Managing Capability Johnson Johnson Marketing Essay

The aim of this report is to firstly explain and assess the importance of Capabilities from the resource-based view, and why these are seen to be important. It will then go on to evaluate Johnson & Johnson’s (JnJ) resources and capabilities and how these might lead to a competitive advantage. From here the report will use an array of analytical frameworks related to the organisation to identify further the competitive advantages JnJ holds over their competitors. Once these have been established the report will discuss how management of JnJ develop and manage these capabilities.

Introduction

I will be undertaking this report on the consumer and healthcare company Johnson & Johnson (JnJ). JnJ was founded in 1887 and is engaged in R&D, manufacture and sale of a range of products in the health field. The organisation is split into three segments; Consumer, including baby and skin care; Pharmaceutical, such as antiviral drugs; and finally their Medical Devices & Diagnostics (MD&D) segment, including orthopaedic instrument & implants, which are distributed directly to hospitals. The organisation comprises of over 250 companies in each of these segments, they had grown organically and through mergers and acquisitions (M&A’s), and JnJ now has a workforce of over 117,000 employees (ft.com, 2009). The report will draw upon real examples of various resources and capabilities from and will apply various frameworks too, a number JnJ franchises across all three of their segments to provide a better understanding of these.

Part 1 & 2

Resource Based View

Grant believes the resource based view puts together the idea that resources and capabilities are the principle basis for strategy and are a firms primary source of profitability, whilst Hamel,G. Prahalad,C. (1992 quoted in Grant, R 2007 p.126) illustrates this further claiming that capabilities are the; ‘roots of competitiveness, sources of new products and the foundation for strategy’. A major source of profit outlined is Competitive Advantage, which is achieved through ‘the development and deployment of resources and capabilities’ (Grant, R 2007, p127).

Grant goes on to say that the greater rate of change in a firm’s external environment, which of course can be the markets in which they operate; the more secure a foundation is built by using internal resources and capabilities (Grant, R 2007). This is because the firm can adapt to and go into whichever markets suit their capabilities, rather than letting the markets and customers dictate what the firm must produce, showing further importance in the need for a competitive advantage.

This therefore illustrates the importance of developing competitive advantage from within, which has been noted for JnJ by Grant claiming ‘Johnson & Johnson… is company that owes much of its success to nurturing talent, developing technologies and building capabilities that allow adaptability to their changing business environments’ (2007, p 129, 130). This they have achieved operating across 250 companies in 3 different market segments, each with different end consumers

Resources and Capabilities as Sources of Competitive Advantage

Resources are the productive assets, both tangible (such as cash and plant), intangible (technology, reputation & culture) and human (skills, capacity for communication and collaboration & motivation), in control by the organisation (Grant, 2007). Grant describes ‘Capabilities are things that the firm can do’ (2007, p. 130-131), these are born out of a firm’s ability ‘to deploy resources for the desired end result’ Helfat & Lieberman (2002 p.135 quoted in Grant 2007). The RBV of competitive advantage is born out of having a capability or resource that has the two following conditions; scarcity & relevance. This advantage, however, is only useful and an advantage if it is durable, hard to imitate and replicate by other firms (Grant, 2007). In Appendix 1 the tangible, intangible and human resources of JnJ have been identified, along with their capabilities, I shall now define what a core and dynamic capability is with some brief examples of JnJ’s taken from the resources in the table. I shall then go on to show linkages further and ultimately if and how they provide JnJ with a competitive advantage, part 3 will go onto use frameworks to evaluate further if these are in fact sustainable.

Core Competences & Dynamic/Distinctive Competences

Johnson, Scholes & Whittington define a core competence as the activities that underpin the competitive advantage, whilst a Dynamic Competence is described by Teece (Grant, 2007: p.152) as ‘a firm’s ability to integrate…build and reconfigure competencies…(to) rapidly changing environments’. Therefore I shall look at JnJ’s M&A capabilities in terms of both a dynamic and core competence.

Grant (2007) states that M&A’s are shorten the development time of capabilities, especially when the development can take some time. This is apparent in the medical industry with vast sums and time lines set aside for the development of a new drug. Grant goes on to also state that using an acquisition as a means of extending their capabilities carries major risks, usually found when integrating the acquired capabilities with their own.

For JnJ the here lies their dynamic competence also, demonstrated in their success rate of their acquisitions along with the benefits and new capabilities that are created as a result, such as their cost saving exercises when acquiring a firm, as well as the ease with which they extrapolate such benefits with limited culture clashes. As I am unsure of finding many solid reasons for success in my research, I believe that a lot of the success of their M&A’s can be attributed to causal ambiguity that may be found within JnJ through years of development through M&A’s, something Harrison, Bosse & Phillips (2010) state to be linked to competitive advantage.

Linkages of Resources and Capabilities

Peters and Waterman (Quoted in Grant 2007, p.134) state that ‘firms with sustained superior financial performance typically are characterized by a strong set of core managerial values that define the ways they conduct business’. This is a statement that can be linked to JnJ across a number of topics in this report. Firstly in terms of JnJ resources there are many which rely upon each other for themselves to be a valuable resource, for example, JnJ’s sheer financial resource, impacts greatly how the firm are able to carry out such capabilities as M&A’s as well as utilise resources such as scientific R&D to develop new products, and developing their Brand power. Such large revenues enable them to spend $7.6bn dollars on R&D to develop ground breaking new products; it also helps them to spend vast sums on M&A’s such as the strategic acquisition of Pfizer consumer group and Groupe Vendome.

Grant believes ‘Establishing competitive advantage involves formulating and implementing a strategy that exploits the uniqueness of a firm’s portfolio of resources and capabilities’ (2007, p 129). This is never so apparent than in acquisitions mentioned above; Johnson, Scholes & Whittington state ‘expected synergies may not be realised’ as stumbling block and the reason why many acquisitions result in failure with as many as ‘70% resulting in lower returns to shareholders’ (2009 p. 235), yet as you can see in the table attached, JnJ have realised instant 40% market share in France along with $500bn cost synergies with the Pfizer acquisition, proving that this aggressive strategy of acquisition exploits their uniqueness of vast financial resources, and management team, which are of such a high standard thanks in kind to their Brand power. Another main contributing factor of this success is the choice of acquisitions, especially in the Groupe Vendome where by the purchase of a similar cultured company helps to extend their path dependency creating a barrier to entry and a difficult advantage to imitate. All of these capabilities in turn feed back to the original resource that enables these capabilities, their finances, thanks to increased sales, and cost savings.

Another way in which a sustainable competitive advantage has been developed from intelligent M&A capabilities by JnJ is the acquisition of their hugely successful MD&D franchise, DePuy Inc. By purchasing DePuy, JnJ had not only purchased a huge brand name in the MD&D world, thanks to their links to the first ever Hip Replacement as mentioned in the table below, but they had been given instant market access to a $270bn dollar a year market, where by $22bn of their $61bn revenue was attributable to with a compounded growth rate of 9% annually. DePuy itself was positioned number 1 or 2 in the majority of markets in which it competed with 15% worldwide share, meaning it is the largest orthopaedic franchise in the world (Mahoney, M, 2008). To put this into perspective and show how this provides a sustainable competitive advantage through Brand & M&A capability, the purchase meant that JnJ purchased a 100 year old+ company, similar to them, helping to synergise cultures and continue a path dependency. Secondly the company took on the location advantages DePuy had in the UK market, the second largest outside of the US (Need figures), it meant they were closest to their 3 main UK customers, so they were able to combine the competitive advantage their sales force had in the relationships with surgeons and their tacit knowledge of the surgical techniques which assist surgeons along with a 2 hour turnaround time on products (as per the interview) a dependability that rivals are unable to match. Their market share that was achieved overnight in the UK meant that high barriers to entry were achieved instantly.

Part 3 – Evaluating Strategic Capability

Now I have identified what are the resources and capabilities of JnJ, I shall evaluate if and how these have given a sustainable competitive advantage to JnJ. There are a number of ways in which I can do this, the approaches I shall be taking are a SWOT Analysis, Value Chain analysis and Benchmarking of some financial indicators with the industry as a whole.

Value Chain Analysis

C:UsersChaddyDocumentsUniversity WorkYear 3Managing CapabilityEssayValue Chain.jpgThe value chain above demonstrates a section of JnJ’s MD&D business, applied to the UK market. The below picture along with the value chain above demonstrates capabilities mentioned in Appendix are in fact linked, and thanks to the complex linkages, how competitive advantages such as their sales force, logistics, and marketing become sustainable due to causal ambiguity making them extremely difficult to be broken down and imitated by rivals. For example, the ‘service’ discussed provided by the sales force to surgeons, would not be achievable without the backing of ‘marketing’ function alerting customers of the product, and the physical equipment being in the hospital thanks to the ‘outbound logistics’, yet the physical equipment would not be there if it had not been designed by surgeons willing to give their time up to create new surgical procedures with JnJ as far back as the ‘operations’ segment, and to get them to that point, they would need a good relationship with the firm, developed through the ‘service’ provided by the sales force.

A problem however with this view is that it is purely an internal view, therefore JnJ could well be going about their day to day business missing potential opportunities outside of themselves, further more it could in turn make them miss opportunities within the external environment, leading to what Johnson, Scholes & Whittington (2009) refer to as strategic drift. Yet on the other hand the core and dynamic capabilities mentioned above, to do with M&A mean that this is not always the case for JnJ meaning they can constantly reconfigure their resources, where by Eisenhardt & Martin (2000) argue competitive advantage derives from. To ensure a way of getting around this being a potential problem to JnJ, an environmental scan through a SWOT analysis can spot any potential opportunities outside of the firm, for example M&S’s.

This table and value chain can also sheds some light on to, and supports the earlier point whereby I claimed that JnJ can lay claim to some sustainability of their advantages thanks to causal ambiguity of many of their processes including M&A’s.

Swot Analysis

Strengths

Weaknesses

Diverse business offering

Forecast growth despite challenges

Significant sales & marketing capabilities

Robust financial position

High reliance upon small molecule drugs, increasing exposure to generic erosion

Limited output from in-house R&D

Opportunities

Threats

Leverage therapeutic coverage of Medical Devices & Diagnostics and Consumer Health divisions

Expand experience in biologics

Failure of launch portfolio to deliver

Earlier than forecast launch of generic Concerta after FDA review of Citizen’s Petition

Datamonitor (2009)

The above SWOT Analysis has been completed by Datamonitor, I shall now critically analyse this based on Appendix . Firstly in terms of their strengths, the diverse business offering is in keeping with their M&A capability, it also leads to a robust financial position mentioned both here and the table. In such poor economic conditions, to be forecasting growth shows how having such a robust financial position and diverse offering ensures that the firm can spread risk and in turn do not rely heavily on one product line, essential in an industry such as theirs.

Thanks to the 250+ companies across 3 sectors, JnJ appear to be in a strong position to deal with these potential threats as no one product accounts for greater than 15% of launch sales from now to 2013 (Datamonitor, 2009). This provides JnJ with stability that is hard to copy, as few companies have 250+ subsidiaries to spread risk.

The weakness of ‘limited output from in house R&D’ does contradict one of the resources discussed in Appendix where by JnJ spend $7.6bn on R&D. This is across all of their franchises, if this is so then this must be predominantly spent by the acquisition etc. This could be a potential stumbling block should JnJ wish to divest in such firms as they may well lose a lot of ground on rivals, yet CEO Bill Weldon claims this is not part of their strategy (to divest), therefore this should not come to fruition in the near future instead it should maintain their strong position within the marketplaces they operate in terms of new product launches of which this report claims there to be 15 over the next 5 years.