Corporate Strategy: Johnson & Johnson, Case Study Example

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Case Study

Corporate Level Strategy and Recommendation

Johnson & Johnson’s corporate strategy is diversification and it is not unreasonable to argue that the company has mastered the art of diversification. It is no small feat to manage as many as 250 companies spread over 60 countries but even the best of management may lose some control when an organization gets as huge as Johnson & Johnson. Diversification is still the most appropriate corporate strategy for the company but the management may benefit from re-evaluating its business level strategies to improve the outcomes of its corporate level strategy.

Benefits of Diversification for Johnson & Johnson

Even though recent events such as the recall of company’s products from the pharmaceutical division including Tylenol, Motrin, Benadryl, and Zyrtec as well as the closure of one of McNeil Consumer Healthcare’s plants have been unfortunate, they have also demonstrated the effectiveness of Johnson & Johnson’s diversification strategy. Even though the recalls have been quite costly in financial terms, they have not materially impacted Johnson & Johnson’s overall financial performance because of the company’s diverse revenue streams. The company has been able to withstand the financial setback well not only because of product diversification but also geographic diversification. The recalls were primarily limited to the U.S. and while the negative publicity might have made Americans weary of Johnson & Johnson’s other products, it had little or no impact on consumer confidence in the Johnson & Johnson brand in most of the international markets. The other benefit of diversification for Johnson & Johnson has been an increase in cumulative organizational knowledge and skills as well as the possibility of creating innovative products due to collaboration among groups with diverse expertise. A great example is the company’s drug-coated stent called Cypher which is the outcome of collaboration between the drug business and the device business. Thus, diversity allows the company to think outside the box and come up with innovative solutions to customers’ needs.

But there have been certain shortcomings of the corporate level strategy of diversification as well. First of all, it prevents company from achieving significant improvements in operating efficiencies that would be possible by eliminating duplicate activities as well as combining similar tasks to achieve economies of scale. Another shortcoming of diversification has been lack of collaboration among units that may otherwise result in several breakthrough products on the pattern of Cypher. Similarly, diversification strategy has also led to loss of control over operations including quality and control as a string of recent product recalls demonstrate. There is also lack of cohesion among units which increases the possibility of individual units pursuing different objectives than those set by the leadership. While Johnson & Johnson has a strong long-term track record, one cannot ignore the growth opportunities the company is capable of pursuing but is being prevented from doing so due to weak working relationship among the business units.

Core Competencies

In order to ensure that the company’s corporate strategy helps it sustain the competitive advantages, it is important to understand Johnson & Johnson’s core competencies. Johnson & Johnson’s long term success could not have been possible without several core competencies the company has built over decades such as a strong brand, entrepreneurial organizational culture, and research & development (R&D). Johnson & Johnson’ brand has become synonymous with quality and consumer trust just as Erik Gordon, a professor at the Ross School of Business at the University of Michigan observed, “Nothing is more valuable to Johnson & Johnson than the brand bond of trust with consumers.” Johnson & Johnson also has competitive edge over the competition in terms of organizational culture which continues to retain its entrepreneurial spirit despite a phenomenal growth in the size of the company. Each business unit has complete autonomy which allows them to function just like small businesses and swiftly respond to changing competitive trends. Similarly, Johnson & Johnson’s success has also been due to strong commitment to R&D which is evident by the fact that the company spends almost 12 percent of its sales or $7 billion to fund the research activities of about 9,000 scientists. These R&D activities ensure that the company continues to develop new breakthrough products to maintain high growth rate as the market for some of the current products mature.

Portfolio Management

Johnson & Johnson has over 250 different businesses and for the sake of convenience, the company has divided them into three divisions which are pharmaceuticals, medical devices, and consumer products divisions. A look at the charts in the case reveals that the company’s pharmaceuticals division is a “star” since it has been becoming the largest contributor to company’s overall sales and operating profits. The fact that pharmaceuticals division earns high profit margins is a sign that there is still ample room for growth. As far as the medical devices division is concerned, it is most probably a “cash cow” because even though it makes significant contribution to overall company sales, the market for many of the company’s medical devices products seems to have reached a saturation point, hence, lower profit margins as well as limited growth potential. The consumer products division could also be considered a “cash cow” because it is also faced with falling profit margins as well as limited room for growth.

The challenge for the company is to turn the medical devices and the consumer products divisions into cash cows and the success of the drug-coated stent called Cypher proves that it is possible even though the company may have to bring changes in its business level strategy. Fortunately, CEO Weldon is getting behind the idea that a greater working collaboration among different business units is required to achieve both operating efficiencies as well as develop new lines of innovative products.

Recommendation

Johnson & Johnson may be able to better utilize its core competencies to strengthen sustainable competitive advantages if the company complements its corporate level strategy with revised business level strategies. Even though alliances are usually formed with external partners, Johnson & Johnson’s organizational structure makes it possible for individual business units to reap the benefits of alliances. Johnson & Johnson’s management may facilitate collaboration by creating communication channels that encourage open communication as well as exchange of ideas. The individual business units may still be able to maintain their autonomy and entrepreneurial spirit but exchange of opinions as well as a growing awareness of the work being done in other business units will increase the frequency of ideas that can be converted into breakthrough products with tremendous commercial potential.

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