Alvin J. Silk is Lincoln Filene Professor of Business Administration Emeritus at the Harvard Business School. His research interests are in the economics of the advertising and marketing services industry, the development and management of advertising campaigns, and decision support systems in marketing.
He served as head of the marketing unit, introduced “Brand Marketing” as an elective in the MBA program and taught “Research Design and Measurement” in the doctoral program. Prior to coming to Harvard in 1989, he was a member of the faculty at MIT’s Sloan School of Management from 1968-88 where he was Erwin Schell Professor and Deputy Dean (1981-88). Earlier, he was a member of the faculty at the University of California, Los Angeles (1963-66) and the University of Chicago (1966-68). Silk received his BA (Honors) from the University of Western Ontario, MBA (with distinction) and Ph.D. from the Kellogg School, Northwestern University.
This paper provides an update on the current state of in-house agencies. Whereas traditional consideration of internalizing advertising services was framed as a binary choice of build or buy, today's advertisers frequently pursue hybrid policies of build and buy to procure the customized bundle required to develop, produce, and implement relevant, resonant promotional campaigns. Increasing numbers of advertisers are discovering that the demand for advertising and marketing services is best served through the coordination and integration of resources from both inside and outside the company, rather than assuming that these options are mutually exclusive. A review of advertising industry history reveals why internal agencies have long operated in the shadows of their external counterparts and how the former organization form has evolved over time. The core competencies underlying the contemporary in-house agency model are analyzed, and the competitive position that in-house agencies presently occupy in relation to external providers is assessed. Two case examples of successful internal/external agency collaboration are presented. Finally, recommendations are offered for advertisers seeking to bring their internal and external agency resources together and arrive at a more collaborative operating model for advertising services.
We analyze changes in concentration levels in the U.S. Advertising and Marketing Services industry using data from the U.S. Census Bureau's quinquennial Economic Census and the Service Annual Survey. These data, heretofore largely ignored, allow us to redress some of the measurement problems surrounding estimates found in the existing literature. The data available permitted concentration levels to be tracked for the period 1977–2007 in the case of advertising agencies and for 1997, 2002, and 2007 for the other industry sectors. Firm level concentration, as measured by the Herfindahl-Hirschman Index (HHI) and concentration ratios (CRs), varies across the nine sectors comprising the industry, but all are within the range generally considered as indicative of a competitive industry. At the holding company level, the four largest organizations account for less than a quarter of the industry's total revenue, a share that changed little over the period 2002–2009, but one that is approximately half of estimates frequently cited in the trade press. The persistence of a diverse and relatively unconcentrated size structure appears quite consistent with other research on the underlying economics of this industry.
This study investigates the extent to which U.S. advertisers use in-house rather than independent advertising agencies and examines inter-industry variation in such internalization. Contrary to the widely held impression that use of an in-house advertising agency is more the exception than the rule, we find that vertical integration of advertising services is much more widespread than has hitherto been appreciated. Drawing on concepts from research on scale economies and transaction costs, we develop a set of hypotheses about differences in the expected depth of internalization across industries. We test these hypotheses in cross-sectional analyses of data covering 69 two-digit SIC industries at two points in time, 1991 and 1999. In both years, approximately half of advertisers of all sizes operated an in-house agency. Across industries, we find that the likelihood of internalization of at least some advertising services decreases as the size of advertising outlays increase but increase as advertising intensity and technological intensity increase, and is greater for "creative" industries.
Mohammad Arzaghi, Ernst R. Berndt, James C. Davis and Alvin J. Silk
We address a puzzle surrounding the shift from bundling to unbundling of U.S. advertising agency services and the slow pace of change over several decades. We model an agency’s decision as a tradeoff between the fixed cost to the advertiser of establishing a relationship with an agency and pecuniary economies of scale from media services provision. Using micro-data from the U.S. Census of Services for 1982–2007, we find agencies are more likely to unbundle with increasing size, diversification, and higher media prices and less likely with increasing age, larger media volume, and an interaction between media prices and volume.
What restrictions should be placed on advertising agencies with respect to serving accounts or clients that are competitors of one another in order to avoid conflicts of interest? In recent decades, the advertising and marketing services industry has undergone a number of structural changes that forced an ongoing re-examination and modification of traditional norms and policies emphasizing exclusivity in agency-client relationships. A typology of conflicts that has arisen in the U.S. shows the variety and complexity of contemporary conflicts. Cases of conflicts reported in the trade literature are used to illustrate policy issues as well as the spillover effects and resolution of disputes. To cope with these developments, two significant changes in conflict policies evident in current U.S. practice are identified. First, safeguards to preserve proprietary information that function as organizational, location, and personnel mobility barriers among quasi-autonomous units within a mega-agency or holding company have become an essential component of conflict policies. Subject to the protection against security breaches afforded by safeguards, rival clients may be served by separate organizational units that are under common control and/or ownership. Second, a family of hybrid conflict polices has evolved that feature elements of the split account system long practiced in Japan, augmented by safeguards that serve as partial substitutes for the umbrella prohibition on serving rivals imposed by exclusivity. By relying on safeguards and splitting account assignments in a variety of ways among different organizational units within a given mega-agency or holding company that may also serve rivals (or across different mega-agencies or holding companies), clients exert a measure of control over the access of those agencies to confidential information while also offering them incentives to avoid conflicts of interest. Findings from the existing body of conceptual and empirical research bearing on the sources and consequences of conflicts are reviewed and directions for further research are discussed.
Dolan, R. J., and A. J. Silk. "Marketing Planning and Organization." In Strategic Marketing Management, by R. J. Dolan. Boston: Harvard Business School Press, 1991.
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Silk, A. J. "Questionnaire Design and Development." In MBA Field Studies: A Guide for Students and Faculty, edited by E. R. Corey. Boston: Harvard Business School Press, 1990.
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This paper provides an update on the current state of in-house agencies. Whereas traditional consideration of internalizing advertising services was framed as a binary choice of build or buy, today's advertisers frequently pursue hybrid policies of build and buy to procure the customized bundle required to develop, produce, and implement relevant, resonant promotional campaigns. Increasing numbers of advertisers are discovering that the demand for advertising and marketing services is best served through the coordination and integration of resources from both inside and outside the company, rather than assuming that these options are mutually exclusive. A review of advertising industry history reveals why internal agencies have long operated in the shadows of their external counterparts and how the former organization form has evolved over time. The core competencies underlying the contemporary in-house agency model are analyzed and the competitive position that in-house agencies presently occupy in relation to external providers is assessed. Two case examples of successful internal/external agency collaboration are presented. Finally, recommendations are offered for advertisers seeking to bring their internal and external agency resources together and arrive at a more-collaborative operating model for advertising services.
What restrictions should be placed on advertising agencies with respect to serving accounts or clients that are competitors of one another in order to avoid conflicts in interest? In recent decades, the advertising and marketing services industry has undergone a number of structural changes that forced an ongoing re-examination and modification of traditional norms and policies emphasizing exclusivity in agency-client relationships. A typology of conflicts that have arisen in the United States shows the variety and complexity of contemporary conflicts. Cases of conflicts reported in the trade literature are used to illustrate policy issues as well as the spillover effects and resolution of disputes. To cope with these developments, two significant changes in conflict policies evident in current U.S. practice are identified. First, safeguards to preserve proprietary information that function as organizational, location, and personnel mobility barriers among quasi-autonomous units within a mega-agency or holding company have become an essential component of conflict policies. Subject to the protection against security breaches afforded by safeguards, rival clients may be served by separate organizational units that are under common control and/or ownership. Second, a family of hybrid conflict polices has evolved that feature elements of the split account system long practiced in Japan, augmented by safeguards that serve as partial substitutes for the umbrella prohibition on serving rivals imposed by exclusivity. By relying on safeguards and splitting account assignments in a variety of ways among different organizational units within a given mega-agency or holding company that may also serve rivals (or across different mega-agencies or holding companies), clients exert a measure of control over the access of those agencies to confidential information while also offering them incentives to avoid conflicts of interest. Findings from the existing body of conceptual and empirical research bearing on the sources and consequences of conflicts are reviewed and directions for further research are discussed.
Mohammad Arzaghi, Ernst R. Berndt, James C. Davis and Alvin J. Silk
We address a longstanding puzzle surrounding the unbundling of services occurring over several decades in the U.S. advertising agency industry: What accounts for the shift from bundling to unbundling of services and the slow pace of change? Using Evans and Salinger's (2005, 2008) cost-based theory of bundling, we develop a simple model of an agency's decision to unbundle as a tradeoff between the fixed cost to the advertiser of establishing a relationship with an agency and pecuniary economies of scale available from providing media services. The key predictions of the model are supported by an econometric analysis of cross-sectional and pooled data from the quinquennial U.S. Censuses conducted between 1982 and 2007. Agencies are more likely to unbundle with increasing size and diversification but are less likely to do so with increasing age. Longitudinal growth in unbundling is partially explained by increases in media prices over time.
This paper analyzes changes in concentration levels in the U.S. Advertising and Marketing Services (A&MS) industry using publicly released data that have been largely ignored in past discussions of the industrial organization of this industry, namely those available from the U.S. Census Bureau's quinquennial Economic Census and the Service Annual Survey. We define the A&MS industry in terms of nine sectors, each of which is represented by a separate 5 digit NAICS category. In so doing, we have sought to redress some of the measurement problems surrounding estimates found in the existing literature. Our main findings are threefold.
First, in the case of the core and largest sector, Advertising Agencies, firm level concentration as measured by Herfindahl-Hirschman Index (HHI) increased slightly but remained relatively low from 1977 to 2002. All of the HHI estimates readily satisfied the standard widely used to characterize an industry as "unconcentrated." We find mixed support for the hypotheses that the ranks of mid-sized agencies were depleted by ongoing waves of mergers and acquisitions and resulted in a polarized size structure. The size distributions of agency revenue have become more polarized in the sense that over time they appear more skewed, more dispersed, and exhibit greater inequality. The share of total receipts realized by small agencies fell while that of large agencies rose. However, the position of mid-sized agencies appears to have changed little over the period 1977–2002, as measured by the shares of agencies and receipts they represent.
Second, concentration levels in 1997 and 2002 varied across the nine sectors comprising the A&MS industry, but all were within the range generally considered as indicative of a competitive industry.
Third, we developed concentration ratios at the level of holding companies (HC's) and find that the four largest HC's captured between a fifth and a quarter of total revenue from the A&MS industry, a share that remained quite stable over the period, 2002-2006. These estimates are lower by an order of magnitude than estimates often cited in the trade press. Reasons for the discrepancy are discussed.
Mohammad Arzaghi, Ernst R. Berndt, James C. Davis and Alvin J. Silk
This paper addresses a longstanding puzzle involving the unbundling of services that has occurredover more than two decades in the U.S. advertising agency industry: How can the shift from the bundling to the unbundling of services be explained and what accounts for the slow pace of change? Using a cost-based theoretical framework of bundling due to Evans and Salinger (2005, 2008), we develop a simple model of an advertising agency's decision to unbundle its services as a tradeoff between the fixed cost to the advertiser of establishing and maintaining a relationship with an advertising agency and pecuniary economies of scale available in providing media services. The results from an econometric analysis of cross-sectional and pooled data collected by the U.S. Census Bureau for quinquenial censuses conducted between 1982 and 2002 support the key predictions of the model. We find that advertising agency establishments are more likely to unbundle if they are large and diversified in their service offerings and are less likely to do so with increasing age and greater geographical scope. We also find a strong trend toward unbundling over time, a result that is partially explained by increases in media prices over time.
The common perception appears to be that vertical integration of advertising services is more the exception than the rule in the U.S. advertising industry. This study investigates the extent of such outsourcing and examines inter-industry variation in the use of in-house rather than independent advertising agencies by U.S. advertisers. While the vast majority of large advertisers employ outside agencies, it comes as a surprise to find that when advertisers of allsizes are considered, about half operate some form of in-house agency. Internalization of advertising services is much more widespread than has hitherto been appreciated and varies widely across industries. To explain this variation, we draw on concepts from research on scale economies and transaction costs to develop a set of hypotheses which we test in cross sectional analyses of data covering 69 two digit SIC industries at two points in time, 1991 and 1999. Across industries, we find that the likelihood of internalization of advertising services decreases as the size of advertising outlays increase but increases as advertising intensity and technological intensity increase and is greater for "creative" industries.
Horsky, Sharon, Steven C. Michael, and Alvin J. Silk. "On Inter-industry Variation in the Vertical Integration of Advertising Services." Harvard Business School Working Paper, No. 06-025, December 2005.
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King, Charles, III, Alvin J. Silk, and Niels Ketelhohn. "Knowledge Spillovers and Growth in the Disagglomeration of the U.S. Advertising Agency Industry." Harvard Business School Working Paper, No. 03-049, October 2002.
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King, Charles, Alvin J. Silk, and Niels Ketelhohn. "Geographic Concentration, Knowledge Spillovers, and Growth in the Evolution of the U.S. Advertising Agency Industry." Harvard Business School Working Paper, No. 01-024, February 2001.
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Silk, Alvin J., Lisa R. Klein, and Ernst R. Berndt. "Restructuring in the U.S. Advertising Media Industry." Harvard Business School Working Paper, No. 99-126, May 1999.
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Silk, Alvin J., Lisa R. Klein, and Ernst R. Berndt. "Intermedia Substitutability in the U.S. National Advertising Market." Harvard Business School Working Paper, No. 98-005, July 1997.
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Jeffrey F. Rayport, Alvin J. Silk, Lisa Klein Pearo and Thomas A. Gerace
Virtual Vineyards markets wine from small California vineyards directly to consumers through its site on the World Wide Web. It also facilitates fulfillment of customer orders. The case focuses on the ways in which Virtual Vineyards provides value to end consumers through cofounder Peter Granoff's accessible but informal evaluations of individual wines and through its electronic Internet with the customer.
Rayport, Jeffrey F., Alvin J. Silk, Lisa Klein Pearo, and Thomas A. Gerace. "Virtual Vineyards." Harvard Business School Case 396-264, April 1996. (Revised April 2004.)
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King, Charles, III, Alvin J. Silk, and Ann Leamon. "Pepcid AC: Racing to the OTC Market (TN)." Harvard Business School Teaching Note 503-107, June 2003.
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Concerns understanding the conditions under which an experimental design that employs matching and randomization may result in gains in precision as compared to a design that utilizes randomization and independent samples--i.e., no matching. An empirical example is presented to illustrate a variety of statistical analyses and tests bearing on this issue.
Silk, Alvin J. "Note on Statistical Tests for a Randomized Matched Pair Experimental Design, A." Harvard Business School Background Note 500-007, July 1999.
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Vistakon, an independent and entrepreneurial subsidiary of Johnson & Johnson, pioneered the production and marketing of disposable contact lenses with the 1987 launch of Acuvue, the first disposable extended-wear lens--a soft contact lens that patients wear for a period of less than two weeks and then abandon. By 1993, Acuvue was the leading brand of soft contact lens in the United States. In March 1994, Gary Kunkle, president of Vistakon, was presented with the test market results for an addition to the firm's product line, 1 Day Acuvue, the world's first daily disposable contact lens. The test market results raised a number of strategic issues relating to: 1) the positioning and pricing of the new daily wear disposable product; 2) cannibalization of the firm's existing extended-wear disposable lens; and 3) the mix of push and pull components required for the introductory marketing campaign to be effective in generating and coordinating demand from both eye-care professionals and consumers. In deciding how to proceed, Kunkle must evalute the risks associated with commencing an immediate launch with an unproven strategy as opposed to extending the test market.
On April 2, 1993 Philip Morris USA launched an elaborate integrated program of consumer and retail promotions of unspecified duration that effectively slashed the retail price of its flagship brand, Marlboro, by 20% in the U.S. market. This program represented a major shift in strategy designed by Philip Morris to reverse the alarming declines in Marlboro's market share, which had occurred in the face of severe price competition from discount brands. Given Marlboro's status as one of the world's premier brands and the changing environment of consumer marketing, the date these actions were announced was immediately labeled "Marlboro Friday" and heralded as a milestone in marketing history. This case describes the state of the cigarette industry in the early 1990s, reviews the history of Philip Morris and Marlboro, and sets forth the key elements of the radical defensive strategy launched on Marlboro Friday. Did Marlboro's actions represent incisive brand strategy and enlightened brand management? What were the long-term implications of Marlboro Friday?
Dewar's, a major brand of Scotch whisky, produced by United Distillers of the U.K., and the U.S. leader in the Scotch category with a 15% market share, faced a declining market among traditional consumers of distilled spirits. Given the growing societal, legal, and regulatory opposition to drinking in the U.S., the marketing options were limited. In addition, drinking preferences had shifted away from distilled spirits to lighter, lower alcohol beverages like wine, wine coolers, and beer. In early 1993, Dewar's U.S. importer, Schieffelin and Somerset, in cooperation with the brand's longstanding advertising agency, Leo Burnett, began to explore the opportunities for repositioning Dewar's to younger adults. Repositioning Dewar's was a necessity for the brand to remain viable in the long term. Its existing customer base was aging, and younger drinkers who did drink Scotch were consuming less. The issue is how to update the brand's image to attract younger consumers. The brand manager faces the decision of planning the strategy for a repositioning or "recruitment" campaign for the brand.
Dewar's is considering employing new media options. The company had committed resources to a new CD-ROM magazine, Launch, in 1994, as its first experiment with new media. During 1994, a number of additional opportunities have been presented to both Leo Burnett and S&S including other CD-ROM "digizines" and World Wide Web sites. Jamie Prusak must now decide how to evaluate these new opportunities, as well as several other lower technology media alternatives, in terms of costs, effectiveness and efficiency, and long-term impact on the brand's two target markets.
Reports the strategic choices made by Dewar's and briefly describes the implementation of the campaign from its launch in September 1993 through September 1995.
In August 1994, Robin Andrews, President of RiceTec, Inc., faces a critical decision that will affect his firm's future: what policy should RiceTec follow for supplying grocery retailers with private label merchandise? RiceTec, a small privately owned firm engaged in rice breeding research and marketing, has struggled for eight years to gain market acceptance for its line of premium specialty rice products sold under its own brand name, Texmati. While Texmati is superior in taste to other leading rice brands on the market, RiceTec's limited cash flow greatly restricts its ability to invest in slotting allowances and pull programs. Consequently, its progress in gaining national distribution in supermarkets has been disappointingly slow. Several leading supermarket chains have expressed interest in having RiceTec supply them with rice products to be sold under their retailer-controlled premium private label brand names. The firm's board is divided on the issue of whether or not it should produce private brands for retailers and Andrews must re-examine the growth strategy in light of changing opportunities for brand building available to a small firm operating in the changing market.
In June, 1994, the Senior Vice President of BayBank's Investment Management Group is preparing a strategic plan for her organization's line of mutual funds. Sixteen months earlier, BayBank, Massachusetts's leading retail bank, had entered the mutual fund business by successfully launching BayFunds, a family of proprietary mutual funds. Now management faces a new set of marketing challenges to develop the business further. How can the mix of funds offered be extended to meet changing market and economic conditions, and what combination of proprietary and third-party funds would be most effective in attracting and retaining customers? In addition, management must also find ways to integrate the mutual funds business further into BayBank's core operations and systems while coping with a complex and uncertain regulatory environment.
In April 1992, American Airlines launched "Value Pricing" -- a radical simplification of the complex pricing structure that had evolved over more than a decade following deregulation of the U.S. domestic airline industry. American expected that the new pricing structure would benefit consumers and restore profitability to both American and the industry as a whole. The critical issue raised is: Would American's bold initiative work?
An introduction to the design of questionnaires administered in surveys undertaken in management and social science research. Outlines a multistep process for developing a questionnaire.
Silk, Alvin J., and Ernst R. Berndt. "Scale and Scope Economies in the Global Advertising and Marketing Services Business." NBER Working Paper Series, October 2003. (1050 Massachusetts Ave.,Cambridge, MA 02138.)
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Silk, Alvin J., Lisa R. Klein, and Ernst R. Berndt. "Intermedia Substitutability and Market Demand by National Advertisers." NBER Working Paper Series, December 2001.
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