;. a _.r.ill&&-n . ':r-rtrklrFl.rt'

,l i:ai i;siiru *,,.,i {ii-.i * *l{i },i''On January 20, 2015, Johnson & Johnson CEO AlexGorsky pl'oudly annollnced that his firm had sales ofS7-1.-l billion duling the prcr iorrs )clr. r'eplesentin[: iinincrease of 4.2 percent over 2013. Most of this growthcame from the firm's pharmaceutical division. wl.richGorsky pointed olrt wils clearly generatin-s the lar-sestreveoues and was the thstest-grou'ing such dir,ision in thedlug industry in the United States. The results ofthis divi-sion compensated the relatively modest increases in reve-nne fiom the firm's rnedical devices and consumer healthdivisions. both of which were recovering fiom lawsuitsand recalls.

Several years earlier, Johnson & Johnson (J&J) hadsettled with an estimated 8.000 patients over problemswith its flawed all-metal altificial hip. The device had adesign flaw th:rt caused it to shed large quantities of metal-lic debrls atter implantation. It was finally recalled by thefil'rn in 2010, atler Johnson & Johnson hacl coverecl up theproblems for almost five years afler they began to surf-ace.The settlement cost the tirm as much as 53 billion to coll-pensate patients who had to have the artificial hip leplaced.The problems with this device would classify it as one ofthe lalgest medicai failures in recent history.

The problems with the medical clevices unit were com-pounded by serious issues that arose with the consumerproducts unit, leading it to recall many of its ploductsincluding the biggest children's dlug recall of all time-that

" Cirsc prcprrcd bl Jamal Shamsic. Nlichigan Statc Llnircrsitl'. u'ith thcilssistatrce ol Prottssor Alan B. Eisner. Pace Universitl. Nhterial hrs beendrawn tl-om publishecl soLrrces to be used lbr pnrposes of clirss discussion.Copl'right O 2015 Janrl Shamsie rrd Alan B. Eisrer.

were potentially contaminated with clark palticles. The Foodand DrLr-s Administration also slapped a plant at one ol itsbusiness units. McNeil Consumer Healthcare. with a scald-ing inspection report. causing the company to close downthe fircbry to bring it up to fbderal standards. The publicitythat arose fiom these problems tarnished the name of one ofthe nation's niost trusted firlns.

Much of the blame for Johnson & Johnson's stumbles lellon William C. Weldon, who stepped down as CEO in April2012 after presiding over one of the most tumultuous decadesin the tirm's history (see Exhibits 1 and 2). Critics said thecompany's once-vaunted attention to quality had slippedunder his watch. Weldon. u,ho had started out as a sales lepre-sentatire at tlle firm. was believed to have been obsessed witl'rmeeting tor-rgl-r perfbrmance targets. even by cutting costs thatmight aIlbct qr-Lality. Erik Gordon. u,ho teaches business atthe Univelslty of Michi-gan. elaborated on tl.ris pl.rilosophy:"We will make our numbers fbr the analysts, peliod."l

Weldon was replaced by Alex Gorsky. who hadheaded thc n'redical devices and diagnostics unit. Likehis pledecessor. Gorsky had worked his r'vay up by meet-ing tough perfbrmance targets as a sales representxtive,and his appointment as CEO continued the film's 126-yeal tradition of hiring leaders from within. "The futureof Johnson & Johnson is in very capable hands," saidWeldon.2 Horvever. the decision to hire anothel insiderraised concerns that the firm was not vely serious aboutchanging the colporate culture that had created so r.nanyof its recent problems. 'As somebody steeped in J.&J.culture. I would be vely surplised to see bi-g changes."said Les Funtleyder. a porttblio manager at a firm thator,vned .l&.I stock.3

Revenue

Gross profit

0perating income

lncome before taxes

Net income

Sourcc: Johnson & Johnson

61,587

42,795

16,527

16,947

'13,334

65,030

44,670

1 6,1 53

12,361

9,672

67,224

45,566

15,869

13,715

10,853

71,312

48,970

18,377

15,471

1 3,831

14,331

51 ,585

20,959

20,s63

16,323

tI

ii

-a +j:=E!

Balance Sheet ($ millions)

Total current assets

Total assets

Total current liabilities

Total liabilities

Total stockholders' equity

47,307

102,908

23,072

46,329

56,579

Source: Johnsor & Johnson.

Cultivating Entrepreneu rshipJohnson & Johnson relied heavily upon acquisitions to enterinto and expand into a wide range of businesses that fellbroadly under the category ofhealth care. It purchased morethan 70 different firms over the past decade. An.rong Johnson& Johnson's recent moves was the $20 billion purchase ofSynthes, a leading player in trauma surgery. In November2014, J&l completed its $1.75 billion acquisition of AliosBioPharma, which produced therapeutics fbr viral infections.

As it grew, Johnson & Johnson developed into anastonishingly complex enterprise, made up of over 250different subsidiaries that were divided among three dif'-fbrent divisions. The most widely known of these was thedivision that made consumer products such as Johnson &Johnson baby care products, Band-Aid adhesive strips,and Visine eyedrops. The division grew substantially afterJ&J acquired the consumer health unit of Pfizer in 2006for $16.6 billion. the biggest acquisition in its 120-yearhistory. The acquisition allowed J&J to add well-knownproducts to its lineup, such as Listerine mouthwash andBenadryl cough syrup.

But Johnson & Johnson reaped far more sales and prof-its from its other two divisions. Its pharmaceuticals divi-sion sold several blockbuster drugs. such as anemia drugProcrit and schizophrenia dlug Risperdal. A new drug,named Zytiga, prescribed to treat prostate cancer, wasselling well. The medical devices division was respon-sible for best-selling products such as DePuy orthopedicjoint replacements and Cypher coronary stents. These twodivisions generated operating profit margins of around30 percent, almost double those generated by the consumerbusiness.

To a lar-9e extent, however. Johnson & Johnson's suc-cess across its three divisions and many different busi-nesses hinged on its unique structure and culture. Mostof its tar-flung subsidiaries were acquired because of thepotential demonstrated by some promising new productsin their pipelines. Each ofthese units was therefbre grantednear-total autonomy to develop and expand upon itsbesrselling products (see Exhibit 3). That independence

e234 CASE 31 :: J0HNSON & J0HNSON

46,116

121,347

24,262

56,521

64,826

56,407

132,683

25,615

58,630

7 4,053

59,31 1

131,119

25,085

61,367

69,752

fostered an entrepreneurial attitude that kept J&J intenselycompetitive as others around it faltered. The relative auton-omy that was accorded to the business units also providedthe firm with the abiiity to respond swiftly to emergingopportunities.

Johnson & Johnson was actually quite proud of theconsiderable freedom that it gave to its different subsid-iaries to develop and execute their own strategies. Besidesdeveloping their strategies, these units were also allowedto work with their own resources. Many of them evenhad their own finance and human resources departments.While this degree of decentralization had 1ed to relativelyhigh overhead costs, none of the executives who ran J&J,Weldon included, had ever thought that this was too higha price to pay. "J&J is a huge company, but you didn't feellike you were in a big company," recalled a scientist whoused to work there.a

Pushing for More CollaborationThe entrepreneurial culture that Johnson & Johnson devel-oped over the years clearly allowed the film to show aconsistent leve1 of high perfbrmance. lndeed, Johnson &Johnson had top-notch products in each of the areas inwhich it operated. It had been spending heavily on researchand development for many years, taking its position amongthe world's top spenders (see Exhibit 4').In2014, it spentabout 12 percent of its sales on about 9,000 scientistsworking in research laboratories around the world. Thisallowed each of the three divisions to continually introducepromising new products.

In spite of the benefits that Johnson & Johnson derivedfrom giving its various enterprises considerable auton-omy, there were growing concerns that these units couldno longer be allowed to operate in near isolation. Shortlyafter Weldon had taken charge of the firm, he realized thatJ&J was in a strong position to exploit new opportunitiesby drawing on the diverse skills of its various subsidiar-ies across the three divisions. ln particular, he was awarethat his firm might be able to derive more benefits fromthe combination of its knowledge in drugs, devices, and

54,31 6

113,644

22,811

56,564

57.080

*€

Segment lnformation ($ millions)

Johnson & Johnson was made up of over 250 different companies, many of which it had acquired over the years.These individual companies were assigned to three ciifferent divisions.

Consumer -United States

I nternation a I

Total

Pharmaceutical -United States

I nternationa I

Total

Medical Devices -United States

I nternationa I

Total

Worldwide total

$ 5,096

9,400

14,496

17,432

14,881

32,313

12,254

15,268

27,522

$74,331

$ '1 ,941

11 ,696

7,953

21 ,590

1,027

$20,563

5,162

9,535

14,597

13,948

14,177

28,12s

12,800

15,690

28,490

71,312

13.4%

36.2

28.9

29.0

27.1v"

5,046

9,401

14,447

12,421

12,930

25,351

12,363

15,063

27,426

67,224

13.4

32.6

18.5

23.0

21.7

Consumer

Pharmaceutical

Medical Devices

Total

Less: Expenses not allocated to segments

Earnings before provision for taxes on income

Source: Johnson & Johnson.

1,973

9,178

5,261

16,412

941

15,471

diagnostics. since few companies were able to match itsreach and strength in these basic areas.

This 1ed Weldon to tind ways to make J&J,s fiercelyindependent units work together. In his own words: .,There

is a convergence that will allow us to do things we haven,tdone before."5 Through pushing the various far-flung unirsof the firm to pool their resources, Weldon believed thatthe firm could become one of the f'ew that was actuallyable to attain that often-promised, rar-ely delivered idea ofsynergy. To pursue this, he created a corporate ofilce that

would get business units to work together on promisingnew opportunities. "It's a recognition that there,s a way totreat disease that's not in silos," Weldon stated. referring tothe need for collaboration between J&J's largely indepen-dent businesses.6

For the most part. however, Weldon confined himselfto taking steps to tbster better communication and morefrequent collaboration among Johnson & Johnson's dis-parate operations. He was convinced that such a push forcommunication and coordination would allow the firm to

il CASE 31 :r ]OHNS0N & JOHNS0N C235

Soruce: Johnson & Johnson.

develop the synergy that he was seeking. But Weldon wasalso aware that any effort to get the different business unitsto collaborate must not quash the entrepreneulial spirit thathad spearheaded most of the growth of the film to date.Jerry Cacciotti. managing director of consulting firm Stra-tegic Decisions Group, emphasized that cultivating thosealliances "would be challenging in any organization, butparticular'ly in an organization that has been so successfulbecause of its decentralized culture."7

These collaborative efforts did lead to the introductionof some highly successful products (see Exhibit 5). Eventhe company's fabied consumer brands started to showgrowth as a result of increased collaboration between theconsllmer prodr"rcts and pharmaceutical divisions. Thefirm's new liquid Band-Aid was based on a material usedin a wound-closing product sold by one of J&J's hospital-supply businesses. And J&J used its prescription antifun-gal treatrnent, Nizoral, to develop a dandruff shampoo. Infact, products that wele developed in large part ollt of suchcross-fertiiization allowed the film's consltmer business toexperience considerable internal growth.

Confronting 0uality lssuesEven as Johnson & Johnson was trying to get moreinvolved with the efforts of its business units" it ran intoquality control problems with several over-the-counterdrugs made by McNeil Consumer Healthcare. Since2008, FDA inspectors had found significant violations ofmanufacturing standards at two McNeil plants, leadingto the temporary closure of one of them. These problemshad forced the flrm to make several recalls of some of itsbest-selling products. Weldon did admit that problemshad surfaced. but he insisted that they were confined toMcNeil. He responded to them in an interview: "This is

{:34 CASE 31 :r JOHNS0N & JOHNSON

, ', Significant lnnovations

Antiseptic Surgery (1 888)Three brothers start up a firm based on antlseptics designed formodern surgical practices.

Band-Aids (1921)Debuts the first commercial bandages that can be applied athome without oversight by a professional.

No More Tears ('1954)Introduces a soap-free shampoo that was gentle enough to cleanbabies' hair without irritating their eyes.

Acuvue Contact Lenses (1987)Offers the flrst-ever disposable lenses that can be worn for up to aweek and then thrown dway.

Sirturo (2012)Gets approval to launch a much-needed treatment for drug-resistant tuberculosis, the first new medication to fight thisdisease in more than 40 years.

i;,,.", ;;;; ;;,;;,,,,,, r".n ru,..

one of the most dilficult situations I'l,e ever had to per-sonally deal with. It hits at the core of who J&J is. Ourfirst responsibility is to the people who use our products.We've let them down.''8

Quality problems had arisen before, but they were usu-ally fixed on a regular basis. Analysts suggested that theproblems at McNeil might have exacerbated in 2006 whenJ&J decided to combine McNeil with the newly acquiredconsumer health care unit from Pfizer. Johnson & Johnsonbelieved that it could achieve $500 million to $600 millionin annual savings by merging the two units. After themerger, McNeil was transferred from the heavily regulatedpharmaceutical division to the marketing-driven consumerproducts division, headed by Colleen Goggins. Becausethe consumer executives lacked pharmaceutical experi-ence, they began to demand several changes at McNeil thatled to a reduced emphasis on qllality control.

Weldon realized the significance of the threat faced byJohnson & Johnson as a result of its probiems with quality.He was especially concerned about the FDA's allegationthat the firm had initially tried to hide the problems that itfound with Motrin in 2009, hiring a contractor to quietly gofrom store to store buyin-t all of the packets on the shelves.McNeil's conduct surrounding the recalls led to an inquiryby both the House Committee on Oversight and Investiga-tions and the FDA's Office of Criminal Investigations.

Various changes were subsequently made at McNeilto resolve these quality issues. Goggins was pushed outof her post as senior executive in charge of all consumerbusinesses. Weldon allocated more than $100 million toupgrade McNeil's plants and equipment, appoint newmanufacturing executives, and hire a third-party consultingfirm to improve procedllres and systems. Bonnie Jacobs, aMcNeil spokeswoman, wrote in a recent email: "We will

Research Expenditures ($ millionsl

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

$8,494

8,r83

7,665

7,548

6,864

6,986

7,577

7,680

7,125

6,462

Iinvest the necessary resources and nlake whatever changes

:rre needed to do so. and we will take the tinle to do it. – –D

rr gh t.-The problerns at McNeil, couplecl with growing prob-

lelrs wjth J&J's artificial hips and contact lenses. alsolecl Johnson & Johnson to make changes to its corporateoversight of its supply chain and manufacturing. ln August2010. the firm appointed Ajit Shetty. a longtime execr"r-tive. to oversee a ne\' system of con'rpanywide qualitycontrol that involveci a single framervork for quality across

all of the operating units and a new reporting systen-r. The

need tbr these changes was highlighted by Erik Cordor.r,a plofessor at the Ross School of Business at the llniver-sity of Michigan: "Nothing is more valuable to Johnson &Johnson than the brancl bond of trust with consumers."i(l

PassimE the BatonIn Aplil 2012. Johnson & Johnson appointed Gorsky ttllcad the health care conglomerate out of the difficultiesthat it had firced over the previous few yeals. He had beenu,ith the firm since 1988, holding positions in its pharma-ceutical businesses across Europe. Africa, and the Middle

E,ast befbre leavin-r fbr a t'ew yeiirs to work in Novartis'Shortly after his return to Johnson & Johr.rson in 2008, hetook over its rnedical device and diagnostic group. Because

of his extensive background with the firm. and with thedivision that was being investigated about its faulty hipreplacements, Gorsky might have been regardecl as theideal person to take over the job.

When he took over, DePuy, the firm's olthopedic unit.was alreacly running into tlouble with its newest artifi-cial hip. The tirm finally lecalled the artificial hip, amidgrowing concerns about its failule among those who hadleceived the implant. Until then, however, executives fiom

the firm had repeatedly insisted that the device was safe'Andrew Ekdahl, the current plesident of DePuy. recentlyreiterated that position. "This was purely a business deci-

sion." he said.llln the trial in Los Angeles Superior Courtregarcling the defective hip replacement. however. Michael

A. Kelly, the lawyel making the case against Johnson &Johnson. suggested that company executives might have

concealed information out of concern fbr flrm profits'In spite of all these issues, Johnson & Johnson did not

attempt to clarify what infbrmation Gorsky might have had

about the ploblems associated with the artificial hip. Under

the circumstances. his promotion to lead the firm sur"prisedDr. Robelt Hauser, a cardiologist and an advocate fbrimproved safety of medical devices. "He's been oversee-ing one of the major J&J quality issues and the board ofJ&J sees fit to name him the n"*iC.E.O.." he questioned.12These issues raised concerns about the ability of the firmto eff'ectively deal with the quality concerns and to takesteps to prevent them tiom recurt"ing in the future.

Gorksy's first.iob as Johnson & Johnson's chief execu-tive was, in fact. to reassure shareholders that the firm would

move quickly to overcome its problems with manr-rfactuling

defects, product recalls. and lawsuits. "We've -qot to adapt

faster than ever belbre, be more agile than ever before." he

statecl at rhe firm's attnual tteeting atier taking overlJ Heacknowleclged that some of the problenls could pafily beattributed to the firm's attenrpt to continue to nreet WallStr"eet's increasin-uly short{erm demands. Gorsky antrounced

that moving forwald. J&J was committed to managing for

the long term, actively soliciting f'eedback I'rom a[] quarters

and adhering to the mission that made customers the first

priority.Gorsky's biggest challenge, however, came from a pro-

posal that Johnson & Johnson might be better off if it wastroken into smaller companies, pelhaps along the linesof its ditterent divisions. There u'ere grouing concetnsabout the ability of the conglomelate to provicle sutficient

sr,rpervision to all of its wor'ldwide subsidiar"ies. Gorskydismissed the proposal. claiming that J&J drew substantial

benefits tiom the divelsified nature of its businesses. Herlid concede. however. that the tirn-r would have to be more

selective. careful. and clecisive about the products that itwould pursue.

ls There a eure Ahead?Uncler Golksy. Johnson & Johnson began to divest someof its lower-glowth businesses and ledltce annual costsby $1 billion. ln 2014. the firm sold off its blood-testingunit. cal1ec1 Ortho-Clinical Diagnostics, for $'1.1-5 billionto the private equity firm Carlyle Group. lt was activelyseeking a buyer for Cordis, which made medical devices

such as stents and catheters. Johnson & Johnson, whichhad helpecl to <levelop the roughly $5 billion global market

tbr cardiac stents. announced that it was sl.rifting its focusto other medical technologies that showed more potential

lbl glowth.To repair the damage to its reputation fl'on'r the many

recalls across two of its divisions, Johnson & Johnsonrecently announced that it would remove a host of poten-tially harmful chemicals, tike tbrnialdehyde. trom its line

of consumer products by the end of 2015. It was the firstmajor consumel products company to make such a wide-

spread commitment. "We've never really seen a majorpersonal care product company take the kind of move that

they are taking with this," said Kenneth A. Cook, president

of ihe Environmental Working Group.llAs he tried to plot a course for the future of Johnson &

Johnson, Gorsky realizedthat he had to deal rvith u larietyof issues. He was aware that much of thc firm's successto date resulted fi'om the relative autonomy that it granted

to each of its businesses. At the same time, he realizedthat he had to provide more direction for the businessesto collaborate ivith each other in order to pursue emerg-ing opportunities. He also understood that it was criticalfor J&J to clevelop sutficient controls that could lnirlirnize

future problems with quality control.In overall terms. it was clear that the health care

giant had to rethink the process by which it managed its

I

aASr:x :: J0l-lNS0N & JOHNSON d:31

diversified portfolio of companies in order to ensure that itcould keep growing without creating issues that could posefurther threats to its reputation. "This is a company that waspurer than Caesar's wife, this was the gold standard, and allof a sudden it just seems like things are breaking down,"said Wiiliam Trombetta, a professor of pharmaceuticalmarketing at Saint Joseph's University in Philadephia.15

ENDNOTESi. Katie Thomas. J.&J.'s next chiel is steeped in sales culture. New York

Iines, Februaly 221,2012, p. B6.2. Katie Thomas & Reed Abelson. J.&J. chref to resign one role. Nerr

ktrk Times, February 22, 2012. p. 88.3. Thomas. op.cit., p. BL4. Peter Lotius & Shirley S. Wang. J&J sales show health care feels the

pinch. Wall Street Journul, January 21,2009, p.81.

5. Avery Johnson. J&J's consurner play paces growth. WuLl StreetJotrnal, Jtmary 24, 2007. p, A3.

6. Holiy Hubbud Preston. Drug giant prot,ides ar model of consistency.Heruld Tribune, March 12-13, 2005, p. 12.

7. Amy Baffett. Staying on top. Business llrealr, May 5, 2003, p. 62.8. rbid.

9. Natasha Singer & Reed Abelson. Can Johnson & Jobnson get irs xcttogether? Nev, York lfuzes, Januarv 16, 201 1, p. 84.

10. Ibid., p. Bz1.I l. Thon.ras & Abelson. op. cit.I2. Michaei L, Diamond. J&J's CEO calls for fast action. Ashburr Park

Press, April 27 ,2012.. p. 13.13, Thomas, op. cit.

1,1, Katie Thomas. Johnson & Johnson to remor,e questionable chemicalsinproducts. Ne*- Ytn'k llnze,r, August 16,2012. p. B1.

15. Natasha Singer'. Hip implants il-e recalled by J&J rnrl. Neyv ktrkIlne.r, August 27. 2010, p. B L

C:3S CAS| 31:: JOHNSON &JOHNSON