Vertical Incentive Alignment and Asset Specificity

It's All About Aligning Incentives

—P&G and the “Barney Relationship”1

One of the key focal areas in business today rests with what I will refer to as vertical incentive alignment. This is a term for designing relationships so that the incentives of all players are aligned with your best interest, in other words, so that your buyers and suppliers have your best interest at heart by virtue of the structural relationship that you have established. Perhaps the best example of this is Procter & Gamble's work in the early 1990s.

P&G shifted to what we know today as a key accounts system in the early 1990s. However, for most of its existence, P&G was organized along product lines, both internally and externally facing. Product managers—typically MBAs that are hired into an assistant brand manager position and, if successful, promoted to manage the brand—were micro-tasked. This essentially meant that brands were subdivided finely. Ivory soap had one brand manager, while Ivory dish soap had another. Pampers' boys small, medium, and large each had its own brand manager. Sales teams were also organized by product lines—examples included health and beauty, household products, and so on. Traditionally, sales teams would call on ...

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