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The Proctor and Gamble Company was founded in Cincinnati, Ohio in 1837 by an English immigrant William Procter, and James Gamble, an immigrant from Ireland. Both men had arrived in Cincinnati separately and were forced to stop there to recuperate from illnesses while on their way to the West. Each independently decided to settle to found a business and Procter became a candle maker while Gamble became a soap maker. This was not coincidental as the raw material for both candles and soap was animal fat. Cincinnati, also popularly nicknamed Porkopolis was the country’s largest meatpacking center allowing for inexpensive access to animal fat. On a personal front, the two gentlemen married sisters and subsequently formed a partnership in 1837. Due to the abundant supply of raw material, many competitors entered the market and Proctor and Gamble (P&G) had to differentiate itself by embarking on an aggressive investment strategy building a large factory in the 1850s despite rumours of the impending civil war.
Response to the Civil War and effects of their response
During the Civil War, P&G focused on operating day and night to supply the Union armies, and by the war’s end sales had more than quintupled to over USD 1 million. When soldiers returned home carrying high quality products, distinguished by their unique characteristic moon- and- stars packaging, P&G quickly developed a national reputation. As a result, their rapid growth and a series of innovations in their internal processes such as human resource management, R&D, distribution, marketing, and organizational design soon followed.
Growth through the Years using different organizational structures
From inception, P&G focused on product innovation, branded goods, research and development, direct distribution and sales and as the growth increased, diverging organizational structures and reward systems were introduced.
In 1948, P&G established its first international sales division to manage its rapidly growing foreign businesses. Over the next forty years, P&G would steadily build its foreign presence, while carefully managing its United States (U.S.) operations. The two types of organizations, that is, the United States one and the European one, led to two distinctly different modes of organizational architectures. The United States, with a large homogenous market, lent itself to nationwide brand and product division management. Western Europe, on the other hand, which represented the larger share of P&G’s overseas division, was a heterogeneous market with different languages, cultures and laws and therefore adopted a decentralized hub and spoke model.
In the United States, in 1954, P&G created individual operating divisions to better manage growing product lines of products, supported by its own line and staff organizations. As a result, growth developed along two key dimensions: functions and brands. In 1987, the matrix reporting structure entered the scene, whereby functional leaders reported directly to their business leadership and also had a dotted line reporting relationship to their functional leadership.
In Western Europe, geographic management was the original structure which developed along the three dimensions of country, function and brand. In this model country managers were responsible for profitability and market strategy, not brand managers. This and other effects led to silos and slow growth. By 1980s, P&G attempted to shift focus from country management to product category management to promote cross- border cooperation across functions.
Eventually, P&G moved into the global market due to attractive expansion opportunities in Japan and developing markets and as a result, it reassessed its globalization model and opted to focus on the global matrix structure of categories and functions. This structure had several pitfalls and externally, competitors were catching up quickly challenging P&G’s first mover strategy and related advantages.
P&G had grown to be a USD 38 billion multinational consumer -products company, with over 50 categories, ranging from toilet paper to pharmaceuticals, with more than 300 brands. Competitors were steadily eating away market share.
As a result in September 1998, P&G announced a six year restructuring plan called Organization 2005. This new structure had adverse effects on P&G sustainability and the scene in the case is set around the negative results of Organization 2005 resulting in the CEO Durk Jager, 17 months into his role as CEO, resigning and A.G Lafley taking over in June 2000 faced with the significant decision of whether to make a strong commitment to the Organization 2005 or dismantle. He also had to decide whether he created more value by splitting the company into sets of stand- alone businesses.
Why did US organizational structure shift from Product grouping in the 1950’s to a Matrix in 1980’s?
The United States had a large homogenous market which lent itself to nationwide brand and product division management. In 1954, P&G created individual operating divisions to better manage growing lines of products, each with its own line and staff organizations.
Specialization by product as described by Cole G.A is when grouping is arranged around specified products, with each group having its own specialist functions provided at the operational level. The advantages of product grouping are that it enables the company’s major product groups to concentrate on their own priorities, within the total business plan. It also provides a mechanism for supplying the major groupings in the company with their own specialist resources and to develop their own preferred culture. In addition, it encourages the senior specialists at director level to focus on corporate issues, leaving production matters within product groups much more in the hands of senior managers involved.
The main disadvantage of this kind of structure is that individual divisions may seek to promote their own objectives so forcefully as to endanger wider, corporate strategies. Thus the senior directors need to be capable of exercising sufficient control over corporate intentions, but without robbing the line manager of their motivation to obtain the optimum results for their divisions.
According to Mullins, L.J. in Management and Organizational Behavior, the Line and staff organization structure is concerned with concerned with different functions which are to be undertaken. It provides a means of maximizing on the utility of specialists while maintaining the concept of line authority. Line organization relates to those functions concerned with specific responsibility for achieving the objectives of the organization and to those people in the direct chain of command. Staff organization relates to the provision of specialist and support functions for the line organization and creates an advisory relationship.
Within this model, P&G US developed along two key dimensions: functions and brands. Brand managers bore responsibility for profitability and could focus on matching company strategy with product category dynamics. Brand managers competed in the same marketplace but also shared access to strong divisional functions which in turn transferred best practices and talent across many brands, fostering leading edge competences in R&D, manufacturing and market research in a rapidly developing consumer products industry. For instance, the invention of fluoride toothpaste in 1955 was a key result of this structure.
In 1987, the United States P&G made a historic shift away from the 56 year old competitive brand management system, to a matrix system whereby brand would now be managed as components of category portfolios by category general managers. The reason for this shift in structure was because product categories were beginning to require more differentiated functional activities but at the same time, P&G US needed to retain functional strengths.
As a result, a matrix reporting structure was set up whereby functional leaders reported directly to their business leadership and also had a dotted line reporting relationship to their functional leadership. Thus 39 US category business units were created, with each category business unit having its own sales, product development, manufacturing and finance functions.
Mullins, L.J. describes a matrix organization as a combination of functional departments which provide a stable base for specialized activities and a permanent location for staff members and units that integrate various activities of different functional departments on any of the following bases: project, product, geographical or systems basis.
He goes on to add that matrix structures offer the advantages of flexibility, greater security and control of project or product information and opportunities for staff development if management implement the structure effectively. The potential problem areas, as seen later in the P&G case, include the fact that a matrix structure can result in a more complex structure. By using two methods of grouping it sacrifices unity of command and may cause problems of co-ordination. There may also be a problem of defining the extent of the product (project) managers’ authority over staff from other departments and of gaining support of other functional managers.
Why did the European organizational structure shift from Geographic grouping in 1950’s to Category management in 1980’s?
In Europe, the P&G organization developed along three dimensions: country, function and brand. This model was established to tailor products and processes to local tastes and norms. This resulted in a portfolio of self sufficient subsidiaries led by country general managers (GMs) who adapted P&G technology and marketing expertise to local markets. These were called mini-U.S’s in each country as new product technologies were sourced from U.S. R&D labs in Cincinnati, qualified, tested and adapted by local research and development (R&D) and manufacturing organizations in each country. In 1963, a European Technical Centre (ETC) was created and housed in Brussels and it developed products and manufacturing processed that country managers could choose to adapt to and launch in their countries. Country managers, not brand managers, had responsibility for profitability and market strategy, while the Brussels regional headquarters was very hands-off, serving mostly legal, tax accounting and public relations entity.
Geographically based structures, according to Cole, have key advantages of widely spread markets can be catered for, local knowledge of customers, labor market and distribution can be utilized as seen in P&G Europe. However, the key disadvantages as with any attempts at decentralization are associated with the inevitable tension that develops between Head office and the regions concerning priorities for action and priorities for scarce company resources. In addition, geographical based cultures and focus may veer away from the overall company strategy, culture and increase costs.
The main reason why geographic grouping did not work positively for P&G in Europe was that it resulted in innovations and brands taking unnecessarily long to globalize. For instance, Pampers, was launched in US in 1961, Germany in 1973 and France not until 1978. In addition, functional organizations became embedded in company silos and worse still, European corporate functions were also completely disconnected from the US operation. To cap it all, focus on product categories and brands was fragmented by country, virtually precluding region- wide category or branding strategies. This led to unstandardized and subscale manufacturing operations in each country which were expensive and unreliable. Products were tweaked unnecessarily, creating pack size and formulation variations that added no value to maintain and reinvented the wheel with each new product initiative.
Thus in early 1980s, Europe attempted to promote cross border co-operation across functions and to shift focus from country management to product category management.
Why were the 2 structures integrated into a global cube in the 1990’s?
The two main P&G structures: U.S matrix structure and Western European category management structure were integrated in the 1990s into a global cube due to the several reasons. Attractive expansion opportunities in Japan and the developing markets led P&G to question its globalization model, particularly in anticipation of the new challenge of appealing to more diverse consumer tastes, cultures, preferences and income levels.
This was demonstrated by the fact that in Europe, increased focus on cross border category management had proven successful. However, corporate function in Brussels still lacked direct control of country functional activities. P&G was also seeking positive results in the area of innovation such that the creation of global technical centers in different regions could have core competencies in a specific product category. P&G also sought tremendous top-line and bottom-line improvements such as creation of powerful and independent global functions promoted to the pooling of knowledge, transfer of best practices, elimination of intra-regional redundancies and standardization of activities. It was also seeking integration of manufacturing, purchasing, distribution and engineering into one global product supply function which managed the supply chain from beginning to end. P&G achieved this specific integration in 1987. In the new global cube, P&G was also seeking massive savings which could be achieved by regionally managed product- supply groups consolidating country manufacturing plants and distribution centers into higher scale regional facilities. P&G also sought a stronger global sales organization with regional leadership so as to develop closer global relationship. One key result of this specific objective was the Customer Business Development (CBD) function which developed closer relationship with bug customers such as the one unprecedented step of co-locating with Wal-Mart in Bentonville, Arkansas to pursue joint strategic planning. Coupled with early supply chain initiatives, this undertaking allowed P&G to be a first mover in electronic integration with customers, leading to disproportionate share growth with mass discounters. Finally, significant initial standardization in Information Technology (IT) systems was made possible by a globally managed IT organization. By 1997, financial and accounting information storage had been consolidated at three global data storage centers. P&G was also seeking global category management whereby it aimed at developing close relationships. This occurred with strong global Research & Development (R&D) product category organizations, helping to standardize and accelerate global product launches.
As a result, P&G started migrating to a global matrix structure of categories and functions. The global cube entailed Europe’s country functions being consolidated into continental functions characterized by dotted-line reporting through functional leadership with direct reporting through the regional business managers. Global functional senior vice presidencies were created to manage functions across all regions. Then in 1989, to better co-ordinate category and branding strategies worldwide, P&G created global category presidencies reporting directly to the CEO. All country category GMs had dotted- line reporting to their global country president, however, career progression and promotion remained in the hands of regional line management.
Some additional key results included a much reduced duration to globalize a new initiative. For instance, by the early 1990s, it took only four years, on average to globalize a new initiative. This advance allowed P&G to quickly inject new technologies into recently acquired beauty care products like Pantene, Olay and Old Spice. For example, two-in-one shampoo and conditioner technology was developed at the Sharon Woods beauty-care global technical center in Cincinnati in mid-1980s. The hair care global category president then achieved its roll out globally under the Pantene brand name with consistent worldwide marketing message and identity. In just over a decade, increased global focus on product categories helped P&G’s beauty care division to grow from USD 600 million to a highly strategic USD 7 billion business.
What are the key distinguishing features of Organization 2005?
Organization 2005 was a six -year restructuring plan announced by P&G in September 1998. The company’s objectives were to achieve a USD 900 million in annual after- tax cost savings by 2004 after spending USD 1.9 billion over the five years. This was to be achieved by specific features and actions of the Organization 2005.
The first part called for voluntary separations of 15,000 employees by 2001, of which almost 10,500 (70%) were overseas staff. Forty five percent of all job separations would result from global product- supply consolidations and a quarter from exploitation of scale benefits arising from more standardized business processes. The plan sought to eliminate six management layers, from 13 to 7.
The second part called for dismantling the matrix organizational structure and replacing it with an amalgam of interdependent organizations which were:
Global Business Units (GBUs) with primary responsibility for the product and whose teams were compensated on profitability.
Market Development Organizations (MDOs) with primary responsibility for markets and whose teams were compensated based on sales growth.
Global Business Services (GBSs) which was a unit responsible for managing internal business processes and whose teams were compensated on cost management.
This radical new design was aimed at improving the speed with which P&G innovated and globalized its innovations.
In detail the GBUs were responsible for product development, brand design, business strategy and new business development. Each operated autonomously focusing on different product categories. In total, there were seven GBUs with complete profit responsibility and benchmarked against focused product category competitors.
Each GBU was led by a president, who reported directly to the CEO and was a member of the global leadership council that determined overall company strategy. At GBU level, Vice Presidents of Marketing, R&D, Product supply, New Business Development and support functions such as IT implementation reported to the GBU president. To ensure that R&D division of different GBUs would share technological innovations, a technology council composed of all GBU R&D VPS would be formed to share and cross pollinate ideas.
The intention of this structure was to increase agility and reduce costs through accelerated global standardization of manufacturing processes and better co-ordination of marketing activities. Global standardization of processes which were on different platforms would eliminate the lengthy process of obtaining launch approval from regional managers and result in systematically faster global rollouts of innovations and new brands.
MDOs were designed to take responsibility for tailoring P&G programs to local markets and using their knowledge of local consumers and retailers to help P&G develop market strategies to guide the entire business. Customer Business Development functions previously dispersed among various business units would be consolidated regionally and converted into line functions in each MDO. There were seven MDOs with each being led by a president who reported directly to the CEO and, like the GBU president, sat on the global leadership council.
GBS was the third leg of the Organization 2005 with the responsibility to standardize, consolidate, streamline and strengthen business processes and IT platforms across GBUs and MDOs globally.
The aim was to centralize responsibility for managing these processes which could lead to economies of scale while allowing the other two GBUs and MDOs to focus on core competencies. This structure was focused on specialization.GBS was organized as a cost center with the head of GBS reporting directly to the CEO but was not a member of the global leadership council.
Routine and HR policies were also to be impacted in Organization 2005. Many decisions were to be made by individuals rather than committees so that routine business tasks that had taken months would now be accomplished in days. Budgeting was streamlined, integrating separate marketing, payroll, and initiative budgets into a single business planning process. It was also to overhaul its incentive system while maintaining the promote- from- within policy P&G increased its performance based portion of compensation and extended its stock option compensation formerly limited to 9,000 employees to 100,000 employees.
Why did P&G adopt this structure?
P&G adopted the structure of Organization 2005 due to key challenges and problem occurring in the Global Matrix during 1995-1998. Firstly, the matrix structure had never been symmetrical as the function retained a high degree of de-facto control because it determined career paths and promotion for its employees.
Unfortunately, each function had determined its own power base and strategic agenda rather than co-operating with other functions and business units to win in the market place. The initial tension caused by functional conflict had served as an effective system of checks and balances but eventually led to poor strategic alignment throughout P&G causing its position to begin to weaken in the global market as managers were focused on their particular countries rather than these global functional conflicts. This was because their focus was based on aiming for their own maximization of particular parameters rather than an optimal tradeoff.
Secondly, the matrix structure had also not fully resolved the tension between regional and product category management. Regional managers still had sole responsibility for financial results and thus it was they who ultimately chose whether or not to launch initiatives made available by global category managers. R&D divisions struggled hard to globalize new technological and brand innovations quickly but had to obtain agreement from regional managers, sometimes country managers and these managers would sometimes hesitate even if it made sense for P&G strategically because it could weaken their upcoming profit and loss statement. As a result, the company’s track record of being a global leader in innovation and brands stagnated and was slipping behind some of its more focused rivals. For instance, Cover Girl, a U.S. cosmetics brand that P&G had acquired in 1989 had still not been globalized in 1997 compared to Maybelline, acquired by L’Oreal in 1996, was globalized in just a few years and well on its way to becoming a global billion-dollar brand.
Thirdly, competitors were catching up quickly. P&G had always been a first mover in supply chain consolidations and integration with customers, but by the latter half of the decade, over 200 vendors had opened ’embassies’ to Wal-Mart in Bentonville. Share price consequently dropped by 3.3% since 1993 and the sales growth slowed down to 2.6% in 1997 and 1998 by contrast to 8.5% on average in the 1980s.
Lastly, the defining question was whether the global matrix cube was internally coherent or scalable over the long term. Full accountability for results could not really by assigned to regional profit centers because they couldn’t fully manage functional strategy and resource allocation. This resulted in a culture of risk aversion and avoidance of failure. With over 100 profit centers, it seemed like there were too many cooks in the kitchen meaning too many managers making decisions that were moving the company away from its intended objectives.
Should Lafley make a strong commitment to keeping Organization 2005 or should he plan to dismantle the structure?
A.G. Lafley should consider dismantling the structure after a careful analysis of the previous structures of Proctor and Gamble and a thorough assessment of the negative adverse effects of Organization 2005 so as to develop a more effective global structure.
The main objective that the previous CEO, Durk Jager had was to use Organization 2005 to change P&G’s risk averse regionally managed structure so that it could launch new blockbuster brands based on new technologies rather than incremental improvements of existing products. He also frequently scrutinized P&G’s R&D portfolio and personally stewarded new technologies through the pipeline that he thought were promising.
Initially, in October 1999, fiscal first quarter results were promising indicating an immediate acceleration in business performance, with sales up by 5% over the previous year which was a marked improvement over the 2.6 % annual revenue growth over the last two years. Core net earnings fell short of long term goals but made a respectable increase of 10 %. This resulted in P&G’s stock price appreciating significantly. When the next quarterly report came out on 30 January 2000, the stock price reached an all-time high of USD 118.38 and sales had grown by an impressive 7% and core net earnings increased by 13%.
Tables turned on 7 March 2000, when P&G gave a profit warning due to external factors such as increased raw material costs, delays in FDA approvals and intense competition. With 50 new products in the pipeline, the situation was expected to reverse. However, on 25 April 2000, when results were announced, core net earnings had dropped 18 % while sales increased 6 % despite a 2% hit from fluctuations in exchange rate. The stock price lost 10 % of its value. The last straw was on 8 June 2000, when fourth quarter profits were flat compared to the expectations of 15 – 17 % increase. P&G lowered its future quarterly sales growth estimates to 2 – 3 %, casting doubt on whether Organization 2005 was even lifting the top line. Market research companies confirmed P&G’s poor competitive position citing loss of U.S. market share in 16 out of 30 categories since the preceding year. P&G stock finally fell to USD 57 after the announcement and was the worst performing component of the Dow over the previous six months.
In conclusion, Lafley, bearing in mind the past performance and stiff competitive arena, should dismantle Organization 2005 for the above reasons as well as for the sagging employee morale due to the substantial job reductions.
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