Corporate Strategy Analysis
Strategic Choices
Johnson and Johnson is a multinational company operating in several markets connected with healthcare products and services. According to Johnson & Johnson’s (2019a) annual report for 2018, the company operates in more than 60 countries with more than 260 companies. Even though all the company’s products and services are related to healthcare, Johnson & Johnson is relatively diversified. A company is considered diversified if it has multiple unrelated businesses, which are those that require unique management expertise, have different end customers, and produce different products or services.
The company produces consumer products, medical devices, and pharmaceutical products, which address the needs of customers of different segments (Johnsons & Johnson, 2019b). Moreover, the company provides health education with the help of different means, including the Johnson & Johnson Institute opened in 2017 (Johnsons & Johnson, 2019c). Even though these businesses may operate in the same industry, they are a sign of Johnson & Johnson’s diversification.
The company can be called vertically integrated, as it owns a large proportion of its supply chain. The analysis demonstrates that Johnson & Johnson follows both forward and backward integration principles. It is responsible for producing, marketing, and distributing its products. The company also puts a considerable emphasis on research and development (R&D) of new products, which is also a part of the supply chain. Johnson & Johnson (2019c) acquired Centocor, one of the first American biotechnology companies, in 1999 to increase its research capacity. This acquisition is an example of vertical expansion, which is a sign of vertical integration of the company.
However, some instances are horizontally integrated because many acquisitions and expansions were done to increase the production of goods in the same part of the supply chain. The acquisition of Pfizer’s consumer healthcare business is a sign of horizontal integration as it broadened the capacity of production of oral care, pain relief, and wound care products (Johnson & Johnson, 2019c). Since had companies operating in the market, the acquisition is a sign of horizontal integration.
For the company’s growth, Johnson & Johnson prefers organic development together with mergers and acquisitions (M&A) to alliances. In the early years of operation, the company gradually created new manufacturing capacities to increase its revenues. At the same time, the timeline provided on the official website of the company includes information on more than 15 acquisitions throughout its history.
The information about alliances is absent, which implies that the company could not agree to the disadvantages associated with this type of growth. The central concern with alliances is that together with access to researches and knowledge of others, the company would need to share its profits and technology. Since the company aims at pioneering in medical product manufacturing and medical service provision, the creation of strategic alliances seems an inappropriate growth strategy. As a result, the company uses acquisitions and greenfield ventures as the central methods for entering international markets.
Analysis of Strategic Choices
Considering the buy, ally, or DIY matrix, the company’s growth choices were consistent with its capabilities. According to the matrix, the primary disadvantage of acquisitions is culture and valuations problems. At the same time, organic development is slow, and failures are likely unsaleable. Since Johnson & Johnson is a diversified multinational company, cultural consistency is of extreme importance to avoid control and valuation problems.
However, in some cases, such problems were acceptable for the company when a fast entry was needed. As mentioned above, allying was not an option is that it would be incongruent with the company culture, which aimed at pioneering in the industry.
The choice between horizontal and vertical integration strategies was made according to the strategic goals identified by the company. For instance, the acquisition of Centocor allowed using biotechnological in the development of new drugs that would be further manufactured, distributed, and marketed. Even though the company may have suffered some cultural consistency problems, the central benefit was that it could start using new technologies immediately retaining leadership in the industry and preserving the reputation of a pioneer in healthcare product production.
At the same time, the acquisition of Pfizer’s consumer healthcare business was a horizontal integration. The acquisition of the company allowed Johnson & Johnson to receive revenues from selling well-known products, such as LISTERINE®, BENGAY®, and NEOSPORIN®. The matter helped Johnson & Johnson to increase its revenues in a short period with low risk. In summary, the company uses a balanced mix of horizontal and vertical integration.
The diversification of the company’s portfolio is limited due to the possible damages to the image of the company. On the one hand, as mentioned above, the company is reasonably diversified as it includes several product lines that address the needs of different customer segments. Such diversification of operations is crucial as it helps to reduce dependency on one market and increase sales and revenues. However, diversification may lead to inconstancy with the company’s image and increased operational stress. Therefore, Johnson & Johnson’s diversification is limited as all of the company’s products and services are related to healthcare. In summary, the company’s portfolio allows using the benefits of diversification while controlling for the possible drawbacks.
As for internationalization, the company’s strategy was to expand to the strategic foreign markets by establishing wholly-owned subsidiaries through either acquisition or greenfield venture. The foreign locations are the most promising in terms of the fast growth of revenues, as Johnson & Johnson is present in all parts of the world. Even though internationalization is associated with increased uncertainty, it allowed the company to increase its revenues and access talents around the globe.
However, the central emphasis is put on the US market due to the decreased amount of associated risks. Even though there is no direct evidence of corporate political activity (CPA) utilized by Johnson and Johnson, it may be assumed that the company engages in such activity. CPA often supports the expansion to international markets as it helps to modify the external environment. In short, even though internationalization is the company’s priority, it is still dependable on the US market.
Corporate Strategy Recommendations
As seen from part one of the present paper, the company seems to have adopted an adequate corporate strategy in terms of growth. The mechanisms of horizontal and vertical integration have proved their effectiveness throughout the years, and the company sells products in almost all countries around the world. While diversification of the company’s portfolio is limited, the limitations are in place to avoid uncertainties and issues with the company’s image as well as mission and vision. However, there are some recommendations about Johnson & Johnson’s corporate strategy that the company may choose to follow to improve its financial performance and influence around the globe.
Internationalization
While the company is present in more than 60 countries, it should still continue to gain presence in international markets to reduce dependency on the US market. China is an attractive market, as the economy of the country is booming for the last several years.
China is known to be an emerging market, which implies that investing in increased presence in the country is associated with higher returns due to rapid growth. However, considering the trade war between China and the US and increased dependency on the US market, aggressive expansion to the Chinese market may lead to a conflict of interest and ethical issues. If the company decides to take the path of increasing its presence in China, it will need to engage in CPA both in the US and China to diminish the associated risk.
Instead of China, Johnson & Johnson is recommended to expand to other country-members of BRICS, even though it has companies operating in these countries. Brazil, Russia, India, and South Africa are all emerging economies and can offer faster returns in comparison with European countries. However, the company should address high uncertainty rates associated with operations in these countries by allying with strategic partners rather than buying or opening subsidiaries in these countries.
For instance, the Russian economy is characterized by intense interventions from the government, which may be associated with considerable risks. At the same time, the alliances are most beneficent, according to buy, ally, or DIY matrix. In summary, further expansion to BRICS by gaining strategic partnerships is recommended to Johnson & Johnson.
Corporate Political Activity
Considering the fact that emerging economies of BRICS country-members are still in the early stages of experimenting with market liberalization, it is vital to utilize an adequate CPA strategy to minimize the risks. According to the resource-based viewpoint, Johnson & Johnson should commit considerable resources, such as dedicated HR roles, special budgets for political-campaign contributions, open positions for politically influential stakeholders on firms’ governing boards, information, relational resources, and public image of firm and reputation.
It is recommended that the company employs a pro-active financial strategy to ensure that the stability of the external environment. Financial strategy presupposes that the company should target political decision-makers by providing financial incentives, such as contributions to political campaigns and sponsorship of government projects.
Business Strategy
Current Business Strategy
In the pharmaceutical industry, Johnson & Johnson employs a differentiation strategy to meet the unique needs of its customers. In recent years, the company has strengthened its leadership in immunology, deepened its expertise in oncology and entered vaccines (Johnson & Johnson, 2011). The differentiation is achieved by aggressive investment in internal R&D to differentiate the portfolio of the company in the pharmaceutical industry (Johnson & Johnson, 2019d).
According to Chairman and Chief Executive Officer Alex Gorsky, recent research was transformed into medications that addressed the society’s most significant unmet medical needs, resulting in meaningful outcomes and benefits to patients (Johnson & Johnson, 2019d). The competitive advantage of the company can be sustained because the activities to achieve similar differentiation are rare and costly. However, the company is still exposed to outside threats coming from increased competition in the sphere of healthcare products and services.
There are several advantages associated with broad differentiation. First, the business strategy is associated with considerable premiums for the products. Second, the strategy is associated with the development of brand loyalty, which implies that customers are more likely to choose the product produced by Johnson and Johnson than by its competitors. Finally, influential buyers and suppliers are not a problem because the product is distinct, and the company is geared more to the price it can charge rather than its cost. At the same time, there are certain disadvantages of the strategy, including the following.
First, the company is forced to commit to considerable investments in R&D despite the external environment. In times of financial crises, it can be a damaging practice. Second, pharmaceutical products can be substituted with cheaper analogs, which may decrease revenues. In other words, uniqueness of the products is difficult to maintain, as it requires considerable investments and agile competitors can quickly imitate the products.
Strategic Recommendations
Due to an increased risk of sustaining broad differentiation long-term, it is recommended to create a line of products based on broad low-cost strategy. The central feature of such a strategy is minimizing cost through a limited selection of products and acceptable quality. When marketing the new product line, the company should focus on a continuous search for cost reduction without sacrificing quality. Considering the fact that the company invests a high amount of its revenues into internal R&D, the creation of a low-cost product line should not be associated with extensive costs (Johnson & Johnson, 2019d).
At the same time, since the market of pharmaceutical products requires constant innovation to maintain the differentiation strategy, older formulas are substituted with new ones. The company can use the older formulas of pharmaceuticals for the new product line if the quality remains adequate.
The introduction of a low-cost product line in the pharmaceutical industry is also coherent with the recommendation for the corporate strategy for Johnsons & Johnson. As it was mentioned in Part 2 of the present paper, the company is recommended to expand to emerging economies to increase the revenues. However, BRICS countries can be characterized by financial disparities and social stratification. Therefore, an emergence of low-cost pharmaceutical products can meet the needs of the economically disadvantaged population of these countries. Addressing the problems of these people can improve the company’s image and increase brand loyalty.
The new line can be produced in alliance with local companies to increase trust in the company and minimize risks associated with internationalization. Sharing knowledge about older products with other companies will not hurt the company as much as sharing newer developments. At the same time, local economies will benefit considerably from such alliances.
While the addition of a low-cost strategy seems a viable option, Johnson & Johnson should be cautious about not becoming a competitor to itself. In other words, the company should ensure the more expensive product lines are attractively different from the newly-established low-cost line. Even though it may seem a challenging task, the company has invested in hiring leaders that can mitigate the possible drawbacks of the suggestion.
Business Model Evaluation
Currently, Johnson & Johnson utilizes a multi-sided business model, which implies that the company provides different products and services to different customer segments. As was identified in Part 1 of the present paper, the company supports limited diversification of its portfolio by producing pharmaceutical products, medical devices, and consumer products. The company serves two different groups of the customer, which are patients and care providers. Care providers using medical devices create additional value for patients using pharmaceutical products. The current business model is stable and beneficial to all stakeholders.
To adopt the proposed changes, Johnson & Johnson will not need to change its business model considerably. The changes will affect only three aspects of the business model canvas. First, the proposed changes will change key partners, depending on the geographic location of the subsidiary. The new set of partners will include allies from the developing countries to ensure secure entry into the market. At the same time, the key partner’s section will be modified to include influential politicians considering the new CPA goals in BRICS countries. While the changes will be considerable, they will not be fundamental, and the business model will not need to be restructured entirely.
Second, the proposed changes will affect customer segments. In particular, the company will start serving a new niche of financially disadvantaged citizens, mostly in developing countries. Even though the modification is not associated with an immediate rise in revenues, it will help to diversify the portfolio of the company and decrease dependency on the US market. Serving the disadvantaged populations is expected to improve the reputation of the company as it will be perceived as more socially responsible, which is vital for building positive relationships with the customers and supporting the company’s CPA.
Finally, the proposed changes will affect revenue streams, as the price of pharmaceutical products will depend on segmentation. Even though the new revenue stream will not significantly improve the financial performance of the company, it will be beneficial for other purposes. In summary, even though the proposed changes will affect the business model, it will remain multi-sided at its core.
Reference List
Johnson & Johnson (2011) Johnson & Johnson Highlights Strategies for Growth Through Differentiated Medicines, Transformational Pipeline and Global Product Launches. Web.
Johnson & Johnson (2019a) Annual Report 2018. Web.
Johnson & Johnson (2019b) Products. Web.
Johnson & Johnson (2019c) Timeline of Our Story. Web.
Johnson & Johnson (2019d) Johnson & Johnson Outlines Strategy to Deliver Above-Market Growth at 2019 Pharmaceutical Business Review. Web.