📗

Session 6

Lafley’s predecessor, Durk Jager, introduced an aggressive restructuring program

(Organization 2005) - designed to generate bolder innovations and accelerate the
company’s global involvement to double P&G’s sales to 70$ billion by 2005, and
achieve annual earnings growth of 13-15%.

In the past, P&G’s organizational design was functioning with formal command
where geography was put first, followed by product, and then function. In the new
design, P&G was restructured as three interdependent global organizations, one
organized by product category, second by geography, and third by business
process.

The early results of this reorganization were insufficient: flat sales, negative earning
growth, and receiving four profit warnings. THERE WERE SIGNIFICANT JOB
REDUCTIONS AND LACK OF RESULTS, which influenced employee morale.

In a short time, Lafley had to decide whether to come back to the previous
organizational structure.

THERE WERE ALSO QUESTIONS TO P&G’s BUSINESS STRATEGY: does it make

sense for a 38$ billion USD company to compete in over 50 categories with 300
brands? In recent years, P&G has been losing its market share to its competitors, which
suggests that perhaps P&G’s strengths in R&D and marketing are becoming
weaker/less exclusive.

Session 6 1
 History

Procter = candlemaker, Gamble = soapmaker

founded in 1837

it was supplying Union armies, so it received national recognition as soldiers were

coming back from the war where they were supplied with P&G’s products

there were also innovations in marketing, HR, R&D, and distribution

established one of the first R&D labs in the industry

developed disintermediation wholesalers

established one of the first market research departments

competitive brand management was institutionalized in 1931, empowering each

brand manager to target different segments

the organization started forming around PRODUCT LINES so that quicker and more
consumer-focused decisions can be made

strong centralized functions were retained in the areas of R&D and manufacturing

Tide was developed secretly and captured market leadership in just 4 years,
validating R&D’s independence

Diverging Organizational Structures (1948-1987)

in 1948, it established the first international sales division to manage its rapidly
growing foreign business

started carefully expanding to foreign countries

it was also maintaining its US presence, which led to two very different modes of
organizational structure

the US → large homogenous market, product division management

Europe → heterogeneous market, decentralized

Session 6 2
 The US → 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 → divided into FUNCTIONS and
BRANDS

brand managers bore responsibility for profitability

brand managers in the same product division competed in the marketplace but
shared access to strong divisional functions

A corporate basic research department helped to make innovative connections

across divisions, leading to inventions like fluoride toothpaste in 1955.

In 1987, the US made a shift from a competitive brand-management system to a matrix

system. Brands were now managed as components of category portfolios by category
general managers.

39 category business units were created, each run by a general manager to whom both
brand and dedicated functional managers would report.

Session 6 3
 Each category business unit had its own sales, product development, manufacturing,
and finance functions.

WESTERN EUROPE

In Europe, the P&G organization developed along three dimensions: country, function,
and brand.

“P&G began expanding globally after World War II,” explained former P&G CEO John
Pepper, “but the company created ‘[Link]’ in each country.”

Western European market functioned like a set of subsidiaries led by country General
Managers who adapted P&G technology and marketing expertise to local markets.

Session 6 4
 New product technologies were sourced from U.S. R&D labs in Cincinnati and
then qualified, tested, and adapted by local R&D and manufacturing organizations
in each country.

In 1963, the European Technical Center (ETC) in Brussels was inaugurated to

house
a European corporate R&D and process-engineering function. ETC developed
products and
manufacturing processes that country managers could choose to adapt to and launch in
their own countries.

In this model country managers, not brand managers, had responsibility for
profitability and
market strategy.

The Brussels office was very hands-off, predominantly busy with legal, tax-
accounting and public-relations tasks

innovations and brands could take more than 10 years to globalize…

Pampers was launched in the US in 1961, in Germany in 1973, in France in 1978!

European corporate functions were completely disconnected from American ones

Session 6 5
 By the early 1980s, P&G operated in 27 countries and it was clear that only a quarter of
their revenues were derived from overseas operations → globalization did not turn out
to be so effective…

manufacturing processes were unstandardized! → expensive and unreliable

little tweaks related to locations were costly for the supply chain and insignificant to
customers

country R&Ds were expensive and ‘reinvented the wheel’

Brussels encouraged cross-border cooperation by creating regional committees →

emphasized on finding a ‘typical’ European consumer to eliminate needless product
variations, coordinate marketing communications, and prioritize product launches!

European countries said there was no ‘typical’ European consumer

BUT THE STRATEGY OF FINDING ONE CONSUMER PROTOTYPE WORKED!

in the early 1980s, Europe became completely restructured around products

Product-category division VP positions were established and assigned continent-wide

divisional profit-and-loss responsibility. Country GMs were replaced with multiple-

Session 6 6
 country product-category GMs who reported to the division VPs. Thus, for example,
the GM responsible for marketing and selling laundry detergents in Germany
would report to the VP of laundry for Europe.

Global Matrix (1987-1995)

Europe’s country functions were consolidated into continental functions (dotted-line

reporting through functional leadership and 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 coordinate category and branding strategies worldwide,

P&G created global category presidencies reporting directly to the CEO.

career progression and promotion were in hands of regional line management

R&D functions were subdivided by CATEGORY RATHER THAN REGION

Global R&D vice presidencies were established to manage R&D for a given
product division worldwide; they reported directly to global category presidents
and were dotted-line reports to the global SVP of R&D.

This structure allowed for the creation of global technical centers in different
regions, each with a core competency in a specific product category.

Session 6 7
 The creation of powerful ONE GLOBAL SUPPLY CHAIN
-standardization

-improvement in It(accounting information storage)

consistent worldwide marketing

no cooperation, each function was competing for power (

For example, while product supply made global efforts to reduce the
number of chemical suppliers for P&G products, R&D sought out high-performance
ingredients to
enhance product performance, no matter where they came from. Neither sought an
optimal tradeoff
between performance and cost; each tried to maximize its particular parameter.)

Session 6 8
Session 6 9