P&G RESTRUCTURING PROGRAM

The objective of the restructuring program P&G announced in 1998

was to achieve $900 million in annual after-tax cost savings by 2004 by
voluntary separation of 15 thousand employees, of with 10.5 overseas, and
eliminating six management layers, reducing the total from 13 to 7, at a
cost of &1.9 billion over five years. The plan also called for the dismantling
of the global matrix structure introduced in 1995 and replacing it with an
amalgam of independent organizations: Global Business Units with primary
responsibility for products, Marked Development Organizations with primary
responsibility for markets, and a Global Business Services unit responsible
for managing internal business processes.

This new organization structure is now known as the front-back hybrid

matrix according to Galbraith (2009, p. 115-127). This structure has two
parallel multifunctional line organizations: one focused on the customer-
markets designated the front end, and a second focused on products
designated the back end. The objective is to achieve simultaneously the
customer focus and responsiveness and the global-scale economies. To
effectively achieve these conflicting objectives the management challenge is
to effectively link and balance the customer-market front end with the
product back end in a matrix. The corporate functions form an additional
matrix across the two parallel organizations.
Restructuring program

The implementation of the ambitious restructuring program started

with the installation of Durk Jager as the new CEO by the P&G board
st
January 1 of 1999 in substitution of John E. Pepper who had been
Chairman and CEO from 1995 to 1998. Pepper who managed the company
during the years that the matrix got into trouble and the planning of the
restructuring program with Jager, the COO, stayed on as Chairman up to
2002. He announced his departure from P&G were started working in 1963
in the 1999 annual report (p. 10-11) but stayed on to 2002 because of the
implementation problems of the restructuring program, the sudden
departure of Jager, and his substitution by Alan G. Leffley as CEO in June
2000. When he left the company, Lefley became Chairman and CEO. The PG
historical timeline from the announcement of the restructuring program in
1998, the success of the new matrix organization in 2005, and the
continuing success up to 2007 is shown in Figure 8.

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Jager in the P&G 1999 Annual Report (p. 3-5) explained his vision:

The first key to faster growth, greater business vitality, is increasing

the pace of innovation at P&G. This has been true for us in the past and is
just as true today. Our Innovation Leadership Team, which I chair, is
fueling our growth in new product categories. It funds promising ideas that
fall outside our businesses, from seed-level investment all the way through
test market. Previously, these kinds of ideas would often go undeveloped. 
Today, we have tapped only a portion of our innovation capacity. With
Organization 2005, we are making changes to unleash this capability and
capitalize on the new marketplace in which we compete.  New Global
Business Units (GBUs) leverage our scale. We will develop products and
plans globally, to better utilize our technology and get products to the world
faster. Focus on new business will increase our innovative output. Each GBU
has a dedicated New Business Development unit to create new brands in
related categories.

The vision Jager had is typical of an entrepreneurial manager. These

managers according to Degen (2009, p. 359-366) are excellent in producing
the needed change in companies that became bogged down in an
administrative stalemate like apparently P&G was. He explains that these
managers have the vision and the courage to make the necessary changes.
However, they never stop to implement these changes and tend to continue
making changes. They tend to have no patience for the detail required to
execute the new strategy that they created. When this happens, they have
to be substituted by administrative managers that are god implementers of
changes. These managers are good executers but not entrepreneurial
enough to make them. This seems to have been the case of P&G, where
Jager made the entrepreneurial changes, created high expectation of
immediate unrealistic results for such an ambitious restructuring program,
and was substituted by Alan G. Lafley an excellent administrator and
executer.

To better understand the personalities of Jager and Lafley and the

context we reproduce some quotes from the press at the time. Before Jager
became the CEO McLean wrote: Is P&G all washed up? (1997, p. 184). He
cites an analyst that pointed out that the sales per share of P&G, Clorox,
Colgate-Palmolive, and Kimberley-Clark that since the second quarter of
1993 have slipped more than 20 percent. What has driven the earnings
gains are a number of onetime factors like sharply falling interest costs,
slow growth in depreciation expenses, and lower effective tax rates. A year
after Jager took over Brooker wrote: "You have to create a revolution," he
(Jager) declares coming into the job. Facing six consecutive quarters of
stagnant sales, Jager vowed to snap the 163-year-old $38 billion behemoth
out of its stupor. He would whip bastions of stogy Proctoids into a sleek
fighting force of nimble, entrepreneurial freethinkers and bigger risk takers.
"Everybody is always worried about taking risks, because nobody likes to
fail," he avowed at the time. "But you have to celebrate failure." For a
company with a long history of playing it safe, this promised to be a real
imbroglio. One year later Jager's revolution is in full swing. The company
has overhauled its reporting lines. It started up an internet beauty site in
Francisco. It bought a multibillion-dollar business, launched three new
big product lines, and will introduce another five this year. All this from a
place that has not delivered a blockbuster product since the introduction of
Pampers in 1961. A new P&G, for sure, is emerging. However, the question
is, is it improving?  Jager's one-year report card is in.  Jager's aggressive
plans have hit earnings hard. This quarter, net income is down 1%. By
contrast, a year ago it grew 11%.  the year 2000 will determine whether
Jager is the Mr. Clean that P&G so desperately needs (2000, p. 44-45). In
June of 2000, Jager resigned and Lafley took over.

Little more than two years after Lafley took over as CEO, Brooker &
Schlosser wrote: Lafley's predecessor, Jager, had been brought in - like
Lafley - for a rescue mission.  Jager had an aggressive plan: Launch a
slew of new products in hopes of finding the next big billion-dollar product,
like Tide or Pampers. Trouble was, he did not find it.  At the same time,
Jagers other ambitious initiatives backfired.  As each initiative failed, the
troops at P&G began to feel rudderless.  When he came in, Lafley had to
move fast.  As he saw it, P&G did not need a radical makeover. What it
needed was, well, to sell more Tide. In its rush for new products, P&G had
neglected its older brands like Tide and Pampers. However, those billion-
dollar blockbusters are, and have always been, the company's bread and
butter.  Therefore, Lafley refocused the company on its big brands.  If
the plan was shocking in anything, it was its simplicity. Everyone down the
chain of command could understand it: Selling more Tide is less
complicated than trying to invent the new Tide.  As he got P&G's mighty
brands on track, Lafley also had to get expenses in line. Under Jager costs
had gotten out of control,  To cut expenses Lafley began a massive round
of layoffs eliminating some 9,600 jobs. He shut down skunk works projects
and pulled flopped launches He sold off  units, which were not strategic
fits.  For a traditional dowry grande dame of a company, with 1002,000
employees in 80 countries, there was surprisingly little resistance to the
transformation. Some credit Lafley's calm, unflappable focus, a directness
that comes without an iota of bluster. Lafley credits the employees.  he
says. "In crisis, people accept change faster."  Watching A. G. Lafley at
work is a deceptively unimpressive sight. As far as CEOs go, it is fair to say
that the 55-year-old New Hampshire native does not have much dazzle or
flair. . Lafley has managed to pull off what neither his two predecessors
could - turn around the global behemoth. In addition, did this in the midst
of a world economic slowdown (2002, p. 88).

implementation of the complex restructuring program required

clear execution skills to manage the cost reduction objective, the radical
change the organization structure, the voluntary separation of 15 thousand
employees, the reduction from 13 to 7 management levels, the redesign of
the internal processes and systems to the new structure and so on. Such a
massive restructuring program normally creates all sorts of problems as
middle management first resist and then adapts to the new structure. For
this reason, results in the first years tend to suffer and the benefits only
start appearing after some time as show for the P&G case in Figure 9 and
10.

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Jager, the entrepreneur, launched the restructuring program, was over
optimistic, overpromised, and created the crisis. Lafley, the administrator,
calmed the crisis, did not overpromise, focused the organization, and
implemented the needed changes. The resulting new P&G organization, the
front-back hybrid matrix structure is today an example of a successful
organization design.

THE P&G FRONT-BACK HYBRID MATRIX ORGANIZATION

The key attribute of the matrix structure is the balance of power

between the different dimensions of the company. One of the most direct
ways to enhance the power of a dimension is to make it report higher up in
the hierarchy. The business units in the P&G organization established in
1995, the product-category country units, reported to regional managers,
who then reported to the CEO. In the new Organization 2005 two types of
interdependent organization were created both reporting directly to the
CEO, the customer focused or front-end organization called Market
Development Organizations (MDOs), and the product-categories focused or
back end business units called Global Business Units (GBUs). In order to
give support to these two organizations the Global Business Services (GBS)
organization was created focused on reducing costs. The basic corporate
functions were kept centralized. Both the GBS and the corporate functions
reported directly to the CEO.

The MDOs were led by a president who reported directly to the CEO
were responsible and compensated for sales growth. Their mission was to
focus on customer needs and adapt the company's global marketing and
sales strategies and programs to these local needs. Each of the seven MBOs
- North America, Western Europe, Central Europe (including Middle East and Africa), Latin
America, Northeast Asia, China, and Asia (including Australia and India) - had its own consumer
market research, sales, in- store presence, and other support functions.
 The GBUs operated autonomously each led by a president that

reported directly to the CEO and was responsible for profit and loss of a
product-category. Each of the seven GBUs - fabric and home care,
healthcare, beauty care, snacks and beverages, tissue and towels, feminine
protection, and baby care - had its own marketing, market research, R&D,
manufacturing, purchasing, distribution and other support functions. The
GBUs also managed their own new business development functions. To
ensure that the GBUs shared technological innovations with each other, a
technology council was created where all were represented.

The GBS led by a vice president that reported directly to the CEO and
was responsible for standardizing, consolidating, streamlining, and
ultimately strengthening business processes and IT platforms across GBUs
and MDOs. GBS was organized into a cost center with three "follow-the-sun"
service centers - Costa Rica, England, and the Philippines - to perform
business-process work 24 hours a day.