978-1259278211 Case 26 Solution Manual Part 2

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1. OPTIONAL QUESTION: What were the major organizational changes Lafley made at

P&G, and what challenges does he face now?

NOTE: There are no PowerPoint slides to accompany this discussion.

Referencing Chapter 10: Organizational Design

Organizational structure refers to the formalized patterns of interactions that link a firm’s tasks,

technologies, and people. Structure provides a means of balancing two conflicting forces: the

need for the division of tasks into meaningful groupings, and the need to integrate the groupings

Factors that facilitate the effective coordination and integration of key activities include having a

common culture and shared values, horizontal organization structures, horizontal systems and

An effective organizational design can encourage the flow of information and enhance working

relationships between functional departments and activities. However, achieving the coordination

and integration necessary to maximize the potential of an organization’s human capital involves

Lafley wanted P&G to be big, yet nimble. He made drastic changes in the organization’s

structure to ensure better communication among managers. For instance, he moved division

presidents from the eleventh floor executive suite to the same floors as their staff. He established

Lafley had trimmed P&G’s workforce by cutting 9,600 jobs and there was always the possibility

of more downsizing to come. This would be a challenge because human resources are P&G’s

Different structures can create an effective flow of information and enhance working

relationships between functional departments and activities. Achieving the coordination and

integration necessary to maximize the potential of an organization’s human capital involves

Some firms, such as Proctor & Gamble, may want to leverage relationships with outside

suppliers and create a more modular organization: an organization in which non-vital functions

are outsourced, which uses the knowledge and expertise of outside suppliers while retaining

strategic control. There are both advantages and disadvantages to this choice of structure. The

advantages of a Modular Organization include:

●Directs talent to the most critical activities

●Maintains strategic control over core competencies

The disadvantages include:

●Inhibits common vision due to reliance on outsiders

●Outsourcing may diminish future competitive advantages

●Difficult to bring value-added activities back into the firm

Financial results indicated the success of Lafley’s moves in the above direction. The company’s

growth rate increased along with its profitability. However, P&G still faced several challenges.

Outsourcing new product innovation meant that P&G might not pick the product winners,

missing opportunities that might go to P&G competitors, or, if adopted, new product

However, choice of structure is also dependent on the ability of top management to guide

decision-making. Lafley had created the design of a complex matrix organizational system that

shared power among executives in charge of functions such as HR, marketing, and finance;

A matrix organizational structure is an organizational form in which there are multiple lines of

authority and some individuals report to at least two managers. This approach strives to

overcome the inadequacies inherent in the other structures. It is a combination of the functional

and divisional structure. Most commonly, functional departments are combined with product

There are both advantages and disadvantages of this structure as well: The matrix structure

allows for shared resources instead of duplicating functions, as would be the case in a divisional

structure based on products. Individuals with high expertise can divide their time among multiple

projects. Such resource sharing and collaboration enables the firm to use resources more

Under McDonald, this matrix system became more cumbersome, leading to a decline in the

Lafley’s decision to divest the company of brands would create major change in organizational

structure. He would have to assess the capabilities of his workforce and reconfigure reporting

2. What intangible resources did P&G have that Lafley and McDonald used to enact

strategies? What competitive strategy do these resources best support now?

NOTE: There are no PowerPoint slides to accompany this discussion.

Referencing Chapter 3: Analyzing the Internal Environment of the Firm

To answer the question of how to support a competitive strategy, it’s important to consider the

concept of the resource-based view of the firm, and the three key types of resources: tangible

resources, intangible resources, and organizational capabilities. The P&G case can be used to

focus on the importance of intangible resources within a firm. Intangible resources can often

provide a firm with the strongest possible source of advantage. Let’s look at Proctor & Gamble’s

key intangible resources:

Intangible Resources:

Organizational – Lafley reorganized to keep the focus on those activities that P&G did better

Human – P&G employees were tightly knit and loyal in the past – P&G only promoted from

Innovation – this was a traditional strength, but it needed to be managed in the right direction –

Reputation – P&G’s core brands are its most significant strength – this should be protected at all

Organizational Capabilities: Lafley’s, and then McDonald’s vision, leadership, and focus on

innovation had kept P&G flexible, therefore able to respond quickly to emerging opportunities.

Referencing Chapter 4: Intellectual Capital

Consider the concepts of intellectual capital and human capital, both of which are intangible

assets that a company such as Proctor & Gamble needs to have in order to compete successfully.

Both Lafley and McDonald focused clearly on two key intangible resources: consumer brand

reputation and the loyalty and commitment, skills and experience of P&G’s human resources.

The case provides evidence of both Lafley’s and McDonald’s interest in building P&G’s brands.

Lafley added to the firm’s brands through acquisitions. Some of the best examples of this are the

In terms of human resources, Lafley focused on improving the leadership qualities of his top

management team. He pushed for appointments based on abilities and performance, resulting in

McDonald’s concept of “purpose-inspired growth” extended Lafley’s vision to all employees,

encouraging P&G’s human resources to think about how they were improving people’s lives.

For instance, McDonald had taken a risk with the new franchise operations, (not in the case) and

had hired, for the first time, an outsider into a key upper management role to run this franchise

Referencing Chapter 5: Business-Level Strategy

In order to achieve a sustainable competitive advantage, Proctor & Gamble has to assess its

ability to contend with other consumer goods providers, especially its main rival, Unilever. The

question of how to compete in a given business to attain competitive advantage requires an

assessment of the types of competitive strategies, including the three generic strategies that are

used to overcome the five forces and achieve a competitive advantage:

●Overall cost leadership

oLow-cost-position relative to a firm’s peers

●Differentiation

oCreate products and/or services that are unique and valued

●Focus strategy

oNarrow product lines, buyer segments, or targeted geographic markets

Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The

Ask the students which strategy they think P&G should pursue, and why. Their answers may

include some of the following points:

It may seem as if cost leadership should be the chosen strategy for a company in the fast-moving

consumer goods industry, but Proctor & Gamble had tried to keep costs under control in order to

achieve parity with competitors. P&G has tried to develop a differentiation advantage while

keeping costs at a reasonable level. Differentiation requires the creation of something that is

As evidence of this, many consumers continued to buy Tide even when generic products were

cheaper! Think about why they do this – had P&G convinced them that they get better

performance from Tide, therefore justifying the premium price? Both Lafley and McDonald

believed that P&G should begin concentrating on higher margin products, like beauty and

personal care, rather than laundry detergent, which can be easily knocked-off (imitated) by

private labels. But couldn’t P&G use the same strategy that worked so well for Tide and apply it

successfully to a category like skin care?

Certainly, things had changed, with consumers becoming increasingly price sensitive, which was

difficult for P&G with its premium-priced product lines. In addition, although P&G had been

NOTE –WEB LINKS, VIDEO:

Succession Planning Pitfalls: In June 2009 Lafley retired and selected Bob McDonald as his

successor as CEO of P&G. McDonald had been groomed for this role, having been with P&G

since 1980, and promoted to COO in 2007. McDonald’s experience with P&G in emerging

markets was expected to aid him in crafting P&G’s future strategy. Lafley would remain

Chairman of the Board. Here are some stories about this:

http://www.businessweek.com/bwdaily/dnflash/content/jun2009/db2009068_155480.htm

http://www.businessweek.com/managing/content/jun2009/ca20090610_248094.htm

http://www.sltrib.com/business/ci_12579344 Given Lafley’s legacy, McDonald had some tough

shoes to fill:

http://www.businessweek.com/magazine/content/09_25/b4136000310754.htm?

chan=top+news_top+news+index+-+temp_news+%2B+analysis.

In January 2013 at least one investor, activist shareholder Bill Ackman, clearly stated his

disappointment with the direction of the business, and he shared his opinion that McDonald was

not likely the best person for the job as CEO based on his track record, partly because top

In May 2013 P&G’s board replaced Bob McDonald after four years of struggle to revive the

business. Even though McDonald had “expanded P&G’s business in developing markets,

building a strong innovation pipeline,” it wasn’t enough. The board had “had enough,” especially

The question in June of 2013 was “can Lafley hit the target”? Lafley brought a “rock star”

quality to the job, but that may not be enough. Lafley needed to crank up the innovation pipeline,

get the right products to the right markets, and groom a successor. Lafley had to get revenue up

Also in June 2013 came the news that Lafley was reorganizing the organizational structure:

streamlining its businesses into four industry-based groups: global baby, feminine and family

care; global beauty; global health and grooming; and global fabric and home care. In a statement,

Lafley said, “We expect this structure to facilitate faster global expansion of brand and product

innovations to win with consumers.…Taken together, these organization changes will help us

report directly to Lafley, and there’s some supposition that Lafley’s eventual successor will come

from this group of four. Lafley said he would continue the turnaround plan started by McDonald,

aimed at cutting $10 billion in costs through 2016, and renewing focus on P&G’s leading

Taking the post holds risks for the 65-year-old executive. Since stepping aside almost four years

ago, Lafley has retained a rock star reputation as one of America’s most lionized corporate

chieftains. Now his legacy will rest on whether he can turn around P&G, an iconic company that

McDonald’s mantra – “living a life driven by purpose is more meaningful and rewarding than

meandering through life without direction. My life’s purpose is to improve lives.”

http://www.bloomberg.com/news/2013-05-28/lafley-s-ceo-encore-at-p-g-puts-rock-star-legacy-

at-risk-retail.html

Lafley’s motto – businesses fail when they don’t make difficult choices about where and how

they can win particular markets and put the full weight of the business behind them. Read more:

http://www.businessinsider.com/ag-lafley-rehired-as-pg-ceo-2013-5#ixzz2W3wBaDnu

Will Lafley be as successful this time around, or have things changed too much?

Referencing Chapter 6: Corporate-Level Strategy

Corporate strategy focuses discussion on the questions of what businesses a corporation should

compete in, and how the businesses should be managed so they can create “synergy” – creating

Diversification is the process of firms expanding their operations by entering new businesses. In

related diversification, a firm enters a different business in which it can benefit from leveraging

core competencies, sharing activities, or building market power. Some possibilities include:

●Mergers and acquisitions

●Strategic alliances

Whatever the choice, it should create value for all stakeholders – employees, suppliers,

distributors, and the organization’s owners themselves. The choice of diversification strategy

When achieving synergy through diversification, a firm has two choices: related diversification

through horizontal relationships with related businesses, sharing tangible and intangible

Proctor & Gamble had primarily pursued related diversification through its acquisition of brands

P&G also had engaged in unrelated diversification through its acquisition of Duracell. This was

Acquisition is the incorporation of one firm into another through purchase. It can be a means of

obtaining valuable resources that can help an organization expand its product offerings and

Over the years, P&G had spent heavily to acquire hundreds of additional brands in new

businesses that it hoped could also become part of consumers’ daily routines. Lafley’s recent

effort to jettison over half of its brands indicated that the strategy was not working anymore. In

Lafley was now trying to scale back and focus on what he called the “core” business. This move

to “stick to the knitting” seemed reasonable, as a way to consolidate assets and possibly leverage

remaining core competencies, but so far the choice of “core” brands remained unclear. And, even

if the choice focused on those long-term steady performers, such as in the fabric and home care

line, would there be enough business there to build market power and therefore profit margins?

Would Lafley succeed this second time around?