Team 2 Markus Bernhuber, Daniel Dong, Tatyana Glushchenko, Francesco Pasquetti, Raffi Semerciyan |August 21th, 2010 | | P&G Case Report Introduction: The case takes us back in June 2000, facing two main issues slumping in stock price and leadership crisis when Jager the CEO at that time steps down and is replaced by Lafley. Jager initiated one year ago a reorganization of P&G called ‘Organization 2005’ in order to regain growth of sales. Mainly the new organization consist of a shift from geographical structure to a global product business divisions structure.
But Wall Street seemed to punish this move in spring 2000 when the stock price felt by 50% from its peak. P&G internal low confidence was also punishing this move and was the expression of the internal resistance to these changes. Lafley, the new CEO who takeover Jager has now a dilemma. He must make a choice on whether or not to continue ‘Organization 2005’. He was facing several problems, first of all the lack of coordination across countries and region combined with a willing of majority of senior manager to reverse back to a regional business organization.
Our job here as EMBA students is to help Lafley in this difficult choice eliminare To do that, we will first understand the features of the ‘Organization 2005’ and their rationales. Then we will also analyse what are the factors that we should consider before concluding with our advices. 1. What are the main features of the Organization 2005 initiative? What are their rationale? The goal of a greater innovation and faster responsiveness was a new culture revolution. Pushing in innovation moving out the organization from the inertia with a strong emphasis of performance target and payment related.
The new organization was a new orientation from geographical to global business unit in order to reduce the burocracy internal to the old organization, thanks to a more efficient integration giving more empowering to the president of the global business unit in order to roll out the new products but at the same time also to be responsible for the P & L , and the senior manager who with a less hierchical organization was be able for a faster decision making.. Features: • New Organizational Structure where: Profit responsibility shifted from P&G four regional organizations to seven global business units (GBU’s) who were now responsible for worldwide products in their category development, manufacturing and marketing. We believe that this is a more efficient way of managing the units as the GBU has a worldwide focus and also knows the adaptation for emerging markets. ? The regional organizations were transformed into seven market development organizations and are responsible for the local implementation of the GBUs’ global strategy. Functional services (HR, Accounting, payroll, IT, … ) were organized into a new global business service unit (GBS). Our understanding is if companies create business service units they plan to get rid of inefficiencies in administration and make better use of their concentrated expertise in the concerned functional service • Emphasis on performance: Increase of performance pay. • For senior management, the performance-related variation in annual compensation would change from 20% to 80% • Stock options were extended from top management team to include middle managers. P&G Budget setting process was organized into a single integrated business-planning process built on stretch performance targets. • Increase decision making authority of middle managers. • Innovate bigger and move faster consistently and across the entire company In P&G? s case they needed to get a step ahead again of their competitors and they needed to achieve sustainable advantage through innovation. • Grow fast and grow profitably Rationales: Low growth of sales during the 1990’s as a result of lack of innovation (according to Jager) • When a new product was introduced, slow global rollout (example of Pampers diapers which needed 20 years to be introduced in UK after its first introduction in US) allowing competitors to launch imitative products before P&G. • P&G organization according to Jager: Bureaucratic, conformist, risk-averse and slow. • Increase the efficiency through greater cross-border integration (standardization of manufacturing processes, simplifying brand portfolios and coordinating marketing activities). Reduce the number of hierarchical levels between the CEO and front line managers. • The central problem in P&G according to Jager was lack of innovation and slow responsiveness. We do believe as well that another rationale is if a firm want to achieve growth, or sustainable growth the company must have a capability to invest, take risk and seize quickly new opportunities. As support of this philosophy or Organisation 2005 we could see the right actions like new processes to boost innovation, plant closures and extensive job losses but most importantly probably the change in the incentive system for manager.
Undoubtedly the most challenging and difficult change probably lies within the company culture itself, to change the culture it takes a lot of effort, is a long term task, that can not be done over night. 2. What factors should Lafley take into account in determining whether to continue or to abandon Organization 2005? Fail in performance this is what we have to concentrate why? More attention to the customer relationship and sale performance Emerging market need adaptation and localization of the product difficult to combne with a global organization.
Probably rate ond type of new producti introduction not succesfull meanwhile the core brand still have a good market share. Internal confidence and leadership of Jaeger too aggressive for a successful change of culture. • Past performance In 2000, it will be one year that the Organization 2005 project was ongoing. We should be able to measure whether or not it contributed to improve the situation. When looking at the result of 2000, we can see that actually, the net income even decreased by 5. 9% compared to the previous years despite the fact that the sales increased by 4. % (and with constant COGS)! So we should analyse the reason of this poor performance and understand whether it is because of some efficiency problem of the new restructuration. • Adequacy of the Organization 2005 structure to P&Gs’ coordination interfaces in the value chain of the company: can this new organization really match optimize/minimize the coordination requirements? In order to illustrate this point, let’s take 2 extreme examples: SKII and Pringles potato chips. The SKII is a typical example of product that cannot be developed in a GBU of the new Organization 2005 structure.
Because Japanese women are very demanding in term of quality of skin care products, the global R&D was unable to match the requirements of this special market. So it was no surprise that the decision of P&G was actually to get help from Japanese team to develop this product. Still we can think that some parts of the value chain can still be globalized as the below value chain of SKII analysis shows. But each time we switch from localized to globalized process and vice versa, there is a head over cost and efficiency loss (due to coordination between different teams).
We can clearly see that in this example, the new organization won’t help to achieve better efficiency and in fact even play against that purpose. On the other extreme side, if we take a product like Springles that is a quite standardized product among all the world, then there is no difficulty to have a GBU and it actually really make sense to do so. [pic] • Product Contribution to sales Another important thing to consider whether to keep Organization 2005 or not is to look at the product and brand portfolio and identify which can be globalized and which contribute most to the sales?
In fact, each product or brand has a capacity of being globalized. Some cannot at all and will definitely lead to loss of dramatic marketshare (detergent or skin care examples). Some others can be fully globalized (potato chips). And finally, the rest are in the middle and the answer is not so clear. [pic] Then the next step, it to understand what are the contribution of each product or brand to the total sales? It surely doesn’t make sense to globalize a product serving a specific market and loss its contribution if this contribution is not negligible.
The picture below shows 3 different situations where GBU structure makes senses, another situation where it doesn’t and a third situation where the answer is not clear! [pic] • Market Maturity. Actually, a product capacity of being globalized is not an intrinsic attribute of the product itself. It is also depends on the market it is serving. Mature markets are more prone of accepting globalized products. Emerging markets like China or Russia are absolutely not ready for that and need time to get used to western values. Mature Markets vs.
Emerging Markets like China or Russia not ready to accept ‘globalized’ products. Current Organization 2005 didn’t take into consideration the cases of emerging markets. • Market Situation: At that time, the market was under the influence of Internet bubble that started to burst. • Are we going through a major technology change • Are customer needs changing, is a new industry coming into existence • Cost of the reorganization together with the difficulty of implementing this reorganization • Expected improvements for the TSR Key customers like Wal-Mart or Carrefour! Will the new structure with GBUs really help to increase the sales with these key customers or will it make it more complicated? According to my understanding, this new organization should lead to a more complicated interactions with key customers as they will need to coordinate with more contact windows (7 now versus 4 initially Disagreed with Raffi, as it will be more efficient as we have MDO and GBS working together. The crisis of confidence, mostly leadership confidence, • Change Management and how to get all the manger’s units and others involved. • Stock price, relation ship with the Wall Street, will (i) be hated like Jager on Wall Street. • P&G is a very complex company with huge variety of brands and products, with 110 00 employees in 140 different countries. This complexity needed minimum requirements to the structure and more attention to the coordination within one product area. It needed to coordinate within each function and it needed to coordinate within each country. Can I create more Share holder value or Total shareholder Return with the new organisation • Does it serve my customers, will the new organisation make live easier for them • Where to play and how to win • Are the changes a threat to the resources and capabilities? 3. Advise Lafley (a) on whether to proceed with or cancel Organization 2005; (b) Whether changes to be made in the organization structure adopted under Organization 2005 (as show in Figure 8. 2). What advice would you give to Mr Lafley regarding the implementation of Organization 2005?
We will advice Lafley to proceed with a slightly modified version of Organization 2005 because we think that P&G should focus more on differentiation than on low cost as they always did in their whole history. So innovation should be a key success factor to achieve this target and the organizational structure should really motivate innovation. In order to achieve this innovation target, organizing the company so that it focuses on product makes sense. So we support the ideas of GBU by product type.
Have to work hardly in the internal consensus for the new type of organization developing and right level of coordination between the business unit involving the middle and high level management in the new orientation motivating them. However, we would also consider the cases of some emerging markets and key customers like Wal-Mart or Carrefour separately. Have a special focusing in the customer relationship in order to create to right mood and education in the customer and in the market to develop new product but also new culture.
Interesting the example of SK II and the related differences between customer in Us and japan. For emerging markets, we should consider that countries like Russia and China just recently opened their door at that time and just started to be in contact with other countries (for example, they don’t have the history of the TV series from the west that are great sources of western values). The population were not educated with tastes from western countries yet even if we can imagine that they were eager to know more about.
So for these special countries with promising market but with totally unknown market conditions and tastes, we would have created one dedicated division for each of these countries. However, we would also prepare mechanisms that will allow P&G to integrate these special divisions later in the primary organizational structure once these markets would be mature enough to accept more global products (let’s say 10 to 15 years later). For key customers, I would also pay attention to facilitate sales of our products and not make them more complex than it was before (actually, it should even be easier if we want to increase the sales).
In order to address this issue, I would create a specific department like ‘Key Account Department’ that will solely contain sales personal in charge of one particular key customer on the global and local point of view. Such person will help coordinate the different internal GBUs with their customers. Each of these persons from this department will be the unique contact window. It will be better to conduct the changes less aggressively and immediately adjust the project according to the market responds.
Further more we think the change needs better communication and buy in and how it works, or should work, should be organized an planned before, seeing that even the current CEO Lafley him self said in the case of SK-II that the management was disrupted, so he himself experienced it, which should make it “simple” for him to communicate such issue with the other management positions. Conclusion: This case puts us at the heart of business strategy and let us feels some of the different aspects to consider when changing the organizational structure of a company.
This case also gives us a good illustration of the ways a company should be organized. It gave an example of comparison between the regional divisions versus the product business units. This case also gave examples of typical situations that CEOs should face when making big changes in a company: • Internal Resistance to changes • Market expectation • Customer expectation This case also invited us to go beyond what is proposed by letting us criticizing the proposed structure and eventually presenting our own proposition.
Great case to explain how event first level company can face difficult moment if we try to change too fast or not in a proper momentum. A consumer company has anyway think to the market and liase to the market, probably the global product was succesfull for mature market with an high brand awareness and need standardize, but in the new and emerging market the strategy should be much more localize and adapted to the need and culture. Other points to mention in the conclusion: Changes are more difficult in big multinational. The task of CEO is a real challenge and not so easy.
We can also say that as the current companies grow, they will more and more face problems to change and adapt to new market situation. Isn’t it a limit that can put in danger big corporations? ———————– Product/Brand capability of being Globalized vs Localized? Where should a product be? Localized Globalized GBU: how to choose? => marginal trend, competitions, market trend, … GBU is clearly not a viable solution here GBU makes sense in this situation Localized Globalized Localized Globalized Localized Globalized P&G Product Contribution to sales