978-1259278211 Case 31 Solution Manual

Unlock access to all the studying documents.

View Full Document

Teaching Note: Case 31 – Johnson & Johnson

Case Objectives

1. To help students understand how a firm makes decisions about what businesses the corporation

2. To encourage discussion of the implications of a firm’s strategy for the structure of its

See the table below to determine where to use this case:

NOTE: There are both PRIMARY and Secondary chapters that can be used for this case. The Teaching

Chapter Use Key Concepts Additional Readings

PRIMARY

Strategy

Acquisition; diversification NOTE links to J&J’s

10: Organizational

Organizational structure NOTE embedded video

11: Strategic

Leadership

SECONDARY

CONCEPTS

8: Entrepreneurial

Strategy

Entrepreneurship; opportunity

recognition

9: Strategic Control Informational vs. behavioral control

12: Managing

Innovation NOTE additional articles,

Case Synopsis

Johnson & Johnson had relied heavily on acquisitions to enter and expand into a wide range of health care

related businesses. As it grew, J&J developed into a complex enterprise made up of over 250 different

businesses, spread over 60 countries, organized into three different divisions: consumer products,

pharmaceuticals, and medical devices. J&J’s success across its three divisions and many different

However, multiple product recalls in 2009 and 2010, primarily from the McNeil Consumer Healthcare

division, had forced William C. Weldon, the firm’s chief executive, to create a more centralized form of

quality control: a single framework for all divisions, with accountability directly to him. This had been a

Weldon was aware that it was getting much harder for J&J to make the same kinds of acquisitions as it

had in the past. The firm would have to search for other avenues for growth. Weldon believed that the best

After a swarm of product recalls, manufacturing lapses, and government inquiries that tarnished the name

of one of the nation’s most trusted brands, Weldon stepped down as CEO in April 2012. Would new CEO

Alex Gorsky be able to change the corporate culture and address the growing list of problems? After all,

while he was head of the medical devices division, Gorsky was reluctant to publicize the defects in the

Teaching Plan

This case is best positioned after students have a firm grasp of strategic analysis, including how to assess

both internal and external environments. J&J provides an opportunity to investigate how strategic

implementation, including organizational design, is dependent on the choice of corporate strategy.

Before engaging in discussion, you might want to test student’s basic knowledge regarding the case and

Which of the following statements is most true?

a. Johnson & Johnson has over 250 different subsidiaries divided among three different divisions.

b. The consumer products division, including J&J baby care and Band-Aid products, was the most

profitable.

c. McNeil Consumer Healthcare, maker of Tylenol, is one of J&J’s highest quality business units.

d. New CEO Gorsky comes from outside J&J, which is a good thing.

ANSWER: a. Johnson & Johnson developed into an astonishingly complex enterprise, made up of over

250 different subsidiaries that were divided among three different divisions. Although consumer products

had grown substantially, Johnson & Johnson reaped far more sales and profits from its other two

Johnson & Johnson has a lot to do to repair its reputation.

a. Yes

b. No

ANSWER: a. To repair the damage to its reputation from the many recalls across two of its divisions,

Summary of Discussion Questions

Here is a list of the suggested discussion questions. You can decide which questions to assign, and also

which additional readings or exercises to include to augment each discussion. Refer back to the Case

Objectives Table to identify any additional readings and/or exercises so they can be assigned in advance.

1. PRIMARY QUESTIONS: What corporate strategy does Johnson & Johnson pursue?

2. What implications does Johnson & Johnson’s corporate strategy have for its organizational

design?

3. What is the role of strategic leadership in a company like Johnson & Johnson?

4. SECONDARY QUESTION: Why is synergy important for Johnson & Johnson?

Discussion Questions and Responses

1. What corporate strategy does Johnson & Johnson pursue?

Referencing Chapter 6: Corporate-Level Strategy: Creating Value through Diversification

Any discussion of strategy assumes an understanding of the strategy concept. Strategy is all about the

ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic

management consists of the analyses, decisions, and actions an organization undertakes in order to

create and sustain competitive advantages:

●strategy directs the organization toward overall goals and objectives;

●includes multiple stakeholders in decision making;

Corporate strategy focuses discussion on the questions of what businesses a corporation should compete

Diversification is the process of firms expanding their operations by entering new businesses. In related

diversification, a firm enters a different business in which it can benefit from leveraging core

competencies, sharing activities, or building market power. Some possibilities include:

●Mergers and acquisitions

●Strategic alliances

Whatever the choice, it should create value for all stakeholders – employees, suppliers, distributors, and

Johnson & Johnson has grown mainly via acquisition in the past. Acquisition is the incorporation of one

firm into another through purchase. It can be a means of obtaining valuable resources that can help an

Some of J&J’s major acquisitions include Pfizer’s consumer health division, the largest acquisition in

J&J’s history, which was an example of consolidation in the consumer health industry. The acquisition of

Johnson & Johnson is also an interesting case to use to explore avenues for creating value through

diversification. When achieving synergy through diversification, a firm has two choices: related

Upon first glance, it would appear that J&J provides a clear example of related diversification. Almost all

of its businesses are in the health care area. Even many of its consumer businesses are tied to health care.

But a much closer scrutiny of the facts in the case does clearly indicate that J&J is quite clear about

These facts suggest that there is some degree of relatedness, most of which is designed to increase the

market power of these units. This power comes largely from the businesses being grouped together under

Weldon tried to work on developing the relatedness between the various business units. Above all, he was

trying to develop at least some R&D activities that are shared between these units. This might lead to a

Synergy due to shared resources is a key motivation for related diversification. Through synergy, each

business in a portfolio helps others, and in so doing, helps itself. As indicated above, J&J follows a related

When Weldon took over the firm in 2002, he was particularly concerned about the prospects of the firm’s

pharmaceutical division, which had consistently accounted for almost half of the firm’s revenues and

more than half of the firm’s profits. While J&J’s pharmaceutical business was robust, the company was

looking at declining revenues from its best selling drugs because of expiring patents and growing

competition. To spur growth, Weldon believed that the best opportunities would come from increased

and independence that it accorded its various business units. Weldon believed that any push for

collaboration should build upon the entrepreneurial spirit that had been built over the years through this

type of organization. How to harness this to increase synergy?

NOTE – ADDITIONAL READING, WEB LINKS:

Johnson & Johnson competes in several highly competitive markets: health care consumer products,

pharmaceuticals, and medical devices. View their financials compared to some of their competitors:

http://finance.yahoo.com/q/co?s=JNJ

How does it appear J&J is doing? Note that this chart uses the pharmaceutical industry as the comparison

industry. Would the competitive picture be different in consumer products, or medical devices? What does

this say about J&J’s competitiveness?

Here’s a list of the product categories J&J competes in:

http://www.jnj.com/about-jnj/company-structure

A major force in pharmaceuticals, medical devices, and consumer products, J&J draws its strength and

In 2009 J&J was considered a strong stock pick, the “most respected company in the world” according to

Barron’s, partly because of its diverse holdings (See

http://online.barrons.com/article/SB124527599477624863.html?mod=googlenews_barrons), but in 2011

one analyst was more leery, mostly because of the product recalls and the resulting reduction in earnings

Although the investment community may have had concerns, it’s the public trust that J&J was worried

about. In 2011 the results of a special committee of the J&J board, formed to investigate the recalls and

related claims that fiduciary duties may have been breached in the problems uncovered at DePuy and

McNeil, found no indications of systemic failure. Specifically regarding McNeil, “With the benefit of

It appears J&J will reconsider the organizational structure at McNeil, removing it from the wider group of

consumer health-care businesses, and once again becoming its own organization. Making McNeil

separate will “give focused attention to quality and compliance, and the critical task of restoring” the

reputation of its products. (See

http://online.wsj.com/article/SB10001424052748703712504576233112549707154.html )

Is J&J’s diversification strategy effective? To what degree might the possible unrelatedness of these

businesses affect investors’ decisions regarding the stock?

2. What implications does Johnson & Johnson’s corporate strategy have for its organizational

design?

Referencing Chapter 10: Creating Effective Organizational Designs

Strategy consists of analysis (setting goals, assessing the internal and external environment of the firm),

formulation (deciding which industries to compete in and how to compete in those industries), and

Chapter 10 stresses that organizational strategy has implications for a firm’s structure. Students should

relate concepts from Chapter 10 such as the differences between various structures and the effectiveness

of each possible structure for J&J’s possible choices of strategy. Organizational structure refers to

formalized patterns of interactions that link a firm’s tasks, technologies, and people. Structure provides a

An effective organizational design can encourage the flow of information and enhance working

relationships between functional departments and activities. However, achieving the coordination and

integration necessary to maximize the potential of an organization’s human capital involves much more

Historically, Johnson & Johnson had had a decentralized divisional structure. Given that Weldon wanted

to take advantage of the existing entrepreneurial spirit within the different divisions and business units, he

(NOT in the case: For instance, he created a new post to oversee all of the pharmaceutical division’s R&D

efforts. He also formed a divisional committee that brought together executives from R&D with those

Weldon worked with the company’s other top executives to set up groups that drew people from across

the firm to focus their efforts on specific diseases. Each of the groups was expected to report every six

months on potential strategies and projects. Weldon’s efforts started to payoff as seen in the following

examples:

●Liquid Band-Aid was based on a material used in a wound-closing product sold by one of J&J’s

●Its antifungal treatment, Nizoral, helped the company develop a dandruff shampoo.

●(NOT in the case: J&J’s drug-coated stent, called Cypher, was a result of collaboration between

Products developed through cross-fertilization allowed the firm’s consumer business to see considerable

growth.

However, emerging quality control problems signaled issues with restructuring: McNeil’s merger with

Pfizer Consumer Products, and subsequent transfer from the heavily regulated pharmaceutical division to

NOT in the case: In 2011 the results of a special committee of the J&J board, formed to investigate the

recalls and related claims that fiduciary duties may have been breached in the problems uncovered at

DePuy and McNeil, found no indications of systemic failure. Specifically regarding McNeil, “With the

J&J reconsidered the organizational structure at McNeil, possibly removing it from the wider group of

consumer health-care businesses, and once again becoming its own organization. Making McNeil

When contemplating the various options for corporate structures, some might suggest creating multi-

divisional strategic business units (SBUs) out of the current 250 different divisions. After all, there is a

cost for duplication of functions, i.e. Human Resources and Finance, but combining them even in a multi-

NOTE – ADDITIONAL READING, VIDEO:

J&J’s need for internal innovation, and the challenges created by the move, starting in 2006, to encourage

cross-functional interaction between decentralized business units, was profiled in Business Week in April

of 2006. To quote from the article, “while J&J managers have spoken often about the potential offered by

combining devices and drugs in one product, the company’s decentralization can also create barriers to

that sort of synergy.” See the story here:

http://www.businessweek.com/stories/2006-04-16/j-and-j-reinventing-how-it-invents

An interview with CEO William Weldon about how to lead a decentralized company was published by

Knowledge@Wharton in 2008 (a 17 minute video is included):

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2003

3. What is the role of strategic leadership in a company like Johnson & Johnson?

Referencing Chapter 11: Strategic Leadership: Excellence, Ethics & Change

Johnson & Johnson’s major challenge was to create a sustainable competitive advantage in the

marketplace that is not only unique and valuable but also difficult for competitors to copy or substitute.

One of the most important sources of growth opportunities is innovation. Innovation involves using new

Some of challenges of innovation involve choosing when and how to continue to innovate, the scope of

future innovation and the pace, as well as whether or not to collaborate with innovation partners. The

At Johnson & Johnson, Weldon was pursuing corporate entrepreneurship, which uses the fruits of the

innovation process to help firms build new sources of competitive advantage and renew their value

The concept of leadership involves the process of transforming organizations from what they are to what

the leader would have them become. See Chapter 11, Exhibit 11.1. This involves:

●Setting a direction

Leaders need to set the direction for the organization by continually scanning the environment to develop

knowledge of all stakeholders, and knowledge of salient environmental trends and events. Then leaders

Leaders are responsible for designing the organization: a strategic leadership activity of building

Difficulties in implementing the leader’s vision and strategies include a lack of understanding of

responsibility and accountability among managers, reward systems that do not motivate individuals and

A key role for leaders is to set a clear direction for the organization as a whole and to then facilitate the

movement of the organization towards this direction. In the past, this direction was defined rather loosely

Under Weldon’s new approach, there was a clearer direction and a more specific emphasis upon the steps

that must be taken. He wanted the business units to share their knowledge and learn from each other.

Gorsky appeared to still see value in J&J being a large diversified company across the whole health-care

continuum. But Gorsky had some work to do to convince the investor community that he was truly doing

sincere work to improve quality and transparency. J&J’s reputation had suffered. Stakeholders were

4. SECONDARY QUESTION: Why is synergy important for Johnson & Johnson?

Note: No PowerPoint slides accompany this discussion.

Referencing Chapter 8: Entrepreneurial Strategy & Competitive Dynamics

Johnson & Johnson’s Weldon had also been trying to grow by identifying entrepreneurial opportunities

that existed among his business units. Entrepreneurship involves the creation of new value by an existing

For an entrepreneurial venture to create new value, three factors must be present—an entrepreneurial

opportunity, the resources to pursue the opportunity, and an entrepreneur or entrepreneurial team willing

Entrepreneurs need to understand the concept of opportunity recognition: the process of discovering and

evaluating changes in the business environment, such as a new technology, socio-cultural trends, or shifts

in consumer demand that can be exploited. Good entrepreneurial opportunities are those that are attractive

Resources are an essential component of a successful entrepreneurial launch. The most important resource

is usually money, but human resources, strong and skilled management, is also an essential asset. Social

As previously noted, synergy due to shared resources is a key motivation for related diversification.

Through synergy, each business in a portfolio helps others, and in so doing, helps itself. As indicated

To spur growth, Weldon believed that the best entrepreneurial opportunities would come from increased

collaboration between its units. The firm had the ability to develop new products by combining its

Referencing Chapter 9: Strategic Control & Corporate Governance

Strategic control involves the process of monitoring and correcting a firm’s strategy and performance. In

a traditional control system, top management formulates strategies and sets goals. These strategies are

This approach utilizes two different types of strategic control: informational control and behavioral

control. These two types of control play a role in the formulation and implementation of strategies.

Informational control is concerned with whether or not the organization is “doing the right things”, while

behavioral control is concerned with whether or not the organization is “doing things right” in the

Although Weldon had believed in the power of behavioral controls – the culture and rewards created to

influence employees to “do things right” through the decentralized entrepreneurial structure – the firm

This illustrates how both kinds of control are necessary, especially in a decentralized structure.

Referencing Chapter 12: Managing Innovation and Fostering Corporate Entrepreneurship

Johnson & Johnson’s major challenge was to create a sustainable competitive advantage in the

marketplace that is not only unique and valuable but also difficult for competitors to copy or substitute.

One of the most important sources of growth opportunities is innovation. Innovation involves using new

Some of challenges of innovation involve choosing when and how to continue to innovate, the scope of

future innovation and the pace, as well as whether or not to collaborate with innovation partners. The

At Johnson & Johnson, Weldon was pursuing corporate entrepreneurship, which uses the fruits of the

innovation process to help firms build new sources of competitive advantage and renew their value

NOTE – ADDITIONAL READING AND WEB LINKS:

J&J prides itself on its history of product innovation. See this section of their website:

http://www.jnj.com/connect/about-jnj/company-history/healthcare-innovations/

J&J has pursued acquisitions to grow this business, as well as soliciting ideas and funding research from

prospective partners via their COSAT office, or J&J’s Corporate Office of Science and Technology. By

opening innovation centers around the world, J&J will be looking to identify promising early stage

Even though they also seem to be trying to encourage innovation between divisions, it still appears that

external sources are important. If you were an employee in a J&J division, how might you feel about this

obvious solicitation of ideas from outside the company?

Here is a list of the various divisions within J&J:

http://www.jnj.com/about-jnj/company-structure Based on the descriptions of their businesses, what kinds

of sharing regarding innovative technology might you expect to see? J&J has a challenge discovering and

developing new products in all its product categories.

The biggest news in 2007 was related to the acquisition and integration of the newest brands acquired

from Pfizer, such as Listerine, Zyrtec, Neosporin, Nicorette and others. J&J has the reputation for

“preserving the independence of the operations it acquires”, and seems to also encourage innovation in

J&J was completing its biggest acquisition ever in the medical devices division by purchasing Synthes,

and was most likely making plans for further acquisitions. See

http://www.bloomberg.com/news/articles/2012-05-01/j-j-new-ceo-s-takeover-watch-spans-edwards-to-st-

jude-real-m-a. However, analysts were suggesting Gorsky might better consider spending “J&J’s cash to

bolster quality control rather than relying on acquisitions to lift its shares…fix their current house before

they put on an addition.” How could any new businesses be successfully integrated into the company

while also including appropriate controls?

Is any new acquisition enough to generate overall growth?