Review – Getting Started in Consulting

Getting Started in Consulting, 4th ed

by Alan Weiss, published 2019

Estimate costs to reasonably support yourself and your family for 1 full year and set this money aside as initial startup costs for consulting

10 Key Traits of Successful Consultants

  1. Humor and perspective
  2. Influence
  3. Confidence and self-esteem
  4. Fearlessness/honesty
  5. Rapid framing (identifying the problem)
  6. Value generation (offering ideas and resources without jealousy)
  7. Intellect
  8. Active listening
  9. Instantiation
  10. Responsiveness

Finding space

  • Needs to be dedicated, private, spacious; need to be able to leave your stuff
  • Don’t want to incur large expense; consider professional service firms with unused space for rent (accountants, lawyers, designers, marketing)
  • Minimize commute
  • Need access at all hours

Startup equipment

  • Laptop, speed and capability for 3 years minimum
  • Copier
  • Postage meter + scale, online Stamps account

Necessary specialist help with professional staff, entrepreneurial bent, accessible, resourceful, same risk-profile:

  • Legal; incorporation
  • Accounting, finance, tax; deductions of reasonable expenses such as medical fees, director’s fees, director’s meetings, salaries to household members for assistance, business credit, withholding and payroll tax strategy, office + equipment, memberships and subscriptions
  • Business banking; a relationship manager to handle questions, expedited banking services, small biz surfaces, SBA-related assistance and opportunities, manage the relationship with the banker and trade business opportunities
  • Designer; letterhead, logo, brochure + publicity materials, media kit, web design
  • Insurance broker; disability, E&O (malpractice), liability, property, major medical and health, term life insurance, umbrella liability, long-term care, etc.
  • Payroll assistance
  • Bookkeeping

Marketing, develop market gravity through:

  • Press kit
    • Client Results/Expected Benefits, what do they get?
    • Testimonials, what have people said about you?
    • Biographical sketch, who are you? accomplishments, credentials and background
    • Position papers/white papers, 2-6 pages outlining ideas or opinions on relevant topics to your consulting work (copyright it)
    • Reference list + contacts, try to fill a page
  • Stationary, letterhead, secondsheets, envelopes, address labels, business cards
  • Networking involves providing value to others to generate reciprocity and becoming interesting to others so they’ll direct others to you; try to do something networking-related at least once per week
    • Buyers
    • Media people
    • Key vendors
    • Mentors
    • Recommenders to buyers
    • Endorsers
    • Bankers
    • Key advisors
    • High profile biz people
    • Trade association execs
    • Community leaders
    • Execs planning conferences and meetings
  • Pro-bono work should be confined to visible, connected non-profits that engage you with potential paying clients who are also donating their time

Advanced marketing

  • Website, as credibility builder, not sales builder or ad
    • clear image about expertise
    • reasons to return (changing content, newsletter)
    • credibility of self and firm
    • personal contact
    • expected results
  • Commercial and self-publishing
    • find publications your target audience reads
  • Media interviews, print, web, radio, TV– PRLeads.com
  • Speaking engagements, National Trade and Professional Associations of the United States
  • Newsletters

Key principles of consulting sales

  • Clients come from relationships, not sales
  • Relationships exist with people, not organizations
  • Think from the buyer’s perspective
  • Focus on outcomes, not methodology
  • Trust comes from convincing people you have their interests at heart
  • Provide value to build trust

Gaining conceptual agreement

  1. What are the objectives to be achieved through this project?
    1. How would conditions improve as a result of this project?
    2. Ideally, what would you like to accomplish?
    3. What would be the difference in the organization if this was successful?
    4. How would your customers be better served?
    5. What is the ROI/ROE/ROA impact you seek?
    6. What is the shareholder impact you seek?
    7. How will you be evaluated in terms of the results of this project?
    8. What keeps you up at night?
    9. What are the top 3 priorities to accomplish?
  2. How will we measure progress and success?
    1. How will you know we’ve accomplished the objective?
    2. Who will be accountable for determining progress and how?
    3. What info would we need from customers, vendors and employees to measure our progress?
    4. How will the environment or culture be improved?
    5. How frequently should we assess progress and how?
    6. What is acceptable improvement? What is ideal improvement?
    7. How will you prove to others the objective has been met?
  3. What is the value or impact to the organization?
    1. What would be the impact if you did nothing at all?
    2. What would happen if this project failed?
    3. What does this mean to you personally?
    4. What is the difference for the organization’s customers/employees?
    5. How will this affect performance or productivity?
    6. How will this affect profitability/market share/competitive advantage?
    7. What is this currently costing you annually and what might you gain or save?

Focus on developing “small yeses”

  • Initial contact, hear background, read some material, agree to second contact
  • Second contact, brief meeting
  • Brief meeting, form relationship, substantiative meeting
  • Second meeting, conceptual agreement
  • Proposal, acceptance and initiation

7 Elements of Great Proposals

  1. Situation appraisal (linkage to previous discussions)
  2. Conceptual agreement components
    1. Objectives
    2. Measures of success
    3. Expression of value
  3. Methodologies and options (provide a menu)
  4. Timing, when does the project begin and end
  5. Joint accountabilities
  6. Terms and conditions
  7. Acceptance

Notes – Best Practices in Deal Flow Origination

These notes are from an article entitled “Where Are The Deals?” by David Teten. He also has resources on adding value to portfolio companies which are worth browsing. For notes on a related topic, check out the “Notes – Stanford Graduate School of Business Search Fund Primer” post.

  • the median investor in private companies had to review 80 companies in order to close one transaction
  • investments sourced through personal and professional networks have been shown to yield better results
  • in order to train your relationships, it is important that you provide them with simple, clear investing criteria, not lengthy checklists; provide them a narrowly defined niche of interest (“Retail brands with $50M in annual revenues”)
  • on average it can take 1-2 years between the first meeting with a target CEO sourced through a network and the close of the deal
  • market mapping, identifying key macro and micro drivers of an industry and creating a database of all key companies; identify those with greatest growth potential or competitive white space
  • specialization enhances deal origination through deeper knowledge base, ability to add value through enhanced network and likelihood of being top of mind to key deal sources
  •  monitor target sector for cyclical opportunities and structure shifts; M&A creates orphan divisions and downturns cause strategy refocuses; 30-46% of PE returns over last 30 years driven by EBIT arbitrage (market timing)
  • other valuable sources of deal flow:
    • regional surveys
    • “fastest growing company” lists
    • trade association membership lists
    • commercial vendors
      • Amadeus
      • Capital IQ
      • Dun & Bradstreet
      • Hoover’s
      • InfoUSA
      • Lexis-Nexis
      • Thomson-Reuters
      • OneSource
  • set up alerts in a blog reader based on key words important to your target or industry focus
  • “A large portion of my deal flow comes from people I have rejected in the past.” be kind to everyone, even those you don’t do a deal with
  • consider having a dedicated, SEO-optimized website and blog for your acquisition fund/team that explains what you’re looking for, why, what you bring to the table, etc.; many VCs and most PE investors are not using basic internet marketing techniques (competitive advantage opportunity)
  • Accel Partners and Khosla Ventures post detailed analyses of their target investment sectors; blogging and posting of internal analyses is the “VC freemium model”
  • PE investing is a relationship business and the most important relationships are with LPs, entrepreneurs, executives and intermediaries which are relatively few in number
  • blogging is the best tool for VC investing according to one experienced observer; helps investor gain information, credibility and relationships through improved visibility
  • look for access to secondary interests through directly approaching funds (particularly distressed), markets for secondary interests (SecondMarket, NYPPEX, PORTAL Alliance) and approaching ibanks specializing in secondary interests (Cogent Partners, Probitas, Triago, UBS)
  • service providers such as accountants, lawyers, etc., are typically not good sources of deal flow because they require too much education and often have a fiduciary responsibility to their client; on the other hand, connecting with service providers in a specialized domain that is being targeted can be a good source of insight
  • trawl the Q&A portion of sites such as LinkedIn to identify domain experts for further outreach
  • measure your deal origination efforts with activity measures, deal flow by source, pipeline analytics and industry benchmarking measures
  • many professional services firms do not use a global CRM system such as Salesforce.com, Act, Saleslogix, Microsoft Access or Angelsoft (angel/VC network)
  • Key data sources for CRM systems include employee networks (ContactNet Enterprise Relationship Management), business cards (Cardscan, IRIS, Neat, Presto), data from email and files (eGrabber, Gwabbit, Grab-Text, Broadlook), the “cloud” (LinkedIn, Spoke, Plaxo) and direct from target companies’ websites, media, etc.

Key attributes of top originators in order of importance

  1. persistence (every no gets you closer to a yes)
  2. personality (people do business with those they like)
  3. business and financial judgment
  4. adequate financial sophistication
  5. seniority and appropriate title (decision-maker)
  6. internal authority to get transaction executed
  7. creativity

Important deal signals when identifying targets (utilize commercial databases, social media, data mining and targeted phone research to uncover)

  • Status of the major equity owner
    • PE funds motivated to sell due to fully invested, raising next fund or current fund has aged beyond 5-7 years
    • Large corp raising cash by selling subsidiaries
    • Time limited tax incentives
    • Family in midst of succession battle
    • Death, disease and divorce (“three Ds”)
  • Status of CEO
    • retirement
    • age
    • acknowledgement of limited competence
  • Corporate performance
    • growth too rapid for self-funding
    • underperforming/distressed
  • Industry/economic trends
    • industry consolidation
      • competitive pressure
      • seeing competitors liquidating equity for large gains
    • competitors raising capital; pressure to maintain parity
    • growth sector

Top considerations for deal intermediaries in directing deal flow

  1. Possibility of future revenue
  2. Integrity
  3. Timely responses
  4. “Fair” treatment of sellers
  5. Experience with the industry or owner type
  6. High certainty to close
  7. Friendship
  8. Feedback and referrals
  9. Maintaining a single point of contact

Most valued aspects of acquiring companies by the acquired

  1. Added operational value
  2. No extra costs
  3. Fair treatment of employees post-transaction
  4. Brand
  5. Long holding periods (no buy-to-flip)

Leading databases of institutional investors (use principles of SEO to optimize your profile here)

  • Galante’s
  • Grey House
  • VentureXpert
  • PE funds
    • Eurekahedge
    • Pitchbook
  • VC funds
    • Angelsoft
    • CrunchBase
    • PWC MoneyTree
    • TheFunded
    • VentureDeal

Market Mapping steps

  1. choose industries and geographies of initial interest
  2. define your proprietary point of view
  3. translate into investment theme (industries/geographies of interest)
  4. list major players in target industry/geography
  5. improve market map with feedback from industry contacts and investment targets
  6. determine which activities offer the highest return and outsource the rest
  7. identify areas of future growth
  8. asses fit with your overall strategy
  9. regularly update the market map with additional feedback and lessons

10 Simple Steps to Improve Your Origination

  1. Analyze your network
  2. Use market mapping to develop deep, proprietary insights about your target
  3. Monitor target ecosystem for cyclical/structural opportunities
  4. Align internal interests
  5. Divide and conquer
  6. Centralize data and become an information sponge
  7. Develop a network with limited overlap
  8. Take control of your virtual presence (marketing)
  9. Join the in-person and virtual communities of your target market
  10. Take a leadership role; find a way to stand out and attract others to you

Notes – How To Win The Pitch

The following notes come from a presentation delivered by marketing gurus Tom Patty and John Pietro at a CEO Forum speaker event:

  • “the desire” is key to improving your pitch
  • getting better at the pitch means getting more business; we’re all pitching, all the time
  • 2 ways to grow business
    • get more customers
    • do more business with existing customers
  • the pitch is when you persuade someone to give something to you, and it usually involves competition with others trying to do the same
  • 7 things you must do to win the pitch
    • know your client; if you don’t know much about them, you’ll probably lose
    • know your competition; do you know who you’re competing against, including the alternative of “No.” or “Not interested.”?
    • know how your client perceives you; look them in the eyes to see how they’re responding to you, engage quickly or the story is over
    • know your client’s business; what do they do well, poorly? “feet on the street”
    • know how their customer’s perceive them; show what you’ve learned from their customers
    • have a great pitch team; look in the mirror, don’t be the “behind the counter manager”
    • be lucky; “the harder I work, the luckier I get” attributed to Lincoln
  • why do winners win? because they make a connection; they know what the other person is thinking all the time
  • 8 strategies for connecting
    • humor
    • common interest
    • common values
    • common friends
    • common beliefs
    • sincere interest in the other
    • ask questions
    • common enemies
  • how to connect: shift the goal from “making a sale” to “making a connection with the other person”
  • how to connect
    • know about their business
    • know what’s important to them
    • know who is important to them
    • know how and where they make their money
    • demonstrate that you honestly care about their business
  • the simple business model; identify these elements in the client’s business
    • the offering
    • the passion
    • the profit
  • Bobby Knight, “Anyone can have the will to win, you have to prepare to win.”

Final comments: John Pietro relates a story about a successful pitch to the Wynn Group on behalf of his client, Coca-Cola. Coca-Cola had been the vendor for the Wynn casinos for many years but they decided to put the contract up for bid with Pepsi-Cola. As John and his client prepared for the final pitch to the group, word came through the grapevine that Wynn’s CFO and another lead decision maker had been informed by Pepsi that they could bid the contract much lower than Coca-Cola which likely made the decision a lock. Not ready to give up, and knowing that Coca-Cola HQ in Atlanta wasn’t willing to budge on their bid price and was confident they’d still win, John and the Coca-Cola VP got to work on a new strategy.

The Coca-Cola VP was good friends with Steve Wynn and his wife and had supported them in various local charity endeavors. They also knew that Steve was a great art lover and was particularly fond of “La Reve” by Picasso, which Steve had recently acquired for his collection at great cost. They decided to produce a special Coca-Cola bottle with the painting reproduced on the label of the bottle, laid inside a velvet case in a specialty wooden box.

After making their pitch covering dollars and cents, product offerings, etc. over a period of several hours, and knowing they were 2nd to present on the final day and Steve Wynn was completely zoned out and bored with the whole process, they finished their presentation by having the Coca-Cola VP walk over to Steve and offer him the box, informing him that he was extremely grateful for their personal and business relationship.

Steve Wynn opened the box, pulled out the bottle and began to tear up as he admired it. On the spot, he announced, “Coca-Cola has won our business.” And like that, the decision was made.

Or so the story goes, but it’s an interesting idea of the principles of the pitch in action to the extent that it is true. It’s also a great example of developing a competitive advantage by some means other than price.

A Thought On Nintendo

Although Nintendo missed its sales targets for the Nintendo 3DS platform, they still sold enough of the systems and its games to give credence to the argument that Nintendo’s business model (independent hardware manufacturer plus proprietary franchise software development) has not been killed and buried in a ditch by the transition to mobile, freemium, changing lifestyles, etc.

What is missing in most discussions of Nintendo’s fortunes, however, is the following fact: what has appeared to die is the profitability of Nintendo’s business model.

That is to say, Nintendo still has a market for its proprietary business model, but going forward it appears to be a marginally profitable effort. However, a business with marginal profitability could have strategic (ie, competitive, brand) value, which is why Nintendo may have decided to keep their hat in that ring.

But it is clear now that Nintendo is a box of cash, with potentially valuable franchise IP sitting on top of it, pursuing a “blue ocean” market.

In other words, Nintendo is not presently an operating company, but a development company that might transform back into an operating company at a later date.

Therefore, the analysis of the value of Nintendo now and in the future hinges on the answers to several questions:

  1. How much, and at what rate, will Nintendo Development Company (NDC) burn through their cash stockpile before finding a new operating business? And will they burn through all of it?
  2. What potential valuable uses do their existing IP have that they are not yet considering them for?
  3. Will NDC’s existing franchise IP have value in their new, blue ocean market?
  4. How valuable will the new, blue ocean market be relative to the past size and scope of the company, its present market cap, size of present cash hoard, etc.? (That is, how big is the potential future market?)
  5. Will they abandon their previous markets once they’ve secured a new market?

Review – Oglivy On Advertising

Oglivy On Advertising

by David Oglivy, published 1985

How to produce advertising that sells

  • Advertising doesn’t need to be “creative”, it needs to be so interesting that a person is compelled to buy the product
  • When Aeschines spoke, they said, “How well he speaks.” But when Demosthenes spoke, they said, “Let us march against Philip.”
  • The wrong advertising can actually reduce the sales of a product
  • Study the product you are going to advertise and look for a “big idea” that can sell it (a big idea whose genesis is found in your research of the product itself)
  • Find out what kind of advertising your competitors have been doing for similar products, and with what success, to get your bearings
  • Consumer research: investigate how they think about your kind of product, what language they use when they discuss the subject, what attributes are important to them and what promises would be most likely to make them buy your brand
  • Product positioning: what the product does, and who it is for
  • Decide what image (personality) you want for your brand
  • Your advertising should consistently project the same image, year after year
  • People don’t pick products, they pick images; few customers try all products within a space and compare before picking one they like best
  • Unless your advertising contains a big idea, it will pass like a ship in the night
  • When researching: stuff your conscious mind with information and then unhook your rational thought process and see what creative ideas flow in
  • Questions to ask about a potential “big idea”: did it make me gasp when I first saw it? do I wish I had thought of it myself? is it unique? does it fit the strategy to perfection? could it be used for 30 years?
  • Make the product itself the hero of your advertising
  • Just say what’s good about your product, and do a clearer, more honest, more informative job of saying it
  • If you are lucky enough to write a good advertisement, repeat it until it stops selling
  • A good advertisement can be thought of as a radar sweep, constantly hunting new prospects as they enter the market
  • Lessons from direct response: use 2-minute commercials (not 30-seconds), there are more sales late at night (not during prime time), use long copy (not short copy)
  • Do your homework, avoid committees, learn from research, watch what the direct-response advertisers do

How to run an advertising agency

  • If each of us hires people who are smaller than us, we will become a company of dwarfs; but if each of us hires people who are taller than us, we will become a company of giants
  • Every time I give someone a title, I make a hundred people angry and one person ungrateful
  • Even a mature agency with a pool of potential leaders does well to refresh its blood occasionally by hiring partners from outside
  • Don’t hire: your friends, partners’ children, your own children, or clients’ children (ambitious people won’t stay in organizations following nepotism)
  • It is suicide to settle for second-rate performance
  • It is a good idea to start the year by writing down exactly what you want to accomplish, and end it by measuring how much you accomplished (you can pay people bonuses based on something like this)
  • Companies cannot grow without innovation
  • Be ruthless and let all the “chefs” feel that they work in the “best kitchen in the world”
  • The more centers of leadership you create, the stronger your agency will become
  • The final test of a leader is the feeling you have after you leave his presence after a conference; have you a feeling of uplift and confidence?
  • Every company should have a written list of principles and purpose
  • Agencies are seldom for sale unless they’re in some kind of trouble
  • Retirement planning: buy the building that houses your office with your excess capital
  • Never allow two people to do a job that could be handled by one
  • Never summon people to your office, go to see them in their offices, unannounced
  • If you want to get action, communicate verbally

How to get clients/how to find an agency

  • Only first-class business, and that in a first-class kind of way
  • What you should worry about is not the price of your agency, but the selling power of its advertisements
  • Tear out the advertisements you envy, and find out which agency did them
  • Pick the agency whose campaign interests you the most
  • Don’t haggle over price and if anything, offer to pay more to ensure extra attention and service
  • Don’t keep a dog and then bark yourself

Print advertising

  • Five times as many people read the headlines as read the body copy
  • Unless your headline sells your product, you have wasted 90% of your money
  • Promise the reader a benefit
  • Headlines which contain news are sure-fire
  • Headlines that offer the reader helpful information attract above-average readership
  • Include the brand name in your headline
  • In local advertising, including the name of the city in the headline attracts better readership
  • The silliest thing of all is to run an ad without a headline
  • On illustrations: have a remarkable idea; the reader should ask, “What goes on here?” at a glance; illustrate the end-result of using your product; crowd scenes don’t pull; don’t show the human face scaled larger-than-life; babies, animals and sex catch the most attention; when you use photographs of a woman, men ignore the advertisement and vice versa
  • Remember: when people read your copy, they are alone
  • Copy should be written in a language people use everyday
  • Avoid analogies, stay away from superlatives, include a testimonial
  • An ad’s chance of success is directly proportional to the number of pertinent merchandise facts included in the copy
  • Until you have a better answer, copy others
  • Illustration at the top, headline underneath illustration, copy under headline
  • Capitals retard easy reading; don’t place periods at the end of headlines; use serifed fonts as they aid easy reading

How to make TV commercials that sell

  • The more amateurish the performance, the more credible
  • Commercials which name competing brands are less believable and more confusing
  • Provided they are relevant to your product, characters are above average in their ability to change brand-preference
  • Cartoons can sell things to children but they are below average in selling to adults
  • Use the name within the first ten seconds
  • Play games with the name
  • Open with the fire, you only have 30 seconds
  • Sound effects can make a positive difference
  • It is better to have the actors talk on camera
  • Show the viewer something she has never seen before
  • The only limit is your imagination
  • Make your commercials crystal clear
  • Because radio is a high-frequency medium, people get tired quickly of the same commercial so make several

Competing with Procter & Gamble

  • They use research to determine the most effective strategy, and they never change a successful strategy
  • They always promise the customer one important benefit
  • They believe that the first duty of advertising is to communicate effectively
  • All their commercials include a ‘moment of confirmation’
  • In 60% of commercials, they use demonstrations
  • Their commercials talk directly to the consumer, using language and situations which are familiar to her
  • They communicate the brand name, always within the first 10 seconds and an average of 3 times in addition thereafter
  • Their commercials deliver the promise verbally and reinforce it with supers
  • They show consumers what the product will do for them
  • They show the users of their products deriving some emotional benefit
  • They use slices of life, user testimonials and talking heads, all proven ad techniques
  • They do not spend their money naming competing brands
  • Continually test new executions of ongoing strategies
  • Continually test higher levels of expenditure
  • Almost all brands are advertised throughout the year

Miracles of research

  • Research lets you measure the reputation of your company
  • Research can estimate the sales of new products and the advertising expenditures necessary to earn maximum profits
  • Research can help you determine optimum positioning of your product
  • Research can define your target audience
  • Research can find out what factors are most important in the purchase decision and what vocab consumers use when talking about your kind of product
  • Research can save you time and money by ‘reading’ your competitor’s test markets
  • Research can determine the most persuasive promise; advertising which promises no benefit to the consumer does not sell, yet the majority of campaigns contain no promise; the selection of the promise is the most valuable contribution that research can make to the advertising process; try to find a process that is not only persuasive, but unique
  • Research can tell you which of several premiums work best
  • Use research to measure a commercial’s ability to change brand preferences; recall testing is a waste of time

What little I know about marketing

  • You can judge the vitality of a company by the number of new products it brings to market
  • Concentrate your time, your brains and your advertising money on your successes
  • In the long run, the manufacturer who dedicates his advertising to building the most sharply defined image for his product gets the largest market share
  • Sales are a function of product-value and advertising. Promotions can not produce more than a temporary kink in the sales curve
  • Regard advertising as part of the product, to be treated as a production cost, not a selling cost
  • The task of advertising is not primarily one of conversion but rather of reinforcement and assurance

Review – Hey Whipple, Squeeze This!

Hey Whipple, Squeeze This!

by Luke Sullivan, published 1998, 2012 (4ed)

Sullivan’s appeal

Not just a thoughtful introduction to the basics of creating advertisement and marketing campaigns, Luke Sullivan’s “Hey Whipple!” is also an argument for aesthetic sense in advertising– in essence, you can sell a lot of things a lot of ways, but not all those ways are artful. Using the eponymous “Mr. Whipple” campaign for Charmin toilet paper in the 1970s as his example, Sullivan laments:

In 1975, a survey listed Whipple’s as the second-most-recognized face in America, right behind Richard Nixon… To those who defend the campaign based on sales, I ask, would you also spit on the table to get my attention? It would work, but would you?

His point is arbitrary, it is an opinion on the state of advertising, but it’s worth considering. If you could get sales by getting on people’s nerves, or by pleasing them, wouldn’t you have to be a lazy or annoying person to do it the first way instead of the second? If you’re passionate about life in all its forms, why not fill the world with advertising art?

Evolution in advertising

The era of modern advertising began in the 1950s, when a person could go on a major television variety show and count on everyone who was watching the show (which was nearly everyone in the country) seeing your product message. Soon, with multiple brands available for each product type, advertising men had to come up with a reason to convince people their product was the best in category.

This gave rise to the unique selling proposition: “Buy this product, and you will get this specific benefit.” This was quickly followed by the Creative Revolution, whose motto was, “It’s not just what you say that stirs people. It’s the way you say it.”

Then came the idea of product positioning: the notion that the consumers head had finite space for categorizing products; you must deposition a competitor for another product to take its place.

Learning the art of advertising

The author himself went on a journey as he learned the ins and outs of advertising. He read the One Show and Communication Arts award annuals as a “graduate education in advertising.” He also quickly learned that there were no points for originality, at least not until you knew how to properly execute on the basics. Essentially, “Until you’ve got a better answer, you copy.” Then, once you learn all the rules, you break them.

Copywriting basics

Developing good copy in an ad requires mindfulness about the value of brands:

  • brand equity: all the baggage, good and bad, that is associated with and comes with the brand
  • a brand is the sum total of all emotions, thoughts, images, history, possibilities and gossip that exist in the marketplace about a certain company
  • in categories where products are essentially all-alike (commodities), the best brand wins; example, most light beers are essentially identical, so people are drinking the advertising, the advertising is the brand
  • “if you systematically dismantled the entire operation of the Coca-Cola Company and left them with only their brand name, management could rebuild the company within five years. Remove the brand name and the company would die within five years”; some companies, like $KO, are nothing but a brand

Next, comes the creative process, which has an element of Underpants Gnomery to it:

  1. Gather info about the brand, company, campaign
  2. Do something else
  3. Generate an idea

The point is that you can’t force creativity, and often distracting yourself with unrelated activities during the process can allow the subconscious time to integrate various thoughts and ideas into a usable idea. In fact, sometimes a process can be deleterious to creativity, “If you want to be ordinary then, yes, use a process.”

Getting the reader’s attention is all about dramatization, finding a way to capture the value of your product in a unique, provocative, compelling and memorable way. More importantly, it must be clear to the reader what they get out of the deal:

How to write an interesting ad? Try this: “Hello. I want to tell you something important or interesting or useful or funny. It’s about you. I won’t take very long and there’s a prize if you stay till the very end.”

Find a “thing” that will keep the reader pondering long after they finish the ad. That thing usually comes from the problem (that the product solves) itself, out of the product or the realities of the buying situation.

Consider brands as verbs or adjectives:

  • Sony dreams
  • Nike exhorts
  • IBM solves
  • Coca-Cola refreshes; refresh
  • Gatorade quenches; quench

Keep in mind the theory of positioning; you’re not just competing with brands in your industry or category, you’re competing with the entire universe of brands for real estate in people’s minds. And it’s a cluttered, confusing world. So wouldn’t it make sense that the solution is– simplicity? Look at $AAPL’s ad campaign; they’ve built an entire brand around simplicity.

Never settle for second best; instead, try the polar opposite. Keep searching, the right adjective tends to come out of the product or your customers. Once you find an adjective, stick to it (continually changing means giving up the brand equity you build each time):

A brand is the most valuable piece of real estate in the world: a corner of someone’s mind

Guard it well. And before you begin your campaign, consider the current positioning of your product. It will inform your strategy and create a context for what’s appropriate as you go forward.

Then, try to get inside the target customer’s head.

How does it feel to be this person? Find the emotion

Know your audience. And know the history of your brand; what has been tried, what has worked, what has not. Eavesdrop on your customers. Learning what customers think can give you huge insight into your brand.

Study the award books. See what is already working. Examine the cliches that are already being used by others and avoid them. Even more importantly, perhaps, pay attention to what is not working and what not to do if you seek to be original.

Ultimately, good copywriting comes down to strategy (what your selling point is) and execution (the creativity you employ in communicating the point).

You’re looking for the central human truth of your product:

write down the truest thing you can say about the brand or the product

When you understand this, you can identify and leverage the central conflicts within your company or product category. You should always be looking for polarities. Additionally,

Underpromising and overdelivering is perhaps another way to disarm distrust. Even self-depreciation can help establish authenticity

You also want to examine the central truths of your competitor’s products. In the vein of Charlie Munger’s “invert, always invert”,

Find a weakness in the leader’s strength and attack at that point

Try to get behind the problem. Ask yourself, “What would make me want to buy this product?” Use sales techniques, “the benefit of the benefit”. Keep in mind that “People don’t buy quarter-inch drill bits. They buy quarter-inch holes.” Focus your efforts on speaking to basic needs that are part of human nature and are unchanging.

Remember that advertising is an argument on behalf of a brand so you want to bring an argument that’s good enough to end any further argument.

If you can think of a comeback [that would shut up the annoying guy in the bar], you should consider a campaign based on this argument.

If you’re stumped, try just writing out what you want to say in plain language, first. You can make it memorable, different or new later. Start with, “This is an ad about…” Ultimately, as you add creative elements, the interesting part of an ad should be the sales message itself, not a device pointing to the sales message. In advertising, form often rules over substance (how you say, not what you say).

emotion usually trumps rational thought when it comes to buying something

So, pick an emotion to characterize your campaign. What do you want your customers to feel when they come across your ad? It might help if you got yourself into the right emotional frame of mind.

Another technique to utilize is to create a list of categorical words related to your product. Try picking two at random and combining them to see what kind of images or ideas they cook up.

Don’t try to come up with a perfect idea right away. It’s okay to write down terrible ideas– you can always discard them or revise them later. Just try to get big ideas down, then go back later to work out the details. And when you’re on a roll, stay on it. Don’t take a break or allow yourself to be interrupted so long as you’re in that creative zone. Ask yourself, “What is good about this idea?” and keep coaxing it along and encouraging it.

It’s okay to be provocative, just be sure it stems from your product.

If you’re about to spend advertising dollars on a campaign and you can’t imagine that anybody is going to write about it or talk about it, you might want to rethink it. It means you probably missed injecting a truth or social tension into it.

Find creative ways to integrate the medium into the message. Also, avoid being an ad as much as possible.

Visuals work fast.

If you can reduce your idea to one simple thing that gets customers to lean in, your ad is a resounding success.

Learn what kind of visual cliches are common in your category and avoid them.

Show, don’t tell. Give your audience some credit, give them an opportunity to figure out how witty you are without you spelling it out for them. “It is far more impressive when others discover your good qualities without your help.”

Try on other people’s shoes, think about how different people will interpret or appreciate your ad.

Use metaphors– they’re conceptually efficient.

Focus your efforts by employing simplicity. Reduce to the essential. Simple is easier to remember.

Every item you subtract raises the visibility and importance of what’s left

Questions to ask to judge the “size of your idea”:

  1. What is the press release of my idea?
  2. Is my idea cool enough that people would seek it out and watch it on demand?

Creating an ad

Start by breaking down the product elements into idea categories and work them one at a time. Don’t be frustrated by dead-ends and don’t think you can get a winning idea after a few tries:

We cannot seriously believe we’ll have crafted a ticket-selling, brand-building, One Show-winning ad after 22 stinking tries… the wastepaper basket is the writer’s best friend

To create an authentic ad experience,

Avoid fake people. Avoid fake names.

Similarly, don’t treat the ad target like an idiot by being too obvious.

Never show what you’re saying and never say what you’re showing

Write like you talk.

And keep an actual individual in mind as you write ad copy… think about the qualities of the kind of person whose attention you’re trying to get.

Put your most interesting, surprising or persuasive point in the first line if you can.

When you’ve done it well, you shouldn’t be able to take out any sentence without disrupting the flow and structure of the entire piece. Test your piece for congruency by reading it aloud.

An ad needs a boss. There needs to be an overall visual hierarchy.

Own something visual.

Social media advertising

Keep the following guidelines in mind:

  • Inspire; give them something beautiful or emotive
  • Provoke; give them something that makes them think
  • Entertain; give them something that’s fun to do
  • Status; give them something that confers kudos among their community
  • Utility; give them something that makes their life easier
  • Access; give them something they couldn’t otherwise get

The human brain is wired to hunger for story. Discover the stories behind a brand and tell them in a way that will get people’s attention.

Social should run through all other formats and efforts like a thread.

“What does this brand stand for? What can we do for these people?”

Five types of social media users:

  1. joiners
  2. spectators
  3. creators
  4. critics
  5. collectors

Design content that’s appropriate for the type of people following you

The objective with your social media efforts is to create an “all-volunteer marketing department” that work for your brand without being paid. Brand ambassadors. However, these users must feel rewarded for participating in your community.

“Is it useful, beautiful, entertaining, incredible, participatory and interactive?”

Facebook-savvy brands:

  • Skittles
  • Starbucks
  • Target

Twitter tips:

  • listening tool
  • research platform
  • service center
  • lead generator
  • promotion device
  • community builder
  • use hastags to make tweets searchable and for making groups
  • frequent $100 prizes beat one big $500 prize
  • keep messages 20 chars short of 140 limit to allow for retweeting

Mobile is where everything is headed, so develop a mobile-ready ad and social media presence.

Useful phone apps: schedule a test drive, service appointment, meet w/ salesman

Putting it all together

Adjust advertising efforts to customer habits– how does a typical customer spend their day?

Don’t buy media without researching customer habits and don’t use the same media buy plan for every audience; you risk diluting efficacy, increasing media competition.

Think through how a customer decides to buy your product, visualize what happens as they move toward actually buying your product, think about “contact points” along the way.

Generate ideas worth advertising.

How would you tell your brand’s story around the campfire?

What works in outdoor may suck in print.

Pull stunts to multiply ad effectiveness and get news coverage which is free publicity.

“Create one world and then look at it through the eyes of another.”

Viral is a result, not a strategy.

Telling stories visually

“Don’t talk at customers. Tell them a story with pictures. Start with images. Stay with images.”

“The eye will remember what the ear forgets.”

Don’t worry too much about production values, worry about the idea.

The most important part of any television advertisement is its conclusion, the last five seconds.

Radio

Radio is “theater of the mind.”

Radio lets you do impossible things– things way too expensive to make into TV commercials.

Radio ad thought process:

  1. Figure out what you want your listeners to feel
  2. What do you want them to do?
  3. Base it partly on your product, partly on what the competition is doing and partly on what you know about the customer

You want your listener to immediately get what’s going on, within the first 5 seconds.

Overwriting is the most common mistake people make in radio. Be a genius. Underwrite.

Write exactly as people speak.

Let a straight voice-over do the heavy lifting.

Make sure it sounds like everyday speech. Read it aloud.

Avoid the formula of “schtick–serious sales part–schtick reprise.”

Avoid jingles as you would a poisonous toad.

Minute subtleties are going to be lost.

Cut into a scene as late as you possibly can, in media res, “in the middle of things.”

Let the sound effects tell your story for you.

Keep cacophony out.

A flat read is almost always best.

“You cannot logic your way to an audience’s heart.”

Review – The 22 Immutable Laws Of Marketing

The 22 Immutable Laws Of Marketing: Violate Them At Your Own Risk

by Al Ries & Jack Trout, published 1993

The redundant and contradictory laws of marketing

The 22 Laws is a helpful quick-read book for those looking to dip their toe into the waters of marketing. It takes a high level approach to the strategy of marketing and is definitely a “how-to-do” not “what-to-do” title. As such, my goal in this write-up is to focus on the laws I found to be most reasonable and deserving of consideration, the combine several laws that seemed to be versions of one another or the same concept examined from different angles, and dropped a number of laws I thought were too crude to be of any use.

An abridged journal of immutable marketing laws

My abridged version of The 22 Laws is as follows:

  1. It’s better to be first than it is to be better
  2. If you can’t be first in an existing category, introduce a new one in which you can be first
  3. Target mindshare, not marketshare
  4. Perception is reality; focus on perception, not products
  5. Own an exclusive word or attribute; your product and a category keyword or attribute should be inseparable in people’s minds
  6. The only positions that count in the market are first and second, and second’s marketing strategy is dictated by first’s
  7. Marketing categories will continually bifurcate over time
  8. There is a temptation to extend brand equity to new product lines, which simply dilutes the brand and invites additional competition
  9. You must be willing to give up product line, target market or constant change in order to dominate a market
  10. Failure is to be expected and accepted
  11. Trends, not fads, are the key to long-term marketing success

Putting the 11 laws into practice

Hopefully each of the 11 abridged marketing laws above are self-explanatory. But even as simple as they are, each holds a wealth of additional implications.

Law 1 is related to the concept of competition and is tied to laws 3 and 4. If you are the first product into a market you will not only likely benefit from a first-mover advantage but, if done correctly, you will have positioned yourself to define the market. People form habits and tend to make up their mind once and then not change it. When you’re first into the market you have a fortress position within people’s minds that entrant firms must assault if they hope to dislodge you. People tend to remember those who did things first, not best. It is easier to entrench than dislodge.

This is why law 2 is important– you want to avoid being an entrant in the competitive landscape as much as you can. Much better to create a category where you are the only supplier at best, or force your competitors to be No. 2, 3, 4, etc. at worst. Once you’ve created a category you are first in, promote the category, not your brand.

Marketing is a deeply psychological enterprise, which is why laws 3-5 focus on the role perception and mental imagery play in good marketing practice. But the specific application of these psychological rules is once again strategic in nature– they are each about how you compete and limiting your competition. By owning a word or attribute, as law 5 suggests, you deny your competition the benefit of identifying their product with that word and you often get a halo effect as related words and benefits get associated with your product in the consumer’s mind as well. The most effective words are simple and benefit oriented.

Furthermore, your word should be exclusive and precise, and you should only have one. If you pick something like “quality” you haven’t said anything about your product, because everyone intends to create a product with quality. You haven’t differentiated. And if you try to pick “value and safety”, you’ll lose because you’re now competing with two opponents– the one which prides itself on value and the one which prides itself on safety. It’s harder to fight two people than one. And it should go without saying that, if available, you should always choose the most important word or attribute to focus on.

Law 6 is important to understanding the concept of relativity in marketing. Your marketing strategy should always take account of “which rung of the ladder” you’re on as certain claims and strategies won’t make sense or will sound inauthentic if given from the wrong place on the market share ladder. Further, it will never be appropriate to market as if you’re No. 1, when you’re No. 2. The advantage of No. 1 is telling everyone you’re the best. The advantage to No. 2 is telling people they have an alternative to No. 1.

Laws 7-9 deal with the concept of marketing focus, or concentrating your marketing strategy to a narrow band where you can actually be competitive. Category bifurcation is a natural process (eg., computers –> laptops vs. desktops; automobiles –> family sedans vs. economy compacts, etc.) in market evolution. Many firms make the mistake of trying to maintain leadership in all resulting markets as initial markets bifurcate, instead of sticking to the market they have an advantage in where their brand is trusted most.

Worse, they dilute their own brand by bifurcating their market themselves (eg., 7UP –> cherry 7UP vs. original 7UP). The market that 7UP made for itself as an “uncola” and the marketing strategy it followed to enable that success does not carry over to derivative products and it ends up just competing against itself. Sometimes, you simply expose yourself to more competition in the process as competitors mimic you and you further slice up a slice of the market.

This is why a successful marketing strategy entails “sacrifice”, either of product line, target market or the impetus to constantly change. Expanding product lines mean expanding competition. According to earlier marketing laws, a brand can’t mean everything or it means nothing. Expanding product lines under a brand means movement toward “meaning everything/nothing”.

Similarly, few products will appeal to everyone. Attempts to appeal to everyone usually result in appealing to no one. Focus on the target markets where your product has the strongest appeal and then dominate those markets. And when you have a marketing strategy that works and results in market dominance, leave it alone, don’t go out in search of a new market you might not dominate (while giving up your dominant position in the process!)

The eleventh law highlights the long-term nature of successful marketing strategies. Good marketing is about coming up with an angle or word that differentiates your product and then establishing a long-term marketing direction to maximize the idea or angle over time. This implies avoiding hype and the temptation to market your product as a fad and instead seek to create a trend, which is more enduring and has more competitive inertia making it harder for your opponents to fight.

The law of failure (10) is the one likely most forgotten and least appreciated. Failure will happen. Not every strategy will work out. In the event of a failure, it’s best to cut your losses early and change directions. At the same time, it’s critical to understand that the first several laws of marketing entail risk-taking (for example, being first at anything involves sticking your neck out) so occasional failure is part of the territory.

Review – The Big Picture: Money And Power In Hollywood

The Big Picture: Money and Power in Hollywood

by Edward Jay Epstein, published 2005

What the movie business was like in 1947

The central theme of “The Big Picture” is that the economics of the film industry and the profitability of Hollywood (both mechanistically and proportionally) have changed significantly from 1947 to the present day. By way of comparison, consider a few of the following starting statistics:

  • In 1947, the major film studios produced 500 films; in 2003, the six major studios produced 80 films
  • In 1947, 90M people out of a total population of 151M went to a theater each week in America at a cost of about $.40/ticket; in 2003, less than 12% of the population saw a movie in a given week
  • In 1947, 4.7B movie tickets were sold in America; in 2003, 1.57B were sold
  • In 1947, “feature films could be shot in less than a month, and some B films were shot in a week”; today, the average live action film takes over a year to produce and the average animated film takes 2-3 years to produce
  • In 1947, “virtually all [studio] films” made money, with the average cost of making a film at $732,000, and average net receipts of around $1.6M; in 2003, “a relatively good year, the six studios lost money on the worldwide theatrical release of most of their titles”

By 2003, the cost of producing the average film had risen to $63.8M. Although the dollar fell 7x from 1947-2003, the cost of producing a film rose 16x! Clearly, when the trend in film production is studied over time it is obvious that film production has become a substantially more capital-intensive business, it is a higher risk business (in terms of the chance and cost of failure) and it is substantially less profitable, at least in terms of theatrical release.

How and why did the economics of the film industry change, and how have film studios managed to stay in business today if their main product (theatrical film releases) are money losers on average? The answer consists of two elements: changing government regulations, and changing strategic dynamics.

Government intervention

The new studio system is the product of three government interventions. (The old one was a product of one– patents and intellectual property laws that caused movie studios to flee the Edison Trust on the East Coast, where the ET’s lawyers had a harder time pursuing patent infringement claims.)

  1. In 1948, the Justice Department issued a consent decree to the major film studios, “give up control over major retail outlets [the theater distribution system] or face the consequences of a criminal antitrust investigation”
  2. In 1970, the FCC passed the fin-syn rule on studios’ behalf, giving Hollywood an advantage over the networks in the syndication business, laying the seeds for and eventual studio takeover of the television network industry and the rise of the international, corporate media conglomerate business model
  3. In the 1990s, fin-syn was weakened and in 1995, abolished altogether by the FCC, allowing studios and networks to become part of vertically integrated conglomerates controlling production, distribution, stations, networks, cables, satellites and other means of TV transmission

A few other intervention-related items of note: the Nixon administration asked studios to portray drug users as menaces to society rather than victims of addiction, resulting in the start of perpetrators of crime frequently being depicted as drug users in film and television productions. Additionally, in 1997 Congress passed a law allowing studios to be paid through a formula for integrating antidrug messages into the plots of television series that were approved by White House Office of National Drug Control Policy.

Your tax dollars at work!

Disney changes the game

The second major change to the old studio production and profitability model was Walt Disney’s decision to focus on young children and families as the primary audience for his film and television productions. This strategy began with development of Snow White and the Seven Dwarfs, which began in 1934. Between 1937 and 1948, 400 million children’s tickets at an average cost of $.25 had been sold. The film was the first to gross over $100 million. It was also the first film to have a commercial soundtrack, the first film to have merchandising tie-ins and the first film with multiple licensable characters.

Disney’s strategic decision was brilliant– he created a niche market (children’s entertainment) that the other studios refused to enter. He had this new and growing market all to himself for a long period of time, during which he established his brand as essential and synonymous with family entertainment. He  and his successors pioneered the idea of film releases as simply the starting point in establishing a long-lived exploitable IP asset which could generate additional cash flows outside the box office through merchandising and licensing arrangements.

The way Hollywood works today

Today, the major movie studios have either been subsumed into massive, international corporate conglomerates, or else they’ve become one (like Disney). Movies are just one of their many businesses, and the role of the box office has dwindled. Many movies lose money at the box office. But this is okay because the corporate studios issue their content and IP across their other media (TV, merchandising, music, home entertainment products, etc.) to make back their money, and then some.

As one example of new studio economics, consider the film Gone in 60 Seconds— worldwide box office gross of $242M, $103.3M paid by Disney to produce the film, $23.2 for physical distribution into theaters (prints and insurance), $67.4M on worldwide advertising, $12.6M in residual fees, all in costs of $206.5M to get the film into the theater and to generate an audience to see the film. The theaters then kept $139.8M of the box office gross. Disney’s distribution arm (Buena Vista) collected $102.2M. Disney’s overhead of $17.2M for employee salaries in production, distribution and marketing and interest payments of $41.8M mean the film lost over $160M by 2003.

But that isn’t the end of the story for a film like Gone in 60 Seconds, as the film IP takes on a new life once it leaves the theatrical market and enters the world of home entertainment, where it is sold as a personal home library title, rented and licensed for syndication through major domestic and foreign TV and other media networks. For animated films (and some live action titles), there is also the opportunity to merchandise relevant IP and license the film’s IP as a movie tie-in for the products of other companies.

As can be seen from the numbers above, the two primary drivers of increased film production costs are related to the competitive aspects of film advertising and distribution and the end of the “chattel talent” system whereby studios essentially owned their stars and laborers (producers, directors and film crews), compared with the “star power” arrangements of today. According to the author,

In this new era, stars, not studios, reap the profit their brand names bring to a film.

One reason that advertising costs have risen is due to the fact that in the previous era, one admission got you in for multiple screenings and every moviegoer essentially watched every screening shown during their admission. Today, movie audiences are highly segmented. This means that studios have to “create” a new audience for each and every film, they can not count on a moviegoer purchasing a general admission ticket which will result in them watching all of their films. As one Sony marketing executive put it:

If we release twenty-eight films, we need to create twenty-eight different audiences which necessitates twenty-eight different marketing campaigns.

Additionally, the transformation of the film industry into a global market with simultaneous releases means higher advertising costs (no way to reuse promotional prints and media as films no longer have “rolling releases” across the country) and higher physical film production and distribution costs (every theater needs its own copy of the film which must be shipped there and back). And because the studios no longer “control” their talent and labor, they must be willing to pay top dollar for the name-brand stars that draw the biggest crowds.

However, the studios have also gotten savvier at advertising and cross-marketing in the age of ownership by global, corporate media conglomerates. Major Hollywood studios cross-promotionalize across their various media. A studio can get actors, directors, etc. to be interviewed on the corporate parent’s TV networks to promote an upcoming film. Corporate sponsors with TV rights for certain sports and national events can get additional advertising and exposure for the corp parents film studios as well.

Film studios have also learned how to leverage their promotional efforts through tie-in marketing and merchandising partnerships. In these relationships, a leveraged marketing and advertising budget results because your partners pay to promote your characters and content for you. For example,

[McDonald’s] invested more than $100M — four times Disney’s own advertising budget– in just one film, Monsters, Inc.

The clearinghouse system

Another essential element of the modern film business that must be understood is the “clearinghouse system.”

Studios now outsource the making and financing of most of their movies and television series to off-the-book corporations

Movies used to return almost all of their money in a year; now, revenue flows in over the lifetime of licensable rights, often lasting many decades.

When revenue flows in, it is the studio that decides (initially at least) who is entitled to what part of it, and when, and under what conditions

which works to the studios advantage because

the studios usually control the information on which the payments are based

Theaters, distribution and merchandising

Today’s theaters have three primary businesses: concessions vending, movie-exhibition, and corporate advertising. However, contrary to popular belief and news headlines, the box office is not the primary source of profits for theaters– the selling of refreshments is.

Theaters want a film with broad appeal so there are more people attending who will buy more refreshments. Additionally, they want films no longer than 128 minutes in length because every film which exceeds that limit causes them to lose a potential evening showing.

Film studios, meanwhile, simply want their films to succeed at the box office because there has historically been a connection between success at the box office and later success in the home entertainment market, which is much more profitable for them as studios end up with only 45-60% of the box office revenues on average.

Non-domestic box office and non-theatrical release have long been critical to the Hollywood model. As early as 1926, Hollywood studios represented 3/4 of European box office and 1/3 of Hollywood revenues came from Europe. In the 1950s, Hollywood film studios had a 30% share of European and Japanese box office which grew to 80% by 1990. American film studios seem to flagrantly violate the Greenwaldian strategic mantra of “compete locally”!

Paramount and Universal jointly control the largest overseas distributor, United International Pictures (UIP). Pay-per-view TV earned the six major studies $367M in 2003, a relatively modest sum of money despite the hype of the model. Other major sources of revenues in nontheatrical release are airline in-flight entertainment, hotel pay-per-view and US military theaters overseas. One of the benefits of television syndication of studio content is that almost all marketing expenses are paid by the broadcaster and the network.

Merchandising is another critical element of film studio profitability. For example, merchandising alone adds an estimated $500M profit to Disney’s bottom line each year.And The Lion King produced $1B in retail sales by itself. Streams of licensing revenues can enrich a studio’s clearinghouse for many decades.

Critical competitive dynamics of the film industry

It’s a well-known fact within the industry that “the date on which a film will open can make or break a movie.” Traditionally, the 9 months between September and May when school is in session promises only a fraction of the audience possible during the three months in the summer season. Studios must compete for a limited number of big-release slots and face a distinct “prisoner’s dilemma” strategic framework in which the refusal to cooperate in selecting movie release dates can result in massively diminished box office performance for each studio.

The studio whose film has the weaker appeal to the target audience has a strong incentive to change its slot, since if the NRG numbers prove correct, it stands to get a smaller share of a confused and cross-pressured audience and will probably fail.

A key competitive strategy for film studios is the creation of franchise films. Franchise films are more stable sources of revenue, because they’re more consistent performers at the box office and in the sell-through of the home entertainment market. Additionally, they ostensibly help to lower the costs of advertising and marketing because there is already a fan-base/audience in place which does not need convincing anew to see a franchise sequel film or buy related merchandise. Additionally, television and other syndication networks are willing to bid higher for franchise films because of their consistency and predictability.

One key to creating franchise films is close adherence to the “Midas formula.”

The Midas formula

Only a very few films account for the lion’s share of a studio’s earnings. The film’s that succeed most often and most extremely typically follow the “Midas formula”. Films which follow this lucrative formula have the following features:

  1. based on children’s stories, comic books, serials, cartoons or a theme-park ride
  2. child or adolescent protagonist
  3. fairy-tale like plot
  4. strictly platonic relationships
  5. appropriate for toy and game licensing
  6. a rating no more restrictive than PG-13
  7. end happily
  8. use digital animation
  9. cast actors who are not ranking stars (do not command gross-revenue shares)

The Disney empire is largely the result of Disney’s successors closely hewing to this formula. R-rated and live action films have far less chance to reach their break-even compared to films adhering to the Midas formula. In act, non-formula films have little, if any, possibility of becoming billion-dollar-club members.

Other facts and figures and final comments

First, a few stray facts and figures:

  • the average cost of American distribution in 2003 was $4.2M per film for the major studios, while independent films averaged $1.87M per film
  • the six major studios spent more than $1B in 2003 on film prints
  • in 2003, the average advertising expense per film was $34.8M, compared to 1947 when $60M was spent on distribution and advertising by ALL major film studios combined
  • in 1947, movies were America’s third largest retail business and the six major studios collectively earned $1.1B, or 95%, of all film “rentals” at the domestic box office
  • in 1947, there were 18,000 neighborhood theaters
  • in 1947, Clark Gable made less than $100,000 per film

Studios are moving away from physical film in favor of digital projections. This could save millions in distribution costs as there will be no more cost of producing, shipping, storing and retrieving prints from film exchanges all over the world.

A critical summary of the film studio business model from Richard Fox, a vice president at Warner Bros.:

The studios are basically distributors, banks and owners of intellectual copyrights.

Notes – Competition Demystified: Chapter 5

Reading notes to Competition Demystified, by Bruce Greenwald and Judd Kahn

Looking for competitive advantages through industry analysis

One way to approach competitive analysis is by critically examining two key measures of performance:

  • operating margins; most useful when comparing firms within an industry
  • return on invested capital; useful for comparing between industries and within

These ratios are both driven by operating profit so they should track one another; when they do not, changes in how the business is financed may be the cause.

As the authors state,

Though the entries on the income statement are the consequences, not the cause, of the differences in operations, they tell us where to look for explanations of superior performance.

Learning by example: the Wal-Mart (WMT) case study

The explanations for Wal-Mart’s success have been numerous and diverse:

  1. WMT was tough on its vendors
  2. WMT monopolized business in small towns
  3. WMT had superior management and business systems
  4. WMT operated in “cheaper” territories in the Southern US
  5. WMT obtained advantages through regional dominance

Let’s examine these claims in order.

The first explanation fails the sniff test because WMT in fact had a higher Cost of Goods Sold (COGS) than it’s competitors. Additionally, its gross profit margins did not increase as it grew larger, implying it was not getting better and better economies of scale with suppliers by buying in bulk.

And while Wal-Mart did manage to generate additional income from higher prices charged in monopoly markets, this advantage was more than offset by its policy of “everyday low prices” in more diverse markets where WMT did higher volumes.

Technologically, WMT was a buyer of logistics and distribution technologies, not a developer of them. Anything it used, its competitors could use as well. Managerially, WMT appeared to have no advantage when it expanded its retailing into hardware, drug and arts and crafts stores. Why would WMT’s superior management be effective at discount general merchandise retailing but not add additional value in these markets?

The fourth explanation fails because Wal-Mart’s opportunities for expansion in the home markets of the South were not very large. Much of Wal-Mart’s growth and success took place in larger markets outside the South.

Wal-Mart’s secret sauce was regional dominance

Competitive advantages occur in numerous, often complementary ways. In the case of WMT, the initial competitive advantage was centered around a concentrated, regional dominance. Though smaller than its competitor Kmart, by focusing on one local region WMT was able to create a number of other competitive advantages for itself, including local economies of scale, that were not available to its competitor:

  • lower inbound logistics due to density of Wal-Mart stores, distribution facilities and vendor warehouses
  • lower advertising costs due to concentration of stores and customer base in target markets
  • concentrated territories which allowed managers to spend more time visiting stores rather than traveling to and from

Looking at Wal-Mart’s activities within the relevant boundaries in which it competed, it was far larger than its competition.

Eventually, economic law won out and growth took its toll on WMT’s great business,

it was unable to replicate the most significant competitive advantage it enjoyed in these early years: local economies of scale combined with enough customer loyalty to make it difficult for competitors to cut into this base.

WMT’s margins and return on capital both began to fall during the 1980s as it began its aggressive growth into the national market. Until then, WMT enjoyed the absence of established competitors.

What could WMT have done if it wanted to grow but maintain its competitive advantages?

If it had wanted to replicate its early experience, Wal-Mart might have targeted a foreign country that was in the process of economic development but that had not yet attracted much attention from established retailers.

Lessons learned from the WMT case study

The WMT case study leaves several general impressions:

  1. Efficiency always matters
  2. Competitive advantages matter more
  3. Competitive advantages can enhance good management
  4. Competitive advantages need to be defended
Learning by example: the Coors case study

From 1945 to 1985, the brewing industry experienced significant consolidation due to the following factors:

  • demographic trends, as home beer consumption rose at the expense of tavern consumption
  • technological disruption, as the size of an efficient plant grew from 100,000 bbl/y to 5M bbl/y, leaving many smaller brewers in a position where they could not afford to keep up
  • advertising trends, as the advent of television meant national brewers could spread fixed advertising costs over a larger revenue base
  • growth in brands, the market segmentation of which did not lead to growth in consumption but did result in larger advertising burdens for smaller brewers
The organization of Coors business

Coors’ business operations were characterized by a few fundamental structures:

  1. vertical integration, Coors produced its own strain of barley, designed its own cans, had its own bottle supplier and even had its own source of water, none of which produced a meaningful cost advantage
  2. operated a single brewery, which required it to transport all its product to national markets at great cost rather than producing within each market and shortening transportation routes
  3. non-pasteurization, which led to shorter shelf life than its rivals, adding to spoilage costs
  4. a celebrity aura, which, like most product differentiation strategies, did not result in a meaningful premium charged for a barrel of Coors compared to its rivals
For Coors, geographic expansion brought with it higher costs and reduced competitive advantage as these business organization decisions interacted with the wider distribution network in unforeseen ways:
  • longer shipping distances from the central plant in Golden, CO, resulted in higher costs that could not be passed on to consumers
  • the smaller share of new local markets it expanded to meant it had to work with weaker wholesalers
  • higher marketing expenses were incurred as Coors tried to establish itself in new markets and then keep up with the efforts of AB and Miller
The net result was that Coors was “spending more to accomplish less.”

Why Coors expansion was so costly

First, although Anheuscher-Busch, the dominant firm in the brewing industry, spent almost three times as much in total on advertising compared to Coors, it spent $4/bbl less due an economy of scale derived from larger total beer output.

Second, Coors experienced higher distribution costs because distribution has a fixed regional component which allows firms with a larger local share of the market to drive shorter truck routes and utilize warehouse space more intensively.

Third, advertising costs are fixed on a regional basis. Again, the larger your share of the market in a given region, the lower your advertising costs per unit. Coors never held substantial market share in any of the national markets it expanded into.

If Coors had “gone local” (or rather, stayed local), all of its competitive disadvantages could’ve been turned into competitive advantages. Advertising expenses would’ve been concentrated on dominant markets instead of being spread across the country. Freight costs would’ve been considerably lower as it would not have been transporting product so many thousands of miles away from its central plant. With a larger share of the market it could’ve used stronger wholesalers who might have been willing to carry Coors exclusively because it was so popular in local markets.

Additionally, Coors sold its beer for less in its home regions, allowing it to win customers from its competitors by lowering prices, offering promotions and advertising more heavily. Expansion, when and if it occurred, should’ve worked from the periphery outward.

The Internet and competitive advantages

Greenwald and Kahn are skeptical of the virtues of combining the Internet with traditional competitive advantages:

The main sources of competitive advantages are customer captivity, production advantages and economies of scale, especially on a local level. None of them is readily compatible with Internet commerce, except in special circumstances. [emphasis added]

With the Internet,

competition is a click away,

and furthermore,

economies of scale entail substantial fixed costs that can then be spread over a large customer base

a state of affairs which often doesn’t exist with virtual, e-businesses.

The Internet is great for customers, but its value to businesses as a promoter of profits is questionable. The Internet doesn’t provide a strong barrier to entry because it is relatively inexpensive to set up an e-commerce subsidiary. Additionally, there are no easily discernible local boundaries to limit the territory  in which a firm competes which is another essential element of the economies of scale advantage.

In other words,

the information superhighway provided myriad on-ramps for anyone who wanted access.

Questions from the reading

  1. Greenwald and Kahn argue that management time is the scarcest resource any company has. Is this true? Why can’t companies solve this simply by hiring more managers and increasing the manager-employee ratio?
  2. In the case study with WMT, why couldn’t Kmart at least match WMT’s efforts in establishing critical infrastructure organization and technology and compete on that basis?
  3. What were the sources of WMT’s customer loyalty?
  4. Which publicly-listed firms have regional dominance as a specific strategy they follow? Do these companies’ financial performance seem to suggest they derive a competitive advantage from this strategy?
  5. In the case study with Coors, what were the industry conditions in beer brewing that made national competition more efficient than local competition?
  6. Standard Oil, another producer and distributor of “valuable liquids” was vertically integrated. Why was vertical integration beneficial in the oil industry but not in the brewing industry for Coors?