However, as the quality of life is increasing, people may be more aware to prevent the diseases than to cure it. The active life styles such as doing more exercise, eating more healthy food will to some extend decrease the demand for drugs.
1.2.4 Technological
Pharmaceutical industry can be classified into the “Ultra-slow’ industry, where regulatory or technical demands prolong the time to bring a new product to market by many years. (Schmid and Smith, 2004). Because of the dominance of technology in this industry, J&J consider “their business begins with science. It drives J&J’s leadership in new products and ways to serve humanity. It spurs continued growth. It encourages collaboration across our pharmaceutical, devices, diagnostics and consumer businesses. It drives a pursuit of innovation.” (Annual Report, 2003)
- High cost, high Risk leads to high input
The development time for the successful introduction of a new drug averages 12 years, with expenditures of $231.6 million. (Kogan, 1991) However, overall the chances of success of a new product are very low. Approximately 1-4 percent see the market, and of those that reach the market, approximately 60 percent fail to achieve sufficient sales to justify their R&D expenditure. (Johnson, 1996)
J&J has been keeping a high proportion of sales revenue on the R&D research expenditure. From 1999-2003, the R&D expenditure has been more than 15% of the sales revenue.
Figure 4: Pharmaceutical R&D Expenditure During 1999-2003
Source: Annual Report, 1999,2000,2001,2002,2003, J&J
As with all drug companies, competition from generic drug manufacturers is a major consideration when patents expire. However, J&J does not expect serious patent expiration problems in the year future. For example, the patents for PROCRIT (20% of 2003 sales) expire in 2014, and RISPERDAL (13% of 2003 sales) expires in 2007.
- Fighting generic products
With the development of technology, the speed of introducing generic products is faster then ever. Pharmaceutical companies thus will have to accelerate the frequency of inventing new drugs and investing more and more money on the R&D expenditure. For example, one of the company’s major products, DURAGESIC, which accounted for $1.6 billion sales income in 2003, will face the generic competition in Jan 2005. Such a competition will result in very substantial market share and revenue losses.
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Attention to the biotechnology
Biotechnology offers a new route to drug discovery that could potentially reduce R&D costs and development time. Among the 4 acquisition bids in 2003, two of the companies that J&J bought are biopharmaceutical companies.
1.3 Five Forces Analysis
1.3.1 Threat to Entry
1.3.1.1 Barriers to Entry
It is said that the marketing effort had a significant effect on market share only for drugs with a differential advantage. Innovative products create opportunities for erecting competitive barriers, thus allowing companies to earn higher sales margins and mitigating the power of buyers who lack acceptable substitute products. (Bond and Lean, 1977). J&J has been concentrated on 13 therapeutic areas, and provides the world with break-through new medicine. It has more 100 branded drug in the worldwide market, which distinguish the company from the other competitors.
J&J has kept more than 15% of its sales revenue on the R&D expenditure and 10% on the acquisition bids each year, which ensure the company with sufficient product pipeline and new market share. Such a high cost is not bearable to those small companies.
The government policy takes a two-sides effect on the pharmaceutical giants. On the one hand, high standards prevent those smaller companies to enter the industry since they are lack of the essential resources and competences to meet the requirements. Pharmaceutical giants thus gain protection. On the other hand, some of the regulations are so strict, even the pharmaceutical giants will find it difficult to pass. It will either cost them more or create failures to the projects. Especially for multinational pharmaceutical companies, such as J&J, they will meet different levels and contents of regulations from different governments, which will create barriers to them for entering the foreign markets.
1.3.1.2 Experience and Scale
J&J has been in the health care industry for 119 years. By relying on the past experience and familiar therapy categories, it can make full use of the existing distribution channels, lower the cost of employee training, and maintain the working efficiency and effectiveness.
1.3.2 Pressure from the Substitute Products
Although J&J’ major products will not experience patent expiration until 2007, which means that the pressure from the generic products will not so severe. However, it’s estimated that the generics market, worth $27 billion in 2001, is predicted to surge to $57 billion within five years as patents on numerous blockbuster drugs expire and demand grows to contain drug costs (I-Entry Network. 2003.) The US Food and Drug Administration (FDA) announced new regulations and review procedures designed to help generic drugs reach the market more quickly. The FDA estimates that the updated regulations will save American consumers $35 billion over the next decade by cutting back on legal delays to generic drug launches. ()
J&J is also facing the competition from other drugs which provide the similar category therapy. For example, J&J's RISPERDAL, an anti-psychotic with $2 billion in sales, will face competition from Bristol-Myers' new schizophrenia medicine ABILIFY, which boasts fewer side effects than RISPERDAL and its kin. If doctors really like the new drug, it could conceivably cut into RISPERDAL l's sales growth. Such competition from other drugs also exist in the company’s other products such as PROCRIT and REMICADE, etc.
1.3.3 Bargaining Power of Buyers
The buyers in pharmaceutical industry can be categorized into three levels:
- High power: government and insurance companies
- Medium power: medical professionals and distributors
- Low power: patients
Since these three parties have different level of rights and interests in the drugs, how to build different relationships with them is critical to the pharmaceutical company. Influenced by international buyer power, J&J has been tactical in facing the challenge of international buyers.
- High power: government and insurance companies
Government or insurance companies are the largest purchasers of the medicine products in most of the countries. In order to minimize the pharmaceutical expenditure, they are price sensitivity. Meanwhile, they also have the strict requirements of product quality. The balance of cheap price and high quality always bring about dilemmas to the pharmaceutical giants. The inventions of break-through drugs often cost the big pharmaceutical companies large amount of money. They will try their best to maximize the price and market share in order to refund the costs. Such an action will be seen as hostile to governments in terms of the control of pharmaceutical expenditure of the governments as well as the patients.
In facing such challenges, J&J adopts the following strategies:
Building relationship with government and media
Relationship building is a marketing strategy that aims for the long-time benefit. By introducing the company image first to the target governments, J&J is able to gain the recognition of the company reliability from the governments and hence increase the potential of buying its products. For example, in the 1996 Taft Corporate Giving Directory List, J&J was ranked No.2 of its donation to the society. By giving away drugs in developing countries with the best potential to become future markets, pharmaceutical manufacturers can gain expertise, contacts, and demand for their products that will propel sales. (Lindquist, 1998) In many instances, developing partnerships with nonprofit organizations can enhance the corporate images.
In the crisis cases which are dangerous to the company image and relationship with the government, J&J have always been a positive actor. For example, in 1982, the company’s most popular product TYLENOL capsules were tampered with. The company then recalled all TYLENOL capsules-approximately 31 million bottles-from the market and sacrificed more than $100 million in product sales to warn and protect consumers. It even posted a $100,000 reward for the killer's arrest. As a result of J&J's socially responsible behavior, the media published articles lauding the company for resisting the temptation to disclaim links to the deaths, pointing out that all the company's actions were in the best interest of public safety. (Richardson and Bolesh, 2002)
Controlling price
J&J has a long standing policy of pricing products responsibly. For the period 1993–2003, in the United States, the weighted average compound annual growth rate of J&J price increases for health care products (prescription and over-the-counter drugs, hospital and professional products) was below the U.S. Consumer Price Index (CPI). The company also strives to maintain its profit margins through cost reduction programs, productivity improvements and periodic price increases.
Ensuring quality
When the product quality is high, the price sensibility will be less.
- Medium power: medical professionals and distributors
The medical professionals, such as physicians or GPs, have the direct rights of deciding which drug will be prescribed to the patients among the drug list given by governments or insurance companies. Maintaining the corporate image, providing the product information, and stimulating the prescription of the company products are the main tasks of the sales representatives. “Although Johnson & Johnson has always had a large Direct-To-Consumer budget for its OTC products, the first quarter of 2000 has seen a shift in prescription advertising dollars away from consumer promotion in favor of professional-directed advertising.” (Brichacek, 2000) The shift of the advertising focus is an indicator that J&J will be more emphasized on building the relationship with the professions.
Patients have few positive rights in choosing between pharmaceuticals since the prescription drugs will be decided by doctors. Gaining the positive relationship with
patients is a long term strategy in terms of potential market shares and secure drug consumption.
J&J has been enhancing the image of ‘caring company’ by providing the patients with safe and effective products. It also actively educates the patients or potential customers with drug knowledge in order to improve their knowledge of relative diseases and ensure the safety of drug intake. For example, J&J conducts “Strength for Caring”, a community-based education and support program for cancer and HIV care givers, and it is one of many resources brought to patients, families and health care professionals.
1.3.4 Intensity of Rivalry Among Existing Competitors
Intensity of rivalry among existing competitors should be considered separately, on the one hand, since the market of pharmaceuticals is highly fragmented, the competition cross the sub-markets are not intensive, on the other, in the same therapy category, if there are a large number of generics, the competition could be very violent. (Zhang, 2004). The competitions among the pharmaceutical giants are equally balanced, in 2002, the top ten sales companies almost occupied 44% of the world total sales. Since the pharmaceutical industry is a high risk, high reward industry, the ability to reduce the odds is linked to long-term survival. (Schmid and Smith, 2004) By internal development and acquisition, J&J has become one of the largest pharmaceutical companies in the world, such a ‘big pharm firm’ strategy reduces the ‘odds’ and prospers long-term development. What is unique to J&J is, the company is composed of three divisions, and the linkage between the three health-care divisions enables J&J to share resource and knowledge learning. A big size of the company can be used to spread risk, and allows greater flexibility through the ability to afford more than one strategic option. (Schmid and Smith, 2004)
The competitive rivalry of this industry is changing very quickly due to the acquisitions. For example, just in 2002, there were 374 mergers and acquisitions deals announced in the pharmaceutical industry. (Arnum, 2003). The emergent of pharmaceutical giants maybe will change the structure and rules of the industry fundamentally. The competition will become more severe and many companies will thus shakeout.
1.3.5 The Power of Supplier
Among the five forces, J&J is least influenced by the power of supplier. However, since pharmaceutical industry is an R&D driven industry, the power of labor cannot be neglected, especially the scientists, engineers and technicians in the R&D department.
1.4 J&J’s Competitive Positioning
J&J positions itself as “competing with all levels of competitors…participating in growth areas in human health care and is committed to attaining leadership positions in these growth segments… in a decentralized company structure.” (Annual Report, 2003)
1.4.1 Strategic Group
According to strategic group theory (Porter, 1980; McGee and Thomas, 1986), the pharmaceutical giants are in the same strategic group in terms of their product diversification, multinational geographic coverage, marketing effort, R&D capability. The unique aspects of J&J lie in:
- Besides pharmaceuticals, J&J also provide other health-care products such as medical devices and consumer products.
- J&J concentrate on 13 therapeutic areas.
- The organization structure is highly decentralized.
1.4.2 Market Segmentation
The pharmaceutical market is segmented basically upon the therapeutic area. J&J is targeting the global patients in the following area: anti-fungal, anti-infective, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, psychotropic (central nervous system) and urology areas.
Part 2: Strategic Capability
2.1 Key Points of J&J’s Value Chain
Before analyze the strategic capability of J&J, it’s essential to figure out the key points of J&J’s value chain. The success of J&J is due to its excellent performance in the value chain and the management of linkage between the individual activities. Port’s theory of value chain can be developed like the following:
Source: Adapted from Porter M.E, Competitive Advantage, Free Press, 1985
2.2 SWOT Analysis
2.2.1 Potential Resource Strengths and Competitive Capabilities
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Cost efficient from the beginning of the value chain. In facing the global pricing pressure and increasing cost, J&J is able to control the cost from the beginning of the value chain. J & J relies on thousands of suppliers to provide the materials, good and services that their company needs to manufacture products and supply their offices and other facilities around the world. J & J upholds a Supplier Diversity Program. This program is designed to ensure that any supplier owned by any type of person may have the opportunity to partner with J & J. Maintaining a diverse supplier base enhances J & J’s role as a healthcare leader as well as enhancing economic and social volatility ()
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Wide geographic coverage and distribution capability. J&J is selling products in more than 175 countries and maintain a good relationship with the distributors. J&J has three large drug distribution companies in the USA. They are also J & J’s three largest customers. AmeriSource Bergen and McKesson each represent 10% of J & J’s sales; while Cardinal Health makes of 9% of J & J’s sales. These partnerships are key to J & J’s role as a leader in the healthcare industry (www.premium.hoovers.com)
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Strong advertising and promotion. J&J has always had a large ‘direct-to-consumer’ budget for its OTC products. From 2000, the company began to invest more on the ‘professional spending’, which stimulated sales of the prescription drugs. The large investment of advertising on consumer products also benefits the brand image and loyalty to the pharmaceutical division.
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Important patents and R&D capability. J&J does not rely exclusively on the sales mode of “blockbuster” drugs, this strength combined with the distant time of experiencing patent expiration ensure the growth in recent years. J&J considers its growth built first upon the ability of innovation, in other words, the ability of R&D. With expertise ranging from high throughput drug screening to genomics and informatics, Johnson & Johnson Pharmaceutical Research & Development, L.L.C. is at the forefront of unraveling complex diseases and developing new medicines.
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Expert and committed management team. J&J is managed by a team of professions. For example, in the board of directors, most of them are still in the high positions of scientific institutions. The composition of such an expert leading team ensures the formulation and implementation of suitable corporate strategy.
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Strong company reputation. According to Rating Research's (RRC) second annual Reputation Strength Study of the Pharmaceutical Industry in 2003, J&J ranked third among the big pharmaceutical companies. Reputation, and the intangible characteristics that constitute it, can be a vital asset-or a worrisome liability-as the industry confronts its challenges. (Resnick, 2003) “A good reputation helps a company to become an ‘employer of first choice…a supplier of first choice…an investment of first choice.’ (Zingales, 1998)
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A strong financial condition. In recent years, J&J has maintained a healthy financial performance on sales, earnings and cash flow. Especially the excellent performance on cash flow which provides the fuel that enabled the company to complete acquisitions valued at over $3 billion in 2003 while increasing the quarterly dividend 17 percent, from $.205 to $.24. In fact, 2003 was the 71st year of consecutive sales growth. J&J accomplished all of this while maintaining its “triple A” credit rating, a recognition afforded to very few industrial companies. (Annual Report, 2003)
Figure 5:
Source: Annual Report, 2003
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Decentralized organizational structure. From 1932, J&J began to adopt the strategy of decentralized organizational structure. This unique structure is a good reaction or match to the complex environment and it keeps the company close to the customers. “Decentralization can improve the decision-making process both from the point of view of the quality of the decision and the speed of the decision…Decision can be made by the person who is familiar with the situation and who should therefore be able to make more informed judgment than central management…Information does not have to pass along the chain of command to the top managers…Decisions can be made on the spot…Delegation of responsibility to divisional managers provides them with greater freedom, thus making their activities more challenging and providing the opportunity to achieve self-fulfillment…Distribution of decision-making responsibility to divisions frees top management from detailed involvement in day-to-day operations, and enables them to devote more effort to strategic planning and decision-making.” (Drury, 2001)
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Human resource. J&J deeply knows the importance of human resource. The company has an effective system of recruiting, developing and rewarding employees. For example, In 1999, J&J launched a new recruiting campaign that not only attracted active job seekers, but also encourage passive job seekers to apply for positions within the company.(Gilbert, 2002). J&J’s three leadership development programs: Executive Development Program; Executive Conference Ⅲ; Leadership Challenge provides essential leaders to J&J, a rapid growing company.
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Acquisition ability. J&J has a strong track record as an acquirer. During 1992 and 2002, 55 companies were purchased. (Barrett, 2002) J&J sees acquisitiveness and its immunity to the not-invented-here syndrome as sources of strength. With its strong balance sheet, high stock price, and AAA credit rating, J&J has enormous buying power, and it is standard practice at J&J to count on acquisitions for 10% or more of annual growth. (Taylor, 2002). By acquisition, J&J expand its product lines and market share. For example, in 2003, J&J purchased the Scios and acquired its product of NATRECOR® (nesiritide), the first-new treatment for acute congestive heart failure in more than 15 years.
2.2.2 Potential Resource Weaknesses & Competitive Deficiencies
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Decentralized organizational structure. Although the decentralized organizational structure has leveraged the development of J&J in the past years, for the company to thrive for the future, that system will be a weakness in terms of high overhead costs; barrier of information flow and inconsistency of corporation strategy.
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Low productivity of R&D. Although J&J invests large amount of money on R&D, however, the outcome is not so cheerful. Among its current seven best selling products, only two of them were developed by its own research center.
2.2.3 Potential Company Opportunities
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Expanding to new geographic markets. About 60 percent of worldwide GDP growth through 2020 is expected to occur in emerging markets such as China, Brazil, India, Mexico and Russia. Emerging markets represent a crucial path to drive the company’s growth over the next decade. In emerging markets such as China, with its 1.3 billion populations and immense potential, J&J seeks to provide enhanced health care by reaching new consumers and growing established businesses. The establishment of Xian-Janssen Pharmaceutical, currently the largest and most successful foreign pharmaceutical company in China, led to tremendous success in bringing modern medicine to China through in-house manufacturing. (Annual Report, 2003)
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Falling trade barriers in attractive foreign markets. With the flourishing outcome of global economy, to J&J, a multinational company, operations in a global range will become more and more smooth. For example, the statue of new WTO member of China and its favorable government policy to foreign investor will further stimulate the development of J&J’s branch in China.
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Population trend and aging problem. According to the World Health Organization, the global 65-and-over population is forecasted to rise from 390 million in 1997 to 800 million in 2025. Eighty percent of all senior citizens use prescription drugs regularly (www.aoa.gov). This will cause a greater demand for healthcare products, prescription drugs and end-of-life care products. The U.S. pharmaceutical market totaled $219 billion in 2002 in part to a large elderly segment who are dependent on prescription drugs (www.mercola.com). The incidence of chronic diseases causes close to 125 million deaths per year and is expected to increase to 157 million by 2020 (Herman, 2003). Demographics of the United States are going to be favorable for the major drugs industry to have continuous revenue gains.
Figure 6
Source: www.agingstats.gov
2.2.4 Potential External Threats
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Growing bargaining power of customers. Throughout the 1990s, pharmaceutical companies relied heavily on building large sales forces to drive revenue and gain competitive advantage over competitors. Today, this sales model is running out of date. Doctors are saturated with sales calls as ever more reps chase ever fewer doctors who are willing to accept a visit. Moreover, many of the products that sales reps are promoting are ‘mature’ blockbusters that have already been promoted on many previous individuals.
Figure 7
Source: Balaban et al, 2003
In the early 1990s, nearly 60% of drugs were paid for by private individuals. Today over 70% of drugs are paid for by insurance companies/HMOs who are leveraging their scale to exert downward pressures on prices. Payers are also demanding that new drugs have health economic benefits as well as enhanced efficacy.
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R&D cost continues to rise. At the same time that research is becoming less productive, R&D costs continue to rise, driven by falling success rates, greater clinical costs per patient and the need to perform larger trials to satisfy ever more stringent regulatory hurdles. In their recently published survey, DiMasi et al (2003) estimate that the overall costs for a successful compound rose over 2.5 times throughout the 1990s, amounting to over $800m today inclusive of capital (opportunity) costs.
Figure 8
Source: Balaban et al, 2003
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The lost effect of ‘blockbuster” model. In the past time, most of the pharmaceutical companies rely on the blockbuster model to generate revenue. However, since nowadays, the competition is becoming fierce that this model is gradually losing its power. Pharmaceutical companies have to develop more new products to meet the requirements of the markets, which means more investment on the R&D and marketing.
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Investors’ expectations remain high. Although the pharmaceutical industry is under high pressure, the expectations from the investors are still high. They put much of their hope on the long-term unlaunched product prospects and assume that the industry will maintain an increase rate of 10%. This translates the needs of launching at least three blockbusters per year, which is a mission quite impossible even to the pharmaceutical giants.
Other major threats such as likely entry of potent new competitors; loss of sales to substitute products and generic products; shifts in foreign exchange rate; costly new regulatory requirements are analyzed in part one.
Part 3: Stakeholder Expectations
and Organizational Purposes
3.1 Corporate Governance
J&J is governed by the value set forth by its “Our Credo”. At all levels, the employees of J&J are committed to the ethical principles embodied in Our Credo and these principles have been woven into the fabric of the Company. (www.jnj.com). The committees of the board are composed of two parts. The Audit, Compensation and Benefits, and the Nominating and Corporate Governance committees are composed entirely of non-employees directors, who oversee performance of the company in the related fields. The other committees: Finance, Public Policy, Science and Technology are composed of board members who exercise the management authorities. The “two-tier board” form of governance, which means the supervisory board oversees the work of the ‘lower-tier’ board, is the counterbalancing of power of managers, which is often a feature of management-dominated unitary boards. (Johnson and Scholes, 1997)
3.2 Identifying Stakeholders
J&J’s “Our Credo” identifies its four most important stakeholders: the customers, the employees, the community and the stockholders. J&J considers that it’s the company’s responsibility to fulfill the expectations of the four parties.
Figure 9: Expectations of the Stakeholders
3.3 Business Ethics and Social Responsibility
The issues of business ethics and social responsibility play an important role in J&J’s development pave. J&J has been considered as a social responsible company for a long time. Its commitment to the community, especially to the environment protection, wins the company high reputation. In 2003, a co-generation system which was completed at the Johnson & Johnson Pharmaceutical Research & Development, L.L.C. reduced the site’s carbon dioxide emissions by 3 million pounds. The system will enable the new building to become one of the first certified “green buildings” at Johnson & Johnson as established by the United States Green Building Council. The recognition of the society will play a long-term benefit to the shareholders in terms of the trust from the customers and society on the company as well as on the products.
Part 4: Strategic Options:
Directions and Methods of Development
From the previous analysis of the external environment and SWOT, it is obvious to see that the characteristics of the pharmaceutical industry has changed quite a lot in terms of the industry structure and dynamics, the technology and science and the customers and markets. The fierce competition requires companies to adopt different strategies in order to survive. J&J is just the kind of company that chooses various strategy development directions and methods.
4.1 Generic Competitive Strategy
According to Michael Porter (1980), bases of strategic choice for organization can usefully be considered in the context of the overall generic competitive strategy. J&J adopts the generic strategy of differentiation in the main forms of brand image, technology, customer service etc. By successfully achieved the differentiation strategy, J&J creates a defensible position for coping with the five competitive forces. It provides insulation against competitive rivalry because of brand loyalty by customers and resulting lower sensitivity to price. It also increases margins, which avoids the need for a low-cost position. The resulting customer loyalty and the need for a competitor to overcome uniqueness provide entry barriers.
In order to conduct successful differentiation strategy, Porter pointed out some commonly required skills and resources.
- Strong marketing abilities
- Product engineering
- Creative flair
- Strong capability in basic research
- Corporate reputation for quality or technological leadership
- Long tradition in the industry
- Strong coordination among functions in R&D, product development, and marketing
- Amenities to attract highly skilled labor, scientists, or creative people
By comparing J&J’s capabilities and competences with the above requirements, it is obvious that there’s a perfect match between them, which means that J&J has the essential ability to conduct a successful differentiation strategy.
4.2 Alternative Directions for Strategy Development
Figure 10 is the matrix for strategy development directions.
Figure 10: Ansoff Matrix for Strategy Development Directions.
4.2.1 Protect/Build
This development direction is concerned with protecting or building on the organization’s current position. These are options built around both the current products and competences of the organization and how they can be stretched to improve the competitive position of the organization in its current markets. (Johnson and Scholes, 1997). This direction is the basic and mostly used by J&J. Since big pharmaceutical companies are often concentrated on certain therapeutic areas, and the R&D cost of the new drug invention is high, maximizing the profit of existing products during their patent protection time in the existing therapeutic areas is the primary marketing tasks.
Consolidation is concerned with the maintenance of market share in existing markets. The study by Strategic Planning Institute (SPI) shows that Return On Investment rises steadily in line with relative market share. (Johnson and Scholes, 1997). This finding gives implications of some strategies that J&J takes.
- J&J develop strategies of higher quality/ higher price. Since J&J is a high-market-share company, it tends to be more profitable, providing extra resources for R&D to improve and differentiate products, enhancing its market position. “Long-term Profit Impact of Market Strategy (PIMS) evidence shows that this phenomenon may be self-sustaining.” (Johnson and Scholes, 1997)
- A PIMS study shows that key drivers of market share are the organization’s competences to sustain quality, innovation and intellectual property… All of these factors impact on the perceived value for money of the organization’s products or services, and can also act as barriers to entry for new competitors.” ((Johnson and Scholes, 1997). J&J is famous for its product quality and innovation ability. The fame will help it to gain more market share.
- “Quality is important in the improvement of profit performance” (Johnson and Scholes, 1997). J&J has been continuing to combine the high share with the high product quality.
- In the pharmaceutical markets, the market intensity is very high, which means that the market share is critical, J&J keeps a high investment on marketing expenditure to consolidate their position. For example, J & J spent $1.4 billion on advertising expenses in 2000 and 2001 and $1.5 billion in 2002 (Annual Report, 2002).
Since the overall drug market is still growing, it’s still possible for companies to gain market penetration. PIMS evidence shows that perceived quality is a key determinant for high share business to resist the penetration from rivalries. (Johnson and Scholes, 1997)
4.2.2 Product Development
Product development option involves the development of new products for existing markets. (Ansoff, 1957). Since J&J has the core competences related to R&D, and it is able to analyze and understand the changing needs of a particular group of customers or clients, products development is preferred to the company. In 2003, its pharmaceutical business achieved an impressive 10 product approvals from regulatory authorities in the U.S., European Union and Japan.(Annual Report, 2003) Product development is also essential the company in terms of the challenge of generic products and similar substitutes.
However, product development requires high commitment to the spending on R&D, especially in these years the cost of R&D is increasing while the productivity is decreasing. The process of creating a broad product line is expensive, risky and potentially unprofitable. (Johnson and Scholes, 1997)
4.2.3 Market Development
Because of the high cost in R&D and experience of scale, as mentioned before, pharmaceutical companies always limit coverage of the market by their products. “However, if the organization’s aspirations outstrip the opportunities in existing markets, it is natural to look for opportunities to exploit the current products in other markets.” There are three ways of doing this: (Johnson and Scholes, 1997)
- Extension into market segments which are not currently served
For example, J&J’s best selling product PROCIT is firstly largely used to treat the chronic kidney disease and chemotherapy-related anemia, now it’s also used to treat the fatigue that is caused by HIV therapy.
However, this strategy is required to modify the product to suit the new segments. For example, the amount of dosage might be different in treating different diseases, or the educations of knowledge about the disease and drug characteristics to the patients might be different as well.
- Development for new uses for existing products.
One of J&J’s most famous brands, TYLENOL is categorized as pain reliever. More patients use it for the relief of minor pain than any other drugs. However, under the brand name of TYLENOL, you can find some special formulation for colds and flu, for children, for menstrual discomfort and for the treatment of arthritis.
- Geographical spread either nationally or internationally into new markets.
From the earliest international expansion in 1919 to today, with 200 companies around the world, J&J has been doing well in exploring the possible international market. According to the company’s own analysis, the next investment heat points will be those countries with high GDP growth rate such as China and Brazil etc. (Annual Report, 2003)
4.2.4 Diversification
From the aspect of the whole company, J&J is a typical diversified company. The initial capital generation was based on the medical devices; pharmaceutical division was formed after the consumer product division. Since the three divisions are in the broad confines of the “health care” industry, J&J is adopting a strategy of related diversification. (Johnson and Scholes, 1997). J&J’s related diversification takes the form of horizontal integration, which means that three divisions are complementary to the company’s present activities. (Johnson and Scholes, 1997). The reasons for J&J’s diversification are due to:
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Spreading risk. Diversification enables J&J to adjust to all kinds of economies, if one section has a bad year, other sections may be able to recoup the losses.
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Resource utilization. The three divisions are able to share recourse. For example, the OTC drugs and consumer products might use the same retailer to sell their products, by building relationship with the same retailer with just one part of market expenditure, both of the products can benefit.
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Cost savings. It is mostly because of the share of knowledge and resource.
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Access to information. Since the three divisions are inter-related. Most of the information can be shared. For example, the medical devices division can use the same hospital information with the pharmaceutical division.
4.3 Methods of Strategy Development
4.3.1 Internal development
Since pharmaceutical industry is driven by technology and R&D is one of the critical factors in the value chain. Continuing to develop the R&D ability is the most important task for pharmaceutical companies.
“Compared to other industries, pharmaceutical companies have little progress in ‘breathing’ risk/reward management culture…Effective portfolio management is a process through which resources are allocated in accordance with corporate strategy.” (Bonduelle and Pisani, 2003). Portfolio management is essential to pharmaceutical companies since the cost on R&D and marketing continue to rise and the profit is squeezed very year. Especially, in the value chain of R&D, the success of new drug discovery is critical to the whole value created to the company. J&J has done well in evaluating its development project and monitor their progress in recent years. For example, in 1999, a new committee was set up to evaluate drug entry’s readiness for early human testing. A year later, another group was formed to decide whether a compound is superior enough to advance to large-scale clinical trials.(Moukheiber and Langreth, 2001)
However, in order to maximize the value-added to the whole value chain, portfolio management can not only based on the knowledge of R&D, it requires a multidisciplinary approach. Company should combine knowledge of other functions such as marketing and sales, supply chain, HR, finance, etc.
- Reconciling agility and size
Although the mergers and acquisition flourishing among the pharmaceutical companies, evidence shows that increased size does not necessarily result in increased clinical success, on the other hand, increased scale does increase the degree of freedom to construct a high quality of R&D portfolio, generating “more shots at goal” (Lehman Brothers, 2001). The decentralized organization structure of J&J enables it to maintain flexibility and quick reaction to the local environmental change.
- Increasing transparency and performance management
In order to help the shareholders understand the risk of pharmaceutical industry, the transparency of financial information, targets and performance is more critical in the future. According to Kaplan and Norton (1992), “What you measure is what you get”. The study by PWC (2001) identifies six indicators that investors think critical: product focus strategy, partnering strategy, economic profit, profitability of licensing management, quality of selection of development candidates and the risk of profile of the product portfolio.
- Motivating the organization
As pharmaceutical industry is driven by technology, the talents are scarce to the industry. Pharmaceutical companies should develop more flexible employment package to recruit and retains professional employees; different motivation should be taken into account
4.3.2 Mergers and Acquisitions
“A Compelling reason to develop by acquisition is the speed with which it allows the company to enter new product/market areas…Another reason for acquisition is the lack of resources or competence to develop a strategy internally.” (Johson and Scholes, 1997). As mentioned before, J&J has a strong track record as an acquirer. Since the pharmaceutical industry has entered a mature stage, the growth has become harder. The competitive situations, to some extend, forces pharmaceutical companies to expand through acquisition. Acquisition is also a short-term financial gain to the company and creates cost efficiency. For example, the acquisition of Scio Inc. by J&J added new product NATRECOR to its product portfolio. Before the acquisition, Scio Inc, had already begun to market the product, J&J saved money on the R&D process. Since the drug is in the front line for the treatment of acute congestive heart failure, it can be assumed that this drug will be the next “blockbuster” in the short future.
Unlike other Pharmaceutical giants, J&J don’t consider mergers to be its main growing method. While others are actively seeking mergers, such as Glaxowellcome with Smithkline Beecham, Pfizer with Pharmacia, J&J has always concentrated on acquiring the small to medium companies. The reasons for this strategy are due to:
- Risk spread. J&& usually uses 10% of its income as the financial resource for acquisition, if the deal fails, this will not affect the whole annual financial performance.
- The small to medium sized companies are usually technologically advanced. By acquiring the technology, J&J is able to add the most critical factor to its value chain.
- Acquiring the small to medium sized companies maintains the flexibility of the J&J group.
“The overriding problem with acquisition lies in the ability to integrate the new company into the activities of the old. ” (Johnson and Scholes, 1997) The corruption of the different organizational culture might bring about failure of the bid. However, in a decentralized organizational structure, J&J used to leave companies almost completely alone after buying them. Although, this strategy ensures the autonomy of the companies being acquired, it did cause trouble in the mid-1990 when newly acquired companies began to vie for customers, distributors, and supplier that were already working with other parts of J&J. So J&J began to run an integration program to help the newly acquired companies to learn the importance and way of collaboration.
4.3.3 Strategic Alliance
Evidence confirms that the primary motivation to form alliances is the need for specific resources and competences to survive and succeed in globalizing markets-particularly where technologies were changing too. (Faulkner, 1995). J&J usually takes the form of licensing. For example, the top sales product PROCRIT was licensed from a big biotech company Amgen. Licensing is common in science-based industry such as pharmaceutical and the risk of assets involved being appropriated is low.
However, in order to conduct successful alliance, partners have to take proactive attitudes to commitment, trust and cultural sensitivity and make clear organizational arrangements. (Johnson and Scholes, 1997) For example, after the licensing of PROCRIT with Amgen, Amgen complained to the headquarter of J&J because some of its markets were wrongly taken over by the subsidiaries of J&J.
Part 5: Strategy Evaluation
5.1 Suitability
“The assessment of suitability of a particular strategy is concerned with whether it addresses the circumstances in which the organization is operating and/or wished to operate.” (Johnson and Scholes, 1997).
According to the life cycle/portfolio matrix (Little, 1974,1984), as the pharmaceutical industry is in the mature stage and J&J is holding a strong competitive position, the strategies should be the choice of attain cost leadership, renew, focus, differentiate or grow with industry. The generic strategy of differentiation and grow with the industry of J&J lies in the suitable matrix, which are reasonable choices.
J&J’s positioning is very reasonable and practical. Its positioning in the health-care product range enables it to grasp the continued growth in this area, especially the demand of drugs will not decrease, which means this division will gain continued growth. J&J is competing with all levels of competitors because the competitive rivalry, especially in the generic products area, forces the company to defend itself from all kinds of “enemies”. J&J wants to be the leadership because it has the critical competence.
The strategies that J&J take are concerned with every aspect of the value chain. It adopts the concept of synergy by doing market development, product development and diversification.
Although it is difficult to analyze the whole product portfolio since J&J has more than 100 brands of drugs, in the long run, J&J is good at introducing the question mark products such as PROCRIT and NETRECO. The ability of finding the growing demand therapeutic area and marketing new products guarantees the sound income from the question mark products and develop them into cash cows.
From its foundation, J&J has been performing well in terms of finance. In fact, it has been Wall Street’s favorite for a long time, which means that the strategies of J&J are successful.
5.2 Acceptability
In 2003, with the sales of $19.5 billion in pharmaceutical, J&J ranked No.4 of the world top ten pharmaceutical companies. (Sellers, 2004). J& J has had 70 consecutive years of sales increases and 41 consecutive years of dividend increases. It regularly gets ranked on Fortune’s Most Admired Companies and Best Companies to Work For list. The current ratio in 2003 is 1.67 with the debt to equity of 0.26 and Return of Equity of 28.89%. Through these figures, it is obvious that J&J performed well in last year, which indicates that the strategies the company took is successful.
Table 1 is the comparison of some major financial indicators between J&J and Glaxosmithkline (GSK), which ranked No. 2 in last year and also has a division of consumer products.
Source: Annual Report, J&J, GSK, 2003
J&J is such a strong performing company and less risky than the market as whole. The title of AAA debt rated company means that the company has a low default risk and can easily carry its current amount of debt.
Part 6: Future Strategic Options
The pharmaceutical industry is changing its characters. The ever more fierce competition requires pharmaceutical companies to further differentiate itself from rivalries. Although future success will largely rely on the ability of R&D since pharmaceutical giants need more new products in their pipelines, the linkage in the value chain is critical. In the future, J&J can further adopt the following strategies in order to consolidate and develop its market position
- Increase the internal R&D productivity and absorb technology from the external institutes. Develop drugs which are more disease curing rather than symptom curing.
- Continue with the acquisition, more concentrated on the biotechnological-based company targets.
- Leverage internal collaborations between the subsidiaries, while maintain the organization flexibility. Emphasize on the share of resources especially knowledge and information.
- Enhance the development of Learning Organization.
Conclusion
Take an overall review of the strategies that J&J is taking, we can conclude that the strategies are suitable and correct to the current situation of the company. The strategies take into full consideration of the external environment influence factors and build the strategies on the bases of the internal capabilities and competences.
However, as the industry enters a new era, J&J has to adapt some aspects of corporate strategic development directions and methods in order to consolidation its market position and continue to be a pharmaceutical giant.
Appendices
Limitations of the Strategic Analysis Tools
- When doing a PEST analysis, every conceivable item is listed. However, it has little value and betrays a lack of serious consideration and logic in the corporate strategy process. (Lynch, 2000)
- The PEST analysis rely on past events and experience, it may be useless to prepare for the future plan when environment is changing so quickly. And if environment is changing quickly, developing the strategy upon the past information will may be harmful to the future success.
- Five forces analysis (Lynch, 2000)
- The analytical framework is essentially static, whereas the competitive environment in practice is constantly changing, sometimes changes more rapidly than the model can show.
- In general, its starting point is that the environment poses a threat to the organization, however, in practice, some companies may engage in closer cooperation with those “threats”, such as suppliers and buyers.
- Porter’s analysis ignores the human resource aspects of strategy, however, human resource may be a critical success factor in some area
- Porter’s theory assumes that once the analysis of has been conducted, then the organizations can formulate a corporate strategy to handle the result: predictive rather than emergent.
Although the Ansoff matrix clearly figure out the possible organization strategy development directions, it doesn’t prescribe when each strategy should be employed and there is no clear boundary between the four directions. In the real situation, organizations may find it difficult to precisely find its development direction.
- Evaluation of strategy by financial figures
In the evaluation procedure of the strategies, the usage of financial figures is an important indicator, however, in order to gain brilliant financial figures, organizations may adopt short-term strategies which are harmful to the long-term company development. If potential investors judge the company performance exclusively on financial figures, they will probably make false investment.
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Websites
www.jnj.com
I-Entry Network. 23 Sept 2003. http://www.webprowire.com/summaries
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