Control mechanisms in organizational systems

Control Mechanisms at Johnson & Johnson

Johnson & Johnson is a sprawling conglomerate in healthcare which uses a combination of strict and loose controls to (1) inspire financial discipline, (2) insure adherence to ethical goals, and (3) allow the operating managers enough freedom to encourage entrepreneurial solutions.

This paper will cover four mechanisms of control used by J&J, and how they reinforce desired behavior at the division President level. It will examine the positive and negative aspects of these control mechanisms. Finally, it will explain how these control mechanisms impact the organization in its four key functions (Planning, Organizing, Leading and Controlling).

Budgetary controls

J&J uses budgetary controls in a loose and tight way. It sets firm targets for divisions based on the financial strategies outlined for the division (growth, cash flow, strategic acquisition, etc.). It leaves a good deal of latitude to the division President to determine how to achieve those goals. Unusual amongst Fortune 100 companies, J&J top management will allow a long-term loss strategy for a division if the division President can make the case for achieving strategic objectives. The President therefore has a lot of strategic and operating leeway. he/she is also allowed to achieve the bottom-line results (ROIC, cash flow, profits) with a great deal of flexibility.

On the control side, the operating President has little direct discretion over capital expenditures. Any capital expenditure, whether approved or not, above $25,000 must be approved by the Executive Committee of the organization -- and this, with an organization with over 200 divisions! This tight capital control insures that the President does not sacrifice balance sheet indiscipline in order to gain short-term profits.

Market controls

J&J has a large number of divisions, some of which come into competition with one another. A logical outcome could be for J&J to pull together businesses in allied healthcare areas and eliminate the competition inherent in such a large, sprawling organization. There may also be an incentive in many companies to look for economies of manufacturing, R&D or product choice. J&J does not choose this path. Rather, it rewards managers based on the performance of their individual division. If there is competition for the same market/product between divisions, as a rule top J&J management does not interfere (Atherton, 1998).

Although there is little interaction between divisions, J&J corporate provides services which its division Presidents can choose to use or to fund themselves. Thus a "market" economy is established which allows the smaller divisions to take advantage of corporate expertise, while larger divisions can develop their own resources, from administrative and finance to sales.

J&J also uses return on invested capital as a capital allocation measure, and encourages its division Presidents to compete for available funds. Those subsidiaries which demonstrate the highest return on capital employed (ROCE) on new projects gain the upper hand in demanding new resources for growth.

Other than this mechanism, J&J does not use additional "market" mechanisms for control, as the company attempts to keep its divisions as independent as possible and its corporate headquarters staff small. Since there is relatively little transfer pricing between divisions, this is not used as a tool to control overall profit allocation.

Clan control: culture and empowerment

As demonstrated above, J&J allows a great deal of operating freedom to its division Presidents. It is similar to the best practices in industry, such as those at Baxter, Abbott and GE, in identifying and encouraging managers to develop. J&J states that one of the advantages of its independent division structure is its ability to give a lot of responsibility to top operating managers quickly.

Although the managers have a lot of operating freedom, they must nevertheless respond to corporate cultural values; this is a central condition for promotion of division executives.

The "Tylenol Scare" of the 1980's resulted in a rededication to J&J's core ethical values. As stated in its corporate responsibility section:

Each Johnson & Johnson business unit or facility is required to measure, monitor and report on its environmental performance and evaluate its Environmental Management System for effectiveness (J&J, 2007).

J&J maintains a small central administrative and finance staff at its headquarters, called "the Tower," in East Brunswick, New Jersey. The top members of the Executive Committee are all operating managers -- each has a group President role for about one-fifth of J&J's companies. Each interacts regularly, with their offices next to one another in close proximity. Thus, the key value at J&J is operating excellence, not the ability to play politics.

From an anthropological point-of-view, J&J's "tribe" supports operations, not staff. J&J top management emphasizes the elements of control which matter most to the corporation:

Put control where the operation is: J&J's division Presidents make most of the operating decisions, with the central HQ acting as "referee" and "scorekeeper," not director.

Uses "real time" controls: Despite approval during the budget process, the division must come back to corporate to renew approvals for capital approvals, deviations from business plans, or major hires.

Builds on trust: Like many 'excellent' companies, J&J entrusts its divisional managers with a great deal of operating authority, then monitors the results.

Strong peer norm culture: There is a strong rivalry amongst J&J divisional managers. Part of this is informal -- all are performance-driven. Some is formal -- they compete for resources from corporate in order to support their divisions.