Information presented on January 25, 2013, during an ongoingtrial, revealed that executives from health care conglomerateJohnson & Johnson had known about a criti- cal design flaw withan artificial hip but decided to conceal this information fromphysicians and patients. Johnson & Johnson’s DePuy Orthopaedicsunit kept selling the hip replacement, called the Articular SurfaceReplacement, although its design flaw caused it to shed largequanti- ties of metallic debris after implantation. The firmfinally recalled the unit in 2010, almost five years after problemshad begun to surface. Johnson & Johnson may now face more than10,000 lawsuits in the U.S. as a result of one of the largestmedical failures in recent history.
The problems with the artificial hip represented yet anotherproblem for Johnson & Johnson, which has strug- gled to emergefrom a swarm of product recalls, manufac- turing lapses, andgovernment inquiries that have tarnished the name of one of thenation’s most trusted brands.
Johnson & Johnson and is expected to grow further with theacquisition in 2012 of Synthes, a Swiss-American medical-devicemaker. Like his predecessor, Gorsky worked his way up by meetingtough performance tar- gets as a sales representative and continuesthe firm’s 126-year tradition of hiring leaders from within. “Thefuture of Johnson & Johnson is in very capable hands,” saidWeldon.2
At the same time, the decision to hire another insider mayindicate that Johnson & Johnson was not serious about changingthe corporate culture that had created so many of its recentproblems. “As somebody steeped in J.&J. cul- ture, I would bevery surprised to see big changes,” said Les Funtleyder, aportfolio manager at a firm that owns the firm’s stock.Furthermore, even if Gorsky attempted to make changes that wouldaddress the growing list of prob- lems, it would be a dauntingtask. “It’s so big that it would take a very long time to move abig battleship like that,” added Funtleyder.3
Cultivating Entrepreneurship
Johnson & Johnson has relied heavily upon acquisitions toenter and to expand in a wide range of businesses that fall broadlyunder the category of health care. It has purchased more than 70different firms over the past decade. In 2008 it paid $1.1 billionto acquire Mentor Corporation, a lead- ing supplier of products forthe global aesthetic market. It topped this last year with a $20billion purchase of Synthes, a leading player in trauma surgery. Aperson familiar with the industry remarked that this latestacquisition of a maker of orthopedic devices was “a good match forthem.”4
As it has grown, Johnson & Johnson has developed into anastonishingly complex enterprise, made up of over 250 differentbusinesses that have been broken down into three differentdivisions. The most widely known of these is the division thatmakes consumer products, such as Johnson & Johnsonbaby care products, Band-Aid adhesive strips, andVisine eye drops. The division grew substantially afterJ&J acquired the consumer health unit of Pfizer in 2006 for$16.6 billion, the biggest in its 120-year history. The acquisitionallowed the firm to add well-known products to its line up such asListerine mouthwash and Benadryl cough syrup.
But Johnson & Johnson has reaped far more sales and profitsfrom its other two divisions. Its pharmaceuticals division sellsseveral blockbuster drugs, such as anemia drug Procit andschizophrenia drug Risperdal. A new drug, namedZytiga, prescribed to treat prostate cancer has beenselling well. Its medical devices division is responsible forbest-selling products such as Depuy orthopedic jointreplacements and Cyper coronary stents. These two divi-sions tend to generate operating profit margins of around 30percent, almost double those generated by the con- sumerbusiness.
To a large extent, however, Johnson & Johnson’s suc- cessacross its three divisions and many different busi- nesses hashinged on its unique structure and culture. Most of its far-flungbusiness units were acquired because of the potential demonstratedby some promising new products in its pipeline. Each of these unitswas therefore granted near-total autonomy to develop and expandupon their best-selling products (See Exhibit 3). That independencehas fostered an entrepreneurial attitude that has kept J&Jintensely competitive as others around it have faltered. Therelative autonomy that is accorded to the business units has alsoprovided the firm with the ability to respond swiftly to emergingopportunities.
Johnson & Johnson has been quite proud of the con- siderablefreedom that it has given to its different busi- ness units todevelop and execute their own strategies. Besides developing theirstrategies, these units have also been allowed to work with theirown resources. Many of the businesses even have their own financeand human resources departments. While this degree of decentraliza-tion has led to relatively high overhead costs, none of theexecutives that have run J&J, Weldon included, had ever thoughtthat this was too high a price to pay. “J&J is a huge company,but you didn’t feel like you were in a big com- pany,” recalled ascientist who used to work there.
Pushing for More Collaboration
The entrepreneurial culture that Johnson & Johnson hasdeveloped over the years has allowed it to be successful with itsvarious businesses. Indeed, Johnson & Johnson has top-notchproducts in each of the areas in which it operates (see Exhibit 4).It has been spending heavily on research and development for manyyears, taking its position among the world’s top spenders (seeExhibit 5). It currently spends about 12 percent of its sales onabout 9,000 scientists working in research laboratories around theworld. This allows each of the three divisions to continuallyintroduce promising new products.
In spite of the benefits that Johnson & Johnson has derivedfrom giving its various enterprises considerable autonomy, therehave been growing concerns that they can no longer be allowed tooperate in near isolation. Weldon had begun to realize that J&Jis in a strong position to exploit new opportunities by drawing onthe diverse skills of its various business units across the threedivisions. In particular, he was aware that his firm could benefitfrom the combination of its knowledge in drugs, devices, anddiagnostics, since few companies were able to match its reach andstrength in these basic areas.
This required him to find ways to make its fiercely independentbusinesses work together. In his own words: “There is a convergencethat will allow us to do things we haven’t done before.”6 Throughpushing the various far-flung units of the firm to pool theirresources, Weldon believed that the firm could become one of thefew that may actually be able to attain that often-promised, rarelydelivered idea of synergy. He created a corporate office that wouldget business units to work together on promis- ing newopportunities. “It’s a recognition that there’s a way to treatdisease that’s not in silos,” Weldon stated, referring to the needfor collaboration between J&J’s largely inde- pendentbusinesses.7
For the most part, Weldon confined himself to foster- ing bettercommunication and more frequent collaboration among Johnson &Johnson’s disparate operations. But the company had to take carethat these attempts to achieve synergy through collaboration amongthe business units did not quash the entrepreneurial spirit thathas spear- headed most of the firm’s growth to date. Jerry Caccott,managing director of consulting firm Strategic Decisions Group,emphasized that cultivating those alliances “would be challengingin any organization, but particularly in an organization that hasbeen so successful because of its decentralized culture.”8
These collaborative efforts have led to the introduc- tion ofsome highly successful products. Even the com- pany’s fabledconsumer brands have been starting to show growth as a result ofincreased collaboration between the consumer products andpharmaceutical divisions. Its new liquid Band-Aid is basedon a material used in a wound- closing product sold by one ofJ&J’s hospital-supply businesses. And J&J has used itsprescription antifungal treatment, Nizoral, to develop adandruff shampoo. In fact, products that have developed in largepart out of such a form of cross-fertilization have allowed thefirm’s con- sumer business to experience considerable internalgrowth.
Confronting Quality Issues
Even as Johnson & Johnson has been trying to get moreinvolved with the efforts of its business units, it ran intoproblems with quality control with several over-the-counter drugsmade by McNeil Consumer Healthcare. Since 2008, FDA inspectors havefound significant violations of manufacturing standards at twoMcNeil plants, leading to the temporary closure of one of these.These problems have forced the firm to make several recalls of someof its best-selling products. Weldon admitted that problems
had surfaced, but he insisted that these were confined toMcNeil. In a recent interview he stated, “This is one of the mostdifficult situations I’ve ever had to personally deal with. It hitsat the core of who J&J is. Our first respon- sibility is to thepeople who use our products. We’ve let them down.”9
Quality problems have arisen before, but they were usually fixedon a regular basis. Analysts suggest that the problems at McNeilmay have been exacerbated in 2006 when J&J decided to combineit with the newly acquired consumer health care unit from Pfizer.The firm believed that it could achieve $500 to $600 million inannual savings
executives lacked pharmaceutical experience, they began todemand several changes at McNeil that led to a reduced emphasis onquality control.
Weldon was aware of the threat faced by Johnson & Johnson asa result of its problems with quality. He was especially concernedabout the allegation by the FDA that the firm initially tried tohide the problems that it found with Motrin in 2009, hiring acontractor to quietly go around from store to store, buying all ofthe packets off the shelves. McNeil’s conduct surrounding therecalls led to an inquiry by both the House Committee on Oversightand Investigations and by the FDA’s office of criminalinvestigations.
Various changes were made at McNeil to resolve these qualityissues. Goggins was pushed out of her post as senior executive incharge of all consumer businesses. Weldon allocated more than $100million to upgrade McNeil’s plants and equipment, appoint newmanufactur- ing executives, and hire a third-party consulting firmto improve procedures and systems. Bonnie Jacobs, a McNeilspokeswoman, wrote in a recent email, “We will invest the necessaryresources and make whatever changes are needed to do so, and wewill take the time to do it right.”10
The problems at McNeil, coupled with growing prob- lems with itsartificial hips and contact lenses, led Johnson & Johnson tomake changes to its corporate oversight of its supply chain andmanufacturing. In August 2010, the firm appointed Ajit Shetty, alongtime executive, to oversee a new system of companywide qualitycontrol that involves a single framework for quality across all ofthe operat- ing units and a new reporting system. The need forthese changes was highlighted by Erik Gordon, a professor at theRoss School of Business at the University of Michigan: “Nothing ismore valuable to Johnson & Johnson than the brand bond of trustwith consumers.”11
Addressing New Problems
In April 2013, Johnson & Johnson appointed Alex Gorsky tolead the health care conglomerate out of the difficulties that ithas faced over the past few years. He had been with the firm since1988, holding positions in its pharmaceutical by merging the twounits. After the merger, McNeil was also transferred from theheavily regulated pharmaceutical division to the marketing-drivenconsumer products divi- sion, headed by Collen Goggins. Becausethese consumer businesses across Europe, Africa, and the MiddleEast before leaving for a few years to work at Novrtis. Shortlyafter his return to Johnson & Johnson in 2008, he took over itsmedical device and diagnostic group. Because of his extensivebackground with the firm, and with the division that was beinginvestigated about its faulty hip replace- ments, Gorsky might havebeen regarded as the ideal per- son to take over the job.
When he took over, DePuy, the firm’s orthopedic unit was alreadyrunning into trouble with its newest artifi- cial hip. It wasfacing resistance from the Food and Drug Administration even ascomplaints about the device were mounting from doctors andregulators around the world. Gorsky moved quickly to phase out thedefective hip replacements, although he did not publicly disclosethe problems that it had been experiencing with the FDA over thesale of these. The decision not to publicize the agency’s findingsto doctors, patients, and others while continuing to market thedevice has exposed Johnson & Johnson to the lawsuits that cantarnish its reputation.
DePuy finally recalled the artificial hip in August 2010, amidgrowing concerns about its failure among those who had received theimplant. Until then, however, executives from the firm hadrepeatedly insisted that the device was safe. Gorsky continued tostate publicly that Johnson & Johnson had decided to drop itbecause of declining sales rather than out of safety concerns.Andrew Ekdahl, the president of DePuy, recently reiterated thatposition. “This was purely a business decision,” he said.12
In the trial in Los Angeles Superior Court regarding thedefective hip replacement, however, Michael A. Kelly, the lawyermaking the case against Johnson & Johnson, suggested thatcompany executives might have concealed information out of concernfor firm profits. DePuy offi- cials, for example, never tolddoctors that the device had failed an internal performance test.“They changed the test and tested it against other things untilthey found one it could beat,” he stated.13
In spite of all these issues, Johnson & Johnson has notattempted to clarify what information Gorsky may have had about theproblems associated with the artificial hip. Under thesecircumstances, his promotion to lead the firm surprised Dr. RobertHauser, a cardiologist and an advo- cate for improved safety ofmedical devices. “He’s been overseeing one of the major J.&J.quality issues and the board of J.&J. sees fit to name him thenew C.E.O.?” he questioned.14
Is There a Cure Ahead?
Moving forward, Gorsky must try to maintain a balance at Johnson& Johnson between the controls throughout the firm that arenecessary to protect its reputation and the freedom for thebusiness units that can allow it to keep growing. Quality problemshave persisted, as the firm announced in early 2012 that it wouldrecall about a
half-million bottles of liquid Infants’ Tylenol because of afaulty dosing system. Additionally, McNeil is still working withthe FDA to bring the plant that was the source of many of theover-the-counter recalls up to federal standards.
In order to repair the damage to its consumer brands from therecalls, Johnson & Johnson recently announced that it wouldremove a host of potentially harmful chemicals, like formaldehyde,from its line of consumer products by the end of 2015. It is thefirst major consumer products company to make such a widespreadcommitment. “We’ve never really seen a major personal care productcompany take the kind of move that they are taking with this,” saidKenneth A. Cook, president of the Environmental WorkingGroup.15
Even as its DePuy unit is trying to recover from its problemswith the faulty artificial hips, Johnson & Johnson iscompleting its biggest ever acquisition that would rein- vigorateits device business. Its $20 billion purchase of Synthes would makethe firm a dominant player in a major segment of the medical devicemarket. Synthes, a maker of equipment used in trauma surgery,accounts for nearly 50 percent of sales of plates and screws thatare used to treat broken bones. The $5.5 billion trauma categorygrew 8 percent last year, according to estimates by Wells FargoSecurities.
Even as he tries to provide more direction and assert morecontrol, Gorksy is also aware that much of its success has resultedfrom the relative autonomy that Johnson & Johnson has grantedto each of its business units. Like oth- ers before him, Gorskyknows that even as he pushes for more control and direction, hedoes not want to threaten the entrepreneurial spirit that hasserved his firm so well. But he must also decide how much to pushon its busi- ness units to try to work more closely together thanthey have done in the past. Johnson & Johnson must be able totap into many more opportunities when it tries to bring togetherthe various skills that it has managed to develop across differentdivisions.
But it is clear that the health care giant has to rethink theprocess by which it manages its diversified portfolio of companiesin order to ensure that there are no further threats to itsreputation. “This is a company that was purer than Caesar’s wife,this was the gold standard, and all of a sudden it just seems likethings are breaking down,” said William Trombetta, a professor ofpharmaceutical market- ing at Saint Joseph’s University inPhiladephia.
What do you see as the issues raised by the facts in thiscase?
What alternative courses of actions can Johnson & Johnsonpursue to respond to these concerns?
What do you see as the consequences of the above-mentionedpossible responses by Johnson & Johnson to these concerns?
Which courses of action would you recommend Johnson &Johnson pursue? Why?
