1.1.

Brief of the case:

• In June 2000, a the new CEO, Mr. Lafley sub entered Mr. Jager, the old CEO who made the company lose $70
billion in market value in a 17 months time – frame (shortest in P&G’s history);
• Jager’s aggressive restructuring program: “Organization 2005” was designed to bolder innovations and to
accelerate their global rollout.
• P&G’s chain of formal commands comparison (Organization Design):
o In the past:
§ 1st: geography§ 2nd: product§ 3rd: function

o “Organization 2005”
à three interdependent global organizations organized differently:
§ One by product category§ One by geography§ One by business process

1.2. Dilemma

• “Organization 2005” resulted in:

o Flat sales
o Negative core earnings growtho Consequentially, job reductions and low employees morale
o Loss of P&G’s advantage in the market, competitors are taking away market share in many product lines and
regions

Mr. Lafley’s problem:

o Step back to previous Organizational design (Matrix)?
o Or Keep “Organization 2005”?o Does P&G ($38 billion multinational company) have to compete in over 50
categories with more than 300 brands across multiple types of products?
o Should P&G create value by splitting the company in stand-alone businesses?

2.1. Brief History of the company:

2.1.1. 1837-1948:

2.1.2. 1948-1987: Diverging Organizational Structure

Key Features:
o Brands are managed as components of category portfolios (by category general managers)
o Product categories require more functional activitieso Each category business unit had:
§ Sale function§ Product-development function§ Manufacturing function§ Finance function
o Every category/brand function (ex: sales) would finally report to VP

Initial European Org Design

Key Features:
o 3 main dimensions:§ Country§ Function§ Brand
o Country GMs adapted P&G to each local market
o 1963: European Technical Center (ETC) established in Brussels (European corporate R&D and process-
engineering functions)
o Not connected to US headquarters
European Category Manager

Key Features:
• Cross-border cooperation across functions
• Shift of focus: country management à product-category management
• Country GMs were replaced with multiple-country product-category GMs (who reported to the division VP)

2.1.3. 1987-1995 Global Matrix

Key Features:
o Global matrix of categories and functions
o Global Functional SVP managed functions across regions
o Global Categories Presidencies reported directly to CEO and managed Country Category GMs
o Global R&D VPs established to manage R&D for a given product division worldwide, and reported directly to
Global category presidents and dottle-line reports to global SVP of R&D
o 1995: structure expanded to the rest of the world
o Advantages created:
§ Pooling of knowledge§ Transfer of best practices§ Elimination of intraregional redundancies§
Standardization of activities (reduction of plant number)
o Creation of Customer Business Development function (CBD) which developed closer global relationships with
big customers (electronic integration with customer)
o Globally managed IT organization
o Fast launching of new products (4 years in 1990s)

2.1.4. 1995-1998: Problems of Matrix

• Poor strategic alignment throughout the company (ex: Product Supply in conflict with R&D à number of
chemical suppliers to be reduced vs.
high-performance ingredients)
• Tension between regional and product-category
• Hard for regional managers focused on particular countries to address
these global function conflicts.
• Competitors were catching up in supply-chain consolidation and integration with customers à low sales
growth compared to previous
years

2.2. Organization 2005 (1998)

• Six-years restructuring plan

• Key Points:
o Separation (voluntary) of 15,000 employeeso More Standardized business process
o Elimination of 6 management layers (from 13 to 7)
o Dismantling the Matrix organizational structure
o Creating Interdependent Organizations:
§ Global Business Units (GBUs) à Product responsibility§ Market Development Organization (MDOs) à
Market responsibility§ Global Business Services Units (GBS)à Internal
Business processes responsibility
o Expectations:
§ Faster innovation and globalization for innovations§ Consistent sale growth of 6-8% / year§ Consistent
profit growth of 13-15% / year

2.2.1. Global Business Units

Main Idea:
• Responsible for:
o Product development
o Brand designo Business strategy
o New business development
• Autonomous work
• Manager reported directly to CEO and member of global leadership council
• R&D and GBU VPs council to share technological innovation

2.2.2. Market Development Organizations

Main Idea:
• Tailoring the company’s global programs to local markets
• Helping P&G to develop market strategies according to local markets
• Manager reported directly to CEO and member of global leadership council

2.2.3. Global Business Services

Main Idea:
• Standardize, consolidate, streamline and strengthen business processes and IT platforms across GBUs and
MDOs.
• Before they were duplicated and performed differently across regions
• Now, a centralized responsibility for managing these processes (ex: accounting transactions, payroll
processing…) could lead to economies
of scale
• Manager reported directly to CEO

2.3. Organization 2005 in action

• New CEO (Mr. Jager) was hired in January 1999 to implement the program
• Expectation of Mr. Jager:
o Change P&G’s risk-averse regionally managed structure
o Possibility to launch new brands based on new technology (rather than incremental improvements of
existing products)
• Mr. Jager allocated large shares of resources to GBU NBD groups and Corporate New Ventures capital to
develop several new categories and brands
• October 1999 (fiscal quarter data)
o Sales were up 5% over previous year
o Core net earnings increased by 10%
o Stock price reached $118.38
• January 2000 (fiscal quarter data)
o Sales grew 7%
o Core net earnings increased 13%
• March 2000 (start of recession of Organization 2005)
o Core earnings would have been 10% lower than 1999 January-March quarter
o Company’s stock lost 30% of its value, closing at $57.25
• April 2000 (fiscal quarter data)
o Core net earnings had fallen 18%
o Sales increased 6%
o Stock lost 10%
• June 2000 (fiscal quarter data)
o Profits were flat (expected were 15-17%)
o Lower future quarterly growth estimates to 2-3%o Stock lost 7%, falling to $57
• After these negative results, Mr. Jager decided to resign.
-------------------------------------------------------------------------------------------------------------------------------

3. Managing the Crisis

• New CEO plan:

o Realistic expectations were set
§ Reduced long-term organic sales growth target to 3-5%
§ Reduced earning targets to 10%
o High Cost Control and profit margin became the priority
o Corporate Innovation Programs into a single Global Business Development division (more rigorous
investment choice)
o Eliminate prior investments if did not fit the core development area
o Consolidation of feminine-care, tissue-and-towel and baby care GBUs into one (less cost of duplicated
hierarchy)
o Further consolidation of just 3 GBUso Another voluntary separation in 2001
o Money saved to:
§ Reduce prices§ Increase spending on innovations in major brands§ Marketing
o Recap: pure cost cutting rather than a company’s structure change.

3.1. A New Model for Sustainable Revenue Growth

• CEO set out a new strategy of building market share:
o Invest only in the strongest and larger global brandso Focus on P&G’s largest countries and customerso
Tailor products for developing markets
• Consequence:
o Sales increased 22.4% over previous yearo Grow in market share in 8/10 US Categories in 2001(from 3 only
in 2000)

3.2. Organization 2005: from Crisis to Best-in-Class

• P&G continued its rapid growth despite significantly lower capital
expenditures and R&D investment• Maximize efficiency through scale (GBS creates scale advantage in back-
office services and IT system) to reduce costso Lead to higher margins and more innovations to market fastero
More flexibility and focus on responsibilities that used to be fragmented and duplicated across many regional
business units
§ Product management§ Market execution
§ Non-product related cost containment
o Functions are now responsible for developing capabilities to help meet business unit goals§ Optimal trade-
offs between product performance and cost
• GBUs were able to accelerate product launches (from 4 years to 1.5 years)o New focus and scale to better
utilize global relationships with
supplier and outside innovatorso Ex: P&G was now restructuring its manufacturing processes around
innovations by suppliers of diapers components (Pampers Baby) à + 4% in global market share in 3 years

• MDOs were able to sell the broad range of P&G products more effectivelyo Ex: best practices for entering a
new developing country:§ Launch certain categories first in these countries
(laundry, shampoo, diapers)§ Once the economy reached the next level, P&G was already present strongly in
these countries and launched new product categories

• GBSs continued to innovate to reduce company costs

o More outsourcing (partners hired new employees in P&G’s shared service centers à more rapid expansion
extension of P&G’s back office organization) o IT was incorporated into GBS in 2005, absorbing 2,400
employees collocated with their GBU and MDO counterparts

1) & 2) Why did the US / European organizational structure shift from product / geographic grouping in the
1950s to a matrix / category management in the 1980s?

A. US Market in the 1950s:

a. Environment is homogeneous (ex: same retail companies in the entire US, same language, etc.)
b. Strategy is focused on Differentiation: I. It’s a period of market growth after WWII, so a Cost
Leadership approach isn’t needed.
c. Main Goal of the company:
i. Increase and accelerate the growth in different segments and markets
d. How can the company reach its goal?
i. DECENTRALISE DECISION MAKING POWER among divisions (while leaving the decision for more radical
innovations to R&D and Corporate Staff)1. P&G adopts a Divisional Structure / Product
grouping (among each division we have a Functional Grouping) 2. Brand Managers with decision
making power on marketing problems
ii. Upside of Centralizing R&D:
1. Effective to launch new products and technologies (Ex: brand managers would refuse to launch new
products otherwise)
iii. Downside of Decentralization:1. Internal competition
2. Non-coordinated marketing procedures (but the market isn’t saturated yet, therefore it is not a big issue)

B. EUROPEAN Market in the 1950s:

a. Environment is heterogeneous (ex: different countries, different languages, different retail companies,
etc.),b. Strategy and Main Goal à look at point A.c. How can the company reach its goal?i.
DECENTRALISATION among different Countries:1. P&G adopts a Geographic grouping Structure / Country
division (Replication of Brand Managers supervised by Country Managers)2. Brand Managers have less power
than the US’, since the goal is to enter in the highest number of markets, Country managers retain more
powers, otherwise Brand Managers would chose not to enter into less profitable markets/countries (they
are accountable for profits)

C. US Market in the 80s:

a. Environment is homogeneous and approaching saturation, so COST LEADERSHIP is becoming more
important, but DIFFERENTIATION remains the main company’s trend to continue market penetration
b. How can the company reach its goal?i. It needs to increase economies of scope while reducing
asset redundanciesii. P&G adopts a Matrix Structure (Divisions – Categories –Functions)1. Emphasis and power
are still on products, not on
functionsiii. Downside of the Matrix:

D. EUROPEAN Market in the 80s:

a. Environment is heterogeneous and à look at point Cb. How can the company reach its goals?
i. Create more standardization in products due to market saturation, reduce time to market (very critical
internal conflicts among brand managers of the same group, so it’s time to consolidate brands into category
management) ii. P&G adopts a Category Management Structure
(country managers lost power along with brand managers)

3) Why were the two structures integrated into a "global cube" in the 1990s?
A. Problems:
a. Very mechanistic company still, and very slow in the global rollout of new products innovationb. Europe has
its own R&Ds that work for the European market, but there’s not a global coordinationc. Market is now
completely saturated so products that could be standardized can be pushed across different countries without
reducing customer’s willingness to pay
B. New focus:
a. Cost leadershipb. Differentiation through new products
C. What does the company have to do?
a. P&G adopts a Global Matrix Structure
D. Results:
a. Cost of goods sold over the sales was reduced: (good in measuring efficiency) à therefore an increase in
economies of scope
b. Revenue growth rate of revenues reduced: (good in measuring
differentiation and innovation capabilities) à therefore a limited growth (the matrix doesn’t allow the
company to introduce new products)

C. Problems and Features of Organization 2005

a. There can be conflicts among these Units
b. There are no Country Managers anymore (MDOs do not control R&D, it is different from the previous
country manager even though it might seem similar)
c. All of the power was in the hands of GBU and GBS (So GBU could change the label of already existing
products, conflicting with the MDO manager)
d. It’s an attempt to centralize R&D (to helps standardization and support scale economies)
e. Collaborative approach is the only way to deal with problems (hard due to different cultures/countries)