Harvard Business School 384 053

Harvard Business School 384-053 Rev. June 30, 1986

Johnson & Johnson (A): Philosophy & Culture

We believe the consistency of our overall performance as a corporation is due to our unique form of decentralized management, our adherence to the ethical principles embodied in our Credo, and our emphasis on managing the business for the long term.Statement of Strategic Direction Our culture is really it. That’s what brought us together when the Tylenol tragedies hit. Without it, we would not have been able to manage the crisis as effectively as we did.James E. Burke, Chairman & CEO In 1983, Johnson & Johnson (J&J) was widely regarded as one of the world’s most successful health care companies. Over a 20-year period, sales had grown at a compound annual rate of 14%, and earnings per share (EPS) at 17%. (During the 1970s, J&J’s EPS growth rate was approximately double the average for the Fortune 100 largest industrial companies.) By 1982, J&J’s worldwide revenues exceeded $5.7 billion and net income $473 million, placing it 55th in sales and 28th in net income on the Fortune 500 list of industrial companies. The underlying operations employed over 77,000 people based in 50 countries and sold products in 149 nations (see Exhibit 1 for financial data).The company had also acquired a reputation for management excellence. A Fortune survey of industry executives to rank the management excellence of the 200 largest U.S. corporations placed J&J third overall and first among health care companies. This case describes the distinctive philosophy J&J espoused and the managerial systems and practices employed to put it into operation.Company Background J&J began with Robert Wood Johnson, an apothecary by training. At age 31 Johnson attended a seminar offered by Sir Joseph Lister, a noted English surgeon, who propounded the theory of “antisepsis.” The year was 1876 and post-operative mortality rates were as high as 90%. The following account typified accepted surgical procedures at that time: “Unclean cotton, collected from sweepings on the floors of textile mills, was used for surgical dressings; surgeons operated in street clothes and wore a blood-spattered frock coat like a badge of honor.” This document is authorized for educator review use only by Dr Camilla Jensen, University of Nottingham Malaysia Campus until January 2017. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860

384-053 Johnson & Johnson (A): Philosophy & Culture

2 Robert Johnson, then a partner in a small firm manufacturing pharmaceutical preparations, was impressed with Lister’s theories and nurtured the idea of applying them. For this purpose, he joined with his two brothers, James and Edward, in establishing Johnson & Johnson to “manufacture and sell medical, pharmaceutical, surgical and antiseptic specialties and analgesic goods.” The firm was incorporated in 1887 with $100,000 of capital and began operations with 14 employees on the fourth floor of what had been a wallpaper factory.When the founder and first president died in 1910, J&J was already firmly established as a leader in the health care field. During Robert Johnson’s tenure, the company had introduced revolutionary surgical dressings, established a bacteriological laboratory, and, in 1888, even published a book, Modern Methods of Antiseptic Wound Treatment, which for many years remained the standard text on antiseptic practices.The company grew rapidly over the years as the result of new-product introductions and international expansion. New health care products were added through internal development and through the acquisition of established companies. One measure of the firm’s recent performance in this regard was given by an independent nationwide survey in 1982 comparing the ten-year record of successful new-product launchings for 18 major health and beauty aid manufacturers, including Bristol-Meyers, Procter & Gamble, and Kimberly-Clark. J&J was at the top of the list.In 1982, J&J’s products spanned four major groupings: consumer (baby care, surgical dressings, first aid, nonprescription drugs); professional (surgical dressings, sutures, diagnostic products); ethical (prescription) pharmaceutical; and industrial (nonwoven fabrics, edible sausage casings). The percentage sales and operating profits for these product groups in 1982 are shown in Table A.International expansion began with the establishment of an affiliate in Canada in 1919 and one in Great Britain in 1924. By 1982, almost half of J&J’s revenues and earnings were produced overseas.The challenge of managing rapid growth in J&J was to do it in a way that would preserve the family like atmosphere so valued in the company. When asked what it was like to work in J&J, a

senior executive described it as follows:

The prime motivator in J&J is the opportunity to grow with more responsibility. It runs through the entire organization. When we look at people in comparable jobs in other high-quality companies, we find that they are typically three to five years older than our managers.Another motivator is the climate. There is both respect for the individual and concern for the team. This is evident in our decision making. Everyone is free to argue his or her point of view. But once a decision is made, everyone is expected to do his or her best to make it work. In that way, even if a plan isn’t exactly optimal, we make it succeed. In short, it’s a nice company. People are nice to each other . . . and it’s a nice place to work.Table ASales and Operating Profits (in %) Consumer Professional Pharmaceutical Industrial Sales 43.0 33.5 19.4 4.1 Operating profits 42.4 17.9 36.9 2.8 This document is authorized for educator review use only by Dr Camilla Jensen, University of Nottingham Malaysia Campus until January 2017. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860

Johnson & Johnson (A): Philosophy & Culture 384-053

3 J&J’s Philosophy and Culture Robert Wood Johnson, “the General,” son of the founder, and chairman of J&J from 1938 to 1963, was generally credited as the individual most responsible for shaping the company’s philosophy and culture. Widely exposed as a young man to business around the world, he developed strong convictions about the merits of free enterprise and the ineffectiveness of large, ponderous organizations. Jim Burke, chairman and CEO since 1976, recounted: “He was convinced that if you have sensible people who know each other, in a small enough group, somehow or other problems would get worked out.” The General also held strong convictions about the public and social responsibilities that any business firm must assume. In 1947 he expressed his thoughts in a book, Or Forfeit Freedom: The evidence on this point is clear . . . . Institutions, both public and private, exist because the people want them, believe in them, or at least are willing to tolerate them. The day has passed when business is a private matter—if it ever really was. In a business society, every act of business has social consequences and may arouse public interest. Every time business hires, builds, sells, or buys, it is acting for the . . .people as well as for itself, and it must be prepared to accept full responsibility for its acts.These convictions about enterprise and social responsibility were reflected in J&J’s decentralization and in its enduring statement of beliefs, the Credo.Decentralization General Johnson’s firm belief about the inherent superiority of small, autonomous units led J&J on a consistent path toward decentralization. Autonomy was preserved for new acquisitions, and new independent units were spun off from existing organizations whenever they appeared ready to respond to new market opportunities on their own. This process continued over the years, leading to an assemblage of some 150 companies.The nature and purpose of J&J’s decentralization were described in the 1981 annual report: Johnson & Johnson is not one company but many. . . . The largest has 6,300 employees; the smallest, at year-end had six. . . .Whatever their size or location, they share a commitment to meeting the special needs of a well-defined customer. In doing so, they create a wide variety of innovative ways to successfully run their businesses.We feel that the secret to liberating that productivity is decentralization— granting each company sufficient autonomy to conduct its business without unnecessary constraints. In short, we believe decentralization = creativity = productivity.

Jim Burke elaborated on the concept:

The basic concept behind the decentralization philosophy is to try to organize each business around a given market need and a given set of customers. It’s easier said than done but that’s really it . . . Ethicon is an example of a business that’s built around the needs of the surgeon sewing people together . . . and their success is based upon their understanding that what they are is an extension of the skills in the hands of the surgeon. With this approach they built this business out of nothing.This document is authorized for educator review use only by Dr Camilla Jensen, University of Nottingham Malaysia Campus until January 2017. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860

384-053 Johnson & Johnson (A): Philosophy & Culture

4 The Credo General Johnson’s views on public and social responsibility were formalized in the 1940s as the company’s Credo. This statement underscored the company’s responsibilities to its customers, to its employees, to the communities in which it operated, and finally to its stockholders. Described by J&J managers as the underlying and unifying philosophy guiding all important decisions, the Credo was prominently displayed in every manager’s office (see Figure A).

Burke described the influence of the Credo on J&J managers as follows:

All of our management is geared to profit on a day-by-day basis. That’s part of the business of being in business. But too often, in this and other businesses, people are inclined to think, “We’d better do this because if we don’t, it’s going to show up on the figures over the short term.” This document allows them to say, “Wait a minute. I don’t have to do that. The management has told me that they’re really interested in the long term, and they’re interested in me operating under this set of principles. So I won’t.” One expression of the Credo was “Live for Life,” a positive health program for J&J employees. In 1976, Burke asked a senior line operating manager to figure out how the company could mount a program to make J&J employees the healthiest in the world. The findings of an exhaustive two-year study led to the introduction of a program focusing on four principal areas: exercise, nutrition, stress control, and the cessation of smoking. “Live for Life” was designed to encourage employees “to create their own programs for improving their life styles and getting rid of bad health practices that lead to illness and disability.” In support of this plan, flextime arrangements permitted employees to use new in-house health fitness facilities daily, and a variety of programs— such as “kick the smoking habit” group sessions, classes on weight control and nutrition, and yoga— were offered. As one senior executive noted, “It’s a great program for the participants. The company also benefits from the feeling it engenders among our people that J&J really cares for its employees.” This document is authorized for educator review use only by Dr Camilla Jensen, University of Nottingham Malaysia Campus until January 2017. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860