ECCH Collection

303-191-1

Restructuring P&G

This case was written by P Mohan Chandran, under the direction of V Gupta,
ICFAI Center for Management Research (ICMR). It is intended to be used as the
basis for class discussion rather than to illustrate either effective or ineffective
handling of a management situation.
The case was compiled from published sources.

2003, ICFAI Center for Management Research (ICMR), Hyderabad, India.

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303-191-1

RESTRUCTURING P&G
"Organization 2005 marks the most dramatic change to P&Gs structure, work processes and
culture in the company's history." 1
- Durk Jager, Former President & CEO, P&G.

INTRODUCTION
The US based Procter and Gamble (P&G), one of the largest fast moving consumer goods
(FMCG) companies in the world, was in deep trouble in the first half of 2000. The company, in
March 2000, announced that its earnings growth for the financial year 1999-2000 would be 7%
instead of 14% as announced earlier. The news led P&Gs stock to lose $27 in one day, wiping
out $40 billion in its market capitalization. To add to this, in April 2000, P&G announced an 18%
decline in its net profit for January March 2000 quarter. For the first time in the past eight years
P&G was showing a decline in profits.
In the late 1990s, P&G faced the problem of stagnant revenues and profitability (Refer Exhibit I).
In order to accelerate growth, the erstwhile P&Gs President and CEO, Durk Jager (Jager)
officially launched the Organization 2005 program in July 1999. Organization 2005 was a sixyear long organizational restructuring exercise which included the standardization of work
processes to expedite growth, revamping the organizational culture in order to embrace change,
reduction in hierarchies to enable faster decision-making, and 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.
According to analysts, though Organization 2005 program was well planned, the execution of the
plan was a failure. Analysts believed that Jager concentrated more on developing new products
rather than on P&Gs well-established brands. Analysts felt, and Jager himself admitted, that he
did too many things in too short a time. This resulted in the decline of the companys revenues
and profitability. After a brief stint of 17 months, Jager had to quit his post.
In June 2000, Alan George Lafley (Lafley) took over as the new President & CEO of P&G.
Under Lafley, P&G seemed to be on the right path. He was able to turn the company around
through his excellent planning, execution and focus. With Lafley at the helm, P&Gs financial
performance improved significantly (Refer Exhibit II). The companys share price shot up by
58% to $92 by July 2003, as against a fall of 32% in S&Ps 500 stock index. A former P&G
executive, Gary Stibel said, If anybody had any doubts about AG, they dont anymore. This is
about as dramatic a turnaround as you will see.2 However, analysts expressed doubts, whether
the measures taken by Lafley would sustain P&Gs growth in the long term. They felt that with a
dominant market position in developed markets the scope for generating more growth there
would be difficult for P&G.

As quoted in the article, Organization 2005: Drive for Accelerated Growth Enters Next Phase, in
www.procter.se, June 9, 1999.
2

As quoted in the article Procter Entrusted to Lafley, by Cliff Peale, The Cincinnati Enquirer, April 11,
2002.

303-191-1
BACKGROUND NOTE
Procter & Gamble was established in 1837 by William Procter, a candle maker, and his brotherin-law, James Gamble, a soap maker, when they merged their small businesses. They set up a
shop in Cincinnati and nicknamed it porkopolis because of its dependence on swine
slaughterhouses. The shop made candles and soaps from the leftover fats of the swine. By 1859,
P&G had become one of the largest companies in Cincinnati, with sales of $1 million. The
company introduced Ivory, a floating soap in 1879 and Crisco, the first all-vegetable shortening
in 1911.
In the period between the 1940s and 1960s, P&G embarked on a series of acquisitions. The
company acquired Spic and Span (1945), Duncan Hines (1956), Chairman Paper Mills (1957),
Clorox (1957; sold in 1968) and Folgers Coffee (1963). In 1973, P&G began manufacturing and
selling its products in Japan through the acquisition of Nippon Sunhome Company. The new
company was named Procter & Gamble Sunhome Co. Ltd.
In 1985, P&G announced several major organizational changes relating to category
management,3 purchasing, manufacturing, engineering and distribution. In 1988, the company
started manufacturing products in China. P&G became one of the largest cosmetics companies in
the US when it acquired Noxell (1989) and Max Factor (1991).
After witnessing a period of significant organic and inorganic growth, P&G began to face several
problems during the 1990s. In the early 1990s, a survey conducted by the consulting firm, Kurt
Salmon Associates,4 had revealed that almost a quarter of P&Gs products in a typical
supermarket sold less than one unit a month and just 7.6% of the products accounted for 84.5%
of sales. The remaining products went almost unnoticed by consumers. Complicated product
lines and pricing were also causing problems to retailers who had to struggle with rebates and
discounts. Commenting on the situation, Jager recalled, We created a whole plethora of
allowances and deals and conditions which were just simply confusing and added cost to the
system.5
P&G faced major challenges in the mid-1990s. P&Gs new product development activities
seemed to have slowed down. Analysts felt that P&Gs risk-averse culture seemed to be stifling
innovation and obstructing commercialization of new ideas quickly. A Fortune report
commented on P&Gs conservative business practices, Procter & Gamble has a cupboard full of
aging brands that do mostly mundane tasks like wash, mop, sop, and glop. No matter how
many times Tide has been new and improved over the years more than 60, in case you were
wondering its still fundamentally detergent. Pampers has just turned 35, Jif Peanut butter has
been sticking to kids gums since 1956, and Ivory is so long in the tooth that your grandmother
might have used it. The company must look elsewhere for growth to new products, new
countries, and new businesses. This methodical, conservative, and insular enterprise will have to
become more innovative, more outward looking.6

Category Management is a distributor/supplier process of managing categories as strategic business units

(SBUs), producing enhanced business results by focusing on delivering consumer value.
4

Kurt Salmon Associates (KSA) is the leading global management consulting firm offering integrated
strategy, process and technology deployment solutions to the consumer goods, retail, and health care
industries.
5

As quoted in the article Make It Simple, by Zachary Schiller, Greg Burns and Karen Lowry Miller,
BusinessWeek, September 9, 1996.
6
As quoted in the article, P&G: New and Improved! by Henkoff Ronald, Fortune, October 14, 1996.

303-191-1
In June 1999, the magazine, Economist reported that P&Gs last real new product innovation had
come way back in 1982, when it had launched its Always feminine hygiene range. Analysts
opined that more consistent innovation would be required to generate faster growth opportunities
for P&G. The above problems had a negative effect on P&Gs financial performance. During the
late 1990s, P&Gs revenues were stagnant and its net income was decreasing.

THE ORGANIZATION 2005 PROGRAM

In January 1999, Jager, a P&G veteran became the new CEO taking charge at a time when P&G
was in the midst of a corporate restructuring exercise that started in September 1998. Jager faced
the challenging task of revamping P&Gs operations and marketing practices. Soon after taking
over as the CEO, Jager told analysts that he would overhaul product development, testing and
launch processes. The biggest obstacle for Jager was P&Gs culture. Jager realized the need to
change the mindset of the P&G employees who had been used to lifetime employment and a
conservative management style.
On July 1, 1999, P&G officially launched the Organization 2005 program. It was a program of
six-year duration, during which, P&G planned to retrench 15,000 employees globally. The cost
of this program was estimated to be $1.9 billion and it was expected to generate an annual
savings (after tax deductions) of approximately $900 million per annum by 2004. The program
worked towards speeding up decision making to enable the company innovate and bring new
products to the market as early as possible. It also aimed at creating a stimulating work
environment for P&Gs employees. The program aimed to redesign P&Gs organization
structure, work processes and corporate culture in order to cut costs and improve its efficiency.
CHANGE IN ORGANIZATION STRUCTURE
Till 1998, P&G had been organized along geographic lines with more than 100 profit centers.
Under Organization 2005 program, P&G sought to reorganize its organizational structure (Refer
Exhibit III and IV) from four geographically-based business units to five product-based global
business units Baby, Feminine & Family Care, Beauty Care, Fabric & Home Care, Food &
Beverages, and Health Care. The restructuring exercise aimed at boosting P&Gs growth (in
terms of sales and profits), speed and innovation and expedition of management decision-making
for the companys global-marketing initiatives. It also aimed to fix the strategy-formulation and
profit-creation responsibilities on products rather than on regions.
The global business units (GBUs) had to devise global strategies for all P&Gs brands and the
heads of GBU were held accountable for their units profit. The sourcing, R&D and
manufacturing operations were also undertaken by the GBU. The number of profit centers was
narrowed down from earlier 100 to just 7. The GBU structure was further strengthened and
integrated with eight regional market development organizations (MDOs).7
The MDOs aimed at maximizing the business potential of the complete product portfolio in their
respective local markets. The MDOs had to identify those business opportunities that were
missed out earlier because of lack of speed, innovation and higher technological requirements.
They also customized global programs to cater to the local markets and designed marketing
strategies based on the specialized knowledge they had about local consumers. They were also
responsible for collaborating with other local companies and maintaining better long-term
relationships between customers and retailers. The GBUs and MDOs worked jointly to promote
P&Gs products in 140 countries.
7

The MDOs comprised of eight regions including North America (excluding Mexico), Central & Eastern
Europe, Middle East/Africa/General Export (MEAGE), Western Europe, Northeast Asia, Greater China
ASEAN/India/Australasia, and Latin America.

303-191-1
P&G also created Global Business Services (GBS) department in order to integrate key business
processes such as accounting, order management, human resource systems, employee benefits
and welfare and IT services globally. GBS assisted P&G in achieving economies of scale, better
quality management and in expediting the delivery of important business services. The services
of GBS (Refer Exhibit V) were made available to all the GBUs. The GBS centers were operated
in three regions (Refer Table I).
It was proposed that half of GBS employees would be accommodated at the above centers and
that the rest be located along with their major customers. GBS also entered into an arrangement
with several companies like GE, IBM, HP, American Express, Johnson & Johnson, Pfizer,
Motorola and Rhone-Poulenc to learn about their best practices in providing services and imbibe
them in P&G.

TABLE I
GBS SERVICE CENTERS
Region
City
North America & Latin America Cincinnati
San Jose
Europe, Middle East & Africa
New Castle
Brussels
Prague
Asia
Kobe
Manila
Guangzhou

Country
USA
Costa Rica
UK
Belgium
Czech Republic
Japan
Philippines
China
Singapore

Source: www.procter.se

The fourth important component of P&Gs new structure under Organization 2005 program was
Corporate Functions.8 The corporate staff concentrated on improving the functional capabilities
of all the operations of the company. The GBS and Corporate Functions played a supportive role
for GBUs and MDOs by methodically creating and managing global business services and
functions.
STANDARDIZATION OF WORK PROCESSES
One of the major objectives of Organization 2005 program was to significantly improve all
inefficient work processes of P&G including its product development, supply chain management
and marketing functions. In order to achieve this objective, P&G undertook several IT initiatives
including collaborative technologies, B2C e-commerce, web-enabled supply chain and a data
warehouse project for supplying timely data to companys various operations located globally.
P&G introduced changes in its new product development process to bring innovative offers or
products to the market faster. The company formed innovation teams to explore promising ideas
rapidly within the company and bring them fast to the market. P&G also indicated that it would
take more risks by reducing pre-market laboratory testing requirements. It also planned to test
market products worldwide in sharp contrast to its traditional practice of first test marketing a
product in the US.
The GBUs developed and sold products on a worldwide basis replacing the old system which
allowed P&Gs country managers to set prices and handle products as they saw fit. P&G also
8

The Corporate Functions included Corporate Customer Business Development Central & Eastern Europe,
Corporate Finance, Corporate Human Resources, Corporate Information Technology, Corporate Legal,
Corporate Marketing/Market Research/ Government Relations, Corporate Product Supply, Corporate
Public Affairs and Corporate Research & Development.

303-191-1
made efforts to simplify its product line by standardizing product formulas and packages
worldwide and divesting non-performing brands. In the new setup, P&G was able to cut down
product development time significantly.
Through the intensive use of IT, P&G aimed at improving the efficiency of its supply chain,
facilitating more collaboration in knowledge sharing and enabling e-commerce with the
suppliers, retailers and customers. P&G adopted a system known as Key Account
Replenishment System (KARS)9 that enabled the company to get automatic orders through the
Internet from retailers point-of-purchase and inventory systems. The system did away with the
need of retailers to place orders manually or take inventory counts using handheld devices.
Elaborating on the benefits of the system, David said, Salespeople are doing more category
management now to help retailers get better assortments of products. The Internet allows us 24by-7 communication with retailers.10
P&G launched an Internet distribution system called Web Order Management, which made it
possible for the consumers to place orders directly with P&G. The system allowed order
fulfillment in substantially less time than it did when compared to the old manual system. The
company also used IT in retail operations. In August 1999, P&G worked in association with
companies such as Johnson & Johnson, Eastman Kodak and the Consumer Products
Manufacturers Association to establish systems to ensure product security to minimize
shoplifting losses during retail sales.
P&G, continuing with its spate of restructuring, took its first initiative in B2C e-commerce by
launching a website called Reflect.com in September 1999. It also started a new division P&G
Interactive Marketing, that aimed at understanding consumer needs by facilitating more
interaction and feedback from them through the Internet. The division, for the first time, also
developed strategies for marketing P&Gs products online. In one such instance, P&G tapped
into customer expertise by integrating customers into the companys product development
process. P&G created P&G Advisors program to collaborate with customers in developing new
products. Customers tried new products and provided feedback, allowing P&G to refine products
and marketing plans. P&G, before restructuring, spent $25,000 to test a new product concept, and
used to take two months to complete the test. But with the introduction of the Internet, P&G was
able to conduct the same test at a cost of $2,500 and reap results in two weeks. P&G also used the
Internet to take these new products to market. For example, in launching its Physique hair care
products, P&G invited consumers to register on its new Physique.com website to sample the
new products. Within 12 weeks, more than five million consumers visited the site, giving a strong
thrust to the product launch.
P&G also introduced 54 change agents (IT personnel) across its seven GBUs. These change
agents facilitated cultural and business change, through closer coordination with product teams
and making the maximum use of IT in real-time collaboration projects. Steve David (David),
P&Gs Global Customer Business Development Officer, said, Our IT people are now embedded
in the organization. Our teams have IT people working side-by-side with businesspeople. The IT
people are helping build the business with the salespeople.11

A Microsoft Access application that generates demand-driven orders from small and midsize retailers,
supported by the company's Electronic Data Interchange (EDI) IBM mainframe replenishment system.
10

As quoted in the article, Lessons from a Cultural Revolution, by Marianne Kolbasuk McGee, in
www.informationweek.com, October 25, 1999.
11
As quoted in the article, Lessons from a Cultural Revolution, by Marianne Kolbasuk McGee, in
www.informationweek.com, October 25, 1999.

303-191-1
REVAMPING THE CORPORATE CULTURE
The Organization 2005 program made efforts to change P&G from a conservative, lethargic and
bureaucratic to modern, quick-moving and internet-savvy organization. The new structure was
directed towards revamping the work culture of P&G so as to focus on its new Stretch,
Innovation and Speed (SIS) philosophy. Emphasizing on innovation, Jager said, Organization
2005 is focused on one thing: leveraging P&G's innovative capability. Because the single best
way to accelerate our growth our sales, our volume, our earnings growth is to innovate bigger
and move faster consistently and across the entire company.12 P&G had outlined the cultural
changes it wanted to achieve through the program (Refer Table II).

TABLE II
CULTURAL CHANGES UNDER ORGANIZATION 2005
Before Organization 2005
After Organization 2005
Misaligned objective with high The organization is aligned on common goals with
penalties for failure
trust as a foundation
Internal inspection keeps everyone A focus on coaching and teaching enables informed
under control
risk taking and team collaboration.
Risk is avoided and victory is narrowly Victory is defined as stretch with trust and candor.
defined
Complexity is delegated down
Leaders take on complex challenges
Creating a slow moving organization An organization driven by stretch, innovation and
that lacks stretch, innovation and speed speed toward breakthrough goals.
Source: The Financial Express, October 11, 1999.

Under the program, P&G changed the way it looked at individual appraisals and moved from a
conservative goal-setting plan to a stretch goal plan. Earlier P&G would appraise employees on
the basis of targets set and their achievements. But, the system seemed to have a loophole. By
setting easy targets, there was a possibility of an under performing manager projecting himself as
an achiever. Through the stretch element, P&G sought to make clear that merely achieving
targets was not sufficient. The individuals appraisal would be on the basis of how the stretch
targets were fixed and what attempts had been made to meet them. The companys goal-setting
process required the employees to set stretch targets. P&G did not concentrate only on
restructuring; it also introduced a new reward system that recognized extraordinary contributions
of the employees at every level of the organization.
P&G discarded the old dressing code. The company left it to the employees to decide as to what
they wanted to wear at the workplace. P&G also introduced measures to play down the hierarchy.
According to an employee, Earlier the top executives were served tea in higher quality cups
compared to what the junior level employees got. But that has changed. Now all P&G employees
sip their brew in the same white bone-china which was earlier reserved for top executives.
The efforts made to change the corporate culture was not limited to just a few countries but were
spread all over the world where P&Gs operations were located. For instance, under the program,
P&G India initiated Project Pride in late 1999 to promote an open work culture. All the six
dispersed offices of P&G in Mumbai were brought under one roof by July 2000. There was an
overhauling of the hierarchical office structure, which would not discriminate between senior and
junior employees. In the new setup, employees could actually see their ideas being implemented.
The CEO like all other employees sat in a cubicle in the new office. Moreover, irrespective of the
rank, all cubicles were to be of same size in all offices.

12

As quoted in the article, Organization 2005: Drive for Accelerated Growth Enters Next Phase, in
www.procter.se, June 9, 1999.

303-191-1
P&G also invested large amount of money in IT to facilitate more employee collaboration and
knowledge sharing. The company introduced e-mail, intranet, and videoconferencing13 facilities
for its employees. Jager also urged P&Gs employees to use the companys IT tools while
communicating with fellow employees. In July 1999, 300 senior managers were asked to
download information in the form of PowerPoint presentations from P&Gs intranet site to
apprise the employees in their department about the Organization 2005 program. Some of the
senior managers and top executives were forced to visit the companys website for the first time.
P&G was earlier known in the FMCG industry as the one-page memo company. The
employees of P&G were asked to offer their ideas, suggestions, or business plans in just onepage, which would in turn be communicated to every manager, who would edit the document and
return it to be finally accepted. By embracing IT, P&G was able to change its image from being a
one-page memo company. By using chat rooms on the companys intranet, the company
attempted to change its soft, traditional and play-it-safe culture to one of an aggressive,
outspoken and risk-taking culture. Emphasizing the importance of intranet, Jager said, The
intranet is becoming an integral part of doing business at P&G and has become our primary
forum for discussing culture change.14
Though Organization 2005 program involved significant job reduction (Refer Exhibit VI), Jager
announced that he would make full use of normal attrition and retirements, hiring reductions, relocations, job retraining, and voluntary separations to help reduce the number of potential
involuntary separations. In cases of involuntary separations, P&G would offer employees
financial assistance to help them in their new careers.
Appreciating Jagers efforts to launch several new initiatives under the Organization 2005
program, William Steele, MD, Banc of America Securities, said, To Durks credit, he got the
company focused on brands, innovations, new products and acquisitions. He really got P&G
energized from a top-line (sales) perspective. And over the long term, thats what consumerproducts companies need to grow their worldwide market share.15

THE MISTAKES COMMITTED

The Organization 2005 program faced several problems soon after its launch. Analysts were
quick to comment that Jager committed a few mistakes which proved costly for P&G. For
instance, Jager had made efforts in January 2000 to acquire Warner-Lambert and American
Home Products. Contrary to P&Gs cautious approach towards acquisitions in the 1990s, this
dual acquisition would have been the largest ever in P&Gs history, worth $140 billion.
However, the stock market greeted the news of the merger negotiations by selling P&Gs shares,
which prompted Jager to exit the deal.
Critics felt that in its pursuit to focus more on developing new products, Jager completely ignored
P&Gs well-established brands. He introduced several new products in quick time with the hope
of finding P&Gs next billion-dollar product. Since the sales and marketing resources were
diverted towards new products, there was a decline in sales and profitability of P&Gs
established, best performing brands like Crest, Pampers and Tide. Elaborating on Jagers mistake,

13

Conducting a conference between two or more participants at different sites by using computer networks
to transmit audio and video data.

14

In the article, Lessons from a Cultural Revolution, by Marianne Kolbasuk McGee, in

www.informationweek.com, October 25, 1999.
15
In the article, Bruised P&G turns to new, old leaders, by Randy Tucker, The Cincinnati Enquirer, June
9, 2000.

303-191-1
Christopher said, They spent way too much on new products. Thats a typical problem that
companies face. They spend too much on growth, and they lose sight of their core businesses.16
Another mistake that Jager committed was to presume that the strategy of selling P&Gs products
under the same name globally would be successful. However, this strategy backfired. For
instance, in Germany, the US dish-washing detergent, Fairy was a popular brand and sold
successfully. But Jager renamed it Dawn, as it was known in the US. Since Dawn was
perceived by German consumers to be a new product, its sales fell drastically.
Jagers measures to revamp P&Gs cautious corporate culture also failed to yield the desired
results. Analysts were of the opinion that his plan had been too aggressive resulting in HR
problems. Managers had become critical of Jagers confrontational style. Employees were not
happy with the changes made in the companys organization structure. In Europe, approximately
2,000 people were abruptly transferred to Geneva, while 200 employees were relocated from
various parts of Asia to Singapore. As a result of restructuring, food and beverage managers,
based in Cincinnati, US, reported to a President in Caracas, Venezuela. Similarly, managers in
the laundry and household cleaning business reported to Brussels.
All the above problems had a negative effect on P&Gs financial performance as well as on its
share price. After touching a high of $117 per share in January 2000, P&Gs stock price fell
below $90 in February 2000. In March 2000, P&G announced that its earnings growth for the
financial year 1999-2000 would be about 7%. The news sent the companys stock to its lowest
level since the mid-90s. The stock price plunged to less than $60, wiping out $40 billion in
market capitalization in just one day.
In April 2000, P&G announced an 18% decline in its third-quarter net profit. Moreover, the
company also announced that its fourth-quarter results earnings growth would be flat compared
to 15% to 17% estimated earlier. Jager accepted responsibility for the companys problems and
resigned.
Summing up Jagers mistakes, Daniel Peris17 said, Jager has launched a wide range of
initiatives, and I think his credibility is beginning to wear thin. The Organization 2005
restructuring ... I think is an excellent program, but adding to that the mega-merger proposals,
adding to that launching rapidly, focusing relentlessly on top-line growth and launching all kinds
of product initiatives to achieve that top-line growth, they let the cost picture get out of
control.18 Another analyst with Olde Discount Corp. based in Detroit, said, P&G had been in a
mode to cut costs and improve efficiencies, and they mastered that. But back then, they lost sight
of the top line (sales). Now, they've reinvigorated the management teams and encouraged
employees to take risks and come out with new products. They've done a good job doing that,
too. But now they've lost sight of the expense side of the equation. They need to find a way to
balance both of those.19

16

In the article, Bruised P&G turns to new, old leaders, by Randy Tucker, The Cincinnati Enquirer, June
9, 2000.
17
Daniel Peris is a senior research and securities analyst with Argus Research Corporation, a leading
investment research firm in the US.
18

In the article, P&G Warning Hurts Dow, by Chris Isidore and Martha Slud, posted on
www.money.cnn.com, March 7, 2000.

19

In the article, Jager Lost Credibility on Wall Street, by Cliff Peale, The Cincinnati Enquirer, June 9,
2000.

303-191-1
ENTER LAFLEY IMPLEMENTING STRATEGIES TO REVIVE P&G
In June 2000, Alan George Lafley (Lafley), a 23-year P&G veteran popularly known as AG,
took over as the new President and CEO of P&G. The major difference between Lafley and Jager
was their style of functioning. Soon after becoming CEO, Lafley rebuilt the management team
and made efforts to improve P&Gs operations and profitability.
Lafley transferred more than half of P&Gs 30 senior most officers, an unprecedented move in
P&Gs history. He assigned senior positions and higher roles to women. In one instance, he
overlooked 78 senior most general managers and appointed a 42-year old woman, Deborah A.
Henretta, as the head of P&Gs global baby care division. After the changes in the management
structure, the heads of P&Gs operating businesses and corporate functions represented 13
different countries. Overall, the average age of P&Gs Global Leadership Council (Refer Exhibit
VII) came down to 49, compared to 54 in 1999. Lafley also proposed to cut down P&Gs
personnel strength by 25,000 (one-fourth of P&Gs existing employee strength). By 2001, Lafley
had achieved the target of remaining 7,800 job reductions, a part of Organization 2005 program.
Lafley focused more on the major markets and leading brands. On the contrary, Jager had
focused more on new product development and tried to build market share in developing and
under-developed markets. The sales of P&Gs leading brands including Tide, Pampers and Crest
picked up as they got more resources in terms of marketing expenditure and manpower. Though
Lafley reduced the thrust on new product development, high potential products like Crest
whitener strips and ThermaCare heat wrap still got attention. Lafley also introduced new product
extensions in an attempt to generate growth. Major brands like Tampax (tampons) introduced
new product extensions in 2002 while other brands planned new products. P&G introduced its
new Ohm by Olay line of body care products, which was the companys first skin-care foray
that used natural products like ginger and jasmine. In 2002, the company also dropped several
brands including Jif, Crisco and Clearasil that did not fit in with its global strategy.
In the midst of intense competition, the baby care, fabric & home care and oral care businesses
lost market share in the 1990s. However, under Lafley, all the three businesses gained both in
terms of increased revenues and market share. In spite of stiff competition from companies like
Kimberly-Clark, revenues rose by 5%, to $2.4 billion, while net earnings increased by 8%, to
$241 million in the baby care segment during the first quarter ending September 2002. Pampers
rolled out its new Baby Stages line in Europe and North America. The revenues from P&Gs
fabric and home care business witnessed a 9% growth for the first quarter ending September
2002, despite strong competition from Unilever. This was possible due to brands like Cheer
reducing its package size and price to compete with Unilevers Wisk. Revenues in oral care
business rose by 20% around the same period while Crest was able to regain #1 oral-care brand
position in the US, which it lost to Colgate in 1998. In the laundry business too, revenues showed
an upward trend. The Tide and Downy brand were offered in different fragrances.
Under Lafley, P&G acquired Clairol in 2001 for $5 billion. The acquisition of Clairol helped
P&G to achieve a 16% ($1 billion) growth in net earnings in the first quarter ending September
2002. The market share in the US for eight out of its top ten billion dollar brands increased by
15% during the same period. Lafley believed that P&Gs IT initiatives under the Organization
2005 program had significantly benefited the company. He increased P&Gs expenditure on IT
initiatives to $1 billion in 2002 and planned to increase it further in 2003.
In 2001, Lafley had announced another program which complemented the Organization 2005
program. The new program was expected to save an additional $600-700 million (post-tax)
annually by the financial year 2003-04. The total cost of the new program was $1.4 billion (posttax). In this new program, P&G planned to retrench 9% of its global workforce or about 9,600
jobs. The total number of job reductions were expected to increase from 15,000 to 17, 400.

10

303-191-1
Unlike Jager, Lafley attempted to change the culture of P&G from harsh to soft one. He believed
that P&G was a family and each employee was its family member. Though he announced that
part of the job reduction would be made through involuntary separations, at the same time he
intended to minimize that number.
Lafley felt that the new program would improve P&Gs competitiveness and boost its long-term
growth. The new program involved streamlining of P&Gs cost structure by further reducing
overheads and manufacturing costs. Speaking about the new program, Lafley said, This program
is right for the long-term health of our business and is the next step in our plan to restore longterm growth. Its one element of a three-part growth plan to focus on big brands and big
opportunities, consistently deliver superior consumer value, and create a more cost-competitive,
productive organization.20

P&G CURRENT STATUS

In 2003, Lafley continued his efforts to make P&G more adaptable to the dynamic changes in
business environment. He challenged P&Gs traditional perspective that all its products should be
produced in-house. In April 2003, Lafley started outsourcing the manufacturing of bar soaps
(including P&Gs longest existing brand, Ivory) to a Canadian manufacturer. In May 2003, IT
operations were outsourced from HP. Since Lafley became CEO, P&Gs outsourcing contract
went up from 10% to 20%.
Lafley continued to review P&Gs businesses and new investments with the aim of achieving
sharper focus on its core businesses, cost competitiveness and improved productivity. He said,
The cost benefits of strengthened competitiveness and improved productivity are significant, but
this is not just a cost-cutting program. No one ever cost-saves their way to sustainable growth.
We will invest these savings in getting our consumer value and pricing right, continuing to invest
in innovation on core businesses and the most promising new businesses, and continuing to
provide strong marketing and sales support for our brands. All of these actions are necessary to
deliver P&Gs long-term financial goals.21
Though Lafley believed that Organization 2005 had made P&Gs global marketing efforts more
disciplined, he still felt that much was required to convince P&G employees about the
applications and the benefits of the program.

QUESTIONS FOR DISCUSSION:

1. According to Jager, Organization 2005 marks the most dramatic change to P&Gs structure,
work processes and culture in the companys history. Explain in detail the key elements of
the Organization 2005 program. What changes did the program bring about in P&G?
2. Lafley believed that Organization 2005 was fundamentally right for P&G. Critically
comment on the merits and demerits of the program. Do you agree that the program was
fundamentally right? Take a stand and justify it taking into account P&Gs future prospects.
3. Analysts had expressed doubts whether the measures taken by Lafley would sustain P&Gs
growth in the long term. Comment on Lafleys strategy of focusing on mature markets and
leading brands. Do you think this strategy will be successful in future? What measures must
Lafley take to improve P&Gs growth in developing markets?
20

In the article, Procter & Gamble Announces Next Step in Overall Plan to Restore Competitiveness and
Growth, in www.procter.se, March 22, 2001.
21
As quoted in the article Procter & Gamble Announces Next Step in Overall Plan to Restore
Competitiveness and Growth, posted on www.procter.se, March 22, 2001.

11

303-191-1
EXHIBIT I
P&Gs FINANCIAL PERFORMANCE (1995-2000)
(Millions of Dollars except per share and percentage amounts)
Year ended June 30
Net Sales
Operating Income1
Net Earnings2
Net Earnings Margin
Basic Net Earnings
per Common Share
Diluted Net Earnings
per Common Share
Dividends
Per Common Share
Research & Development
Expense
Advertising Expense
Total Assets
Capital Expenditures
Long-Term Debt
Shareholders' Equity

2000
$39,951
5,954
3,542
8.9%
2.61

1999
$38,125
6,253
3,763
9.9%
2.75

1998
$37,154
6,055
3,780
10.2%
2.74

1997
$35,764
5,488
3,415
9.5%
2.43

1996
$35,284
4,815
3,046
8.6%
2.14

1995
$33,482
4,244
2,645
7.9%
1.85

2.47

2.59

2.56

2.28

2.01

1.74

1.28

1.14

1.01

0.90

0.80

0.70

1,899

1,726

1,546

1,469

1,399

1,304

3,667
34,194
8,916
12,287

3,538
32,113
2,828
6,231
12,058

3,704
30,966
2,559
5,765
12,236

3,466
27,544
2,129
4,143
12,046

3,254
27,730
2,179
4,670
11,722

3,284
28,125
2,146
5,161
10,589

Source: www.pg.com
1

Operating income includes a before-tax charge of $481 for Organization 2005 program costs. Net
earnings include an after-tax charge of $385 for Organization 2005 program costs, and basic and diluted
net earnings per share include charges of $0.29 and $0.26, respectively.
2

Net earnings include an after-tax charge for Organization 2005 of $688 in 2000 and $385 in 1999. Basic
and diluted net earnings per share include Organization 2005 charges of $0.52 and $0.48 in 2000 and $0.29
and $0.26 in 1999 respectively.

12

303-191-1
EXHIBIT II
P&G & ITS SUBSIDIARIES CONSOLIDATED EARNINGS
($ Mn)

Fabric And Home

Care
Baby And Family
Care
Beauty Care
Health Care
Snacks And
Beverages
Total Business
Segment
Corporate
(Excluding
Restructuring
Costs)
Total Company
Core
Restructuring
Costs
Total Company Reported

Twelve Months ended June 30, 2003

Net Sales
% change
EBIT
% change
Net
Vs Year
Vs Year Earnings
ago
ago
12,560
8%
3,080
13%
2,059

% change
Vs Year
ago
12%

9,933

8%

1,448

14%

882

20%

12,221
5,796
3,238

14%
16%
0%

2,899
1,034
460

23%
30%
-3%

1,984
706
306

23%
35%
1%

43,748

10%

8,921

17%

5,937

19%

(375)

N/A

(640)

N/A

(213)

N/A

43,373

8%

8,281

13%

5,724

13%

N/A

(751)

N/A

(538)

N/A

43,377

8%

7,530

18%

5,186

19%

Source: www.pg.com

13

303-191-1
EXHIBIT III
P&GS ORGANIZATION STRUCTURE UNDER ORGANIZATION 2005

GLOBAL BUSINESS
UNITS
Business Strategy &
Planning
Brand Innovation &
Design
New
Business
Development
Full
Profit
Responsibility

MARKET
DEVELOPMENT
ORGANIZATIONS
Market Strategy
Customer
Development
External Relations
Recruiting

P&G

GLOBAL BUSINESS
SERVICES
Key Business Processes
Accounting
Info and Technology
Services
Order Management
Employee Benefits &
Payroll

CORPORATE
FUNCTIONS
Cutting-Edge Knowledge
Transfer Best Practices
Function Work
Supporting P&G

Source: www.pg.com

14

303-191-1
EXHIBIT IV
OVERVIEW OF THE NEW STRUCTURE UNDER ORGANIZATION 2005
The new organization structure has four pillars including Global Business Units, Market
Development Organizations, Global Business Services, and Corporate Functions.
GLOBAL BUSINESS UNITS AND MARKET DEVELOPMENT ORGANIZATIONS

PILLARS

Comprises

Philosophy
General
Role

GLOBAL BUSINESS
UNITS
Baby, Feminine and
Family Care
Beauty Care
Fabric & Home Care
Food & Beverage
Health Care

Think Globally
Create strong brand equities,
robust strategies and ongoing
innovation in products and
marketing to build major
global brands.

MARKET DEVELOPMENT
ORGANIZATIONS
North America Asia/ India/ Australia
Northeast Asia
Greater China
Central-Eastern
Europe/ Middle East/ Africa
Western Europe
Latin America
Act Locally
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 game in our favor at point of purchase.

GLOBAL BUSINESS SERVICES AND CORPORATE FUNCTIONS

PILLARS
Comprises

Philosophy
General
Role

GLOBAL BUSINESS SERVICES

GBS Americas located in Costa Rica
GBS Asia located in Manila
GBS Europe, Middle East & Africa
located in Newcastle

Minimize Administration Costs

Bring 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
speed

Source: www.pg.com

15

CORPORATE FUNCTIONS
Customer Business Development
External Relations
Finance & Accounting
Human Resources
Information Technology
Legal
Marketing
Consumer & Market Knowledge
Product Supply
Research & Development
Workplace Services
Be the Smartest/Best
Ensure 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

303-191-1
EXHIBIT V
SERVICES OFFERED BY GBS
The key services offered by GBS include the following:

Finance & Accounting Services, which includes Accounts Payable, Expense Accounting, and
Standard Financial Reporting.
Customer Logistics & Financial Services, which includes Order Management, Credit and
Collections, and Delivery Systems.
Employee Services, which includes Human Resources Systems such as Employee Benefits,
Payroll, and Travel Management/Reporting.
Purchases, which includes Corporate Facilities, Transportation and Consultants and
Contractors (this does not include raw materials purchases, which will be handled by GBUs).
Information Services Worldwide, which includes Business Information Services and Market
Measurement Data.
Technology Services Worldwide, which includes P&G's computing and telecommunications
infrastructure.

Source: www.pg.com

EXHIBIT VI
JOB REDUCTION TARGETS UNDER ORGANIZATION 2005
Estimated Job Impact
Estimated costs (after-tax)

Total
15,000
$1.9 bn

FY98/9-00/1
10,000
$1.4 bn

Estimated Job Impact by Item

Product Supply
GBS
6,700
3,900
Estimated Job Impact by
Region
Europe, Middle East, Africa
North America
Latin America
Asia
Total

Job Impact
6,250
4,300
2,450
2,000
15,000

Source: www.procter.se, P&G Annual Report 1999.

16

FY01/2-03/4
5,000
$0.5 bn

Other
4,400
Expressed as
%
42
29
16
13
100

303-191-1
EXHIBIT VII
P&GS GLOBAL LEADERSHIP COUNCIL

June
1999

John
Pepper
Chairman

June
2002

Durk
Jager CEO

Wolfgang
Berndt
Fabric and
Home care
and Europe
Michael
Casper
Home
Care
Paul
Polman
Fabric

Gary
Martin
Tissue and
Towel

Kerry
Clark
Feminine
Care and
Asia

Brian
Buchan
Feminine
Care

Tony
Belloni
Western
Europe
Claude
Meyer
Europe,
Middle
east and
Africa
special
projects
Faud
Kuraytim
Middle
East,
Africa
and
Export
Herbert
Schmitz
Central
and
Eastern
Europe

D Panayotopoulos
China
Bob
Mcdonald
NE Asia

AG
Lafley
Beauty
and
North
America

Susan
Arnold
Skin
Care

Martin
Neuchem
Hair
Care
Jorge
Montoya
Food/
Beverage
and Latin
America
Steve
Donovan
Beverage

Mary
Ketchum
Baby
Care

Bruce
Bymes
Health
care and
New
Ventures

Clayton
Daley
CFO
Gordon
Bruner
R&D
Richard
Antoine
Product
supply
and
Human
Resource
Michael
Power
Global
Business
Services
Bob
Wehling
Marketing
Steve
David
Global
Customer
Development
Todd
Garnet
CIO
Bob
Blanchard

Special
Assignment
John
Okeeffe
Special
Assignment
Charlotte
Otto
External
Relations

Source: The Cincinnati Enquirer

17

AG Lafley
ChairmanElect & CEO

B McDonald
Fabric
and
Health
Care

Bruce
Bynes
Beauty
and
Health
Care

Jorge
Mesquit
a Home
Care

Jeff
Ansell
Pet Care

Mark
Kechum
Baby
Feminine &
Family
Care

Susan
Arnold
Personal
and
Beauty
Care

Deb
Henretta
Baby
Care

Martin
Neuchem
Hair
Care

Fernando
Aquirre
Feminine
Care
Charles
Pierce
Family
Care
Jorge
Montoya Food,
Beverages
and
Latin
America
Michael
Griffin
Beverage
Fabrizio
Freda
Snacks

Kerry
Clark
Market
Development
Rob Steele
North
America
Paul
Polman
Western
Europe
Chip
Bergh
Asia,
Australia
& India
Werner
Gelssler
NE Asia
Laurent
Phillppe
China

D
Panayotopoulos
Central and
Eastern Europe,
Middle East and
Africa
Tom
Muccio
Global Customer
Teams
Michael Power
Global Business
Services

Clayton
Daley
CFO
Gill
Cloyd
R&D
Keith
Harrison
Product
Supply
Richard
Antoine
Human
Resources
Jim
Stengel
Marketing
Steve
David
CIO
Charlotte
Otto
External
Relations