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Organisational Structure of Procter & Gamble

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Introduction

Procter & Gamble is a Fortune 500 American multinational corporation headquartered

in Downtown Cincinnati, Ohio that manufactures a wide range of consumer goods

(Wikipedia 2010, Procter & Gamble). Procter & Gamble (P&G) is America’s biggest

maker of household products, with at least 250 brands in six main categories: laundry

and cleaning (detergents), paper goods (toilet paper), beauty care (cosmetics,

shampoos), food and beverages (coffee, snacks), feminine care (sanitary towels) and

health care (toothpaste, medicine). P&G’s famous brands include Ariel, Pantene,

Head & Shoulders, Fabreze, Sunny Delight, and Oil of Olaz. About half of P&G's

sales come from its top ten brands. P&G also makes pet food and PUR water filters

and produces the soap operas Guiding Light and As the World Turns (Corporate

Watch, n.d. Procter & Gamble). So what has made P&G become what it is today? The

answer is multiple but apparently its organisational structure has played an important

role, which has necessitated this study.

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P&G’s Structure

An organisation is a consciously coordinated social entity, with a relatively

identifiable boundary, that functions on a relatively continuous basis to achieve a

common goal or set of goals. And organisation structure defines how tasks are to be

allocated, areas of responsibility and authority, who reports to whom, and the formal

coordinating mechanisms and interaction patterns that will be followed (Robbins &

Neil Barwell 2002, pp.6-7).

So far, a great number of theorists have developed their theories as to the

classification of the organisation structure. According to Duncan (1979, cited in

Bartol et al. 2006, p.196), organisation structure is also called departmentalisation

which is defined as grouping individuals into units, and units into departments and

larger units to achieve organisational goals. Different patterns of departmentalisation

are called organisation designs. Functional, divisional, hybrid and matrix are four

common departmentalisation patterns.

Functional structure is a type of departmentalisation where positions are grouped

into functional (or specialization) areas. In other words, positions are combined on the

basis of similarity of expertise, skill and work activity.

Divisional structure is a type of departmentalisation, with positions grouped by

product, service or market similarity.

Hybrid is a form of departmentalisation with both functional and divisional structure

elements at the same management level (Draft 1998, cited in Bartol et al. 2006,

p.202).

Matrix structure is a type of departmentalisation which superimposes divisional

horizontal reporting relationships onto a hierarchical functional structure (Miles &

Snow 1992, cited in Bartol et al.2006, p.204). Thus the structure is both functional

and divisional at once. There are two chains of command, one vertical and one

horizontal.

P&G has undertaken many structural changes over the past century, but that discussed

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in this study is the current structure of P&G. The main structure, partial organisation

structure and specific structure of P&G are shown in Figure 1.1, 1.2 and 1.3.

Figure 1.1 (Corporate culture: Strength in Structure, P&G)

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Figure 1.2 Partial organisation structure of P&G (MIKOŁA J JAN PISKORSKI &

ALESSANDRO L . SPADINI , Procter & Gamble: Organization 2005(A) pdf, p.9)

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Figure 1.3 Organization 2005 Structure, 1999 (MIKOŁA J JAN PISKORSKI &

ALESSANDRO L . SPADINI , Procter & Gamble: Organization 2005(A) pdf, p.15)

Global Business Units (GBUs)

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Global Business Units were responsible for product development, brand design,

business strategy and new business development. In total, there were seven GBUs

(represented by the ellipsis) each with complete profit responsibility, and

benchmarked against focused product-category competitors. Each operated

autonomously focusing on a different product category, such as Fabric and Home

Care or Tissue and Towel (see the middle section of Figure 1.3). Each GBU was led

by a president, who reported directly to the CEO and was a member of the global

leadership council that determined overall company strategy. At a GBU level, Vice

Presidents of Marketing, R&D, Product Supply, New Business Development, and

support functions such as IT implementation reported to the GBU President (see the

middle section of Figure 1.2 ). The new business development function of GBUs was

managed separately from the rest of the GBU.

Market Development Organizations (MDOs)

Market Development Organizations (MDOs) were designed to take responsibility

for “tailoring the company’s global programs to local markets and for using their

knowledge of local consumers and retailers to help P&G develop market strategies to

guide the entire business.” In total, there were seven MDOs represented by the ellipsis

(see the top part of Figure 1.3). Unlike the GBUs, they did not have complete profit

responsibility, but were instead compensated on sales growth. Each MDO was led by

a president who reported directly to the CEO and, like the GBU presidents, sat on the

global leadership council.

Global Business Services (GBS)

The third leg of the new organizational structure, Global Business Services (GBS)

unit was given an ambitious plan to standardize, consolidate, streamline, and

ultimately strengthen business processes and IT platforms across GBUs and MDOs

around the world. GBS was organized as a cost center. The head of GBS reported

directly to the CEO, but was not a member of the global leadership council.

As shown in Figure 1.2 and Figure 1.3, corporate new ventures president, chief

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financial officer and other presidents or officers make up the functional structure,

while seven MDOS and GBUS who are responsible for different areas and different

products make up the divisional structure. Thus the structure is both functional and

divisional at once, so P&G’ organisation structure should be a matrix structure as per

the classification of organisation structure.

Contingency Factors of P&G’s Current Structure

The mostly adopted theory in deciding an organisation’s structure is contingency

theory. This viewpoint argues that appropriate managerial action depends on a

situation’s parameters. The best structure for a firm was seen to depend on

contingency factors such as strategy, technology, size and environment (Bartol et

al.2006, p. 219).

Miller (1986; 1998, cited in Bartol et al. 2006, p.220) matched strategies with

appropriate structures. And in terms of his theory, P&G’s strategy is similar to

innovative differentiation which is to distinguish one’s products and services from

those of competitors by leading in complex product or service innovations. As in

P&G’s case, it has diversified its products into many types (cleaners, shampoos,

toothpaste) and into hundreds of brands. A matrix structure fits with an innovative

differentiation strategy.

Another factor determines P&G’s current structure is partly owing to technology.

Woodward (1958; 1965, cited in Bartol et al. 2006, p.221) found three different

technology types often predicted structural firm’s practices, and P&G should be of

continuous-process production that makes products of liquids solids or gases through

a continuous process. Therefore, by Woodward’s theory, P&G should have low

formalization and centralisation.

It is known for sure that size has played a critical part in the formation of P&G’s

current structure. As organisations grow, departments and levels need to be added, and

structures grow more complex. With functional forms, this drives a change to

divisional structure (Astley 1985; Cullen, Anderson & Baker 1986, cited in Bartol et

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al. 2006, p. 222). As organisations grow, decentralizations increases. This is probably

due to the rules and regulation guiding lower level decision making (Robbins 1990,

cited in Bartol et al. 2006, p.222).

Burns and Stalker (1961, cited in Bartol et al. 2006, p.223) studied the effects of

environment on organisation structure. They found different structural characteristics,

depending on whether the environment was stable with little change or unstable with

rapid change and uncertainty. P&G has been classified as a downstream company,

originating as a marketer distributor (Galbraith, 1991, cited in Leadership &

Organisation Development Journal. Vol. 15. No.2, 1994, pp.24-28). Downstream

companies, like P&G, have multiple products and multiple markets. They are also

customer oriented and concerned with tailoring their products to meet target market

needs. Thus they need to be more flexible and adaptable than traditional

manufacturing companies (Leadership & Organisation Development Journal. Vol. 15.

No.2, 1994, pp.24-28). In highly unstable and uncertain environments, by contrast,

firms had more organic characteristics, decentralized decision making, few rules and

regulations, with hierarchical considerable delegation between levels, which is also

applicable to P&G.

Another Perspective to Analyze P&G’ s Structure

Henry Mintzberg (1983, cited in Stephen P. Robbins & Neil Barnwell, 2002, p.111)

argues that there are five basic parts to any organisation. They are defined as follows:

1. The operating core—employees, who perform the basic work related to the

production of products and services.

2. The strategic apex—top-level managers,who are charged with the overall

responsibility for the organisation.

3. The middle line—managers, who connect the operating core to the strategic apex.

4. The technostructure—analysts, who have the responsibility for effecting certain

forms of standardization in the organisation.

5. The support staff—people who fill the staff units that provide indirect support

services for the organisation.

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Any one of these five parts can dominate an organisation and where each dominates, a

different organisational form emerges. Moreover, a given structural configuration is

likely to be used depending on which part is in control. As a result, there are five

distinct design configurations and each one is associated with the domination by one

of the five basic parts.

After comparison P&G’ structure with Mintzberg’s theorem, we can draw a

conclusion that P&G should be of machine bureaucracy with a horizontal divisional

structure. The machine bureaucracy has highly routine operating tasks, formalised

rules and regulations, tasks that are grouped into functional departments, centralized

authority and a decision making that follows the chain of command. And the

divisional structure is a set of autonomous self-contained units, each typically

configured as a machine bureaucracy. The dominant part of the divisional structure

lies with middle management. They report to, and are administered by, a central

headquarters. (Stephen P. Robbins & Neil Barnwell, 2002, p.114-117) In P&G’s case,

the functional departments are engineering, financial, human resources, technology

and other departments, and divisions are seven MDOS and GBUS which perform

different function and are in charge of different regions and different products.

What Makes P&G’ Current Structure Stand Out?

The market and industry P&G lies in have determined P&G’s present structure, as

P&G must focus on two things, one is means (processes) in order to make excellent

product quality and minimize the cost, the other is ends (outcomes) to yield profits

and satisfy the shareholders, stakeholders, customers and so on. And this structure

overtly has its manifold merits than P&G’s former structure, mainly are as follows:

First it created a clear balance between these two key dimensions – customer focus

and product focus; second it presented a unified sales contact for customers that is

focused on sales growth of all products; third the product-category business units with

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profit and loss responsibility have full control over their key functions; and fourth the

service functions and corporate functions formed a third and fourth dimensions in

matrix structures over the two key dimensions. The new structure is a four-dimension

front-back hybrid matrix with a top leader, a coordination council to define priorities

and solve disputes, matrix leaders, and subordinates with the need to coordinate and

balance four influences structure as shown in Figure1.2.

The routines and policies that had created problems to the proper functioning of

the matrix organization also streamlined and adapted to the new structure. A single

business-planning process was created whereby all budget elements could be

reviewed and approved jointly by the various matrix leaders (Ronald Jean Degen,

2009, pp.34-35).

Examination of Organisational Effectiveness

Centring around organisational effectiveness, there have appeared diverse

approaches trying to measure it, the most common ones are the goal-attainment

approach, systems approach, strategic-constituencies approach and the balanced

scorecard approach.

First the definition of organisational effectiveness must be presented despite that

effectiveness is conceptually complex. Organisational effectiveness can be defined as

the degree to which an organisation attains its short-(ends) and long-term (means)

goals, the selection of which reflects strategic constituencies, the self-interest of the

evaluator and the life stage of the organisation (Stephen P. Robbins & Neil Barnwell

2002, p.87).

(1) The goal-attainment approach states that an organisation’s effectiveness must

be appraised in terms of the accomplishment of ends rather than means. Put another

way, it should be judged by whether it has achieved what it set out to achieve, rather

than how it got there. Popular goal-attainment criteria include achieving profit

objectives or meeting budgets, achieving certain quality outcomes, helping a certain

number of disadvantaged people, attaining health objectives or winning a sports

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competition. Goal attainment approach allows for better concentration on and

dedication to certain objectives of an organisation and easier assessment of its

performance because the number of goals of the organisation is usually small and

countable.

(2) Systems approach is to evaluate an organisation’s effectiveness by its ability to

acquire inputs, process the inputs, channel the outputs and maintain stability and

balance. Systems models emphasise criteria that will increase the long-term survival

of the organisation, such as the organisation’s ability to acquire resources, maintain

itself internally as a social organisation and interact successfully with its external

environment.

Therefore, systems approach has such advantages: it allows managers to make

decisions that will benefit the organisation’s long-term health and survival rather than

short-goals; besides, the systems approach increases the manager’s awareness of the

interdependence of organisational activities; moreover, systems approach has higher

applicability where end goals either are very vague or defy measurement.

(3) Strategic-constituencies approach proposes that an effective organisation is one

that satisfies the demands of those constituencies in its environment from which it

requires support for its continued existence. This approach is similar to the systems

view, yet it has a different emphasis. Both consider interdependencies, but the

strategic-constituencies view is not concerned with all the organisation’s environment.

It seeks to appease only those in the environment who can threaten the organisation’s

survival—that is, the strategic constituencies. Strategic-constituencies approach

enables managers to decrease the chance that they might ignore or severely upset a

group whose power could significantly hinder the organisation’s operations as well as

to modify its preference ordering of goals as necessary to reflect the changing power

relationships with its strategic constituencies (Robbins & Barnwell, 2002, p. 81).

(4)Balanced scorecard approach seeks to balance the various demands on the

organisation with its capabilities by use of balanced scorecard. The balanced

scorecard encompasses four basic components or perspectives that any organisation

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needs to consider: financial perspective, customer perspective, internal business

perspective and innovation & learning perspective. The first advantage of the

balanced scorecard is that it brings together in a single report many areas of

importance to an organisation’s competitiveness. Second is that the scorecard acts to

guard against suboptimisation. Third it also has the advantage of involving a

reasonably wide range of managers and stakeholders in the process of nominating

what is important for the organisation.

After introducing the four current approaches to examine the organisational

effectiveness, a question that what is the appropriate approach for the assessment of

P&G’s organisational effectiveness needs to be answered. Because of the complexity

and vastness of P&G’s structure and a demanding environment where it operates, goal

attainment, systems, strategic-constituencies approaches are all inappropriate for the

assessment of P&G’s organisational effectiveness. The P&G’s management must look

into every perspective and identify just a few goals for each of the four perspectives

and reach the final decision which should be balanced in terms of every perspective

rather than contributing to one particular perspective.

Inherent Structural Problems and Better Option

Though P&G has started its restructuring plan since 1998 and gone to as far as

today, there are still some inherent structural problems. As its matrix structure has

added a layer of category managers, brand managers and service staffs to a functional

hierarchy, costs grow. Also, matrix designs can also encourage group decision making

until groups make even minor decisions, which can seriously erode productivity.

Finally, while a matrix can adapt to change, this can be slow if members have poor

interpersonal skills, or senior management tries to keep control (Bartol et al. 2006, p.

206); in other words it means slow responsiveness and low flexibility. Could there be

a better option for P&G? Boundaryless structure may be the answer. A contemporary

organisational design is the idea of the Boundaryless organisation, an organisation

whose design is not defined by, or limited to, the horizontal, vertical or external

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boundaries imposed by a predefined structure. Also named as “barrier-free”

organisation by Gregory G. Dess et al.(1995, pp. 7-20), a Boundaryless organisation

enables a firm to bridge real differences in culture, function, and goals to find

common ground that facilitates cooperative behaviour. Boundaryless organizing is to

remove vertical boundaries through such structural approaches as cross-hierarchical

teams (which include top-level managers, middle managers, supervisors and

employees) and participative decision-making, the hierarchy is flattened. Managers

can remove horizontal boundaries by using cross-functional teams and organizing

work activities around work processes instead of around functional departments. And

external boundaries can be minimized or eliminated by using strategic alliances with

suppliers, or value chain management customer-organisation linkages. Ideally,

through all these restructuring, P&G can streamline its work activities so that it can

respond quickly to the tumultuous and fast moving marketplace.

Conclusion

Through this study, we have looked into the P&G’s organisation matrix structure

and how does its structure facilitate the achievement of its goals and to some extent,

this structure is effective. However, in a context of complex, rapidly changing and

highly competitive global environments, an organisation has to adapt quickly in order

to take advantage of opportunities that arise anywhere in the world. And the need for

rapid innovation cannot be ignored as well. So turning to a boundaryless structure

which has higher environmental responsiveness may be a better option for P&G.

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