Procter and Gamble's Organization 2005 strategy execution analysis

Proctor & Gamble

Analysis of Organization 2005

Using Thompson's Eight Managerial Tasks for Strategy Execution

The intent of this paper is to analyze Proctor & Gambles' approach to implementing one of the largest strategic initiatives in their history, Organization 2005. In analyzing this strategic initiative, Thompsons' eight managerial tasks for strategy execution are used as the framework for this analysis. These specific tasks including allocating resources, building a capable organization, establishing strategy-supportive policies and exercising strategic leadership in addition to installing support systems. The defining and instituting of best practices for continuous improvement, which also leads to the shaping corporate culture to fit strategy, and finally creating a reinforcing culture by tying rewards to achievements of key strategic targets is the framework this paper will analyze Organization 2005 using. The culmination of these eight managerial tasks for strategy execution is the development of a strategy implementer's action agenda. For the agenda to be achievable there needs to be a high level of synchronization across the entire organization, a task that the CEO and senior managers working on Organization 2005 found difficult to complete. What emerges from a thorough analysis of Organization 2005 is a paradoxical and often contradicting set of requirements for this massive reorganization, looking to the past and the significant gains from standardization on the one hand, yet needing to create a high level of customization of R&D, marketing, distribution, and global brand positioning. To position Organization 2005 as a generational shift in strategy is to greatly simplify it; what is occurring with Organization 2005 is a global realignment of processes, product categories, and geographical market orientation. What follows is an analysis across each of the eight managerial tasks of strategy execution. P&G had found success in the past in standardizing processes, and those previous major successes have served as the foundation for their matrix-based organizational successes in the past. Yet in the context of the timeframe of the case study, P&G is at a crossroad of looking at the previously proven value of standardization relative to market requirements that require high levels of customization, and in that inherent conflict of past successes to future market needs, P&G finds itself in an organization quagmire as Organization 2005 is introduced and initially implemented.

Allocating Resources

The traditional model of allocating marketing resources within P&G had followed the previously highly regimented geography, product, and function process workflow and resulting hierarchy. Overarching this hierarchy however is the supremacy of Research & Development investments and expenditures which has dominated the organizational culture for decades. Organization 2005 proposes an entirely new paradigm of resource allocation, focusing on the intersection of product/brand categories, geographies, and business processes. Visualizing a Venn diagram of these three areas of product/brand categories, geographies, and business processes inevitably leads to a very process-centric strategy as it relates to the development of the Organization 2005 planning framework.

As Durk Jager has often defined in his vision statements of Organization 2005 that new brands and new markets will be the primary focus of the development priority, which further indicates the primacy of research and development in P&G. In fact Mr. Jager has also been very vocal and highly involved in the development of entirely new categories of products (Piskorski & Spadini 2006).

In analyzing the Organization 2005 initiative from the standpoint of allocating resources, the following findings provide insight into how P&G planned to re-define resource allocations based on the precepts of their planned strategic change:

Purely following process standardization is no longer a viable strategy and this is redefining resource allocations.

P&G senior management including CEO Jager had, through their experiences with matrix management during 1987-1995, and the Strengthening Global Effectiveness (SGE) restructuring program completed in 1993, had seen process standardization become the most effective strategy for re-defining how resources will be allocated. Process standardization had been a proven cost reduction and resource allocation strategy in P&G, yet Organization 2005 presents an entirely different set of market conditions and as a result, organizational constraints senior management must deal with.

Organization 2005 allocates resources into the triad architecture of Market Development Organization (MDO), Global Business Units (GBU) and Global Business Services (GBS) with the dual objectives of localizing marketing strategies while at the same time capturing business best practices. CEO Durk Jagers' roadmap for Organization 2005 allocates resources heavily into the areas of process standardization, both from a business and an it process standpoint. Both GBU and GBS are specifically focused on the process standardization aspects of the Organization 2005, with MDO leading the localization of marketing. This dichotomy of resource allocation is one of the more difficult conflicts that P&Gs' senior management had to contend with in Organization 2005, as process standardization and supply chain optimization was at odds with localized and highly targeted marketing campaigns.

Information Technologies investments are increasingly becoming a major priority for resource allocation during the Organization 2005 initiative.

Building a Capable Organization

Clearly the main consideration for Organization 2005 is the redefining of a new organizational structure that capitalizes on the past proven successes P&G has had with process standardization on the one hand, and a much more focus go-to-market strategy, localized to specific markets through the use of MDOs on the other. What the senior management of P&G quickly realizes however is that in the new organizational structure of Organization 2005 is one that contradicts itself in the missions of each organizational unit. At its most fundamental level, Organization 2005 has failed to resolve the most critical conflict in P&G at the time of this significant re-organization and initiative, and that are the trade-offs of process standardization and best practices vs. The development of more autonomous market development processes as illustrated by the development of the Market Development Organization (MDO). The following are key challenges for P&G in building a capable organization using Organization 2005 as the framework:

An inherent conflict exists between process standardization and localized go-to-market strategies due to a lack of incentives consistency. GBUs are rewarded on profit, while the MDO is rewarded for sales growth, while GBS is rewarded for standardizing processes (Piskorski & Spadini, 2006). With GBS given the critical roles of product development, brand design, business strategy and new business development, clearly global process standardization dominates the majority of organizational structure decisions. In fact P&G, in reporting the anticipated benefits of Organization 2005, publicly states they expect a 45% of all headcount reductions would be from supply chain consolidations, and 25% from the exploitation of scale benefits arising from more standardized business processes (McQulling, 2000). P&G senior management also expect to see a reduction in management layers from 13 to 7, further driven by process standardization (McQulling, 2000).

Replacing the traditional matrix organizational structure with the triad of brand/product category, business process and geography as defined by Organization 2005 creates organizational imbalance. As was the case when P&G relied on a matrix-based organizational structure, marketing is often displaced by process standardization, confusion over its role historically in the organizational structure, and the preeminence of R&D spending and long-term investment. Organization 2005 creates even more confusion as members of GBS have no clear direction if they are to re-architect major business processes or execute key marketing strategies.

Organization 2005 from an organizational perspective creates confusion within the existing P&G matrix-driven culture by defining divisions that have potentially opposing missions in addition to divergent measures of performance. Underscoring all this is the new religion of P&G, which is process standardization. The lack of clarity in roles within GBS for previous brand and marketing managers, the adherence to process standardization in the past as the panacea that P&G had successfully used in redefining their organizational directions and strategies and its conflicting role with MDO provide insight into why financial performance for P&G after Organization 2005 was initiated had been faltering. The temptation to move back into a purely process standardization strategy is where P&G reverts to during the last phases of Organization 2005 to alleviate the pain of mass organizational change.

Exercising Strategic Leadership

Durk Jagers' vision is to capitalize on the strengths of P&G to quickly develop new products for new markets and then relying on a triad-based organizational structure, launch new products while achieving business process standardization. A complex vision, Jager sees the synchronization of each organizational unit (GBS, GBU, and MDO) as delivering on business process management (BPM) and business process reengineering (BPR) while at the same time scaling global programs to local markets. Looking for standardization in business processes while at the same time looking for agility in the market is a conflict-intensive strategy, yet one if executed correctly could lead to long-term significant competitive advantage.

What Jager does not address however from a strategic leadership standpoint are the most critical aspects of where P&G is suffering the most, and that is in increasing the supply chain efficiency, including order management, supplier collaboration, and the need for P&G to become more adept at interpreting customer demand in its many markets. The entire focus of Organization 2005 on a customer-to-innovation continuum is solidly on innovation alone, completely disregarding how to grow existing customer sales.

What's missing in the strategic leadership standpoint is the development of a Demand Driven Supply Network (DDSN) as defined by Asgekar, Fontanella and Swanton (2004). The DDSN model looks to define how transparent and agile supply chains are in response to customer demands. Ironically one of the most critical of business processes that could benefit from greater standardization, which is supply chain-based order management, is not specifically addressed by Jager or the management team. The ability to turn P&G into a lean manufacturing enterprise is not part of the Organization 2005 vision either, a serious shortcoming and ironic given the focus on high levels of process standardization.

Installing Support Systems

As Organization 2005s' success is in large part dependent on the integration between GBU and MDO components to enable business development functions and drive initiatives that lead to goals being attained in the areas of customers, geographic segments, functional areas and coordinate with corporate functions, the role of support systems is critical. Compounding this is the need for integrating literally tens of thousands of process workflows with Global Business Services, who in turn manage the process standardization and the development of best practices for the entire company. Support systems then in the context of Organization 2005 are both processes that serve to integrate GBU and MDO roles, and then synchronize those roles with GBS. Support systems from a process perspective can workflows between division then and don't necessarily entirely rely on information technologies. Clearly the biggest challenge for P&G from a systemic perspective is the integration and definition of process workflows across GBU, MDO and GBS.

Systems support from an it standpoint is also prevalent through the Organization 2005 initiative as well. P&G for example is lagging in certain areas during this time period. it-based initiatives needed to support Organization 2005 are defined as follows:

Enabling suppliers electronically, including supply chain collaboration and enabling supply chain integration with mass merchandisers including Wal-Mart and others is a major emerging competitive strategy for P&G using Organization 2005. Resource allocations for the development of Private Trading Exchanges (PTX) (Columbus 2001) and the completion of SAP installations also are defining resource allocations during the organization 2005. The SAP installation promises to provide product line forecasting functionality for Organization 2005, which is a critical reporting requirement for the new organizational structure. To accomplish this level of global visibility however, Global Business Services (GBS) will not only have to contend with an entirely new role in the company it must also consolidate 70% of the company's it systems. Resource allocation for supply chain integration with suppliers and mass merchandisers, development of Private Trading Exchanges (PTX) and the completion of an SAP ERP system that will lead to significant systems consolidation all are defining resource allocations from an it standpoint in organization 2005.

The structure of the PTX was first defined by AMR Research (2001) in the report, Building a Case for the Private Trading Exchange.

This landmark report was actually setting the stage for the creation of Service Oriented Architectures, as the many integration points between buyers, suppliers, and customers. Figure 1 shows an example of the diagram of what a PTX consists of. This is the beginning of the actual progression of it architectures to SOAs. Proctor & Gamble, according to AMR Research (2001) had begun pioneering the development of PTX market trading architectures as a result of the policy definitions in the latter stages of Organization 2005.

Figure 1: Structure of the Private Trading Exchange as pioneered by Proctor & Gamble

Table 1 provides insight into the maturity of the PTX architecture that P&G has defined and begun to use during Organization 2005.

Table 1: P&G Private Trading Exchange Maturity

Market

Hierarchy

Maturity Level of P&G Using PTX Architectures to Define Organization 2005

Where Org2005 is during the case study time period

Mass merchandisers including Wal-Mart are defining this type of PTX during the Org 2005 timeframe

Low; this is the area of best practices as it relates to P&G at the time of Org 2005

Supplier Preferences or Choices

Independent

Dependent

Interdependent

Amount of Commitment Among the Parties

Medium to High

Degrees of Flexibility

Means of Communication

Prices

Routines

Relational

Method of Conflict Resolution

Haggling and Negotiating - resort to courts and lawyers for resolutions

Administrative Control through hierarchical authority

Norm of reciprocity and trust - reputational context

Tone or Climate

Precision and suspicion

Formal and bureaucratic

Open-ended, more democratic and focused on mutual benefits

Transactions

Fluid and market by velocity

Controlled and often monitored closely

More reciprocal in nature; focused on growing relationships

Trust

Medium - Low

Medium - High

P&Gs' continual pursuit of process standardization is also directly influencing the development of their it strategies relating to Organization 2005. Targeting a 70% reduction in systems while at the same time ramping up an entirely new ERP system and also pursuing a Private Trading Exchange (PTX) architecture for supplier enablement also underscore the need for a very high level of process integration both between systems and clearly between divisions.

Instituting Best Practices for Continuous Improvement

For P&G and their intensely focused strategy on process standardization, the company cannot lose focus on the integration of those processes across business units, between and with suppliers and buyers, and also with the rapidly evolving distribution channels it sells into. The extent to which there is integration, both for a process and system standpoint, between divisions of Organization 2005 is the extent to which higher levels of financial performance will be achieved. One of the major reasons that process standardization is seen as such a panacea within P&G, when placed into the context of a Process Maturity Model, shown in Figure 2, is that the company has for years worked to attain a collaborative and even orchestrating level of performance through standardization, yet viewed these strategies more from a cost reduction, and less from a process enabling standpoint.

Figure 2: Process Maturity Model

The higher the level of integration, the greater the standardization of processes, the greater the Return on Investment (ROI), and ultimately the more successful a collaborative strategy is. In fact P&G has been experiencing this for years in their choice of standardization over specialization. Standardize a process enough, and it will become orchestrated across all departments as the process steps become defined ot the lowest common element. This makes for more processes, yet they are highly synchronized and eventually lead to greater levels of visibility throughout an organization. For P&G, this is the goal of Organization 2005.

Shaping Corporate Culture to Fit Strategy

The vision of having a highly synchronized organizational structure that would finally delineate a precise role of marketing through the use of the MDO, place process management and ownership in GBS and have GBU designated as having control over global strategy execution required a corresponding change in the corporate culture. Changing the corporate culture to fit the Organization 2005 strategy required significant re-assignments of brand and marketing managers, many into the GBU and MDO divisions. While P&Gs' execution of Organization 2005 did in fact change the organizational culture through the complete re-alignment of centralized resources globally, the initiative did not succeed from the standpoint of changing culture. Culturally there were still barriers to accomplishing the objectives of Organization 2005, primarily coming for a resistance to change, a resistance to changing how political equity and power are distributed in P&G, and a resistance to how financial reporting is completed as well. Ultimately Organization 2005 did not specifically change the culture in the short-term; rather it illustrated to the comp[any that despite the believe in process standardization being a panacea, it was extremely difficult for the company to achieve. Further, the need for integration across the three operating divisions needed more work and was further prrof that on a cultural level, Organization 2005 did not accomplish its intended result.

Typing Rewards to Achievements of Key Strategic Targets

Durk Jager, CEO of P&G at the time of Organization 2005 envisioned a more reward-driven culture within the company, and his structuring of rewards for achievement specifically reflected his preference for performance over conformity and the status quo.

Organization 2005 introduced radical changes in compensation structures, hoping to fuel intuitive and personal responsibility. Clearly from an HR perspective Organization 2005 is structured to incent more employees to take personal responsibility for their own and their departments' performance. P&G was careful to retain their long-standing promote-from-within policy, with the intent of holding into top performers, many of which had been lured away by dotcom start-ups during the Organization 2005 time period. In response to the drain of top talent to Internet start-ups, P&G increases stock option plans that had been limited to 9,000 employees to 100,000 employees, and also increased the percentage of income that upper-level executives could earn from 20% (10% above or below base) to 80% (40% above or below base) of base pay.

Summary

In conclusion, Organization 2005 illustrates the paradox of a company wanting to becoming process-centric, pursue best practices, and create a highly agile organizational structure capable of competing at the product line level globally. A complex vision to bring into reality, Organization 2005 did not first define the process integration points between its three major divisions (GBU, GBS and MDO) and also underestimated the amount of internal process standardization that would be necessary for the company to succeed. In lacking process maturity in manufacturing consolidation, P&G found standardization as a panacea for their organizational challenges. On top of the triad architecture of brand/category management, business process and geography that Organization 2005 looked to capitalize on with new products and new technologies came the realization that agility would be harder than ever achieve as process simplification would dominate. Second, attempts to rejuvenate and focus the culture as a result of Organization 2005 were falling flat; in the haste to create the triad there was little employee ownership as well. The bottom line is that the structure of Organization 2005 was inherently in conflict with itself, and eventually process standardization would dominate.