causes to be marketed, and they provide the funds that pay for advertising and promotions. The advertisers also assume major responsibility for developing the marketing program and making the final decisions regarding the advertising and promotional program to be employed. The organization may perform most of these efforts itself, either through its own advertising department or by setting up an in-house agency.

However, many organizations use an advertising agency, an outside firm that specializes in the creation, production, and/or placement of the communications message and that may provide other services to facilitate the marketing and promotions process. Many large advertisers retain the services of a number of agencies, particularly when they market a number of products. For example, Kraft Foods uses as many as eight advertising agencies for its various brands, while Procter Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION 69 EXHIBIT 3–1 National Geographic promotes its value to advertisers Gamble uses eight primary ad agencies and two major media buying services companies. Many large companies often use additional agencies that specialize in creating ads for specific ethnic markets. For example, in addition to its primary agency of record, Toyota Motor Corporation uses additional agencies in the United States to create ads for the African-American, Hispanic, and Asian-American markets. More and more, ad agencies are acting as partners with advertisers and assuming more responsibility for developing the marketing and promotional programs.

Media organizations are another major participant in the advertising and promotions process. The primary function of most media is to provide information or entertainment to their subscribers, viewers, or readers. But from the perspective of the promotional planner, the purpose of media is to provide an environment for the firm’s marketing communications message. The media must have editorial or program content that attracts consumers so that advertisers and their agencies will want to buy time or space with them.

Exhibit 3-1 shows an ad run in advertising trade publications promoting the value of National Geographic magazine and its family of media products as a way to reach consumers around the world. While the media perform many other functions that help advertisers understand their markets and their customers, a medium’s primary objective is to sell itself as a way for companies to reach their target markets with their messages effectively. The next group of participants are organizations that provide specialized marketing communications services.

They include direct-marketing agencies, sales promotion agencies, interactive agencies, and public relations firms. These organizations provide services in their areas of expertise. A direct-response agency develops and implements direct-marketing programs, while sales promotion agencies develop promotional programs such as contests and sweepstakes, premium offers, or sampling programs. Interactive agencies are being retained to develop Web sites for the Internet and help marketers as they move deeper into the realm of interactive media.

Public relations firms are used to generate and manage publicity for a company and its products and services as well as to focus on its relationships and communications with its relevant publics. The final participants shown in the promotions process of Figure 3–1 are those that provide collateral services, the wide range of support functions used by advertisers, agencies, media organizations, and specialized marketing communications firms. These individuals and companies perform specialized functions the other participants use in planning and executing advertising and other promotional functions.

We will now examine the role of each participant in more detail. (Media organizations will be examined in Chapters 10 through 14. ) ORGANIZING FOR ADVERTISING AND PROMOTION IN THE FIRM: THE CLIENT’S ROLE LO 03-1 Virtually every business organization uses some form of marketing communications. However, the way a company organizes for these efforts depends on several factors, including its size, the number of products it markets, the role of advertising and promotion in its marketing mix, the advertising and promotion budget, and its 70 Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION

President Production Finance Marketing Research and development CHAPTER 3 Human resources Marketing research Advertising Sales Product planning FIGURE 3–2 The Advertising Department under a Centralized System marketing organization structure. Many individuals throughout the organization may be involved in the advertising and promotion decision-making process. Marketing personnel have the most direct relationship with advertising and are often involved in many aspects of the decision process, such as providing input to the campaign plan, agency selection, and evaluation of proposed programs.

Top management is usually interested in how the advertising program represents the firm, and this may also mean being involved in advertising decisions even when the decisions are not part of its day-to-day responsibilities. While many people both inside and outside the organization have some input into the advertising and promotion process, direct responsibility for administering the program must be assumed by someone within the firm. Many companies have an advertising department headed by an advertising or communications manager operating under a marketing director.

An alternative used by many large multiproduct firms is a decentralized marketing (brand management) system. A third option is to form a separate agency within the firm, an in-house agency. Each of these alternatives is examined in more detail in the following sections. The Centralized System LO 03-2 In many organizations, marketing activities are divided along functional lines, with advertising placed alongside other marketing functions such as sales, marketing research, and product planning, as shown in Figure 3–2. The dvertising manager is responsible for all promotions activities except sales (in some companies this individual has the title of marketing communications manager). In the most common example of a centralized system, the advertising manager controls the entire promotions operation, including budgeting, coordinating creation and production of ads, planning media schedules, and monitoring and administering the sales promotions programs for all the company’s products or services. The specific duties of the advertising or marketing communications manager depend on the size of the firm and the importance it places on promotional programs.

Basic functions the manager and staff perform include the following. Planning and Budgeting The advertising department is responsible for developing advertising and promotions plans that will be approved by management and recommending a promotions program based on the overall marketing plan, objectives, and budget. Formal plans are submitted annually or when a program is being changed significantly, as when a new campaign is developed. While the advertising department develops the promotional budget, the final decision on allocating funds is usually made by top management.

Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION 71 Administration and Execution The manager must organize the advertising department and supervise and control its activities. The manager also supervises the execution of the plan by subordinates and/or the advertising agency. This requires working with such departments as production, media, art, copy, digital/interactive, and sales promotion. If an outside agency is used, the advertising department is relieved of much of the executional responsibility; however, it must review and approve the agency’s plans.

Coordination with Other Departments The manager must coordinate the advertising department’s activities with those of other departments, particularly those involving other marketing functions. For example, the advertising department must communicate with marketing research and/or sales to determine which product features are important to customers and should be emphasized in the company’s communications. Research may also provide profiles of product users and nonusers for the media department before it selects broadcast or print media.

The advertising department may also be responsible for preparing material the sales force can use when calling on customers, such as sales promotion tools, advertising materials, and point-of-purchase displays. Coordination with Outside Agencies and Services Many companies have an advertising department but still use many outside services. For example, companies may develop their advertising programs in-house while employing media buying services to place their ads and/or use collateral services agencies to develop brochures, point-of-purchase materials, and so on.

The department serves as liaison between the company and any outside service providers and also determines which ones to use. Once outside services are retained, the manager will work with other marketing managers to coordinate their efforts and evaluate their performances. A centralized organizational system is often used when companies do not have many different divisions, product or service lines, or brands to advertise. For example, airlines such as Southwest, American, and JetBlue have centralized advertising departments, as do major retailers such as Target, Walmart, and Best Buy.

Many companies prefer a centralized advertising department because developing and coordinating advertising programs from one central location facilitates communication regarding the promotions program, making it easier for top management to participate in decision making. A centralized system may also result in a more efficient operation because fewer people are involved in the program decisions, and as their experience in making such decisions increases, the process becomes easier. At the same time, problems are inherent in a centralized operation.

First, it is difficult for the advertising department to understand the overall marketing strategy for the brand. The department may also be slow in responding to specific needs and problems of a product or brand. As companies become larger and develop or acquire new products, brands, or even divisions, the centralized system may become impractical. The Decentralized System In large corporations with multiple divisions and many different products, it is very difficult to manage all the advertising, promotional, and other functions through a centralized department.

These types of companies generally have a decentralized system, with separate manufacturing, research and development, sales, and marketing departments for various divisions, product lines, or businesses. Many companies that use a decentralized system, such as Procter & Gamble, Unilever, and Nestle, assign each product or brand to a brand manager who is responsible for the total management of the brand, including planning, budgeting, sales, and profit performance. (The term product manager is also used to describe this position. The brand manager, who may have one or more assistant brand managers, is also responsible for the planning, implementation, and control of the marketing program. 1 72 Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION EXHIBIT 3–2 Many of Procter & Gamble’s brands compete against each other CHAPTER 3 Corporate Production Finance Marketing Research and development Human resources Sales Product management Marketing services Brand manager Advertising department Marketing research Ad agency Brand manager Sales promotion Package design Merchandising Ad agency Brand manager FIGURE 3–3 A Decentralized Brand Management System

Ad agency Under this system, the responsibilities and functions associated with advertising and promotions are transferred to the brand manager, who works closely with the outside advertising agency and other marketing communications specialists as they develop the promotional program. 2 In a multiproduct firm, each brand may have its own ad agency and may compete against other brands within the company, not just against outside competitors. For example, Exhibit 3–2 shows ads for Tide and Gain, which are both Procter & Gamble products that compete for a share of the laundry detergent market.

As shown in Figure 3–3, the advertising department is part of marketing services and provides support for the brand managers. The role of marketing services is to Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION 73 assist the brand managers in planning and coordinating the integrated marketing communications program. In some companies, the marketing services group may include sales promotion. The brand managers may work with sales promotion people to develop budgets, define strategies, and implement tactical executions for both trade and consumer promotions.

Marketing services may also provide other types of support services, such as package design and merchandising. Some companies may have an additional layer(s) of management above the brand managers to coordinate the efforts of all the brand managers handling a related group of products. This system—generally referred to as a category management system—includes category managers as well as brand and advertising managers. The category manager oversees management of the entire product category and focuses on the strategic role of the various brands in order to build profits and market share. Each category manager will have one or more brand managers reporting to him or her for each specific brand as well as an advertising manager. The advertising manager may review and evaluate the various parts of the program and advise and consult with the brand managers. This person may have the authority to override the brand manager’s decisions on advertising. In some multiproduct firms that spend a lot on advertising, the advertising manager may coordinate the work of the various agencies to obtain media discounts for the firm’s large volume of media purchases.

Category management is often used in large multiproduct or divisional companies. For example, Procter & Gamble’s broad portfolio includes 86 brands (22 of which generate more than a billion dollars in revenue each year) which are assigned to one of three major divisions: Beauty & Grooming, Health & Well Being, and Household Care (Exhibit 3–3). Each division includes multiple product categories to which individual brands are assigned for management purposes.

For example, the North American Household Care Brands division contains seven product categories including laundry and fabric care, household cleaners, baby and child care, batteries, paper, dishwashing, air fresheners, and paper. An advantage of the decentralized system is that each brand receives concentrated managerial attention, resulting in faster response to both problems and opportunities. The brand managers have full responsibility for the marketing program, including the identification of target markets as well as the development of integrated marketing communications programs that will differentiate the brand. The brand manager system is also more flexible and makes it easier to adjust various aspects of the advertising and promotional program, such as creative platforms and media and sales promotion schedules. 5 There are some drawbacks to the decentralized approach. Brand managers often lack training and experience. The promotional strategy for a brand may be developed by a brand manager who does not really understand what advertising or sales promotion can and cannot do and how each should be used. Brand managers may focus too much on short-run planning and administrative tasks, neglecting the development of long-term programs.

Another problem is that individual brand managers often end up competing for management attention, marketing dollars, and other resources, which can lead to EXHIBIT 3–3 P&G’s broad portfolio of brands are assigned to various categories for management 74 Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION unproductive rivalries and potential misallocation of funds. The manager’s persuasiveness may become a bigger factor in determining budgets than the long-run profit potential of the brands. These types of problems were key factors in Procter & Gamble’s decision to switch to a category management system.

Finally, the brand management system has been criticized for failing to provide brand managers with authority over the functions needed to implement and control the plans they develop. 6 Some companies have dealt with this problem by expanding the roles and responsibilities of the advertising and sales promotion managers and their staff of specialists. The staff specialists counsel the individual brand managers, and advertising or sales promotion decision making involves the advertising and/or sales promotion manager, the brand manager, and the marketing director.

For example, General Motors, which is the largest advertiser in the United States, decided to drop its brand management system and give division marketing directors more control of the advertising and promotion for its various models. 7 The traditional brand management system has come under attack recently as critics argue that brand managers spend too much time on internal issues such as planning and budgeting and do not devote enough effort to external matters or to creativity and problem solving. 8 It has also been argued that this system is becoming increasingly outdated in the apidly changing world of digital media as is discussed in IMC Technology Perspective 3–1. LO 03-2 CHAPTER 3 In-House Agencies Some companies, in an effort to reduce costs and maintain greater control over agency activities, have set up their own advertising agencies internally. An in-house agency is an advertising agency that is set up, owned, and operated by the advertiser. Some in-house agencies are little more than advertising departments, but in other companies they are given a separate identity and are responsible for the expenditure of large sums of advertising dollars.

Large advertisers that use in-house agencies include Hyundai, Avon, Revlon, and Benetton. Many companies use in-house agencies exclusively; others combine in-house efforts with those of outside agencies. For example, retail giant Target has an internal creative department that handles the design of its weekly circulars, direct-mail pieces, in-store displays, promotions, and other marketing materials. However, the retailer uses outside agencies to develop most of its branding and image-oriented ads and for specific TV and print assignments.

Other retailers such as Benetton and Banana Republic also have in-house advertising departments that work with outside agencies. A major reason for using an in-house agency is to reduce advertising and promotion costs. Companies with very large advertising budgets pay a substantial amount to outside agencies in the form of media commissions. With an internal structure, these commissions go to the in-house agency. An in-house agency can also provide related work such as production of collateral materials, digital media, package design, and public relations at a lower cost than outside agencies.

A study by M. Louise Ripley found that creative and media services were the most likely functions to be performed outside, while merchandising and sales promotion were the most likely to be performed in-house. 9 In house agencies are also preferred by some companies because they keep the marketing communications function more closely tied to top management. A study by Forrester Research found that nearly 60 percent of in-house agencies report directly to the company’s CEO or chief marketing officer (CMO). 10 Another reason is the stability an n-house agency provides because external agencies have much higher turnover levels which can take a toll on the client-agency relationship. In contrast, in-house agencies are known for retaining their personnel and have a turnover rate of less than 5 percent. 11 Saving money is not the only reason companies use in-house agencies. Time savings, bad experiences with outside agencies, and the increased knowledge and understanding of the market that come from working on advertising and promotion Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION 75 IMC Technology Perspective 3–1 > > >

How Technology Is Changing the Role of the Brand Manager The brand management concept originated at Procter & Gamble nearly 80 years ago. A young employee working on an advertising campaign for the company’s Camay soap brand became frustrated with having to compete against competing brands from Lever and Palmolive as well as P&G’s own flagship Ivory soap brand. He sent a memo to P&G management which argued that more focused attention should be paid to Camay, as well as to other P&G brands, and suggested that there should be an individual or team of people responsible for overseeing all aspects of marketing each product.

The idea was that each brand would be managed as if it were its own company which would result in more attention being given to it, particularly with respect to marketing. The brand management system was adopted by P&G and widely emulated in one form or another by companies throughout the world, particularly those with multiple brands competing in a product category. Marketers viewed brand management as a way to decentralize their decision making and give more autonomy to front line managers while still maintaining some centralized control over all of the individual brands in their portfolio.

The brand management system has persisted and evolved throughout the 20th century and into the new millennium. For most of this time period brand managers have focused their efforts on areas such as planning, budgeting, target marketing, and looking for ways to differentiate the products they manage. They also have worked closely with the agencies that handle the advertising, promotion, and other elements of their IMC programs.

However, some critics are arguing that the traditional brand management system is becoming increasingly out-of-date in today’s world of digital media where brand meaning and identity is increasingly being determined by consumers rather than marketers. In late 2009 Forrester Research, a leading technology and market research company, released a major report titled “Adaptive Brand Marketing: Rethinking Your Approach to Branding in the Digital Age” which notes that today’s brand marketing organizations are ill equipped to handle the complex world of media fragmentation and “always on” marketing in the digital age.

Forrester suggest that to remain relevant, marketing leaders need to embrace what they term adaptive brand marketing which they describe as a more consumer-centric approach that encourages rapid response to align consumer and brand needs. The Forester report also calls for changes in the brand management system. The authors suggest that brand managers be renamed brand “advocates” and recommend restructuring their role to better accommodate the real-time digital world.

They also advocate the elimination of the formal annual budgeting process which generally includes an upfront allocation of funds for specific media, in favor of more frequently updated and spontaneous plans that can be adapted as conditions change. Forrester also recommends that market research and analytics, which they call “consumer intelligence” be given a more prominent and central role and that brand advocates should shift their emphasis from long-term external partnerships with advertising agencies to alliances with media and other content creators that can shift more rapidly.

Some of the major marketers that utilize the brand management system argue that they are already doing much of what is recommended in the Forrester report. For example, P&G recently began organizing its beauty business along gender lines rather than product category groupings and plans to organize other divisions around different customer cohorts as well. The company’s global brand-building officer points to multibrand programs such My Black Is Beautiful for African American women and BeingGirl for teenage girls as examples of how P&G is marketing to consumer groups rather than individual brand consumers.

One of the changes that P&G is making in their brand-building strategies is a greater reliance on digital media such as social networking systems. Marc Pritchard, P&G’s global marketing officer, notes that “Our media strategy is pretty simple: follow the consumer. And the consumer is becoming more and more engaged in the digital world. ” P&G has set an explicit goal of assuring that each of its brands has a meaningful presence on Facebook by the end of 2010.

The company also views Twitter as a great broadcast medium for one-to many communications that can deliver short bursts of timely information and be a valuable listening tool that can be used to engage with consumers when they have a question. for the product or service day by day are also reasons. Companies can also maintain tighter control over the process and more easily coordinate promotions with the firm’s overall marketing program. Some companies with global brands prefer an in-house shop so they can have a consistent brand image worldwide and reduce the number of marketing partners with which they work.

For example, Dell has been working with the London-based WPP holding company to develop an agency dedicated exclusively to serving the company’s marketing communications needs around the globe. The computer company had more than 800 agencies and marketing partners worldwide and wanted to consolidate all of its advertising and marketing communications efforts. 12 A company may also use an in-house agency because they believe it can do a better job than 76 Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION P&G isn’t the only company that is changing its perspective on brand-building and spending more money on digital media.

Unilever, which is another consumer packaged goods giant, is also making changes. The company’s CEO compares his global brand directors more to orchestra conductors than traditional managers and notes that they are more open to different types of partnerships, including those with the consumers who use the firm’s products. For example, Unilever has used consumer-generated content where consumers have been invited to develop communications for products such as its Omo laundry detergents and Vaseline to complement those developed by the company and its advertising agencies.

Kraft Foods has also increased its use of digital media by revamping its consumer Web site as well as its Food & Family online magazine, and targeting consumers looking for immediate cooking inspiration with e-mail newsletters. Kraft also has developed a popular app for the iPhone called iFood Assistant that has a dedicated Web site and provides consumers with simple recipes and food ideas, how-to videos and even built in shopping lists. Branding experts have noted that the traditional brand management system must change in order for managers to keep abreast of the rapidly changing world of digital media.

For example, Tom Hinkes, a principal at brand consultancy company OutBranding, argues that brand managers spend too much time on internally focused skill sets such as setting and revising budgets as well as trying to improve profit margins by cutting costs. He argues that this often results in “numbers” managers who chose to compete on short-term tactics such as price and promotions rather than coming up with new or compelling things to say about their brands and ways to promote them.

Lisa Braner, the principal author of the Forester report on adaptive brand marketing, notes that much of brand managers’ time is subsumed by internal management issues and much of the creative process and planning is outsourced to agencies and other parties. She argues that “brand advocates really need to be in charge of the heart and soul of what the brand stands for. ” For many marketers, this means that they need to begin making changes in their brand management systems to prepare for the challenges their managers will face in the rapidly changing world of digital media.

Sources: Tom Hinkes, “Our Biggest Brands Can No Longer Be Managed by Nerds,’ Advertising Age, March 17, 2010, http//adage. com/print? article_ id=142841; Emily Bryson York, “Behind Kraft’s Marketing Makeover: From CHAPTER 3 New Ad Agencies to New Attitude,” Advertising Age, February 8, 2010, http//adage. com/print? article_id=141943; Jack Neff, “P&G Embraces Facebook as Big Part of Its Marketing Plan,” Advertising Age, January 25, 2010, http//adage. com/print? article_id=141733; Jack Neff, “Why It’s Time to Do Away with the Brand Manager,” Advertising Age, October 12, 2009, http// adage. com/print? article_id=139593. n outside agency. They may feel they have more knowledge about the market and competitors as well as a better understanding of the intricacies and complexities of their business. Some companies use an in-house agency simply because they believe it can do a better job than an outside agency could. 13 For example, Google launched an in-house agency in 2007 to handle its advertising. The company did very little advertising during its first 10 years in business because it relied primarily on the extensive publicity the company received and promotions done by other companies that would mention its search engine.

However, as Google introduced more products and services, the company recognized the need to promote them to a broader audience and feels this can be done effectively using its own internal capabilities. 14 Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION 77 FIGURE 3–4 Comparison of Advertising Organization Systems Organizational System Centralized Advantages ¦ ¦ ¦ ¦ Disadvantages ¦ Facilitated communications Fewer personnel required Continuity in staff Allows for more top-management involvement Concentrated managerial attention Rapid response to problems and opportunities Increased flexibility ¦ ¦

Less involvement with and understanding of overall marketing goals Longer response time Inability to handle multiple product lines Ineffective decision making Internal conflicts Misallocation of funds Lack of authority Internal rather than external focus Less experience Less objectivity Less flexibility Less access to top creative talent Decentralized ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ In-house agencies ¦ ¦ ¦ ¦ ¦ Cost savings More control Increased coordination Stability Access to top management ¦ ¦ ¦ ¦ Opponents of in-house agencies say they can give the advertiser neither the experience and objectivity of an outside agency nor the range of services.

They argue that outside agencies have more highly skilled specialists and attract the best creative talent and that using an external firm gives a company a more varied perspective on its advertising problems and greater flexibility. Outside agencies also can provide greater strategic planning capabilities, outside perspectives on customers, and more creative experience with certain media such as television. 15 In-house personnel may become narrow or grow stale while working on the same product line, but outside agencies may have different people with a variety of backgrounds and ideas working on the account.

Flexibility is greater because an outside agency can be dismissed if the company is not satisfied, whereas changes in an in-house agency could be slower and more disruptive. The cost savings of an in-house agency must be evaluated against these considerations. For many companies, high-quality advertising is critical to their marketing success and should be the major criterion in determining whether to use in-house services. Companies like Rockport and Redken Laboratories have moved their inhouse work to outside agencies in recent years.

Redken cited the need for a “fresh look” and objectivity as the reasons, noting that management gets too close to the product to come up with different creative ideas. Companies often hire outside agencies as they grow and their advertising budgets and needs increase. For example, Best Buy, the largest electronics retailer in the United States, handled all of its advertising through its in-house agency, Best Buy Advertising, for nearly 20 years. However, in 2007 the company hired an outside agency to handle its advertising.

The in-house shop was retained to work on the retailer’s newspaper inserts, Hispanic, direct and local marketing, as well as local store openings and advertising for some of the company’s private-label brands. Best Buy management felt that an outside agency was needed to help achieve its aggressive growth goals and better position the company as a trusted retailer in the complex and competitive technology marketplace. 16 Best Buy now uses the Crispin Porter 1 Bogusky agency to handle its brand-related advertising work as well as ads focusing on its Geek Squad customer-support unit. 7 The ultimate decision as to which type of advertising organization to use depends on which arrangement works best for the company. The advantages and disadvantages of the three systems are summarized in Figure 3–4. We now turn our attention to the functions of outside agencies and their roles in the promotional process. 78 Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION FIGURE 3–5 Top 25 Agencies Ranked by U. S. Advertising Revenue, 2009 Rank Agency Headquarters U. S. Revenue ($ millions) $450 436 325 286 267 250 210 198 185 180 175 170 168 165 165 161 160 142 138 134 115 112 105 99 94 CHAPTER 3 2 3 4 5 6 7 8 9 10 11 12 13 14 14 16 17 18 19 20 21 22 23 24 25 McCann Erickson Worldwide (Interpublic ) BBDO Worldwide (Omnicom) JWT (WPP) Y&R (WPP) Leo Burnett Worldwide (Publicis) DDB Worldwide (Omnicom) Saatchi & Saatchi (Publicis) DraftFCB (Interpublic) Euro RSCG Worldwide (Havas) Grey (WPP) Ogilvy & Mather Worldwide (WPP) Richards Group TBWA Worldwide (Omnicom) Deutsch (Interpublic) Publicis (Publicis) Campbell Ewald (Interpublic) Hill Holiday (Interpublic) Doner Crispin Porter Bogusky (MDC Partners)

New York New York New York New York Chicago New York New York Chicago/New York New York New York New York Dallas New York New York New York/Paris Warren, MI Boston Southfield, MI Miami/Boulder Ft. Lauderdale, FL Portland, OR Richmond, VA San Francisco Santa Monica, CA Chicago Zimmerman Advertising (Omnicom) Wieden & Kennedy Martin Agency (Interpublic) Goodby, Silverstein & Partners (Omnicom) RPA Cramer-Krasselt Source: Advertising Age, Agency Report, April 26, 2010, p. 26. ADVERTISING AGENCIES LO 03-3

Many major companies use an advertising agency to assist them in developing, preparing, and executing their promotional programs. An ad agency is a service organization that specializes in planning and executing advertising programs for its clients. More than 15,000 U. S. and international agencies are listed in the Standard Directory of Advertising Agencies (the “Red Book”); however, most are individually owned small businesses employing fewer than five people. The U. S. ad agency business is highly concentrated. Nearly two-thirds of the domestic billings (the amount of client money gencies spend on media purchases and other equivalent activities) are handled by the top 500 agencies. In fact, just 10 U. S. agencies handle nearly 30 percent of the total volume of business done by the top 500 agencies in the United States. The top agencies also have foreign operations that generate substantial billings and income. The top 25 agencies, ranked by their U. S. gross incomes, are listed in Figure 3–5. The table shows that the advertising business is also geographically concentrated, with 13 Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION 79

EXHIBIT 3–4 New York City is the center of the advertising industry in the United States of the top 25 agencies headquartered in New York City. Nearly 40 percent of U. S. agency business is handled by New York–based agencies. Other leading advertising centers in the United States include Boston, Chicago, Los Angeles, the Detroit area, Dallas, and Minneapolis. New York City is clearly the center of the advertising industry in the United States as nearly half of the top 100 agencies are headquartered in the city or the surrounding area (Exhibit 3–4).

In addition to advertising agencies, nine of the top 10 media specialist companies are based in the Big Apple as are many of the direct marketing, digital, promotion, and marketing services agencies. 18 There are several reasons why New York City is the hub of the IMC business in the United States. Many of the major companies with large advertising and promotion budgets are based in the city or the surrounding area. In 2010, 45 of the companies ranked in the Fortune 500 were headquartered in New York City while another 40 or so of the top firms were located nearby in suburbs or in cities in Connecticut or New Jersey.

New York is also the world’s leading media center as nearly all of the major television and radio networks are based in the city as well as many magazine and news organizations. 19 During the late 1980s and into the 90s, the advertising industry underwent major changes as large agencies merged with or acquired other agencies and support organizations to form large advertising organizations, or superagencies. These superagencies were formed so that agencies could provide clients with integrated marketing communications services worldwide. Some advertisers became disenchanted with the uperagencies and moved to smaller agencies that were flexible and more responsive. 20 However, during the mid-90s the agency business went through another wave of consolidation as a number of medium-size agencies were acquired and became part of large advertising organizations such as Omnicom Group, WPP Group, and the Interpublic Group of Cos. Many of the mid-size agencies were acquired by or forged alliances with larger agencies because their clients wanted an agency with international communications capabilities and their alignment with larger organizations gave them access to a network of agencies around the world.

The consolidation of the agency business continued into the new millennium as large agencies such as Fallon Worldwide, Leo Burnett, Saatchi & Saatchi, and Kaplan Thaler were acquired by the giant French holding company Publicis Groupe. In 2009, the top four holding companies—WPP, Omnicom Group, Interpublic Group, and Publicis Groupe accounted for nearly half of U. S. agency revenue. Exhibit 3–5 shows the primary holdings of the top four agency holding companies. With the move toward IMC, agencies are now getting much of their revenue from more than just traditional advertising services which now account for just a third of the revenue for U.

S. agencies. In 2009 agencies revenue came from other areas such as media buying (15 percent), public relations (11 percent), digital (14 percent), direct marketing (17 percent) and promotion (9 percent). 21 Many of the advertising organizations and major agencies have been acquiring companies specializing in areas such as interactive communications, public relations, direct marketing, and sales promotion so that they can offer their clients an ever-broader range of integrated marketing communication services. The Ad Agency’s Role

The functions performed by advertising agencies might be conducted by the clients themselves through one of the designs discussed earlier in this chapter, but most large companies use outside firms. This section discusses some reasons advertisers use external agencies. 80 Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION CHAPTER 3 EXHIBIT 3–5 Primary holdings of the world’s top four agency holding companies by 2009 worldwide revenue EXHIBIT 3–6 Communications specializes in creating ads for high-tech companies

Reasons for Using an Agency Probably the main reason outside agencies are used is that they provide the client with the services of highly skilled individuals who are specialists in their chosen fields. An advertising agency staff may include artists, writers, media analysts, researchers, and others with specific skills, knowledge, and experience who can help market the client’s products or services. Many agencies specialize in a particular type of business and use their knowledge of the industry to assist their clients.

For example, Mentus Inc. is an agency that specializes in integrated marketing communications for the high-technology, e-commerce, and bioscience industries (Exhibit 3–6). An outside agency can also provide an objective viewpoint of the market and its business that is not subject to internal company policies, biases, or other limitations. The agency can draw on the broad range of experience it has gained while working on a diverse set of marketing problems for various clients.

For example, an ad agency that is handling a travel-related account may have individuals who have worked with airlines, cruise ship companies, travel agencies, hotels, and other travel-related industries. The agency may have experience in this area or may even have previously worked on the advertising account of one of the client’s competitors. Thus, the agency can provide the client with insight into the industry (and, in some cases, the competition). Types of Ad Agencies

Since ad agencies can range in size from a one—or two-person operation to large organizations with over 1,000 employees, the services offered and functions performed Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION 81 President Chief Operations Officer/ Chief Financial Officer Director, Client Service Director, Planning, Research Creative Services Director Interactive/ Digital Creative Director Production Director Specialized Services Director Media Director Management and Finance Directors Account Director(s) Account Planner(s) Art Director(s) Interactive Producer Print Production Manager

Direct Marketing Media Planner(s) Accountant(s) Account Supervisor(s) Market Research Copywriter(s) Interactive Developer(s) Broadcast Production Manager Sales Promotion Media Buyer(s) Financial Manager Account Executive(s) Graphic Designer(s) Interactive Graphic Designer(s) Traffic Manager Public Relations Office Manager Studio Artist(s) Events and Support Service Human Resources FIGURE 3–6 Full-Service Agency Organizational Chart will vary. This section examines the different types of agencies, the services they perform for their clients, and how they are organized.

Full-Service Agencies Many companies employ what is known as a full-service agency, which offers its clients a full range of marketing, communications, and promotions services, including planning, creating, and producing the advertising; performing research; and selecting media. A full-service agency may also offer nonadvertising services such as strategic market planning; sales promotions, direct marketing, and interactive capabilities; package design; and public relations and publicity.

The full-service agency is made up of departments that provide the activities needed to perform the various advertising functions and serve the client, as shown in Figure 3–6. Account Services Account services, or account management, is the link between the ad agency and its clients. Depending on the size of the client and its advertising budget, one or more account executives serve as liaison. The account executive is responsible for understanding the advertiser’s marketing and promotions needs and interpreting them to agency personnel. He or she coordinates agency efforts in planning, creating, and producing ads.

The account executive also presents agency recommendations and obtains client approval. As the focal point of agency-client relationships, the account executive must know a great deal about the client’s business and be able to communicate this to specialists in the agency working on the account. 22 The ideal account executive has a strong marketing background as well as a thorough understanding of all phases of the advertising process. IMC Perspective 3–2 discusses how some agencies are cutting back on their account services departments and how the role of account executives is changing. 2 Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION Marketing Services Over the past two decades, use of marketing services has increased dramatically. One service gaining increased attention is research, as agencies realize that to communicate effectively with their clients’ customers, they must have a good understanding of the target audience. As shown in Chapter 1, the advertising planning process begins with a thorough situation analysis, which is based on research and information about the target audience.

Most full-service agencies maintain a research department whose function is to gather, analyze, and interpret information that will be useful in developing advertising for their clients. This can be done through primary research—where a study is designed, executed, and interpreted by the research department—or through the use of secondary (previously published) sources of information. Sometimes the research department acquires studies conducted by independent syndicated research firms or consultants. The research staff then interprets these reports and passes on the information to other agency personnel working on that account.

The research department may also design and conduct research to pretest the effectiveness of advertising the agency is considering. For example, copy testing is often conducted to determine how messages developed by the creative specialists are likely to be interpreted by the receiving audience. In many large agencies, the marketing services department may include account planners who are individuals that gather information that is relevant to the client’s product or service and can be used in the development of the creative strategy as well as other aspects of the IMC campaign.

Account planners work with the client as well as other agency personnel including the account executives, creative team members, media specialists, and research department personnel to collect information that can be helpful in gaining a better understanding of the client’s target audience and the best ways to communicate with them. They gather and organize information about consumers as well as developments in the marketplace that can be used to prepare the creative brief, which is a document that the agency’s creative department uses to guide the development of advertising ideas and concepts. Account lanners may also be involved in assessing consumers’ reactions to the advertising and other elements of the IMC program and providing the creative staff as well as other agency personnel with feedback regarding performance. Account planning has become a very important function in many agencies because it provides the creative team, as well as other agency personnel, with more insight into consumers and how to use advertising and other IMC tools to communicate with them. 23 However, the account planning function has also become more demanding as the number of marketing communication channels and ways of contacting consumers increases.

Account planners increasingly find themselves interacting with individuals from a variety of marketing communication disciplines and have to keep up with developments that are occurring in all of these areas. John Thorpe, the director of brand strategy for the Good Silverstein & Partners, an agency which is known for its account planning, notes: “No longer can planners just be good at strategy. It’s a cross-silo activity. They have to be good at a lot of things that run across advertising. Ambidexterity is required across the house. 24 The media department of an agency analyzes, selects, and contracts for space or time in the media that will be used to deliver the client’s advertising message. The media department is expected to develop a media plan that will reach the target market and effectively communicate the message. Since most of the client’s ad budget is spent on media time and/or space, this department must develop a plan that both communicates with the right audience and is cost-effective. Media specialists must know what audiences the media reach, their rates, and how well they match the client’s target market.

The media planning department reviews information on demographics, magazine and newspaper readership, radio listenership, and consumers’ Internet and TV viewing patterns to develop an effective media plan. The media buyer implements the media plan by purchasing the actual time and space. CHAPTER 3 Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION 83 IMC Perspective 3–1 > > > The Changing Role of Account Reps Traditionally, a very important position in advertising agencies has been that of an account representative or “account rep” as they are commonly referred to in the ad business.

Account reps are the liaison between the agency and client and are responsible for formulating the advertising plan, coordinating the agency’s services, and representing the client’s point of view to others on the agency side such as the creative team. College graduates with undergraduate and graduate degrees in marketing, advertising, and other disciplines are often hired for account executive positions and go on to have careers in account management. However, with the revolutionary changes sweeping the advertising business, the role of account reps is changing dramatically and they are struggling to remain relevant.

Cost cutting by marketers has thinned the once-bloated ranks of account management personnel in agencies by as much as 30 percent over the past five years. Moreover for those who remain, the expectations and demands of the position are changing. For many years, advertising agencies touted their extensive account-services departments and used them to build strong relationships with their clients that lasted for many years. However, as the number of account reps assigned to their business increased, clients began expressing concern over the costs associated with them and the value they provided.

In fact, many years ago legendary ad man David Ogilvy questioned why account executives so often outnumbered creatives noting: “If you were a farmer, would you employ twice as many milkers as you had cows? ” One of the reasons for the increase in the number of milkers was that many agencies hired additional account executives over the years as a way to justify the fees they were being paid by their clients. Many agencies were compensated based on commissions from the gross media and production spending by their clients and as media costs increased, so did the amount of money they received.

However, over the past 10 years there has been a dramatic shift away from commissions to fee-based compensation and clients now want to know exactly what they are paying for and the services they are receiving from their agencies. In addition to cutting back on the number of account executives, agencies are also changing what they are looking for in those individuals who work in their most client-facing function. Agencies want account executives that are good strategic thinkers and have broad-based business acumen, not just expertise in advertising.

And as other integrated marketing communication tools such as direct, digital, and interactive media become more central, they want them to have an understanding of, and be able to coordinate activities and relationships in, these areas. One agency CEO suggests that the models that best capture the qualities of star account persons are those of entrepreneurs as they often help people see the value of a new product that has not yet been created, they raise funds, create the economic model, and must establish partnerships.

He notes that “When you start to think of account people as entrepreneurs, it introduces a new level of potential into the role. They are no longer viewed The media department is becoming an increasingly important part of the agency business. An agency’s ability to negotiate prices and effectively use the vast array of media vehicles, as well as other sources of customer contact, is becoming as important as its ability to create ads. Some of the major agencies and/or their holding companies have formed independent media services companies to better serve their clients.

For example, Starcom MediaVest Group is a subsidiary of the Publicis Groupe and has a network of over 100 offices in 67 countries, while McCann-Erickson Worldwide formed Universal McCann, which is now one of the primary media specialist agencies for the Interpublic Group. Other large media specialist companies include MindShare, which is owned by the WPP Group, and OMD Worldwide, which is owned by the Omnicom Group. These media specialist firms serve the media needs of the agencies that are part of their parent holding companies but may also offer media services to other clients as well.

The research and media departments perform most of the functions that fullservice agencies need to plan and execute their clients’ advertising programs. Some agencies offer additional marketing services to their clients to assist in other promotional areas. An agency may have a sales promotion department, or merchandising department, that specializes in developing contests, premiums, promotions, pointof-sale materials, and other sales materials. It may have direct-marketing specialists and package designers, as well as a PR/publicity department. Many agencies have developed interactive media departments to create web sites for their clients.

The growing popularity of integrated marketing communications has prompted many 84 Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION as suits dutifully carrying the ideas to meetings. They become catalysts for new thinking and innovation. ” While clients want account executives to be able to do more things and work across a variety of areas, finding individuals with these skills is becoming increasingly difficult. Agencies face competition for top talent from any number of higher-paying professions such as management consulting, investment banking, and financial services as well as from media companies.

The competition also includes account planning in their own agencies as well as media agencies that are expanding the communications planning services they offer to clients. Many agencies feel there are not enough properly trained candidates in the talent pool who have the skills needed, which include solving complex communication problems, communicating in a mature fashion, selling the agency and its capabilities, and knowing when to push back on a client.

To deal with this problem some agencies are developing client-services training programs for their account executives that are designed to educate them in a variety of areas including basic agency business issues, strategic marketing, the procurement process, and relationship building. Account executives, like the marketing executives on the client side with whom they often work closely, also face the challenge of communicating with the creative types in advertising agencies.

There is often a disconnect between the more systematic and analytical left-brain thinking of account representatives and brand managers, who often have business degrees, versus the right-brain thinking of creative types who may have degrees in design or liberal arts. Some agencies and clients are working together to address this problem by developing communication and indoctrination programs that provide agency personnel with an overview of their clients’ business objectives and marketing strategy as well as their financial situation.

This allows them to understand the limits within which creative solutions have to be developed. It is unlikely that the account representative position will go away as they still play an important role in managing the relationships between agencies and their clients. However, the days of the old-school account executive in the gray wool suit are long gone as agencies look for more from those who work most closely with their clients. Sources: Dale Buss, “Bridging the Great Divide in Marketing Thinking,” Advertising Age, adage. om, March 26, 2007; Matthew Creamer, “The Demise of the Suit,” Advertising Age, March 13, 2006, pp. 1, 41; Phil Johnson, “A Vision for the Future of Account Management,” Advertising Age, March 24, 2010, http://adage. com/print? article_id=142947. CHAPTER 3 full-function agencies to develop capabilities and offer services in these other promotional areas. Traditional advertising agencies are recognizing that they must develop integrated marketing capabilities that extend beyond media advertising. Creative Services The creative services department is responsible for the creation and execution of advertisements.

The individuals who conceive the ideas for the ads and write the headlines, subheads, and body copy (the words constituting the message) are known as copywriters. They may also be involved in determining the basic appeal or theme of the ad campaign and often prepare a rough initial visual layout of the print ad or television commercial. While copywriters are responsible for what the message says, the art department is responsible for how the ad looks. For print ads, the art director and graphic designers prepare layouts, which are drawings that show what the ad will look like and from which the final artwork will be produced.

For TV commercials, the layout is known as a storyboard, a sequence of frames or panels that depict the commercial in still form. Members of the creative department work together to develop ads that will communicate the key points determined to be the basis of the creative strategy for the client’s product or service. Writers and artists generally work under the direction of the agency’s creative director, who oversees all the advertising produced by the organization. The director sets the creative philosophy of the department and may even become directly involved in creating ads for the agency’s largest clients.

Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION 85 Once the copy, layout, illustrations, and mechanical specifications have been completed and approved, the ad is turned over to the production department. Most agencies do not actually produce finished ads; they hire printers, engravers, photographers, typographers, and other suppliers to complete the finished product. For broadcast production, the approved storyboard must be turned into a finished commercial. The production department may supervise the casting of people to appear in the ad and the setting for the scenes as well as choose an independent production studio.

The department may hire an outside director to turn the creative concept into a commercial. For example, Nike has used film directors such as David Fincher and Spike Lee to direct some of its commercials; BMW has used well-known film directors such as Guy Ritchie, Ang Lee, and Tony Scott to direct some of its commercials and Webisodes. Copywriters, art directors, account managers, people from research and planning, and representatives from the client side may all participate in production decisions, particularly when large sums of money are involved. Creating an advertisement often involves many people and takes several months.

In large agencies with many clients, coordinating the creative and production processes can be a major problem. A traffic department coordinates all phases of production to see that the ads are completed on time and that all deadlines for submitting the ads to the media are met. The traffic department may be located in the creative services area of the agency, or be part of media or account management, or be separate. Management and Finance Like any other business, an advertising agency must be managed and perform basic operating and administrative functions such as accounting, finance, and human resources.

It must also attempt to generate new business. Large agencies employ administrative, managerial, and clerical people to perform these functions. The bulk of an agency’s income (approximately 64 percent) goes to salary and benefits for its employees. Thus, an agency must manage its personnel carefully and get maximum productivity from them. Agency Organization and Structure Full-function advertising agencies must develop an organizational structure that will meet their clients’ needs and serve their own internal requirements. Most medium-size and large agencies are structured under either a departmental or group system. Under the departmental system, each of the agency functions shown in Figure 3–6 is set up as a separate department and is called on as needed to perform its specialty and serve all of the agency’s clients. Ad layout, writing, and production are done by the creative department; marketing services is responsible for any research or media selection and purchases; and the account services department handles client contact. Some agencies prefer the departmental system because it gives employees the opportunity to develop expertise in servicing a variety of accounts.

Many large agencies use the group system, in which individuals from each department work together in groups to service particular accounts. Each group is headed by an account executive or supervisor and has one or more media people, including media planners and buyers; a creative team, which includes copywriters, art directors, artists, and production personnel; and one or more account executives. The group may also include individuals from other departments such as marketing research, direct marketing, or sales promotion.

The size and composition of the group vary depending on the client’s billings and the importance of the account to the agency. For very important accounts, the group members may be assigned exclusively to one client. In some agencies, they may serve a number of smaller clients. Many agencies prefer the group system because employees become very knowledgeable about the client’s business and there is continuity in servicing the account. Other Types of Agencies and Services LO 03-3 Not every agency is a large full-service agency. Many smaller agencies expect their employees to handle a variety of jobs.

For example, account executives may do their own research, work out their own media schedule, and coordinate the production 86 Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION of ads written and designed by the creative department. Many advertisers, including some large companies, are not interested in paying for the services of a full-service agency but are interested in some of the specific services agencies have to offer. Over the past few decades, several alternatives to full-service agencies have evolved, including creative boutiques and media buying services.

Creative boutiques are small ad agencies that provide only creative services and have long been an important part of the advertising industry. These specialized agencies have creative personnel such as writers and artists on staff but do not have media, research, or account planning capabilities. Creative boutiques have developed in response to some companies’ desires to use only the creative services of an outside agency while maintaining control of other marketing communication functions internally.

While most creative boutiques work directly for companies, fullservice agencies often subcontract work to them when they are very busy or want to avoid adding full-time employees to their payrolls. They are usually compensated on a project or hourly fee basis. Many creative boutiques have been formed by members of the creative departments of full-service agencies who leave the firm and take with them clients who want to retain their creative talents. An advantage of these smaller agencies is their ability to turn out inventive creative work quickly and without the cumbersome bureaucracy and politics of larger agencies.

Many companies also prefer working directly with a smaller creative boutique because they can get more attention and better access to creative talent than they would at a larger agency. An example of a successful creative boutique is New York–based Droga5 whose clients include Unilever’s Suave shampoo brand, Puma, Rhapsody, and household cleaning products company Method. This hot agency also created the popular viral campaign for Activision featuring Tillman, the skateboarding, snowboarding, and surfing Bulldog playing the Tony Hawk RIDE video game (Exhibit 3–7).

Creative boutiques will continue to be an important part of the advertising industry. However, they face challenges as many find themselves competing against larger agencies for business, particularly when there are cutbacks in advertising spending. Moreover, many clients want the range of services that large agencies provide as they are often looking for business-building ideas rather than just creative work. 25 CHAPTER 3 Creative Boutiques EXHIBIT 3–7 Droga5 is a very successful creative boutique

Media Specialist Companies Media specialist companies are companies that specialize in the buying of media, particularly radio and television time. The task of purchasing advertising media has grown more complex as specialized media proliferate, so media buying services have found a niche by specializing in the analysis and purchase of advertising time and space. Agencies and clients usually develop their own media strategies and hire the buying service to execute them. Some media buying services do help advertisers plan their media strategies.

Because media buying services purchase such large amounts of time and space, they receive large discounts and can save the small agency or client money on media purchases. Media buying services are paid a fee or commission for their work. Media buying services have been experiencing strong growth in recent years as clients seek alternatives to full-service agency relationships. Many companies have been unbundling agency services and consolidating media buying to get more clout from their advertising budgets.

Nike, Revlon, and Hyundai/Kia are among those that have switched some or all of their media buying from full-service agencies to independent media buyers. As noted earlier, many of the major agencies have formed independent media services companies that handle the media planning and buying for their clients and also offer their services separately to companies interested in a more specialized or consolidated approach to media planning, research, and/or Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION 87 EXHIBIT 3–8 Initiative is one of the leading media specialist companies buying.

A number of large advertisers have consolidated their media buying with these large media specialist companies to save money and improve media efficiency. For example, MillerCoors consolidated its $400 million U. S. media planning and buying with Initiative which is part of the Interpublic Group while Mars-Wrigley moved its $500 million media budget to Starcom MediaVest. 26 A number of companies such as PepsiCo and Campbell Soup Co. also use media specialist companies to handle all of their global media buying which helps them achieve economies of scale and more uniform media strategies and implementation across various countries.

The rise of the independent media buying services, operating outside the structure of the traditional ad agency media department, and the divestment of these departments from the agency system are two of the most significant developments that have occurred in the advertising industry in recent years. A recent study conducted for the Association of National Advertisers found a small percentage of companies still use a “general” ad agency to handle their media planning and buying as the vast majority use a media agency specialist to handle these functions.

These media specialists are often part of the same agency holding company as the primary agency that handles their creative work, particularly for large advertisers. However, about a third of the time the media specialist agency is not related to the primary agency. 27 Exhibit 3–8 shows how Initiative, which is one of the largest media specialist companies, promotes its services. AGENCY COMPENSATION LO 03-4 As you have seen, the type and amount of services an agency performs vary from one client to another. As a result, agencies use a variety of methods to get paid for their services.

Agencies are typically compensated in three ways: commissions, some type of fee arrangement, or percentage charges. Commissions from Media The traditional method of compensating agencies is through a commission system, where the agency receives a specified commission (usually 15 percent) from the media on any advertising time or space it purchases for its client. (For outdoor advertising, the commission is 162/3 percent. ) This system provides a simple method of determining payments, as shown in the following example. 88 Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION

FIGURE 3–7 Example of Commission System Payment Media Bills Agency Costs for magazine space Less 15% commission Cost of media space Less 2% cash discount Agency pays media $100,000 –15,000 85,000 –1,700 $ 83,300 Agency Bills Advertiser Costs for magazine space Less 2% cash discount Advertiser pays agency $100,000 –1,700 $ 98,300 CHAPTER 3 Agency income $ 15,000 Assume an agency prepares a full-page magazine ad and arranges to place the ad on the back cover of a magazine at a cost of $100,000. The agency places the order for the space and delivers the ad to the magazine.

Once the ad is run, the magazine will bill the agency for $100,000, less the 15 percent ($15,000) commission. The media will also offer a 2 percent cash discount for early payment, which the agency may pass along to the client. The agency will bill the client $100,000 less the 2 percent cash discount on the net amount, or a total of $98,300, as shown in Figure 3–7. The $15,000 commission represents the agency’s compensation for its services. While the commission system was the primary agency compensation method for many years, it has always been controversial.

Critics of the commission system have long argued that it encourages agencies to recommend high-priced media to their clients to increase their commission level. The system has also been criticized on the grounds that it ties agency compensation to media costs, which have been skyrocketing over the past decade. Still others charge that the system encourages agencies to recommend mass-media advertising and avoid noncommissionable IMC tools such as direct mail, sales promotion, public relations, or event sponsorships, unless they are requested by the clients.

Defenders of the commission system argue that it is easy to administer and keeps the emphasis in agency compensation on nonprice factors such as the quality of the advertising developed for clients. Proponents of the system argue that agency services are proportional to the size of the commission, since more time and effort are devoted to the large accounts that generate high revenue for the agency. They also note that the system is more flexible than it appears as agencies often perform other services for large clients at no extra charge as a way of justifying the large commission they receive.

Companies began moving away from the commission system during the 1990s, and most companies no longer use it as the basis for compensating their agencies. The most recent study of agency compensation conducted by the Association of National Advertisers (ANA) found that only 16 percent of major advertisers still paid commissions to their agencies, down from 21 percent in 2000. 28 Among those companies that do pay commissions, most do not pay the traditional 15 percent.

Many advertisers have gone to a negotiated commission system whereby the commissions average from 8 to 10 percent or are based on a sliding scale that becomes lower as the clients’ media expenditures increase. Agencies are also relying less on media commissions for their income as their clients expand their IMC programs to include other forms of promotion and cut back on mass-media advertising. The amount of agency income coming from media commissions is declining as many companies are now using other methods of agency compensation such as fees and performance-based incentives.

Appraisal of the Commission System Fee, Cost, and Incentive-Based Systems Since many believe the commission system is not equitable to all parties, many agencies and their clients have developed some type of fee arrangement or cost-plus agreement for agency compensation. Some are using incentive-based compensation, which is a combination of a commission and a fee system. Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION 89 FIGURE 3–8 Fee Arrangement There are two basic types of fee arrangement systems. In the straight or fixed-fee method, the agency charges a basic monthly fee for all f its services and credits to the client any media commissions earned. Agency and client agree on the specific work to be done and the amount the agency will be paid for it. Sometimes agencies are compensated through a fee-commission combination, in which the media commissions received by the agency are credited against the fee. If the commissions are less than the agreed-on fee, the client must make up the difference. If the agency does much work for the client in noncommissionable media, the fee may be charged over and above the commissions received.

Both types of fee arrangements require that the agency carefully assess its costs of serving the client for the specified period, or for the project, plus its desired profit margin. To avoid any later disagreement, a fee arrangement should specify exactly what services the agency is expected to perform for the client. Fee arrangements have become the primary type of agreement used by advertisers with their agencies, accounting for 66 percent of the compensation plans in the recent ANA survey.

Blended compensation plans that include fees and commissions were used by 14 percent of the companies surveyed. Performance Criteria Used for Incentive Plans Performance reviews Sales goals Brand/ad awareness Achieve project objectives Brand perceptions Copy test results Market share goals Profit goals Other criteria Basis for Incentives Agency performance Company performances Both agency and company 27% 13 53 82% 53 51 44 33 24 24 24 13 Source: Association of National Advertisers, Trends in Agency Compensation, 14th ed. , 2007.

Cost-Plus Agreement Under a cost-plus system, the client agrees to pay the agency a fee based on the costs of its work plus some agreed-on profit margin (often a percentage of total costs). This system requires that the agency keep detailed records of the costs it incurs in working on the client’s account. Direct costs (personnel time and out-of-pocket expenses) plus an allocation for overhead and a markup for profits determine the amount the agency bills the client. Fee agreements and cost-plus systems are commonly used in conjunction with a commission system.

The fee-based system can be advantageous to both the client and the agency, depending on the size of the client, advertising budget, media used, and services required. Many clients prefer fee or cost-plus systems because they receive a detailed breakdown of where and how their advertising and promotion dollars are being spent. However, these arrangements can be difficult for the agency, as they require careful cost accounting and may be difficult to estimate when bidding for an advertiser’s business. Agencies are also reluctant to let clients see their internal cost figures.

Incentive-Based Compensation Many clients are demanding more accountability from their agencies and tying agency compensation to performance through some type of incentive-based system. Recently a new variation of this system has emerged in the form of value-based compensation whereby agencies are compensated above their basic costs, if they achieve or exceed results as measured by agreed-upon metrics. 29 The costs are determined by the tasks that the agency is expected to perform, staffing required, and hourly rates.

While there are many variations, the basic idea is that the agency’s ultimate compensation level will depend on how well it meets predetermined performance goals. These goals often include objective measures such as sales or market share as well as more subjective measures such as evaluations of the quality of the agency’s creative work. Companies using incentive-based systems determine agency compensation through media commissions, fees, bonuses, or some combination of these methods.

The use of performance incentives varies by the size of the advertiser, with large advertisers the most likely to use them. Figure 3–8 shows the various performance criteria used along with the basis for the incentive. Recognizing the movement toward incentive-based systems, most agencies have agreed to tie their compensation to performance. Agency executives note that pay for performance works best when the agency has complete control over a campaign. 90 Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION

Thus, if a campaign fails to help sell a product or service, the agency is willing to assume complete responsibility and take a reduction in compensation. On the other hand, if sales increase, the agency can receive greater compensation for its work. CHAPTER 3 Percentage Charges Another way to compensate an agency is by adding a markup of percentage charges to various services the agency purchases from outside providers. These may include market research, artwork, printing, photography, and other services or materials.

Markups usually range from 17. 65 to 20 percent and are added to the client’s overall bill. Since suppliers of these services do not allow the agency a commission, percentage charges cover administrative costs while allowing a reasonable profit for the agency’s efforts. (A markup of 17. 65 percent of costs added to the initial cost would yield a 15 percent commission. For example, research costs of $100,000 3 17. 65% 5 $100,000 1 $17,650 5 $117,650. The $17,650 markup is about 15 percent of $117,650. )

The Future of Agency Compensation As you can see, there is no one method of agency compensation to which everyone subscribes. Companies have continued to make significant changes in their agency compensation plans over the past decade. One of the most significant findings from the ANA survey is the rapid rise in incentive-based compensation agreements as more than half of advertisers surveyed indicated that they are using some type of performance-based system versus 38 percent in 2004 and only 13 percent in the early 1990s.

Nearly 60 percent of those who use incentives feel that they result in improved agency performance and the overwhelming majority (82 percent) who use them plan to continue to do so. The ANA study concluded that the use of performance incentives as the basis for agency compensation continues to grow, and is generally gaining popularity across the board, regardless of advertiser type or size or type of agency service. 30 As more companies adopt IMC approaches, they are reducing their reliance on traditional media advertising, and this is leading to changes in the way they compensate their agencies.

For example, Procter & Gamble (P&G), which is the world’s largest advertiser, no longer uses the commission system to compensate its agencies. In 2000, P&G implemented a major change in its compensation structure by moving from a commission-based system to a sales-based incentive system. P&G made the change to encourage its agencies to focus less on expensive commissionable media such as television and magazines and to make use of other IMC tools such as direct mail, event marketing, public relations, and the Internet.

P&G has been very satisfied with its incentive-based compensation system and has extended it to media agencies and other marketing services providers. 31 In 2009 the Coca-Cola Company began using a “value-based” compensation model whereby agencies are guaranteed only recouped costs, with any profit coming only if certain agreed upon targets are met. The new model will encompass all of the company’s advertising and media agency relationships by 2011. Coke is also encouraging the advertising industry to adopt value-based models as a standard practice. 2 A number of other major advertisers, including Colgate-Palmolive, Unilever, General Motors, Nissan, and Ford, also use some form of incentive-based compensation system. General Motors made the change to encourage its agencies to look beyond traditional mass-media advertising and to develop more creative ways of reaching automobile customers. 33 The changes in agency compensation are also being driven by economic factors because most companies have cut their advertising and promotion budgets during the recession and are looking for ways to save money across all areas of their marketing programs.

A recent survey conducted by the ANA found that 72 percent of marketers plan to reduce their advertising production budgets, 68 percent plan to challenge agencies to reduce internal expenses and/or identify cost reduction, and 48 percent Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION 91 IMC Perspective 3–2 > > > Agencies Face Off with Procurement Specialists For many years Madison Avenue was a world unto itself.

Advertising agencies were compensated based on a 15 percent commission on the media purchases they made for their clients: every time an ad appeared on television, played on radio, or was placed in a magazine, the cash registers rang on Madison Avenue. Agencies were dominated by “creatives” who came up with big ideas that could be translated into TV, print, radio, or billboard ads that would be run through these mass media to be seen or heard by the millions of consumers comprising the mass markets.

During the late 90s, the ad industry prospered, in large part due to the advertising frenzy driven by the Internet bubble, and many agencies were still able to get many of their clients to agree to pay them based on a percentage of their media billings. However, during the first decade of the new millennium, many major advertisers have done away with commissions entirely. The vast majority of clients now compensate their agencies by paying fees based on the agency’s labor costs.

To make matters more complicated, some companies now have their procurement officers negotiate contracts with their advertising agencies rather than their marketing or advertising managers. Many agencies are finding the procurement people to be much more difficult to negotiate with on issues such as their allocation of labor costs, employee salaries, overhead, and reasonable profit. The agencies argue that procurement departments really do not understand the advertising business and the role they play in brand building. Some agencies have tried to take a stand against clients who view them as vendors rather than marketing partners.

However, other agencies are often willing to accept lower margins to gain new business, which has resulted in a loss of pricing power for many agencies. The intervention of procurement departments into the advertising process is also receiving a cold reception from many marketing executives who argue that the advertising process is different from sourcing raw materials for manufacturing. They note that creating ideas is different from creating widgets and also express concern over procurement executives and chief financial officers (CFOs) trying to take over the agency selection process.

They argue that too much emphasis is put on policing the financial aspects of the client-agency relationship and advertising, and agency fees are viewed as an expense rather than an investment. Many marketing executives and the majority of those on the agency side feel that it is difficult to judge the value of an agency’s work on the basis of the number of hours they log on a client’s account but recognize that this is becoming the new model under which they must operate.

There is also a shift in the balance of power occurring within agencies. The ad industry is no longer dominated by the creatives as the media buying has become a more important and powerful area. Many of the holding companies have plan to reduce agency compensation. 34 Most companies are also making their agencies more accountable for the fees they charge them for their services and many are now using procurement specialists to negotiate financial terms and contracts with their agencies.

IMC Perspective 3–2 discusses the changes that are occurring in the agency business and how they are impacting agency compensation. EVALUATING AGENCIES Given the substantial amounts of money being spent on advertising and promotion, demand for accountability of the expenditures has increased. Regular reviews of the agency’s performance are necessary. The agency evaluation process usually involves two types of assessments, one financial and operational and the other more qualitative. The financial audit focuses on how the agency conducts its business.

It is designed to verify costs and expenses, the number of personnel hours charged to an account, and payments to media and outside suppliers. The qualitative audit focuses on the agency’s efforts in planning, developing, and implementing the client’s advertising programs and considers the results achieved. The agency evaluation is often done on a subjective, informal basis, particularly in smaller companies where ad budgets are low or advertising is not seen as the most critical factor in the firm’s marketing performance.

However some companies have developed formal, systematic evaluation systems, particularly when budgets are large and the advertising function receives much emphasis. The top LO 03-4 92 Chapter 3 ORGANIZING FOR ADVERTISING AND PROMOTION spun off their media divisions into freestanding firms that handle only media buying. These large media-buying firms can use their size and clout to extract better media prices and cost savings for their clients. These media companies are also the major source of growth for their parent companies since clients have negotiated very thin margins in other areas.

The ascension of the media buyers into the powerful position in the advertising business is disrupting the old guard on Madison Avenue. The CEO of Carat North America, one of the largest media-buying companies, has stated, “We’re getting to the point where the media plan is done first, and the creative is done behind it. This is a radical vision for the advertising business that would have been unheard of five years ago. We used to be the dorks. Now we’re driving the whole advertising process. The media buyers are not immune, however, from the cost reduction pressures facing other areas of the agency business. For example, Levi Strauss & Co. held a $50 million contest for media planning and buying on its Levi’s and Dockers brands whereby it sought invoices from the competing agencies that could be used to determine what their other clients were paying for national television and print media. If provided, this information could be used by Levi Strauss as leverage to negotiate similar pricing deals from the networks and publishers.

Some agencies are starting to resist the pressure from the client’s procurement departments and are pushing back on efforts to reduce the fees for their services to a level where they are lower than the cost it takes to provide them. They argue that a client relationship that starts off losing money is not sustainable and that the companies need to respect the right of agencies to make a reasonable profit, just as they do. In late 2009 the JWT agency pulled out of a pitch for UPS’s $200 million global advertising account citing frustration over drawn-out financial and contractual negotiations.

While agency executives may not like the changes that are occurring in the world of advertising, most recognize that they have little choice but to adapt to the changes. The involvement of clients’ procurement departments is here to stay and one former agency executive’s response to those who complain about it is “Welcome to the real world. ” He notes that most of those on the client side have had to deal with a purchasing department or hard-nosed buyer almost from the day they started work. Most clients no longer want traditional marketing approaches that rely on mass-media advertising.

As a CEO of one agency notes, “Historically, agencies pushed clients. Today, clients are pushing agencies. The same-old, same-old is not being accepted. ” Many persons working in the advertising industry argue that the two sides must find a way to work together. Agencies will have to continue to find ways to reduce their costs and accept smaller profit margins. However, they note that clients who continue to tighten the vise on their agencies may be cutting off their nose to spite their face as the quality of service they

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