Procter & Gamble : Organization 2005 and Beyond

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Authors: Ravi Madapati,
Faculty Member,
ICMR (IBS Center for Management Research).

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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%.

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.

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.

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