MANAGING CULTURAL CHANGES

Presentation Flow
Cultural change in P&G

About P&G P&G + Gillette About Organization 2005 Overview Why: cultural change Managing Stretch, Innovation & Speed P&Gs Financial Highlights Conclusion

About P&G
At a glance

$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

P&G + Gillette
The worlds largest consumer products company

Began operations as one company October 1, 2005 Increases P&Gs position in faster-growing, higher-margin, more asset-efficient businesses Combines each companys 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

P&G + Gillette
Even stronger together
22 brands with sales of $1 billion or more 14 with sales between $500 million and $1 billion = Expanded innovation platforms and pipeline

Two Moments of Truth About P&G

When she chooses and when sheof truth Two moments uses

When she chooses

When she uses

Proctor and Gambles Organization 2005

In 2003 Procter & Gamble was the worlds 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&Gs 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&Gs 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 region Global 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 firms 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 firms 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 Firm

Formalization: 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.

Establishing Linkages
Corporate Business Strategy Business Unit Vision, Mission Specific Goals & Measures Organizational Unit Compelling Business Need Specific Goals & Measures Departments Specific Goals & Measures Teams Specific Tactics, Plans & Measures Individuals Specific Goals & Measures In the Work Plan

Leadership

Results

How: Linkage to Scorecard

Metrics

Organization

Metrics

Department
Packing Operations Logistics Operations Initiative Support

Individual

Work Plan

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 innovation
Center-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 firms 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

Urgent Need to Address OOS

On average, retailers lose the sale 41% of the time P&G loses 28% of the time

Consumer behavior when confronted with an OOS 48% switch stores based on P&G top 100 SKUs
Delayed purchase 14% Did not buy product Other

8%

10%

Substituted another brand 19%

Purchased at another retailer 31%

Substituted same brand (different size)

18%

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

2002 The Procter & Gamble Company, All Rights Reserved.

Reinventing the Supply Network

From
Chain Long and slow Forecast-based Manufacturer-driven Internal focus Designed from product forward Cost-reduction

To
Network Fast and flexible Demand-based Consumer-driven External focus Designed from shelf back Value and growth creation
supplier

supplier

manufctr

retailer

consumer

consumer manufctr retailer

How: Key Operating Principles

The journey to the Consumer-Driven Supply Network
1. 2. 3. 4. 5. External focus: culture change Operational excellence: service and availability Synchronization: information replaces inventory Shelf-back design Flexibility: take time and cost out of the system 6. Responsiveness: customer and consumer driven 7. Customer collaboration: joint value creation

Winning at the First Moment of Truth

The need for a Consumer-Driven Supply Network

Why: The Consumer is Boss

Ever-increasing expectations

Innovation Value Shelf presence Customization In-store experience

Why: Retailers Are Responding

Changing to win with the new consumer

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

What:Manufacturings Focus
Enable a Flexible, Responsive, Highly Productive and Profitable Supply Network

Link to External Metrics

Build capabilities to execute a Produce to Demand operating strategy

How: Demand Driven

Manufacturing integrated with end-to-end SN
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

Results
Reinventing the Supply Chain 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

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 ORG2005

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

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