Strategy but for Agencies: Resources and Capabilities
After the last several articles, we now have a general strategic picture of the agencyland industry. I’ll quickly sketch out that big picture and then talk about one more concept before we move on to exploring ways to reframe the challenge. You can imagine being able to sketch out the dynamics of any industry from a similar analysis.
The major dimensions along which agencies vary are size and scope (specialisation vs integration).
The three biggest impacts of size are:
Economies of scale for small agencies. Small agencies tend to have relatively larger fixed costs in management and office expenses, which makes profitability challenging until a certain minimum scale is reached. Once it’s reached, though, margins stay relatively stable – labour remains as the largest cost to serve (except for media).
Demand variability. With fewer clients, small-agency demand is more likely to come in peaks and troughs. And with fewer team members across whom to spread the load, peaks can mean losing work or losing margin to freelancers, while troughs mean paying people to sit on their hands.
Available market. Industry spend from larger clients tends to be available only to larger agencies with the credibility and capacity to handle the work, limiting the revenue available to smaller agencies and further increasing competition for it.
The biggest impacts of scope are:
Demand variability. Specific departments face the same dynamics described for smaller agencies above. A large integrated agency might still have a small web development team, in which case the agency’s size doesn’t translate into load sharing to manage peaks and troughs.
Unrealised efficiencies. Integrated agencies can add value or cut costs through offering multiple services to the same client, but new clients are often looking for just one service at a time.
Inter-agency conflict. Both of the previous impacts put pressure on integrated agencies to cross-sell services – to provide work for under-utilised departments and/or to gain efficiencies of scope. But if a client needs those other services, it probably already engages a competitor with whom the agency must cooperate for the client’s benefit.
And we can expect these factors to incentivise these behaviours:
Aspiring agencies sacrificing price for scale or scope. Smaller agencies struggling with relatively high overheads or integrated agencies struggling with single-service clients are incentivised to offer very attractive rates and conditions to clients for new or cross-sold business. This puts downward pressure on overall profitability.
Large agencies attempting to compete on quality but being forced to give up premiums. With no clear points of difference to compete on, large agencies will end up competing on points of parity – all attempting to offer the best creative quality, most awards, best talent, best client service, most reliable project management. Because they all compete similarly and will go after the same large accounts, they will end up competing with each other on price. (Though the strategic group in general may outperform the industry.)
Hands-on management in smaller agencies. To reduce relative overheads in small agencies, managers are incentivised to have a dual role both running the agency and doing billable work for clients. The urgency of working for the business will conflict with the (seemingly) postponable work on the business, resulting in either over-work of the individuals or under-management of the agency.
Consolidation, mergers & acquisitions to achieve scale. Another thing we would expect in this industry is agencies being combined, probably through acquisition, to achieve those minimal economies of scale. In other words, an agency that is unprofitable primarily because of relative overheads and demand variability – rather than the quality of its work or the number of its clients – can become profitable by being bought or merged into a larger entity with shared overheads and more capacity and clients to share load across.
There are plenty of other observations and predictions we could make from the various industry factors discussed so far, but these are a few of the big ones, I think.
There’s one more concept I want to introduce before talking about reframing agencyland for more creative strategies – resources and capabilities.
All viable businesses do something, some kind of activity, which creates some goods and/or services which are valuable enough to someone that they will pay for them. To do those things, they use resources in ways that create capabilities. Resources can be tangible (like plant equipment) or intangible (like intellectual property, expertise, company culture). Capabilities are what you can do with them to create value.
Resources and capabilities can be sources of competitive advantage, and there’s a handy acronym for thinking about whether they might be. VRIO stands for four conditions which are each necessary and are collectively sufficient for competitive advantage:
Valuable – does the resource or capability create some kind of value, either by creating value for customers or by reducing the costs of serving them?
Rare – is the resource or capability something that only some businesses (or ideally only one) possess?
Imitability – can the resource or capability be easily copied? (Remembering that “will not” is as good as “cannot”.)
Organised – is the business organised in a way to take advantage of the resource or capability?
Identifying resources and capabilities in a business can be fiddly, because folks get a bit excited about listing all kinds of things. Carpet on the floors? Resource. Annette does stand-up comedy on the weekends? Capability. Because VRIO resources and capabilities are the goal, I find it helpful to look at potential resources and capabilities through that lens:
What do we have or do that creates value for customers or controls costs?
What do we have or do that competitors don’t?
What do we have or do that competitors can’t or won’t?
This model goes back to the point I made in the first article in this series, about how some strategists prefer to work from the outside-in (look at the environment, market, industry, and determine the best way in) and some prefer to work from the inside-out (look at the company, its resources and capabilities, and determine the best way to use them). As I said, strategists typically iterate back and forth between the two.
Agencies all have valuable resources and capabilities. (They must, or they’d go out of business.) They have collective knowledge, ways of working, relationships., etc., which allow them to charge clients for their services.
How often do agencies have rare resources and capabilities? Ones that can’t easily be copied? Which they’re organised around to create sustainable competitive advantage?
Well, a few come to mind.
WPP’s many agencies have exclusive access to the Brand Asset Valuator™ system for evaluating brand equity, originally developed within Y&R. Because it’s trademarked and owned, it can’t be copied. Because it’s based on decades of survey data, it cannot be easily imitated. (That is, it could, but it would be so expensive and time-consuming that it wouldn’t.)
TBWA globally has a central database of resources, including its Disruption playbook of analysis techniques and workshop tools. These are available to all TBWA agencies, and are presumably updated over time with feedback from around the world.
Research agencies often have carefully built and curated panels of survey participants which they use for their clients’ research. These are not unique, but still rare and difficult to imitate, protecting incumbents from new entry.
Speaking of research agencies, Tracksuit has its digital platform for self-service pared-down brand tracking. Rare and valuable, yes, but not so difficult to imitate – if the self-service brand-tracking approach turns out to be very lucrative, it will likely attract imitation. Tracksuit’s strategic challenge will be to defend and extend its lead as a first mover, for example by turning the initial years of data into a value-creating resource in some way (can’t be imitated overnight).
Personal brands of key team members can be valuable, rare and difficult to imitate resources for agencies. James Hurman of Previously Unavailable has effectively branded himself as a thought leader in creative effectiveness, which should improve hit rates on new business development for the agency. But note that he’s a founding partner. Agencies who pay big bucks to employ recognisable names may only enjoy the benefits until someone else pays bigger bucks – they are rented, not owned.
Most resources and capabilities developed by agencies are neither rare nor inimitable. There’s nothing wrong with that per se – most industries have activities which must be performed simply to be a functioning member of that industry. But if these resources and capabilities basically do the same things from one agency to the next, we’re back to my earlier point about operational excellence – it’s just agencies trying to out-good each other. Some will do better, some worse, but that difference is not due to strategy.
How should businesses think about developing resources and capabilities? In some ways, those choices should be informed by a strategy; and in other ways, strategy may be informed by the resources and capabilities at hand.
But here are a few questions to ask:
What rare and inimitable resources/capabilities do we have which could create value for clients? I once had a client who sold items on a website, but the site was a distant second place in popularity to a competitor. Rather than try to beat the category leader at their own game, I suggested a way to use previously ignored sales data from the less popular site to help vendors save money on the popular site, simultaneously reducing the competitor’s revenue. This was a case where the data turned out to be an overlooked resource – overlooked because the business was too focused on playing the same game as its competitor.
What valuable resources/capabilities do we have which could be developed into being rare or inimitable? The trick here is that they also need to increase in the value they create or change to creating a different kind of value.
What potential connections or synergies between our resources and capabilities are we overlooking? Developing two or three resources/capabilities at a time, working together in a way that creates value, can be a very powerful approach. It can make imitation more difficult because the imitation requires multiple changes at the same time. Consider the way Ikea’s resources/capabilities work together. A competitor couldn’t simply copy the flat-pack packaging without developing relevant design capabilities, warehousing systems, showroom assets and perhaps even brand associations. Individually, any could be copied easily enough, but the imitation wouldn’t pay off unless it could all be somehow imitated at once. Again: wouldn’t = couldn’t.
What unmet needs or wants do our customers have, for which we could develop new resources and capabilities? If rarity and inimitability are consciously designed into the creation of new offerings, you may create yourself a sustainable advantage.
Okay, now we have a complete enough picture of the obvious to start thinking about the non-obvious.