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International School of Management

PhD Professional Assessment Evaluation I Submitted By Tewelde Mezgobo (Asst. Professor, PhD candidate)

Sep 2011

Contents
Abstract ................................................................................................................................................... 3 1) 2) 3) 4) 5) 6) Early History .................................................................................................................................... 4 Shift in organizational structure from product grouping in 1950s to a matrix in the 1980s ........ 5 Why P & Gs organisation in Europe changed from geographic grouping in the 1950s to category management in the 1980s .............................................................................................. 6 Matrix structure in the US and the global matrix in 1995 .............................................................. 8 Unique features of Organization 2005 .......................................................................................... 12 Implication of The case study........................................................................................................ 13

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

Abstract
The 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 1950s to a matrix structure in 1980s? 2. Why did the European organizational structure shift from geographic grouping in the 1950s to a 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 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 & Gs aggressive investment strategy in 1850s 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 & Gs transformation in which it managed to develop soap ivory which matched the standard of the imported soap from Europe. The developer was Gambles 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 & Gs 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 1920s. 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 & Ds independence.

2) Shift in organizational structure from product grouping in 1950s to a matrix in the 1980s
In 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 & Gs organisation in Europe changed from geographic grouping in the 1950s to category management in the 1980s
The 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 & Gs 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 & Gs structure to change from geographic groupings in 1950s to category management in 1980s. Accordingly, in the beginning of 1980s 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 1980s, 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 1995


Historically, 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, lets 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 dottedline 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 WalMart. 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-productcategory 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 suboptimized 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 organizations inability to solve the classic conflicts among the functional overall cost optimization strategy, with the regional managers focused on local profit-andloss, 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 2005


In 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 Jagars 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 Lafleys 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 study


Business 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 Ss 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 Lefleys 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, lets now look at the following summary. In short here are the key elements in Lafleys 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 Lafleys attention was not this biggest loss of market capitalization, rather the missing link the companys loss of leadership confidence. In Lafleys words we started things as they are, not as we want them to be. Lafley thus understood the companys 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. Lafleys 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 Ss 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 todays turbulent and dynamic environment that organizations are working today. In

that regard P & Gs case is a good example of how the organization 2005 has been successfully managed its implementation by Lafley.

Bibliography
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EUROPEAN UNION (EU) 2010, http://europa.eu/abc/history/index_en.htrr GALBRAIHT, Jay R, Designing Organisation Structure that Actually Work, Centre for effective organisation in Marshal School of Business University of South California, CEO Webinar Matrix Organisations ppt, 2009. GALBRAIHT, Jay R, Organizing to Deliver Solutions, Centre for effective organisations, Marshal School of Business University of South California, 2002. LAWRENCE, Paul R, Kolodny, Harvey F, DAVIS, Stanley M, The Human Side of the Matrix, This abide is an adaptation of material from matrix, a fourth coming book by Davies and Lawrence to be published by Addison Wesley Publishing Co. Inc, 1997. Peters, Thomas J, Beyond the Matrix Organisation, Business Horizons, the Makinsey Quarterly, 1979.

PETERS, Thomas J. & WATERMAN, Robert H, In Search of Excellence Lessons from Americas Best-Run Companies, 1982. PISKORSKI, Mikolaj Jan & SPADINI, Alessandro L. 2007, Procter & Gamble: Organization 2005 (A), Harvard Business School Case No. 707-516