The US based Procter and Gamble ( P & G ), is one of the largest fast moving consumer goods companies in the world.
In the late 1990s, P&G faced the problem of stagnant revenues and profitability. In order to accelerate growth, the erstwhile P&G’s president and CEO, Durk Jager officially launched the Organization 2005 program in July 1999. Organization 2005 was a six year long organization restructuring exercise which included the standardization of work processes to expedite growth, the revamping of organization’s culture in order to embrace change, the reduction in hierarchies to enable faster decision making, and the retrenchment of employees to cut costs. With the implementation of the program, P&G aimed to increase its global revenues from $38 billion to $70 billion by 2005.
However, Jager concentrated more on developing new products rather than on P&G’s well-established brands and he did too many things in too short a time. These facts resulted in the decline of the company’s revenues and profitability. After a brief stint of 17 months, Jager had to quit his post and Alan George Lafley took over as the new president and CEO of P&G in June 2000. With Lafley at the helm, P&G’s financial performance improved significantly with his new strategies and the “Organization 2005” program.
However, analysts doubted whether Ladley’s strategies could sustain P & G’s growth in the long run. This report gives a briefing on the structure and culture changes in P ; G with “Organization 2005”. Finally, this report suggested some recommendations to the company overcome difficulties and avoid potential problems in the future.1.
The reasons for P;G’s restructuring and current statusIn the late 1990s, P&G faced the problem of stagnant revenues and profitability. In order to accelerate growth, P&G officially launched the Organization 2005 program in July 1999.P&G is delivering broad-based, a significant growth by clear strategies and a unique combination of P&G strengths. P&G’s performance has accelerated over the past three years.
During the past three years, P;G’s goals are to deliver 4%-6% sales growth (excluding the impact of foreign exchange), 10% or better earnings per- share growth, and free cash flow equal to 90% or more of net earnings. ( the source from P&G’s Annual Report 2004 )In 2004, growth was broad-based. All five Global Business Units delivered at or above the sales goal; four of five were at or above the earnings goal. Every Market Development Organization delivered sales and volume growth at or above Company targets.
P;G brands grew share in categories accounting for more than two-thirds of total Company sales. This year’s results culminate increasingly strong performance over the past three years since July 2001. There is a significant up trend during three years performance. ( see Figure 1, the source from P&G’s Annual Report 2002,2003,and 2004)Figure 1, Strong performance and significant up trend since 2002 )aP;G can sustain growth because several systemic and structural changes implemented over the past few years are improving the consistency and reliability of P;G performance.
2. “Organization 2005″ Program—Organization Structure2.1 Organizational Structure before ” Organization 2005″P & G’s organizational structure before “Organization 2005” was a high administrative hierarchy. Each employee started in entry level position and climbed upwards level by level.
“P & G had been organized along geographic lines with more than 100 Profit centres.” ( P Mohan Chandran, 2003 ) P & G’ s four business units were based on geographic locations and the organization had a large R & D centre. The geographic structure is organized according to the requirements of the different locations. For the management aspect, the geographic structure can be centralized at one headquarters location and others can be decentralized with a regional level.
There are some advantages and limitations for P & G adopted geographic product structure. The advantages for P & G adopted this structure, such as, this structure could have higher level of customer satisfaction, because each product was adapted to the requirement of the different regions. The decision making was quickly made by regional managers. Therefore, each unit responded quickly to changes in the market.
However, there are some limitations for this structure. Such as, limitation efficiently producing, the difficulty for products linkage across region and employees emphasized on regional target rather than organization’s global goal.2.2 Changing Organization StructureThe “Organization 2005” program changed P&G from a conservative, lethargic and bureaucratic to modern, quick-moving and internet-savvy organization.
The program attempted to translate this purpose into practices, duties and functions which are allocated as specific tasks to individuals and groups.2.2.1 Content of New Organizational StructureThe new organization’s structure consists of the Global Business Units (GBUs), Market Development Organizations (MDOs), Global Business Services (GBS), and Corporate Functions.
( see Figure 2 in Appendices, The new organization structure under “Organization 2005” source: P Mohan Chandran, 2003) The purpose of restructuring of P&G is that increasing the sales and profits of P&G and speed and innovation and expedition of management decision making for the company’s global marketing initiatives.Under Organization 2005 program, P&G sought to reorganize its organizational structure from four geographically-based business units to five product-based global business units. Such as, Baby, Feminine & Family Care, Beauty Care, Fabric & Home Care, Food & Beverages and Health Care. “R&D and manufacturing operations were also undertaken by Global Business Units (GBUs), which will move innovations to market faster and better align capacity with the new Global Business Units.
” ( P&G’s Annual Report 2003)The GBUs structure will be complemented by eight Market Development Organizations (MDOs) intended to maximize the business potential of the entire product portfolio in each local market. The MDOs customized global programs to satisfy the local markets and designed marketing strategies about local consumers. They also dealing with other local companies and keeping great long-term relationships between customers and retailers. Market Development Organizations will bring deep knowledge of individual markets to ensure that innovations developed globally win locally.
The P&G’s products have been sold in 140 countries by combining GBUs and MDOs.The Global Business Services (GBS), and Corporate Functions reflected the functional structure of the hybrid. Functions were important for each product or market which decentralized to the self-contained units. However, some functions were relatively stable and require in-depth specialization were centralized as functional departments at headquarter.
Those departments provide services for the entire company. The advantages of the functional structure are that it promotes the economies of scale within functional departments and encourages the development of in in-depth expertise. The major disadvantage is functional structure slow response to environmental changes due to lack of cross functional coordination.2.
2.2 Matrix StructureP&G adopt a matrix structure which is designed by function and product. “In the context of organizational design, a matrix is a rectangular grid that shows a vertical flow of product responsibility and a horizontal flow of functional responsibility.” (Gareth R, Jones, 2001)P&G adopted the matrix structure which combined the global business units (GBUs) with the market development organizations ( MDOs), the global business services ( GBS) and the corporate functions.
The matrix structure of P&G contains vertical aspect ( GBUs) and horizontal aspects ( MDOs, GBS and corporate functions). This structure made the P&G from a higher level of hierarchy and bureaucratic organization become to a having minimal hierarchical levels within each function and decentralized organization. ( see Figure 3 )Figure 3. The P&G’s Matrix Structure in the New Organization Program(Scource: Author adopted Gareth R, Jones’s Market Structure: Team members are two-boss employees because they report to both the product team manager and the functional manager)Team members in P&G’s matrix structure have two bosses, the product manager and the functional manager.
They must juggle the conflicting demands of the function and the product. Team membership is not fixed in the matrix structure. Team members move from team to team to where their skills are most needed.There are some advantages for P&G adopted the matrix structure.
They are as following:* P&G could use the cross-functional teams to reduce functional barriers and overcome the problem of subunit.* The matrix structure opens up communication between functional specialists and provides an opportunity for team members from different functions to learn from one another and develop their skills* The matrix enables an organization to maximize its use of skilled professionals, who move from product to product as needed.* The matrix built-in focus on both functional and product quality and cost keeps the team on track and keeps technical possibilities in line with commercial realities.All those facts show that the new P&G’s organizational structure has instead of the conservative, lethargic and bureaucratic structure.
2.2.3 Information Systems and Organizational StructureInformation technology could improve the ability of managers to coordinate and control the activities of P&G and by helping managers make more effective decision. Management hierarchies suffer from a number of deficiencies that impact negatively on the quality and timelines of the information they can provide.
By providing managers with high-quality, timely, and relatively complete information electronically, the new information technologies have reduced the need for tall management hierarchies. Moreover, computer networks are now used as a primary conduit of information in P&G. “Both e-mail system and the development of intranet software programs for sharing documents electronically.” (P Mohan Chandran, 2003)One of the major consequences of this development is an increase in horizontal information flows with organizations so that the development of organization wide computer networks is breaking down the barriers—produced by differences in subunit orientations—that have traditionally separated departments and subunits.
Another consequence of advanced information technology’s ability to speed the flow of horizontal communication has been the growth of outsourcing and the development of network organization. (source: J. Fulk and G. DeSanctis, 1995)3.
Revamping the corporate culture3.1 The Definition of Organizational Culture and ImportanceThe culture of an organization refers to “the unique configuration of norms, values, beliefs, ways of behaving and so on that characterise the manner in which groups and individuals combine to get things done,” ( Eldrige & Crombie,1974)Organization culture change seems likely to be a key to improving organizational performance and effectiveness, such as, using Advanced Information Technologies improving the ability of managers to coordinate and control the activities of the organization, and helping managers make more effective decisions. Using Advanced Information Technologies changed the way of doing business and it also approved the importance of organization culture changing.3.
2 The “Organization 2005” program—Culture ObjectiveBefore “Organization 2005” program, P&G’s culture was the hierarchy of corporate culture. Senior managers worked in higher floors of the company building and with bigger size of office, even were served coffee in better cups. The employees’ dressing requirement was given by P&G’s culture. The stretch element was not sufficient.
The consequence for this culture is that the manager set easy targets and employees’ working lack enthusiasm. The old P&G’s culture lacks high technology support and knowledge sharing. These facts lead the old P&G’s culture with slowly decision making, higher level hierarchy, and lack ability for market changes.The Organization 2005 program made efforts to change P&G from a conservative, lethargic and bureaucratic to modern, quick -moving and internet-savvy organization.
( see Figure 4, source: The Financial Express, October 11. 1999)Figure 4. CULTURAL CHANGES UNDER “ORGANIZATION 2005″Before “Organization 2005″After “Organization 2005″* Misaligned objective with high penalties for failure* The organization is aligned on common goals with trust as a foundation* Internal inspection keeps everyone under control* A focus on coaching and teaching enables informed risk taking and team collaboration* Risk is avoided and victory is narrowly defined* Victory is defined as stretch with trust and candor* Complexity is delegated down* Leaders take on complex challenges* Creating a slow moving organization that lacks stretch, innovation and speed* An organization driven by stretch, innovation and speed toward breakthrough goals3.3 The P&G’s culture changes under the “Organization 2005” programThe erstwhile P&G’s CEO Jager launched the “Organization 2005” program in 1999, and he concentrated more on innovation new product.
The new culture discarded the dressing requirement of company and reduced the hierarchy by adopted using the same cup for all staffs and overhauling of the hierarchical office structure, which would not discriminate senior and junior employees. ( source: P Mohan Chandran, 2003) The new culture rejected restrictive rules and rigid line distinction in favour of more informal communication that promotes sharing knowledge and resources. Information technology was extensively used in the company to expedite efficient communication and significantly support knowledge sharing inside of P&G.However, Jager did not lead P&G turnaround from difficulty.
The situation of business performance was still not changed. There were several reasons for this failure. Jager did too many things in that short period, and original strong culture was not easy to change. People do not like accept the new things instead of previous customs.
Although “Organization 2005” program was well planned, the result of this restructuring P&G was failed.Lafley took over as the new CEO of P&G in 2000. He changed P&G’s culture move towards to soft and values the family culture. He focused more on the major markets and leading brands.
Lafley changed P&G’s management structure which he assigned senior positions and higher roles to women. Lafley increased expenditure on IT initiatives to $1 billion in 2002. In 2001, Lafley had announced another program which complemented the “Organization 2005” program.He suggested that the new program would improve P&G’s competitiveness and continue keeping P&G’s long term growth.
His new program is focus on big brands and big opportunities. From the past three years’ great financial performance, the culture change under Lafley seems to be successful. His strategies in culture changes were not like Jager, he did not change original culture completely. He maintained parts of original culture, it made the new culture be acceptable for employees.
However, P&G should continue develop the organization’s culture for its long term growth.4. ConclusionThrough the past six years, the “Organization 2005” program had made P&G’s global marketing efforts more disciplined. Although, at the beginning of execution of the program was a failure.
However, P&G has dramatically turnaround with its new CEO’s right strategies. Under the “Organization 2005” program, P&G have changed its geographic product structure to a matrix organization structure, which combined the production structure with functional structure. P&G could use the cross-functional teams to reduce functional barriers and overcome the problem of subunit.The matrix structure opens up communication and increase knowledge sharing in P&G.
Lafley’s strategy changed the P&G’s culture seemed more mild-mannered. He lead the new culture is more easier accepted and added some new programs as a complement for “Organization 2005” program to ensure further growth. P&G has a great performance in nowadays. However, there are some insufficiencies in P&G’s organizational structure and culture aspects.
Therefore, P&G should continue develop its organizational structure and culture for further long-term growth.5. RecommendationSuggestions for P&G’s organizational structure:* Keeping employees’ training in IT section. IT provides information flows and supports the fast decision making.
Therefore, it requires employees have relative knowledge.* Give more autonomy of authority for decision making. So that strategy can be more flexible and top management overload should be avoided.* For disadvantages of matrix structure, it lacks the advantages of bureaucratic structure.
Such as, the matrix structure lacks the monitoring and supervising managers’ activities. Therefore, P&G should more develop its organizational structure in monitoring section. ( source: David Buchanan & Andrzej Huczynski,1997)* IT should be more extensively applied in P&G to reduce the barrier to coordination through hierarchy and between divisions.Suggestions for P&G’s culture aspect:* Expanding outsourcing for product innovation and development.
* Encourage the employees to be more adventure and sensitive with market environment changing.* Never lose sight of the customer. Keeping track of their needs and requirements.* Maintain some old culture and motive employees for changing.
6. AppendicesFigure 2. GLOBAL BUSINESS UNITS AND MARKET DEVELOPMENT ORGANIZATIONSPILLARSGLOBAL BUSINESS UNITSMARKET DEVELOPMENT ORGANIZATIONComprise* Baby, Feminine and Family Care* Beauty Care* Fabric & Home Care* Food & Beverage* Health Care* North America Asia/India/Australia* Northeast Asia* Greater China* Central-Eastern* Europe/Middle East/ Africa* Western Europe* Latin AmericaPhilosophyThink GloballyAct LocallyGeneral RoleCreate strong brand equities, robust strategies and ongoing innovation in products and marketing to build major global brands.Interface with customers to ensure marketing plans fully capitalize on local understanding, to seek synergy across programs to leverage corporate scale, and to develop strong programs that change the same in our favour at point of purchase.
GLOBAL BUSINESS SERVICES AND CORPORATE FUNCTIONSPILLARSGLOBAL BUSINESS SERVICESCORPORATE FUNCTIONSComprises* GBS Americas located in Costa Rica* GBS Asia located in Manila* GBS Europe, Middle East & Africa located in Newcastle* Customer Business Development* External Relations* Finance & Accounting* Human Resources* Information Technology* Legal* Marketing* Consumer & Market Knowledge* Product Supply* Researc&Development* Workplace ServicesPhilosophyMinimize Administration CostsBe the Smartest/BestGeneral RoleBring together transactional activities such as accounting and order management in a single organization to provide services to all P&G Units at best-in-class quality, cost, and speedEnsure that the functional capability integrated into the rest of the company remains on the cutting edge of the industry. We want to be the thought leader within each CF