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P&G Case Study

Procter & Gamble: Organization 2005 (A) + (B)   Outline:     Part  A     1.                The  Case  Study:  Summary   ________________________________________________  2   1.1.          Brief  of  the  case   ________________________________________________  2   1.2.          Dilemma       ________________________________________________  2     2.                  About  P&G   ________________________________________________________________  3   2.1.          Brief  history  of  the  company   ________________________________  3   2.1.1.  1837-­‐1948   ________________________________________________  3   2.1.2.  1948-­‐1987:  Diverging  Organizational  Structure  ______  3   2.1.3.  1987-­‐1995  Global  Matrix   ________________________________  6   2.1.4.  1995-­‐1998:  Problems  of  Matrix   ________________________  7   2.2.          Organization  2005   ________________________________________________  7   2.2.1.  Global  Business  Units   ________________________________  8   2.2.2.  Market  Development  Organizations   ________________  8   2.2.3.  Global  Business  Services   ________________________________  8   2.2.4.  Routines  and  HR  policies   ________________________________  8   2.3.     Organization  2005  in  action   ________________________________  9     Part  B     3.     Managing  the  Crisis     ________________________________________________  10     3.1.   A  New  Model  for  Sustainable  Revenue  Growth     ________  10     3.2.   Organization  2005:  from  Crisis  to  Best-­‐in-­‐Class   ________  10   3.3.   Looking  ahead  in  2006   ________________________________________  11   4.   Case  Analysis  &  Professor  Solution   ________________________________  12     4.1.     Professor’s  questions   ________________________________________  12     4.2.     Answers  (from  the  notes)  ________________________________________  12                                   Part  A   1.  The  Case  Study:  Summary     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 growth o 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   2. About Procter & Gamble 2.1. Brief History of the company: 2.1.1. 1837-1948: • • • • • • • • • • • Founded in Cincinnati by Mr. Procter (candlemaker) and Gamble (soapmaker) à Partnership in 1837; 1850s: aggressive investment strategy à build a large factory Focus on Product Innovation: o James Gamble (son) is a chemist and makes “Ivory” o soap and candle making process becomes a science 1882: “Ivory” is the first product marketed nationally (P&G is a brandedgood producer) 1887: mass production begins 1890: First centralized R&D labs o more diversification into other chemistry-based consumer industries (cooking oils, detergents, personal care, paper, pharmaceutical) (EXIBIT 1) 1924: First market research department 1920s: managers are “entrepreneurs” and manage brands as companies 1931: competitive brand management o Brand managers can target different consumer segments o Consumer focused business decision made at lower levels in the hierarchy. 1943: First product category division (personal care products in the drug-product dept.) Centralized function were retained in areas such as R&D and manufacturing o Conflicts among R&D and Brand Managers 2.1.2. 1948-1987: Diverging Organizational Structure •   1948: first international sale division o US: homogeneous market § Brand and product division management o Western Europe: heterogeneous market, different languages, cultures, laws § Decentralized hub-and-spoke model 3   - United States: Product Division Management (1954) Key Features: o Individual operating divisions o 2 key dimensions: § Functions § Brands - United States: Advent of MATRIX (1987) Key Features: o Brands are managed as components of category portfolios (by category general managers) o Product categories require more functional activities o 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   4   the VP of that function (ex: sales VP) - Western Europe: Geographic Management (1948) 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 - Western Europe: Advent of Category Management (1980s)   5   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   6   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 employees o 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 7   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 design o 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 • Goal: One single SAP software system 2.2.4. Routines and HR policies Main Idea: • Decisions now assigned to individuals (faster Decision Making process) • Budgeting processes were streamlined, integrating different budgets into a single business-planning process   8   • Increase in compensation for employees and executives. 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 JanuaryMarch 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. 9   Part B 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 GBUs o 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 brands o Focus on P&G’s largest countries and customers o Tailor products for developing markets Consequence: o Sales increased 22.4% over previous year o 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 costs o Lead to higher margins and more innovations to market faster o More flexibility and focus on responsibilities that used to be fragmented and duplicated across many regional business units § Product management § Market execution 10   • • • § 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 innovators o 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 effectively o 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 § This integration between GBS and the rest of P&G evolved into an intricate web of network relationships § GBS representatives within the GBUs and MDOs became members of leadership committees to set long-term strategies and planned joint budgeting processes § GBS now able to manage a lot of integration projects with less time needed. 3.3. Looking ahead in 2006 • • • • •   22 billion-dollars brands (from 10 in 2000) that delivered 2/3 of revenues P&G had grown volume of its top 16 geographies and top 10 retail customers by 9% in 4 years P&G enjoyed the lowest costs as a percentage of sales of its peer competitors (30) Acquisition of Gillet in 2005 helped a continued shift toward more asset-efficient, higher-margin health and care beauty business (shares up to 51% compared to 28% of 2000) Plan to o Increase gross margin by 24% o Reduce non-strategic SG&A 11   • o Keep R&D and advertising constant Competitors (Colgate, Kimberly-Clark and Unilever) were trying to replicate elements of Organization 2005 design. 4. Case Analysis & Professor Solution 4.1. Professor’s questions 1. Why did the US organizational structure shift from product grouping in the 1950s to a matrix in the 1980s? 2. Why did the European organizational structure shift from geographic grouping in the 1950s to category management in the 1980s? 3. Why were the two structures integrated into a "global cube" in the 1990s? 4. What are the key distinguishing features of Organization 2005? Why did P&G adopt this structure? What are the main changes? 5. Why did "Organization 2005" produce poor results? What were their limitations? 4.2. Answers (from the notes) These answers can be implemented by reading the previous points about P&G since they only come from lecture notes • P&G had to change its organizational structure due to the fact that the current structure wasn’t suitable to the change in: o The strategy, o The environment. 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   12   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) ii. Problem: 1. It’s better to centralize R&D but, for products developed globally it would take too long to be released in every country 2. Solution: a new R&D Center in Brussels 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 redundancies ii. P&G adopts a Matrix Structure (Divisions – Categories – Functions) 1. Emphasis and power are still on products, not on functions iii. Downside of the Matrix:   13   1. Increase the number of managers 2. Double supervision à less decision making power D. EUROPEAN Market in the 80s: a. Environment is heterogeneous and à look at point C b. 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 innovation b. Europe has its own R&Ds that work for the European market, but there’s not a global coordination c. 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 leadership b. 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   14   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) 4) What are the key distinguishing features of Organization 2005? Why did P&G adopt this structure? What are the main changes? 5) Why did "Organization 2005" produce poor results? What were their limitations? A. Reorganization in 3 different structures:   15   B. Why did it change the structure? a. Look at answer 3), point D) 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) D. Should we just come back to previous Structure? It doesn’t make sense; executives prefer to keep the organizational structure due to the high costs that have to be faced. E. Solution of the new CEO (After 2001): a. Consolidate number of BUs b. More outsourcing and consolidation in global business services à less capital expenditures / sales à more Advertising c. Chief information officer in leadership to plan the strategy d. Focus on core brands e. Downsizing program (reduction of employee) f. GBS: keep standardization while introducing customer satisfaction metrics g. MDOs have more power h. Change in metrics in the entire company i. Incentive systems to avoid conflicts among the company’s units     16  

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The purpose of the present paper is to analyse how product innovation process has been organized by a multinational company, such as Procter & Gamble. Since open innovation is a new approach on the local market, we have chosen to conduct a research in form of a case study showing the steps that the company has taken in order to involve other organizations to contribute to the development of new products. The paper will first describe what innovation management theory is suggesting. Following this, the mission and vision of Procter & Gamble will be analysed emphasizing its innovation efforts in time. The approach that the company has nowadays, related to development of new products, has its roots in several complex initiatives in the past, initiatives that have in their central attention the customer. Finally, it provides the research limitations and implications for future analysis on the case of Procter & Gamble open innovation approach.

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