CASY STUDY:

On January 26, 2017, Johnson & Johnson, the worlds largest health care company, bolstered its roster of treatments for rare diseases by announcing a $30 billion deal to acquire Actelion, a Swiss biotechnology frm. The deal expanded its portfolio of leading medicines and promising late stage products. We believe this transaction offers compelling value to both Johnson & Johnson and Actelion shareholders Alex Gorsky, the chairman and chief executive of J&J, stated in a news release.1 With 250 companies in virtually every country, J&J has under its banner the worlds largest medical device business, an even bigger pharmaceutical business, and a consumer products division with a dozen megabrands, from Neutrogena to Tylenol. Although the frm is best known for its common consumer products, its biggest recent growth has come from its vast range of pharmaceuticals. J&J has advantages from its diversifed businesses such as greater fnancial stability, a wider range of expertise, and a customer base that spans consumers to hospitals to governments. Financial stability has been J&Js calling card for decades. Its sales have risen on a regular basis, with profts showing an annualized growth rate of over 12 percent over the three years 20142016 (see Exhibits 1 and 2). The frm has consistently raised its dividend for well over 50 years and it remains one of only two U.S. companies with an AAA credit rating from Standard and Poor. Theyre in a great position, said Kristen Stewart, an analyst at Deutsche Bank. They have the luxury of time and the ability to look at different opportunities across different business units. That is what a diversifed business platform affords them. However, even as it has grown and become more diversifed, J&J has struggled to extract the greatest value from its vast portfolio of diversifed businesses. Much of its growth has come from acquisitions, and it has developed a culture of granting considerable autonomy to each of the frms that it has absorbed. Although this was intended to cultivate an entrepreneurial attitude among each of its units, it has probably prevented the frm from pursuing opportunities that would result from closer collaboration among the units. Because the units fercely guard their independence, they have rarely searched for opportunities on which they could combine their different areas of expertise. William C. Weldon, who spearheaded a period of dramatic growth at J&J, began to direct efforts at trying to get the business units to work with each other on a more regular basis. After Gorsky took over as CEO in 2012, he pushed harder to weave together the operations of the different units. The need for greater oversight became more urgent after the frm ran into quality issues in two of its three divisions, with some consumer products being recalled. At the same time, Gorsky realized that J&J must preserve its entrepreneurial culture. Cultivating Entrepreneurship Johnson & Johnson was founded in 1886 by three Johnson brothers. The company grew slowly for a generation before Robert Wood Johnson II decided reluctantly to take the family business public. He fretted about the effects that market pressures would have on the companys practices and values, which led him to write a 307-word statement of corporate principles. This spelled out that J&Js primary responsibility was to patients and physicians, followed by employees, and then by communities. Shareholders were placed last on the list. This credo is inscribed in stone at the entrance of the frms headquarters and is routinely invoked at the company. C-129 Over the years, as J&J has grown by acquisitions of frms engaged in some aspect of health care, it has been guided by its original credo. The task has become more challenging as J&J has developed into an astonishingly complex enterprise, made up of over 250 different subsidiaries broken into three divisions. The most widely known of these is the division that makes consumer products such as Johnson & Johnson baby care products, Band-Aid adhesive strips, and Visine eye drops. Its pharmaceuticals division sells several blockbuster drugs such as anemia drug Procit and schizophrenia drug Risperdal. Its medical devices division is responsible for best selling products such as Depuy orthopedic joint replacements and Cyper coronary stents. J&Js credo has kept the frm focused on quality of health care, even as it has expanded into several different business segments and adopted a decentralized approach in managing its different businesses. Most of its far-fung subsidiaries across its three divisions were acquired because of potential demonstrated by promising new products in their pipeline. Each of these units was granted near-total autonomy to develop and expand upon their best selling products in order to better serve their patients It is widely believed that this independence has fostered an entrepreneurial attitude that has kept J&J intensely competitive. The relative autonomy that is accorded to the business units has provided the frm with the ability to respond swiftly to emerging opportunities. A commitment from everyone throughout these units to the principles that had been laid out in the famous credo was considered to be suffcient to provide the necessary direction. J&J is proud of the considerable freedom that it gives to its different subsidiaries to develop and execute their own strategies. Besides developing their strategies, these units have also been allowed to work with their own resources. Many of them have been able to operate their own fnance and human resources departments. While this degree of decentralization led to relatively high overhead costs, none of the executives that have run J&J, Weldon included, have ever thought that this was too high a price to pay. J&J is a huge company, but you didnt feel like you were in a big company, recalled a scientist who used to work there.3 Pushing for More Collaboration The entrepreneurial culture at Johnson & Johnson has consistently developed top-notch products in each of the areas in which it operates. It spends heavily on research and development (see Exhibit 4), currently about 12 percent of its sales on about 9,000 scientists working in research laboratories around the world. The three divisions continually introduce promising new products.In spite of the benefts that J&J has derived from giving its various enterprises considerable autonomy, however, there have been growing concerns that they can no longer be allowed to operate in near isolation. Weldon soon realized that J&J was in a strong position to exploit new opportunities by drawing on the diverse skills across the three divisions. The frm might derive more benefts from combining its knowledge in drugs, devices, and diagnostics, since few companies matched its reach and strength in these basic areas. This led Weldon to seek ways to make its fercely independent units work together. In his words: There is a convergence that will allow us to do things we havent done before.4 Through pushing the various far-fung units of the frm to pool their resources, Weldon believed they could deliver real synergy. Accordingly, he created a corporate offce that would get business units to work together on promising new opportunities. Its a recognition that theres a way to treat disease thats not in silos, Weldon stated, referring to collaboration between J&Js largely independent businesses.5 For the most part, however, Weldon confned himself to taking steps to foster better communication and more frequent collaboration among J&Js disparate operations. He was convinced that such a push for communication and coordination would allow the frm to develop the synergy that he was seeking. But any effort to get the different business units to collaborate must not quash the entrepreneurial spirit that has always spearheaded most of the growth of the frm. Jerry Caccott, managing director of consulting frm Strategic Decisions Group, emphasized that cultivating those alliances would be challenging in any organization, but particularly in an organization that has been so successful because of its decentralized culture.6 These collaborative efforts did lead to the introduction of some highly successful new products (see Exhibit 5). Even the companys fabled consumer brands have started C-131to show growth as a result of increased collaboration between the consumer products and pharmaceutical divisions. Its new liquid Band-Aid is based on a material used in a wound-closing product sold by one of J&Js hospital-supply businesses. And J&J has used its prescription antifungal treatment, Nizoral, to develop a dandruff shampoo. By now, products that have developed in large part out of such cross-fertilization have allowed the frms consumer business to experience considerable internal growth.

Leaders must continually reassess three interdependent activities for organizations to succeed (see exhibit 11.1). What of these activities were followed by Gorsky? Identify examples from the case that match to, at least, two of those activities.

Leaders must follow six steps to create a learning organization (see exhibit 11.4). What of those steps were followed by Gorsky? Identify examples from the case that match to, at least, three of those steps.

Exhibit 11.1

Income Statement (in $ millions)

Year Ending 2016 2015 2014

Total Revenue $71,890 $70,074 $74,331

Gross Proft 21,685 21,536 51,585

Operating Income 20,645 17,556 20,959

Net Income 16,540 15,409 16,323

Exhibit 11.4

EXHIBIT 4 Research Expenditures (in $ millions)

2016- $9,095

2015- 9,046

2014- 8,494

2013- 8,183

2012- 7,665

2011- 7,548

2010- 6,864

2009- 6,986

2008- 7,577

2007- 7,680

2006- 7,125

2005- 6,462

How can J&J create a sustainable competitive advantage in the marketplace that is not only unique and valuable but also difficult for competitors to copy or substitute? Please provide answers in detail.