A new normal and why Mad Men (and women) are becoming more important. By Sir Martin Sorrell

WPP CEO Sir Martin Sorrell reports

On Monday 14 September 2008, Lehman Brothers went into bankruptcy. If you had asked me at that point when things would get back to normal – or when our business would return to pre-Lehman levels – I’d have said it would be a very, very long time. True, we had felt the sub-prime and insurance monoline tremors in June 2007, and had witnessed the dismemberment of Bear Stearns in March 2008, but the sacrificing of Lehman seemed an altogether more significant event. Warren Buffet was to call it America’s financial Pearl Harbour. Jeffrey Immelt would declare, according to Andrew Ross Sorkin in Too Big to Fail, that GE Capital was 48 hours away from being unable to extend its credit facilities. The crucifixion of Lehman was a seminal moment, an inflection point.

Well, here we are three years later, beyond where we were in 2008, reflecting on a record year against almost all measures in 2011 and on a 2010 that surprised us, as the US and traditional media bit back (see last year’s think piece). Of course, it is foolhardy to be arrogant or complacent. We should remain paranoid, but what has happened? How did things snap back relatively quickly? Why the surprise?

Life after Lehman

It didn’t seem that way in the first half of 2009. Lehman did not appear to affect the final quarter of 2008, when our like-for-like revenues were flat globally. Maybe because most of our clients budget are on a calendar-year basis, there is little or no immediate institutional reaction even to violent financial events. The effect is inevitably delayed until the next calendar year. Certainly, I saw little or no impact in that final quarter on my travels, perhaps with the exception of those companies that despite their size were more focused and less diverse.

We certainly were shaken out of any complacency by the second quarter of 2009. Having ourselves budgeted for a 2% decline in like-for-like revenues for calendar 2009, -3% in the first half and -1% in the second half, we finished the first half down 8%, without having made any significant reduction in our cost base. That certainly was the wake-up call and, beginning in the second quarter of 2009, we started to make the necessary cost adjustments, which sadly resulted in a reduction of over 15,000 positions. By the end of 2009, point-to-point headcount on a like-for-like basis was down over 12% and incentive pools had been reduced to below 16% of headline operating profits before bonuses and taxes. Interestingly, as a result, the second half of 2009 saw our operating margins achieve the same level as the second half of 2008. Certainly in 2009, most of our clients had thought the financial world, at least, had come to an end and were cutting costs indiscriminately, focusing on effectiveness (better work), efficiency (more for less) and liquidity (act as our banker).

Well, 2009 might have been extremely painful, even brutal, but it was not the end of the financial world. Principally because governments flooded the financial markets with Keynesian-style support (we gave up counting at $12 trillion against global GDP of $65 trillion or 20% in the form of TARPs, investments, liquidity, investments and guarantees).

2010 turned out, however to be completely different. Once bitten, twice shy, we budgeted flat like-for-like revenue growth and it came in at 5%. Why? Well, certainly, clients realised the world had not come to an end. Severe cost actions in 2009, combined with stimulatory monetary and fiscal policies saved the day, and gave clients the headroom to focus, once again, on geographic and functional growth. I could not find a client CEO who was not hesitant about increasing capacity in mature, mainly Western markets, while I could not find a client CEO who was hesitant to invest in the growth markets of Asia (except Japan), Latin America, Africa and the Middle East, and Central and Eastern Europe.

Two forces seemed to be at work and confirmatory evidence came from Alan Greenspan, the former chairman of the Federal Reserve. In late 2010, he told CNBC (which he confirmed again in mid-2011) that he had seen little evidence that fixed-capital formation among US non-financials had shown any lift. While that statistical series included about 40% of earnings from outside the US, the point was made. First, in 2010 we saw a snap back in traditional markets that had become overly depressed. For example, in the US, advertising as a proportion of GDP seemed to have fallen to levels not seen since the 1970s. At the very least, there was an opportunity for dead cat bounce. Secondly, there was a growing realisation, that although growth rates had slowed in the BRICs and Next 11, relative growth opportunities were still considerable.

Functionally, the change in the consumer's media consumption habits meant growth in digital media was also faster. The result was a multi-speed world. The Premier League teams were BRICs, Next 11 and digital. The Championship teams were the US, Germany, free-to-air television and outdoor. League One was Western Europe, mainly the UK, France, Italy and Spain, and magazines and radio. Finally, League Two was Japan and newspapers. What we thought might be a LUV-shaped recovery, in fact was more LVV- or LuVVY-shaped, with the US being V-shaped rather than U-shaped.

2011 was similar. We budgeted like-for-like revenue growth of more than 5% and achieved 5.3%, with gross margin growing even faster at 5.9%, pretty much at the increased level we indicated at the end of the first quarter of 2011. The recovery continued, but this year it was more LUV-shaped, with the BRICs, Next 11 and digital regaining their greater prominence, and the mature markets and media slowing, mainly affected by the Eurozone crisis and the US budgetary deadlock, particularly in the second half of the year.

Worldwide communications services expenditure 2011 $m

 AdvertisingMarket researchPublic relationsDirect & specialist communicationsSponsorshipTotal
North America 159,769 11,077 3,940 95,384 17,846 288,016
Latin America 29,134 2,052 360 25,246 3,840 60,632
Europe 126,406 13,547 2,321 96,641 13,468 252,383
Asia Pacific 159,804 5,392 3,500 37,902 11,100 217,698
Africa, Middle East and Rest of World 15,728 627 122 1,712 2,100 20,289
Total 490,841 32,695 10,243 256,885 48,354 839,018

Source: GroupM

Worldwide communications services expenditure

Source: GroupM

f: Forecast.

How consumers and corporates have changed

Now, three years after Lehman, how has consumer and corporate behaviour changed? Is there a new normal, as many predicted (maybe Jeffrey Immelt being the first)? Well, both consumers and corporates, as well as governments, have de-levered – the first two by far more, as governments continued to stimulate their ailing economies. Consumers have certainly become more cautious and cost-conscious, not only because they were frightened by the over-leveraging or irrational exuberance of the previous 10 or so years, but also because of historically high levels of unemployment. Most mature economies are experiencing overall unemployment levels of around 8%, with youth unemployment double that. Interestingly, the impact on luxury consumption has not been so profound and remains relatively unscathed, perhaps reflecting the much talked about levels of income and wealth inequality.

The impact on corporate behaviour, however, seems to have been more profound. Ever is a long time, but I am not sure corporates will ever behave in the way they did before 2009. US-based multinationals are sitting on cash balances of as much as $2 trillion, with relatively unleveraged balance sheets. Boards remain unwilling to take excessive risks. External governance pressures are so intense and non-executive rewards so slim, it is really not worth it. With the average CEO lasting about 4.5 years in the US and the average CMO only two, why take a big chance?

Corporates are broadly taking two routes. In slow growth, mature, mainly Western markets, they are realising that it makes sense to invest in the brand to maintain or increase market share. In faster growth, mainly Eastern or Southern or South-Eastern markets, it makes sense to increase capacity AND invest behind the brand. This produces a positive double whammy for our advertising and marketing services industry.

Although we believe such spending really is a fixed investment, clients may believe the approach also has the virtue in slow growth markets that brand spending can be cut if necessary. This despite the fact that research from Deutsche Bank and others shows that sustained brand spending results in faster growth of sales and profits, and better margins. Cutting only means slower growth and greater cost to get back to where you were, if you can.

Growth of media in major markets 2007-2012 %

Internet20072008200920102011f 2012f
North America 26.2 11.5 11.2 10.8 12.0 10.0
Latin America 57.4 52.8 27.1 31.4 33.8 35.7
Western Europe 36.6 22.4 7.4 17.3 12.1 10.5
Central & Eastern Europe 133.8 51.4 5.2 33.6 35.2 19.1
Asia Pacific (all) 32.2 24.5 7.3 22.0 23.6 26.9
North Asia1 52.6 43.4 18.0 43.9 38.0 37.2
ASEAN2 72.6 39.9 33.7 50.3 96.7 119.4
Middle East & Africa 56.5 8.9 6.8 11.4
World 31.6 19.4 9.5 16.1 16.0 15.8
Television20072008200920102011f 2012f
North America -2.2 1.3 -6.1 5.0 3.4 4.0
Latin America 11.0 9.5 6.8 19.1 7.8 13.3
Western Europe 4.4 -3.1 -10.7 8.7 0.2 1.4
Central & Eastern Europe 23.7 13.3 -15.5 15.4 14.8 9.0
Asia Pacific (all) 6.4 5.1 -0.1 8.8 7.9 10.1
North Asia1 13.4 14.1 6.7 9.3 12.2 12.8
ASEAN2 7.9 10.5 11.1 25.9 16.3 16.8
Middle East & Africa 22.5 25.4 12.2 23.6 4.8 6.8
World 4.1 3.4 -4.0 9.1 5.4 6.9
Outdoor20072008200920102011f 2012f
North America 6.0 -6.0 -4.7 1.4 2.7 3.8
Latin America 0.7 6.5 1.3 13.5 8.6 12.7
Western Europe 3.8 -2.8 -8.6 2.3 -1.5 1.3
Central & Eastern Europe 19.5 10.2 -32.3 9.8 12.2 5.7
Asia Pacific (all) -2.7 7.0 -9.1 5.7 6.4 5.3
North Asia1 -16.8 36.4 -1.8 17.2 11.2 9.0
ASEAN2 12.6 18.5 7.4 12.1 9.6 10.5
Middle East & Africa 72.4 5.5 -5.4 -3.7 -12.5 4.6
World 2.8 2.7 -9.8 4.5 4.0 4.5
Magazines20072008200920102011f 2012f
North America 3.4 -6.8 -15.0 -3.3 0.0 1.9
Latin America 4.3 17.3 -17.0 10.8 5.8 9.7
Western Europe 1.4 -5.6 -22.0 -1.9 -3.2 -2.0
Central & Eastern Europe 12.4 32.8 -38.8 -0.2 7.3 5.6
Asia Pacific (all) 2.2 -3.5 -17.3 0.5 -1.3 -0.9
North Asia1 17.4 15.4 -1.5 17.4 6.8 8.5
ASEAN2 -2.0 8.7 -1.0 11.3 3.0 3.0
Middle East & Africa 15.3 10.3 -5.6 4.5 0.6 1.3
World 3.0 -4.0 -18.3 -1.8 -0.6 0.8
Radio20072008200920102011f 2012f
North America -3.3 -9.9 -7.6 -2.5 2.5 4.5
Latin America 10.9 12.7 9.3 9.3 5.2 7.7
Western Europe 4.1 -1.3 -8.7 1.9 0.2 1.0
Central & Eastern Europe 22.2 3.9 -22.4 4.5 7.2 3.3
Asia Pacific (all) 5.6 4.7 -1.3 9.9 4.6 5.4
North Asia1 26.2 23.5 8.5 23.8 10.5 12.4
ASEAN2 1.8 9.8 12.1 15.2 1.9 4.5
Middle East & Africa 6.4 23.0 1.3 14.7 9.9 4.1
World 1.9 -2.3 -5.6 3.0 3.1 4.2
Cinema20072008200920102011f 2012f
North America 7.5 5.0 -4.8 10.5 0.0 0.0
Latin America 2.2 17.3 -8.9 -3.1 15.3 10.2
Western Europe 0.7 -11.0 -8.3 6.5 -1.2 2.4
Central & Eastern Europe 15.7 24.5 -20.8 30.9 8.0 7.1
Asia Pacific (all) 37.3 1.1 1.6 16.3 9.3 7.3
North Asia1 58.4 -0.8 0.0 5.0 3.0 0.0
ASEAN2 97.4 -2.2 10.4 19.7 15.1 8.6
Middle East & Africa -5.3 9.1 -17.8 8.5 48.8 5.1
World 5.8 -4.0 -8.0 9.0 5.2 4.6
Newspapers20072008200920102011f 2012f
North America -4.8 -9.9 -17.9 -8.0 -5.9 -4.8
Latin America 14.4 3.9 1.0 14.6 17.6 16.4
Western Europe 3.6 -5.5 -15.0 -2.8 -3.9 -2.2
Central & Eastern Europe 11.4 2.7 -24.2 4.6 3.3 2.9
Asia Pacific (all) 1.9 -2.3 -8.3 8.7 0.7 2.3
North Asia1 7.2 6.2 1.9 17.3 3.8 5.7
ASEAN2 10.9 11.5 5.1 19.8 10.9 11.1
Middle East & Africa 18.1 12.6 -3.8 -1.4 0.3 -2.0
World 1.5 -4.7 -13.0 0.3 -1.5 -0.1
  • Source: GroupM
  • f: Forecast.
  • 1 China, Hong Kong, South Korea, Taiwan.
  • 2 Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam.
  • (Figures rounded up.)

Prospects for 2012 look similar, perhaps a little more muted, despite the maxi-quadrennial impact of the UEFA Football Championships in Poland and the Ukraine, the Summer Olympics and the US Presidential election, which troika usually adds about 1% to global advertising and marketing services demand. We are budgeting like-for-like revenue growth of more than 4% and have achieved that in the first three months. Real GDP is forecast at 2.5-3.5%, with nominal GDP at 4.5-5.5%. Our forecasts are balanced across the year taking into account the grey swans (the ones we know) of the Eurozone, a Chinese hard landing and Middle Eastern uncertainty, although not the possibility of an Israeli strike on Iranian nuclear capacity.

2013, however, may be a little more challenging. There are no maxi or mini-quadrennial events to boost advertising and marketing services spending. True, we may well continue to muddle through the Eurozone crisis. There may well be a Chinese soft landing. The well-telegraphed 12th Five-Year Plan promises 7% compound growth, with social security protection to stimulate consumption and the service sector. The Middle East may also benefit from recent developments in the longer run. But the big issue may well be how a reelected President Obama deals with a Republican-dominated Congress over the US budget deficit.

We will see, but in any event I would prefer to go into 2013 with a relatively tight level of capacity and high levels of variable cost, just in case.

There are already those who believe, however, that 2013 will be a better year than 2012. I do not share that view currently. They argue that forecasts for World GDP, both real and nominal are in excess of 2012, at around 3-4% and 5-6% respectively (as the IMF has just confirmed) and that advertising as a proportion of GDP will continue to recover, driven by new markets and new media. Again I would rather be cautious at this stage, at least until there are signs that America is not kicking the deficit can down the road any more.

  • Shape of golbal recovery
    Source: GroupM
    f: Forecast.
  • GDP projections 2011-2013 change
    Source: IMF/GroupM
    f: Forecast.

2014 may be a different story if the new US Administration shows signs of dealing with the deficit issue, perhaps by embracing the Simpson-Bowles $4 trillion, 10-year plan for deficit reduction. By then Europe will have had another year to muddle through its crisis and should be showing some signs of growth, albeit slow ones. In addition, 2014 will be a mini-quadrennial year with the Winter Olympics in Sochi (which President Putin will ensure is successful), the FIFA World Cup in Brazil (another iconic event to position this decade as the decade of Latin America) and, would you believe it, more elections again in the US – the mid-term Congressionals.

So that is the short- to medium-term view. It may explain why the past few years and the next few years have been and will be relatively successful, particularly post-Lehman. But why be bullish about the prospects for our industry in the longer term? Why will the advertising and marketing industry continue to be relatively important? There are at least nine reasons why it will.

The long-term importance of Mad Men (and women)

Globalisation

1First, and probably most importantly, there is the continuing shift in economic power from not only the West to the East, but also to the South and South-East, particularly if you believe New York is still the centre of the world. If you asked me what has been the biggest factor contributing to WPP’s growth over the last 26 years, I would definitely plump for free trade and the resulting global growth.

While protectionism rears its ugly head, particularly at election time, broadly globalisation continues to provide the biggest opportunity for corporate growth both internationally for multinationals and locally for national companies. Myanmar is the latest example, a not so mini-Vietnam, with 48 million people, and Rangoon, a historic cultural, educational and university centre. Perhaps Cuba will be next, albeit on a smaller scale. We clearly have to get better at explaining the benefits of globalisation to electorates in the mature markets, especially to displaced employees in traditional industries.

To be fair the growth of the BRICs, the Next 11, the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa), MIST (Mexico, Indonesia, South Korea, Turkey) and the new G8 is nothing new. Some 200 years ago, the BRICs and Next 11, for example, accounted for almost half of worldwide GDP, just as they were forecast to do again by Goldman Sachs in its ground-breaking paper in 2001.

China and India may have been on the wrong side of history for the past two centuries or so, but they seem likely to be on the right side for the foreseeable future. Western Europe and Japan, in particular, will have to decide whether they wish to change to compete successfully or fall even further behind. While the Schröder reforms in Germany have helped and the proposed labour market reforms in Spain and Italy are also helpful, the French presidential election platforms are not. In the words of The Wall Street Journal: "[Maurice] Lévy for Le President."

Principal sources of annual media growth
Contribution %

 2011f2012f
North America 22 20
Western Europe 3 6
Brazil 7 8
China 31 30
India 4 3
Russia 8 3
Indonesia 4.6 5.4
Mexico 0.3 0.8
South Korea 0.8 0.8
Turkey 1.8 1.1

Principal sources of annual media growth
Contribution $bn

 2011f2012f
North America 4,992 6,217
Western Europe 770 2,005
Brazil 1,651 2,347
China 7,192 9,241
India 832 932
Russia 1,918 1,050
Indonesia 1,069 1,682
Mexico 75 251
South Korea 190 251
Turkey 410 333

Source: GroupM

f: Forecast.

The 30 largest companies in the world*

RankCompanyCountryMarket cap $m
1 Apple Inc. US 559,002
2 Exxon Mobil Corporation US 410,580
3 Microsoft Corporation US 270,644
4 PetroChina Co Ltd China 258,798
5 International Business Machines Corporation US 241,755
6 Industrial And Commercial Bank Of China Ltd China 225,229
7 China Mobile Limited Hong Kong 220,869
8 Royal Dutch/Shell Group Netherlands 217,993
9 General Electric Company US 212,366
10 Chevron Corporation US 211,951
11 Wal-Mart Stores, Inc. US 209,591
12 Google Inc. US 208,490
13 Berkshire Hathaway Inc. US 201,244
14 Nestle S.A. Switzerland 198,861
15 China Construction Bank Corp China 193,182
16 BHP Billiton Limited Australia 191,334
17 AT&T Inc. US 185,155
18 Procter & Gamble Co (The) US 185,123
19 Johnson & Johnson US 181,065
20 Wells Fargo & Company US 180,028
21 JPMorgan Chase & Co. US 175,522
22 Pfizer Inc. US 170,710
23 Coca-Cola Company (The) US 167,500
24 Petroleo Brasileiro SA – PETROBRAS Brazil 167,174
25 BHP Billiton PLC UK 162,481
26 HSBC Holdings plc UK 158,611
27 Philip Morris International Incorporation US 152,575
28 Roche Holding Aktiengesellschaft Switzerland 146,952
29 Samsung Electronics Company Limited South Korea 146,793
30 Oracle Corporation US 145,074

Source: The Winthrop Corporation, CorporateInformation.com

*
Market values as at end of March 2012.
Contributions 2012 advertising growth

BrandZ Top 10 most valuable Chinese brands

RankBrandBrand value
$m
Year-on-year change %
1 China Mobile 53,607 -4
2 ICBC 43,910 15
3 China Construction Bank 21,981 1
4 Bank of China 18,643 -17
5 Agricultural Bank of China 17,329 5
6 Baidu 16,256 67
7 China Life 15,253 -17
8 Sinopec 13,791 n/a*
9 PetroChina 13,755 -3
10 Tencent 12,624 3

Source: Millward Brown Optimor

*
Value not comparable, as upstream business included this year, to bring it in to line with the global Top 100 methodology.
Government debt as% GDP 2009-2015

Source: IMF

f: Forecast.

Overcapacity and shortage of talent

2Second, there continues to be significant overcapacity in most industries. Take, for example, the auto and truck industry, in which our largest client operates. Two of the Detroit-based Big Three auto manufacturers went into Chapter 11 bankruptcy, with only Ford not taking government money. In such circumstances, you might have expected a reduction in global car and truck capacity. Think again. The world can still produce around 80 million units, while consumers can still only buy around 60 million. The US market has indeed seen a fall off in demand from around 18 million at its peak to a current level of around 12-13 million. Europe currently buys 14-15 million, but China has now become the largest car market in the world at around 18 million.

An Israeli entrepreneur I met recently in Beijing is launching a budget car in China with a big local manufacturer, aimed at the domestic market and for export. He believes the country’s car market will reach 32 million. Any shrinkage in mature market demand has been more than compensated for by the rise of the faster-growing markets. South Korea with Hyundai and Kia, China with Geely and BYD, and India with Tata and the Nano have taken up any slack. The US domestics have in turn sought sales growth in the new markets. In Brazil, for example, Fiat and Volkswagen dominate and Chinese manufacturers such as JAC have launched, although new Brazilian tariffs have stopped them for the moment.

  • US sales new vehicles

    Source: Ward's AutoInfoBank

  • Average age disposed vehicles

    Source: NVCS

Overcapacity is a feature of many if not all industries. Few have the natural advantages of the tequila industry, where it takes seven years or so to cultivate the requisite herb and the supply is naturally limited. In these circumstances, therefore, what we do, which is to provide tangible or intangible differentiation, is critical. Defining and emphasising emotional and psychological differences as well as qualitative ones, is increasingly critical in over-supplied markets. In the 20th century, the major problem was a shortage of productive capacity and getting products to market. In the 21st century, the key issue is ensuring available production is consumed.

So where is the shortage? It will not be in fixed capital or capacity, but in human capital. Although youth unemployment in many countries, mostly the mature markets, is high, the surplus will be absorbed over time as birth rates fall.

Improvements in healthcare, later marriages, increased divorce rates, more working women, all will result in more mature and ageing populations. Even countries like Mexico and Pakistan, which have relatively young population profiles, will mature over time. If you think there is a war for talent currently, it will become even more violent. The key differentiator between companies will increasingly become the ability to identify, train, motivate, incentivise, develop and retain talent, whether you are in the advertising and marketing services industry, the consulting business, investment banking, manufacturing or oil refining. Superior talent will ever more increasingly be the key reason for success.

The web

3Third, the web (currently defined as personal computers, mobile, video, search, display and social) disintermediates legacy businesses with lower cost business models and – looping back to the increasingly important point about talent – seduces your people. Some speculate that Sergey Brin and Larry Page’s basic motivation is to disintermediate or displace legacy businesses, by removing intermediaries and simplifying the supply chain, reducing its profitability and reducing prices for the ultimate consumer. This certainly was a fear, for example, in our industry a few years ago. The G-word was seen as a competitive threat that would displace agencies by going directly to clients. Similar concerns have more recently been expressed about Facebook.

There is no doubt that these new digital organisations are ‘frienemies’. On the one hand, we do considerable business with them on behalf of our clients. In 2011, for example, of a total media investment of approximately $75 billion, GroupM invested around $1.6 billion with Google and $200 million with Facebook (helped by our investment in Buddy Media, the Facebook platform that manages eight of Facebook’s top 10 advertisers). By contrast, we only invested $6 million with Twitter.

A point of comparison to ‘old’ media would be the $2.5 billion we invested with Rupert Murdoch’s NewsCorp. This year the targets are $2.3 billion for Google and a doubling to $400 million at Facebook. On the other hand, these new media owners, who masquerade as technology companies, try to build direct client relationships. It is almost like Rupert Murdoch, Philippe Dauman, Les Moonves or Bob Iger going direct to clients and saying: ‘Buy my media properties exclusively.’ Clients are certainly responsive. New media tend to be cheaper and no CEO or CMO’s career is damaged by investing more in digital or being lauded as a digital marketeer.

However, we may be reaching an inflection point. On Facebook, for example, the biggest advertiser spends around $125 million out of total Facebook advertising revenues of around $4 billion, with the more usual client investment at around $25-$50 million. Often these sums are invested at the centre and are imposed with some difficulty worldwide. Client finance and procurement departments are becoming increasingly involved and looking at measuring the returns on new media investments. Certainly, search is a directly measurable medium and Google, in my view, is in an increasingly powerful position with five legs – search, display, video, social and, most potently, mobile. Larry Page, Google’s new CEO, seems to have focused them more. They are also to be congratulated for managing to convince regulators on both sides of the Pond of the appropriateness of the acquisition of Motorola Mobility. Instantly they have created a new set of frienemies – hardware manufacturers such as Samsung, LG, Sony Ericsson and Nokia, for example, all of whom use the Google Android software platform.

  • digital vs traditionals

    Source: GroupM

  • social networking sites

    Source: Compete.com

1
Industrialised/mature consumer economies.
2
Industrialising/growing consumer economies.

It is true that the playing field is a much more level one than a few years ago, when Google dominated search on its own, with Microsoft/Yahoo and Bing in search, Facebook in social and coming in mobile, Twitter in social, and Apple and Amazon in video, e-commerce and potentially TV. The chief threats to Google seem to be from within with the issue of scale and difficulty of growing big numbers, and from outside from the regulators. They are rapidly becoming the new Microsoft. As long as these new media systems are open ones, they offer us considerable opportunities. Closed systems are more problematic. While Apple’s iPad and iPhone have given us significant creative and media opportunities, with relatively closed systems, it is important that an Apple TV, for example, gives us similar opportunities, where the creative hurdles imposed are not too high and access available.

Top 20 US advertisers 2011
Advertising spend $m

2011 rank2010 rankAdvertiser20112010% change
1 1 Procter & Gamble 2,949 3,117 -5.4%
2 3 AT&T 1,925 2,181 -11.7%
3 2 General Motors 1,784 2,127 -16.1%
4 4 Verizon Communications 1,637 1,857 -11.9%
5 Comcast 1,578 1,417 11.4%
6 10 L’Oreal 1,344 1,138 18.1%
7 7 Time Warner 1,279 1,210 5.7%
8 6 Pfizer 1,204 1,231 -2.2%
9 Chrysler Group 1,194 876 36.3%
10 5 News Corp 1,171 1,363 -14.1%
11 12 Toyota 1,087 1,112 -2.3%
12 9 Ford Motor Co 1,062 1,136 -6.5%
13 15 Berkshire Hathaway 1,044 1,037 0.7%
14 11 Walt Disney 1,007 1,043 -3.4%
15 8 Johnson & Johnson 995 1,141 -12.8%
16 16 McDonald's 974 899 8.3%
17 18 General Mills 938 898 4.5%
18 14 Sprint Nextel 921 1,081 -14.8%
19 17 Macy's 857 885 -3.2%
20 Sony 795 763 4.1%

Source: Kantar Media

Top 10 US search advertisers 2011
Search spend $m

RankParent company$m
1 IAC/Interactivecorp 288.2
2 Amazon.com Inc 178.0
3 AT&T Inc 160.1
4 Expedia Inc 109.8
5 Microsoft Corp 100.4
6 Ebay Inc 99.8
7 Experian Group Ltd 96.0
8 Priceline.com Inc 87.2
9 Verizon Communications Inc 71.7
10 Sprint Nextel Corp 68.2

Source: Kantar Media

Top US websites ranked by unique visitors

2012 rank2011 rankDomain
1 1 google.com
2 3 facebook.com
3 2 yahoo.com
4 4 youtube.com
5 5 bing.com
6 6 wikipedia.org
7 7 amazon.com
8 11 ebay.com
9 9 msn.com
10 8 live.com
11 13 ask.com
12 10 blogspot.com
13 12 microsoft.com
14 14 craigslist.org
15 15 go.com
16 18 walmart.com
17 16 about.com
18 17 aol.com
19 20 ehow.com
20 twitter.com

Source: Compete.com
As at January 2012

Not only do the new media owners disintermediate you, but they are still evaluated on totally different criteria. Venture capital funding tends to be based on the size of audiences and usage, rather than on cash flow, margins or profitability. There did seem to be a brief period, two or three years ago, when investors started to look at profitability in a more focused way, but now there has been a return to the ‘old’ new media investment metrics. In both the private and public markets, different, relatively relaxed criteria are used, and lapses in forecasts and less rigorous definitions are allowed. A lot of new ventures are therefore sardines for buying and selling, rather than for eating, and many are short-term starting and selling operations, not businesses built for long-term brand-building.

Finally, not only are you disintermediated by lower cost business models, but they steal your people. Younger people find the new digital companies more attractive career destinations. They are smaller, more entrepreneurial, faster, more flexible and less bureaucratic, and offer more enticing compensation packages, with significant potential capital gains. In response, legacy companies have to be more flexible in their organisational responses, more networked and willing to experiment with incentive arrangements – another issue to deal with in the straitjacket of compensation governance.

  • percentage global companies with
  • global companies social media platform
  • global companies all four platforms
  • number accounts company

Source: Burson-Marsteller

The rise and rise of retail

4Fourth, there is the rise and rise of retail. Although it is little talked about openly, the growth of global retailers inevitably puts pressure on manufacturers, particularly the package-goods manufacturers or fmcgs. Walmart, the biggest retailer with global sales of $447 billion is the 11th largest country in the world by retail sales, just behind the UK and ahead of Mexico. Walmart often accounts for 15-20% of most global fmcg companies’ US sales. Manufacturers rarely admit it – indicating their relationships are strong with high volumes, good margins and high stock turns – but inevitably global buying power puts pressure on them. Walmart, Tesco and Carrefour have all built multinational businesses, with Tesco, for example, having 65% of its footage outside the UK, although not 65% of its profits. Inevitably, the current challenges that each of the big three retailers have with both their domestic and foreign operations will result in more pressure on the manufacturer, and inevitably more referred pain for the manufacturers’ suppliers.

Global share retail growth forecast

 2015 growth
share %
2015 cumulative growth share %
China 21.5 21.5
US 19.1 40.6
Russia 7.5 48.1
India 5.9 54.0
Mexico 3.1 60.4
UK 2.9 63.3
South Korea 2.8 66.1
France 2.2 68.4
Brazil 1.7 70.1
South Africa 1.7 71.8
Canada 1.7 73.5
Spain 1.7 75.1
Australia 1.2 76.3
Japan 1.2 77.5
Indonesia 1.1 78.7
Turkey 1.1 79.8
Ukraine 1.0 80.8
Germany 0.9 81.7
Iran 0.9 82.6
Romania 0.8 83.4
Italy 0.8 84.2
Poland 0.6 84.9
Vietnam 0.6 85.5
Egypt 0.6 86.1
Total non US/WE/Jap share 66.7

Source: Kantar Retail

Communicating change internally

5Fifth, there are the challenges of internal communications. The biggest task facing CEOs is communicating strategic and structural change to increasingly larger and more complex organisations. The nature and the history of the organisation may offer additional challenges. A uni-branded organisation that has grown organically is probably the easiest to manage. At the other end of the scale is the multi-branded organisation that has grown by acquisition. It is no accident that in the professional services industry, for example, the two brands that continue to impress are McKinsey and Goldman Sachs, essentially uni-branded companies that have not grown significantly by acquisition. Certainly, where they have grown by acquisition, they have found it difficult going, McKinsey with ISG and Envision, and Goldman with J Aaron. Strong, internally-grown cultures reject foreign bodies, just as amoeba do.

You are also at the other end of the scale, if you have had to build an organisation in significant part by acquisition, to take, for example, a wire basket manufacturer to a global communications services provider in your own lifetime and maintain separate brands for conflict or diseconomies of scale reasons – you have to grapple with the complexities. This is particularly difficult if the businesses acquired have traditionally been competitors or were subject to hostile takeovers – although as Sir James Goldsmith pointed out, there is no such thing as a hostile takeover. It is certainly not hostile to the clients, the people (particularly the good ones) or the share owners – probably only hostile to the incumbent CEO. Although new technologies have eased the task, getting, in our case, around 160,000 people to face in the same direction at the time remains the critical task. If you succeed, you have a very powerful army.

Global and local balance

6Sixth, there is the move to greater centralisation, although at the same time there is increasing complexity at a local or country level. While it is true that the overwhelming trend is to greater centralisation or control in organisations, there is a parallel tendency to focus on country organisations, particularly as they grow in scale, if not complexity. There is also a need to concentrate on areas at a country level like government relations, research and development, universities and craft schools, and corporate social responsibility. Also, how is it possible, if the corporate centre is in New York, Chicago, London, Paris, Frankfurt, Milan or Madrid to know what is going on in each of up to 200 countries? Increasingly, therefore, organisations will have a dumbbell look to them, with strong central management and country management, but with regional management increasingly slimmed down, as new technology speeds the flow of information around the organisation. Regional management also has so much ground to cover that it inevitably focuses on the issues or problems and not the strategy and opportunities. When we were reviewing our Middle Eastern and African operations in Cape Town last year, it was clear that our EMEA regional people were more focused on the E than the MEA – principally because the E is where the challenges are. However, the MEA is where the growth and opportunities are. It is also illogical to manage Brazil, Russia, India or China as you would Portugal or Singapore with a country head or as part of a region. Each of the BRICs is so big and so full of potential, they should report directly to the centre.

To deal with these central and local opportunities, we at WPP have appointed client leaders for our top 30 accounts, amounting to almost one-third of our total revenues last year. These key people are responsible for deepening and broadening our client relationships across the whole of WPP. While logical, this does create a more complex matrix and a need to develop a better balance between the 'horizontal' team leaders and the 'vertical' operating company or brand leaders.

Similar complexity occurs at a country level, with our development of country managers to focus on finding the best people, the local companies that will be the multinationals of the future and potential acquisitions. We need the country focus to ensure our people work together locally and that we have the requisite local knowledge. The matrix becomes even more complicated – particularly difficult when it is the good people who tend to be the least co-operative. The weak tend to co-operate more easily, the strong do not need the help, and they receive the offers.

The rise of the green eyeshade

7Seventh, there is the rise and rise of finance and procurement. For almost 20 years, the world has had little or no inflation, despite fears to the contrary. In the 1990s, Alan Greenspan and Robert Rubin controlled the American economy and hence the global economy exceptionally well – perhaps with the exception of irrational exuberance towards the end of the millennium. Particularly so, because the world’s second-biggest economy and second-biggest engine, Japan, has been virtually idle for 20 years. All you had to do was come into the office and stand up to succeed. In such circumstances, our clients have had little pricing power, despite increasing demand and rising prices for input commodities. This situation has been aggravated by the rise of retail power, which has pressurised pricing still more. As a result, the power of finance and procurement has grown and was only reinforced by the Lehman downturn.

If anything, finance and procurement have gained too much power, eclipsing marketing. This may well prove to be dangerous. In theory, there is no limit to how far you can grow revenues or sales, at least until you have 100% market share. On the other hand, there is a limit to how far you can reduce costs. You cannot cut your way to success. Research from Deutsche Bank over 15 years or more has shown that those companies that invest consistently in their brands grow revenues, operating margins and profitability far more successfully than those who cut marketing costs and face significantly more cost to recapture lost market positions.

Growing governments

8Last but one, the growing role of government, not just as a Keynesian interventionist, but also as a potential client. Given economic circumstances and the remaining excess leverage in government and consumer sectors, it is likely that growth will remain tepid particularly in the mature economies and that governments will still be a major factor in the economy. The nearest precedent seems to be the Great Depression of the 1930s, when it took a world war to limit the intervention – although I am certainly not advocating another to stimulate the economy.


Companies repsonsibility support society

Source: The Fututres Company, Global MONITOR survey 2011

Doing good is good business

9Last, but not least (the reader will be glad to know) is the rise of the poorly-named corporate social responsibility. We are now using the term sustainability to describe our long-term approach. I cannot think of any CEO who now relegates doing good to a department of their company or as an adjunct or appendix to their corporate strategies.

We tend to over-intellectualise the point. Doing good is just simply good business. As long ago as 1997, Lord Browne pointed out that if you are in business for the long term you will not offend society, government or the environment. If, however, you are in it for the short term you do not have the same approach. In the oil exploration business, for example, you might well decide to rip the maximum amount of oil out of the ground in the quickest time at the lowest cost. That, thankfully, now seems to be the exception rather than the rule – particularly as our consumer insight agencies clearly show that consumers and employees value more highly those companies and brands investing in the communities with which they work.

Steady progress ahead

So in summary, the short to medium term looks set fair, with the exception of some concerns in the US in 2013. The long term looks reasonably good with communications services expenditure driven by nine factors – globalisation, overcapacity and the shortage of talent, the web, retail, internal communications, central and local organisational focus, the rise of finance and procurement, the role of government, and sustainability. I hope that prediction proves to be right.

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