INDIAN INSTITUTE OF FOREIGN TRADE

RESTRUCTURING P&G
"Organization 2005 marks the most dramatic change to P&G’s structure, work processes and
culture in the company's history." 1

- Durk Jager, Former President & CEO, P&G.

INTRODUCTION

The US based Procter and Gamble (P&G), one of the largest fast moving consumer goods
(FMCG) companies in the world, was in deep trouble in the first half of 2000. The company, in
March 2000, announced that its earnings growth for the financial year 1999-2000 would be 7%
instead of 14% as announced earlier. The news led P&G’s stock to lose $27 in one day, wiping
out $40 billion in its market capitalization. To add to this, in April 2000, P&G announced an 18%
decline in its net profit for January – March 2000 quarter. For the first time in the past eight years
P&G was showing a decline in profits.

In the late 1990s, P&G faced the problem of stagnant revenues and profitability (Refer Exhibit I).
In order to accelerate growth, the erstwhile P&G’s President and CEO, Durk Jager (Jager)
officially launched the Organization 2005 program in July 1999. Organization 2005 was a six-
year long organizational restructuring exercise which included the standardization of work
processes to expedite growth, revamping the organizational culture in order to embrace change,
reduction in hierarchies to enable faster decision-making, and retrenchment of employees to cut
costs. With the implementation of the program, P&G aimed to increase its global revenues from
$38 billion to $70 billion by 2005.

According to analysts, though Organization 2005 program was well planned, the execution of the
plan was a failure. Analysts believed that Jager concentrated more on developing new products
rather than on P&G’s well-established brands. Analysts felt, and Jager himself admitted, that he
did too many things in too short a time. This resulted in the decline of the company’s revenues
and profitability. After a brief stint of 17 months, Jager had to quit his post.

In June 2000, Alan George Lafley (Lafley) took over as the new President & CEO of P&G.
Under Lafley, P&G seemed to be on the right path. He was able to turn the company around
through his excellent planning, execution and focus. With Lafley at the helm, P&G’s financial
performance improved significantly (Refer Exhibit II). The company’s share price shot up by
58% to $92 by July 2003, as against a fall of 32% in S&P’s 500 stock index. A former P&G
executive, Gary Stibel said, “If anybody had any doubts about AG, they don’t anymore. This is
about as dramatic a turnaround as you will see.”2 However, analysts expressed doubts, whether
the measures taken by Lafley would sustain P&G’s growth in the long term. They felt that with a
dominant market position in developed markets the scope for generating more growth there
would be difficult for P&G.

1
As quoted in the article, “Organization 2005: Drive for Accelerated Growth Enters Next Phase,” in
www.procter.se, June 9, 1999.
2
As quoted in the article “Procter Entrusted to Lafley,” by Cliff Peale, The Cincinnati Enquirer, April 11,
2002.

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BACKGROUND NOTE

Procter & Gamble was established in 1837 by William Procter, a candle maker, and his brother-
in-law, James Gamble, a soap maker, when they merged their small businesses. They set up a
shop in Cincinnati and nicknamed it “porkopolis” because of its dependence on swine
slaughterhouses. The shop made candles and soaps from the leftover fats of the swine. By 1859,
P&G had become one of the largest companies in Cincinnati, with sales of $1 million. The
company introduced Ivory, a floating soap in 1879 and Crisco, the first all-vegetable shortening
in 1911.

In the period between the 1940s and 1960s, P&G embarked on a series of acquisitions. The
company acquired Spic and Span (1945), Duncan Hines (1956), Chairman Paper Mills (1957),
Clorox (1957; sold in 1968) and Folgers Coffee (1963). In 1973, P&G began manufacturing and
selling its products in Japan through the acquisition of Nippon Sunhome Company. The new
company was named “Procter & Gamble Sunhome Co. Ltd.”

In 1985, P&G announced several major organizational changes relating to category

management,3 purchasing, manufacturing, engineering and distribution. In 1988, the company
started manufacturing products in China. P&G became one of the largest cosmetics companies in
the US when it acquired Noxell (1989) and Max Factor (1991).

After witnessing a period of significant organic and inorganic growth, P&G began to face several
problems during the 1990s. In the early 1990s, a survey conducted by the consulting firm, Kurt
Salmon Associates,4 had revealed that almost a quarter of P&G’s products in a typical
supermarket sold less than one unit a month and just 7.6% of the products accounted for 84.5%
of sales. The remaining products went almost unnoticed by consumers. Complicated product lines
and pricing were also causing problems to retailers who had to struggle with rebates and
discounts. Commenting on the situation, Jager recalled, “We created a whole plethora of
allowances and deals and conditions which were just simply confusing and added cost to the
system.”5

P&G faced major challenges in the mid-1990s. P&G’s new product development activities
seemed to have slowed down. Analysts felt that P&G’s risk-averse culture seemed to be stifling
innovation and obstructing commercialization of new ideas quickly. A Fortune report commented
on P&G’s conservative business practices, “Procter & Gamble has a cupboard full of aging
brands that do mostly mundane tasks – like wash, mop, sop, and glop. No matter how many times
Tide has been ‘new and improved’ over the years – more than 60, in case you were wondering –
its still fundamentally detergent. Pampers has just turned 35, Jif Peanut butter has been sticking to
kids gums since 1956, and Ivory is so long in the tooth that your grandmother might have used it.
The company must look elsewhere for growth – to new products, new countries, and new
3
Category Management is a distributor/supplier process of managing categories as strategic business units
(SBUs), producing enhanced business results by focusing on delivering consumer value.
4
Kurt Salmon Associates (KSA) is the leading global management consulting firm offering integrated
strategy, process and technology deployment solutions to the consumer goods, retail, and health care
industries.
5
As quoted in the article “Make It Simple,” by Zachary Schiller, Greg Burns and Karen Lowry Miller,
BusinessWeek, September 9, 1996.

2
businesses. This methodical, conservative, and insular enterprise will have to become more
innovative, more outward looking.”6

In June 1999, the magazine, Economist reported that P&G’s last real new product innovation had
come way back in 1982, when it had launched its ‘Always’ feminine hygiene range. Analysts
opined that more consistent innovation would be required to generate faster growth opportunities
for P&G. The above problems had a negative effect on P&G’s financial performance. During the
late 1990s, P&G’s revenues were stagnant and its net income was decreasing.

THE ‘ORGANIZATION 2005’ PROGRAM

In January 1999, Jager, a P&G veteran became the new CEO taking charge at a time when P&G
was in the midst of a corporate restructuring exercise that started in September 1998. Jager faced
the challenging task of revamping P&G’s operations and marketing practices. Soon after taking
over as the CEO, Jager told analysts that he would overhaul product development, testing and
launch processes. The biggest obstacle for Jager was P&G’s culture. Jager realized the need to
change the mindset of the P&G employees who had been used to lifetime employment and a
conservative management style.

On July 1, 1999, P&G officially launched the Organization 2005 program. It was a program of
six-year duration, during which, P&G planned to retrench 15,000 employees globally. The cost of
this program was estimated to be $1.9 billion and it was expected to generate an annual savings
(after tax deductions) of approximately $900 million per annum by 2004. The program worked
towards speeding up decision making to enable the company innovate and bring new products to
the market as early as possible. It also aimed at creating a stimulating work environment for
P&G’s employees. The program aimed to redesign P&G’s organization structure, work processes
and corporate culture in order to cut costs and improve its efficiency.

CHANGE IN ORGANIZATION STRUCTURE

Till 1998, P&G had been organized along geographic lines with more than 100 profit centers.
Under Organization 2005 program, P&G sought to reorganize its organizational structure (Refer
Exhibit III and IV) from four geographically-based business units to five product-based global
business units – Baby, Feminine & Family Care, Beauty Care, Fabric & Home Care, Food &
Beverages, and Health Care. The restructuring exercise aimed at boosting P&G’s growth (in
terms of sales and profits), speed and innovation and expedition of management decision-making
for the company’s global-marketing initiatives. It also aimed to fix the strategy-formulation and
profit-creation responsibilities on products rather than on regions.

The global business units (GBUs) had to devise global strategies for all P&G’s brands and the
heads of GBU were held accountable for their unit’s profit. The sourcing, R&D and
manufacturing operations were also undertaken by the GBU. The number of profit centers was
narrowed down from earlier 100 to just 7. The GBU structure was further strengthened and
integrated with eight regional market development organizations (MDOs).7

6
As quoted in the article, “P&G: New and Improved!” by Henkoff Ronald, Fortune, October 14, 1996.
7
The MDOs comprised of eight regions including North America (excluding Mexico), Central & Eastern
Europe, Middle East/Africa/General Export (MEAGE), Western Europe, Northeast Asia, Greater China
ASEAN/India/Australasia, and Latin America.

3
The MDOs aimed at maximizing the business potential of the complete product portfolio in their
respective local markets. The MDOs had to identify those business opportunities that were missed
out earlier because of lack of speed, innovation and higher technological requirements. They also
customized global programs to cater to the local markets and designed marketing strategies based
on the specialized knowledge they had about local consumers. They were also responsible for
collaborating with other local companies and maintaining better long-term relationships between
customers and retailers. The GBUs and MDOs worked jointly to promote P&G’s products in 140
countries.

P&G also created Global Business Services (GBS) department in order to integrate key business
processes such as accounting, order management, human resource systems, employee benefits
and welfare and IT services globally. GBS assisted P&G in achieving economies of scale, better
quality management and in expediting the delivery of important business services. The services of
GBS (Refer Exhibit V) were made available to all the GBUs. The GBS centers were operated in
three regions (Refer Table I).

It was proposed that half of GBS employees would be accommodated at the above centers and
that the rest be located along with their major customers. GBS also entered into an arrangement
with several companies like GE, IBM, HP, American Express, Johnson & Johnson, Pfizer,
Motorola and Rhone-Poulenc to learn about their best practices in providing services and imbibe
them in P&G.

TABLE I
GBS SERVICE CENTERS
Region City Country
North America & Latin America Cincinnati USA
San Jose Costa Rica
Europe, Middle East & Africa New Castle UK
Brussels Belgium
Prague Czech Republic
Asia Kobe Japan
Manila Philippines
Guangzhou China
Singapore
Source: www.procter.se

The fourth important component of P&G’s new structure under Organization 2005 program was
Corporate Functions. 8 The corporate staff concentrated on improving the functional capabilities
of all the operations of the company. The GBS and Corporate Functions played a supportive role
for GBUs and MDOs by methodically creating and managing global business services and
functions.

STANDARDIZATION OF WORK PROCESSES

One of the major objectives of Organization 2005 program was to significantly improve all
inefficient work processes of P&G including its product development, supply chain management

8
The Corporate Functions included Corporate Customer Business Development Central & Eastern Europe,
Corporate Finance, Corporate Human Resources, Corporate Information Technology, Corporate Legal,
Corporate Marketing/Market Research/ Government Relations, Corporate Product Supply, Corporate
Public Affairs and Corporate Research & Development.

4
and marketing functions. In order to achieve this objective, P&G undertook several IT initiatives
including collaborative technologies, B2C e-commerce, web-enabled supply chain and a data
warehouse project for supplying timely data to company’s various operations located globally.

P&G introduced changes in its new product development process to bring innovative offers or
products to the market faster. The company formed innovation teams to explore promising ideas
rapidly within the company and bring them fast to the market. P&G also indicated that it would
take more risks by reducing pre-market laboratory testing requirements. It also planned to test
market products worldwide in sharp contrast to its traditional practice of first test marketing a
product in the US.

The GBUs developed and sold products on a worldwide basis replacing the old system which
allowed P&G’s country managers to set prices and handle products as they saw fit. P&G also
made efforts to simplify its product line by standardizing product formulas and packages
worldwide and divesting non-performing brands. In the new setup, P&G was able to cut down
product development time significantly.

Through the intensive use of IT, P&G aimed at improving the efficiency of its supply chain,
facilitating more collaboration in knowledge sharing and enabling e-commerce with the suppliers,
retailers and customers. P&G adopted a system known as ‘Key Account Replenishment System’
(KARS)9 that enabled the company to get automatic orders through the Internet from retailers’
point-of-purchase and inventory systems. The system did away with the need of retailers to place
orders manually or take inventory counts using handheld devices. Elaborating on the benefits of
the system, David said, “Salespeople are doing more category management now to help retailers
get better assortments of products. The Internet allows us 24-by-7 communication with
retailers.”10

P&G launched an Internet distribution system called ‘Web Order Management,’ which made it
possible for the consumers to place orders directly with P&G. The system allowed order
fulfillment in substantially less time than it did when compared to the old manual system. The
company also used IT in retail operations. In August 1999, P&G worked in association with
companies such as Johnson & Johnson, Eastman Kodak and the Consumer Products
Manufacturers Association to establish systems to ensure product security to minimize shoplifting
losses during retail sales.

P&G, continuing with its spate of restructuring, took its first initiative in B2C e-commerce by
launching a website called ‘Reflect.com’ in September 1999. It also started a new division ‘P&G
Interactive Marketing,’ that aimed at understanding consumer needs by facilitating more
interaction and feedback from them through the Internet. The division, for the first time, also
developed strategies for marketing P&G’s products online. In one such instance, P&G tapped into
customer expertise by integrating customers into the company’s product development process.
P&G created “P&G Advisors” program to collaborate with customers in developing new
products. Customers tried new products and provided feedback, allowing P&G to refine products
and marketing plans. P&G, before restructuring, spent $25,000 to test a new product concept, and
used to take two months to complete the test. But with the introduction of the Internet, P&G was

9
A Microsoft Access application that generates demand-driven orders from small and midsize retailers,
supported by the company's Electronic Data Interchange (EDI) IBM mainframe replenishment system.
10
As quoted in the article, “Lessons from a Cultural Revolution,” by Marianne Kolbasuk McGee, in
www.informationweek.com, October 25, 1999.

5
able to conduct the same test at a cost of $2,500 and reap results in two weeks. P&G also used the
Internet to take these new products to market. For example, in launching its Physique hair care
products, P&G invited consumers to register on its new ‘Physique.com’ website to sample the
new products. Within 12 weeks, more than five million consumers visited the site, giving a strong
thrust to the product launch.

P&G also introduced 54 ‘change agents’ (IT personnel) across its seven GBUs. These change
agents facilitated cultural and business change, through closer coordination with product teams
and making the maximum use of IT in real-time collaboration projects. Steve David (David),
P&G’s Global Customer Business Development Officer, said, “Our IT people are now embedded
in the organization. Our teams have IT people working side-by-side with businesspeople. The IT
people are helping build the business with the salespeople.”11

REVAMPING THE CORPORATE CULTURE

The Organization 2005 program made efforts to change P&G from a conservative, lethargic and
bureaucratic to modern, quick-moving and internet-savvy organization. The new structure was
directed towards revamping the work culture of P&G so as to focus on its new Stretch,
Innovation and Speed (SIS) philosophy. Emphasizing on innovation, Jager said, “Organization
2005 is focused on one thing: leveraging P&G's innovative capability. Because the single best
way to accelerate our growth – our sales, our volume, our earnings growth – is to innovate bigger
and move faster – consistently and across the entire company.”12 P&G had outlined the cultural
changes it wanted to achieve through the program (Refer Table II).

TABLE II
CULTURAL CHANGES UNDER ‘ORGANIZATION 2005’
Before ‘Organization 2005’ After ‘Organization 2005’
Misaligned objective with high The organization is aligned on common goals with
penalties for failure trust as a foundation
Internal inspection keeps everyone A focus on coaching and teaching enables informed
under control risk taking and team collaboration.
Risk is avoided and victory is narrowly Victory is defined as stretch with trust and candor.
defined
Complexity is delegated down Leaders take on complex challenges
Creating a slow moving organization An organization driven by stretch, innovation and
that lacks stretch, innovation and speed speed toward breakthrough goals.
Source: The Financial Express, October 11, 1999.

Under the program, P&G changed the way it looked at individual appraisals and moved from a
conservative goal-setting plan to a stretch goal plan. Earlier P&G would appraise employees on
the basis of targets set and their achievements. But, the system seemed to have a loophole. By
setting easy targets, there was a possibility of an under performing manager projecting himself as
an achiever. Through the stretch element, P&G sought to make clear that merely achieving targets
was not sufficient. The individual’s appraisal would be on the basis of how the stretch targets
were fixed and what attempts had been made to meet them. The company’s goal-setting process

11
As quoted in the article, “Lessons from a Cultural Revolution,” by Marianne Kolbasuk McGee, in
www.informationweek.com, October 25, 1999.
12
As quoted in the article, “Organization 2005: Drive for Accelerated Growth Enters Next Phase,” in
www.procter.se, June 9, 1999.

6
required the employees to set stretch targets. P&G did not concentrate only on restructuring; it
also introduced a new reward system that recognized extraordinary contributions of the
employees at every level of the organization.

P&G discarded the old dressing code. The company left it to the employees to decide as to what
they wanted to wear at the workplace. P&G also introduced measures to play down the hierarchy.
According to an employee, “Earlier the top executives were served tea in higher quality cups
compared to what the junior level employees got. But that has changed. Now all P&G employees
sip their brew in the same white bone-china which was earlier reserved for top executives.”

The efforts made to change the corporate culture was not limited to just a few countries but were
spread all over the world where P&G’s operations were located. For instance, under the program,
P&G India initiated ‘Project Pride’ in late 1999 to promote an ‘open’ work culture. All the six
dispersed offices of P&G in Mumbai were brought under one roof by July 2000. There was an
overhauling of the hierarchical office structure, which would not discriminate between senior and
junior employees. In the new setup, employees could actually see their ideas being implemented.
The CEO like all other employees sat in a cubicle in the new office. Moreover, irrespective of the
rank, all cubicles were to be of same size in all offices.

P&G also invested large amount of money in IT to facilitate more employee collaboration and
knowledge sharing. The company introduced e-mail, intranet, and videoconferencing13 facilities
for its employees. Jager also urged P&G’s employees to use the company’s IT tools while
communicating with fellow employees. In July 1999, 300 senior managers were asked to
download information in the form of PowerPoint presentations from P&G’s intranet site to
apprise the employees in their department about the Organization 2005 program. Some of the
senior managers and top executives were forced to visit the company’s website for the first time.

P&G was earlier known in the FMCG industry as “the one-page memo company.” The
employees of P&G were asked to offer their ideas, suggestions, or business plans in just one-
page, which would in turn be communicated to every manager, who would edit the document and
return it to be finally accepted. By embracing IT, P&G was able to change its image from being a
“one-page memo company.” By using chat rooms on the company’s intranet, the company
attempted to change its soft, traditional and ‘play-it-safe’ culture to one of an aggressive,
outspoken and risk-taking culture. Emphasizing the importance of intranet, Jager said, “The
intranet is becoming an integral part of doing business at P&G and has become our primary
forum for discussing culture change.”14

Though Organization 2005 program involved significant job reduction (Refer Exhibit VI), Jager
announced that he would make full use of normal attrition and retirements, hiring reductions, re-
locations, job retraining, and voluntary separations to help reduce the number of potential
involuntary separations. In cases of involuntary separations, P&G would offer employees
financial assistance to help them in their new careers.

Appreciating Jager’s efforts to launch several new initiatives under the Organization 2005
program, William Steele, MD, Banc of America Securities, said, “To Durk’s credit, he got the

13
Conducting a conference between two or more participants at different sites by using computer networks
to transmit audio and video data.
14
In the article, “Lessons from a Cultural Revolution,” by Marianne Kolbasuk McGee, in
www.informationweek.com, October 25, 1999.

7
company focused on brands, innovations, new products and acquisitions. He really got P&G
energized from a top-line (sales) perspective. And over the long term, that’s what consumer-
products companies need to grow their worldwide market share.”15

THE MISTAKES COMMITTED

The Organization 2005 program faced several problems soon after its launch. Analysts were
quick to comment that Jager committed a few mistakes which proved costly for P&G. For
instance, Jager had made efforts in January 2000 to acquire Warner-Lambert and American Home
Products. Contrary to P&G’s cautious approach towards acquisitions in the 1990s, this dual
acquisition would have been the largest ever in P&G’s history, worth $140 billion. However, the
stock market greeted the news of the merger negotiations by selling P&G’s shares, which
prompted Jager to exit the deal.

Critics felt that in its pursuit to focus more on developing new products, Jager completely ignored
P&G’s well-established brands. He introduced several new products in quick time with the hope
of finding P&G’s next billion-dollar product. Since the sales and marketing resources were
diverted towards new products, there was a decline in sales and profitability of P&G’s
established, best performing brands like Crest, Pampers and Tide. Elaborating on Jager’s mistake,
Christopher said, “They spent way too much on new products. That’s a typical problem that
companies face. They spend too much on growth, and they lose sight of their core businesses.”16

Another mistake that Jager committed was to presume that the strategy of selling P&G’s products
under the same name globally would be successful. However, this strategy backfired. For
instance, in Germany, the US dish-washing detergent, ‘Fairy’ was a popular brand and sold
successfully. But Jager renamed it ‘Dawn,’ as it was known in the US. Since ‘Dawn’ was
perceived by German consumers to be a new product, its sales fell drastically.

Jager’s measures to revamp P&G’s cautious corporate culture also failed to yield the desired
results. Analysts were of the opinion that his plan had been too aggressive resulting in HR
problems. Managers had become critical of Jager’s confrontational style. Employees were not
happy with the changes made in the company’s organization structure. In Europe, approximately
2,000 people were abruptly transferred to Geneva, while 200 employees were relocated from
various parts of Asia to Singapore. As a result of restructuring, food and beverage managers,
based in Cincinnati, US, reported to a President in Caracas, Venezuela. Similarly, managers in the
laundry and household cleaning business reported to Brussels.

All the above problems had a negative effect on P&G’s financial performance as well as on its
share price. After touching a high of $117 per share in January 2000, P&G’s stock price fell
below $90 in February 2000. In March 2000, P&G announced that its earnings growth for the
financial year 1999-2000 would be about 7%. The news sent the company’s stock to its lowest
level since the mid-90s. The stock price plunged to less than $60, wiping out $40 billion in
market capitalization in just one day.

15
In the article, “Bruised P&G turns to new, old leaders,” by Randy Tucker, The Cincinnati Enquirer, June
9, 2000.
16
In the article, “Bruised P&G turns to new, old leaders,” by Randy Tucker, The Cincinnati Enquirer, June
9, 2000.

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In April 2000, P&G announced an 18% decline in its third-quarter net profit. Moreover, the
company also announced that its fourth-quarter results earnings growth would be flat compared to
15% to 17% estimated earlier. Jager accepted responsibility for the company’s problems and
resigned.

Summing up Jager’s mistakes, Daniel Peris17 said, “Jager has launched a wide range of initiatives,
and I think his credibility is beginning to wear thin. The Organization 2005 restructuring ... I
think is an excellent program, but adding to that the mega-merger proposals, adding to that
launching rapidly, focusing relentlessly on top-line growth and launching all kinds of product
initiatives to achieve that top-line growth, they let the cost picture get out of control.”18 Another
analyst with Olde Discount Corp. based in Detroit, said, “P&G had been in a mode to cut costs
and improve efficiencies, and they mastered that. But back then, they lost sight of the top line
(sales). Now, they've reinvigorated the management teams and encouraged employees to take
risks and come out with new products. They've done a good job doing that, too. But now they've
lost sight of the expense side of the equation. They need to find a way to balance both of those.”19

ENTER LAFLEY – IMPLEMENTING STRATEGIES TO REVIVE P&G

In June 2000, Alan George Lafley (Lafley), a 23-year P&G veteran popularly known as ‘AG,’
took over as the new President and CEO of P&G. The major difference between Lafley and Jager
was their ‘style of functioning.’ Soon after becoming CEO, Lafley rebuilt the management team
and made efforts to improve P&G’s operations and profitability.

Lafley transferred more than half of P&G’s 30 senior most officers, an unprecedented move in
P&G’s history. He assigned senior positions and higher roles to women. In one instance, he
overlooked 78 senior most general managers and appointed a 42-year old woman, Deborah A.
Henretta, as the head of P&G’s global baby care division. After the changes in the management
structure, the heads of P&G’s operating businesses and corporate functions represented 13
different countries. Overall, the average age of P&G’s Global Leadership Council (Refer Exhibit
VII) came down to 49, compared to 54 in 1999. Lafley also proposed to cut down P&G’s
personnel strength by 25,000 (one-fourth of P&G’s existing employee strength). By 2001, Lafley
had achieved the target of remaining 7,800 job reductions, a part of Organization 2005 program.

Lafley focused more on the major markets and leading brands. On the contrary, Jager had focused
more on new product development and tried to build market share in developing and under-
developed markets. The sales of P&G’s leading brands including Tide, Pampers and Crest picked
up as they got more resources in terms of marketing expenditure and manpower. Though Lafley
reduced the thrust on new product development, high potential products like Crest whitener strips
and ThermaCare heat wrap still got attention. Lafley also introduced new product extensions in
an attempt to generate growth. Major brands like Tampax (tampons) introduced new product
extensions in 2002 while other brands planned new products. P&G introduced its new ‘Ohm’ by
Olay line of body care products, which was the company’s first skin-care foray that used natural

17
Daniel Peris is a senior research and securities analyst with Argus Research Corporation, a leading
investment research firm in the US.
18
In the article, “P&G Warning Hurts Dow,” by Chris Isidore and Martha Slud, posted on
www.money.cnn.com, March 7, 2000.
19
In the article, “Jager Lost Credibility on Wall Street,” by Cliff Peale, The Cincinnati Enquirer, June 9,
2000.

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products like ginger and jasmine. In 2002, the company also dropped several brands including Jif,
Crisco and Clearasil that did not fit in with its global strategy.

In the midst of intense competition, the baby care, fabric & home care and oral care businesses
lost market share in the 1990s. However, under Lafley, all the three businesses gained both in
terms of increased revenues and market share. In spite of stiff competition from companies like
Kimberly-Clark, revenues rose by 5%, to $2.4 billion, while net earnings increased by 8%, to
$241 million in the baby care segment during the first quarter ending September 2002. Pampers
rolled out its new Baby Stages line in Europe and North America. The revenues from P&G’s
fabric and home care business witnessed a 9% growth for the first quarter ending September
2002, despite strong competition from Unilever. This was possible due to brands like Cheer
reducing its package size and price to compete with Unilever’s Wisk. Revenues in oral care
business rose by 20% around the same period while Crest was able to regain #1 oral-care brand
position in the US, which it lost to Colgate in 1998. In the laundry business too, revenues showed
an upward trend. The Tide and Downy brand were offered in different fragrances.

Under Lafley, P&G acquired Clairol in 2001 for $5 billion. The acquisition of Clairol helped
P&G to achieve a 16% ($1 billion) growth in net earnings in the first quarter ending September
2002. The market share in the US for eight out of its top ten ‘billion dollar brands’ increased by
15% during the same period. Lafley believed that P&G’s IT initiatives under the Organization
2005 program had significantly benefited the company. He increased P&G’s expenditure on IT
initiatives to $1 billion in 2002 and planned to increase it further in 2003.

In 2001, Lafley had announced another program which complemented the Organization 2005
program. The new program was expected to save an additional $600-700 million (post-tax)
annually by the financial year 2003-04. The total cost of the new program was $1.4 billion (post-
tax). In this new program, P&G planned to retrench 9% of its global workforce or about 9,600
jobs. The total number of job reductions were expected to increase from 15,000 to 17, 400.

Unlike Jager, Lafley attempted to change the culture of P&G from harsh to soft one. He believed
that P&G was a family and each employee was its family member. Though he announced that
part of the job reduction would be made through involuntary separations, at the same time he
intended to minimize that number.

Lafley felt that the new program would improve P&G’s competitiveness and boost its long-term
growth. The new program involved streamlining of P&G’s cost structure by further reducing
overheads and manufacturing costs. Speaking about the new program, Lafley said, “This program
is right for the long-term health of our business and is the next step in our plan to restore long-
term growth. It’s one element of a three-part growth plan to focus on big brands and big
opportunities, consistently deliver superior consumer value, and create a more cost-competitive,
productive organization.”20

P&G – CURRENT STATUS

In 2003, Lafley continued his efforts to make P&G more adaptable to the dynamic changes in
business environment. He challenged P&G’s traditional perspective that all its products should be
produced in-house. In April 2003, Lafley started outsourcing the manufacturing of bar soaps
(including P&G’s longest existing brand, Ivory) to a Canadian manufacturer. In May 2003, IT

20
In the article, “Procter & Gamble Announces Next Step in Overall Plan to Restore Competitiveness and
Growth,” in www.procter.se, March 22, 2001.

10
operations were outsourced from HP. Since Lafley became CEO, P&G’s outsourcing contract
went up from 10% to 20%.

Lafley continued to review P&G’s businesses and new investments with the aim of achieving
sharper focus on its core businesses, cost competitiveness and improved productivity. He said,
“The cost benefits of strengthened competitiveness and improved productivity are significant, but
this is not just a cost-cutting program. No one ever cost-saves their way to sustainable growth.
We will invest these savings in getting our consumer value and pricing right, continuing to invest
in innovation on core businesses and the most promising new businesses, and continuing to
provide strong marketing and sales support for our brands. All of these actions are necessary to
deliver P&G’s long-term financial goals.”21

Though Lafley believed that Organization 2005 had made P&G’s global marketing efforts more
disciplined, he still felt that much was required to convince P&G employees about the
applications and the benefits of the program.

(Case Adapted from ICFAI Case Folio, May 2003)

21
As quoted in the article “Procter & Gamble Announces Next Step in Overall Plan to Restore
Competitiveness and Growth,” posted on www.procter.se, March 22, 2001.

11
 EXHIBIT I

P&G’s FINANCIAL PERFORMANCE (1995-2000)

(Millions of Dollars except per share and percentage amounts)

Year ended June 30 2000 1999 1998 1997 1996 1995
Net Sales $39,951 $38,125 $37,154 $35,764 $35,284 $33,482
Operating Income1 5,954 6,253 6,055 5,488 4,815 4,244
Net Earnings2 3,542 3,763 3,780 3,415 3,046 2,645
Net Earnings Margin 8.9% 9.9% 10.2% 9.5% 8.6% 7.9%
Basic Net Earnings 2.61 2.75 2.74 2.43 2.14 1.85
per Common Share
Diluted Net Earnings 2.47 2.59 2.56 2.28 2.01 1.74
per Common Share
Dividends 1.28 1.14 1.01 0.90 0.80 0.70
Per Common Share
Research & Development 1,899 1,726 1,546 1,469 1,399 1,304
Expense
Advertising Expense 3,667 3,538 3,704 3,466 3,254 3,284
Total Assets 34,194 32,113 30,966 27,544 27,730 28,125
Capital Expenditures - 2,828 2,559 2,129 2,179 2,146
Long-Term Debt 8,916 6,231 5,765 4,143 4,670 5,161
Shareholders' Equity 12,287 12,058 12,236 12,046 11,722 10,589
Source: www.pg.com

• 1
Operating income includes a before-tax charge of $481 for Organization 2005 program costs. Net
earnings include an after-tax charge of $385 for Organization 2005 program costs, and basic and
diluted net earnings per share include charges of $0.29 and $0.26, respectively.

• 2
Net earnings include an after-tax charge for Organization 2005 of $688 in 2000 and $385 in 1999.
Basic and diluted net earnings per share include Organization 2005 charges of $0.52 and $0.48 in 2000
and $0.29 and $0.26 in 1999 respectively.

12
 EXHIBIT II

P&G & ITS SUBSIDIARIES – CONSOLIDATED EARNINGS

($ Mn)
Twelve Months ended June 30, 2003
Net Sales % change EBIT % change Net % change
Vs Year Vs Year Earnings Vs Year
ago ago ago
Fabric And Home 12,560 8% 3,080 13% 2,059 12%
Care
Baby And Family 9,933 8% 1,448 14% 882 20%
Care
Beauty Care 12,221 14% 2,899 23% 1,984 23%
Health Care 5,796 16% 1,034 30% 706 35%
Snacks And 3,238 0% 460 -3% 306 1%
Beverages
Total Business 43,748 10% 8,921 17% 5,937 19%
Segment
Corporate (375) N/A (640) N/A (213) N/A
(Excluding
Restructuring
Costs)
Total Company – 43,373 8% 8,281 13% 5,724 13%
Core
Restructuring 4 N/A (751) N/A (538) N/A
Costs
Total Company - 43,377 8% 7,530 18% 5,186 19%
Reported
Source: www.pg.com

13
 EXHIBIT III

P&G’S ORGANIZATION STRUCTURE UNDER ‘ORGANIZATION 2005’

GLOBAL BUSINESS MARKET

UNITS DEVELOPMENT
• Business Strategy & ORGANIZATIONS
Planning • Market Strategy
• Brand Innovation & • Customer
Design Development
• New Business • External Relations
Development • Recruiting
• Full Profit
Responsibility

P&G

GLOBAL BUSINESS
CORPORATE SERVICES
FUNCTIONS Key Business Processes
• Cutting-Edge Knowledge • Accounting
• Transfer Best Practices • Info and Technology
• Function Work Services
• Supporting P&G • Order Management
• Employee Benefits &
Payroll

Source: www.pg.com

14
 EXHIBIT IV

OVERVIEW OF THE NEW STRUCTURE UNDER ‘ORGANIZATION 2005’

The new organization structure has four pillars including Global Business Units, Market
Development Organizations, Global Business Services, and Corporate Functions.

GLOBAL BUSINESS UNITS AND MARKET DEVELOPMENT ORGANIZATIONS

PILLARS GLOBAL BUSINESS MARKET DEVELOPMENT

UNITS ORGANIZATIONS
Comprises • Baby, Feminine and • North America Asia/ India/ Australia
Family Care • Northeast Asia
• Beauty Care • Greater China
• Fabric & Home Care • Central-Eastern
• Food & Beverage • Europe/ Middle East/ Africa
• Health Care • Western Europe
• Latin America
Philosophy Think Globally Act Locally
General Create strong brand equities, Interface with customers to ensure marketing plans
Role robust strategies and ongoing fully capitalize on local understanding, to seek
innovation in products and synergy across programs to leverage Corporate
marketing to build major scale, and to develop strong programs that change
global brands. the game in our favor at point of purchase.

GLOBAL BUSINESS SERVICES AND CORPORATE FUNCTIONS

PILLARS GLOBAL BUSINESS SERVICES CORPORATE FUNCTIONS

Comprises • GBS Americas located in Costa Rica
• GBS Asia located in Manila
• GBS Europe, Middle East & Africa
located in Newcastle
Philosophy Minimize Administration Costs
General Bring together transactional activities such
Role as accounting and order management in a
single organization to provide services to all
P&G Units at best-in-class quality, cost, and
speed
Source: www.pg.com
• Customer Business Development
• External Relations
• Finance & Accounting
• Human Resources
• Information Technology
• Legal
• Marketing
• Consumer & Market Knowledge
• Product Supply
• Research & Development
• Workplace Services
Be the Smartest/Best
Ensure that the functional capability
integrated into the rest of the
company remains on the cutting edge
of the industry. We want to be the
thought leader within each CF

15
 EXHIBIT V

SERVICES OFFERED BY GBS

The key services offered by GBS include the following:

• Finance & Accounting Services, which includes Accounts Payable, Expense Accounting, and
Standard Financial Reporting.
• Customer Logistics & Financial Services, which includes Order Management, Credit and
Collections, and Delivery Systems.
• Employee Services, which includes Human Resources Systems such as Employee Benefits,
Payroll, and Travel Management/Reporting.
• Purchases, which includes Corporate Facilities, Transportation and Consultants and
Contractors (this does not include raw materials purchases, which will be handled by GBUs).
• Information Services Worldwide, which includes Business Information Services and Market
Measurement Data.
• Technology Services Worldwide, which includes P&G's computing and telecommunications
infrastructure.
Source: www.pg.com

EXHIBIT VI

JOB REDUCTION TARGETS UNDER ‘ORGANIZATION 2005’

Total FY98/9-00/1 FY01/2-03/4

Estimated Job Impact 15,000 10,000 5,000
Estimated costs (after-tax) $1.9 bn $1.4 bn $0.5 bn

Estimated Job Impact by Item

Product Supply GBS Other
6,700 3,900 4,400

Estimated Job Impact by Job Impact Expressed as

Region %
Europe, Middle East, Africa 6,250 42
North America 4,300 29
Latin America 2,450 16
Asia 2,000 13
Total 15,000 100
Source: www.procter.se, P&G Annual Report 1999.

16
 EXHIBIT VII

P&G’S GLOBAL LEADERSHIP COUNCIL

John
Pepper
June Chairman June AG Lafley
1999 2002 Chairman-
Durk Elect & CEO
Jager CEO

Clayton
Wolfgang B Mc- Bruce Kerry Clayton
Berndt Daley Bynes Clark Daley
AG CFO Donald
Fabric and Fabric Beauty Market CFO
Lafley
Home care and and Develop-
Beauty Gordon
and Europe Health Health ment
and Bruner Care Gill
North Care Cloyd
Tony R&D
America Rob Steele R&D
Michael Belloni Jeff
Casper Richard Jorge North
Western Ansell America Keith
Home Antoine Mesquit
Europe Pet Care Harrison
Care Susan Product a Home
Arnold supply Care Paul Product
Claude Skin and Polman Supply
Paul Meyer Care Human Susan Western
Polman Europe, Mark
Resource Kechum Arnold Europe Richard
Fabric Middle Personal Antoine
Baby
Care east and Michael and Human
Femi- Chip
Africa Martin Power nine & Beauty Re-
Bergh
special Neu- Global Family Care sources
Asia,
Gary projects chem Care
Business Australia
Martin Hair Services & India Jim
Tissue and Care Deb Martin Stengel
Faud
Towel Henretta Neu- Marketi-
Kuray-
Bob Baby chem Werner ng
tim Jorge Wehling Care Hair Gelssler
Middle Montoya Marketing Care NE Asia
Kerry East, Food/ Steve
Clark Africa Fernan- David
Beverage
Feminine and Steve do CIO
and Latin Laurent
Care and Export David Aquirre
America Phillppe Char-
Asia Global Femi-
nine China lotte
Customer
Herbert Steve Care Otto
Develop-
Schmitz Donovan External
ment
Central Beverage Rela-
Brian Charles
and tions
Buchan Pierce
Eastern Todd
Feminine Family
Europe Garnet D
Care Care
Mary CIO Panayotopoulos
Ketchum Jorge Central and
D Panayotopoulos Baby Bob Monto- Eastern Europe,
China Care Blanchard Middle East and
ya Food,
Special Beve- Africa
Assign- rages
Bob ment
Mcdonald Bruce and Tom Muccio
NE Asia Bymes Latin Global Customer
Health America Teams
John
care and O’keeffe
New Special Michael Michael Power
Ventures Assign- Griffin Global Business
ment Be- Services
Promoted verage
Charlotte Promoted
Retired Otto Fabrizio New
External Freda Additions
Relations Snacks
Source: The Cincinnati Enquirer
17
 EXHIBIT VIII

P&G's Task: Turning Razor Blades into a Beauty Brand

Procter & Gamble may be basking in the afterglow of its planned $57 billion purchase of
The Gillette Co., but the hard part, industry observers say, will be making it work.

Judging by P&G's track record with earlier acquisitions of Clairol and Wella, retailers
and other market experts appear unconvinced that the Cincinnati-based consumer
products giant can turn a razor blade manufacturer into a vibrant beauty brand. They cite
P&G's penchant for jettisoning the talent of the acquired company, consolidating
marketing spending and its inability to develop new markets that it has acquired as its
main hurdles for a successful merger.
In addition, some major drugstore and discount retailers are voicing fear of being strong-
armed by the new union, which will boast $60 billion in sales. "This is just part of the
ongoing back and forth shift of power," said a discount store executive.
Whether P&G can absorb another acquisition is the question on many beauty executive's
lips, most notably since the consumer company has a penchant for shedding the experts
in charge of the brands it acquires, along with overhead. This is a critical point since
P&G has no expertise in the razors and blades category. Succeeding in this new territory
won't be easy, in the view of consultants.
Wendy Liebmann, president of WSL Strategic Retail, elaborated on P&G's typical
acquisitions strategy: "The company tends to want to bring its acquired brands in-house
rather quickly," rather than rely on the marketing expertise of the acquired executives. "It
takes a long time to get your head around a new category," added Liebmann. "With each
acquisition, [P&G] senior management can't continue to be totally devoted to the core
categories."
Consumer products analyst Bill Chappell of SunTrust Robinson Humphrey predicts P&G
likely will leave Gillette's razors and blades business as a stand-alone operation, and first
bring its personal care brands in-house, namely the men's grooming line Gillette
Complete and Right Guard deodorants. "It would be a monumental mistake if P&G
brought the razors and blades business in-house, because Gillette does such a good job
marketing to men," said Chappell, adding, "It's questionable that P&G could actually
improve on that part."
The deal, which a P&G spokeswoman said likely will take six to nine months to close,
could cause P&G to take its eye off of its most precious asset: beauty. Over the past
several years, P&G has been challenged in beauty by the formidable L'Oreal Paris,
retailers said, as well as by up-and-comer Physicians Formula. One retail executive said
his P&G beauty business has been down and that the company has done little to boost
Clairol's hair color business. "Maybe this [deal] is to take our minds off of the fact we
aren't seeing hair color growth yet," he said.

18
Indeed, sales gains of Clairol products haven't been realized since the 2002 acquisition
brought P&G into the hair color arena. In fact, sales of Clairol's hair color brands fell by
6.7 percent for the 12 months ended Dec. 24. to $318 million, according to Information
Resources Inc., excluding Wal-Mart. And while P&G was busy integrating Clairol,
L'Oreal was launching new products such as Couleur Experte, a $20 dual-process hair
color kit that shattered the price barrier in the category. In the skin care aisle, L'Oreal
broke new ground with a $25 microdermabrasion kit that is selling like beauty's answer
to the iPod.
As if to acknowledge its slow digestion of Clairol, P&G's Rob Matteucci, former head of
the Clairol business, left the company last year and hair color was added to the title of
Marc Pritchard, who is now president of Global Cosmetics and Retail Hair Colorants.
Pritchard is credited with turning around the Cover Girl and Max Factor brands.
Clairol also brought Patrice Louvet, former general manager of P&G's Northwest Asia
Hair Care division, on board, naming him general manager of North America Retail Hair
Care Color.
Growth in the hair color category has been negative for at least the 12 months prior to
Dec. 26. One drugstore buyer noted that P&G's ambivalent handling of the Clairol brands
might signal what it will do with Gillette's brands.
"It's too early to tell what the acquisition will bring, but with Clairol, it seems that P&G
just added the brand to an existing salesperson's bag of goods. Where once the
salesperson was selling Pantene and Secret, they then started selling Nice 'n Easy and
Herbal Essences, too. It doesn't seem to have the specialty it once did," the buyer said of
the Clairol business, adding that he hopes that the same won't be the case for Gillette's
technologically sophisticated product portfolio.
Others think the acquisition might dilute the Cover Girl and Max Factor businesses,
perhaps even giving Revlon more time for revival.
"This can distract them," said industry expert Allan Mottus. He added that a big part of
the allure of Gillette for P&G is to expand its international business -- another component
that could remove the emphasis for the short term from beauty.
Mark Griffin, president and chief executive officer of Lewis Drugs Inc., a regional
drugstore chain based in Sioux Falls, S.D., is among those thinking that the effort P&G
must put into digesting the acquisition could give Revlon some wiggle room. "It gives
Revlon a breather. No matter how you cut it, it isn't easy to take on a $57 billion
acquisition."
The acquisition also could help L'Oreal flourish in mass beauty. "L'Oreal is kicking on all
cylinders," said Mottus. "Their new products, such as the glycolic peel, are hot and the
company is going to learn so much from its freestanding stores."
But the Gillette acquisition does offer P&G a real opportunity to immediately delve into
the men's beauty business. Gillette, far from a true beauty brand with shave, batteries and
oral care accounting for much of its revenue, last year launched Complete Skincare, a six-

19
item men's line that includes a shave gel, an SPF 15 moisturizer and a cleansing bar.
Men's beauty is a category that P&G has only dabbled in with its Old Spice brand, even
as the segment grew from a niche market into an estimated $175 million business, $45
million of which comprises face lotions and cleansers, P&G's specialty. The balance
comprises aftershave sales.
Even with Old Spice, P&G has been a relatively minor player in the thriving men's arena.
Compared with its competitors, P&G seems to have arrived at the party late. Since 2002,
manufacturers such as Beiersdorf and Neutrogena have carved space on crowded mass
retail shelves with product lines that defeminize the skin care experience and instead
focus on true product benefit.
Beiersdorf's Nivea set the standard for what men liked and wanted in their personal care
regimen with Nivea For Men. No-nonsense products with masculine packaging sealed its
potential. Most recently, the brand launched the mass market's first men's antiaging
treatment, Nivea Revitalizing Lotion Q10, and last year expanded the brand with several
face products, including Fresh Cooling Shaving Gel, Oil Control Face Wash and Oil
Control Lotion.
Neutrogena also has built a solid men's skin care business comprising face wash, shave
gel, face scrub, face lotion and, most recently, a deodorant bar. Unilever, known in mass
beauty for its hair care portfolio, designed an entire Suave shampoo and styling line for
men, complete with 12 stockkeeping units. And L'Oreal, which has several men's hair
color sku's, is rumored to be entering the blossoming men's skin care category this spring.
Retailers also are starting to respond to the growing category. Rite Aid, for one, has
doubled the amount of space it dedicates to men's grooming, from four to eight feet. CVS
last year signed an exclusive deal with King of Shaves' XCD brand to sell its men's skin
care products.

Whether P&G can pull off supporting a men's skin care brand remains to be seen, let
alone whether the firm can nurture it into a relevant, competitive business. Already some
analysts are saying Gillette Complete may fall by the wayside as "the opportunity for
P&G is [in making] line extensions of the Gillette brand," not necessarily retaining
existing products.

But Gillette isn't just a men's company. Roy White, vice president of education for the
General Merchandise Distributors Council, discussed its women's business. "Just look at
what they've done in women's shave," he said. Since it hit the market in 2001, Gillette's
Venus brand has amassed sales of $2 billion and continues to introduce new, higher-
priced versions, such as the battery-power Venus Vibrance, due out this spring. And
Gillette does have some beauty roots: The company once owned Germaine Monteil as
well as Jafra, a direct beauty company.
What both companies have going for them -- given their stature as category captains
across several beauty and personal care areas -- is their capacity to leverage reams of
consumer research to help retailers build a more profitable, consumer-friendly

20
assortment. And both have independently pushed retailers to adopt a "good, better, best"
merchandising strategy to encourage consumers to trade up to more expensive products.

But will the consumer see a difference? Gary Crawford, director of nonfoods operations
of United Supermarkets, believes consumers will see better products with higher levels of
marketing expertise.

"Shrinking isn't always a good thing for the industry," said Crawford. "I don't think P&G
will take its eye off anything. I think they'll add more lines as it sees fit and cut what
needs to be cut."

And, Mottus thinks, in an interesting twist, P&G might actually become more
entrepreneurial when it comes to product development. "Procter has been oriented to
going big; this may give them the chance to innovate."
Added Griffin at Lewis: "P&G is creative and Gillette is known for manufacturing.
Putting the two together is a coup. Consumers should benefit."
The verdict is still out whether retailers will feel the pinch from the megadeal. On a
conference call with investors last week, Alan G. Lafley, chairman and ceo of P&G, said
with the addition of Gillette, P&G is projected to grow to a $75 billion company by the
end of the decade. The deal has been approved by the board at both firms, but must still
be given the green light by regulators and shareholders.
Retailers as mighty as Wal-Mart might not flinch at P&G's beefed-up size, and may
continue negotiating with the supplier as they normally do.
"Procter was a 400-pound gorilla before the acquisition," said SunTrust's Chappell.
"Now, it's a 410-pound gorilla. Either one can crush the competition."
But deals of this magnitude generally hit regional retailers hard. "I think anytime you
have fewer sources, it is a bigger challenge," said Lewis' Griffin.
Often, big vendors link with powerful retailers, leaving regional chains behind in new
products and programs. However, Griffin said P&G has been attuned to regional needs
and he expects that will continue.
However, retailers smaller than Wal-Mart will feel the impact of the deal, mainly since
the acquisition means one less deep pocket to support lucrative retailer programs, such as
trade shows. These venues can mean the loss of as much as $50,000 per show in support.
But the real pain for retailers will come from the potential absence of Gillette's
promotional dollars, especially when it comes to in-store promotions and cooperative ad
campaigns.
"There will certainly be less promotional opportunities," said one industry consultant who
works closely with retailers to build their beauty business.
He added, "Gillette was extremely aggressive in their spending. They would pony up
increased funds to drive business, whereas P&G uses a standard percentage for their
promotional budget. P&G always had a problem with Wal-Mart because [the retailer]

21
was trying to drive prices down. But now P&G is a larger, broad-based player and is in
all kinds of categories, such as shave and batteries," the consultant continued, asserting
that P&G's bulk will now strengthen its influence because of its newly broadened base.
This could have an impact on its negotiations with Wal-Mart.

"I think Wal-Mart has been insulated from this for a long time, but there will be less
room for them to make demands," the consultant said.
Other retailers have mixed feelings about the marriage of P&G and Gillette. On one hand,
retail chain executives are happy about the prospects of product innovation under P&G's
tutelage combined with Gillette's expertise in manufacturing. But many grumble about
the ongoing consolidation in the manufacturing sector. With fewer vendors, retailers fear
tougher price negotiations and a lack of creativity.
Some drugstore executives think the ongoing compression shifts the balance from
retailers to manufacturers, making it harder to strike opportunistic deals. "They just had
to counter Wal-Mart," said one discount store source. Explaining the shifts of power, he
continued, "First, manufacturers had more power, then point-of-sale scanning technology
shifted it to retailers. Category management put it back in the vendors' court and then
Wal-Mart rewrote the rules."
However, Wall Street seems unmoved by the deal's possible effect on retailers.

"I haven't really given much thought to it," said Jack Russo of A.G. Edward & Sons.
"CVS will still be dealing with much of the same thing," such as the rising cost of
prescriptions, not pricing issues from the P&G-Gillette deal.

Ulysses A. Yannas of Buckman, Buckman & Reid Inc. said the merger wouldn't likely
affect drugstores since they traditionally pay more -- and charge more -- for consumer
goods than retailers such as Wal-Mart anyway.

He was unfazed, too, about the impact on Wal-Mart, explaining that P&G's and Wal-
Mart's relationship is decades old. P&G's second-largest U.S. office is practically across
the street from the retailer in Bentonville, Ark.

"Wal-Mart buys 17 percent of P&G's inventory and 15 percent of Gillette's inventory. I

doubt if P&G is interested in disturbing that relationship," Yannas said.

22
QUESTIONS FOR DISCUSSION:

1. According to Jager, “Organization 2005 marks the most dramatic change to P&G’s structure,
work processes and culture in the company’s history.” Explain in detail the key elements of
the Organization 2005 program. What changes did the program bring about in P&G?

2. Comment on the organization structure and its suitability in view of the overall strategy
adopted by P&G.

3. What are the changes in the marketing strategy of P&G proposed in the case? How do you
evaluate in terms of global perspective of the organization?

4. Lafley believed that Organization 2005 was fundamentally right for P&G. Critically
comment on the merits and demerits of the program. Do you agree that the program was
fundamentally right? Take a stand and justify it taking into account P&G’s future prospects.

5. Analysts had expressed doubts whether the measures taken by Lafley would sustain P&G’s
growth in the long term. Comment on the Lafley’s strategy of focusing on mature markets
and leading brands? Do you think this strategy will be successful in future? What measures
must Lafley take to improve P&G’s growth in developing markets?

23