Procter & Gamble : Organization 2005 and Beyond
Ravi Madapati
Faculty Member
Icfai Knowledge Center
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Organization 2005
In 1998, P&G’s Earnings Per Share
(EPS) fell below the 14% to 15% that Wall Street had got used to. Revenue
growth, which had varied between 1.4% and 5.5% between 1995 and 1999, also was
well below P&G’s internal target of 7%.
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Revenue growth was slowing down particularly in
developed markets due to the maturity of its established brands. Half the
brands were generating bulk of the growth while the rest were lagging
behind. In a retail world increasingly populated by private label goods,
P&G’s premium products were having difficulty competing. More nimble
competitors were beating P&G to the market by launching products, by
executing marketing plans better and by faster product innovation. There
was also speculation that P&G’s profitability was being eroded by the
increasing dominance of retailers like Wal-Mart, who controlled the
point-of-sale. Wal-Mart with a turnover of about $160 bn in 1999 was a
particularly formidable player.P&G’s innovation
track record had also been disappointing. New brands had the ability to
add billions of dollars in incremental revenue, but P&G had not launched a
major new brand in almost a decade. |
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In an effort to reinvigorate growth,
P&G announced a corporate restructuring program, named Organization 2005, in
September 1998. The goal of the program was to improve P&G’s competitive
position and generate operating efficiencies through more ambitious goals,
nurturing greater innovation and reducing time-to-market. This was to be
accomplished by substantially redesigning the company’s organizational
structure, work processes, culture and pay structures.
P&G estimated that Organization 2005
would result in an acceleration of annual sales growth
to 6-8% and of annual earnings growth to 13-15%. Organization 2005 envisaged the
transformation
of P&G from a geographically based organizational structure to one based on
global product lines.
The program had five key elements.
Global Business Units (GBU): P&G moved from four business units based on
geographical
regions to seven GBUs based on global product lines. By putting the
responsibility for strategy and
profit on brands, instead of geographic regions, P&G hoped to spur greater innovation and speed.
Market Development Organizations (MDO): P&G established eight MDO regions whose
objective was to tailor global marketing programs to local markets.
Global Business Services (GBS): Overhead functions such as human resources,
accounting,
order management, and information technology were consolidated from separate geographic regions
to one corporate organization that would serve all GBUs.
Corporate Functions: Most of the corporate staff were transferred to one of the
new business
units.
Company Culture: P&G redesigned reward systems and training programs to improve
result
orientation amongst employees.
Organization 2005 involved substantial costs. Of the approximately $1.9 bn in
costs, $400 mn
were planned for 1999, $1 bn over the next two fiscal years, the balance during
fiscal years 2002-2004. However, these costs were expected to be more than offset by savings from
the program.
The company expected to increase its after-tax profits by approximately $600-700
mn annually by
fiscal year 2003/04 and $900 mn by fiscal 2004. Approximately 10,000 positions
would be eliminated
through fiscal 2001 with a further 5,000 cut after 2001. P&G indicated that
approximately 42%
of total workforce reduction would occur in Europe, Middle East and Africa; 29%
in North America;
16% in Latin America; and 13% in Asia.
Despite the substantial retrenchment,
Jager remained confident that employee morale would
not be affected. He believed that Organization 2005 was about accelerating
growth, not cutting jobs[1].
“These job reductions are principally an
outgrowth of changes, such as standardizing global
manufacturing platforms, to drive innovation and
faster speed to market, as always, we have
considered these decisions very carefully with deep
concern for the impact on our people. We would
carry out the changes with maximum respect and
attention to the welfare and future of our
employees”.
P&G announced it would make full use
of normal attrition and retirements, hiring
reductions, re-locations, 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.
Jager’s resignation
Soon after it was introduced,
Organization 2005 ran into various problems. After reaching $117 a share in
January 2000, the stock fell below $90 a share in February. On March 7, 2000,
P&G warned that its earnings would drop by10-11%, rather than rise by 7-9% as
previously expected, citing higher raw materials costs, lower realization and
increasing competition from many generic brands that produced cheaper versions
of many of its core products.
The news sent the company’s stock to
its lowest level since the mid-90s. The stock price plunged to less than $60 a
share wiping out $40 bn in market value in one day. Then in April 2000, P&G
posted an 18% decline in third-quarter profit, its first decline in eight
years. It also announced that fourth-quarter results would fall short of
estimates. Jager accepted responsibility for the company’s problems and
resigned. But he maintained[2]:
“I am proud of the vision we set out to achieve with Organization 2005, and
we’ve made important progress. It’s unfortunate our progress in stepping up
top-line sales growth resulted in earnings disappointments”. Analysts speculated on the reasons
behind Jager’s failure. Jager had tried to put too much pressure on P&G managers
into bringing products to market faster. He had pursued major moves such as the
dual acquisition of Warner-Lambert and American Home Products, which were
futile. None of these improved P&G’s performance. Jager’s exhortations also did
not go well in P&G’s cautious corporate culture. His plan had been too
aggressive. He had introduced new products recklessly in the hope of finding the
next billion-dollar product. He had decided that P&G would sell its products
under the same name all around the world. So in Germany, the name of its
dishwashing liquid suddenly changed from Fairy to Dawn, the name it sold under
in US. But since Dawn was unknown in Germany, sales plummeted.
There had also been problems related
to people. Managers had become critical of Jager’s confrontational style. As
employees felt they were being pushed, there was significant disenchantment. In
Europe, about 2000 people were suddenly transferred to Geneva. About 200
employees were asked to relocate from various parts of Asia to Singapore.
Besides transfers, the program had also led to various behavioral problems. As a
result of the Organization 2005 program, some food and beverage managers, based
in Cincinnati, reported to a president in Caracas, Venezuela. Managers in the
laundry and household cleaning business reported to Brussels.
Organization 2005 under Lafley
Conclusion
[1]P&G press release: Organization 2005 Drive For Accelerated Growth Enters Next
Phase, June 9, 1999.
[2]
Source: CNN Money, P&G CEO Quits Amid Woes, June 8, 2000.
© Icfai Press. Global CEO •
May 2003 , All Rights
Reserved.
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