This week you are required to submit a case study analysis. Your paper analysis should be between 3 – 5 pages, not counting the title and reference page. No submission should be fewer than 1050 words.

Several years earlier, Johnson & Johnson (J&J) had settled with an estimated 8.000 patients over problems with its flawed all-metal altificial hip. The device had a design flaw th:rt caused it to shed large quantities of metal- lic debrls atter implantation. It was finally recalled by the fil'rn in 2010, atler Johnson & Johnson hacl coverecl up the problems for almost five years afler they began to surf-ace. The settlement cost the tirm as much as 53 billion to coll- pensate patients who had to have the artificial hip leplaced. The problems with this device would classify it as one of the lalgest medicai failures in recent history. The problems with the medical clevices unit were com- pounded by serious issues that arose with the consumer products unit, leading it to recall many of its ploducts including the biggest children's dlug recall of all time-that " Cirsc prcprrcd bl Jamal Shamsic. Nlichigan Statc Llnircrsitl'. u'ith thc ilssistatrce ol Prottssor Alan B. Eisner. Pace Universitl. Nhterial hrs been drawn tl-om publishecl soLrrces to be used lbr pnrposes of clirss discussion. Copl'right O 2015 Janrl Shamsie rrd Alan B. Eisrer. were potentially contaminated with clark palticles. The Food and DrLr-s Administration also slapped a plant at one ol its business units. McNeil Consumer Healthcare. with a scald- ing inspection report. causing the company to close down the fircbry to bring it up to fbderal standards. The publicity that arose fiom these problems tarnished the name of one of the nation's niost trusted firlns. Much of the blame for Johnson & Johnson's stumbles lell on William C. Weldon, who stepped down as CEO in April 2012 after presiding over one of the most tumultuous decades in the tirm's history (see Exhibits 1 and 2). Critics said the company's once-vaunted attention to quality had slipped under his watch. Weldon. u,ho had started out as a sales lepre- sentati e at tlle firm. was believed to have been obsessed witl'r meeting tor-rgl-r perfbrmance targets. even by cutting costs that might aIlbct qr-Lality. Erik Gordon. u,ho teaches business at the Univelslty of Michi-gan. elaborated on tl.ris pl.rilosophy: "We will make our numbers fbr the analysts, peliod."l Weldon was replaced by Alex Gorsky. who had headed thc n'redical devices and diagnostics unit. Like his pledecessor. Gorsky had worked his r'vay up by meet- ing tough perfbrmance targets as a sales representxtive, and his appointment as CEO continued the film's 126- yeal tradition of hiring leaders from within. "The future of Johnson & Johnson is in very capable hands," said Weldon.2 Horvever. the decision to hire anothel insider raised concerns that the firm was not vely serious about changing the colporate culture that had created so r.nany of its recent problems. 'As somebody steeped in J.&J. culture. I would be vely surplised to see bi-g changes." said Les Funtleyder. a porttblio manager at a firm that or,vned .l&.I stock.3 Revenue Gross profit 0perating income lncome before taxes Net income Sourcc: Johnson & Johnson 61,587 42,795 16,527 16,947 '13,334 65,030 44,670 1 6,1 53 12,361 9,672 67,224 45,566 15,869 13,715 10,853 71,312 48,970 18,377 15,471 1 3,831 14,331 51 ,585 20,959 20,s63 16,323 tIii -a +j:=E! Balance Sheet ($ millions) Total current assets Total assets Total current liabilities Total liabilities Total stockholders' equity 47,307 102,908 23,072 46,329 56,579 Source: Johnsor & Johnson. Cultivating Entrepreneu rship Johnson & Johnson relied heavily upon acquisitions to enter into and expand into a wide range of businesses that fell broadly under the category ofhealth care. It purchased more than 70 different firms over the past decade. An.rong Johnson & Johnson's recent moves was the $20 billion purchase of Synthes, a leading player in trauma surgery. In November 2014, J&l completed its $1.75 billion acquisition of Alios BioPharma, which produced therapeutics fbr viral infections. As it grew, Johnson & Johnson developed into an astonishingly complex enterprise, made up of over 250 different subsidiaries that were divided among three dif'- fbrent divisions. The most widely known of these was the division that made consumer products such as Johnson & Johnson baby care products, Band-Aid adhesive strips, and Visine eyedrops. The division grew substantially after J&J acquired the consumer health unit of Pfizer in 2006 for $16.6 billion. the biggest acquisition in its 120-year history. The acquisition allowed J&J to add well-known products to its lineup, such as Listerine mouthwash and Benadryl cough syrup. But Johnson & Johnson reaped far more sales and prof- its from its other two divisions. Its pharmaceuticals divi- sion sold several blockbuster drugs. such as anemia drug Procrit and schizophrenia dlug Risperdal. A new drug, named Zytiga, prescribed to treat prostate cancer, was selling well. The medical devices division was respon- sible for best-selling products such as DePuy orthopedic joint replacements and Cypher coronary stents. These two divisions generated operating profit margins of around 30 percent, almost double those generated by the consumer business. To a lar-9e extent, however. Johnson & Johnson's suc- cess across its three divisions and many different busi- nesses hinged on its unique structure and culture. Most of its tar-flung subsidiaries were acquired because of the potential demonstrated by some promising new products in their pipelines. Each ofthese units was therefbre granted near-total autonomy to develop and expand upon its besrselling products (see Exhibit 3). That independence e234 CASE 31 :: J0HNSON & J0HNSON 46,116 121,347 24,262 56,521 64,826 56,407 132,683 25,615 58,630 7 4,053 59,31 1 131,119 25,085 61,367 69,752 fostered an entrepreneurial attitude that kept J&J intensely competitive as others around it faltered. The relative auton- omy that was accorded to the business units also provided the firm with the abiiity to respond swiftly to emerging opportunities. Johnson & Johnson was actually quite proud of the considerable freedom that it gave to its different subsid- iaries to develop and execute their own strategies. Besides developing their strategies, these units were also allowed to work with their own resources. Many of them even had their own finance and human resources departments. While this degree of decentralization had 1ed to relatively high overhead costs, none of the executives who ran J&J, Weldon included, had ever thought that 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 company," recalled a scientist who used to work there.a Pushing for More Collaboration The entrepreneurial culture that Johnson & Johnson devel- oped over the years clearly allowed the film to show a consistent leve1 of high perfbrmance. lndeed, Johnson & Johnson had top-notch products in each of the areas in which it operated. It had been spending heavily on research and development for many years, taking its position among the world's top spenders (see Exhibit 4').In2014, it spent about 12 percent of its sales on about 9,000 scientists working in research laboratories around the world. This allowed each of the three divisions to continually introduce promising new products. In spite of the benefits that Johnson & Johnson derived from giving its various enterprises considerable auton- omy, there were growing concerns that these units could no longer be allowed to operate in near isolation. Shortly after Weldon had taken charge of the firm, he realized that J&J was in a strong position to exploit new opportunities by drawing on the diverse skills of its various subsidiar- ies across the three divisions. ln particular, he was aware that his firm might be able to derive more benefits from the combination of its knowledge in drugs, devices, and 54,31 6 113,644 22,811 56,564 57.080 * € Segment lnformation ($ millions) Johnson & Johnson was made up of over 250 different companies, many of which it had acquired over the years. These individual companies were assigned to three ciifferent divisions. Consumer - United States I nternation a I Total Pharmaceutical - United States I nternationa I Total Medical Devices - United States I nternationa I Total Worldwide total $ 5,096 9,400 14,496 17,432 14,881 32,313 12,254 15,268 27,522 $74,331 $ '1 ,941 11 ,696 7,953 21 ,590 1,027 $20,563 5,162 9,535 14,597 13,948 14,177 28,12s 12,800 15,690 28,490 71,312 13.4% 36.2 28.9 29.0 27.1v" 5,046 9,401 14,447 12,421 12,930 25,351 12,363 15,063 27,426 67,224 13.4 32.6 18.5 23.0 21.7 Consumer Pharmaceutical Medical Devices Total Less: Expenses not allocated to segments Earnings before provision for taxes on income Source: Johnson & Johnson. 1,973 9,178 5,261 16,412 941 15,471 diagnostics. since few companies were able to match its reach and strength in these basic areas. This 1ed Weldon to tind ways to make J&J,s fiercely independent units work together. In his own words: .,There is a convergence that will allow us to do things we haven,t done before."5 Through pushing the various far-flung unirs of the firm to pool their resources, Weldon believed that the firm could become one of the f'ew that was actually able to attain that often-promised, rar-ely delivered idea of synergy. To pursue this, he created a corporate ofilce that would get business units to work together on promising new opportunities. "It's a recognition that there,s a way to treat disease that's not in silos," Weldon stated. referring to the need for collaboration between J&J's largely indepen- dent businesses.6 For the most part. however, Weldon confined himself to taking steps to tbster better communication and more frequent collaboration among Johnson & Johnson's dis- parate operations. He was convinced that such a push for communication and coordination would allow the firm to il CASE 31 :r ]OHNS0N & JOHNS0N C235 Soruce: Johnson & Johnson. develop the synergy that he was seeking. But Weldon was also aware that any effort to get the different business units to collaborate must not quash the entrepreneulial spirit that had spearheaded most of the growth of the film to date. Jerry Cacciotti. managing director of consulting firm Stra- tegic Decisions Group, emphasized that cultivating those alliances "would be challenging in any organization, but particular'ly in an organization that has been so successful because of its decentralized culture."7 These collaborative efforts did lead to the introduction of some highly successful products (see Exhibit 5). Even the company's fabied consumer brands started to show growth as a result of increased collaboration between the consllmer prodr"rcts and pharmaceutical divisions. The firm's new liquid Band-Aid was based on a material used in a wound-closing product sold by one of J&J's hospital- supply businesses. And J&J used its prescription antifun- gal treatrnent, Nizoral, to develop a dandruff shampoo. In fact, products that wele developed in large part ollt of such cross-fertiiization allowed the film's consltmer business to experience considerable internal growth. Confronting 0uality lssues Even as Johnson & Johnson was trying to get more involved with the efforts of its business units" it ran into quality control problems with several over-the-counter drugs made by McNeil Consumer Healthcare. Since 2008, FDA inspectors had found significant violations of manufacturing standards at two McNeil plants, leading to the temporary closure of one of them. These problems had forced the flrm to make several recalls of some of its best-selling products. Weldon did admit that problems had surfaced. but he insisted that they were confined to McNeil. He responded to them in an interview: "This is {:34 CASE 31 :r JOHNS0N & JOHNSON , ', Significant lnnovations Antiseptic Surgery (1 888) Three brothers start up a firm based on antlseptics designed for modern surgical practices. Band-Aids (1921) Debuts the first commercial bandages that can be applied at home without oversight by a professional. No More Tears ('1954) Introduces a soap-free shampoo that was gentle enough to clean babies' hair without irritating their eyes. Acuvue Contact Lenses (1987) Offers the flrst-ever disposable lenses that can be worn for up to a week and then thrown dway. Sirturo (2012) Gets approval to launch a much-needed treatment for drug- resistant tuberculosis, the first new medication to fight this disease in more than 40 years. i;,,.", ;;;; ;;,;;,,,,,, r".n ru,.. one of the most dilficult situations I'l,e ever had to per- sonally deal with. It hits at the core of who J&J is. Our first responsibility is to the people who use our products. We've let them down.''8 Quality problems had arisen before, but they were usu- ally fixed on a regular basis. Analysts suggested that the problems at McNeil might have exacerbated in 2006 when J&J decided to combine McNeil with the newly acquired consumer health care unit from Pfizer. Johnson & Johnson believed that it could achieve $500 million to $600 million in annual savings by merging the two units. After the merger, McNeil was transferred from the heavily regulated pharmaceutical division to the marketing-driven consumer products division, headed by Colleen Goggins. Because the consumer executives lacked pharmaceutical experi- ence, they began to demand several changes at McNeil that led to a reduced emphasis on qllality control. Weldon realized the significance of the threat faced by Johnson & Johnson as a result of its probiems with quality. He was especially concerned about the FDA's allegation that the firm had initially tried to hide the problems that it found with Motrin in 2009, hiring a contractor to quietly go from store to store buyin-t all of the packets on the shelves. McNeil's conduct surrounding the recalls led to an inquiry by both the House Committee on Oversight and Investiga- tions and the FDA's Office of Criminal Investigations. Various changes were subsequently made at McNeil to resolve these quality issues. Goggins was pushed out of her post as senior executive in charge of all consumer businesses. Weldon allocated more than $100 million to upgrade McNeil's plants and equipment, appoint new manufacturing executives, and hire a third-party consulting firm to improve procedllres and systems. Bonnie Jacobs, a McNeil spokeswoman, wrote in a recent email: "We will Research Expenditures ($ millionsl 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 $8,494 8,r83 7,665 7,548 6,864 6,986 7,577 7,680 7,125 6,462 I invest the necessary resources and nlake whatever changes :rre needed to do so. and we will take the tinle to do it . - --D rr gh t.-The problerns at McNeil, couplecl with growing prob- lelrs wjth J&J's artificial hips and contact lenses. also lecl Johnson & Johnson to make changes to its corporate oversight of its supply chain and manufacturing. ln August 2010. the firm appointed Ajit Shetty. a longtime execr"r- tive. to oversee a ne\' system of con'rpanywide quality control that involveci a single framervork for quality across all of the operating units and a new reporting systen-r. The need tbr these changes was highlighted by Erik Cordor.r, a plofessor at the Ross School of Business at the llniver- sity of Michigan: "Nothing is more valuable to Johnson & Johnson than the brancl bond of trust with consumers."i(l PassimE the Baton In Aplil 2012. Johnson & Johnson appointed Gorsky ttl lcad the health care conglomerate out of the difficulties that it had firced over the previous few yeals. He had been u,ith the firm since 1988, holding positions in its pharma- ceutical businesses across Europe. Africa, and the Middle E,ast befbre leavin-r fbr a t'ew yeiirs to work in Novartis' Shortly after his return to Johnson & Johr.rson in 2008, he took over its rnedical device and diagnostic group. Because of his extensive background with the firm. and with the division that was being investigated about its faulty hip replacements, Gorsky might have been regardecl as the ideal person to take over the job. When he took over, DePuy, the firm's olthopedic unit. was alreacly running into tlouble with its newest artifi- cial hip. The tirm finally lecalled the artificial hip, amid growing concerns about its failule among those who had leceived the implant. Until then, however, executives fiom the firm had repeatedly insisted that the device was safe' Andrew Ekdahl, the current plesident of DePuy. recently reiterated that position. "This was purely a business deci- sion." he said.llln the trial in Los Angeles Superior Court regarcling the defective hip replacement. however. Michael A. Kelly, the lawyel making the case against Johnson & Johnson. suggested that company executives might have concealed information out of concern fbr flrm profits' In spite of all these issues, Johnson & Johnson did not attempt to clarify what infbrmation Gorsky might have had about the ploblems associated with the artificial hip. Under the circumstances. his promotion to lead the firm sur"prised Dr. Robelt Hauser, a cardiologist and an advocate fbr improved safety of medical devices. "He's been oversee- ing one of the major J&J quality issues and the board of J&J sees fit to name him the n"*iC.E.O.." he questioned.12 These issues raised concerns about the ability of the firm to eff'ectively deal with the quality concerns and to take steps to prevent them tiom recurt"ing in the future. Gorksy's first.iob as Johnson & Johnson's chief execu- tive was, in fact. to reassure shareholders that the firm would move quickly to overcome its problems with manr-rfactuling defects, product recalls. and lawsuits. "We've -qot to adapt faster than ever belbre, be more agile than ever before." he statecl at rhe firm's attnual tteeting atier taking overlJ He acknowleclged that some of the problenls could pafily be attributed to the firm's attenrpt to continue to nreet Wall Str"eet's increasin-uly short{erm demands. Gorsky antrounced that moving forwald. J&J was committed to managing for the long term, actively soliciting f'eedback I'rom a[] quarters and adhering to the mission that made customers the first priority. Gorsky's biggest challenge, however, came from a pro- posal that Johnson & Johnson might be better off if it was troken into smaller companies, pelhaps along the lines of its ditterent divisions. There u'ere grouing concetns about the ability of the conglomelate to provicle sutficient sr,rpervision to all of its wor'ldwide subsidiar"ies. Gorsky dismissed the proposal. claiming that J&J drew substantial benefits tiom the divelsified nature of its businesses. He rlid concede. however. that the tirn-r would have to be more selective. careful. and clecisive about the products that it would pursue. ls There a eure Ahead? Uncler Golksy. Johnson & Johnson began to divest some of its lower-glowth businesses and ledltce annual costs by $1 billion. ln 2014. the firm sold off its blood-testing unit. cal1ec1 Ortho-Clinical Diagnostics, for $'1.1-5 billion to the private equity firm Carlyle Group. lt was actively seeking a buyer for Cordis, which made medical devices such as stents and catheters. Johnson & Johnson, which had helpecl to

To repair the damage to its reputation fl'on'r the many recalls across two of its divisions, Johnson & Johnson recently announced that it would remove a host of poten- tially harmful chemicals, tike tbrnialdehyde. trom its line of consumer products by the end of 2015. It was the first major consumel products company to make such a wide- spread commitment. "We've never really seen a major personal care product company take the kind of move that they are taking with this," said Kenneth A. Cook, president of ihe Environmental Working Group.ll As he tried to plot a course for the future of Johnson & Johnson, Gorsky realizedthat he had to deal rvith u lariety of issues. He was aware that much of thc firm's success to date resulted fi'om the relative autonomy that it granted to each of its businesses. At the same time, he realized that he had to provide more direction for the businesses to collaborate ivith each other in order to pursue emerg- ing opportunities. He also understood that it was critical for J&J to clevelop sutficient controls that could lnirlirnize future problems with quality control. In overall terms. it was clear that the health care giant had to rethink the process by which it managed its I aASr:x :: J0l-lNS0N & JOHNSON d:31 diversified portfolio of companies in order to ensure that it could keep growing without creating issues that could pose further threats to its reputation. "This is a company that was purer than Caesar's wife, this was the gold standard, and all of a sudden it just seems like things are breaking down," said Wiiliam Trombetta, a professor of pharmaceutical marketing at Saint Joseph's University in Philadephia.15 ENDNOTES i. Katie Thomas. J.&J.'s next chiel is steeped in sales culture. New York Iines, Februaly 221,2012, p. B6. 2. Katie Thomas & Reed Abelson. J.&J. chref to resign one role. Nerr ktrk Times, February 22, 2012. p. 88. 3. Thomas. op.cit., p. BL 4. Peter Lotius & Shirley S. Wang. J&J sales show health care feels the pinch. Wall Street Journul, January 21,2009, p.81. 5. Avery Johnson. J&J's consurner play paces growth. WuLl Street Jotrnal, Jtmary 24, 2007. p, A3. 6. Holiy Hubbud Preston. Drug giant prot,ides ar model of consistency. Heruld Tribune, March 12-13, 2005, p. 12. 7. Amy Baffett. Staying on top. Business llrealr, May 5, 2003, p. 62. 8. rbid.9. Natasha Singer & Reed Abelson. Can Johnson & Jobnson get irs xct together? Nev, York lfuzes, Januarv 16, 201 1, p. 84. 10. Ibid., p. Bz1. I l. Thon.ras & Abelson. op. cit. I2. Michaei L, Diamond. J&J's CEO calls for fast action. Ashburr Park Press, April 27 ,2012.. p. 13. 13, Thomas, op. cit. 1,1, Katie Thomas. Johnson & Johnson to remor,e questionable chemicals inproducts. Ne*- Ytn'k llnze,r, August 16,2012. p. B1. 15. Natasha Singer'. Hip implants il-e recalled by J&J rnrl. Neyv ktrk Ilne.r, August 27. 2010, p. B L C:3S CAS| 31:: JOHNSON &JOHNSON