Saatchi & Saatchi Worldwide: Globalisation and Diversification

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Why Did Saatchi & Saatchi Decline?

Saatchi & Saatchi had every thing good going for it until the commencement of its acquisition strategy in which it acquired several other advertising companies, most of which were over priced. Several other ancillary factors were responsible for the decline of the company and will be analysed below including its acquisition strategy. Saatchi & Saatchis growth had been a radical one that was not backed by strategic focus, as the Saatchi brothers were only driven by ambition to be the worlds largest advertising agency, in the process, they ignored stability and liquidity. Stability could have been achieved by acquiring firms with tangible product lines, and liquidity buy exploring the valuation of the companies with regards to future growth prospects. All these should have been done taking into cognisance the effects of the acquisition on the organizations cash reserves which would be needed sometime in the future for further expansion and operational purposes. The acquisitions bogged down Saatchi & Saatchi because of the dearth of empirical evidence then that acquisitions hardly increase shareholder value, organizations were then acquiring and merging based only on theoretical arguments that mergers and acquisitions have the propensity to increase shareholders value (Kummer & Hoffmeister, 1978; Asquith, 1983; Roll, 1986), it was not until the late 1980s into the early 1990s that considerable empirical evidence started to build up on the real effects of mergers and acquisitions, and even then the research results were still mixed (Martynova & Renneboog, 2008), but by the mid 1990s research evidence had started to confirm that acquisitions often fail to deliver the much touted improvement in shareholder value (Kaplan & Weisbach, 1992; Bleek & Ernst, 1993). For instance, most of these acquisitions cannot be classified as being in line with the conditions set out by Porter (1996) as those which must be fulfilled when formulating corporate strategy. Particularly, the acquisition of Hay Consulting Group in 1984 failed the cost-of-entry test, the bid for the two British banks, Midland and Hill Samuel did not pass the attractiveness test, while Ted Bates acquisition failed the better-off test, these show that the organization did not consider these essential strategic issues before going ahead with the acquisitions (Porter, 1996).

The Saatchi & Saatchi brothers were overwhelmed by the early success of their business and the rate at which the fortunes of their business had grown within a period of ten years, rather than being cautious, they proceeded on an acquisition spree which saw their turnover rise to $13.5 billion in the early 1980s. But what they failed to realize then was the challenges that would come along with the acquisitions regarding maintaining a balance between the marginal cost and marginal revenue of their entire operations on the long run (Horngren et al., 2009). These are notorious aspects of an organizations core financial management whose control continues to challenge financial managers till date. One scenario in which this would have happened was strategic error of acquiring and merging advertising companies managing two different competing consumer product companies, for instance that of Procter & Gamble and Colgate-Palmolive, which resulted in one of them leaving the company for confidentiality and conflict of interests purposes, this definitely affected the revenue of the merged businesses, and while revenue would have reduced, cost would have remained the same. Also, it can be argued that the sudden growth course pursued by the two brothers fell short of meeting the acquisition motives discussed by Schoenberg (2006), this can be discerned in the acquisition of Hay which had completed its earn out period, this would have compounded the scenario above as the acquisition would have reduced the revenue-generating prospects of the merged company, although the companys stream of acquisitions presented the picture of an upwardly mobile and successful company, according to Meyer (2003), that aura was not to last long as the acquisitions soon began to show some signs of indigestion. The most significant impact of this indigestion was the exit of Marten Sorrell, the influential financial executive of the company, whose exit led to the acquisition of Ted Bates at an overpriced amount of $400 million (Meyer, 2003), there was the impression then that Sorrell would have negotiated a better deal. The board of the company was also to lose the confidence of the shareholders, since Sorrell who had been a cheerleader, apart from being a financial guru had always played the role of intermediary between the shareholders and the board, and the unfilled vacuum after his exit changed the perception of the shareholders about the actual direction of the board besides shareholder value management (Mintzberg et al., 2003).

The boards acquisition spree as well as other key decisions was clearly based on uninformed ideas in strategy, and a result the companys fortunes took a downward trend, and they simply
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lost shareholders confidence, had the board been more purposeful, they would have taken more value-adding decisions in the management, which would have influenced the companys growth more positively. For instance, the board needed to have based their strategy on striking a balance between their financial and business risks while also considering the potential conflicts likely to arise between their long-term strategic reasons and shorter-term financial reasons for acquiring the companies (Johnson, Scholes & Whittington, 2008). The company needed to have analysed the companies within the growth/share matrix as in figure 1 below, in order to analyse the developmental stages of companies like Ted Bates and Hay Consulting.
Growth (Stars) Business risk: High Financial Risk needs to be: Low Funding by: Equity (growth investors) Dividends: Nominal Launch (Question marks) Business risk: Very high Financial Risk needs to be: Very low Funding by: Equity (Venture capital) Dividends: Zero

Maturity (Cash cows) Business risk: Medium Financial Risk needs to be: Medium Funding by: Debt and equity (retained earnings) Dividends: High

Decline (Dogs) Business risk: Low Financial Risk needs to be: Funding by: Debt Dividends:

High

Nominal

Figure 1: Balancing business and financial risk

Source: Johnson, G., Scholes, K. & Whittington, R. (2008) Exploring Corporate Strategy: Text & Cases. 8th edn. Essex, England.: Pearson Education Limited.

Also, had the board considered achieving effective risk management, then the Ansoff Matrix would have proved useful in the determination of its product offerings, rather than just embark on the acquisitions simply because they had the resources to pursue them when the decisions had not been subject to rigorous analysis. Applying the Ansoff product/market would have provided the board with four alternative strategic directions for the organizations strategic development as in figure 2 below: Products
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Existing
A Market Penetration Consolidation B

New

Product Development

Existing Markets
C D Diversification

New

Market Development

Figure 2: Strategic directions: Ansoff Matrix

Source: Johnson, G., Scholes, K. & Whittington, R. (2008) Exploring Corporate Strategy: Text & Cases. 8th edn. Essex, England.: Pearson Education Limited.

The Ansoff matrix would have pointed the board in the direction of increased market share with its existing product range in which case the organization would have sought to develop its products and markets in a consolidation strategy, the diversification strategy of buying into the consultancy firms, would not have been necessary in view of its distractive tendencies for management. Staff losses also contributed to Saatchi & Saatchis problems as staff leaving the company in droves gives out signal to competitor that all was not well with the company, they take advantage of the chance by attracting the employees and the accounts which they handled with their former organization.

Question 1(b)

What I would have done differently to prevent the downturn at the end of the 1980s.
In addition to the application of the growth share matrix and the Ansoff product/market matrix as above, I would apply the Balanced Scorecard at the corporate level and I will use the results obtained as the background for my strategy, which determines whether I acquire or not. The balanced scorecard is a model developed by Kaplan & Norton (1996), and which was organized around four distinct perspectives in an organization, and it includes financial, customer, internal, and innovation and learning. The model is appropriate in dealing with the dynamism which surrounded the business enterprise in the 1980s into the 1990s, particularly innovation, mergers and acquisitions and globalization. The use of performance targets will be applied, the first task is to identify the key performance indicators within the business. One thing that the company had going for it was the innovativeness of the board, apart from that all other things the board did was rather lack-lustre, the balanced scorecard can help to analyse the key performance indicators as identified by Kaplan & Norton (1996) in the new operating environment, which the board of Saatchi & Saatchi failed to determine while they were running the company. According to Johnson, Scholes & Whittington (2008), balanced scorecards combine both qualitative and quantitative measures, acknowledge the expectations of different stakeholders and relate an assessment of performance to choice of strategy as shown in figure 3 below. With the Balanced Scorecard, I will need to develop a dynamic measurement system that potentially translates vision and strategy of Saatchi & Saatchi into action, in order that feedback is provided around internal business processes and external outcomes with which I can continuously improve strategic performance and results, to ensure that challenges within the environment are controlled (Learn.com, 2010). Since the firm is a service industry, the firms core competence which is creativity will be highly rewarded as it is important for the continued stability in the companys earnings, while most of the overheads will be watched with a view to reducing them drastically, in order to increase profits margins. The internal control of the organization will be strengthened to relate freely with the Board since the Audit Committee will be board members as well, this will create a clear reporting process in order to aid performance measurement.

Figure 3: The Balanced Scorecard

Source: Learn.com (2010) The Balanced Scorecard Application for the LearnCentre Platform.

The customers will also be taken into cognisance as their perception, as well as employee turnover will be constantly measured and analysed. The financial performance of the company will be under constant monitoring, as a service company, it needs to have constant supply of cash with which to meet the demands of its service provision especially with third party engines such as TV and newspaper media, so that customer advertisement would continue to run uninterrupted. I will ensure that shareholder wealth maximisation is a key focus, while also looking at ways of accessing foreign markets under tight financial control. Potential acquisitions and mergers will be the subject of rigorous tests of profitability, while risk managment will remain a key focus of financial management. The companys marketing strategies will also be kept under watch for their value-adding capabilities. Finally, learning, growth, and innovation measures will be measured and kept under watch in order for the organization to continually innovate, improve, and sustain itself within the dynamic environment. The human resource capabilities will be under constant watch to ensure it is at least stable, but must be constantly reviewed upwards, the motivation and reward system, learning capacity, investment strategy will be continuously measured with a view to
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improving them, most of the organizational processes will be decentralised to allow for quick decision making. The informationn and communication technology systems capabilities and capacity will be strengthened as the backbone of the companies learning systems and as the medium of contact with the external bodies, competitors and governement. Question 2

SAATCHI & SAATCHIS APPROACH TO THE BALANCE BETWEEN GLOBALIZATION AND LOCALIZATION
The concept of globalization means many things to different people, and this depends on the perspective from which they each look at globalization, this is mainly because globalization from corporate perspective is different from globalization on a national perspective. This is because while corporate organizations see globalization from the point of view of market development, competition, and operating in many different geographical markets (Johnson, Scholes & Whittington, 2008), globalization from national perspective involves cooperation and collaboration to address issues of common interest. Whereas, localization is the degree of responsiveness to and or the level to which a business is embedded in various local environments (Lane, 1998; Lessard, 2003). According to Lane (1998), it is a general strategy where competitive advantage is still strongly influenced by intangible assets bestowed on a company by an origin, derived by embeddedness in national institutional structures and from implantation into national policy and business networks. While Doz, Hamel, & Prahalad (1998) identified the benefits of localization, and emphasized its importance alongside globalization, Lessard (2003) discussed the frameworks for strategic globalization and localization analysis in hierarchical fashion, but Johnson argued that the factors affecting localization are more complex than those of globalization. Saatchi & Saatch was driven by the ambition of the Saatchi brothers, and this ambition has always driven their strategic beliefs rather than tried and tested models and frameworks. For instance, it was their dream to of becoming the worlds largest advertising agency that drove their ambition which is only a superficial driver to say the least, and they simply went on an acquisition spree, they never intended to leave an indelible mark which can enable their name to be etched in the history of advertising for ever.

Based on the work of Dicken et al., (1995), Bartlet (1986) and Porter (1986), Lane (1998) captured the conflicting pressures between globalization and localization by decomposing them into a number of more specific strategies, structures, and sets of activitieswhich suggest the elaboration of different types of globalization and localization, most of which are influenced by economic balance of production factors, customer and product characteristics. While the Saatchi Brothers preferred acquisition and globalization strategy, Louis-Dreyfus preferred a mix of globalization and internal growth as a stabilizing mechanism, within this framework, he embarked on the offering of one-stop shopping while international operations still continued on a global scale, especially the communication service companies. To prevent the threat of conflicting client accounts, the company created two distinct advertaising agencies that were literally in direct competition with each other. This further entrenched creativity along two business models, there was also the interplay of culture. In advancing its strategic direction of balancing between globalization and localisation, Saatchi & Saatch operated within two main regions of the world which is Europe and North America, this is hardly surprising in light of the findings of Rugman & Verberke (2007), that very few multinational enterprises actually operate globally, as most of their branches and subsidiaries are actually located on not more than two regions of the world. Also, Saatchi & Saatchi ensured creativity by operating a dispersed organizational structure wherein the management boards operated outside the jurisdiction of the headquaters, the regional offices were also allowed to make suggestions regarding advertising and product design concepts according to the local environmental culture. Question 3

A Critical Analysis of Robert Louis-Drefus Strategy to turnaround the company

In managing strategic change, there are many change forces which a change agent can use, but then the most important aspect involves selecting the appropriate change force to apply, rather than following a set formula for managing strategic change (Johnson, Scholes & Whittington, 2008), the first factor which Louis-Drefus brough to bear on the company was leadership since leadership is an important aspect of the achievement of organizational objectives (Adair, 2003). leadership is essential in decision evaluation, defining direction, and scope of the organization.

The turnaround strategy adopted by Louis-Drefus was combination of recapitalization, a turnaround of the companys core advertising business, and he set about this by embarking on internal growth as opposed to Saatchis traditional method of acquisitions, he set cautious, long range potentially achievable targets. In order to stabilise the company, Louis-Drefus disposed ten out of the twelve consulting businesses which the company had, and secured a recapitalization plan which provided short term access to funds, thus eliminating non-profitable and burdensome lines from the companys service offerings (Johnson, Scholes & Whittington, 2008). Louis-Drefus also embarked on some management changes (Johnson, Scholes & Whittington, 2008), the most notable of which was the dismisal of Roy Warman and Terry Bannister, two senior managers at Saatchi, a move which improved Louise-drefus standing before shareholders and the stock market. Prior to that, the management positions had shifted for Louise-Drefus to come in, in which Charles and Maurice Saatchi had given up their positions and only remained on the board. With such incidents taking place at the top of the organization, Louise-Dreyfus was able to gain key stakeholder support as he was seen to be in full control of the company when the two employees were dismissed. Louis-Drefus embarked on the clarification of target market (Johnson, Scholes & Whittington, 2008), with the concentration of the company on a total range of communications services, thereby offering one stop shopping to clients who preferred it, he also removed potential dyssynergy by creating two distinct and separate advertising agencies which were to be seen in direct competition. This was done in order to keep the accounts of competitors well under the companys control while ensuring confidentiality among the two competitors accounts. Finally, Loise-Drefus leadership style can be positioned within the designer (Senge, 1990), leadership style can be regarded from the perspective of Senge (1990), who referred to designer leaders as those leaders with significant business responsibility and bottom-line focus. As such, Louise-Drefus takes decision regarding the overall well-being of the organization, he turned the company around, and formulated core values directly related to the companys over all strategy. He thus displayed the attributes of a visionary leader (Johnson, Scholes & Whittington, 2008), also he can be regarded from a transformational leadership perspective, in his roles at various times as influencer (Lussier & Achua, 2007), thereby encouraging a change in management and employee behaviour. Question 4
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Advice to Maurice Saatchi on his musings

The environment of business is constantly changing, creativity is not enough to get the business back on the path to growth, if anything, it can only be a short-run success since it is a core competence for the organization, and it was not a shortage of this resource that led to the downturn in the fortunes of the company, rather, it was poor financial management, and in particular risk management, poor employee relations and lack of strategic focus on the par of the board, poor merger and acquisition strategies, and unnecessary grandeur brought into business, whereas, self-discipline and astuteness should have prevailed when taking business decisions. Therefore, if the organization is to witness a thorough revamp, the concept of balanced scorecard must be applied for a complete check-up of the organizations operations in order to bring it out of the woods. On a final note, the leader of an organization that wants to continue to remain in business for the foreseeable future needs to be constantly thinking about the organizations evolution, in which case, the organization must continue to evolve, which takes us to the issue of business life cycle (Armstrong & Stephens, 2005), the leader needs to constantly monitor his organization or product as it goes through the four stages of the product life cycle from start-up through growth, it peaks and then begins to decline, and if no corrective measures are taken, the business dies off, as depicted in the figure below:

Source: Armstrong, M. & Stephens, T. (2005) A Handbook of Management and Leadership: AGuide for Managing Results. London: Kogan Page

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The leader of the organization needs to have the capability to be able to sustain the organization such that when to company is almost nearing its peak, it is repacked, refocused and redirected in order that it will continue its sustenance, the organization is thus managed such that it never reaches decline level and is continuously sustained. This is the scenario that he should have started the business with, such that the business remains constantly on the path of sustainability.

References

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