On January 26, 2011, health care conglomerate Johnson & Johnson announced that earnings had declined in the fourth quarter of the previous year, and lowered its estimates for its earnings for 2010. The firm claimed that the weaker results could be attributed to the depressed economy and to a string of product recalls. Sales figures do indicate that Johnson and Johnson has clearly been hurt by 17 recalls since September 2009, covering several over-the-counter medicines, a batch of contact lenses and some hip replacements.
The most serious problems have surfaced at McNeil Consumer Healthcare, which has had to recall many of its products, including one for an estimated 136 million bottles of children’s Tylenol, Motrin, Benadryl and Zyrtec – the biggest children’s drug recall of all time – that were potentially contaminated with dark particles. Johnson & Johnson has been excoriated by the Food and Drug Administration for failing to catch McNeil’s quality problems. The agency slapped one of McNeil’s plants with a scalding inspection report, causing the company to close down the factory until 2011.
In response to these problems, Johnson & Johnson recently announced that it intended to revamp its quality controls, creating a single framework for its consumer, pharmaceutical and medical device divisions. Ajit Shetty, the corporate vice president responsible for supply chain operations, will oversee the new system, reporting directly to William C. Weldon, the firm’s chief executive. The company said it also planned to appoint chief quality officers for each of its three major divisions.
The decision to create a more centralized form of quality control was a difficult one for Weldon. The firm has relied heavily on acquisitions to grow over the years, resulting in a collection of as many as 250 different operating companies that are spread over 60 countries. Johnson & Johnson has been committed to providing each of these units as much autonomy as possible in order to preserve an entrepreneurial culture throughout the organization. “The company really operates more like a mutual fund than anything else,” commented Pat Dorsey, director of equity research at Morningstar.1
In spite of the benefits that Johnson &Johnson may derive from such an arrangement, Weldon had already been thinking about taking steps to be more actively involved with its far flung business units. He recently told investors that he has been particularly concerned about pushing for more internal growth: “We’ll come at it from a variety of different ways, to accelerate top and bottom-line growth.”2 Given the scope of the businesses that J&J manages, he believes that the best opportunities may come from increased collaboration between its different units. But even as he has been pushing for some form of stronger direction for its units, Weldon does not want to threaten the strong entrepreneurial spirit that has been the basis of much of its success. The concerns over quality control have pushed the firm to try to find a more effective method of running its businesses without stripping them of their relative autonomy.
Case developed by Jamal Shamsie, Michigan State University. Material has been drawn from published sources. To be used for purposes of class discussion. Cultivating Entrepreneurship
Johnson & Johnson has relied heavily upon acquisitions to enter into and to expand into a wide range of businesses which fall broadly under the category of health care. Over the last decade alone, the firm has spent nearly $50 billion on 70 different purchases. Since 2008, J&J has made eight acquisitions, including a $1.1 billion acquisition of Mentor Corporation, a leading supplier of products for the global aesthetic market. The acquisition allowed the firm to make substantial move into the growing field of cosmetic drugs and devices. “It’s a natural extension of where J&J would want to go,” said Michael...