International School of Management

PhD Professional

Assessment Evaluation I

Submitted By

Tewelde Mezgobo (Asst. Professor, PhD candidate)

Sep 2011

ContentsAbstract.................................................................................................................................................3

1) Early History...................................................................................................................................4

2) Shift in organizational structure from product grouping in 1950’s to a matrix in the 1980’s.........5

3) Why P & G’s organisation in Europe changed from geographic grouping in the 1950’s to category management in the 1980’s.............................................................................................6

4) Matrix structure in the US and the global matrix in 1995..............................................................8

5) Unique features of Organization 2005.........................................................................................12

6) Implication of The case study.......................................................................................................13

Bibliography........................................................................................................................................15

AbstractThe main task of this paper is to analyse P & G and address the following questions:

1. Why did P & G US organizational structure shift from product grouping in 1950’s to

a matrix structure in 1980’s?

2. Why did the European organizational structure shift from geographic grouping in the

1950’s to a category management in the 1980’s?

3. Why were the two structures integrated into a global cube in the 1990’s?

4. What are the key distinguishing features of the organization 2005? Why did P & G

adopt this structure?

5. Should Lafely make a strong commitment to keeping the organization 2005 or should

he plan to dismantle the structure?

The analysis is based on the information provided in the case (developed by Mikolaj Jan

Piskorski & Alenssandro L Spadine)

1) Early History

Proctor & Gamble was born in 1937. Founded by William Proctor and James Gamble,

both immigrants, married two sisters; Proctor was in soap making business & Gamble

was a candle maker. They started a new enterprise by formalizing the partnership and

established an enterprise that produces and sells soaps and candles. From the

beginning, competition with fourteen other similar companies was the focus for

market share P & G’s aggressive investment strategy in 1850’s by establishing a new

factory of what is pursued differently from its unbranded local competitors. This

decision was made by P & G despite the rumours of impending civil war. This is an

indication that from its early beginning P & G is a risk-taking enterprise. Indeed the

war was an opportunity for the organization as they kept providing their products to

the army. In the wake of the war soldiers often popularised the high quality products

in their home lands which helped P & G to develop national recognition.

1879 was a landmark for P & G’s transformation in which it managed to develop soap

‘ivory’ which matched the standard of the imported soap from Europe. The developer

was Gamble’s son James Nurris Gamble, who banking on his chemistry profession

gave the soap and candle making scientific edge. This once again is a proof that

product innovation has been at the heart of P & G’s market directions right from the

start.

In 1882 Ivory was branded nationally for its superior purity. Mass production of the

product enabled the company to meet the increasing demand starting from 1887. To

enhance the belongingness and maintain its good relationship with its workers, P & G

introduced profit sharing plan and in fact it started giving dividends’ in 1890 and is

doing it ever since.

The first centralized R&D lab in the industry, established in the same year paved a

way for diversification into other consumer industries. In 1919, P&G innovated a

direct distribution rather than via whole sellers by way of creating a direct sales force

with a view to create good link between production and demand.

The marketing effectiveness of P&G was further enhanced by establishing a

department for market research in1924. The department is one of the first of its type

which it leads into the invention of soap opera in 1993. This clearly show cases that P

& G is innovative not only in production but also in marketing which give the

organization a competitive advantage in the consumable product and sales industry.

Its marketing innovation is also further exemplified by its promotional technique, in

which ‘Guiding Light’ started to be aired in radio serial in 1937, and is still being

produced by a P & G owned production studio and appears daily on CES.

P&G managers were encouraged to manage brands as separate companies throughout

the 1920’s. In 1931 competitive brand management was institutionalised. Accordingly

each brand manager was made to target different consumer segments. In order to

enhance, speedy and be consumer – focused, business decisions by brand managers in

the lower level of the corporate hierarchy in the organisation started to be based on

product lines. Keeping strong and centralised function in the areas of R&D and

manufacturing, in 1943, P & G created its first product category division focused on a

growing line of personnel- care products.

A revolutionary synthetic detergent launched in 1946, Tide, was developed by R & D

against the wishes of brand managers through a secret five years program known as

“Product X”. Upper management eventually fast tracked the project; Tide captured

market leadership in just four years (and still held it over 50 years later), validating R

& D’s independence.

2) Shift in organizational structure from product grouping in 1950’s to a matrix in the 1980’sIn his review of modern industrial corporations he stated that “By the mid-1840s

personally managed enterprises – those that carried out the process of production and

distribution in market economics had become specialized, usually handling a single

functions and a single product.” Technological developments in transportation and

communication enabled mass production and distribution. Such developments cannot

be managed by informal organizations. Accordingly the establishment of “material

hierarchies appeared during the 1850s and 1860s”. Such organizational forms enabled

integrated and appropriately managed mass production and distribution by a single

form. These form of organizations “have had much in common whether they are

American, European, or Japanese”.

In almost all cases they grew first by forward and then backward integration. In that

fashion they had multifunctional organizational form.

Relating the evolution with P & G, we can see a similar trend in its managerial

development. Similar to other personally managed enterprises its organizational

structure was informal that is personally managed its production and distribution in

market economies. It is after the 1850s, through the establishment of mass production

in the 1880s and the establishment of R & D labs lead to the diversification that

created a functional structure. In 1920s in order to better coordinate the products

across functions P& G established Brand managers were incorporated into its

organizational structure. This was the major change in organizational structure that is

from purely functional to organization by product.

In his paper The Growth of the Transnational Industrial Firm in the United States and

the United Kingdom: ALFRED D. CHANDLER showed the patter on how the US

companies develop in their home operations after that he indicated that “As they were

building this organisation at home, the large American firms often moved over sees”

Chandler ( 399 ).

In the same fashion in 1948, P&G established its first international sales division to

manage its rapidly growing foreign businesses. “Then, as demand grew and as local

tariff disappeared or as shipping costs increased and scheduling of flows across

oceans become complex, the enterprise built plants abroad which it soon began to

supply from nearby sources” ( Ibid). Similarly P & G built its foreign presence while

carefully managing its US operation.

The transition from the traditional line staff organisation started in 1943 with the

establishment of the first product category division, the drug-products department. In

1954, in order to appropriately manage the growing lines of products, P&G created

individual operating divisions with their line and staff organisation.

3) Why P & G’s organisation in Europe changed from geographic grouping in the 1950’s to category management in the 1980’sThe Europe organizational structure for P & G was developed in three dimensions:

country, function, and brand. As indicated by P & G CEO John Pepper “P & G began

expanding globally after World War II. But the company was creating ‘mini-Uses’ in

each country”. The reason as stated by P & G first president of over sees operations,

Walter Lingle, was in order to appropriately respond to local tastes and norms. As per

this model of the organisational structure country managers not brand managers, had

the responsibility for bottom lines and marketing strategies. This structure however in

the final end lead to a condition in which innovation was very slow and brands took

above ten years to globalize. Pampers, for example, was launched in the US in 1961,

in Germany in 1973, and in France not until 1978. Not only European functional

organisations embedded in country silos, but European corporate functions were also

completely disconnected from the US operations. In addition, the focus on product

categories and brands was fragmented by country, virtually precluding region –wide

category or branding strategies.

In order to explain the reason for the change in structure of P & G’s operations in the

Europe one would better see the history of European countries and their move

towards European Union. The report of EU the 1945 -1957 was identified as the

beginning of cooperation toward peaceful Europe. Accordingly, the European Union

was established with the objective of attaining peace among member countries who

were engaged in frequent and bloody war, between neighbours, which came to an end

in the Second World War. As of the 1950, the European coal and steel community

began, to unite European nations economically and politically in order to secure a

lasting peace. The six founders were Belgium, France, Germany, Italy, Luxemburg,

and the Netherlands. In 1957 The Treaty of Rome created the European Economic

Community (EEC) or ‘common market’.

The year between1960 and1969 was identified as ‘Swinging sixties’-a period of

economic growth. The period from 1970 – 1979 was identified as ‘The growing

community-the first enlargement’ further in the 1980-1989 there comes the changing

face of Europe-the fall of the Berlin Wall. It was in the period 1990-1999 that Europe

without frontiers was created and then came the decade of the two treaties the

‘Maastricht’ treaty on European Union and the treaty of Amsterdam in 1999. From

2000- today is identified as the decade of further expansion.

From this short review we can understand that the European market goes from

heterogeneous to more homogeneous in type and further integrated market. (EU)

These facts can explain the reason for P & G’s structure to change from geographic

groupings in 1950’s to category management in 1980’s.

Accordingly, in the beginning of 1980’s P & G operated in 27 countries and derived a

quarter of its 11 billion $ in revenue from operations over sees. It becomes clear that

the European model towards globalisation was not getting effective. Unstructured and

subscale manufacturing were expensive and unreliable for each country. Un -

standardised products and packaging varieties create no value addition but significant

cost and complexity to the supply chain.

Accordingly Europe organisation shifted from country management to product

category management, although many small- country managers resist by claiming that

there were no “typical” European consumer and that this initiative would lead to

neglect of local consumer preferences. The strategy eventually proved successful,

however, and Europe was split into sub regions whose leaders were given secondary

responsibilities for coordinating particular categories across the entire continent. In

the early 1980’s, Europe was fully restructured around product categories. Product

category vice president VP positions were established and assigned with continent

wide divisional profit-and –loss responsibility.

4) Matrix structure in the US and the global matrix in 1995Historically, the matrix organization was getting acceptance in the space age of late

1960s. However “in the early 1970s it almost seemed to be fad.” Paul R. Lawrence,

Harvey F. Kolodny and Stanley M. Davis (1977) the typical distinguishing feature of

the matrix approach to organizational design is its flexible nature (Ibid) as indicated

by Thomas J. Peters, in its article Beyond Matrix organization (1979:11) “During the

late 1950s most companies were functionally organized. The post war boom and

subsequent economic growth led to mushrooming product lines and increasing

organizational complexity. During the late 1950s and 1960s many companies sought

to regain control and achieve "product-line rationality shedding their traditional

functional organizations for a divisional structure based on the model initiated by

General Motors and DuPont in 1920s” In the mid 1960s, However, long rang, more

elaborate capital investment projects called for a partial recentralization of corporate

decision making.” (Ibid) consequently, “new threats to divisional autonomy had

appeared in the 1970s” (Ibid)

To tackle with the treats organizations respond in three phase. Some set up “project

teams” to solve the problem of coordination emanating from functional, geographic

&divisional responses. As the number of teams increased then comes the problem of

responsibility & authority which led to the creation of teams that pursue only their

ways. To solve the problem the second phase was identified by the introduction of

matrix by few large &advanced companies. Although the move was followed by other

companies too the result was not as expected that is, problems start with the matrix

structure. Some leaders go on to the third phase of ‘calling behavioural scientists to

solve the problems in ‘team building’ & ‘conflict management’. However, still the

problem was not solved.

“In short, the matrix “solution” had brought with it problems at least as knotty as

those it was supposed to cure. But no fresh alternative was in sight.” (Ibid)

Accordingly, people like Peters said that the matrix organizational solution cannot

work by arguing that “matrix rests on an overly optimistic model of how people in

organizations actually behave. Its central concept- that simultaneous decisions can

routinely be made along multiple dimension with fragmented accountability- over

estimates the information processing capacity of most human brain & the problem

solving capacity of most social system.” (ibid) to support their arguments they provide

an example of “a consumer goods company designed a strategy to expand its product

line as competition closed in on its historically successful bread and better it.

Unfortunately, it was a strategy that only Procter & Gamble could have executed.”

(Ibid)

The same argument was also raised by Peters & Waterman, in their number one

National best seller, “in Search of Excellence” arguing that “our favourite candidate

the wrong kind of complex response, of course, is the matrix organizational

structure...” (1982:306)

Unlike the foregoing arguments, Jay R. Galbraith in his lecture on “Designing Matrix

organization that actually Work” shades a different light. For Galbraith, it is not

matrix that fails; rather the failure is evident in the implementation of matrix itself. In

his view matrix actually works best for excellent performers (Nokia, P & G,

Toyota, ...) albeit a significant number of failure cases with other companies.

Galbraith goes further on figuring out how this ‘high-performers’ scored a proven

success on matrix. For him these excellent performers, “have sophisticated leaders,

who grew up on both sides of a matrix, manage conflict and work as a team...”.

According to Galbraith, the sole attribution of a viable change process goes for the

instrumentalities of a transparent team set up, which he believes is the natural

organizational context for matrix to operate.

According to Galbraith there are different types of matrix designs: “Two dimensions,

like products and functions. This type is a solved problem. Three dimensions, like

functions, business units, and countries. This type is far more challenging and

encounters cultural differences. Four or more dimensions, which arise when serving

global customers. This type is the cutting edge.”

From the ppt summary of his position we can understand that structure is not the only

thing that we need to focus rather there are other components that need consideration.

In line with this he concluded in his article “Organizing to Deliver Solutions” as

follows “the company that desires to create and deliver solutions to its customers

needs an organization that is a challenge to manage.

Source: Jay R. Galbraith, organizing to deliver solutions, (2002:18)

The above figure indicates the organizational elements that need to be aligned. “The

features depend on the strategic dimensions like scale and scope, and the integration

of components. The structure requires customer-facing solutions units and flexible

resource units to staff capture teams. It needs profit and loss accounting systems for

customers and solutions.”

To have a more comprehensive understanding of the model, let’s review his Star

Model. In his solution Star Model, Galbraith reiterates the five integral processes

which help companies deliver a solution and dully manage thereof. For Galbraith, the

Model works out with an interplay of effective strategy, required expertise, a structure

of customer – facing units, a reward of one – whole show orientations and a process

geared for customer solutions. In all these Galbraith emphasizes on the development

of fundamental skills, like, “team management, team participation and conflict

management.” Galbraith finally reaffirms that the whole process centres on putting

forward a solution and managing it, which is way beyond the regular obsessions of

selling a product.

It was in 1987 that the US organizational structure shift from a brand management

system that was introduced in 1931 to a matrix structure. Brands are going to be

managed as components of category managers. Accordingly, the 39 US, category

business units operated by a general manager to who both brand and functional

managers would report. A matrix reporting structure was created in which functional

leaders reported to their business leaders & were made to have a dotted line

relationship to their functional leaders.

The matrix was expanded to include Europe. County functions were consolidated

into continental functions with dotted line reporting to the newly created global

corporate functional leadership & direct reporting to regional product-category

business managers.” Taken from rone

“In 1989, global corporate product-category presidents reporting directly to the CEO

were created to better coordinate product-categories & branding worldwide. The

country product category business general managers have a dotted line relationship to

these global corporate product category presidents and line reporting to the regional

product-category business Vice presidents who were responsible for their career

progression & promotion. The product category presidents were also given direct

responsibility for global R&D in their product category, which in turn had a dotted-

line responsibility to corporate R&D, “the same is also true here.

In the late 1980s & early 1990s P&G moved into the global matrix structure. This

ascribed to the success of the cross border cooperation across functions in Europe,

which set an example for the rest of the world, and the attractive expansion

opportunities in Japan & developing countries in the late 1980s & the need to respond

to the new challenge of appealing to more diverse consumer tastes and income levels.

In 1995 the structure was extended to the rest of the world through the creation of four

regions-North America, Latin America, Europe (including Middle East & Africa) and

Asia. Each with a president, reporting directly to the CEO & responsibility for profit

&loss.

The matrix organization structure facilitated top & bottom line improvements. At the

same time, the global sales organization was transformed into the customer Business

Development function to develop global relationship with big customers, like Wal-

Mart. Global category management also generated benefits, like by standardizing &

accelerating global product launches.

The strong global & regional functions that had promoted extraordinary benefits

appeared to create a strong imbalance in the matrix structure in detriment of the

country product-category managers.

The reason for the reversal in the imbalance of the matrix from country-product-

category managers in favour of the functional leadership seems to have been caused

by the high degree of de-facto control they had on the country functional managers as

they determined their career paths and promotions, and those of their subordinates.

The functional managers tried to optimize their particular parameters in cases of sub-

optimized regional performance conflicted with the regional managers who were the

solely responsible for the financial results. A similar conflict arose between the

product-category global leadership and the country managers who were reluctant to

implement initiatives that affect their short-term results even if this meant sacrificing

future gains for the company. These unresolved conflicts made it difficult to make the

regional profit canters fully accountable for their results.

The organization’s inability to solve the classic conflicts among the functional overall

cost optimization strategy, with the regional managers focused on local profit-and-

loss, and the product-category leaders initiatives that increased short term cost to

capture future profits raised serious concerns about the matrix structure to the extent

of doubting if matrix right organizational form for P&G. Even worse competitors

were popped up quickly in the market. The problems with the matrix and the poor

sales performance prompted P&G to announce in 1998 a six-year restructuring plan

named Organization 2005.

5) Unique features of Organization 2005In 1998, P&G announced a new restructuring program called Organization 2005, with

the objective of achieving $900 million annually after tax cost saving by 2004. The

restructuring plan costs $19 billion over five years. It also entails a voluntary

separation of 15,000 employees oversees. This is due to the expected 45% benefits

from global product-supply consolidations, 25% from scale benefits from

standardized business process & elimination of six management layers by scaling

down the total from 13to 7.

The other unique feature of the initiative is that it aims at avoiding the matrix &

changing it by an amalgam of interdependent organizations. In doing so, three units

namely, global business units responsible for products, Market development

organization with the responsibility for marketing and Global Business Services with

responsibility for business process have been established.

On top of that routine & policies were changed to speed up the decision process,

streamlined & integrate business- planning and overhaul the promotion & incentive

system. In so doing by 1999 Durk Jagar was appointed by the Board to be the CEO of

P&G in order to implement the plan. He was the key player under Chairman & CEO

John E. Popper in the development of the restructuring plan (organization 2005). The

1999 annual report indicated Jagar’s strategy to launch new blockbuster brands based

on new technologies rather than incremental improvements of existing products. To

his dismay research companies in 2000 showed that P&G lost its market share.

Including 16 of the 30 product-categories lost market share since the preceding year.

Despite of the promise given by executives, there was a disappointing stock loss of 7

percent. Consequently Durk Jagar resigned in June 2000 & A. G. Lefley took over the

CEO position.

The 2000 annual report outlines Lafley’s strategy to focus on building up the existing

global brands, the core business and make tougher choices about investing in new

products & new businesses. The report also showed that Organization 2005 is the

right design.

In 2002 John E. Pepper leaves the co. & A. G. Lefley was appointed as the chairman

& CEO. 2005 annual report stated that the foundation for consistent sustainable

growth were clear, strategies, focus on core strengths and a unique organizational

structure that leveraged P&G strengths.

6) Implication of The case studyBusiness organizations have been evolved from informal and personally managed

then to functional departmentalization have been introduced. In order to gain

competitiveness from different dimensions they evolve into divisional and later they

start to focus on the human side in order to create appropriate team building and

conflict management to make the multidimensional and matrix structures work.

These different organizational structures as stated by Chandler was in response to the

different strategies that demand its aliened organizational structure. But beyond the

strategy structure there are other important elements like system, leadership, and

appropriate HRM in order for the strategies to work. Although there are still

arguments as to whether the structure or strategy that should come first. But beyond

this unless appropriate considerations in soft S’s are made whatever strategy you

develop your ultimate strategy may not be realised.

When we see P & G after introducing its matrix structure there comes problems in its

structure emanating from structural, conflict and other problems which pave the way

for its restructuring program introduced by Jagar but after his resignation for a

successful implementation of the strategy by Lafley as we can see from summary of

his speech on the issue at hand.

In line with the report we can see the Lefley’s speech at the Rotman school to see how

he appropriately managed to reverse the problem that P&G was facing on the basis of

the speech and our subject matter, let’s now look at the following summary.

In short here are the key elements in Lafley’s speech address:

As A. G. Lafley took the post of a CEO, P & G was at its biggest crisis in which the

company lost over 85 billion dollars. Amid the crisis what drew Lafley’s attention

was not this biggest loss of market capitalization, rather the missing link – the

company’s loss of leadership confidence. In Lafley’s words “we started things as they

are, not as we want them to be.” Lafley thus understood the company’s situation in

down to earth practicality. He thus managed to set up a strong and cohesive team

accordingly, the company managed to be closer to customers, build a strong

partnership with retail customers and most of all living up to a leading innovation,

which paid of dearly.

(Source: A.G. Lafley’s spoke at the Rotman School on April 21st in the ongoing Rotman Integrative Thinking Seminar Series.)

From this one can infer that if all elements of the strategy alignment issues can be

appropriately made organizational structures like the organization 2005 of the P & G

can be appropriately implemented.

On the other hand many organizational structures like the Business Process

Reengineering which were adopted by countries like my own , Ethiopia, is an

example of failure to appropriately implement the reason mainly are there are no

changes especially in the soft S’s like reward and development of employees, a

change in leadership style and failure to change the routines in implementation of the

program which ultimately lead to it failure.

One thing what I have as a concern is rather than having extreme stands in arguments

of for example strategy structure (which one should come first) we should see issues

in totality of all aspects in achieving organizational strategy if we need success in

today’s turbulent and dynamic environment that organizations are working today. In

that regard P & G’s case is a good example of how the organization 2005 has been

successfully managed its implementation by Lafley.

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professionals’, The McKinsey Quarterly

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