Special Feature — New Medium-term Management Plan

1. Overview of the New Medium-term Management Plan

1-1 From Dentsu Innovation 2013 to Dentsu 2017 and Beyond

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In the medium-term management plan Dentsu Innovation 2013, launched in 2009, Dentsu highlighted "Taking on the Platform Era" as a central theme and adopted various measures in line with this theme for the Group to implement. We set our focus on digitization and globalization, which were becoming the drivers of market growth, and directed our efforts toward securing scale and presence in areas essential to achieving a competitive advantage over the medium to long term. As presented below, our commitment to these efforts yielded significant results in each domain.

• Achievements to Date
Digital
  • With Japan and the U.S. as the core, succeeded in expanding service offerings and securing scale through business platform development including investment and M&A.
  • Consolidated gross profit increased 1.7 times from fiscal 2008 to fiscal 2012.
Global
  • Consolidated gross profit increased 1.9 times from fiscal 2008 to fiscal 2012 through enhancement of existing business bases as well as M&A, etc.
  • Saw progress in diversification and globalization of the client portfolio through the acquisition of important clients by McGarrybowen, which was named "Agency of the Year" twice in three years.
  • Completed the acquisition of the Aegis Group in March 2013.
Structural
Reform
  • Promoted structural development of the Japan business and launched specific measures such as introducing a new HR system.
  • Conducted a fundamental review of parent company operating expenses starting in fiscal 2009 and has since maintained the same level.

Under Dentsu Innovation 2013, we came close to completing development of the necessary business platforms to meet clients' needs and expectations on a global basis. Going forward, we will shift from a phase of platform development to a phase of consolidating and maximizing existing resources. Also, we remain committed to efforts aimed at structural reforms and improved operational efficiency and profitability of the entire Group.

Meanwhile, the structure of the Dentsu Group has changed significantly with the move to make the Aegis Group (currently, "Aegis Media") a wholly owned subsidiary, as part of our growth strategy to expand on a global scale.

Gross Profit Percentage Mix by Major Region
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Simple combined consolidated total of gross profit for Dentsu and the Aegis Group in fiscal 2012

Given these changes in business structure, the Dentsu Group formulated a new medium-term management plan—Dentsu 2017 and Beyond—which commenced in fiscal 2013, the year ending March 31, 2014. Dentsu 2017 and Beyond is based on a review of the Group's overall activities and the progress achieved through Dentsu Innovation 2013, the previous medium-term management plan, and incorporates unresolved issues that require further attention.

The feasibility of achieving the business targets—consolidated operating income of ¥70 billion, operating margin exceeding 20% and ROE of 8%—stated in Dentsu Innovation 2013 has become less likely, mainly because of the changes in the Group's business structure. This development notwithstanding, we will continue to do our utmost to achieve higher numbers in the future.

1-2 Growth Opportunities Targeted in Dentsu 2017 and Beyond

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Looking at growth opportunities from a macro perspective, the Dentsu Group divided the world into three regions—North America, Asia and emerging countries, and Japan and Western Europe—and dubbed this regional framework "3 Speed World."

In addition, we have discovered another growth opportunity—progress in "marketing convergence"—which has definitely changed the relationship between companies and consumers in marketing activities.

• Growth Opportunity from a Macro Perspective: 3 Speed World

The first region is North America—the largest ad market and the one that still offers plenty of opportunity for share expansion—where we will work to steadily gain market share and outperform total ad market growth.

The second region is Asia and emerging countries, where growth rates are likely to remain high. Here, we will emphasize efforts to achieve scale through M&A activity designed to further expand our business platform and also secure market-leading positions.

The third region is Japan and Western Europe, which have entered the mature phase but where we have established solid business platforms and market shares. We will look to cement a stronger market-leading presence while improving profitability.

2013 Ad spend Growth Forecasts

Market Data

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The size of the circle represents the ad market size of each region.
Source: CARAT ADSPEND FORECAST SEPTEMBER 2013
• Growth Opportunity from a Macro Perspective: Development of Marketing Convergence

In recent years, several developments have definitely changed the relationship between companies and consumers in marketing activities, including the spread of digital media and social media, changes in consumers' behavior patterns and the evolution of technologies.

As such changes unfold, it has become difficult for companies to succeed without linking each marketing process and individual measure organically, where they used to function separately in the past.

We define these changes as a whole as marketing convergence. In an environment in which marketing convergence is progressing, companies require ever more focused strategies and tactics in order to raise the effectiveness of their marketing activities.

The prevailing situation demands a diversified data platform and intelligence leading to accurate insights, ideas and planning that improve the effects of companies' overall marketing activities, and the utilization of various possibilities brought about by the development of technology. The Dentsu Group therefore has more opportunities to display its superior abilities. The integrated abilities of the Dentsu Group, based on these platforms, will have greater value through the development of marketing convergence.

1-3 Objective of Dentsu 2017 and Beyond

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The objective and business target guideline described in the medium-term management plan Dentsu 2017 and Beyond are described below.

• Objective

To evolve into a truly global network at the forefront of marketing convergence Innovation × Reinvention

• Business Target Guideline
Business Target Guideline
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The growth of existing businesses after deduction of decrease or increase of gross profit attributable to business acquisitions or foreign exchange fluctuations
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Digital domain includes Internet-related marketing services and entrusted development and sales of information technology systems.
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Calculated by dividing operating income before deduction of amortization of goodwill and other intangible assets by gross profit. "Operating income before deduction of amortization of goodwill and other intangible assets" is operating income excluding the amount of amortization expense related to business acquisitions.
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Compound annual growth rate
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Simple combined consolidated total of gross profit for Dentsu and the Aegis Group in fiscal 2012

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2. Four Priority Themes of Dentsu 2017 and Beyond

Four priority themes were set to guide the Group toward achieving the targets stated in Dentsu 2017 and Beyond.

2-1 Diversifying the Portfolio on a Global Basis

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Two pillars will support efforts to diversify the portfolio on a global basis: Strengthening the client base and developing regional strategies.

• Strengthening the Client Base
The client base of the Dentsu Group, which has been invigorated by the inclusion of Aegis Media, will be enhanced through the mutual use of client assets that Dentsu and Aegis Media have established independently. The integration has been a touchstone for significantly more opportunities to extend global support to companies that are engaged in global marketing. Specifically, we will be able to offer services that underpin overseas expansion by Japanese companies, which form the core of Dentsu's client base, and enhance entry into Japan by overseas companies, which comprise the core of Aegis Media's client base, as well as facilitate worldwide expansion by global companies.

Also, for existing global clients that already have accounts in several countries and regions, we will strive to concurrently expand business regions and business service domains, particularly creative, digital and media, through up-selling.

Not only will these efforts strengthen our client base, they will also facilitate distribution and expansion of Japan's leading-edge entertainment content and sports content—assets of the Dentsu Group—through the enhanced global platform that was built with the addition of Aegis Media. This will enable the Group to demonstrate even greater influence.

• Developing Regional Strategies
We have laid out regional strategies under the 3 Speed World framework for North America, Asia and emerging countries, and Japan and Western Europe. We will promote strategies aligned with each 3 Speed World market to capitalize on growth opportunities in these markets.

Many global companies are headquartered in North America, the world's largest advertising market. For the Dentsu Group, North America is thus an important market that directly leads to global expansion of the client base, and we will focus on increasing market share by strengthening cooperation among all agencies under the Dentsu Aegis Network umbrella.

In fast-growing Asia and emerging countries, we are energetically promoting efforts to expand business scale through M&A activity and secure a market-leading position in our pursuit of expanded business platforms that will underpin business development in high market growth countries.

In Japan and Western Europe, where we already have firm business platforms established, we aim to not only maintain but strengthen existing business and further improve profitability. Also, we will focus on creating and capturing new growth opportunities beyond the conventional ad business.

2-2 Evolution and Expansion of the Digital Domain

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For the Dentsu Group to grow by capitalizing on progress in the digital domain and market expansion, our central themes are to enhance competitiveness to put the Group at the forefront of marketing convergence and to create new businesses from marketing convergence.

• Enhance Competitiveness to Put the Group at the Forefront of Marketing Convergence
(1) Continuous Growth by Expanding Digital Revenues
It is imperative for the Group to expand digital revenues if it is to realize sustained top-line growth. Toward this end, we will seek to strengthen the capabilities of the entire Group through measures that include M&A and pursue expansion of service offerings and revenue size.
Expand client base by strengthening data analysis capabilities and PDCA (Plan → Do → Check → Act) services
Create a service network on a global basis, organically and through M&A
Establish a new earnings model based on marketing ROI and integration attribution
(2) Improve Profitability of the Digital Business
We will also strive to improve the profitability of the digital business, beginning with enhanced efficiency in media-buying operations.
Improve operational efficiency by utilizing technology and Group resources
Achieve a higher level of added value in business operations through the adoption of Aegis Media standards and practices
(3) Develop and Acquire Cutting-Edge Technology
Through joint efforts with Aegis Media and other approaches, we will improve both quality and speed with regard to the development and acquisition of cutting-edge technology, which leads directly to a competitive advantage in the digital domain.
Boost efficiency by sharing knowledge with Aegis Media, emphasizing function concentration to elevate R&D capabilities and utilizing the merits of scale
Strengthen cooperation with partner companies
Capture external resources (data and technology) through M&A and investment
• Create New Businesses from Marketing Convergence
(1) Support the Development of New Revenue Sources for Existing Media and Content Owners
We will continue to actively support the development of new revenue sources for existing media and content holders, based on strong existing relationships.
Support the establishment of new values and presence for existing media and content owners based on marketing convergence
Establish a collaboration system in intelligence and data gathering
(2) Develop New Solutions That Respond to the Evolution of Mobile Technology
We will capitalize on new business opportunities brought about by the evolution of mobile technology, which is set to see further progress, due to the penetration of smartphones and tablets.
Develop and monetize communication and sales platforms in new devices and services centered around mobile technology
(3) From Advertising to Commerce
We will provide consistent services that integrate and manage all processes at companies, from communication to distribution.
Support clients' EC/CRM (e-Commerce/Customer Relationship Management) activities for maximizing consumers' lifetime values
Develop new marketing flow lines

2-3 Re-engineering Business Processes and Improving Profitability

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A theme that the Dentsu Group has positioned as important, in addition to expansion of the revenue platform, is the further improvement of profitability.

We will re-engineer our overall business processes for higher efficiency through such approaches as realizing flexible resource management and implementing cost control on a global basis.

At the same time, we will carry out a fundamental review of the system that offers solutions to clients geared toward maximizing the added-value generation abilities of the Dentsu Group. We will also restructure the value chain across the entire Group, a process that includes the integration and reorganization of affiliated companies.

In addition, we will review and subsequently reduce assets to improve the business efficiency and profitability of the entire Group.

2-4 Further Reinforcing the Business Platform in the Core Japanese Market

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The establishment of an unrivaled business platform in Japan underscores the Group's unique advantage as a global network and reflects the core competence that gives the Group its competitive edge. One of the priorities stated in Dentsu 2017 and Beyond is to further reinforce the business platform in the core Japanese market. We will strive to enhance our competitiveness with the following goals in mind.

Achieve Organic Growth by Enhancing Profitability of Existing Businesses
We seek to further enhance the competitiveness and profitability of our existing businesses including the mass media business and achieve higher market share by demonstrating integration capabilities of the Group adapted to our progress in marketing convergence.
Expand the Service Domain Based on the Conventional Ad Business
We will create and deepen new growth domains and diversify revenue sources by utilizing networks built to date with clients and partners. As part of this effort, we will become a leader in the marketing convergence domain, such as the EC/CRM support business, and expand our presence and services globally.
Accelerate Structural Reforms
In achieving "2-3 Re-engineering Business Processes and Improving Profitability," we have positioned Japan as the most important region, and through improvements in personnel and resource utilization, we will accelerate the structural reforms carried over from the previous medium-term management plan.

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