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Case study
Procter and Gamble’s organizational structure did not appropriate
for achieving profitability any more

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Abstract
You may have heard the saying, “form follows function.” In organizing terms, the form of the
organizational structure should be designed so that it can help an organization achieve its
function. Procter and Gamble’s organizational structure did not seem to be appropriate for
achieving profitability any more .The organizational structure, with its rigid rules and tightly
defined jobs and organizational units, interfered with rather than assisted designing, making, and
marketing products that customers wanted.

Introduction

The innovation machine Procter & Gamble , have adopted an organizational structure of
innovation that significantly facilitates Fast Innovation.
P & G have taken the following seven key actions in order to structure their innovation
management and organization for Fast Innovation:

1. Delegation of Decisions to Innovation Teams

Despite best intentions, if all important decisions in the innovation process are made dependent
on (top) management´s agreement a time delay will result. Therefore decisions need to be
delegated to the innovation team in order to avoid these delays and enable Fast Innovation. The
consent of (top) management is in this case only required at the milestones or gates of the
innovation process. The members of the innovation team should be available to the team with
100% of their time in order to get the innovations to market as quickly as possible.

2. Integration of R&D into the Business Units

The organizational integration of the majority of R&D into the business units makes innovation
management more effective. It fosters the collaboration with the other departments of the
business unit and the orientation towards the customer (customer pull) in lieu of an exclusive
focus on the technology (technology push). Furthermore it improves the preconditions for Fast
Innovation.

3. Co-Location of Teams and Departments

Although we are living in a time of powerful electronic communication, the organization
structure of co-located teams and co-located divisional departments maintains at least the same
relevance as formerly. Co-Location fosters the integration of teams and departments and a free-
flowing communication. By locating all innovation team members and relevant departments of a
division in the same place, companies can make sure that everybody hears the same thing at the
samte time. This way information does not get distorted. Spontaneous communication and
exchange of ideas are facilitated. Co-location raises the probability that in the management of an
innovation the necessities of the market-place and of the technology are simultaneously taken
into consideration, and that the innovation gets to market faster.

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Procter & Gamble is a fervent supporter of Fast Innovation and of organizing for innovation
via co-location.

4. Central Innovation Teams

The management of disruptive innovations, and the management of innovations that will result in
a new category or a new market or that will cut across multiple categories often necessitates the
use of central innovation teams that are not assigned to individual divisions. Such a central
innovation team then reports to a manager at the corporate headquarter. As an alternative
organizational structure of innovation management central innovation teams are established at
the divisional level, and they will report to the head of the division, and not to the head of an
individual category, product group or brand. Such central teams are mainly utilized in cases
when the motivation and resources of individual divisions, categories, product groups or brands
are insufficient in order to get the respective innovation to market with maximum effort and at
maximum speed despite the daily pressure and distraction from the established operation. In such
cases an organizational structure of innovation management which allocates the responsibility
for getting the innovation project off the ground to a central innovation team and thus enables
Fast Innovation is superior to a decentralized project organization.

5. Central Innovation Funds

The innovation projects which later will be led by central innovation teams in most cases need a
special budget to get funded because the divisions shy away from making funds available given
the typically high risk of such projects. Without a central innovation fund these innovations
would not be launched fast, if they would get to market at all. Fast Innovation would be
impossible.
P&G has established the P&G Corporate Innovation Fund (CIF) for such purposes which
provides financing for the development of disruptive innovations and of new businesses. .
External Interface for Open Innovation

Open Innovation is a core strategy of innovation management in order to get innovations to

market more rapidly and enable Fast Innovation. In order to execute Open Innovation and to
channel external solutions and ideas into the company, innovation management needs an
effective external interface.
For this purpose P&G has established its External Business Development Organisation and
its Connect & Develop Organization. The Mission of these departments is to realize the
innovation potential, which slumbers in the outside world, via the development of external
networks..

7. Merger & Acquisition Department

A special organizational structure of managing for Fast Innovation via Open Innovation is the
M&A department which is involved in the acquisition of innovative companies. Via acquisitions
an enterprise can signficantly strengthen its innovation management, and can be in the market-
place with innovations much faster.

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Company Introduction

Procter & Gamble started its operations in the country in 1991 is

marketing a range of consumer goods products including 13 brands comprising shampoos,
detergents, soaps, baby care, feminine protection, Vicks and snacks products. The company,
which serves over 5 billion consumers in 140 countries worldwide and markets more than 250
brands, produces bar soaps and repacks bulk shampoos and Pampers brand of diapers into
sachets and smaller packs respectively at its Hub plant near Karachi.

Compared to its global operations, which employ over 106,000 persons worldwide and annual
global sales of $ 40 million, P&G's Pakistan operation is relatively small and yet it has been
successful to improve the lives of consumers here in Pakistan, like elsewhere in the world. It has
served over 140 million consumers in Pakistan, which equals the entire population of the country
since its operations 11 years ago.

The company has made an investment of $ 6 million to triple the production capacity of its plant
at Hub. "This is aimed at increasing the volume of the exports of our products, the quantity of
which at present remains small from our plant in Pakistan." The company is exporting bar soaps
manufactured here in Pakistan to Saudi Arabia, Yemen, Syria and Afghanistan where it is in
great demand due to its high quality and competitive price.

Though P&G make over 250 brands worldwide not all the products are available in any one
single market due primarily to strategic positioning of a product depending on the realities of a
particular market. "For instance," Lawrence said, "Pakistani bar soap market is much bigger than
Germany as people there prefer to use shower gel instead of bar soaps."

P&G spend around $ 2 billion annually on research and its over 106,000 strong worldwide
workforce include some 8,600 scientists including 1,200 PhDs. In addition it has some 27,000
patents which can be developed if and when necessitated by demand at any point in time. This
dedication to R&D since its inception in 1937 in Cincinatti, Ohio, USA has helped P&G to
develop products which make every day life of the people better all across the world. It helped it
develop Tide, the world's first heavy-duty synthetic detergent, and also helped create the
disposable diaper business when it introduced Pampers.

Almost all the products marketed by P&G here in Pakistan have been successful to become a
household name: Head & Shoulder and Pantene shampoo, Ariel detergent, Pampers diapers, Flex
hair conditioner, Vicks menthol drops and Vaporub, Always feminine protection napkins, Oil of
Ole, Clairol skin care, Safeguard and Camay bar soaps. P&G's stress on R&D has helped it
develop products which enjoy inherent edge over the competitors.

"For instance, Ariel, the market leader in Pakistan which is specially designed to prove what a
detergent can do, contain between 30-40 ingredients half of whom are carefully developed to

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clean the clothes without destroying the fabric. Similarly, P&G uses patented ingredients in the
manufacture of Pantene while Head and Shoulder contain patented anti-dandruff ingredients. Our
ability to invent the right product for the right person for the right job gives us that edge. Our
another edge is that we feel that we work for the consumers, particularly the housewives who
comprise the majority of our consumers."

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Case study

Problem

It is almost unimaginable that Procter and Gamble (P&G), the company that introduced Tide in
1946 and disposable diapers (Pampers) in 1961, as well as a vast variety of consumer products,
would be in financial difficulty. By 2000 revenues were not increasing but costs were, driving
down profit margins. In turn, the price of the stock fell 43% in a year.

When Jager became CEO, he began immediately to try to change the organization’s culture,
which was very resistant to new ideas and change.

Rather, the culture was rule bound, and everyone stayed in his or her own department and job.
There was little cooperation and communication from person to person, job to job, and
department to department. Jager used a very aggressive approach to try to get the people to
change and to try to get new products developed because new products and/or new uses for
existing products were necessary in the very slow-growing markets of household products.

Solution

Meeting The Challenge

Every Sunday evening, A. G. Lafley, CEO of Procter and Gamble (P&G), meets with the
manager of human resources to review the performance of the top 200 managers. The focus is on
how well the managers are delivering what customers want. Lafley made important decisions to
stop P&G’s slide. To regain efficiency, he cut the workforce and eliminated some unprofitable
products. He directed that pricing be studied and changed where necessary to fit the competitive
situation. He replaced over half of the 30 top managers. He set out to slowly change the parts of
the P&G culture that resisted change and did not allow people and departments to communicate
and cooperate with each other. Lafley intended to focus the managers on making and selling
products that customers wanted and that were related to the core competencies of P&G. The tight
rules and jobs made inflexible by the organizational culture subsided as Lafley began to hold
managers accountable for keeping products in line with consumer preferences and essentially
made the man-agers’ jobs much more flexible so that they could cooperate to be focused on the
wants of customers and on taking advantage of the company’s core competencies.
The main changes that made jobs more flexible, enhanced cooperation, and held managers
accountable are the following:

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• A quarterly meeting of the top-level people fromthe 15 biggest brands was initiated so that
ideas can be shared across products and divisions.

• Internal trade shows were started so that managers could learn from each other across the
Corporation.

• The five division managers were moved from the corporate headquarters’ 11th floor to the
floors on which their managers were located.

• The walls were removed between the senior managers; including Lafley’s whose desk is next to
the managers with whom he interacts most.

• The table in the conference room where the top 12 managers meet every Monday morning is
now round rather than square.

• Lafley started conducting “innovation reviews” in which he evaluates how well managers share
ideas.

• Managers who do not share ideas are not promoted. One example of many successful products
that were developed with the much more flexible jobs in P&G is Mr. Clean Auto Dry, a product
that attaches to the end of a garden hose to wash a car and help it to dry without water spots. It
came about after cooperation among people from R&D in the home-care division, the Pur water-
purification unit, and the Cascade dishwasher detergent department.

Since Lafley became CEO, the stock price of P&G has more than doubled. Almost all the major
brands have increased market share. Core volume, revenue from products that were part of
P&G’s existing business, is up about 12% per year. Although work is still to be done, as there
always is, the more flexible organization structure, culture, and jobs helped P&G get back
to understanding what its customers want and help the company to deliver in a way that takes
advantage of core competencies and results in profits.

Summary
In 2003, Lafley continued his efforts to make P&G more adaptable to the dynamic changes in
business environment. He challenged P&G’s traditional perspective that all its products should
be produced in-house. In April 2003, Lafley started outsourcing the manufacturing of bar soaps
(including P&G’s longest existing brand, Ivory) to a Canadian manufacturer. In May 2003, IT
operations were outsourced from HP. Since Lafley became CEO, P&G’s outsourcing contract
went up from 10% to 20%. Lafley continued to review P&G’s businesses and new investments
with the aim of achieving sharper focus on its core businesses, cost competitiveness and
improved productivity

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Refrences
http://slidesandnotes.blogspot.com/2011/02/corporate-restructuring-exercises-by.html
http://www.google.com.pk/search?q=procter+and+gamble+organizational+structure&hl=en&ie=
UTF-8&prmd=imvns&ei=e9LPTt2CI4GK4gTNp-Vp&start=20&sa=N
http://www.scribd.com/
http://www.notes123.com/
http://www.websitenotes.com/
https://addons.mozilla.org/en-US/firefox/addon/net-notes/
http://www.mystickies.com/