Strategic Analysis of Johnson & Johnson Pharmaceutical Division

Company Overview

Johnson & Johnson is an American multinational company producing a wide range of products that include consumer products, pharmaceutical products, and medical devices. Incorporated in 1889, Johnson & Johnson operates through three divisions: the Consumer Healthcare Division, the Medical Devices Division, and the Pharmaceutical Division. The pharmaceutical division produces different products to treat infectious diseases, neurological diseases, and oncological conditions. The immunology products the company produces include the antibodies Remicade and Simponi, which have been used for the treatment of ankylosing spondylitis, ulcerative colitis, Crohn's disease, and other disorders. In 2013, sales of two of these products accounted for 11.3% of total company revenue and 29% of the pharmaceutical division's revenue.

Despite the company's sustained success, Johnson & Johnson recorded a decline in total revenue between the 2014 and 2015 fiscal years. In 2014, the company's total revenue was $74.3 billion; however, total revenue declined to $70 billion by the end of the 2015 fiscal year. This decline also affected the pharmaceutical division, where revenue fell from $32.3 billion in 2014 to $31.4 billion in 2015. The objective of this study is to provide a strategic analysis of Johnson & Johnson's pharmaceutical division in order to assist the company in developing an effective strategy to achieve competitive market advantages.

Industry Overview and Strategic Issues

The U.S. pharmaceutical industry is one of the largest industries in the United States. In 2010, the industry was worth $2.3 trillion, contributing to 16% of the country's GDP. The United States is the largest market for pharmaceuticals, with sales of more than $307 billion — more than 40% of global sales. Since 2001, the U.S. pharmaceutical industry has recorded an annual market growth rate of 2.3% and a compound annual growth rate (CAGR) of 6.6%. By 2015, the market value of the pharmaceutical industry reached $420 billion. Top players in the industry include Johnson & Johnson, Pfizer, Merck & Co., and GlaxoSmithKline. The industry provides approximately 854,000 direct jobs, and the total of direct and indirect jobs exceeds 4.4 million, with an economic contribution of over $1.2 trillion. In the last 60 years, the U.S. pharmaceutical industry has become the world leader in the development of new medicines, driving increases in high-quality employment and U.S. economic output.

Continued technological and scientific innovation is expected to generate industry growth of between 5% and 8% over the next three years. The United Kingdom is projected to record growth of between 4% and 7% in the same period. Global pharmaceutical growth will be propelled largely by the United States, which is forecast to record an 80% sales growth in the industry over the next three years. By 2019, the U.S. is expected to retain the top position in pharmaceutical markets, followed by China, Japan, and Germany (Arnum, 2015).

A report by KPMG (2011) reveals that the pharmaceutical industry has performed below expectations over the last decade compared to other U.S. industries, owing to a combination of negative and positive factors that have affected both profits and revenues. A comparative analysis of the U.S. pharmaceutical industry against other key industries shows that pharmaceutical share prices have lagged behind those of peer sectors.

Intense competition has been the major strategic issue facing Johnson & Johnson. Advances in internet technology and the rise of emerging markets have fueled increased competition affecting Johnson & Johnson's pharmaceutical segment. Additionally, the costs of research and development (R&D) have climbed in recent years relative to the benefits derived. The U.S. Food and Drug Administration (FDA) affirmed that 61% of new drugs were approved between 2006 and 2009, compared with 68% approved in Europe during the same period. Rising R&D costs associated with new drug approval have contributed to Johnson & Johnson recording high operating costs. Between 2005 and 2015, R&D expenses amounted to several billions of dollars; in 2015 alone, the company spent approximately $9 billion on R&D. Johnson & Johnson therefore needs to develop a new strategic roadmap to reduce costs and achieve competitive market advantages.

Definitions of Strategy Applied to Johnson & Johnson

Porter (1996) defines strategy as the roadmap that decides where a business intends to go and how to get there. Porter further argues that an organization can develop a strategy by creating value that exceeds its cost of operations. Gates (2010) defines strategy as an organization's intended approach and the means to achieve it. Gates argues that a strategy for winning in a market environment is not analogous to a chess game with only two opponents; in the pharmaceutical industry, the appropriate strategy is more like a poker game where a player faces multiple opponents simultaneously. To stay ahead of competitors, Johnson & Johnson has intensified its commitment to R&D. Between 2011 and 2015, Johnson & Johnson's R&D expenses increased from $7.5 billion to $9 billion.

Steiner (2008) defines strategy as a tactic to counter competitors' predicted and actual moves. Tregoe and Zimmerman (1980) define strategy as a framework that guides the direction and nature of an organization. Of all these definitions, however, Porter's (1996) definition is the most applicable here. Porter argues that competitive strategy involves deliberately choosing a mix of activities to enhance value, thereby differentiating a firm from its competitors. Over the years, Johnson & Johnson's strategic method has been to differentiate itself from competitors by addressing unmet medical and pharmaceutical needs — enabling the company to outpace rivals in the pharmaceutical market.

Conclusion

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Gates, L.P. (2010). Strategic planning with critical success factors and future scenarios: An integrated strategic planning framework. Technical Report. Carnegie Mellon University, Software Engineering Institute.

KPMG (2011). Future pharma: Five strategies to accelerate the transformation of the pharmaceutical industry by 2020. KPMG LLP, UK.

PhRMA (2016). 2016 profile biopharmaceutical research industry. Washington, DC: PhRMA.

Porter, M. (1996). What is strategy? Harvard Business Review, 74(6).

Steiner, G. (2008). Strategic planning. New York: Simon and Schuster.

Tregoe, B.B., & Zimmerman, J.W. (1980). Top management strategy. New York: Simon & Schuster.