Professor Violet Johnson & Johnson Case Analysis PDF

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Professor Violet Z. Christopher, MBA BUS 497 #13695 7 November 2017 Johnson & Johnson Case Analysis EXECUTIVE SUMMARY Johnson & Johnson was founded in 1886 and had grown into a large multinational enterprise with over 250 subsidiaries operating in 60 countries and its products being sold in more than 175 countries. Spending heavily on research and development, the company relied on innovative ideas to expand their businesses and continue to compete. Throughout the course of 130 long years of being in business, the company had grown its brand to be one consumers associated with trust. However, the company ran into a couple major quality control issues in the 2000s. After the publicity generated from these issues, the company was being criticized that it had grown too big and needed a way to better manage its subsidiaries in order to avoid further issues with quality control in the future. Loosely managing its subsidiaries was in fact one of the strengths J&J possessed and it was responsible for much of the firm’s historic success. By providing each of the acquired subsidiaries with near-total autonomy, J&J encouraged innovation by feeding the entrepreneurial spirit at these firms. However, the firm could not risk anymore major quality control issues in the firm and must assess its strategic position Although the firm’s independent subsidiaries were historically successfully, assessing the firm’s external and internal environments reveals that there may be potential benefits if various firms were grouped to work together. With Johnson & Johnson’s large international presence and strengths in its value chain, the firm can exploit new opportunities through collaboration of its subsidiaries while reducing its vulnerability to quality control issues. A careful analysis of the firm’s environment leads to the recommended strategy that the firm should adopt a strategic business unit (SBU) structure and implement an international strategy. By doing so, Johnson & Johnson will be able to better manage and control its strategic business units while continuing to grow and compete in international business. The strategic business units will still be encouraged to be innovative and differentiate their products, which has been crucial to J&J’s success historically.

INTRODUCTION Johnson & Johnson was founded in 1886 in New Brunswick, NJ and has grown into a large multinational firm that partakes in a wide range of businesses under the broad category of healthcare. The company is known for spending heavily on research and development. Through science and research, the company’s mission is to continue to serve doctors, patients, and consumers with innovative products and ideas under the category of healthcare (Johnson & Johnson). The firm has also historically favored inorganic growth through acquisitions in order to grow and diversify its businesses while remaining competitive. This tradition has led to J&J becoming an incredibly complex enterprise with over 250 subsidiaries divided into only three divisions: consumer products, pharmaceuticals, and medical devices. The consumer products division is the most widely known division of Johnson & Johnson and is responsible for the creation of Band-Aid adhesive strips, Listerine mouthwash, baby care products, and other consumer items. Although the consumer products division is the most popular, J&J’s other two divisions earn the firm more profits due to both more sales and higher operating profit margins. The pharmaceuticals division sells various types of drugs including Procrit, a drug used to treat anemia, and Risperdal, a drug used to treat schizophrenia. The medical devices division is best known for coronary stents and orthopedic joint replacements. For the course of over a century of being in business, Johnson & Johnson was able to stay true to its thoughtful slogan: “Caring for the world, one person at a time” (Johnson & Johnson). The company’s brand had evolved into one with tremendous consumer trust. However, Johnson & Johnson was unfortunate to stumble upon some major quality control issues in the 2000s under the watch of CEO William C. Weldon. Weldon had started out as a sales representative at J&J and was said to have been obsessed with meeting performance targets. Critics believe his philosophy may have led the company to be more concerned with meeting short-term goals which thus translated into cutting costs and reduced quality of their products. In 2008, inspections conducted by the FDA found significant violations of manufacturing standards at two McNeil Consumer Healthcare plants. McNeil Consumer Healthcare was a subsidiary of Johnson & Johnson responsible for manufacturing several overthe-counter drugs. The violations found by the FDA led to the temporary closure of one of the plants and recalls of some of the company’s best-selling products. These recalls included the biggest children’s drug recall of all time with 43 over-the-counter children’s medications being

recalled. To address these quality control issues, Weldon allocated more than $100 million to upgrade the McNeil plants, appointed new manufacturing executives, and also hired a third-party consulting firm. Despite Weldon’s efforts to make things right, the publicity from McNeil Consumer Healthcare’s quality control issues would have a negative effect on the trustworthiness of J&J’s brand. Unfortunately for Johnson & Johnson, the timing of the quality control issues with the McNeil Consumer Healthcare plants coupled with the quality issues the firm was facing with DePuy’s artificial hip. DePuy was Johnson & Johnson’s orthopedic unit. Its new artificial hip had a defect which caused the device to shed large quantities of metallic pieces after implantation. The firm finally recalled the artificial hip in 2010 after almost five years since problems with the device first began to surface. Johnson & Johnson paid approximately $3 billion in settlements with an estimated 8,000 patients who had to have the hip replaced. DePuy’s flawed artificial hip is said to be one of the largest medical failures in recent history. These major quality control issues caused Weldon to step down as CEO of Johnson & Johnson in 2012. J&J continued its 126-year tradition of hiring leaders from within the firm and appointed Alex Gorsky, the head of the medical devices and diagnostics unit, to be the next CEO. Upon being appointed CEO, Gorsky was already being met with criticism about J&J having grown too big as critics were claiming that if the company did not find a way to better manage its 250 subsidiaries, more quality control issues would take place in the future. Gorsky was aware that much of J&J’s historical success can be attributed to its strategy of providing its various business units with near-total autonomy. Although this strategy had proved to be successful by helping J&J expand its businesses and introduce differentiated products, continuing the implementation of this strategy would leave the firm vulnerable to more quality control issues in the future. He understood that there could be potential benefits from the synergy created between J&J’s business units, but also did not want to inhibit the innovation capabilities and entrepreneurial spirit of each of the subsidiaries. Therefore, Gorsky’s task at hand was a difficult one. He was faced with the challenge of repairing the damage done to J&J’s reputation by the recent quality control issues and finding a way for the company to continue to grow and compete without stumbling upon anymore major quality control issues in the future. ANALYSIS OF THE EXTERNAL ENVIRONMENT

The Threat of New Entrants Michael E. Porter’s “five forces” model, which can be found in Appendix A, is a helpful tool for analyzing Johnson & Johnson’s competitive environment. Through a “five forces” analysis, it is determined that the threat of new entrants is low. It is extremely unlikely for new entrants to enter the industry and significantly affect J&J profits. According to the J&J website, the company’s three divisions make up more than 250 operating companies in nearly 60 countries. Each company is given near-total autonomy in order to encourage innovation and the entrepreneurial spirit. Furthermore, J&J has been in business since 1886. This serves as a high barrier to entry for new entrants since it would be difficult for them to achieve both cost and differentiation parity with the healthcare giant due to its size and experience. Further analysis determines that economies of scale exists within the industry. With respect to Johnson & Johnson’s three different divisions, this is especially true for the consumer products division. J&J’s cost per unit for each of its products would be significantly lower than that of a new entrant due to J&J’s enormous size and total output. This discourages new entrants from entering the industry because even if they were to take a great risk and enter the industry at a large scale, they would still be at a cost disadvantage when compared to the multinational J&J, whose size and output would not be possible to match by a new entrant. Even if a new competitor was somehow able to achieve near cost parity with Johnson & Johnson, they can expect to be met with strong reaction from the healthcare giant. Johnson & Johnson’s product differentiation serves as another barrier to entry for new competitors. With over 250 subsidiaries operating with entrepreneurial spirit, the company is known for its innovation. Its product lineup includes well known and widely used products such as Band-Aid adhesive strips, Visine eyedrops, Listerine mouthwash, and Benadryl cough syrup. Although these subsidiaries operate with near-total autonomy, collaborative efforts between them have also lead to highly successful products, including a Band-Aid made with a material that helps close wounds and Nizoral dandruff shampoo. Most of Johnson & Johnson’s products are protected by patents, which cause a high barrier to entry for other. In other words, Johnson & Johnson possesses proprietary products. Although some of J&J’s patents are beginning to expire since it has been in business for approximately 130 years, the company is actively pursuing patent renewals. Its long course of being in business has also created customer loyalty to its brand, which further contributes to the high barrier of entry for new competitors.

Other contributors to the high barrier of entry for new competitors include capital requirements and access to distribution channels. For a new firm to even have the slightest chance of competing with Johnson & Johnson, they will need to invest a great amount of financial resources. This is especially true due to the fact that the broad category of healthcare in which Johnson & Johnson operates requires investing heavily in research and development. This fact coupled with another one that Johnson and Johnson is known to be one of the world’s top spenders on research and development, spending 12 percent of its sales on nearly 9,000 research scientists throughout the world in 2014, contributes to a very large barrier to entry for new competitors. Another obvious barrier to entry that keeps the threat of new entrants low for Johnson & Johnson is the fact that the new entrant would be at an extreme disadvantage when it comes to having access to distribution channels. Johnson & Johnson is a multinational firm with access to distribution channels throughout 60 countries in the world. This serves as a great discouragement for a new entrant to enter the industry. The Bargaining Power of Buyers Through further analysis using Porter’s “five forces,” it can be determined that the bargaining power of buyers is also low. Johnson & Johnson is a large multinational company with sales in over 175 countries. It does not depend on a few select buyers for the revenues it generates. Furthermore, the company is widely known for its differentiated products. Buyers and customers cannot find alternative suppliers of J&J products due to their innovative nature, as opposed to buyers of a standard product such as a commodity good who have high bargaining power due to the several options of suppliers available to them. J&J products are also patent protected, which further reduces the bargaining power of buyers, since they will not be able to find the exact same product elsewhere. The Bargaining Power of Suppliers Analysis using Porter’s “five forces” model reveals that the bargaining power of Johnson and Johnson’s suppliers is also low. According to the J&J website, Johnson & Johnson has a diverse suppliers program and works with countless suppliers of all sizes throughout the 60 countries in which its 250 subsidiaries reside. The supplier group is by no means concentrated

and Johnson & Johnson does not depend on a few large suppliers for most of its supplies. If a supplier group tries to exert power by raising prices or negotiating terms for its own benefit, Johnson & Johnson will simply look elsewhere for the raw materials and supplies they need. If a supplier were to reduce the quality of the supplies they provide J&J in order to save money, J&J would not have a difficult time switching to another supplier. Even if the supplier attempted to exert power over J&J on the basis of its differentiated products, J&J would still be able to find another supplier with products at par or better than the original supplier due to its access to many diverse suppliers. Given J&J’s massive size and operations in 60 countries, a supplier considering forward integration also does not pose a threat. The Threat of Substitute Products and Services When analyzing Johnson & Johnson’s competitive environment using Porter’s model of the “five forces,” there seems to be a high level threat from substitute products. Johnson & Johnson was founded in 1886 and throughout its 130-year course of being in business, it was able to establish brand loyalty and create trust between its products and consumers. However, the recent quality control issues that took place with the McNeil Consumer Healthcare plants and DePuy’s artificial hip tainted the company’s brand image. These quality control issues reduced the brand loyalty customers previously held. This can serve as a threat to the company’s consumer products and medical devices divisions, especially since these divisions were already not the industry leaders in their respective niches. Although Johnson & Johnson products are differentiated and patent protected, other mouthwashes, adhesive strips, dandruff shampoos, and baby care products from other brands exist for consumers to choose from. Similarly, in the orthopedic joint replacement market, Zimmer is the clear market leader with hundreds of other companies occupying the market space. After the incident with DePuy’s flawed hip, consumers would be reluctant to work with Johnson & Johnson companies in the future due the breach in trust and many other options available to them. Another major threat J&J faces is the substitutes available to consumers for the drugs sold by its pharmaceuticals division. Generic drugs available to customers can be substituted for J&J’s branded drugs. Although the J&J branded drugs may appear slightly more trustworthy to consumers, the lower prices of generic drugs make them a favorable option. This can be a serious

threat to Johnson & Johnson due to the fact that its pharmaceuticals division is its most profitable one and is also an industry leader. The Threat of Rivalry among Competitors in the Industry Porter’s “five forces” analysis reveals that the threat of rivalry among competitors in the industry for Johnson & Johnson is medium. Although the quality control issues J&J experienced gave power to some of its rivals, J&J still remains a dominant force with all three of its divisions in their respective niches. Its medical devices and consumer products divisions still hold significant market share in their respective niches and its pharmaceuticals division is still the industry leader. SWOT Analysis A SWOT analysis, which can be found in Appendix B, is also a helpful tool for analyzing Johnson & Johnson’s external environment. The last two sections of a SWOT analysis analyze opportunities and threats present in an organization’s competitive environment. Opportunities in the environment that exist for Johnson & Johnson include cross-selling opportunities through collaboration between its subsidiaries, a heightened concern in people for dealing with health issues early and competently, introducing new innovative products, medications, and devices, and acquiring new firms that help J&J expand its businesses. Threats are also present in J&J’s external environment. These threats include slow market growth in each of J&J’s divisions’ markets, which causes competitors to fight each other for market share. Another threat for J&J is the growing concern in people to lead a healthy lifestyle, which may lead to fewer consumers having the need for some of J&J’s best-selling products. Other threats in the environment include regulations in the pharmaceuticals industry and other globally competing companies offering alternative products at lower prices. INTERNAL ANALYSIS SWOT Analysis A SWOT analysis can also be used to analyze the internal strengths and weaknesses of Johnson & Johnson. The strengths J&J possess include its trusted brand name, even though the brand name may have been slightly tainted after recent quality control issues, a strong

international presence with products sold in over 175 countries, diversified and innovative products, subsidiaries that possess an entrepreneurial spirit, a strong research and development department, and the acquisition of many diverse value-adding firms. Although the company possesses several favorable strengths, J&J also possesses weaknesses that require attention. These weaknesses include vulnerability to quality control issues due to the many independent subsidiaries, difficulty managing its 250 subsidiaries located in 60 countries, the dependence on new innovative products due to heavy research and development spending, and a 126-year tradition of hiring CEOs from within the company. Although CEOs emerging from within the company may not seem like a weakness at first, CEOs that are “steeped” in corporate culture may be prone to have a blind eye toward certain weaknesses of the company. Value Chain Analysis Analyzing Johnson & Johnson’s value chain reveals some of its strengths. The first strength in J&J’s value chain comes from its heavy spending on R&D which leads to innovative products. These products are then patented, which further adds value. According to the company’s website, J&J also has a diverse supplier program and works with different suppliers in the 60 countries in which its subsidiaries reside. Not depending on a select few suppliers and having access to so many diverse suppliers adds tremendous value to the inbound logistics aspect of J&J’s value chain. Another strength in J&J’s value chain is its outbound logistics. With 250 subsidiaries in 60 countries and products sold in over 175 countries, J&J is able to competently deliver its final products to consumers with its global reach. Lastly, by having been in business for so long and remaining competitive, brand recognition also adds value to the marketing and sales component of J&J’s value chain. Although J&J possesses these various strengths in its value chain, a major weakness exists in its operations department of the value chain. Over the course of the 130 years J&J has been in business, it has not had any major quality control issues until the recent incidents with McNeil Consumer Healthcare and DePuy’s artificial hip. Now although these were only two major incidents, any further complications with quality control and the publicity it will generate can be detrimental for Johnson & Johnson and its brand. With its current business structure of

having 250 subsidiaries with near-total autonomy, the company remains vulnerable to quality control issues. Core Competencies Johnson & Johnson has a few simple core competencies that have been responsible for its tremendous competitive success. It starts with the firm’s heavy emphasis on research and development. The significance J&J...