MANAGING CULTURAL CHANGES

Presentation Flow

• About P&G• P&G + Gillette• About “Organization 2005”• Overview• Why: cultural change• Managing Stretch, Innovation & Speed• P&G’s Financial Highlights• Conclusion

Cultural change in P&G

3

• $67.9 billion sales*• 135,000 employees• More than 170 manufacturing

facilities in more than 40 countries• More than 20 R&D centers in

10 countries• Unique organization structure

About P&GAt a glance

P&G + Gillette

Began operations as one company October 1, 2005•Increases P&G’s position in faster-growing, higher-margin, more asset-efficient businesses•Combines each company’s unique consumer/shopper understanding to strengthen retailer relationships•Common vision of supply network as source of value creates opportunity to share and accelerate best practices

The world’s largest consumer products company

P&G + Gillette

•22 brands with sales of $1 billion or more•14 with sales between $500 million and $1 billion

= Expanded innovation platforms and pipeline

Even stronger together

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Two Moments of TruthWhen she chooses and when she uses

About P&GTwo moments of truth

When she chooses When she uses

Proctor and Gamble’s “Organization 2005” In 2003 Procter & Gamble was the world’s largest household

and personal products company, with $43.4 billion in net revenues. It had almost 7,500 scientists working in 20 technical centers on four continents.

In 1999, P&G’s CEO Durk Jager had initiated a major reorganization, “Organization 2005,” intended to accelerate innovation.

New product development would be more decentralized, conducted in both U.S and foreign market.

Products would be tested in U.S. and foreign markets simultaneously.

Regional business units were replaced with global business units based on product lines.

Business services would be centralized.

Mission and objectives of “Organization 2005”

The mission to take P&G’s global turnover from $38 billion to 70 billion

The objective was to raise profitability by change the work culture

The change drivers identified were the attributes of Stretch, Innovation, Speed(SIS)

• Structural changes to be include; Four global business units based on product lines Eight market development organization based on regionGlobal business service centre

Cultural Change – a Sustained Effort

• Establishing the culture of innovation requires a broad and sustained effort.

• Though changing a company's culture is never easy, with the right leadership, cultures can be reshaped and amazing results can accrue.

• Establishing an attitude of relentless growth is what enables an organization and its people to achieve their goals.

• the primary challenge facing market leaders is to institutionalize an environment where every decision and direction can be constantly and safely reassessed."

WHY: NEED OF STRUCTURAL CHANGE

• A firm’s size and structure will impact its rate and likelihood of innovation.

• Some structures may foster creativity and experimentation; others may enhance efficiency and coherence across the firm’s development activities.

• There may also be structures that enable both simultaneously.

• Some structural issues are even more significant for the multinational firm.

STRETCH

Size and Structural Dimensions of the Firm

• Size: Is Bigger Better?

In 1940s, Schumpeter argued that large firms would be more effective innovators

• Better able to obtain financing• Better able to spread costs of R&D over large volume

Large size may also enable…

• Greater economies of scale and learning effects• Taking on large scale or risky projects

Cont…

However, large firms might also be disadvantaged at innovation because…

• R&D efficiency might decrease due to loss of managerial control

• Large firms have more bureaucratic inertia• More strategic commitments tie firm to current technologies

Small firms often considered more flexible and entrepreneurial

Many big firms have found ways of “feeling small”

• Break overall firm into several subunits• Can utilize different culture and controls in different units

Cont…

Structural Dimensions of the FirmFormalization: The degree to which the firm utilizes rules and procedures to structure

the

behavior of employees.

• Can substitute for managerial oversight, but can also make firm rigid.

Standardization: The degree to which activities are performed in a uniform manner.

Facilitates smooth and reliable outcomes, but can stifle innovation.

Centralization: The degree to which decision-making authority is kept at top

levels of the firm OR the degree to which activities are performed at a central

location.

Cont…

• Centralized authority ensures projects match firm-wide objectives, and may be

better at making bold changes in overall direction.

• Centralized activities avoid redundancy, maximize economies of scale, and

facilitate firm-wide deployment of innovations.

• But, centralized authority and activities might not tap diverse skills and resources,

and projects may not closely fit needs of divisions or markets.

Some firms have both centralized and decentralized R&D activities.

TeamsSpecific Tactics, Plans & Measures

DepartmentsSpecific Goals & Measures

CorporateBusiness Strategy

Leadership

Results

Business UnitVision, Mission

Specific Goals & Measures

IndividualsSpecific Goals & Measures

In the Work Plan

Organizational UnitCompelling Business NeedSpecific Goals & Measures

Establishing Linkages

Linkage to ScorecardMetrics

Packing Operations

Logistics Operations

Initiative Support

Organization

Department

Metrics

Individual Work Plan

How:

RESULT:MANAGEING STRETCH

• Greater economics of scale• Usage of better technology• Wide adaptation of innovation• Co-ordination to achieve company strategy• Proper work plan

INNOVATION

P&G: Regional Focus and Global Coordination

Procter & Gamble (P&G) with annual sales of almost $40 billion has

operations in virtually every country of the world.

Trick:

• the firm employs a strategy that combines high national responsiveness

with high economic integration.

• strategies being developed and implemented locally and/or regionally. In

particular, product delivery and marketing are local.

• the ‘back office’ of payroll, financing, human resource management and

other general services and processes is coordinated on a more global

basis, in order to achieve internal economies of scale.

Centralized and Decentralized R&D activities

Managing innovation across borders

• Centralization versus decentralization is a particularly important issue for multinational firms.–Foreign markets offer diverse resources, and have diverse needs.

–Innovation tailored to local markets might not be leveraged into other markets.

• Customization might make them poor fit for other markets.• Divisions may be reluctant to share their innovations.• Other divisions may have “not invented here” syndrome.

Cont…

• Bartlett and Ghoshal identify four strategies of multinational innovationCenter-for-global: all R&D activities centralized a single hub

• Tight coordination, economies of scale, avoids redundancy, develops core

competencies, standardizes and implements innovations throughout firm.

Local-for-local: each division does own R&D for local market

• Accesses diverse resources, customizes products for local needs.

Locally leveraged: each division does own R&D, but firm attempts to

leverage most creative ideas across company.

• Accesses diverse resources, customizes products for local needs, improve

diffusion of innovation throughout firm and markets

Cont…

Globally linked: Decentralized R&D labs but each plays a different role in firm’s strategy and are coordinated centrally.

• Accesses diverse resources, improve diffusion of innovation throughout firm and

markets, may help develop core competencies.

Bartlett and Ghoshal encourage transnational approach: resources and skills anywhere in firm can be leveraged to exploit opportunities in any geographic market. Requires:

1. Reciprocal interdependence among divisions

2. Strong integrating mechanisms such as personnel rotation, division-spanning teams, etc.

3. Balance in organizational identity between national brands and global image

RESULT:MANAGING INNOVATION

• economic efficiency and localization.• Centralized and Decentralized R&D• R&D for local market• Customization of product to local needs• Developing core competencies

SPEED

It's Not the Big That Eat the Small...It's the Fast That Eat the Slow

The Consumer Driven Supply Network

*2000 Shoppers Research (12 P&G categories at 64 NA retailers)

Purchased atanother retailer 31%

Substitutedanother brand 19%

Substituted same brand(different size)

18%

Other

8%

Did not buy product 10%

Delayedpurchase 14%

Consumer behavior when confronted with an OOS• 48% switch stores based on P&G top 100 SKUs

2002 The Procter & Gamble Company, All Rights Reserved.

Urgent Need to Address OOSOn average, retailers lose the sale 41% of the time

P&G loses 28% of the time

Reinventing the Supply Network

Chain

Long and slow

Forecast-based

Manufacturer-driven

Internal focus

Designed from product forward

Cost-reduction

Network

Fast and flexible

Demand-based

Consumer-driven

External focus

Designed from shelf back

Value and growth creation

From To

supplier manufctr retailer consumer consumer

manufctr

supplier

retailer

1. External focus: culture change2. Operational excellence: service and availability3. Synchronization: information replaces inventory4. Shelf-back design 5. Flexibility: take time and cost out of

the system6. Responsiveness: customer and

consumer driven7. Customer collaboration:

joint value creation

How: Key Operating PrinciplesThe journey to the Consumer-Driven Supply Network

Winning at the First Moment of TruthThe need for a Consumer-Driven Supply Network

• Innovation• Value• Shelf presence• Customization• In-store experience

Why: The Consumer is BossEver-increasing expectations

• Industry consolidation• Importance of free cash flow• Growth of private labels• Focus on margins• Seeking to be unique• Seeking to offer solutions

Why: Retailers Are RespondingChanging to win with the new consumer

What:Manufacturing’s FocusEnable a Flexible, Responsive, Highly Productive and Profitable

Supply Network

• Link to External Metrics

• Build capabilities to execute a Produce to Demand operating strategy

Collaborative business planning with retail customer• Design product to move it efficiently to

the shelf• Collaboration on “events”, key

merchandising activities and Initiatives

Manufacturing flexibility and cycle response to produce-to-demand vs. produce-to-forecast

Supplier relationships move from “connected” to “integrated” based on demand

• Speed and reliability of the supply system

How: Demand DrivenManufacturing integrated with end-to-end SN

Consumer wins• Better in-store experience: fresh quality

product ON the shelf, more new products and innovations

Customer wins• Synchronized, reliable innovation flow• Inventories reduced – more cash• Drop in OOS

P&G wins• Drop in OOS• Despite 2-3 times more SKUs, costs

are lower, inventories are reduced and volume is growing

ResultsReinventing the Supply Chain

P&G FINANCIAL HIGHLIGHTS

Conclusion

• To ensure the success out of cultural change programme “Organization 2005”

1. SPEED:

The change should be implemented globally at a rapid speed

It requires aggressive plan and executives to implement the same

The new structure and work has to be designed across all global operations, assignments of people finalized and communicated and the new organizations started up on schedule

Cont….

2.EMPLOYEE COMMUNICATION:

The key to successful transformation is employee buy in Proactive two way communication is the key to achieve that The top management of the organization has to meet a good

number of employees across all levels, functions and countries to seek feedback and provide clarifications on ORG’2005

Cont…

3.FOLLOW THE GLOBAL STRATEGY:

An important element should be to give the great degree of standardization to the local management to align their own design with global strategy

This will give a feeling of independence to the local management while the global standard will also be met

THANK YOU…