Johnson & Johnson:

Successfully Strategizing for the Changing Global Business Environment

April 27, 2009 IBE D

Kara Findley Emily Manz Alex Thompson

I.

Introduction

Johnson & Johnson is the world's largest healthcare company. Founded in the United States in 1886, the company has been profitable for 75 straight years and currently operates 250 subsidiary companies in 57 countries. Its products fall into three segments: pharmaceuticals, with 39% of total sales; medical devices and diagnostics, with 36%; and consumer products, with 25%. Additionally, the company employs 119,200 people worldwide and sells its products in 175 countries. A truly global corporation, Johnson & Johnson has securely positioned itself to overcome the challenges its ever-changing business environment poses, as well as take advantage of the opportunities presented. With a focus primarily on Johnson & Johnsons pharmaceutical segment, this paper seeks to explore the complex multinational environment within which the company operates as well as the opportunities and threats that the environment poses. Next, the paper will analyze Johnson & Johnson's current positioning, describing its value-chain and competitive positioning. The paper will close by evaluating how Johnson & Johnson both can seize these opportunities to realize the goals of the company. 2

II.

Analyzing the Environment

In industries as competitive as pharmaceutical, medical devices and consumer goods, analyzing the environment is vital for being able to make sound strategic decisions. Since Johnson & Johnson strives to anticipate the external factors that affect its international business environment, as well as adapt to those changes, it is important that it understands the environment in which it is operating. The two sets of external forces that face the company are competitive and contextual.

A. Competitive Environments Five Forces Model

Michael Porters five forces model provides a way of analyzing Johnson & Johnsons competitive environment. Due to a lack of available information about the bargaining power of suppliers as it applies to Johnson & Johnson, this paper will address the four other forces: the threat of new entrants, the threat of substitutes, the bargaining power of customers, and the rivalry among industry competitors.

1. The Threat of New Entrants High Barriers to Entry

The threat of new entrants is not of particular concern to Johnson & Johnson. Barriers to entry, especially in the industries of pharmaceuticals and medical devices, are extremely high if not unsurpassable. The worlds top pharmaceutical companies have extensive manufacturing capabilities, distribution systems, and economies of scale that have been built up over decades and would be virtually impossible for a new entrant to replicate. These top firms also have patents that 3

protect their current products, as well as established research pipelines that ensure the continual development of new products. Also, they have strong brand names and large marketing budgets with which to defend them. Finally, the exceptionally high capital requirements for founding a pharmaceutical company and the sharp retaliation that new entrants could expect from the established competitors render the threat of new entrants very low. The medical device industry has similarly high barriers to entry. While entering the consumer goods market is easier, relatively, the vast number of competitors makes this industry very competitive, thus a strong brand name is vital for standing out. As the worlds most respected company according to Barron Magazine, new entrants to the consumer goods market do not pose a threat to Johnson & Johnson.

2. The Threat of Substitutes The Rise of Generics

The threat of substitutes is much more problematic than that of new entrants, especially in the pharmaceutical segment. The Food and Drug Administration (FDA) requires that generic drugs be bioequivalent to their brand name counterparts, making them serious substitutes. Once a patent expires, generic manufacturers are quick to reverse-engineer the formerly proprietary drugs and sell generic versions at a fraction of the cost. Virtually all the top pharmaceutical companies, Johnson & Johnson included, face an influx of upcoming patent expirations. The impending loss of sales when generic versions of the drugs inevitably become available is a serious threat to the profitability of many players in the industry. For example, Risperdal, a drug for schizophrenia made by a subsidiary of Johnson & Johnsons called Janssen-Cilag, was a significant source of profits, with sales that totaled $3.5 billion in 2005 and surged 21% percent in the first quarter of 2006, to $1.2 billion. However, when the patent for Risperdal expired in December of 2007 and became available in generic form in October of 2008, the companys revenue from pharmaceutical sales stagnated. In fact, in July of 2007, Johnson & Johnson announced plans to eliminate up to 4,800 jobs, citing patent expirations as the main motivation to trim the workforce and thus save money. If the company does not prepare for the difficult transition between enjoying market exclusivity and losing that security as those patents expire, it will face more negative consequences. 4

3. The Bargaining Power of Buyers Influence of Generics

In the pharmaceutical industry, buyers include patients, medical doctors who prescribe drugs, pharmacists, hospital boards, insurance companies, and other health authorities. The bargaining power of patients goes hand in hand with the threat of substitutes. When drugs are patent-protected, pharmaceutical companies enjoy a monopoly where they can set prices to include high profit margins. Since there are few to no substitutes for their products during this time, customers have little choice but to pay these prices, especially if their lives depend on the drugs. However, once cheaper, generic versions of the drugs become available, buyers gain more power. Patients switching costs, an important element in determining the bargaining power of buyers, are fairly low, and price-sensitive buyers will likely switch to generic versions once available. Johnson & Johnsons main tool in combating this problem is its strong brand name. Many customers have more trust in brand name products and are willing to pay extra for this perceived security. The other groups within buyers of pharmaceutical products, while fragmented, have more power than patients. Within the American healthcare system, insurance companies and health maintenance companies (HMOs) have considerable bargaining power, as they decide which drugs to endorse and provide. Since they have an interest in lowering costs, they exert a strong downward pressure on drug prices, partly due to the threat of the availability of generics. European governments national healthcare systems have a similarly high level of power, if not higher due to strict price controls. Thus, pharmaceutical companies have a need to establish successful relationships with these groups and market towards them heavily.

4. The Degree of Rivalry Fierce and Changing Competition

Competition in the pharmaceutical industry is intense and growing in intensity. While the numerous competitors remain fairly fragmented, mergers and acquisitions have increased rivalry, 5

as the top firms areas of expertise began to overlap. Rivalry is especially intense in saturated markets, such as the pain reliever segment, in which Johnson & Johnson competes with its products Tylenol and Motrin. In growing markets, innovation is a key driver of competition since pharmaceutical companies depend on blockbuster drugs for a large proportion of their revenue. With only one out of every 10,000 discovered drugs approved to be sold, stakes are high to find the cash cow drugs that recuperate the increasingly high costs of development. Since me too drugs are not as profitable, innovation drives the race to be first-to-market. While the main competitors in the pharmaceutical industry are concentrated in the United States, Europe, and Japan, an increasing number of players especially generic drug manufacturers are appearing in developing countries, such as China and India. These companies are driving the shift in the industry toward becoming more commoditized. Also, numerous biotech upstarts, which are smaller, more agile, and have lower overhead costs than their conglomerate competitors, are growing in power and taking market share. As the dynamics of the industry change, the established companies will find themselves facing stiff competition from all sides.

B. Contextual Environment PEST Analysis

A PEST (Political, Economic, Social, and Technological) analysis is a useful tool for understanding the larger environment within which the company operates. Companies can use this tool to identify a multitude of important aspects of their environments that may impact their businesses.

1. Political Environment Changing Politics and Policies

First, the politics on local, regional, national, or international scales can exert strong forces on businesses. Since Johnson & Johnson operates worldwide, it must keep track of the political developments that may affect its business. For example, in the Czech Republic, health care is the subject of a major political debate. Changes in the healthcare system may affect to whom Johnson & Johnson needs to market, and with whom it needs to negotiate if the company wants its products covered by the Czech healthcare system. Also, Johnson & Johnson should be aware that the Czech Republic has a weak Parliament that will change in 2010s elections. The company needs to anticipate which policies may shift under the new government. Finally, Johnson & Johnson should be aware that the Czech Republic will serve as president of the Council of the European Union for the first six months of 2009. This is the best time for the Johnson & Johnson branch located in the Czech Republic to lobby for any policy changes regarding the companys interests and the business environment.

2. Economic Environment The Crisis and the Euro

The economic climate is also important for Johnson & Johnson to analyze in order to predict when its business may face challenges, as well as when it can seize an opportunity for growth. Operating in the European Union and larger European community means that Johnson & Johnson has felt the effects of the current economic crisis. Aware of the crisis, the company has been able to plan for its impact, and fortunately, the effects on Johnson & Johnson have not been severe, as medical products remain necessities even in periods of economic downturn. In respect to the Johnson & Johnson branch in the Czech Republic, the economic environment is one that quickly transitioned from a communist, planned economy to the free market. Though the Czech Republic has embraced free market principles since the fall of the Soviet Union, it is important that Johnson & Johnson recognize that this change was relatively recent, and certain aspects of working in the Czech Republic may still be affected by this history. Finally, discussions surrounding the use of the euro and the benefits and disadvantages of a common currency are debates that Johnson & Johnson should be aware of in this time period. 7

While Slovakia adopted the euro in January 2009, the Czech Republic has kept its own currency. A switch to the euro in the Czech Republic could have a wide range of effects, some positive and some negative, and Johnson & Johnson should understand the implications for its business if that change occurs in the Czech Republic. For example, adopting the euro would make transactions with other countries more convenient, and Johnson & Johnson should be prepared for a possible increase in transactions or the speed in which transactions take place in order to take advantage of the opportunities this change could provide. It should also be ready for the numerous practical difficulties with tasks such as accounting that may occur with a change in currency. Keeping these economic scenarios in mind is the kind of forward-thinking that is crucial to Johnson & Johnson's success.

3. Social Environment Aging Population and Public Health Problems

There are two major social changes on the horizon that will both affect Johnson & Johnson as well as provide tremendous opportunities. The first is the aging population. The gigantic baby boomer generation, consisting of those born between 1946 and 1964, has had a huge social and economic impact on the world since its birth. This trend will continue as the generation is beginning to enter old age. The influx of senior citizens will create huge demands throughout all realms of medical care. Johnson & Johnson can expect to see increased sales across all three of its segments pharmaceuticals, medical devices and diagnostics, and consumer goods in the coming decades, and must plan production accordingly to be able to meet the needs of this huge generation as they enter their most medically-dependent years. Additionally, in order to cater to the aging population, Johnson & Johnson is pioneering developments in preventative medicine as well as less invasive surgery techniques. Another major social change affecting Johnson & Johnson is the phenomenon of surging rates of various health problems, especially in developed societies but spreading worldwide, from obesity and diabetes to cancer and mental disorders. Though highly problematic for society, companies in medicine-related industries such as Johnson & Johnson are finding themselves with an increasing number of people to treat and cure. As a company that invests heavily in research 8

and development, Johnson & Johnson has the opportunity to lead the way in finding ways to address these serious public health issues.

4. Technological Environment Promising New Fields

As many pharmaceutical drug markets become saturated and the blockbuster drug strategy becomes obsolete due to the major changes occurring in the industry, innovation and breakthrough medical technologies are essential for finding blue oceans in which to compete. Predictive medicine, which entails predicting diseases based on genetics and preventing them, and personalized medicine, which involves managing a patients health based on his or her individual characteristics as opposed to following the more traditional standards of care model, are growing fields into which Johnson & Johnson can expand. The companys strong emphasis on research and development and its leadership in the medical devices and diagnostics segment put it in an excellent position to become a frontrunner in making new discoveries in these promising new technological fields.

C. Determining Threats and Opportunities

1. Threats The Uneducated Consumer and Mergers and Acquisitions

One of the biggest threats facing a company like Johnson & Johnson is the uneducated consumer. Especially within the consumer products and pharmaceuticals markets, with the increasing availability and lower cost of generic products, a key component of continued competitiveness is the discerning consumer who has preferences when it comes to treatment options. Johnson & Johnson must continually work hard to make sure that people are aware of its products and the quality that it ensures through effective branding and promotional practices, as 9

well as consumer education. Patent expirations are also a constant concern for Johnson & Johnson as proprietary information is an integral part of sustained revenue streams. Mergers and acquisitions (M&As) present both potential opportunities and threats for Johnson & Johnson. The company has pursued M&As that have served to expand the companys resources and help penetrate new and diverse markets. For example, Johnson & Johnson recently acquired Mentor Corporation in order to expand its operations in to the aesthetic and reconstructive medicine market. Also, an important new medical product called the Fibrin Pad was developed with the cooperation of three Johnson & Johnson-owned subsidiaries. These are just a couple examples of how Johnson & Johnson is able to both grow and innovate through M&A. On the other hand, M&As between other companies in the healthcare industry have the potential to upset Johnson & Johnsons value chain and competitive advantages. Johnson & Johnson must pay close attention to the actions of rival companies in order to maintain its market-leader positions and barriers to entry against competitors.

2. Opportunities Research, Synergies, Emerging Markets, and the Aging Population

Johnson & Johnsons greatest opportunity is found in its heavy investment in research and development. This is especially important for its medical devices and diagnostics and pharmaceutical divisions. It is necessary for the company to be on the leading technological edge when it comes to medical devices to ensure that it can offer the most accurate and up-to-date machines available. As for the pharmaceutical sector, patent expiration and generic drugs demand constant innovation and addition to Johnson & Johnsons pipeline of products for sustained success. Strong pipelines in its pharmaceutical and medical devices sectors are a major source of confidence in the companys long-term success. With eight new late-stage compounds in the pharmaceutical sector and the introduction of several new products to new markets in the medical devices sector, Johnson & Johnson seems to be advancing its pipeline quite progressively. It also strives to be a consistently innovative company, and around 40% of its current products have been developed within the last 3-4 years. In 2008, Johnson & Johnson spent $7.6 billion on research and

10

development. The reinvestment of 11% of sales in to R&D, versus the industry average of 3%, demonstrates a source of competitive advantage for the company. Synergies between product branches are yet another source of opportunities for Johnson & Johnson. Through the well-coordinated efforts of its pharmaceutical and consumer products divisions, Johnson & Johnson was able to make the formerly prescribed drug Zyrtec available as an over-the-counter drug, which came to be the companys most successful product launch in 2008. This is yet another example of how the company is able to pool its resources in order to find ways to fulfill both the needs of both its customers and stakeholders. Other opportunities for Johnson & Johnson are present in emerging markets such as Brazil, Russia, India and China. Its products are currently available to only 25% of the worlds population. However, through its decentralized management approach and the adjustment of its products and strategies to match local needs and preferences, Johnson & Johnson is reaching an ever-increasing consumer base. One method Johnson & Johnson has been able to reach a broader consumer base through is the de-featuring of products, such simplified blood-glucose meters, which allows for access to lower-income customers and dampens the parasitic effect of cheap substitutes. One final opportunity exists in the demographic trend towards an ageing population. People are living longer, and because of this, new types of medical needs are arising all the time. Many types of medical treatments and surgeries are being developed and becoming more commonplace, such as hip replacements and plastic surgery. Patients want to be able to fix their ailments and expect a quick and uncomplicated recovery afterwards. It is up to Johnson & Johnson to develop and provide the best possible equipment and supplies to do this and fulfill the company promise of customer success.

III.

Establishing European and Global Opportunities

A. Expansion into New Markets Developing Countries

11

Despite the many challenges of working in both the European and global business environments, it is clear that these environments also allow Johnson & Johnson to strengthen and continue to grow its business. With income and living standards on the rise in many European countries such as Turkey and the Czech Republic, where sales have already increased, and across the globe in developing countries like China and India, Johnson & Johnson has many opportunities to sell its products in new markets or expand more in markets it has previously penetrated. In order to take advantage of the broadening market field, Johnson & Johnson has begun to offer products that will appeal to people in less affluent nations. Its objective is clear: make products that are affordable for most of the world. To do this, Johnson & Johnson has created de-featured versions of products that can be sold at a lower price, thus becoming accessible to more patients.

B. Domestic Market Defense Competition and Mistakes

While Johnson & Johnson expands to serve more customers in new markets, it must also maintain its secure position domestically. Though the consumer segment only accounts for only 25% of its total sales, the company realizes that keeping up its reputation and remaining a household name will help it as it moves into foreign markets. To put it simply, Johnson & Johnson must remain synonymous with quality, safe products. Next, Johnson & Johnson must be ready to compete with an even greater number of competitors, such as Pfizer, Merck, Novartis and Eli Lilly. Despite being the world's largest healthcare company, it still faces competition and has run into problems when it has attained the market lead, grown too confident in its product, and then lost the lead. Because Johnson & Johnson has twice lost its lead with one particular product, a heart stent, it now seems aware of this problem in its business strategy and therefore will be prepared for similar situations as it continue to penetrate new markets.

12

IV.

Analyzing Johnson & Johnsons Current Position

A. Value Chain Analysis Synergies, Cost Reductions, and Relationships

A value chain analysis of Johnson & Johnson reveals several key sources of value generation. Johnson & Johnson consists of 250 companies that operate in 57 countries worldwide. The widespread nature of its operations and decentralized management practices allow for a high degree of local autonomy and adaptation. This makes Johnson & Johnson very efficient in discovering and reacting to changing consumer demands across the globe. Also, the convergence of knowledge and information from branches across the globe gives the corporation a great advantage in the development of new products and technologies. Flexibility and detailed, locationspecific knowledge coupled with heavy investments in technology, most notably IT, are the main production-based value drivers of the corporation. They allow for timely, adaptive responses to changing needs and the ability to achieve first leader power in emerging markets. Johnson & Johnson is making progress in finding ways to reduce costs. Standardization initiatives in its pharmaceutical sector enabled the company to streamline operations and cut costs by $1.6 billion in 2008. Cost savings are also created by means of acquisitions. For example, Johnson & Johnsons acquisition of Pfizer Consumer Healthcare is expected to generate up to $600 billion in cost synergies by unifying the efforts of the two companies. Johnson & Johnson also emphasizes the importance of relationships with both its consumers and employees in its company credo. A talented and dependable workforce is important for innovation and efficiency in operations for any corporation. The company demonstrates its desire for employee welfare with healthcare services and carefully developed online resources. With an employee turnover ratio of less than 5%, Johnson & Johnson demonstrates that it is capable of attracting and retaining the right kind of people to help it remain successful.

B. Competitive Positioning Differentiation and Resource Allocation 13

As stated in the annual report, Johnson & Johnson is a company focused on broad-based human healthcare. It offers a plethora of products throughout its pharmaceutical, medical devices and diagnostics, and consumer products divisions. These products are made in response to both local and global consumer demands, representing solutions for many different customer segments. These factors are evidence that Johnson & Johnson has chosen the competitive strategy of differentiation. Using this strategy affords Johnson & Johnson a sense of prestige and quality and this is evident in its pricing practices. However, the company does use competitive pricing strategies and is continually trying to find ways to lower costs without sacrificing quality or reputation. Johnson & Johnson is constantly seeking to expand its product portfolio across all divisions and spends large amounts of money in R&D to that end. A Johnson & Johnson representative said, Be the first, be the best. This is the most effective way for the company to enter new markets and secure a strong position by being the first to offer the right products in the right locations in a time efficient manner. Johnson & Johnsons ability to perform these actions successfully is due to the sprawling nature of its subsidiaries and the amount of resources dedicated towards making sure that they all work with each other and share information. Johnson & Johnson holds a very strong competitive position versus other corporations due to the amount of its resources and depth of its operations. It is able to maintain its position as market leader in several product categories, as well as penetrate emerging markets, because of its ability to adapt quickly and intelligently. The company must remain vigilant, however, as complacency can result in loss of market share.

V.

Assessing Effectiveness and Conclusion

In todays fast-paced business environment, any firm needs to consistently reevaluate its strategic positioning, but in industries as competitive as the ones in which Johnson & Johnson 14

competes, continual evaluation is vital for long-term success. By any quantitative measures, Johnson & Johnson is a very successful company, and the fact that it has earned a profit for 75 straight years suggests that there is a definite plan for long-term success. The companys famous credo, known as Our Credo and written by former chairman Robert W. Johnson in 1943, may have a role in this success. The credo outlines Johnson & Johnsons responsibilities to its customers, employees, communities, and finally its stockholders. It also establishes the principles that guide the company, from making high quality products and recognizing employees merit to protecting the environment and experimenting with new ideas. Johnson & Johnsons credo has endured, unchanged, for over 65 years. While it does not explicitly state long term goals, the principles within it express the companys intrinsic values. According to the companys website, Our Credo is more than just a moral compass. We believe its a recipe for business success. The fact that the Johnson & Johnson is one of only a handful of companies that have flourished through more than a century of change is proof of that. Johnson & Johnson has indeed flourished. It consistently tops the corporate reputation charts and is a role model for social responsibility. Moreover, the company is clearly prepared for the many challenges its ever-changing international business environment poses. Due to its strategic positioning and eye on the future, Johnson & Johnson will likely survive another century.

REFERENCES Academic Visit to Johnson & Johnson, Prague, Czech Republic.

2008 Annual Report. Johnson & Johnson <http://www.myvirtualpaper.com/doc/jnj/Johnson-And-Johnson/2009030501/>

15

Gassman, Oliver, Gerrit Reepmeyer and Maximilian von Zedtwitz. Leading Pharmaceutical Innovation. Springer <http://books.google.com/books?id=FcMmMrL7VSoC>

The Global Pharmaceutical Industry. Duke University <http://www.duke.edu/web/soc142/team2/social.html#barriers>

Mental health drug market tapped out? CNNMoney.com <http://money.cnn.com/2006/04/18/news/companies/antipsychotic/index.htm>

Our Credo Values. Johnson & Johnson. <http://www.jnj.com/connect/about-jnj/jnj-credo/>

Patent Expirations Behind J&J Cuts, C&T Looks Closer at Patents. Cosmetics and Toiletries <http://www.cosmeticsandtoiletries.com/networking/news/company/8830827.html>

Porter's Five Forces: A Model For Industry Analysis. QuickMBA <http://www.quickmba.com/strategy/porter.shtml>

A Recent History Of The Pharmaceutical Industry. Venture Navigator <http://www.venturenavigator.co.uk/content/154>

16