P&G Case Studies

The key performance gaps P&G faced back in 2000 included: clearly defined ownership of business units resulted in a sluggish annual sales growth and shrinking market share; massive investment on innovation and R&D did not generate competitive advantage in launching new products in global markets; and overhauled HR and incentive system did not increase corporate earnings. SG&A was a big factor in causing earnings drops in Organization 2005.Three major factors contributed to the increased SG&A and decreased earning: One was the decentralized R&D centers within GBU, which not only consequently diminished synergy effects among the GBUs but delayed time to market; secondly, the lack of reporting structure, KPI integration and direct communication channel between MDOs and GBUs slowed sales growth and profitability; third, employee’s compensation was not linked appropriately with corporate earnings.To achieve the best SG&A optimization, we recommend that the new CEO (Lafley) centralize R&D centers; include MDO presidents in the strategic decision making progress for key decisions and link KPI metrics between MDOs and GBUs; and link employees’ performance to corporate earnings proportionally.

Case Analysis and Recommendations The biggest increase in the financial statement was that the total SG&A in 2000 went up by 12%. The annual R&D Expenses increased in 2000 by 10%, which was more than twice the growth rate of Net Sales (4. %) during the same period.Similarly, between 1998 and 1999, the R&D expenses increased by 12% while Net Sales grew by only 3%.

Clearly, this over-proportional increase in R&D expenses compared to Net Sales showed that P&G sales did not grow by increasing investments in R&D. Having decentralized R&D unit and setting a R&D center for each GBU consequently diminished synergy effects among the GBUs, increased administrative costs, and delayed the time to market. R&D was previously the competitive advantage of P&G and this came from a centralized R&D effort.However, while the decentralization of R&D under Organization 2005 formalized a technology council that contributed to the technology innovation sharing, overall R&D decentralization caused redundancy in functions, increased operational costs and delayed the rollout of new products. To address this issue, we suggest centralizing global R&D units and creating a president of R&D to report directly to the CEO.

In addition to the current reporting structure, each GBU R&D VP should have dotted lines with the global president of R&D.Consolidating each R&D center can cut layers of decision making, streamline the budgeting processes, and save operational costs of global R&D expense. Additionally, there were no formal incentive metrics that ensured GBS, MDO, and GBU units would collaborate and work toward the same goal: to achieve P&G’s best financial performance. GBS functioned as a cost center and was compensated on cost management; its president was not a member of the global leadership council.

The lack of direct performance measurement of GBS and the absence of GBS in the global leadership council made it difficult for GBS to effectively execute and support GBU and MDO in making the best financial and strategic decisions. Thus, we recommend that a KPI matrix should be applied to both GBUs and MDOs and the MDO president should join the key strategic decision making that involves R&D, NBD (New Business Development), and marketing units with GBUs.The financial compensation to both groups should be linked together so that MDOs care not only about sales revenue but also about cost management and profitability. The overhaul on HR and compensation also significantly contributed to the SG&A increase. The solution is to limit stock options to high performers and link everyone’s compensation with corporate earnings instead of net sales.

Action Plan and Potential HurdlesOur immediate action plan includes: recommending that the CEO centralize R&D functions and create a direct report (the president of global R&D) to streamline R&D budgeting and accelerate product development and commercialization; adding GBS’s president to the global leadership council and create KPI matrix to link GBU, MDO, and GBS compensation and performance results; and changing the corporate stock option and compensation policy.To manage the risk of formal organizational change on the relationship and performance between GBU and MDO, our pilot program plan is to have MDO presidents sit in on the key decision making meeting for GBUs with low performing product categories (i. e. Paper) and high performing product categories (i. e. health care).

We will track and measure results of such units after six months before applying this to all MDOs and GBUs. The potential hurdles include but are not limited to: R&D VPs may be reluctant to lose direct influence over individual GBU R&D centers; and downsizing the option pool could demoralize employees and negatively bring down sales and earnings.The logic behind the new organizational structure also needs to be well communicated and understood by R&D VPs and the general employee base. It should be highlighted that the new structure will maintain the competitive advantage of P&G while also emphasizing that R&D has to be cost effective. R&D VPs and general employees can only gain the best financial rewards and career advancement through a cost effective R&D center.