1. What implications does Johnson & Johnsons corporate strategy have for its organizational design?

CASE 24 JOHNSON & JOHNSON* EXHIBIT 1 Income Statement in $ millions) Year Ending 2018 2017 2016 Total Revenue $81,581 $76,450 $71,890 Gross Profit 54,490 51,011 51,101 Operating Income 20,049 18,489 20,862 Net Income 15,297 1,300 16,540 Source: Johnson & Johnson, Annual Report 2018. EXHIBIT 2 Balance Sheet (in $ millions) Year Ending 2018 2017 2016 Current Assets $ 46,033 $ 43,088 $ 65,032 On March 13, 2019, a California jury awarded $29 million to a woman who claimed that asbestos in Johnson & Johnson's (J&J) talcum-powder-based products caused her cancer. The verdict marked the latest in a series of legal challenges that the world's largest healthcare com- pany has faced about the quality of its products. In addi- tion to having to settle misleading claims about its hip implants, J&J now faces more than 13,000 talc-related lawsuits across the United States-claims that some of its products, such as Johnson's Baby Powder, contain traces of asbestos that can cause cancer. Even though such talc- based products account for a very small share of J&J's overall sales, the firm's image has long been tied to the purity of these products. These lawsuits have posed a serious problem for the well-established reputation of J&J that has been devel- oped over many years. With 260 operating companies in virtually every country, J&J has managed to develop un- der its banner the world's largest medical device busi- ness, an even bigger pharmaceutical business and a consumer products division with a dozen megabrands from Neutrogena to Tylenol. The firm's reputation has been derived from its diversified businesses that have re- flected its wide range of expertise and allowed it to de- velop a customer base spanning from consumers to hospitals to governments. In fact, the financial stability that has resulted from its range of businesses has been J&J's calling card for decades. Its sales have risen on regular basis, although profits have dipped a bit in recent years (see Exhibit 1 and 2). The firm has 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's. 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 oppor- tunities across different business units. That is what a diver- sified business platform affords them." However, even as it has grown and become more diversi- fied, J&J has struggled to find a way to manage 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 Total Assets 152,954 157,303 141,208 Current Liabilities 31,230 30,537 26,287 Total Liabilities 93,202 97,143 70,790 Stockholder Equity 59,752 60,160 70,418 Source: Johnson & Johnson, Annual Report 2017-2018 entrepreneurial attitude among each of its units, this has prevented J&J from instilling a strong set of controls, such as for quality standards. It has also prevented the firm from pursuing opportunities on which its various units could combine their different areas of expertise. Over the past decade, William C. Weldon, who spear- headed a period of dramatic growth at J&J, began to direct his efforts at trying to exert more control over its different businesses. After Alex Gorsky took over as CEO in 2012, he has pushed harder to try and weave together the opera- tions of the different units. The need for greater oversight became more urgent after the firm ran into quality issues with some of its well-known products. But like Weldon, Gorsky realizes that it must try to find a balance between its new push for greater control with its traditional empha- sis on autonomy throughout the organization. * Case prepared by Jamal Shamsie, Michigan State University, with the assistance of Professor Alan B. Eisner, Pace University. Material has been drawn from published sources to be used for purposes of class discussion Copyright 2019 Jamal Shamsie and Alan B. Eisner. C186 CASE 24 :: JOHNSON & JOHNSON Cultivating Entrepreneurship tralization has led to relatively high overhead costs, none of the executives that have run J&J-Weldon included- Johnson & Johnson was founded in 1886 by three brothers had ever thought that this was too high a price to pay. named Johnson. The company grew slowly for a generation before Robert Wood Johnson II decided reluctantly to take "J&J is a huge company, but you didn't feel like you were the family business public. He fretted about the effects that in a big company, recalled a scientist who used to work there. market pressures would have on the company's practices and values that led him to write a 307-word statement of corporate principles. This spelled out that J&J's primary Pushing for More Collaboration responsibility was to patients and physicians, followed by The entrepreneurial culture that Johnson & Johnson devel- employees, and then by communities. Shareholders were oped over the years has clearly allowed it to show a consis- placed last on the list. This credo is inscribed in stone at the tent level of high performance. Indeed, J&J has top-notch entrance of the firm's headquarters and is still routinely in products in each of the areas in which it operates. It has voked around the company. been spending heavily on research and development for Over the years, as J&J has grown by acquisitions of many years, taking its position among the world's top firms engaged in some aspect of health care, it has been spenders (see Exhibit 4). It has been spending about 12 per- guided by its credo. The task has become more challenging cent of its sales on about 9,000 scientists working in re- as J&J has developed into an astonishingly complex enter search laboratories around the world. This allows each of prise, made up of over 260 different subsidiaries that have the three divisions to continually introduce promising new been broken down into three different divisions. The most products. widely known of these is the division that makes consumer In spite of the benefits that J&J has derived from giving products such as Johnson & Johnson baby care products, its various enterprises considerable autonomy, there have Band-Aid adhesive strips, and Visine eye drops. Its pharma been growing concerns that they can no longer be allowed ceuticals division sells several blockbuster drugs such as to operate in near isolation. Shortly after Weldon had anemia drug Procrit and schizophrenia drug Risperdal. Its taken charge of the firm, he realized that J&J was in a medical devices division is responsible for best-selling strong position to exploit new opportunities by drawing on products such as Depuy orthopedic joint replacements and the diverse skills of its various subsidiaries across the three Cypher coronary stents. divisions. In particular, he was aware that his firm may be In particular, J&J's credo has kept the firm focused on able to derive more benefits from the combination of its health care, even as it has expanded into several different knowledge in drugs, devices, and diagnostics, since few business segments. Furthermore, it has pushed the com companies were able to match its reach and strength in pany to adopt a decentralized approach in managing its these basic areas. different businesses. Most of its far-flung subsidiaries This had led Weldon to find ways to make its fiercely across its three divisions were acquired because of the po- independent units to work together. In his own words: tential demonstrated by some promising new products in "There is a convergence that will allow us to do things we its pipeline. Each of these units was therefore granted haven't done before."4 Through pushing the various far. near-total autonomy to develop and expand upon their flung units of the firm to pool their resources, Weldon had best-selling products in order to better serve their patients believed that firm could become one of the few that may (see Exhibit 3). actually be able to attain that often-promised, rarely deliv- It is widely believed that this independence has fos-ered idea of synergy. In order to pursue this, he created a tered an entrepreneurial attitude that has kept J&J in corporate office that would get business units to work to- tensely competitive as others around it have faltered. The gether on promising new opportunities. "It's a recognition relative autonomy that is accorded to the business units that there's a way to treat disease that's not in silos." Wel- has also provided the firm with the ability to respond don stated, referring to the need for collaboration between swiftly to emerging opportunities. A strong enough J&J's largely independent businesses. commitment from everyone throughout these units to the For the most part, however, Weldon confined himself to principles that have been laid out in the credo were taking steps to foster better communication and more fre- considered to be sufficient to provide the necessary quent collaboration among J&J's disparate operations. He direction. was convinced that such a push for communication and co- J&J has actually been quite proud of the considerable ordination would allow the firm to develop the synergy he freedom it has given to its different subsidiaries in order was seeking. But Weldon was also aware that any effort to to develop and execute their own strategies. Besides de get the different business units to collaborate must not veloping their strategies, these units have also been al quash the entrepreneurial spirit that had spearheaded most lowed to work with their own resources. Many of them of the growth of the firm to date. Jerry Caccott, managing have even been able to operate their own finance and hu director of consulting firm Strategic Decisions Group, em- man resources departments. While this degree of decen phasized that cultivating those alliances "would be EXHIBIT 3 Segment Information Johnson & Johnson is made up of over 260 different companies, many of which it has acquired over the years. These individual companies have been assigned to three different divisions. Geographic Areas Sales to Customers 2018 2017 2016 (Dollars in Millions) Consumer- United States $ 5,761 $ 5,565 $ 5,420 International 8,092 8,037 7,887 Total 13,853 13,602 13,307 Pharmaceutical United States 23.286 21,474 20.125 International 17,448 14,782 13,339 Total 40.734 36,256 33,464 Medical Devices- United States 12,837 12,824 12,266 International 14,157 13,768 12.853 Total 26,994 26,592 25,119 Worldwide total 81,581 76,450 71,890 Business Segments Income Before Tax Identifiable Assets (Dollars in Millions) 2018 2017 2016 2018 2017 Consumer $ 2,320 2,524 2,441 25,877 25,030 Pharmaceutical 12.568 11,083 12.827 56,636 59,450 Medical Devices 4,397 5,392 5,578 46,254 45.413 Total 19,285 18,999 20,846 128,767 129,893 Less: Expense not allocated to segments 1,286 1,326 1,043 General corporate 24,187 27,410 Worldwide total 17.999 17,673 19,803 152,954 157,303 Source: Johnson & Johnson, Annual Report 2018. challenging in any organization, but particularly in an orga- nization that has been so successful because of its decen- tralized culture." These collaborative efforts did lead to the introduc- tion of some highly successful products (see Exhibit 5). Even the company's fabled consumer brands have started to show growth as a result of increased collaboration be- tween 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&J's hospital-supply businesses. And J&J has used its prescrip- tion antifungal treatment, Nizoral, to develop a dandruff shampoo. In fact, products that have developed in large part out of such a form of cross-fertilization have allowed the firm's consumer business to experience considerable internal growth. 2012 7.680 EXHIBIT 4 Research Expenditures (in $ millions) concern for firm profits. The problems with the medical devices unit were compounded by serious issues that arose 2018 $10,775 with the consumer products unit, which led it to recall 2017 10,549 many of its products-including the biggest children's drug recall of all time. 2016 9,095 Quality problems have arisen before, but they were usu- 2015 9,046 ally fixed on a regular basis. Analysts suggest that the prob- lems at J&J's McNeil division may have exacerbated in 2014 8,494 2006 when J&J decided to combine it with the newly ac- 2013 8,183 quired consumer health care unit from Pfizer. The firm be lieved that it could achieve $500 to $600 million in annual 7,665 savings by merging the two units together. After the merger, 2011 7.548 McNeil was also transferred from the heavily regulated pharmaceutical division to the marketing driven consumer 2010 6,864 products division, which was not subjected to the same 2009 level of quality control. 6,986 Much of the blame for J&J's stumbles fell on William C. 2008 7,577 Weldon who stepped down as CEO in April 2012 after pre- 2007 siding over one of the most tumultuous decades in the firm's history. Critics said the company's once vaunted at- Source: Johnson & Johnson, Annual Report. tention to quality had slipped under his watch. Weldon, who had started out as sales representative at the firm, was EXHIBIT 5 Significant Innovations believed to have been obsessed with meeting tough perfor Antiseptic Surgery (1888) mance targets, even by cutting costs that might affect qual- ity. Erik Gordon, who teaches business at University of Three brothers start up a firm based on antiseptics designed for Michigan elaborated on this philosophy: "We will make our modern surgical practices. numbers for the analysts, period," Band-Aids (1921) In April 2012, J&J appointed Gorsky to lead the health- care conglomerate out of the difficulties with quality that it Debuts the first commercial bandages that can be applied at home had faced over the past few years. He had been with the without oversight by a professional. firm since 1988, holding positions in its pharmaceutical businesses across Europe, Africa, and the Middle East be No More Tears (1954) fore leaving for a few years to work at Novartis. Shortly Introduces a soap-free shampoo that is gentle enough to clean after his return to J&J in 2008, he took over its medical babies' hair without irritating their eyes. devices unit that made the problematic hip implants. Since he took over, Gorsky has been dealing with the various law- Acuvue Contact Lenses (1987) suits the firm faced over the problems with its hip replace- Offers the first-ever disposable lenses that can be worn for up to a ments, paying out over $2.5 billion in in settlements. week and then thrown away. Even as J&J was trying to get over its problems with the hip implants, there were rising concerns about the asbestos Sirturo (2012) that might have contaminated its talcum powder-based Gets approval to launch a much-needed treatment for drug-resistant products. Memos that were obtained during the court cases tuberculosis, the first new medication to fight this disease more revealed that the firm may have known about this problem than 40 years. for years, but it tried to deny the charge and downplay any possible health threats from the use of their Baby Powder Source: Bluestein, Will Johnson & Johnson's New Innovation Centers Point The Way Toward Its Future? Fastcompany, February 10, 2014 and other similar products. This ongoing problem with quality issues also forced Gorsky to find ways to gain more oversight over the firm's 260-odd units. As such, he wanted Facing Quality Concerns to push further than Weldon to work with the various units Even as Johnson & Johnson has been trying to get more of the firm to establish standard practices that would allow involved with the efforts of its business units, it ran into the firm to pursue opportunities without posing risks to the firm's long-established reputation. problems with quality control with two of its divisions. Its medical devices division had run into problems with its newest artificial hip. Although it did eventually recall the Pushing for Tighter Integration device, it was not before rumors had begun to circulate that In order to gain more oversight over all of its units, Gorsky company executives may have concealed information out of lured Sandra Peterson from Bayer and gave her the position CASE 24 JOHNSON & JOHNSON C189 olla single of group worldwide chairman. The newly created position more than 3,400 opportunities through these centers, lead- gave Peterson sweeping responsibly to oversee technology ing to 200 partnerships. across the entire firm. Gorsky believed that the very nature of the job required him to hire an outsider who had not had Is There a Cure Ahead? much exposure to J&J's existing culture. Because decentral Gorsky's biggest challenge came from a demand that ization had allowed each of the business units to make all of Johnson & Johnson might be better off if it was broken off their own decisions, there had been no consistency in their into smaller companies, perhaps along the lines of its differ- different practices. Gorsky wanted to bring order to this un en divisions. There were growing concerns about the abil wieldly machine. "Sometimes a customer doesn't want to ity of the conglomerate to provide sufficient supervision to deal with 250 J&J's" he said. 10 all of its subsidiaries that were spread all over the globe. Peterson worked feverishly to align everything from Gorsky dismissed the proposal, claiming that J&J drew sub- HR policy to procurement processes from the 250 busi stantial benefits from the diversified nature of its busi- ness units that had been making their own decisions inde nesses. Given the enormous shifts in the healthcare pendently. She covered everything from the timing of industry and the large number of government and institu- financial forecasts to employee car policies. She also con tional customers and partners involved, he believes that the solidated all of the firm's data-all of its 120,000 employees firm's huge scale could be a rare asset for negotiating deals. to a HR database. Her efforts to process tons of In support of this belief, Gorsky has pointed to J&J's data each day led to the creation of a warehouse, which recent acquisition of Auris Health for approximately contained upwards of 500 terabytes of data. By the time $3.4 billion in cash. The acquisition will accelerate the Peterson decided to leave J&J in October 2018, she firm's entry into surgical robotics and other interventional claimed that her streamlining process would save the firm applications that have shown considerable potential for about $1 billion. growth. "We believe the combination of best-in-class robot- A far more significant effort had already been initiated ics, advanced instrumentation, and unparalleled end-to-end by Paul Stoffels when he was appointed J&J's global head connectivity will make a meaningful difference in patient of pharmaceuticals a few years ago. All of the units that outcomes," said Ashley McEvoy, executive vice president, operated within the pharmaceutical division had also oper who is in charge of J&J's medical devices division. In ated with complete autonomy. In particular, J&J's seven dif other step, the firm has been working on an app in collabo- ferent drug R&D organizations had operated in completely ration with Apple for its watch that can provide better data siloed fashion. In some cases, multiple companies pursued on cardiac issues. the development of the same drugs and each had its own Even as Gorsky plots a course for the future of J&J, he is system for handling clinical or regulatory development. aware that its stock has been struggling recently because of Stoffels began to merge all of the units under his purview some slower-growing segments of its business. He realizes into one group and organized it to target 11 different dis that it may not be possible to count on much growth from eases. In the process, 12 of the division's 25 facilities were its existing model that grants considerable autonomy to shuttered and nearly 200 projects were slashed. each of its businesses. Above all, he feels strongly that he This new integrated unit developed a streamlined devel must provide more direction for these units, partly to en- opment process, a highly coordinated system that Stoffels courage them to collaborate with each other in order to pur- calls Accererando. Under this model, global teams sue emerging opportunities. He also understands that it statisticians in China, data managers in India, regulatory critical for J&J to take steps to develop sufficient controls folks in Europe-work 24/7 to speed drugs to market. The that can minimize future problems with quality control. assembly-line e approach has cut months and, in some cases, Overall, it is clear that the healthcare giant has to re- years off the development time. Its increase in drug approv think the process by which it manages its diversified portfo- als over the past decade have put J&J in a league of its own. lio of companies in order to ensure it can keep growing No other company has come close to that," said Bernard without creating issues that can pose further threats to its Munos, a pharmaceutical innovation consultant." reputation. "This is a company that was purer than Caesar's Stoffels has accomplished more than just reducing the wife, this was the gold standard, and all of a sudden it just time needed to bring drugs to market. He has begun to look seems like things are breaking down." said William Trom- for ideas from all sources, whether it is from any of J&J's betta, a professor of pharmaceutical marketing at Saint own business units or from entrepreneurs or scientists out. Joseph's University in Philadephia. 13 side the firm. He has set up four innovation centers in bio- tech clusters-Cambridge, MA: Menlo Park, CA; London: ENDNOTES and Shanghai-around the world, places where scientific 1. Hsu, T. 2019. Johnson & Johnson hit with $29 million verdict in case over talc and asbestos. New York Times, March 14, https://www.nytimes.com/ entrepreneurs can interact with J&J's own drug and tech- 2019/03/14/business/johnson-johnson-powder-cancer.html. nology scouts. His flexible approach with these outsiders 2. Fry, E. 2016. Can big still be beautiful? Fortune, August 1, p.84. lets J&J work with them more casually and helps build 3. Thomas, K. and R. Abelson. 2012. J&J chief to resign one role. New stronger relationships. Since 2013, the firm has reviewed York Times, February 22. p. 38 C190 CASE 24 :: JOHNSON & JOHNSON CASE 24 JOHNSON & JOHNSON* EXHIBIT 1 Income Statement in $ millions) Year Ending 2018 2017 2016 Total Revenue $81,581 $76,450 $71,890 Gross Profit 54,490 51,011 51,101 Operating Income 20,049 18,489 20,862 Net Income 15,297 1,300 16,540 Source: Johnson & Johnson, Annual Report 2018. EXHIBIT 2 Balance Sheet (in $ millions) Year Ending 2018 2017 2016 Current Assets $ 46,033 $ 43,088 $ 65,032 On March 13, 2019, a California jury awarded $29 million to a woman who claimed that asbestos in Johnson & Johnson's (J&J) talcum-powder-based products caused her cancer. The verdict marked the latest in a series of legal challenges that the world's largest healthcare com- pany has faced about the quality of its products. In addi- tion to having to settle misleading claims about its hip implants, J&J now faces more than 13,000 talc-related lawsuits across the United States-claims that some of its products, such as Johnson's Baby Powder, contain traces of asbestos that can cause cancer. Even though such talc- based products account for a very small share of J&J's overall sales, the firm's image has long been tied to the purity of these products. These lawsuits have posed a serious problem for the well-established reputation of J&J that has been devel- oped over many years. With 260 operating companies in virtually every country, J&J has managed to develop un- der its banner the world's largest medical device busi- ness, an even bigger pharmaceutical business and a consumer products division with a dozen megabrands from Neutrogena to Tylenol. The firm's reputation has been derived from its diversified businesses that have re- flected its wide range of expertise and allowed it to de- velop a customer base spanning from consumers to hospitals to governments. In fact, the financial stability that has resulted from its range of businesses has been J&J's calling card for decades. Its sales have risen on regular basis, although profits have dipped a bit in recent years (see Exhibit 1 and 2). The firm has 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's. 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 oppor- tunities across different business units. That is what a diver- sified business platform affords them." However, even as it has grown and become more diversi- fied, J&J has struggled to find a way to manage 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 Total Assets 152,954 157,303 141,208 Current Liabilities 31,230 30,537 26,287 Total Liabilities 93,202 97,143 70,790 Stockholder Equity 59,752 60,160 70,418 Source: Johnson & Johnson, Annual Report 2017-2018 entrepreneurial attitude among each of its units, this has prevented J&J from instilling a strong set of controls, such as for quality standards. It has also prevented the firm from pursuing opportunities on which its various units could combine their different areas of expertise. Over the past decade, William C. Weldon, who spear- headed a period of dramatic growth at J&J, began to direct his efforts at trying to exert more control over its different businesses. After Alex Gorsky took over as CEO in 2012, he has pushed harder to try and weave together the opera- tions of the different units. The need for greater oversight became more urgent after the firm ran into quality issues with some of its well-known products. But like Weldon, Gorsky realizes that it must try to find a balance between its new push for greater control with its traditional empha- sis on autonomy throughout the organization. * Case prepared by Jamal Shamsie, Michigan State University, with the assistance of Professor Alan B. Eisner, Pace University. Material has been drawn from published sources to be used for purposes of class discussion Copyright 2019 Jamal Shamsie and Alan B. Eisner. C186 CASE 24 :: JOHNSON & JOHNSON Cultivating Entrepreneurship tralization has led to relatively high overhead costs, none of the executives that have run J&J-Weldon included- Johnson & Johnson was founded in 1886 by three brothers had ever thought that this was too high a price to pay. named Johnson. The company grew slowly for a generation before Robert Wood Johnson II decided reluctantly to take "J&J is a huge company, but you didn't feel like you were the family business public. He fretted about the effects that in a big company, recalled a scientist who used to work there. market pressures would have on the company's practices and values that led him to write a 307-word statement of corporate principles. This spelled out that J&J's primary Pushing for More Collaboration responsibility was to patients and physicians, followed by The entrepreneurial culture that Johnson & Johnson devel- employees, and then by communities. Shareholders were oped over the years has clearly allowed it to show a consis- placed last on the list. This credo is inscribed in stone at the tent level of high performance. Indeed, J&J has top-notch entrance of the firm's headquarters and is still routinely in products in each of the areas in which it operates. It has voked around the company. been spending heavily on research and development for Over the years, as J&J has grown by acquisitions of many years, taking its position among the world's top firms engaged in some aspect of health care, it has been spenders (see Exhibit 4). It has been spending about 12 per- guided by its credo. The task has become more challenging cent of its sales on about 9,000 scientists working in re- as J&J has developed into an astonishingly complex enter search laboratories around the world. This allows each of prise, made up of over 260 different subsidiaries that have the three divisions to continually introduce promising new been broken down into three different divisions. The most products. widely known of these is the division that makes consumer In spite of the benefits that J&J has derived from giving products such as Johnson & Johnson baby care products, its various enterprises considerable autonomy, there have Band-Aid adhesive strips, and Visine eye drops. Its pharma been growing concerns that they can no longer be allowed ceuticals division sells several blockbuster drugs such as to operate in near isolation. Shortly after Weldon had anemia drug Procrit and schizophrenia drug Risperdal. Its taken charge of the firm, he realized that J&J was in a medical devices division is responsible for best-selling strong position to exploit new opportunities by drawing on products such as Depuy orthopedic joint replacements and the diverse skills of its various subsidiaries across the three Cypher coronary stents. divisions. In particular, he was aware that his firm may be In particular, J&J's credo has kept the firm focused on able to derive more benefits from the combination of its health care, even as it has expanded into several different knowledge in drugs, devices, and diagnostics, since few business segments. Furthermore, it has pushed the com companies were able to match its reach and strength in pany to adopt a decentralized approach in managing its these basic areas. different businesses. Most of its far-flung subsidiaries This had led Weldon to find ways to make its fiercely across its three divisions were acquired because of the po- independent units to work together. In his own words: tential demonstrated by some promising new products in "There is a convergence that will allow us to do things we its pipeline. Each of these units was therefore granted haven't done before."4 Through pushing the various far. near-total autonomy to develop and expand upon their flung units of the firm to pool their resources, Weldon had best-selling products in order to better serve their patients believed that firm could become one of the few that may (see Exhibit 3). actually be able to attain that often-promised, rarely deliv- It is widely believed that this independence has fos-ered idea of synergy. In order to pursue this, he created a tered an entrepreneurial attitude that has kept J&J in corporate office that would get business units to work to- tensely competitive as others around it have faltered. The gether on promising new opportunities. "It's a recognition relative autonomy that is accorded to the business units that there's a way to treat disease that's not in silos." Wel- has also provided the firm with the ability to respond don stated, referring to the need for collaboration between swiftly to emerging opportunities. A strong enough J&J's largely independent businesses. commitment from everyone throughout these units to the For the most part, however, Weldon confined himself to principles that have been laid out in the credo were taking steps to foster better communication and more fre- considered to be sufficient to provide the necessary quent collaboration among J&J's disparate operations. He direction. was convinced that such a push for communication and co- J&J has actually been quite proud of the considerable ordination would allow the firm to develop the synergy he freedom it has given to its different subsidiaries in order was seeking. But Weldon was also aware that any effort to to develop and execute their own strategies. Besides de get the different business units to collaborate must not veloping their strategies, these units have also been al quash the entrepreneurial spirit that had spearheaded most lowed to work with their own resources. Many of them of the growth of the firm to date. Jerry Caccott, managing have even been able to operate their own finance and hu director of consulting firm Strategic Decisions Group, em- man resources departments. While this degree of decen phasized that cultivating those alliances "would be EXHIBIT 3 Segment Information Johnson & Johnson is made up of over 260 different companies, many of which it has acquired over the years. These individual companies have been assigned to three different divisions. Geographic Areas Sales to Customers 2018 2017 2016 (Dollars in Millions) Consumer- United States $ 5,761 $ 5,565 $ 5,420 International 8,092 8,037 7,887 Total 13,853 13,602 13,307 Pharmaceutical United States 23.286 21,474 20.125 International 17,448 14,782 13,339 Total 40.734 36,256 33,464 Medical Devices- United States 12,837 12,824 12,266 International 14,157 13,768 12.853 Total 26,994 26,592 25,119 Worldwide total 81,581 76,450 71,890 Business Segments Income Before Tax Identifiable Assets (Dollars in Millions) 2018 2017 2016 2018 2017 Consumer $ 2,320 2,524 2,441 25,877 25,030 Pharmaceutical 12.568 11,083 12.827 56,636 59,450 Medical Devices 4,397 5,392 5,578 46,254 45.413 Total 19,285 18,999 20,846 128,767 129,893 Less: Expense not allocated to segments 1,286 1,326 1,043 General corporate 24,187 27,410 Worldwide total 17.999 17,673 19,803 152,954 157,303 Source: Johnson & Johnson, Annual Report 2018. challenging in any organization, but particularly in an orga- nization that has been so successful because of its decen- tralized culture." These collaborative efforts did lead to the introduc- tion of some highly successful products (see Exhibit 5). Even the company's fabled consumer brands have started to show growth as a result of increased collaboration be- tween 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&J's hospital-supply businesses. And J&J has used its prescrip- tion antifungal treatment, Nizoral, to develop a dandruff shampoo. In fact, products that have developed in large part out of such a form of cross-fertilization have allowed the firm's consumer business to experience considerable internal growth. 2012 7.680 EXHIBIT 4 Research Expenditures (in $ millions) concern for firm profits. The problems with the medical devices unit were compounded by serious issues that arose 2018 $10,775 with the consumer products unit, which led it to recall 2017 10,549 many of its products-including the biggest children's drug recall of all time. 2016 9,095 Quality problems have arisen before, but they were usu- 2015 9,046 ally fixed on a regular basis. Analysts suggest that the prob- lems at J&J's McNeil division may have exacerbated in 2014 8,494 2006 when J&J decided to combine it with the newly ac- 2013 8,183 quired consumer health care unit from Pfizer. The firm be lieved that it could achieve $500 to $600 million in annual 7,665 savings by merging the two units together. After the merger, 2011 7.548 McNeil was also transferred from the heavily regulated pharmaceutical division to the marketing driven consumer 2010 6,864 products division, which was not subjected to the same 2009 level of quality control. 6,986 Much of the blame for J&J's stumbles fell on William C. 2008 7,577 Weldon who stepped down as CEO in April 2012 after pre- 2007 siding over one of the most tumultuous decades in the firm's history. Critics said the company's once vaunted at- Source: Johnson & Johnson, Annual Report. tention to quality had slipped under his watch. Weldon, who had started out as sales representative at the firm, was EXHIBIT 5 Significant Innovations believed to have been obsessed with meeting tough perfor Antiseptic Surgery (1888) mance targets, even by cutting costs that might affect qual- ity. Erik Gordon, who teaches business at University of Three brothers start up a firm based on antiseptics designed for Michigan elaborated on this philosophy: "We will make our modern surgical practices. numbers for the analysts, period," Band-Aids (1921) In April 2012, J&J appointed Gorsky to lead the health- care conglomerate out of the difficulties with quality that it Debuts the first commercial bandages that can be applied at home had faced over the past few years. He had been with the without oversight by a professional. firm since 1988, holding positions in its pharmaceutical businesses across Europe, Africa, and the Middle East be No More Tears (1954) fore leaving for a few years to work at Novartis. Shortly Introduces a soap-free shampoo that is gentle enough to clean after his return to J&J in 2008, he took over its medical babies' hair without irritating their eyes. devices unit that made the problematic hip implants. Since he took over, Gorsky has been dealing with the various law- Acuvue Contact Lenses (1987) suits the firm faced over the problems with its hip replace- Offers the first-ever disposable lenses that can be worn for up to a ments, paying out over $2.5 billion in in settlements. week and then thrown away. Even as J&J was trying to get over its problems with the hip implants, there were rising concerns about the asbestos Sirturo (2012) that might have contaminated its talcum powder-based Gets approval to launch a much-needed treatment for drug-resistant products. Memos that were obtained during the court cases tuberculosis, the first new medication to fight this disease more revealed that the firm may have known about this problem than 40 years. for years, but it tried to deny the charge and downplay any possible health threats from the use of their Baby Powder Source: Bluestein, Will Johnson & Johnson's New Innovation Centers Point The Way Toward Its Future? Fastcompany, February 10, 2014 and other similar products. This ongoing problem with quality issues also forced Gorsky to find ways to gain more oversight over the firm's 260-odd units. As such, he wanted Facing Quality Concerns to push further than Weldon to work with the various units Even as Johnson & Johnson has been trying to get more of the firm to establish standard practices that would allow involved with the efforts of its business units, it ran into the firm to pursue opportunities without posing risks to the firm's long-established reputation. problems with quality control with two of its divisions. Its medical devices division had run into problems with its newest artificial hip. Although it did eventually recall the Pushing for Tighter Integration device, it was not before rumors had begun to circulate that In order to gain more oversight over all of its units, Gorsky company executives may have concealed information out of lured Sandra Peterson from Bayer and gave her the position CASE 24 JOHNSON & JOHNSON C189 olla single of group worldwide chairman. The newly created position more than 3,400 opportunities through these centers, lead- gave Peterson sweeping responsibly to oversee technology ing to 200 partnerships. across the entire firm. Gorsky believed that the very nature of the job required him to hire an outsider who had not had Is There a Cure Ahead? much exposure to J&J's existing culture. Because decentral Gorsky's biggest challenge came from a demand that ization had allowed each of the business units to make all of Johnson & Johnson might be better off if it was broken off their own decisions, there had been no consistency in their into smaller companies, perhaps along the lines of its differ- different practices. Gorsky wanted to bring order to this un en divisions. There were growing concerns about the abil wieldly machine. "Sometimes a customer doesn't want to ity of the conglomerate to provide sufficient supervision to deal with 250 J&J's" he said. 10 all of its subsidiaries that were spread all over the globe. Peterson worked feverishly to align everything from Gorsky dismissed the proposal, claiming that J&J drew sub- HR policy to procurement processes from the 250 busi stantial benefits from the diversified nature of its busi- ness units that had been making their own decisions inde nesses. Given the enormous shifts in the healthcare pendently. She covered everything from the timing of industry and the large number of government and institu- financial forecasts to employee car policies. She also con tional customers and partners involved, he believes that the solidated all of the firm's data-all of its 120,000 employees firm's huge scale could be a rare asset for negotiating deals. to a HR database. Her efforts to process tons of In support of this belief, Gorsky has pointed to J&J's data each day led to the creation of a warehouse, which recent acquisition of Auris Health for approximately contained upwards of 500 terabytes of data. By the time $3.4 billion in cash. The acquisition will accelerate the Peterson decided to leave J&J in October 2018, she firm's entry into surgical robotics and other interventional claimed that her streamlining process would save the firm applications that have shown considerable potential for about $1 billion. growth. "We believe the combination of best-in-class robot- A far more significant effort had already been initiated ics, advanced instrumentation, and unparalleled end-to-end by Paul Stoffels when he was appointed J&J's global head connectivity will make a meaningful difference in patient of pharmaceuticals a few years ago. All of the units that outcomes," said Ashley McEvoy, executive vice president, operated within the pharmaceutical division had also oper who is in charge of J&J's medical devices division. In ated with complete autonomy. In particular, J&J's seven dif other step, the firm has been working on an app in collabo- ferent drug R&D organizations had operated in completely ration with Apple for its watch that can provide better data siloed fashion. In some cases, multiple companies pursued on cardiac issues. the development of the same drugs and each had its own Even as Gorsky plots a course for the future of J&J, he is system for handling clinical or regulatory development. aware that its stock has been struggling recently because of Stoffels began to merge all of the units under his purview some slower-growing segments of its business. He realizes into one group and organized it to target 11 different dis that it may not be possible to count on much growth from eases. In the process, 12 of the division's 25 facilities were its existing model that grants considerable autonomy to shuttered and nearly 200 projects were slashed. each of its businesses. Above all, he feels strongly that he This new integrated unit developed a streamlined devel must provide more direction for these units, partly to en- opment process, a highly coordinated system that Stoffels courage them to collaborate with each other in order to pur- calls Accererando. Under this model, global teams sue emerging opportunities. He also understands that it statisticians in China, data managers in India, regulatory critical for J&J to take steps to develop sufficient controls folks in Europe-work 24/7 to speed drugs to market. The that can minimize future problems with quality control. assembly-line e approach has cut months and, in some cases, Overall, it is clear that the healthcare giant has to re- years off the development time. Its increase in drug approv think the process by which it manages its diversified portfo- als over the past decade have put J&J in a league of its own. lio of companies in order to ensure it can keep growing No other company has come close to that," said Bernard without creating issues that can pose further threats to its Munos, a pharmaceutical innovation consultant." reputation. "This is a company that was purer than Caesar's Stoffels has accomplished more than just reducing the wife, this was the gold standard, and all of a sudden it just time needed to bring drugs to market. He has begun to look seems like things are breaking down." said William Trom- for ideas from all sources, whether it is from any of J&J's betta, a professor of pharmaceutical marketing at Saint own business units or from entrepreneurs or scientists out. Joseph's University in Philadephia. 13 side the firm. He has set up four innovation centers in bio- tech clusters-Cambridge, MA: Menlo Park, CA; London: ENDNOTES and Shanghai-around the world, places where scientific 1. Hsu, T. 2019. Johnson & Johnson hit with $29 million verdict in case over talc and asbestos. New York Times, March 14, https://www.nytimes.com/ entrepreneurs can interact with J&J's own drug and tech- 2019/03/14/business/johnson-johnson-powder-cancer.html. nology scouts. His flexible approach with these outsiders 2. Fry, E. 2016. Can big still be beautiful? Fortune, August 1, p.84. lets J&J work with them more casually and helps build 3. Thomas, K. and R. Abelson. 2012. J&J chief to resign one role. New stronger relationships. Since 2013, the firm has reviewed York Times, February 22. p. 38 C190 CASE 24 :: JOHNSON & JOHNSON