The case discusses in length about the HR

practices and corporate culture of the US

based Procter & Gamble (P&G), global leader
in the fast moving consumer goods industry.
The case elaborates on the measures taken by
Durk Jager, former CEO of P&G, to bring
about a significant change in the corporate
culture of the company in order to fuel
innovation and financial growth. It examines
the reasons why Jager's measures failed to
deliver the desired results. The case then
discusses how Alan George Lafley, the new
CEO, who followed a different approach from
that of Jager, managed to restore the cultural
equilibrium at P&G and was able to revive the
company's financial performance.

Issues:
» Best practices in HR and the corporate culture of a large, multinational company in the
FMCG industry

» Problems involved in radically altering the corporate culture of a large, conservative,

tradition-bound company

Contents:
Page No.
Introduction 1
P&G's HR Practices and Culture 2
Cultural Changes under Jager 4
Cultural Changes under Lafley 7
Exhibits 10

Key Words:
HR practices, corporate culture, US, Procter & Gamble, P&G, global leader, Durk Jager,
culture, fuel innovation, financial growth, results, Alan George, cultural equilibrium

P&G's desire to change isn't a sign of weakness but one of strength. Successful
companies can't sit still. They must continually reinvent themselves in order to stay
competitive in an ever-changing environment."1

- Mel Hughes, Financial Analyst at Stein, Roe & Farnham, a US-based investment
firm.
"P&G people and our strong culture are sustainable competitive advantages. P&G
people are bright, creative owners of their company with a passion for winning. But,
more than that, they are committed to improving the lives of the world's consumers. They
embrace a common set of values and principles that keeps them focused on doing the
right thing - on doing whatever it takes to serve our consumers."

- www.pg.com, May 04, 2001.

Introduction
The US-based Procter and Gamble (P&G),
one of the leading fast moving consumer
goods (FMCG) companies in the world was
faced with a situation of stagnant revenues
and profitability in the mid-late 1990s (Refer
Exhibit I). In order to accelerate growth,
P&G's President and CEO at the time, Durk
Jager (Jager) launched the Organization 2005
program in July 1999. Organization 2005 was
a six-year long organizational restructuring
exercise, which involved a radical revamping
of P&G's organizational culture, reduction in
hierarchies and retrenchment of employees.
With the implementation of the program,
P&G aimed to increase its global revenues
from $38 billion in 1999 to $70 billion by
2005.

Established in 1837, P&G was globally famed for its people-centric policies (Refer
Exhibit II). It was the first company to introduce a shorter workweek over a hundred
years ago, and also had the oldest profit-sharing plan in the US.

Each and every employee was entitled to stock options in P&G. Over the decades, P&G
had built a strong, tradition-bound and conservative corporate culture that was resistant to
change. Analysts felt that the culture had taken deep roots in P&G and in its operations
across the world. They felt that changing this culture would be a major challenge. Jager
took up the challenge, in order to foster growth and innovation in the company.

Analysts said that though the Organization

2005 program was well-conceived, it was not
executed properly. They felt, and Jager
himself admitted, that he tried to change the
culture too drastically in a very short time.

This resulted in a rise in costs and a decline in

the company's profitability. In April 2000,
 P&G announced an 18% decline in its net
profit for the January-March 2000 quarter. For
the first time in eight years, P&G witnessed a
decline in net profits. After a brief stint of 17
months as CEO, Jager resigned.

In June 2000, Alan George Lafley (Lafley) took over as the new President & CEO of
P&G. Lafley reverted back to the old culture of P&G and did not make attempts to
change it radically. With Lafley at the helm, P&G's financial performance improved
significantly (Refer Exhibit III).

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. However, analysts expressed doubts, whether Lafley's
leadership would sustain P&G's growth in the long term.

Managing Cultural Change at P & G - Next Page>>

1] "Culture Change: Lessons from A Cultural Revolution," Marianne Kolbasuk McGee,

www.informationweek.com, October 25, 1999.

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Managing Cultural C

P&G's HR Practices and Culture

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 fat of the swine. By 1859, P&G had
become one of the largest companies in
Cincinnati, with sales of $1 million.

From the very beginning, P&G's management

treated its employees like family members.

The company's core values, purpose, principles and vision focused on the development of
its people (Refer Exhibit IV, V and VI). In 1885, P&G decided to give its employees
Saturday afternoons off with pay. By 1887, P&G had started a profit-sharing plan.

In 1915, the company began to offer a sickness, disability and life insurance plan. Eight
years later, P&G guaranteed employees forty-eight weeks of employment in a year.

While the Great Depression of the 1930s forced other manufacturers to shut down, P&G's
soap plants continued to function. P&G has traditionally encouraged lifetime
employment by offering stock options and other benefits to those who stayed with the
company.

P&G followed a comprehensive recruitment

process. The company's cultural legacy was
the rule to conduct almost all its recruitments
on campuses. Resumes were scanned for
promising candidates, including those students
who had not signed up for interviews. Top
officials of the company went for pre-
placement talks at colleges. Strong
relationships were developed with college
placement offices and faculty. The company
hired students for various functions such as
finance, manufacturing, marketing, research
and sales. It hired from all the major
universities in general, and from the big
business schools such as Harvard, Wharton,
Stanford and Northwestern in particular.

P&G conducted written tests to evaluate the applicants' aptitude for leadership and
problem solving. The company conducted an in-house test (known as the M Test) that
measured the candidate's interpretative and reasoning skills. Studies made by P&G
showed a strong positive correlation between high scores on the M Test and success on
the job.

P&G's interviewing process was purposeful and behavior-based. The candidate's past
experience and accomplishments were examined for leadership, problem solving
capabilities, initiative and ability to work with others.

P&G's manpower policies emphasized giving new recruits early responsibility and
charted out a rapid career path. New recruits were encouraged to build long-term careers
with the company.

The company took several measures to develop its employees. Superiors were
encouraged to train and help in the development of their subordinates. The vehicle for
this process, used around the world, was the Work and Development Planning System
(W&DP).

The W&DP had four components - the previous year's plan versus the results; areas for
further growth and development; near-term and long-term career interests; and a
development and training plan for the year ahead. The W&DPs were reviewed annually
and updated regularly. In addition to the formal review and updates of the W&DPs,
superiors were encouraged to supplement the program with informal, ongoing coaching...

Excerpts >>

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P&Cultural Changes under Jager

Under the Organization 2005 program, P&G's
corporate structure was reorganized from four
geographic business units to five global
business units (GBUs) based on product
categories (Refer Exhibit VIII). Using IT as
catalyst for change, the program worked
towards speeding up decision making to
enable the company innovate and introduce
new products, eliminate bureaucracy and
reduce costs. It also aimed at creating an
informal work environment that facilitated
knowledge sharing among employees.

The program was also directed towards

revamping the work culture of the company so
as to focus on its new Stretch, Innovation and
Speed (SIS) philosophy.

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." Jager outlined the cultural changes he wanted to achieve through the
program (Refer Table I).

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 the possibility that an under-
performing manager might project himself as an achiever...

Cultural Changes under

Lafley
Soon after becoming CEO, Lafley rebuilt the
top management team and made efforts to
improve P&G's operations and profitability.
Lafley transferred 15 senior most officers, an
unprecedented move in P&G's history. He
assigned senior positions and higher roles to
women. In one instance, he appointed a 42-
year old woman, Deborah A. Henretta, as the
head of P&G's global baby care division, in
preference to 78 more senior general
managers in the company.

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 (GLC - Refer Exhibit IX) came down to 49, compared
to 54 in 1999.

Lafley made efforts to promote competition among its top management team. In the
meeting of GLC held every quarter, Lafley disclosed financial results of each business
unit to the entire team. He said, "It motivates people who are performance-oriented. For
the few people that it doesn't motivate, we are probably not the right place for them."...
Exhibits
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