Growing pains

Dentsu’s ten-year-old goal to become a major global player is looking tired, yet has become more urgent than ever as competition from international agencies in Japan increases.

Dentsu’s calendar has been much the same in recent years. New Year begins with a stirring speech from agency president Yutaka Narita emphasising the need to go both global and digital. This refrain recurs in the summer on Founder’s Day. As autumn leaves begin to fall, there are rumours of a partnership with Leo Burnett outside Japan.

Dentsu’s agenda to become a major global player has been in place for more than a decade. Its dominance at home, where it holds 23 per cent of the world’s second largest advertising market, ranks it as the world’s largest agency brand, but extending that power outside Japan has proved difficult.

International goals were formalised in an international development plan at a Dentsu board meeting as far back as April 1990. Most of that plan’s objectives were to be accomplished within five years. These included increasing overseas billings, which accounted for about ten per cent of Dentsu’s total in 1989, to 20 per cent.

To achieve this, Dentsu’s planners reckoned they needed not one but three international networks to handle overseas the many competing brands Dentsu serves at home. Winning as many of these brands as possible abroad was crucial if goals were to be met.

Fortune smiled on Asia. Dentsu’s partnership with Y&R, first broached in 1975 and which led to a small joint venture in Tokyo in 1981, blossomed. Despite four name changes, DY&R has become the third largest multinational agency network in Asia, trailing McCann-Erickson and JWT. DY&R’s Asian billings topped $1.1bn (&£687.5m) in 1998 from an equal mix of Japanese, Western multinational and local clients. Separately, Dentsu’s network of wholly-owned agencies rank in the top ten in most of their Asian markets.

Elsewhere, the going has been difficult. Account conflicts in the US hindered the growth of Dentsu/Y&R joint ventures. HDM, a European partnership with Y & R and Eurocom, briefly gave Dentsu a major European network in 1988. But this dissolved at the end of 1990 when the French opted out and went ahead to build Euro-RSCG Worldwide by themselves. CDP meanwhile neither regained its former lustre in the UK nor became a major springboard to Europe.

Patience about international expansion was allowable while domestic business was good and margins wide. But now the Japanese market is shrinking, margins are under pressure, and competition in Japan from international agency brands is increasing.

That patience is no longer permissible, according to Fumio Oshima, the Dentsu managing director who won control of international this July. “In two years we’ll become a public company. The goals [my predecessors] set are best described as long-term intentions. Now we must decide both what is truly feasible and how we will achieve it.”

While new targets have yet to be set, at least the starting point has been defined. For calendar year 1998, says Oshima, Dentsu’s gross billings outside Japan were yen 229 billion (&£1.35bn), dropping to yen 139 billion (&£817m), an equity-adjusted basis. By comparison, Dentsu’s consolidated gross billings for fiscal 1997/98 (the closest period for which comparable data is avail able) were yen 1,569bn (&£9.2bn). Against this yardstick, equity-adjusted international billings register only 8.9 per cent.

Considering that Dentsu has spent at least $1bn (&£625m) over the past decade, striving to build not one but three strong networks, this is not a major achievement.

In fact, Dentsu’s major clients have been so much more successful overseas that the pressures to perform better outside Japan are heightening. Oshima says: “Our major Japanese clients have developed into global enterprises whose budgets outside Japan are bigger than those at home. Take Toyota for example, we reckon their overall communications budget outside Japan is over $ 3.5bn (&£2.19bn). Our share of this is less than ten per cent.” In contrast, Toyota – Japan’s largest advertiser and Dentsu’s largest client – spends most of its $1bn (&£625m) domestic advertising budget through the agency.

The implications are profound. Oshima explains: “It is only a matter of time before one of our major clients decides to run a campaign in Japan, created originally for the US or elsewhere. We have to become global ourselves, the alternative simply is not an option.”

Why has so little been achieved internationally? Mark Gault, McCann-Erickson regional director for Japan and North Asia, says: “Dentsu’s dominance in Japan is unchallenged. In Japan, you do not have a choice other than to respect them. In media buying terms, they are formidable.

“They have contacts and connections most other agencies can only dream about, and which they use ruthlessly. But it is this dominance in their home market which has not driven Dentsu to break out of its Japan-centric, insular culture.”

Dentsu’s major stumbling blocks have been cultural. There were mistakes in personnel training. Management’s belief that the strength of the brand name in Japan would win and retain business overseas was flawed. An outmoded management model encouraging direct day-to-day control from Tokyo rather than local empowerment was also a failure.

The US was especially intolerant. The pain threshold rose each year as staff defected, clients deserted, and agencies imploded. One dark day, in 1990, a group of workers dismissed from DCA took grievances to the EEOC and sued. Out poured tales of cultural insensitivity, alienation and misunderstanding. These problems have been fixed, however, since Narita became Dentsu president in 1993.

But there are still many cultural differences between Dentsu and its international peers, which may limit what can be achieved outside Japan.

Oshima says: “Other groups have been more aggressive in M&A, but in Japan we don’t do things that way. Buying and selling companies is not part of our culture in the way it is in the West, especially in the communications industry. That is why, many years ago, we decided to form a joint venture with Y&R and why we are now seeking a partnership with Leo Burnett.”

Additionally, Dentsu’s board of directors is an exclusively male club, mostly comprising graduates of the agency’s media department. No non-Japanese has ever been a candidate for board membership. “There are no foreign candidates fluent in Japanese,” explains Oshima.

“In many ways, Dentsu is still a deeply conservative organisation,” says Hotaka Katahira, professor of marketing science at Tokyo University. “Even so, it is a highly creative company, but while its culture allows many divergent views to flourish, it has been less successful at focusing all that energy on achieving specific goals.”

International expansion is a case in point. There is no intrinsic reason why a strategy based on partnerships rather than ownerships should fail to deliver. Perhaps all it needs is a more open culture to evolve in Dentsu’s bureaucratic Tokyo headquarters.

Evolution is also the name of the game for Y&R, Dentsu’s international partner for so many years. This July, Y&R took equity control of DY&R’s Asian agencies while Dentsu took the majority of their three joint ventures in Tokyo – DY&R Japan, Dentsu Wunderman Cato Johnson, Dentsu Sudler and Hennessy. Overall, the joint venture continues as a 50:50 partnership but with Y&R for the first time having equity control of a significant Asian network.

Oshima says: “Y&R, as a global agency, needs a network in Asia. In addition to DY&R, we have a network of our own agencies in Asia, and now we are negotiating with Leo Burnett as well.

“We are going to have three networks in Asia, but for Y&R, DY&R is their sole network in Asia and they only held 50 per cent of this which, in some [clients’] eyes, looked weak. Therefore, we agreed to rearrange our equity relationships. To Western minds it might seem that our relationship is weakening, that we are drifting apart, but this is not so.”

Though a year has passed since Dentsu and Leo Burnett began to explore an alliance, the two have started working together. This August, they formed a media agency in Seoul to handle P&G’s AOR for South Korea.

The new agency, called Unison PDS (Phoenix, Dentsu, Starcom), is a 50:50 arrangement between Leo Burnett and Phoenix, one of Dentsu’s Korean agencies.

Could more such ventures be imminent? “We have not finalised things, but I am sure we will be signing an agreement within a few months,” says Oshima.

But perhaps the defining characteristic of Dentsu’s approach to international expansion is that after more than ten years of planning and investment, it is in a board room in Chicago, not Tokyo, that the critical decisions will be taken which will determine much of Dentsu’s international future.

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