Phil Bilbrough: Horizontal or vertical? Where should an agency go?

Horizontal or vertical? Where should an agency go?

By Phil Bilbrough

Which way should an advertising agency go? Up, down, across or eek out a living in the middle?  I’m picking that it will go vertical – not up but down. I’m not talking about revenue or profit (maybe I am) I’m talking about the direction in which agencies will acquire other businesses in order to survive.

Years ago while being bored by business administration papers at Uni, I was being taught the business strategies of day which were horizontal and vertical integration. There might have been others, but these are the only ones that I  remember. Nothing spectacular like creating a funky vodka brand, talking it up and then selling the whole kit and caboodle.

A horizontal strategy would be when a company acquires another company that would work  on their product before it moves on to the next step in the supply chain. For example an advertising agency buying a video production company, a re-touching company, a web development company or a digital print company – these actions would all be horizontal integration. The objective is to provide more services to the customer and let less money to other suppliers.

If an ad agency bought a media company that would be vertical integration, or a media company buys an ad agency that too is vertical integration. In the past a large advertiser like Unilever purchased an ad agency and that too is vertical integration. The objective of going vertical is to own more steps in the supply chain from producer to consumer.

Should either of these strategies be considered for the advertising industry? Absolutely, every idea has to be on the table, given that no strategy is without  investment and risk.

Perhaps because the vertical and horizontal business strategies are the only things that I remember from that course, I see them often. And when I see them, I think  that that business owner has run out of ideas or believes that business needs to move in any direction from its current space to survive, a sort of “Do something” strategy. I probably also see them when they aren’t there.

I also see a business strategy cycle. First horizontal acquisition, followed by a contraction, followed by vertical acquisition, followed by a contraction. I have visions of a boy doing yo-you tricks out to the side then back, then down then back, up then back.

So when I hear of an agency buying up advertising space and selling it to their own customers and probably to anyone who wants it, then this is a vertical integration business strategy. Don’t just book it the space, buy it and have inventory ready and waiting.  This strategy has been around for a while in different guises. It makes a mockery of an agency being a media-neutral buyer, one that would book advertising depending on the unique campaign strategy, not because it  is already in the cupboard. However, some advertisers don’t change or alter media strategies that often so the risks of a pre-buy-up of advertising space might reduced with a bit of inside information.

At the back of my mind there is a thought about the increasingly fragmented media market. Lets see the where this takes us…

There are many many advertising options out there and the list is growing.  There is TV (10s of channels), 1000s of radio stations, billboards, online advertising, bus shelters, direct mail, in-store advertising, Google adwords, contextual online ads, playstation advertising, taxi’s, newspapers, magazines, airport billboards, urinal billboards, event sponsorship, product placement, video game advertising, email, social media campaigns, flags on taxis, sandwich boards on trailers being towed by small cars or by bicycles… And more appear everyday. Where ever there is an internet connection and a monitor there is an opportunity to display ads.

Yet the total advertising spend in New Zealand hasn’t risen – certainly not in 2010.  A growing supply meets  contracting demand. A deal is crying out to be made, particularly if an agency can deliver clients to get a new advertising channel up and running.

Marketers with advertising money to spend are understandably confused. Being presented with an advertising schedule that combines 7 or 8 different advertising channels, different times, different costs different measurements and being led to believe that they will all work together to achieve the campaign objective – it can all be a much to accept.

A client’s confusion evaporates when someone thumps the table and says, “Spend less and get more”. So an agency offering some advertising inventory at a great price and perhaps delivers the ads themselves (cutting another middleman and more $$). I think a client would go for that.

I’m bad at a predictions. Yet 2011 is going to be hard. More companies with advertising $$ will go direct to the broadcaster cutting the advertising agency. That’s what Google wants. And Google gets. Great nous and great creative may not save an agency – it will be another cut price year. Not ideal but survival is key, just survive – then aim to grow in 2012.

So vertical, horizontal, up down outwards inwards? This is not the time for horizontal integration.  I wouldn’t be adding new salaries to the wage bill – keep your belt tight and stay agile. But it isn’t the time for an agency to stay still either, so unless there is another direction (and there maybe) it might be time for some vertical movement.

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Phil Bilbrough is a freelance online advertising specialist who is blogging on the subject for Scoop at Advertising.scoop.co.nz. He can be contacted at phil@bilbrough.com.

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