In the summer of 1999, Procter & Gamble told its shareholders that it was changing almost everything at once.
The maker of Tide, Crest and Pampers had just had “a good year for our shareholders, but not a great year,” in the words of its chief executive, Durk Jager. He wanted faster growth, and his answer was Organization 2005, “our major initiative to accelerate growth through far-reaching changes in structure, work processes and culture.”
The list was long. P&G would move from a structure built around geographic regions to global business units built around products. Decision-making was decentralized “for greater speed.” People were asked to go for stretch targets, and new reward systems put more of senior management’s pay at risk. The program would affect about 15,000 positions worldwide and cost about $1.9 billion after tax over six years. In return, the company expected sales growth of 6 to 8 percent and core earnings-per-share growth of 13 to 15 percent in each of the next five years.
The chairman, John Pepper, who had designed the plan with Jager, called it “the boldest change effort in Procter & Gamble’s history.”
On March 7, 2000, P&G warned that its third-quarter earnings would fall 10 to 11 percent from a year earlier, blaming higher costs for raw materials and manufacturing. Its shares lost 31 percent that day, falling to $60 and dragging on a Dow Jones Industrial Average that fell about 374 points in all, the Associated Press reported.
By June, A.G. Lafley was chief executive. Jager retired as of July 1.
In their letter to shareholders that August, Lafley and Pepper did not lead with raw materials. “We tried to do too much too fast,” they wrote. P&G had launched more new brands than in any other period in its history, while its biggest, most profitable brands had not grown at acceptable rates. It had placed people into new jobs as part of the restructuring, “but we lost continuity in some parts of the business.” The new organizational design itself, they added, “remains fundamentally right.”
Nine years later, Lafley described that summer in the Harvard Business Review. P&G had lost $85 billion in market value, but its biggest problem, he wrote, “was a crisis of confidence.” Many of its leaders “had retreated to their bunkers.” Business units were blaming headquarters for poor results, and headquarters was blaming the units. Retirees had seen their profit-sharing nest eggs cut in half.