Thumbs Up Will Be Given For Answer

Question: What corporate strategy does Johnson & Johnson pursue?

EXHIBIT 2 Balance Sheet fin $ millions) Year Ending 2016 2015 Current Assets $ 65,032 $ 60,210 Total Assets 141,208 133,411 Current Liabilities 26,287 27.747 70,790 62.261 Stockholder Equity 70,418 71,150 2014 $ 55,744 130.358 2 5.031 6 0.606 69.752 Source: Jon Jone JOHNSON & JOHNSON On January 26, 2017, Johnson & Johnson, the world's larg. est health care company, bolstered its roster of treatments for rare diseases by announcing a $30 billion deal to acquire Actelion, a Swiss biotechnology firm. 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 Actclion sharehold- ers" Alex Gorsky, the chairman and chief executive of J&J stated in a news release. With 250 companies in virtually every country, J&J has under its banner the world's largest medical device busi- ness, an even bigger pharmaceutical business, and a con- sumer products division with a dozen megabrands from Neutrogena to Tylenol. Although the firm 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 diversified businesses such as greater financial stability, a wider range of expertise, and a customer base that spans consumers to hospitals to governments. Financial stability has been J&J's calling card for decades. Its sales have risen on a regular basis, with profits showing an annualized growth rate of over 12 percent over the three years 2014-2016 (see Exhibits 1 and 2). The firm 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. "They're 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 diversified business platform affords them. However, even as it has grown and become more diversi fied. J&J has struggled to extract the greatest value from its vast portfolio of diversified businesses. Much of its growth has come from acquisitions, and it has developed a culture of granting considerable autonomy to each of the firms that it has absorbed. Although this was intended to cultivate an entrepreneurial attitude among cach of its units, it has prob ably prevented the firm from pursuing opportunities that would result from closer collaboration among the units. Because the units fiercely guard their independence, they have rarely searched for opportunities on which they could combine their different areas of expertise. William C. Weldon, who spearheadeda period of dramatic growth at J&J, began to direct efforts at trying to get the busi- ness 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 firm 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 fam ily business public. He fretted about the effects that market pressures would have on the company's practices and values. which led him to write a 307-word statement of corporate principles. This spelled out that J&J's 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 firm's headquarters and is routinely invoked at the company *Case prepared by Jamal Shamile Michigan State University, with the assistance of Professor Alan 1. Ele Pace University. Material has been drawn from published sources to be used for purposes of class discussion Copyright 2017 Jo Shase and Alas B. Eiser. EXHIBIT 1 Income Statement in millions) Total Revenue Gross Profit 2016 $71,890 50,205 20.645 16,540 Year Ending 2015 $70,074 48,538 17,556 15.409 2014 $74,331 51,585 20,959 1 6,323 Operating Income Net Income Source: Johnson & Johnson Over the years, as J&J has grown by acquisitions of firms responsible for best selling products such as Depuy ontho engaged in some aspect of health care, it has been guided pedic joint replacements and Cyper coronary stents by its original credo. The task has become more challenging J&J's credo has kept the firm focused on quality of as J&J has developed into an astonishingly complex enter health care, even as it has expanded into several different prise, made up of over 250 different subsidiaries broken business segments and adopted a decentralized approach in into three divisions. The most widely known of these is the managing its different businesses. Most of its far lung sub division that makes consumer products such as Johnson & sidiaries across its three divisions were acquired because of Johnson baby care products. Band-Aid adhesive strips, and potential demonstrated by promising new products in their Visine eye drops. Its pharmaceuticals division sells several pipeline. Each of these units was granted near total auton blockbuster drugs such as anemia drug Procit and schizo m y to develop and expand upon their best selling products phrenia drug Risperdal. Its medical devices division is in order to better serve their patients (see Exhibit 3). EXHIBIT 3 Segment Information Johnson & Johnson is made up of over 250 different companies, many of which has acquired over the years. These individual companies have been assigned to three different divisions. Geographic Areas Sales to Customers 2015 2016 2014 (Dollars in Millions) Consumer - $ 5,420 United States International 7.887 13,307 5.222 8.285 13.507 5,096 9.400 14,496 Total Pharmaceutical- United States International 18.333 20.125 13,339 33,464 17.432 14,881 13,097 31,430 Total 32313 Medical Devices United States International 12.132 12.254 15.25 12,266 12,853 25.119 $71,890 Total 25. 137 27,522 74,331 Worldwide total 70.074 Identifiable Assets 2 Dollars in Millions) Consumer 1941 Business Segments Income Before Tax 2016 2015 $ 2,441 1787 12.827 11.734 5.578 6,825 20.846 20.347 1013 1.151 $ 23,971 27.477 Pharmaceutical 11 50 20,772 26.140 40.979 Medical Devices Total 7.953 21.590 1,027 91221 Less: Expense not allocated to segments It is widely believed that this independence has fostered opportunities by drawing on the diverse skills across the an entrepreneurial attitude that has kept J&J intensely com- three divisions. The firm might derive more benefits from petitive. The relative autonomy that is accorded to the busi combining its knowledge in drugs, devices, and diagnos ness units has provided the firm with the ability to respond tics, since few companies matched its reach and strength swiftly to emerging opportunities. A commitment from in these basic areas. This led Weldon to seek ways to make everyone throughout these units to the principles that had its fiercely independent units work together. In his words been laid out in the famous credo was considered to be suf "There is a convergence that will allow us to do things we Ticient to provide the necessary direction haven't done before. Through pushing the various far J&J is proud of the considerable freedom that it gives to hung units of the firm to pool their resources. Weldon its different subsidiaries to develop and execute their own believed they could deliver real synergy. Accordingly, he strategies. Besides developing their strategies, these units created a corporate office that would get business units have also been allowed to work with their own resources to work together on promising new opportunities. It's a Many of them have been able to operate their own finance recognition that there's a way to treat disease that's not in and human resources departments. While this degree of silos." Weldon stated, referring to collaboration between decentralization led to relatively high overhead costs, none J&J's largely independent businesses of the executives that have run J&J, Weldon included, have F or the most part, however, Weldon confined himself ever thought that this was too high a price to pay. "J&J is to taking steps to foster better communication and more a huge company, but you didn't feel like you were in a big frequent collaboration among J&J's disparate operations. company recalled a scientist who used to work there. He was convinced that such a push for communication and coordination would allow the firm to develop the synergy Pushing for More Collaboration that he was seeking. But any effort to get the different busi- The entrepreneurial culture at Johnson & Johnson has ness units to collaborate must not quash the entrepreneur consistently developed top-notch products in each of the fal spirit that has always spearheaded most of the growth areas in which it operates. It spends heavily on research and of the firm. Jerry Caccott, managing director of consulting development (see Exhibit 4), currently about 12 percent of firm Strategic Decisions Group, emphasized that cultivat- its sales on about 9,000 scientists working in research laboing those alliances would be challenging in any organiza ratories around the world. The three divisions continually tion, but particularly in an organization that has been so introduce promising new products. successful because of its decentralized culture. In spite of the benefits that J&J has derived from giv These collaborative efforts did lead to the introduction ing its various enterprises considerable autonomy, however, of some highly successful new products (see Exhibit 5). there have been growing concerns that they can no lon- Even the company's fabled consumer brands have started ger be allowed to operate in near isolation. Weldon soon realized that J&J was in a strong position to exploit new EXHIBIT 5 Significant Innovations EXHIBIT 4 Research Expenditures in $ millions) 2016 2015 2014 2013 2012 2011 2010 2009 $9.095 9,046 8.494 8.183 7.665 Antiseptic Surgery (1888) Three brothers start up a firm based on antiseptics designed for modern surgical practices Band-Aids (1921) Debuts the first commercial bandages that can be applied at home without oversight by a professional No More Tears (1954 7.518 6.85 6.986 7.57 7.580 Introduces a soap-free shampoo that is gentle enough to dean babies hair without imitating their eyes Acuvue Contact Lenses (1987) Offers the first ever disposable lenses that can be worn for up to a week and then thrown away Siuro 2012 2007 to show growth as a result of increased collaboration. However, Shor e CEO between the consumer products and pharmaceutical divs Gorsky began to challenge the firm's once acrosanct prin sions. Its new liquid Band-Aid is based on a material used iple of giving complete autonomy to its 256-odd units in a wound closing product sold by one of J&J's hospital his view. decentralization that fostered creativity should not supply businesses. And J&J has used its prescription anti Sllow these different units to be completely disconnected Tungal treatment, Nizoral, to develop a dandruff shampoo Gorksy wanted to push further than Weldon had to get the By now, products that have developed in large part out of various units of the firm to work together to find synergies such crossfertilization have allowed the firm's consumer to cross-fertilize ideas, and to reap cost savings that could business to experience considerable internal growth be reinvested in the business Making a Difficult Transition Pushing for Tighter Integration As Johnson & Johnson sought more interaction among in order to tie the units more closely together, Gorsky Its business units, it ran into problems with quality control ured Sandi Peterson from Bayer and gave her the position with two of its divisions. Its medical devices division as of group worldwide chairman. The newly created position into problems with its newest artificial hip. It recalled the gave Peterson sweeping responsibly to oversee technology device, amidst rumors that company executives may have across the entire firm. Gorky believed that the very mature concealed information out of concern for firm profits of the job required him to hire an outsider who had not had These problems were compounded by serious issues that much exposure to JAJ's existing culture. Because decen rose with the consumer products division, which led to the tralization had allowed the business units to make all of biggest children's drug recall of all time. their own decisions, there had been no consistency in the Quality problems had arisen before, but they were usu different practices. Gorsky wanted to bring order to this ally fixed in a routine manner inside the units. Analysts unwieldy machine. "Sometimes a customer doesn't want to suggest that problems al subsidiary McNeil may have been deal with 250 J&J' She said. exacerbated in 2006 when J&J decided to combine it with Peterson began feverishly working to align everything the newly acquired consumer health care unit from Pfizer From HR policy to procurement processes from the 250 The firm believed that it could achieve $500 to $600 million business units, which had been making their own decisions in annual savings by merging the two units together. After Independently. She covered everything from the timing of the merger, McNeil was also transferred from the heavily financial forecasts to employee car policies, consolidas regulated pharmaceutical division to the marketing drivering all of the firm's data, such as about all of its 120.000 consumer products division, which was not subjected to the employees, to a single HR database. Peterson claimed that Same level of quality control her efforts would allow the company to save about $1 bil Much of the blame for such stumbles fell on Weldon lion. She processed as much data per day as Bay, ware who stepped down as CEO in April 2012 after presiding housing about 500 terabytes of data. According to Peterson, over one of the most tumultuous decades in the firm's hist, this represented 2.5 times as much data as resides in the pry. Crities said the company's once vaunted attention to IRS data warehouse quality had slipped under his watch. Weldon, who had An even more significant effort had already been in started out as sales representative at the firm, was believed tiated by Paul Stoffels three years earlier when he was to have been obsessed with meeting tough performance appointed J&J's global head of pharmaceuticals. All of the targets, even by cutting costs that might affect quality units that operated within the pharmaceutical division had Erik Gordon, who teaches business at the University of also operated with complete autonomy. Jy's seven differ Michigan, elaborated on this cost-cutting philosophy: "We en drug R&D organizations had operated in completely will make our numbers for the analysts, period." Siloed fashion. In some cases multiple companies pursued In April 2012. J&J appointed Gorsky to lead the way the development of the same drugs and each had its own put of the difficulties. Gorsky had been with the firm since system for handling clinical or regulatory development 1988, holding positions in its pharmaceutical businesses Stoffels began to merge all of the units under his purview across Europe, Africa, and the Middle East before leaving into one group and organized it to target 11 diseases. In the for a few years to work at Novartis. Shortly after his return process, 12 of the division's 25 facilities were shuttered and to J&J in 2008, he took over its medical devices unit that nearly 200 projects were slashed was being investigated about its faulty hip replacements This new integrated unit developed a streamlined devel Because of his extensive background with the firm, Gorsky opment process, a highly coordinated system that Stoffels was regarded as the ideal person to take the job calls Accrerande under this model global team When Gorksy took over as CEO, it was expected that Statisticians in China, data managers in India, regulatory he would sort out the quality problems that had recently folks in Europe-work 24/7 to speed drugs to market. The surfaced at the firm. But because he was a consummate assembly-line approach has cut months, and in some case Insider, having run the two biggest of its three divisions, years of development time. Seventeen drug approvals in It was assumed he would do it without major changes 10 years put in a league son "Nother company has come close to that," said Bernard Munos, a pharmaceu- $5 billion global market for cardiac stents, announced that tical innovation consultant." it was shifting its focus to other medical technologies that Stoffels has accomplished more than just reduce the showed more potential for growth. time needed to bring drugs to market. He has begun to look As he plotted a future course for Johnson & Johnson, for ideas from all sources, whether it is from any of J&J's Gorsky realized that although much of the firm's success own business units or from entrepreneurs or scientists out had always resulted from the relative autonomy granted kide the firm. He has set up four innovation centers in bio to cach of its businesses, he must continue to emphasize tech clusters in Cambridge, MA: Menlo Park, CA: London: ongoing collaboration among them to pursue emerging and Shanghai, where scientific entrepreneurs can interact opportunities. As recent problems had demonstrated, it with J&J's own drug and technology scouts. His flexible was also critical for J&J to maintain and develop sufficient approach with these outsiders lets J&J work with them quality control across its vast business. The health care more casually and helps build stronger relationships. Since giant must manage its diversified portfolio of companies to 2013, the firm has reviewed more than 3,400 opportunities keep growing without creating issues that could pose any through these centers, leading to 200 partnerships. further threats to its reputation. This is a company that was purer than Caesar's wife, this was the gold standard, Is There a Cure Ahead? and all of a sudden it just seems like things are breaking Gorsky's biggest challenge came from a demand that down," said William Trombetta, a professor of pharmaceut- Johnson & Johnson might be better off if it was brokenical marketing at Saint Joseph's University in Philadephia." off into smaller companies, perhaps along the lines of its different divisions. There were growing concerns about the ENDNOTES ability of the conglomerate to provide sufficient supervi 1. Chad Bray. Johnson & Johnson Says It Will Acquire Action New sion to all of its subsidiaries that were spread all over the York Times, January 27, 2017. p.B5. globe. Gorsky dismissed the proposal, claiming that J&J 2. Erika Fry Can Big Still Be Beautiful Forums August 1, 2016.p.84. 3. Katie Thomas Reed Ahelsea JAJChief to Resign One Role Nor drew substantial benefits from the diversified nature of its York Times, February 22, 2012. p. B. businesses. Given the enormous shifts in the health care 4. Katie Thomas J&J's Next Chief Is Steeped in Sales Culture. New York industry and the large number of government and institu- Times, February 24, 2012. p. B.L tional customers and partners involved, he believed that the 5. Peter Loftus & Shirley S. Wang JJ Sales Show Health Care Feels the firm's huge scale could be a rare asset for negotiating deals. Pinch. Wall Street Journal, January 21, 2009, p.BL Gorsky did concede, however, that the firm will have 6. Avery Johnson. JAJ's Consumer Play Paces Growth Wall Street to be more selective, careful, and decisive about the prod- Journal, January 24, 2007.P.AZ ucts that it pursues. Since he took over, J&J has begun 7. New York Times, February 24, 2012.p.B.6. 8. Fortunc, August 1, 2016. p. 86. to divest some of its lower growth businesses and reduce 9. Thid. . 87 annual costs by $1 billion. The firm had just completed the 10. Ibid. p. 88 sale of Cordis, which makes medical devices such as stents 11. Natasha Singer. Hip Implants Are Recalled by J&J Unit. New York and catheters. J&J, which helped to develop the roughly Times, August 27, 2010, p.BL