WPP is a multinational communications firm based in London, England. WPP was initially founded in 1971 as the maker of wires and plastic products, then the entry of marketing and advertising enthusiast Martin Sorrell and reinvented as a marketing company in 1985. The company is considered one of the biggest advertising companies globally, and it has operations expanding the globe. WPP expanded quickly and pursued growth by acquisition initially and afterward by organic growth and small-scale merger and acquisition (WPP, 2021). The company is the market leader and makes the big four firms in the advertising and communications sphere. WPP is the first company to publish its sustainability report in 2002 and has set net zero-emission goals by 2030. Porter’s five forces model is an appropriate analytical tool to evaluate threats WPP faces and the opportunities it can potentially explore.
Competitive Rivalry in the Market
The communications industry has a unique importance in the world of global business, and therefore there is serious competition among participants. The companies rely upon the agencies to market and promote their products and services, increase public awareness and enhance the reach to the target market segment. Therefore, all companies, irrespective of their size and business domain has significant marketing and advertising cost. The market size of the advertising industry will be $351.6 billion based on revenue (IBIS World, 2021). WPP is one of the largest firms in the industry; in 2020, it reported a revenue of $15.4 billion (Forbes, 2021). The other major competitors are Publicis Groupe, Interpublic Group (IPG), and Omnicom Group (OMC). Publicis Groupe was incorporated in 1926 in France; the company has earned a profit of $656.6 million and reported revenue of $12.3 billion (Forbes, 2021). In 2020, OMC reported revenue and profit of $13.2 billion and $945.3 million (Forbes, 2021). In the same period, IPG reported $9.1 billion in revenue and $351.1 million in profits (Forbes, 2021). Therefore, the market is highly competitive.
Threat of Substitutes
The threat of substitutes is perceived to be high in the presence of better alternatives, consumers’ behavior, and the acceptance of available alternatives. The threat appears to be low for the advertising industry. The advertisement and communications industry has significant market capitalization; big corporations OMC and WPP are worth €15.8 billion and €13.9 billion (Statista, 2021). Traditional advertisement panels and agencies provide immense value for the business. There are other non-traditional methods to challenge the conventional methods such as blogs, emails list, influence campaigns through social media, and optimization of search engine results. These all measures act as complementary with traditional methods and cannot naturally replace the role of marketing and advertisement. Therefore, there are no natural substitutes for the advertisement industry, and the threat remains low.
Threat of New Entrants
There are inherent limitations associated with every industry; such is the case with the advertisement industry. The major hurdles are related to the acquisition of a business; it is difficult for the services sector compared to product-based industries. The newcomer does not have a portfolio, and thus it becomes difficult to break through. Other is the cost of retaining the creative crew and the designers. Businesses can ill afford to keep expensive resources on payroll and not generate any cash flow. Undercapitalization and high fixed is one reason for the failures of small business (Lussier, 1996). Another obstacle is posed by the established incumbents and their long-standing business relationships with the clients. Thereby, the threat of new entrants in the industry remains low.
Bargaining Power of Buyers
The bargaining power of the buyers depends upon the underlying factors as follows: the availability of better alternatives, the number of options, and buyers’ concentration. Usually, buyers are mega-corporations with massive advertisement budgets. Irrespective of the industry and business model, companies have significant advertisement budget, Coca-Cola spent $4 billion and Gillette $ 8.3 billion on advertisement in 2016 (Business Chief, 2020). Due to higher budgets and value for the business consumers can seek discounts on the services. Consumers know their value for the business and therefore can pose a higher bargaining power. Also, huge corporations add value to the service providers’ portfolios. There is no or low switching cost for the consumer. Considering the above, buyers have higher buying power.
Bargaining Power of Supplier
Supplier power depends upon the industry dynamics and other factors affecting the equilibrium. These factors include suppliers’ concentration, risk of forward integration and importance of suppliers for the consumers business. In advertisement agency, the suppliers have higher power in terms of the space they provide therefore they command the higher bargaining power. Moreover, suppliers are concentrated, there are few space and suppliers and more demand. This phenomenon makes the supply side more important because of the demand squeeze. Suppliers’ concentration and over-reliance pose a risk to the smooth sailing of business (Ceryno, 2015). Another factor that favors suppliers is that they are industry-independent and can work with multiple industries, and the risk of forwarding integration exists. Therefore, suppliers can exercise higher bargaining power.
References
Business Chief. (2020). Top 20 companies with the biggest advertising budget. Available at: https://businesschief.eu/digital-strategy/opinion-its-time-stop-waiting-normal
Ceryno, P. S., Scavarda, L. F., & Klingebiel, K. (2015). Supply chain risk: empirical research in the automotive industry. Journal of Risk Research, 18(9), 1145-1164.
Forbes. (2021). Interpublic group (IPG). Available at: https://www.forbes.com/companies/interpublic-group/?sh=4133b59c1ef7
Forbes. (2021). Omnicom Group (OMC). Available at: https://www.forbes.com/companies/omnicom-group/?sh=4fe5de753476
Forbes. (2021). Publicis Groupe. Available at: https://www.forbes.com/companies/publicis-groupe/?sh=c8547637887a
Forbes. (2021). WPP. Available at: https://www.forbes.com/companies/wpp/?sh=6843e200e193
IBIS World. (2021). Global Advertising Agencies – Market Size 2005–2025. Available at: https://www.ibisworld.com/global/market-size/global-advertising-agencies/#:~:text=The%20market%20size%2C%20measured%20by,to%20increase%202%25%20in%202021.
Lussier, R. N. (1996). Reasons why small businesses fail: and how to avoid failure. The Entrepreneurial Executive, 1(2), 10-17.
Statista. (2021). Market capitalization of selected advertising and media agencies worldwide 2019. Available at: https://www.statista.com/statistics/1041913/market-capitalization-ad-agencies-worldwide/
WPP. (2021). About. Available at: https://www.wpp.com/about/our-history