Adapt (and prosper) or die: Why the marketing industry is becoming attractive to outsiders
Business, they say, is a lot like life – and so it is. In life, particularly at times of crisis or upheaval, it is not the strongest, or most intelligent, organisms which survive to pass their genes to future generations – it is the most adaptable; this, truly, is Darwin’s “survival of the fittest” - and so it is in business.
IBM has moved with the times
The very fittest, most adaptable enterprises last, at most, for a couple of centuries; most businesses die, or at least enter a long period of decline, quite quickly. To survive – let alone grow – businesses must adapt to the environment around them and the demands of their customers. Many of our best-known, and longest-running, corporations have morphed so much that their founders would no longer recognise them.
Nokia began back in the 19th century as a conglomerate making rubber boots, cables and paper. By the 1970s, thanks to its cables business, it was moving into telecoms – and a couple of decades later it was the world’s largest maker of mobile phones. However, once established as market leader, its inability to adapt to a fast-changing environment (and competition from Samsung and Apple) has meant that it has missed out of the high-margin smartphone business – an area it previously had competitive advantage in through it’s links with, and subsequent purchase of, the Symbian operating system. I think Nokia will be with us for a while, but it needs to find something else to do if it is to have a viable long-term future.
An example of how to prosper through adaption is IBM. ‘Big Blue’ was founded in 1911 as an office equipment/adding machine maker, and by 1960 had become the world’s biggest computer manufacturer, supplementing its mainframe activity with a very strong foothold in the desktop PC market in the 1980s running the Microsoft DOS system (the forerunner to the ubiquitous Windows of today).
However, by the early 1990s, as hardware got cheaper and more powerful, its mainframe business began to suffer, and margins on desktop PCs got thinner. It was a bloated company working in low-margin, commoditised areas and was in big trouble. In one of the most dazzling reinventions in corporate history, CEO Lou Gerstner turned an $8bn loss into a $3bn profit within a year. He also moved Big Blue away from low margin business into high-margin business – including software, research and consulting, while retaining the legacy mainframe/supercomputer business. And the rest, they say, is history – IBM is one of the most profitable of all American companies.
Although it’s by no means of a similar scale, St Ives’ change from a printer into a marketing consultancy is, in its way, just as remarkable. You used to be able to make a decent living out of print, but not any more. In a digital world, supply far outstrips demand, and apart from at the specialized and high ends, it is a massively commoditised activity which generates slender margins.
On 11 March, St Ives acquired Amaze, a Manchester-based full-service digital agency offering services such as search, SEO, design, data management, brand strategy and technical consulting, from Hasgrove plc. Last year Amaze delivered an operating profit of £1.7m on the back of £17.3m turnover – a pretty good performance given it was purchased by Hasgrove in 2007 after Amaze had gone into administration.
This not only shows what can be done in terms of rebuilding companies in a relatively short timeframe, but from a St Ives perspective is probably more important for what the acquisition represents rather than what it adds to its bottom line.
Ten years ago St Ives was an international printer with some of the UK’s biggest magazine publishers on its books. Seeing the writing on the wall, the company disposed of its international business in 2008 and in 2011 sold off its St Ives Web print business. Over the past five years, as documented in The Drum, it has been buying up digital marcomms businesses – such as mobile agency Sponge, data marketer and software developer Occam DM, the market researcher Incite Marketing Planning, field marketer Tactical Solutions and retail consultancy Pragma. It has also bought, or invested in, businesses that relate to its legacy activities – such as The Evolved Group, a leading provider of eBook conversion software to the publishing industry; and point-of-sale specialist SP Group.
St Ives is now a group of 13 businesses and total revenues of £327m. Its “print on paper” business is still there, but smaller and subsumed within a wider “publishing services” portfolio that includes higher margin activities such as book production, print-on-demand, e-book conversion, design, and consultancy.
Look at St Ives, and other legacy firms like newspaper and magazine distributor John Menzies (which last year bought Orbital Marketing Services Group) and ATM operator Cardtronics' acquisition of media agency i-Design – they all have ambitions to get out of declining industries and into the same space that has allowed Omnicom, WPP, Publicis, Interpublic and the like to become giants.
The proof, as ever, is in the City pudding. Shares in St Ives plc are up nearly 60 per cent on this time last year. Investors obviously think CEO Patrick Martell and his team are doing something right.
Andrew Moss is a partner at Green Square, corporate finance advisors to the media and marketing sector.