CASE: Building a magical organization at Johnson and Johnson

The typical pharmaceutical MNE emphasizes global integration, given its steep product development costs and potential scale economies. However, it must respond to local market conditions, obtaining government approval for its product in various countries and establishing local sales, support, and distribution systems. Consequently, headquarters and subsidiaries jointly implement the company’s strategy. Building an organization that can meet this mission is tough. One standout that does is Johnson & Johnson (J&J).

Since the start of its U.S. operations in 1886, J&J has evolved into the most broadly-based health-care company in the world. international activity began in 1919 with J&J Canada. Headquartered in New Brunswick, New Jersey, J&J now lists some 275 operating units in 60 countries. Approximately 55 percent of its $75 billion in sales occurs outside of the United States. Its diversified portfolio of anti—infective, cardiovascular, dermatology, immunology, and oncology products rests on more than 55,000 U.S. and foreign patents. Some, though, believe the intricacy of the company’s organization, in terms of its decentralized structure, sophisticated coordination and control systems, and Credo-based culture, anchors its superior performance.

The “Magic of Decentralization”

Decentralized management is the heart of J&J’s organization. It allows managers who are closest to customers and competitors to make decisions. As the company says,

‘it aims to be big and small all at once, building its global reach from the integration of many small units. By design, each of its 275 units operates with substantial autonomy. commanding the authority to act as it believes best given its read of local conditions. Each performs as its own business, entrepreneurial in character, and aware that success depends on anticipating local customers’ needs and delivering solutions.

Decentralization, explains Ralph Larsen, former CEO, “gives people a sense of ownership and control—and the freedom to act more rapidly.”‘ His successor, William Weldon, concurs, adding that reducing bureaucracy, liberating initiative, and rewarding enterprise—the hallmarks of a decentralized organization—is the wellspring of the “magic around J&J.” Moving decision-making from headquarters to the front lines helps a large, globe-spanning MNE capture the qualities typically found in smaller companies. Certainly, a top-down hierarchy delivers benefits. Still, J&J reasoned that centralization reduces the magic cast by entrepreneurial drive, close customer contact, and agile decision-making. Shortening chains of command, increasing spans of responsibilities, and breaking down boundaries in a decentralized organization gives everyone a strong sense of ownership of action and accountability for outcomes.

These outlooks, Larsen explains, make the managers running J&J’ s 275 operating units intensely competitive, both with each other as well as rivals. Furthermore, managers that directly shape their future are driven to innovate, translating ideas into new products and insights into better processes. Backstopping their efforts are the deep Pools of resources and capabilities that one finds in a large, successful MNE.

J&J’s successful decentralization attracted talented, bright, and motivated people. The authority to make decisions, Weldon noted, encouraged them to dream big dreams, keen to test new ideas that improved their While often found in small companies, these entrepreneurial outlooks and orientations are seldom seen in large MNEs. As such, senior leadership believes the company's ability to simultaneously achieve local effectiveness and global efficiencies sustained its competitiveness.

The Dilemma of Decentralization

local autonomy and global integration, spurs tightening coordination and control systems. Communication channels cut across the organization, thereby helping far-flung units share ideas. Self-directed councils— for research, engineering, and operations, among others-meet regularly to swap ideas. Headquarters negotiates planning formats, scheduled mandatory reports, and formally reviewed budgets and interim results. Senior executives push a global perspective into local decision-making. Likewise, local objectives influence global discussions.

Pressures to integrate operations due to market trends, competitors' moves, and shifting technologies push J&J to centralize some activities. These changes, while understood, are not entirely welcome. Some local units resist integration, arguing that global standards poorly fit their unique circumstances. Senior executives acknowledge these concerns and reiterates their commitment to decentralize decision-making. They argue, however, that leveraging core competencies, as well as capturing location and scale effects, means that when J&J rolls out a key product or process, country operations worldwide roll with it.

J&J has recentralized some activities from operating units. Senior executives set standards for issues common to all operating units, such as finance, science and technology, government affairs, and quality management. It has installed centralized reporting processes for key business functions, including manufacturing and quality control. Centrally managing common support activities, senior executives reason, frees operating units to focus on their day-to-day performance.

Culture and the Credo

J&J's philosophy held that people who understand how the company creates value, are familiar with the company's Competencies, and are culturally and physically close to the market ought to run the local business. Thus, for example, baby oil managers in Italy decide how big a bottle to use, even if that bottle differs from the one sold in Germany, Japan, or Mexico, given their sense of the local marketplace.

J&J entered markets by adding subsidiaries through investment, alliance, or acquisition. New units do not fear being overrun by legions of expatriates directed by headquarters-based generals because, with few exceptions, host-country citizens direct local subsidiaries –indeed, a common view holds that “companies love to be acquired by J&J because they don't mess with you."130 Granted, headquarters installs coordination and control systems and negotiates performance targets. But, then it steps aside, supporting subsidiaries as needed, patiently awaiting superior results, yet always prepared to intervene in the event of shortfalls.

High degrees of autonomy created dilemmas for local management. At one point, the centralization decentralization balance had tipped so unevenly that the directors of J&J's foreign subsidiaries acted as kings of their own countries. For example, J&J launched Tylenol in 1960 as an over-the-counter pain reliever in the United States. Although it was available to local operating units shortly thereafter, the Japanese unit did not begin local sales until 2000.131

This sort of situation no longer exists. Yes, the company's commitment to decentralization endorses delegating authority to local managers. Headquarters however, increasingly relies on coordination and control systems to ensure that subsidiaries optimize local activities while supporting global performance.

Inconsistent market development and duplicated efforts fan friction between headquarters and subsidiaries. Tempting as it was to adopt a policy of benevolent tyranny J&J's proud legacy encourages otherwise. It relies on its organizational culture to add a global orientation to local entrepreneurialism. From the CEO to the employees of the smallest unit, management believes that the people and their values are the firm's greatest assets.

Senior executives note that rank-and-file workers have created product breakthroughs, process innovations, and customer insights. In and of itself, such praise is not terribly unusual. Many companies-perhaps even some that you have worked for-have likely expressed similar sentiments. Separating J&J from the pack is the primacy of its organizational culture, as embodied in “Our Credo." Crafted in 1943 by Robert Wood Johnson, company chair from 1932 to 1963, this one-page ethical code of conduct states how J&J fulfills its responsibilities. Former CEO Larsen called it the "glue that binds this company together."

The Credo specifies who and what to care about and in what order. J&J's "first responsibility is to the doctors, nurses, patients, mothers, and fathers who use our products

Herding 275 SBUs Decentralization enables J&J to respond to local needs but slows the global diffusion of products and programs. Preserving the magic of decentralization, given the contest between and services." It addresses the communities where J&J operates and the roles and duties of employees. Notably, shareholders come last, long after customers, suppliers, and distributors. It declares that shareholders will get a reasonable return if other stakeholders are treated fairly. Collectively, the "Credo underscores J&J's personal responsibility to put the needs...of the people we serve first. It liberates our passion and deepens our commitment to delivering meaningful health innovations."133 J&J steadfastly maintains that the Credo is more than just a moral compass; it anchors its long-running success.

Despite its direct message, executives worry that differing outlooks in different markets might blur its interpretation. Consequently, J&J periodically surveys employees on how well the Credo fits their world. Where there are shortcomings, senior management steps in. They have modernized aspects of the Credo given rising environmental concerns and work/family balance tensions. Despite occasional revisions, though, management believes the founding spirit of the Credo transcends time and place.

The Power of Organization

J&J's long list of accomplishments, earned by developing, adjusting, and improving its structure, systems, and culture, has built an organization that confidently leverages bright ideas, no matter if global executives or local subsidiary leaders champion them. Ultimately, the power of decentralization, the balance of coordination and control systems, and the clarity of the Credo anchors a magical organization that lets employees capitalize on their initiative, develop their capabilities, enrich their perspectives, and quite possibly change the game.

Question:

Identify the key problem(s) in the case and determine the decision(s) to be made.

Explain in details.