The case discusses the âOrganization 2005â program; a six-year long organizational restructuring exercise conducted by the US based Procter & Gamble (P&G), global leader in the fast moving consumer goods industry. The case examines in detail, the important elements of the restructuring program including changing the organizational structure, standardizing the work processes and revamping the corporate culture. The case elaborates on the mistakes committed by Durk Jager, the erstwhile CEO of P&G and examines the reasons as to why Organization 2005 program did not deliver the desired results. Finally, the case discusses how Alan George Lafley, the new CEO, accelerated the initiatives under the Organization 2005 program and revived P&Gâs financial performance.
Issues
Gain insight into the common causes that contribute to steady decline over a period of time in the performance of a large multi-product multi-national company of high repute.
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&Gâs 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 â 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. In order to accelerate growth, the erstwhile P&Gâs President and CEO, Durk Jager (Jager) officially launched the Organization 2005 program in July 1999. Organization 2005 was a six-year 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&Gâs 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 companyâs 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&Gâs financial performance improved significantly (Refer Exhibit II). The companyâs share price shot up by 58% to $92 by July 2003, as against a fall of 32% in S&Pâs 500 stock index. A former P&G executive, Gary Stibel said, âIf anybody had any doubts about AG, they donât anymore. This is about as dramatic a turnaround as you will see.â
However, analysts expressed doubts, whether the measures taken by Lafley would sustain P&Gâs 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.
Background Note
Procter & Gamble was established in 1837 by William Procter, a candle maker, and his brother-in-law, James Gamble, a soap maker, when they merged their small businesses. They set up a shop in Cincinnati and nicknamed it âporkopolisâ 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 âProcter & Gamble Sunhome Co. Ltd.â In 1985, P&G announced several major organizational changes relating to category management, 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, had revealed that almost a quarter of P&Gâs 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 discountsâŚ
Excerpts:
The âOrganization 2005â 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&Gâs 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&Gâs 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 2004âŚ
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 from four geographically-based business units to five product-based global business units â Baby, Feminine & Family Care, Beauty Care, Fabric & Home Care, Food & Beverages, and Health Care.
The restructuring exercise aimed at boosting P&Gâs growth (in terms of sales and profits), speed and innovation and expedition of management decision-making for the companyâs 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&Gâs brands and the heads of GBU were held accountable for their unitâs profit. The sourcing, R&D and manufacturing operations were also undertaken by the GBU.
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 companyâs various operations located globally.
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, âOrganization 2005 is focused on one thing: leveraging P&Gâs innovative capability.
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&Gâs cautious approach towards acquisitions in the 1990s, this dual acquisition would have been the largest ever in P&Gâs history, worth $140 billion.
However, the stock market greeted the news of the merger negotiations by selling P&Gâs shares, which prompted Jager to exit the deal.
Implementing Strategies to Revive P&G
In June 2000, Alan George Lafley (Lafley), a 23-year P&G veteran popularly known as âAG,â took over as the new President and CEO of P&G. The major difference between Lafley and Jager was their âstyle of functioning.â Soon after becoming CEO, Lafley rebuilt the management team and made efforts to improve P&Gâs operations and profitability. Lafley transferred more than half of P&Gâs 30 senior most officers, an unprecedented move in P&Gâs history. He assigned senior positions and higher roles to women.
P&G â Current Status
In 2003, Lafley continued his efforts to make P&G more adaptable to the dynamic changes in business environment. He challenged P&Gâs traditional perspective that all its products should be produced in-house. In April 2003, Lafley started outsourcing the manufacturing of bar soaps (including P&Gâs longest existing brand, Ivory) to a Canadian manufacturer. In May 2003, IT operations were outsourced from HP. Since Lafley became CEO, P&Gâs outsourcing contract went up from 10% to 20%. Lafley continued to review P&Gâs businesses and new investments with the aim of achieving sharper focus on its core businesses, cost competitiveness and improved productivity.
Nice article, but can you please add a bit more on what Lafley did to turn things around.
Alan G. Lafley has brought P&G out of a difficult period of declining sales and dropping share prices into a promising new beginning. Revitalized brands like Pampers, Tide, Crest, and Folgers; ânew and improvedâ versions of familiar products like Bounty and Downy; marketing innovations; and acquisitions like the Clairol hair-care line and the powered-toothbrush start-up called SpinBrush are among the ways in which Lafley is helping bring in more revenueâenough to push sales past $40 billion and beat Wall Streetâs expectations for eight financial quarters in a row. The company has also cut costs, shortened the time it takes to roll out new products, and entered partnerships and licensing agreements with other firms to pave its way into the market for upscale cosmetics and perfumes.
Lafley, a history major who has about 25 years with P&G and once considered a graduate degree in Renaissance studies, became the companyâs chief executive in June 2000. He is now also president and chairman of the board. But his easygoing manner and relaxed management style downplay his impressive roles in the turnaround. Lafley dismantled the companyâs executive suite, stripping away the oak panels and donating to museums the art that hung on the walls. Cubicles for him and his staff have taken their place. Lafley has also introduced a new accessibility into the firmâs formerly arrogant atmosphere. âYou can tell him bad news or things youâd be afraid to tell other bosses,â says one of P&Gâs vice presidents.
Gary Stibel, chief executive of the New England Consulting group that monitors P&Gâs performance, agrees. Lafley âwants to hear any bad newsâand as a result,â Stibel says, âhe hears far less of it.â
Known as a hands-on manager, Lafley has kept his longtime habit of dropping in on stores all over the world where P&G products are sold. Heâll inspect the displays in each aisle, observe shoppers, and consult with store owners about whatâs selling well and what isnât. âI donât think the answers are just in numbers,â he reveals. âYou have to get out and look.â Lafley has also been known to do his own product research, calling on consumers in their homes and spending an hour going through the contents of their kitchen and bathroom cabinets with them. His much-admired listening skills complement his natural curiosity. âI am a broken record when it comes to saying, âWe have to focus on the consumer,ââ Lafley admits.
Lafley also knows how to get back to basics. He quickly reduced the number of product-development projects at P&G from over 50 to a mere dozen. âI think we got into a little trouble getting excited about the technologies before we thought through the consumer,â he says.
Under Lafleyâs management, sales are up, costs are down, and the share price has never looked better. Strife within the company seems to have been resolved, and P&G is once again turning its sights on the competition. âWhat Iâm trying to build into this organization,â he says, âis something that will last long after Iâm gone. This is a company that aspires to be around for 1,000 years.â
Nice article, but what happen to the P&GâS dividend yeild since 1999 and revenue since 1999.