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Saatchi & Saatchi Worldwide: Globalisation and Diversification
1 (a)
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 & Saatchi’s 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 world’s 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 organization’s 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).1
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 organization’s 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 it’s 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 company’s 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).
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The board’s acquisition spree as well as other key decisions was clearly based on uninformed
ideas in strategy, and a result the company’s fortunes took a downward trend, and they
simply 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
company’s 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.
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
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Growth(Stars)
Business risk: HighFinancial Risk needs to be: LowFunding by: Equity (growth
investors)Dividends: Nominal
Launch(Question marks)
Business risk: Very highFinancial Risk needs to be: Very lowFunding by: Equity (Venture
capital)Dividends: Zero
Maturity(Cash cows)
Business risk: MediumFinancial Risk needs to be: MediumFunding by: Debt and equity
(retained earnings)Dividends: High
Decline(Dogs)
Business risk: LowFinancial Risk needs to be: HighFunding by: Debt
Dividends: Nominal
would have provided the board with four alternative strategic directions for the organization’s
strategic development as in figure 2 below:
Products
Existing New
Existing
Markets
New
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 & Saatchi’s 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.
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A
Market Penetration
Consolidation
C
Market Development
D
Diversification
B
Product Development
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 firm’s core competence which is creativity will be
highly rewarded as it is important for the continued stability in the company’s 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
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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 ScorecardSource: 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 company’s 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
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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 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 & SAATCHI’S APPROACH TO THE BALANCE BETWEEN GLOBALIZATION AND LOCALIZATIONThe 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 world’s largest advertising agency that drove
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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 &
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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 company’s core advertising business, and he set about this by embarking on
internal growth as opposed to Saatchi’s 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 company’s 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 company’s 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
9
organization, he turned the company around, and formulated core values directly related to
the company’s 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
Advice to Maurice Saatchi on his musingsThe 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 organization’s 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 organization’s 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:
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Source: Armstrong, M. & Stephens, T. (2005) A Handbook of Management and Leadership: AGuide for
Managing Results. London: Kogan Page
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.
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References
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