Case Summary: Proctor & Gamble: Organization 2005 (A)

Harvard Business School Case Summary of Proctor & Gamble: Organization 2005 (A) by MikolajPiskorski and Alessandro L. Spadini

Problem : Durk Jager , had introduced a restructuring program named “Organization 2005” – designed to accelerate sales and innovations. In past P&G chain of formal command put geography first, followed by product and function. In new design, P&G was structured as 3 interdependent global organizations, one organized by product category, one by geography and one by business process.

Lack of immediate results, job reductions, reduced employee morale led to reduced profits and stock price reduced to half in last six months.

Organizational Structure: Two different models for US and Europe were adopted, as US market was more homogenous, a nationwide brand and product division management was adopted. Western Europe is a heterogeneous market with different languages, culture and laws therefore a decentralized model was adopted.

United States

The organizational model was developed on two key dimensions: functions and brand. Brand manager has responsibility for profitability and matching company strategy with product category. Brand manager has access to strong divisional functions. It was more product centric and costlier. There was competition within brand managers and this was the era when max product innovation took place.

In 1987 structure was changed and functional units were centralized. Brands would be managed as components of category portfolios by category general manager, to whom both brand and functional managers would report. Each business unit has it’s own sales, product development, manufacturing and finance functions. To retain the functional strength a matrix reporting structure was set up whereby functional leaders report directly to their business leader and also have reporting relationship to their functional leadership. Again product managers were more powerful and responsible for profit and loss, matrix structure create ambiguity as man can’t serve two masters. Interdivision communication improved.

Western Europe

P&G organizational model developed along three key dimensions: Geography , function , brand. The result was a portfolio of self- sufficient subsidiaries led by country GM with local market expertise. New technologies were sourced from US , tested in local R&D and manufactured in each country. there was high product launch time and sometimes it was as high as 14 years !

In 1963 , the European Technical Center (ETC) in Brussels was establish to act as centralized R&D and process-engineering unit. ETC develop products and manufacturing process that country managers could choose to adapt and launch in their own countries.

Problems in Europe: Corporate R&D were completely disconnected from US operations. European functional organizations were also in isolation from US counterparts. Un standardized , sub-scale production was expensive and unreliable. Country R&D were expensive to maintain.

By early 1980s , An attempted was made to promote cross-border cooperation and focus was shifted from country management to product-category management. Headquarters at Brussels encouraged formation of regional committees and eliminate needless product variations. The strategy was successful and Entire Europe was divided into three sub regions, whose leaders were given secondary responsibility for coordinating particular product category across the entire continent. Country GMs were replaced with multiple country product-category GMs who report to the division VPs.

Global Matrix

In late 1980s, expansion opportunities in Japan and other parts of world led P&G to develop globalization model. Corporate functions in Brussels still lacked direct control of country functional activities. P&G started migrating to a global matrix structure, country functions were consolidated into continental functions reporting through functional leadership and direct reporting through the regional business manager. All country category GMs had reporting to their global category president. The global category presidents and R&D VPs developed product category platform technologies that could be applied to global branding strategies. In 1995 this structure was extended to rest of the world through creation of four regions – North America , Latin America , Europe /Middle East/Africa and Asia.

Regionally managed product supply groups could extract massive savings by consolidating country manufacturing plants and distribution centers into high scale regional facilities.

Global Matrix Problem

Strong regional functions produced extraordinary advantages,but in mid 1990s created grid lock. Most functions nominally had straight line reporting through regional management and also reporting through functional management, the function retained a high degree of de-facto control. They develop their own strategic agenda, maximize power, do not coordinate with other functions and business units. Regional managers were responsible for profit and loss statement, they often hesitate to launch a particular product even if it made sense for the company strategically because it could weaken their upcoming profit and loss statement. As regional managers were responsible for profit and loss they were hesitate to launch new product.

Organization 2005

In 1998 , P&G started a 6 years restructuring program – organization 2005.

• Voluntary separations of 15000 employees by 2001
• 45% job separations from global product-supply consolidation.
• 25% from exploitation of scale benefits arising from standardized business process.
• Eliminate 6 management layers , reducing the total from 13 to 7
• Dismentaling matrix organization and replacing with interdependent organizations: Global Business Units, Market Development , and a Global Business Services managing internal business process.

Analysis of Organization 2005

• Focus was more on rolling out new products at faster rate. Implementation of 3M concept i.e product launched in last 3 year should make up certain percentage of total turnover.
• Previously organization was more decentralized and centralization coupled with separations and negative growth rate has weaken moral of employees
• Jager decided that P&G would sell its products under the same name all around the world. So in Germany, the name of its dishwashing liquid suddenly changed from Fairy to Dawn
• Large level of transfers (2000 from Europe to Geneva ) and relocation led to moral and behavioral changes.