Exploring Corporate Strategy of Procter & Gamble - Case Study Example

CONTEMPORARY MANAGEMENT PRACTICE PROCTER & GAMBLE Essay structure This essay on Contemporary management practice and more specifically on organizational structure and change management at P & G contains the following components : 1. Introduction to the case 2. Organisational structure and change management theory 3. Case scenario and answers to queries raised in the case 4. Conclusions 5. Recommendations 6. Reflective journal 1. Introduction to the case Procter & Gamble (P&G), a large multinational manufacturer of consumer goods, was founded in 1837 as a soap company. After focusing solely on soap for the first century, P&G expanded into chemical processing and seed crushing in the 1930s. Subsequently, it added flaked soap and beauty soap to its product offerings and diversified further into cleaners, shampoos and toothpaste. More recently, it has achieved industry diversification by entering the paper, food, beverage and pharmaceutical businesses. A typically downstream company with multiple products and multiple markets, value addition is generally by adding extras to the product to meet specific customer needs. Customer-orientation and customization are the keys to success. The product-function matrix structure was a source of competitive advantage for P & G. Complemented by the academy culture, the Brand Managers and the functional heads were able to achieve a high degree of co-ordination which proved to be highly successful. The decentralized bureaucracy framework led to the entire strategic decision making at the top in the Cincinnati Head Office while the Brand Managers were responsible for operational decisions. P & G’s strategic orientation necessitated it to be innovative and responsive to the environment. However, the matrix structure was unable to achieve the right balance and decision making power was skewed towards top management. This high degree of centralization was at cross roads with its growth strategy and responsiveness needs. Brand managers suffered from lack of formal authority vis-à-vis their responsibilities which dented their responses to product problems and environmental changes. It also added to conflict and frustration. The distribution channels had greater bargaining power and customers were less brand-loyal. Inter-firm competition, product cannibalisation and a lack of adherence the organisation’s super-ordinate goals led to a severe erosion of market share in the 1970s. It was only in 1980 that John Smale, P & G’s chairman, stepped in to stem the rot and restructured the corporation. A new, category management system was put in place to co-ordinate the efforts of the brand managers. A fair degree of authority was delegated by the top management to the category managers which ensued greater co-ordination and quicker decision-making. International divisions were given more autonomy and flexibility. Newer work processes, work systems were put in place and communication across different countries improved. The category manager acted as a profit centre and fewer layers separated the top of the pyramid from the market. This restructuring exercise was a success. P & G management felt that though the new matrix structure may not be ideal, it was definitely suitable. It fitted P&G’s culture, supported its strategy and was flexible enough to adapt to the environment. 2. Organisation structure and change theory There are four major approaches to organisation, structure and management. They are: 1. Classical approach 2. Human relations approach 3. Systems approach, and 4. Contingency approach. The Classical approach (Taylor 1917) emphasised on purpose, formal structure, hierarchy, technical requirements and common principles of organisation. The Scientific management approach of Taylor advocated bureaucracy which was based on the principles of specialisation, hierarchy of authority, system of rules and impersonality. The human relations approach (Barnard 1968) drew attention to social factors at work, groups, leadership, the informal organisation and the behaviour of people. Systems approach (Senge 1990) tried to achieve an integration of the classical and human relations models and focused on the importance of the socio-technical system. The Contingency model (Woodward 1965) postulated that there was no one best design of the organisation and it was dependent on a range of situational variables. The Post Modernism view rejected a rational, systems and accepted explanations of society and behaviour. It placed greater emphasis on the use of language and attempts to portray a particular set of assumptions. Each of these schools represented a progression of studies and theory and faced a lot of criticism. Further, they were unable to prescribe any consensus on the shape of the organisation. However, the greatest advantage was that these theories provided a conceptual base for analysis and selection of the best structure, depending upon the unique needs of an organisation. Organisation structure (Kast & Rosenzweig 1972) is the pattern of relationships among positions in the organisation and among members of the organisation. It creates a framework of order and command through which the activities of the organisation can be planned, organised, directed and controlled. The various objectives of organisation structure are: Economic and efficient performance of the organisation and level of resource utilisation. Monitoring the activities. Individual and group work accountability Co-ordination among the various activities Flexibility in adapting to changing needs Social satisfaction of members working in the organisation. The different forms of organisation structure are presented in the following visual : The functional structure categorised the organisation vi-a-vis the various functions such as Marketing, Finance, Human Resource, Systems, Production, Research & Development etc. Product-based structures had the hierarchy divided on product / service lines. Each product or product range had an independent structure of its own. Location structures are appropriate for organisations which have a very widely spread operations. The Matrix structure (Galbraith 1971) is a combination of a functional department and a project team. Change Is a coping process of moving from a unsatisfactory present state to a desired state. Planned change refers to deliberate attempts by managers to improve organisational operations. Depending on the degree of change, four approaches (Buchanan and Huczynski 1997) to change management, as underlined in the visual, exist. Current organisational performance of P & G P & G has grown from a humble soap company to a highly diversified successful multi business group today with interests in chemical processing, seed crushing, soaps, cleaners, shampoos, tooth paste, food, beverages and pharmaceuticals. Truly, this is no mean achievement. Between 1930 and 1970, the product- function matrix structure, which allowed the Brand Managers to function in the nature of an academy, was a source of competitive advantage and P &G was a leading market player. Subsequently, however, the inherent disadvantages of the matrix structure combined with top heavy, centralized decision making, weakened the organisation’s innovative and responsive functions. Inter-firm competition, competitive forces and customer behaviour changes led to a severe erosion of market share. As a result, P & G moved from being a salesman to a drifter. It was only in 1980, after P & G top management undertook a corporate restructuring exercise and put in place a new matrix structure by bringing in category managers, a turnaround was achieved. 3. Case scenario Traditionally, P & G has been following a function-product matrix structure. Brand Managers oversaw a brand group and were responsible for a particular brand and its extensions. They also interacted with the functional heads. They reported to the Associate Advertising Managers. This structure was complemented by the Academy culture of working. All strategic decisions were centralised with the top management and the Brand Managers enjoyed only operational decision making. Here too, authority was not always associated with responsibility. The loose-tight bureaucracy could not achieve an ideal balance and hence, had failed to sustain the success story of P & G. The new Matrix structure introduced Category Managers who functioned as Profit centres, to co-ordinate the activities of the Brand Managers. The Category Managers reported to the central division managers. Delegation of authority took place and the number of layers in the organisational hierarchy was reduced. The revised structure is given below : The new structure has paid good dividends in that P & G has been able to achieve a turnaround. It allows it to be more responsive to international market trends. More decentralisation has taken place and the number of layers in the hierarchy has been reduced. The international divisions enjoy more autonomy and flexibility and communication among country divisions has improved. The present structure, admits P & G top management, may not be ideal, but, is suitable because it fitted P&G’s culture, supported its strategy and was flexible enough to adapt to the environment. Its top management is still not willing to give up control and wants to regulate co-ordination between the managers. The major disadvantages of this model are associated with their staff reporting to two managers. It reduces organisational flexibility and potentially generates conflicts between managers. Perhaps, a decentralised bureaucracy would be a better alternative. This will enable decisions to be taken closer to operational work levels and facilitate better responsiveness. More importantly, innovation, that can be a driver of growth for P & G, will be fostered. Positives can also be in the form of increased motivation and higher employee morale. Question no.1 it must be borne in mind that there is no ideal organisation structure. A wide array of models and organisational structure frameworks are available. However, there is no best model for an organisation. This is because the business environment of an organisation is dynamic and is exposed to continuous change. The various factors in the macro environment such as physical, economic, socio-cultural, technological, legal, demographic etc. are beyond the control of the organisation. Further, the strategic and operational changes taking place within the organisation in terms of growth, may call for a revised approach. Organisational culture is key factor in any organisation. Many a time, it is the most important determinant for a company’s success or failure. It represents the way of life in an organisation and includes the values, attitudes, beliefs, assumptions etc. It is impossible to radically change the culture. Culture change is very slow and only incremental improvements could be expected. There are three levels (Johnson & Scholes) of Strategy – Corporate Strategy, Business Strategy and Functional Strategy. Corporate strategy is the single overarching long term plan for the entire organisation, as a whole. It is one single strategy, irrespective of the size and nature, and addresses the issues of the multi-business enterprise. It embraces all other levels of strategy. The Corporate Strategy encompasses the scope, nature, purpose and choice of business. Business Strategy is formulated one for each business. It highlights the products, markets and the competitive advantages of a business. Hence, single businesses would have a single business strategy while a multi-business house with, say, six different types of businesses will have six different business strategies, one each catering to the unique, special needs of six individual businesses. Functional strategies, otherwise known as Operational Strategies, are designed for each function of a business such as Marketing, Finance, Systems, Human Resource, Research & Development. Thus, there are as many functional strategies in an organisation as the number of departments or functions. In view of this, what structure is ideal, at one point of time, may become outdated and obsolete, after a point of time. The product-function matrix structure at P & G, is a case in point. From the period 1930 to 1970, this structure functioned very well, was a source of competitive advantage and led P & G on the path of success. But, soon after, this model became useless and proved to be a major liability. Only after the restructuring exercise, P & G was able to effect a turnaround. Further, the success of this new structure too, has been seen only in the short term. We need to wait and watch, if this success story continues into the future as well. Question no. 2 The category management system was introduced as part of the organisation restructuring exercise at P & G. Category managers became integration agents and were responsible for co-ordinating the efforts of brand managers and in a particular product line and sharpening its strategic focus. The idea was to promote greater co-ordination and quicker decision-making. The category managers were delegated enough authority to make decisions previously done at higher levels. The category managers focused on profits and acted as a mini profit centre and reported to P & G’s central division managers. This new matrix structure was also extended to its international divisions, giving them more autonomy and flexibility. It also increased individual units’ communication across different countries. Each local manager reports to the country manager as well as the category manager. Question no. 3 A cluster is a group of 30 to 50 people of different specialities who work together on a semi-permanent basis. Within each cluster are smaller work teams of five to seven people. Upper levels of management are lean and there is little hierarchical control. The advantages and disadvantages are highlighted hereunder. Advantages Disadvantages Evolved from the matrix structure, which model has been prevailing at P & G. Requires large scale changes in the corporate culture Room for more creativity, innovation, communication and productivity. Lean management may not be acceptable to P & G top brass Much looser and more autonomous system, the type that existed at P & G from 1930 to 1970. Radical organizational culture changes may be near impossible to achieve More flexible and adaptable and might help achieve P & G’s strategy better. This model would be optimal for P & G given its size and structure as well as the future strategic and growth initiatives necessary. P & G top management must become the major drivers of change and the rest of the organisation would follow suit. 4. Conclusion P & G, presently, is a successful multi business organisation with a wide range of businesses and products. After almost forty years of success and prosperity, it had to concede considerable market share due to organisational and environmental problems. The restructuring exercise in 1980 has turned around the organisation and set it on a path of success. However, to sustain its prosperity, it needs to change more and the clustering organisational structure model, would be highly appropriate. This model necessitates in a radical shift in the top management corporate culture. But, considering the future plans, P & G would be best served by this model. 5. Recommendations – Answer to question no.4 of the case It is highly recommended that P & G embraces the clustering model of organisational structure. P & G has already adopted loose-tight, decentralised bureaucracy in the past. Recent changes in the form of the new matrix structure have been fairly substantial. Therefore, P & G top management must go the whole hog and take up the clustering model, with all seriousness. P & G must realise that unless this is done, it will not be able to command a dominant presence in the market and it may be forced to accept large scale changes in the future. The clustering model, as a follow-up to the new matrix structure, will definitely work wonders for the long term success and prosperity of P & G. Reflective journal Change is an essential part of an individual or organisation’s life. Only change is permanent and therefore, willy nilly, one needs to accept it. There are two major forces involving change – drivers of change and resistors to change. Depending upon the force and power of the individual forces, change acceptance and implantation, is easy or difficult. Resistance to change is generally characterized by unwillingness to accept newer environments and the fear of the unknown. With proper education and counseling, change management can succeed. The organizational change management model with regard to the degree of change and change approach has been highlighted. References Taylor F 1917, Organizational theory and behaviour, Available at http://statpac.org/walonick/organizational-theory.htm, Accessed 1 May 2011 Barnard, C. I. 1968. The Functions of the Executive. Cambridge: Harvard University Press. Senge, P. 1990, The art & practice of the learning organization, World Business Academy. p. 126-138. New York: Jeremy P. Tarcher. Woodward, J. 1965: Industrial organization: Theory and practice. New York, NY: Oxford University Press. Mullins, Management & Organization behaviour 2005 , 7th edn. Pearson Education Robbins, S.F., Judge, T.A. 2007. Organizational Behaviour. 12th edition. Pearson Education Galbraith, J.R. 1971. Matrix Organization Designs: How to combine functional and project forms. In: Business Horizons, February, 1971, 29-40. Buchanan, D. and Huczynski, A. 1997. Organizational Behavior – An Introductory Text. London et al.: Prentice Hall. Johnson, G, Scholes, K, Whittington, R Exploring Corporate Strategy, 8th Edition, FT Prentice Hall, Essex, 2008 Kast, F. E., and Rosenzweig, J. E. 1972. General systems theory: Applications for organizations and management, Academy of Management Journal. 15(4): Read More