Why is Johnson & Johnson (J&J) interesting?

Incorporated in 1887, Johnson & Johnson is one of the world’s best-managed, financially-successful, global companies in spite of operating in one of the most rapidly-changing industries – health care. Although the company’s historical strengths have been derived from active acquisition strategies and from research and development (R&D) conducted in decentralized operating companies, there is strong evidence that J&J also has developed competences in integrating activities including, at times, merging companies to better serve customers. J&J also appears to be expanding its traditional R&D and manufacturing focus to value-added services. J&J is an interesting company because it appears to have identified the greatest leverage points for integrating and centralizing certain activities while preserving the decentralization of others.

Company overview

J&J is one of the world’s largest health care companies with international operations since 1919. In 1995, sales reached $19 billion, and net earnings were $2.4 billion. At the end of 1995, J&J had 82,000 employees and 164 operating companies located throughout the world. Employment has remained at 82,000 employees since 1990 when sales were $11 billion. Investors have benefited from the company’s performance: $10,000 of J&J stock in 1990 was worth $26,000 at the end of 1995.

J&J is organized into three broad areas: Consumer, Pharmaceutical, and Professional. J&J’s Consumer companies focus on over-the-counter health care products with strong brand recognition ranging from dental floss to baby shampoo. J&J’s Pharmaceutical companies sell products such as prescription drugs to members of the health care profession. J&J’s Professional companies concentrate on products like wound closures, disposable contacts, and joint replacements which were used by physicians, nurses, dentists, etc. Revenues from sales in 1995 were split roughly equally between domestic and international as well as between the Consumer, Pharmaceutical, and Professional groups. However, profit was distributed less equally: 8% for Consumer, 57% for Pharmaceutical, and 35% for Professional.

J&J’s core activities include R&D, acquisition of promising companies, global coordination, decentralized decision-making, manufacturing, marketing, and distribution. Of these activities, J&J continues to place the highest value on decentralized R&D. Of the $19 billion in 1995 sales, 35% came from products which were introduced in the past five years and from existing products which were introduced to new markets. The cover of J&J’s 1981 annual report emphasized J&J’s philosophy of decentralization: “Decentralization = Creativity = Productivity.” A common practice at J&J to preserve decentralization has been to spin off successful and growing divisions of companies into separate operating companies. Historically, J&J has always had corporate staffs for personnel, legal, finance, science and technology, and management information systems (MIS), although sometimes these functions served only corporate headquarters (i.e., none of the operating companies). Given the decentralized nature of the organization, all of the major operating companies developed their own MIS departments, and marketing typically has remained within the operating companies. Increasingly, however, the company has identified areas in which more integrated activities can be leveraged to benefit the entire company. Information technology (IT) plays a large part in these leverage points.

Changes in the health care industry

In order to appreciate the success of J&J, it is necessary to understand the recent changes in the health care industry. Beginning in the 1970’s, the health care industry started to change dramatically. Costs of health care, including new equipment, were spiraling out of control at more than twice the rate of inflation. Consumers began to take a more active interest in health care. The U.S. government became more involved in exerting pressure to contain health care costs. Hospitals responded by consolidating, thereby increasing their purchasing power. J&J’s customers evolved from disparate physicians and hospitals to integrated health care systems involving health maintenance organizations (HMOs) and insurance companies.

Integration and centralization at J&J

In order to meet the needs of this evolving customer base and to control costs, J&J is depending on IT-related services to increase the value of the company and its products. J&J was caught off-guard in the early 1980’s by American Hospital Supply (AHS). While J&J focused on its manufacturing rivals, AHS captured sales of hospital supplies through providing computerized inventory, ordering, and distribution to hospitals. AHS succeeded in capturing hospital sales by focusing on customers’ preferences to deal with one representative from one company and by focusing on an area of the value chain in which J&J was weak. Learning from its early mistakes, J&J has taken remarkable steps in addressing changes in the health care industry. In particular, J&J has integrated operating companies and activities and has focused on developing knowledge-based products.

Over the past several years, J&J has integrated several of its operating companies. In 1992, J&J formed the Customer Support Center. This group was the first of its kind in that it coordinated information from the fiercely independent consumer products companies in order to sell consumer products to the U.S.’s largest retailers. And, at the beginning of 1995, Health Care Systems (HCS) was formed. HCS was designed to sell products to large managed care and provider organizations (e.g., HMOs, hospitals). The 1,200 employees of HCS represented 18 of J&J’s U.S. pharmaceutical, diagnostic, medical/surgical, and consumer companies. In 1995, J&J integrated Japan’s Ortho Diagnostic Systems K.K and Kodak Japan Diagnostics (now Ortho-Clinical Diagnostics K.K.); Janssen and Cilag (now Janssen-Cilag) outside the U.S.; Janssen and Ortho-McNeil in Canada; and J&J Orthopaedics and Codman (now J&J Professional). In France, Germany, and the United Kingdom, J&J Medical was merged with J&J Professional Products to become J&J Medical, providing financial, human resources, and customer service to business. Also in 1995, J&J formed an enterprise-wide database for college recruiting called Corporate College Relations Group. In Europe, J&J developed the European Logistics Center to support the Ethicon operating company in both Europe and other global markets. Activities to be centralized are purchasing, logistics, finance, planning, and IT in order to improve customer service and competitiveness.

J&J has evolved from providing treatments to providing products which are safe and effective and, most recently, to providing products differentiated by information. For instance, J&J has begun to develop disease management programs. In 1995, J&J acquired Cordis and integrated it with J&J International Systems. J&J International Systems is now one of the leading companies providing circulatory disease management programs. J&J also offers disease management programs for diabetics through Lifescan’s glucose monitoring and Novo Nordisk’s monitoring products. J&J is also working with Value Health Services to provide disease management products and services. In 1995, J&J’s Health Care Systems began developing wellness and prevention programs. In addition to disease management programs, J&J has established an agreement with Incyte Pharmaceuticals in which J&J has access to Incyte’s genomic database to assist in product development.

Conclusion

J&J is a remarkably resilient company which has maintained a mostly decentralized structure for its most valued activity (R&D) while using information technology to leverage other functions and operating companies.

Sources

Johnson & Johnson (A), Harvard Business School, 384-053, 1983.

Johnson & Johnson (B): Hospital Services, Harvard Business School, 384-054, 1983.

Johnson & Johnson: Building an Infrastructure to Support Global Operations, MIT Center for Information Systems Research, 1995.

Johnson & Johnson 1995 Annual Report. “Central casting for job candidates,” Sales & Marketing Management, September 1995.