Organization 2005 was P&G's structure implemented in the 1990s that focused on cost savings through job cuts and standardized global processes. However, it failed to fully resolve tensions between regional and product management. It also resulted in a risk-averse culture with little tolerance for failure. Given P&G's profit warning and falling stock price since Organization 2005, the document recommends Lafley dismantle the structure and develop a new global framework after carefully analyzing previous structures and Organization 2005's negative effects.

1. Mr. Mohammad Akbar
Group 4

2. Why did the US organization structure
shift from product groupings in the
1950s to matrix organization in 1980s?

3. • The reason for this shift in structure was because product categories were
beginning to require more differentiated functional activities but at the same
time, P&G US needed to retain functional strengths.
• Reporting directly to their business leadership and also had a dotted line
reporting relationship to their functional leadership.
• Thus 39 US category business units were created, with each category
business unit having its own sales, product development, manufacturing and
finance functions.
• As a combination of functional departments which provide a stable base for
specialized activities and a permanent location for staff members,
• Units that integrate various activities of different functional departments on
any of the following bases: project, product, geographical or systems basis.
• Advantages of flexibility, greater security and control of project or product
information and opportunities for staff development if management implement
the structure effectively

4. Why did the European organization structure shift from
geographic grouping in the 1950s to category management in
the 1980s?

5. • It resulted in innovations and brands taking unnecessarily long to
globalize.
• For instance, Pampers, was launched in US in 1961, Germany in 1973
and France not until 1978.
• In addition, functional organizations became embedded in company silos
and worse still, European corporate functions were also completely
disconnected from the US operation.
• focus on product categories and brands was fragmented by country.
• This led to unstandardized and subscale manufacturing operations in
each country which were expensive and unreliable.
• Products were tweaked unnecessarily, creating pack size and formulation
variations that added no value to maintain and reinvented the wheel with
each new product initiative.

6. Why were the two structures
integrated into a global cube
in 1990s?

7. The two main P&G structures: U.S matrix structure and
Western European category management structure were
integrated in the 1990s into a global cube due to the
several reasons. Attractive expansion opportunities in
Japan and the developing markets led P&G to question its
globalization model, particularly in anticipation of the new
challenge of appealing to more diverse consumer tastes,
cultures, preferences and income levels.

8. What are the key distinguishing
features of Organization 2005? Why
did P&G adopt this structure?

9. • A new system with mixture of interdependent organization
eliminating the old matrix system
• Focus on cost saving by laying-off 15,000 employees
estimated to achieve a cost saving of $900m after tax annually
• Formal and standardized processes globally (making P&G
more centralized)
• Leaner organization with less employees and fewer
management layers
• Some of the tasks/decisions were assigned to individuals,
previously being decided upon by the committee to reduce the
time taken.
• Three major separate organizations
⚬ Global Business Unit focused on products
⚬ Market Development Organization focused on Markets
⚬ Global Business services focused on internal business
processes

10. Reasons for Adoption
• Firstly, the matrix structure had never been symmetrical as
the function retained a high degree of de-facto control
because it determined career paths and promotion for its
employees.
• Secondly, the matrix structure had also not fully resolved
the tension between regional and product category
management.
• Thirdly, competitors were catching up quickly. P&G had
always been a first mover in supply chain consolidations
and integration with customers, but by the latter half of the
decade, over 200 vendors had opened ’embassies’ to Wal-
Mart in Bentonville.
• Couldn’t fully manage functional strategy and resource
allocation. This resulted in a culture of risk aversion and
avoidance of failure.

11. Should Lafley make a strong commitment to keeping
Organization 2005 or should he plan to dismantle the
structure?

12. • A.G. Lafley should consider dismantling the structure
after a careful analysis of the previous structures of
Proctor and Gamble and a thorough assessment of the
negative adverse effects of Organization 2005 so as to
develop a more effective global structure.
• A profit warning due to external factors such as
increased raw material costs, delays in FDA approvals
and intense competition.
• Core net earnings had dropped 18 % while sales
increased 6 % despite a 2% hit from fluctuations in
exchange rate. The stock price lost 10 % of its value.
• P&G stock finally fell to USD 57 after the
announcement and was the worst performing
component of the Dow over the previous six months.

13. In conclusion, Lafley, bearing in mind the past
performance and stiff competitive arena, should
dismantle Organization 2005 for the above
reasons as well as for the sagging employee
morale due to the substantial job reductions.