1 Carry out a five forces analysis of the advertising industry in 2015. What is the strength of the five forces and what underlying factors drive them?
What is the industry attractiveness?
2 What are the changes in the industry? Which forces are becoming more negative or positive for the major advertising agencies?

This case is centred on the global advertising industry which faces significant strategic dilemmas driven by the rise of consumer spending in developing economies, technological convergence and pressures from major advertisers for results-based compensation. Strategy in this industry is further explored in MyStrategyExperience simulation ( https://heuk.pearson.com/simulations_my_strategy_experience.html).

In the second decade of the new millennium, advertising agencies faced a number of unanticipated challenges. Traditional markets and industry operating methods, developed largely in North America and Western Europe following the rise of consumer spending power in the twentieth century, were being radically reappraised.

The industry was subject to game-changing forces from the so-called ‘digital revolution’ with the entry of search companies like Google, Bing and Yahoo as rivals for advertising budgets. Changing patterns in global consumer markets impacted on both industry dynamics and structure. Budgets being spent through traditional advertising agencies were being squeezed as industry rivalry intensified.

Overview of the advertising industry

Traditionally, the business objective of advertising agencies is to target a specific audience on behalf of clients with a message that encourages them to try a product or service and ultimately purchase it. This is done largely through the concept of a brand being communicated via media channels. Brands allow consumers to differentiate between products and services and it is the job of the advertising agency to position the brand so that it is associated with functions and attributes which are valued by target consumers. These brands may be consumer brands (e.g. Coca-Cola, Nike and Mercedes Benz) or business-to-business (B2B) brands (e.g. IBM, Airbus Industrie and KPMG). Some brands target both consumers and businesses (e.g. Microsoft and Apple).

As well as private-sector brand companies, governments spend heavily to advertise public-sector services such as healthcare and education or to influence individual behaviour (such as ‘Don’t drink and drive’). For example, the UK government had an advertising budget of £289m (€347m, $433m) in 2014. Charities, political groups, religious groups and other not-for-profit organizations also use the advertising industry to attract funds into their organisation or to raise awareness of issues. Together these account for approximately three per cent of advertising spend.

 Advertisements are usually placed in selected media (TV, press, radio, internet, mobile, etc.) by an advertising agency acting on behalf of the client brand company: thus they are acting as ‘agents’. The client company employs the advertising agency to use its knowledge, skills, creativity and experience to create advertising and marketing to drive consumption of the client’s brands. Clients traditionally have been charged according to the time spent on creating the advertisements plus a commission based on the media and services bought on behalf of clients. However, in recent years, larger advertisers such as Coca-Cola, Procter & Gamble and Unilever have been moving away from this compensation model to a ‘value’ or results-based model based on a number of metrics,  including growth in sales and market share.

Growth in the advertising industry

Money spent on advertising has increased dramatically over the past two decades and in 2015 was over $180 billion (€166bn, £126bn) in the USA and $569 billion worldwide. While there might be a decline in recessionary years, it is predicted that spending on advertising will exceed $719 billion globally by 2019. Over 2014–15, the Dow Jones stock price index for the American media agencies sector (of which the leading advertising agencies are the largest members) rose about 15 per cent ahead of the New York Stock Exchange average (sources: bigcharts. com and dowjones.com )........