A Family of Companies – Johnson & Johnson

Johnson & Johnson’s flexible operating model helps them maintain a strong presence in healthcare.

Johnson & Johnson (J&J) is a large multidimensional company with a business model to provide innovative products to advance the health and well-being of the global population. And the structure of their operating model suggests they are focused on long-term growth over short-term gains. In my opinion, they are a TOM winner because of the alignment they exhibit firm-wide between their business & operating models. Even credit rating agencies have taken note of their consistent success as they are one of only three US companies that hold a “AAA” credit rating.

J&J’s operating model is formed around their Credo, which is a management document authored by their former chairman, Robert Wood Johnson, over 70 years ago (see video below). The Credo states that the company’s primary responsibility is to the people who use their products, secondary responsibility is to their employees, tertiary responsibility is to the communities they operate in, and final responsibility is to their shareholders. And as a result, J&J historically has deployed an operating strategy to invest in people and innovation, both through their own employees and external parties through acquisitions.

New Focus

J&J is known by many as being the company that makes Band-Aids, Listerine, Tylenol, and different types of baby shampoos and oil. However, consumer products are just a small piece of the pie. In Figure 1, you can see J&J makes most of its money from pharmaceuticals and medical devices. They have grown these two sectors over the past decade through major capital investments in acquisitions and people development. Instead of investing in developing technology in-house, they use their size to acquire smaller companies who they believe have a promising trajectory in the healthcare space.

Figure 2
Figure 1

However, success does not follow every investment decision they make. After investing heavily within their medical devices sector in the early 2000s, they were forced to cut their losses on two operating companies, Orthoclinical Diagnostics and Cordis, and sold them off in the past two years. Yet because they operate in multiple sectors, they can quickly shift focus to another area of the company to pick up the slack.

Over the past 5 years, this shift has apparently moved to their pharmaceuticals sector. In 2014, pharmaceuticals accounted for more than 50% of their earnings (43% of revenue). As we have learned through several cases here at HBS, in order to maintain strong earnings in pharmaceuticals, companies must continue to develop new drugs to supplant the drugs that come off patent. And although J&J spends a great deal on internal R&D, in recent years they have deployed a strategy to acquire companies with promising drug trials. They recently acquired Alios BioPharma, Cougar Biotech, and Crucell to develop their viral disease, oncology, and vaccines pipeline. Combine these recent acquisitions to promising trial results on drugs already in J&J’s pipeline, and their pharmaceuticals business is projected to add another $5-$6 billion in annual revenues by 2021.


The last piece of their operating strategy that has allowed J&J to create and sustain a competitive advantage in the healthcare industry is their decentralized management approach. Once they have acquired a company, rather than waste valuable resources and time on merging the new company’s model to fit within their own, they allow the firm to operate on its own. There are some slight organizational changes, and recently they have begun to centralize procurement functions to leverage existing contracts, but on the whole they take a backseat approach. Figure 2 visually brings together J&J’s operating model, and we can see these four strategic principles has allowed this value-based company to stay true to its business model of providing innovative healthcare products to help the worldwide population.

Figure 3
Figure 2

With $37 billion in excess cash and a strong pharmaceuticals pipeline, J&J is primed and ready to have a sustaining business model for many years to come. Whether they choose to grow through internal innovation or through acquiring companies on the verge of major breakthroughs, J&J’s flexible operating model allows them to continue to maintain a broad presence in the growing healthcare industry.




[1] (n.d.). Retrieved December 9, 2015, from http://www.jnj.com/sites/default/files/pdf/jnj_ourcredo_english_us_8.5x11_cmyk.pdf

[2] A History of Leadership at Johnson & Johnson. (n.d.). Retrieved December 9, 2015, from https://www.youtube.com/watch?v=nlTijmelPCQ#t=56

[3] Abrams, P. (n.d.). The J&J Credo — A Model for Corporate America That Would Make America Work. Retrieved December 9, 2015, from http://www.huffingtonpost.com/paul-abrams/responsible-capitalism_b_1125597.html

[4] Company Structure. (n.d.). Retrieved December 9, 2015, from http://www.jnj.com/about-jnj/company-structure

[5] GuruFocus Premium Membership. (n.d.). Retrieved December 9, 2015, from http://www.gurufocus.com/news/351552/johnson–johnson-53-years-of-lowrisk-dividend-growth

[6] Johnson & Johnson — Trefis. (n.d.). Retrieved December 9, 2015, from http://www.trefis.com/stock/jnj/model/trefis?easyAccessToken=PROVIDER_8ab24d0592c70128498434b208ba1c0205f7befd

[7] Johnson & Johnson Strategic Framework. (n.d.). Retrieved December 9, 2015, from http://www.jnj.com/strategic-framework

[8] Johnson & Johnson is Going Strong. (n.d.). Retrieved December 9, 2015, from http://www.forbes.com/sites/greatspeculations/2014/01/27/johnson-johnson-is-going-strong/

[9] Johnson & Johnson’s Segment Performance in 2Q15. (n.d.). Retrieved December 9, 2015, from http://finance.yahoo.com/news/johnson-johnson-segment-performance-2q15-140929510.html

[10] Our Management Approach. (n.d.). Retrieved December 9, 2015, from http://www.jnj.com/about-jnj/management-approach

[11] These 3 Companies Have Debt Rated. (n.d.). Retrieved December 9, 2015, from http://seekingalpha.com/article/3418446-these-3-companies-have-debt-rated-aaa-but-not-all-are-buys


Axalta: “We Paint Winners”


Southwest Airlines: A Recovering Innovator

Student comments on A Family of Companies – Johnson & Johnson

  1. Interesting take on one of the largest healthcare companies in the world. I in particular find their innovation through acquisition approach very interesting: It is a great way to be flexible in a fast changing environment, and to acquire and retain talent. Their decentralized approach to integrating the newly acquired companies shows that they don’t acquire for cost synergies but rather for knowledge and revenues. I am wondering however whether the fact of not integrating the operations of the acquired companies will, in the long term, create organizational silos and increase complexity and duplication of work ?

  2. Interesting you bring that up Akram, J&J for the longest time strictly kept a strategy of decentralization. However, in recent years, especially with the cost pressures facing healthcare, they have found it necessary to attack the “low-hanging fruit” and integrate at a minimum their procurement and logistics channels. I think as they move forward, they will be sure to find new ways to be more effective and efficient with their approach to acquisition. I could see them developing some sort of playbook to apply to a certain situation because they acquire companies so frequently each year.

  3. Keyur, loved the piece. Especially about the corporate credo. It was simple and principled to encourage consistent execution. Couple of random questions (feel free to find me in class instead of penning a long reply):

    (1) Are you bullish on the growth prospects for Med Devices + Pharma in the next 10 years? I would guess their is a healthy tension between aging baby-boomers and the wave of health care reform designed to slow costs.

    (2) What are the biggest sub-categories in Med Devices? Are they concentrated or diversified in terms of revenue by organ system/disease/etc?

    (3) How are acquisitions underwritten? Is there a valuation range J&J thinks is the sweet spot? Do they take minority positions?

Leave a comment