Procter & Gamble (PG 91.77, +0.41, +0.45%), is making some important organizational changes. P&G announced a new management structure that they believe will be simpler and will provide greater clarity on responsibilities. Beginning July 1, 2019, the company will operate though six industry-based Sector Business Units (SBUs) for the largest geographic markets, led by Sector Business Unit CEOs who will report to P&G CEO David Taylor.

These SBUs will have direct sales, profit, cash and value creation responsibility for its largest markets (US, Canada, China, Japan, UK, Germany, France, Spain, Italy, Russia and smaller adjacent countries). Together, these geographies account for about 80% of company-wide sales and 90% of after-tax profit. These SBUs will have responsibility for all facets of the business in these markets: consumer understanding, product and package innovation, brand communications, selling and retail execution, and supply chain. Sometimes when a large company has issue, such as in the case of PepsiCo (PEP), there are calls to spin off units and break a company in pieces. It is good to see PG coming up with an alternate solution.

The stock is not reacting much to this development, but investors are probably happy to hear this news. It simplifies the company by cutting the business units from ten to six which addresses the complaint about Procter & Gamble that its large size has hurt its ability to be innovative and adaptive to changes in the marketplace and changes in consumer tastes. This new structure will allow for more freedom to make decisions and should foster product/packaging innovation as SBUs will be able to take more risks.

Another big problem has been P&G's general organizational structure. In what is known as a matrix system, the company is organized so that rather than reporting relationships being set up in a traditional hierarchy, they are organized in a matrix. It gets confusing and there can be competing incentives. What this new change does is combine all of this into one SBU and those segment CEOs are fully responsible for driving sales growth in their regions with responsibility for all facets of the business.

There is little doubt an important catalyst for this reorganization was Trian Partners' activist billionaire investor Nelson Peltz. His firm owns a large stake and he won a proxy fight for a board seat in March 2018. He has been pushing for P&G to reorganize in order to improve innovation and, more importantly, create a sense of accountability at the product unit level. He has also pushed for P&G to get better at developing local brands as consumers are moving away from large brands.

Peltz may have already been having an impact before the reorganization announcement. The stock gapped higher in mid-October on a very strong SepQ earnings report. P&G has been posting lackluster growth for a long time, but this was a nice improvement in SepQ. The stock has continued to move higher following that report. Hopefully, strong results will continue in DecQ.

This will take some time. A company as large as P&G cannot turn itself on a dime. So investors will need to be patient. However, this seems like the right course of action and we are fans of Trian Partners. They tend to be longer-term focused and clearly see some value here.