A truly global corporation, Johnson & Johnson has securely positioned itself to overcome the challenges its ever-changing business environment poses, as well as take advantage of the opportunities presented. With a focus primarily on Johnson & Johnny’s pharmaceutical segment, this paper seeks to explore the complex multinational environment within which the company operates as well as the opportunities and threats that the environment poses. Next, the paper will analyze Johnson & Johnny’s current positioning, describing its value-chain and competitive positioning.
The paper will close by evaluating how Johnson & Johnson both can seize these opportunities to realize the goals of the company.
II. Analyzing the Environment In industries as competitive as pharmaceutical, medical devices and consumer goods, analyzing the environment is vital for being able to make sound strategic decisions. Since Johnson & Johnson strives to anticipate the external factors that affect its international business environment, as well as adapt to those changes, it is important that it understands the environment in which it is operating.
The two sets of external forces that face the company are competitive and contextual.
A. Competitive Environments – Five Forces Model Michael Porter’s five forces model provides a way of analyzing Johnson & Johnny’s competitive environment. Due to a lack of available information about the bargaining power of suppliers as it applies to Johnson & Johnson, this paper will address the four other forces: the threat of new entrants, the threat of substitutes, the bargaining power of customers, and the rivalry among industry competitors. 1 . The Threat of New Entrants – High Barriers to Entry The threat of new entrants is not of particular concern to Johnson & Johnson.
Barriers to entry, especially in the industries of pharmaceuticals and deiced devices, are extremely high if not unassailable. The world’s top pharmaceutical companies have extensive manufacturing capabilities, distribution systems, and economies of scale that have been built up over decades and would be virtually impossible for a new entrant to replicate. These top firms also have patents that protect their current products, as well as established research pipelines that ensure the continual development of new products.
Also, they have strong brand names and large marketing budgets with which to defend them. Finally, the exceptionally high capital acquirement for founding a pharmaceutical company and the sharp retaliation that new entrants could expect from the established competitors render the threat of new entrants very low. The medical device industry has similarly high barriers to entry. While entering the consumer goods market is easier, relatively, the vast number of competitors makes this industry very competitive, thus a strong brand name is vital for standing out.
As the world’s most respected company according to Barron Magazine, new entrants to the consumer goods market do not pose a threat to Johnson & Johnson. 2. The Threat Of Substitutes – The Rise Of Generics The threat of substitutes is much more problematic than that of new entrants, especially in the pharmaceutical segment. The Food and Drug Administration (FDA) requires that generic drugs be bougainvillea to their brand name counterparts, making them serious substitutes. Once a patent expires, generic manufacturers are quick to reverse-engineer the formerly proprietary drugs and sell generic versions at a fraction of the cost.
Virtually all the top pharmaceutical companies, Johnson & Johnson included, face an influx of upcoming patent expirations. The impending loss of sales when energetic versions of the drugs inevitably become available is a serious threat to the profitability of many players in the industry. For example, Residual, a drug for schizophrenia made by a subsidiary of Johnson & Johnny’s called Janssen-Cilia, was a significant source of profits, with sales that totaled $3. 5 billion in 2005 and surged 21% percent in the first quarter of 2006, to $1. 2 billion.
However, when the patent for Residual expired in December of 2007 and became available in generic form in October of 2008, the company’s revenue from pharmaceutical sales stagnated. In fact, in July of 2007, Johnson Johnson announced plans to eliminate up to 4,800 jobs, citing patent expirations as the main motivation to trim the workforce and thus save money. If the company does not prepare for the difficult transition between enjoying market exclusivity and losing that security as those patents expire, it will face more negative consequences. 3.
The Bargaining Power of Buyers – Influence of Generics In the pharmaceutical industry, buyers include patients, medical doctors who prescribe drugs, pharmacists, hospital boards, insurance companies, and other health authorities. The bargaining power of patients goes hand in hand tit the threat of substitutes. When drugs are patent-protected, pharmaceutical companies enjoy a monopoly where they can set prices to include high profit margins. Since there are few to no substitutes for their products during this time, customers have little choice but to pay these prices, especially if their lives depend on the drugs.
However, once cheaper, generic versions of the drugs become available, buyers gain more power. Patients’ switching costs, an important element in determining the bargaining power of buyers, are fairly low, and price-sensitive buyers will likely switch to generic versions once available. Johnson & Johnny’s main tool in combating this problem is its strong brand name. Many customers have more trust in brand name products and are willing to pay extra for this perceived security. The other groups within buyers of pharmaceutical products, while fragmented, have more power than patients.
Within the American healthcare system, insurance companies and health maintenance companies (Homos) have considerable bargaining power, as they decide which drugs to endorse and provide. Since they have an interest in lowering costs, they exert a strong downward pressure on drug prices, partly due to the threat of the availability f generics. European governments’ national healthcare systems have a similarly high level of power, if not higher due to strict price controls. Thus, pharmaceutical companies have a need to establish successful relationships with these groups and market towards them heavily. 4.
The Degree of Rivalry – Fierce and Changing Competition Competition in the pharmaceutical industry is intense and growing in intensity. While the numerous competitors remain fairly fragmented, mergers and acquisitions have increased rivalry, as the top firms’ areas of expertise began to overlap. Rivalry is especially intense in saturated markets, such as he pain reliever segment, in which Johnson & Johnson competes with its products Ethylene and Motoring. In growing markets, innovation is a key driver of competition since pharmaceutical companies depend on “blockbuster” drugs for a large proportion of their revenue.
With only one out of every 1 0,000 discovered drugs approved to be sold, stakes are high to find the cash cow drugs that recuperate the increasingly high costs of development. Since “me too” drugs are not as profitable, innovation drives the race to be first-to- market. While the main competitors in the pharmaceutical industry are incinerated in the United States, Europe, and Japan, an increasing number of players – especially generic drug manufacturers – are appearing in developing countries, such as China and India. These companies are driving the shift in the industry toward becoming more commoditized.
Also, numerous biotech upstarts, which are smaller, more agile, and have lower overhead costs than their conglomerate competitors, are growing in power and taking market share. As the dynamics of the industry change, the established companies will find themselves facing stiff competition from all sides. B. Contextual Environment – PEST Analysis A PEST (Political, Economic, Social, and Technological) analysis is a useful tool for understanding the larger environment within which the company operates. Companies can use this tool to identify a multitude of important aspects of their environments that may impact their businesses. . Political Environment – Changing Politics and Policies First, the politics on local, regional, national, or international scales can exert strong forces on businesses. Since Johnson & Johnson operates worldwide, it must keep track of the political developments that may affect its business. For example, in the Czech Republic, health care is the subject of a ajar political debate. Changes in the healthcare system may affect to whom Johnson & Johnson needs to market, and with whom it needs to negotiate if the company wants its products covered by the Czech healthcare system.
Also, Johnson & Johnson should be aware that the Czech Republic has a weak Parliament that will change in 201 g’s elections. The company needs to anticipate which policies may shift under the new government. Finally, Johnson & Johnson should be aware that the Czech Republic will serve as president of the Council of the European Union for the first six months of 2009. This is the best time for the Johnson & Johnson branch located in the Czech Republic to lobby for any policy changes regarding the company’s interests and the business environment. 2.
Economic Environment – The Crisis and the Euro The economic climate is also important for Johnson & Johnson to analyze in order to predict when its business may face challenges, as well as when it can seize an opportunity for growth. Operating in the European Union and larger European community means that Johnson & Johnson has felt the effects of the current economic crisis. Aware of the crisis, the company has en able to plan for its impact, and fortunately, the effects on Johnson & Johnson have not been severe, as medical products remain necessities even in periods of economic downturn.
In respect to the Johnson & Johnson branch in the Czech Republic, the economic environment is one that quickly transitioned from a communist, planned economy to the free market. Though the Czech Republic has embraced free market principles since the fall of the Soviet Union, it is important that Johnson & Johnson recognize that this change was relatively recent, and certain aspects of working in the Czech Republic may still be effected by this history. Finally, discussions surrounding the use of the Euro and the benefits and disadvantages of a common currency are debates that Joy moons & Johnson should be aware of in this time period.
While Slovakia adopted the Euro in January 2009, the Czech Republic has kept its own currency. A switch to the Euro in the Czech Republic could have a wide range of effects, some positive and some negative, and Johnson &Johnson should understand the implications for its business if that change occurs in the Czech Republic. For example, adopting the Euro would make transactions with other countries ore convenient, and Johnson & Johnson should be prepared for a possible increase in transactions or the speed in which transactions take place in order to take advantage of the opportunities this change could provide.
It should also be ready for the numerous practical difficulties with tasks such as accounting that may occur with a change in currency. Keeping these economic scenarios in mind is the kind of forward-thinking that is crucial to Johnson & Johnny’s success. 3. Social Environment Aging Population and Public Health Problems There are two major social changes on the horizon that will both affect Johnson & Johnson as well as provide tremendous opportunities. The first is the aging population. The gigantic baby boomer generation, consisting of those born between 1946 and 1964, has had a huge social and economic impact on the world since its birth.
This trend will continue as the generation is beginning to enter old age. The influx of senior citizens will create huge demands throughout all realms of medical care. Johnson & Johnson can expect to see increased sales across all three of its segments -? pharmaceuticals, medical devices and diagnostics, and consumer goods – in he coming decades, and must plan production accordingly to be able to meet the needs of this huge generation as they enter their most medically- dependent years.
Additionally, in order to cater to the aging population, Johnson & Johnson is pioneering developments in preventative medicine as well as less invasive surgery techniques. Another major social change affecting Johnson & Johnson is the phenomenon Of surging rates Of various health problems, especially in developed societies but spreading worldwide, from obesity and diabetes to cancer and mental disorders. Though highly problematic for society, companies in medicine- elated industries such as Johnson & Johnson are finding themselves with an increasing number of people to treat and cure.
As a company that invests heavily in research and development, Johnson & Johnson has the opportunity to lead the way in finding ways to address these serious public health issues. 4. Technological Environment -? Promising Nevus Fields As many pharmaceutical drug markets become saturated and the blockbuster drug strategy becomes obsolete due to the major changes occurring in the industry, innovation and breakthrough medical technologies are essential for finding blue oceans in which to compete.
Predictive declined, which entails predicting diseases based on genetics and preventing them, and personalized medicine, which involves managing a patient’s health based on his or her individual characteristics as opposed to following the more traditional “standards of care” model, are growing fields into which Johnson & Johnson can expand. The company’s strong emphasis on research and development and its leadership in the medical devices and diagnostics segment put it in an excellent position to become a frontrunner’s in making new discoveries in these promising new technological fields. C. Determining Threats and Opportunities 1 .
Threats -? The Uneducated Consumer and Mergers and Acquisitions One of the biggest threats facing a company like Johnson & Johnson is the uneducated consumer. Especially within the consumer products and pharmaceuticals markets, with the increasing availability and lower cost of generic products, a key component of continued competitiveness is the discerning consumer who has preferences when it comes to treatment options. Johnson & Johnson must continually work hard to make sure that people are aware of its products and the quality that it ensures through effective branding and promotional practices, as well as consumer education.
Patent expirations are also a constant concern for Johnson & Johnson as proprietary information is an integral part of sustained revenue streams. Mergers and acquisitions (M&As) present both potential opportunities and threats for Johnson & Johnson. The company has pursued M&As that have served to expand the company’s resources and help penetrate new and diverse markets. For example, Johnson & Johnson recently acquired Mentor Corporation in order to expand its operations in to the aesthetic and reconstructive medicine market. Also, an important new medical product called the Fibrin pad was developed with the cooperation of three Johnson &
Johnson-owned subsidiaries. These are just a couple examples of how Johnson & Johnson is able to both grow and innovate through M. On the other hand, M between other companies in the healthcare industry have the potential to upset Johnson ‘s value chain and competitive advantages. Johnson & Johnson must pay close attention to the actions of rival companies in order to maintain its market-leader positions and barriers to entry against competitors. 2. Opportunities -? Research, Synergies, Emerging Markets, and the Aging Population Johnson & Johnny’s greatest opportunity is found in its heavy investment in research and development.
This is especially important for its medical devices and diagnostics and pharmaceutical divisions. It is necessary for the company to be on the leading technological edge when it comes to medical devices to ensure that it can offer the most accurate and up-to-date machines available. As for the pharmaceutical sector, patent expiration and generic drugs demand constant innovation and addition to Johnson & Johnny’s pipeline of products for sustained success. Strong pipelines in its pharmaceutical and medical devices sectors are a major source of confidence n the company’s long-term success.
With eight new late-stage compounds in the pharmaceutical sector and the introduction Of several new products to new markets in the medical devices sector, Johnson & Johnson seems to be advancing its pipeline quite progressively. It also strives to be a consistently innovative company, and around 40% of its current products have been developed within the last 3-4 years. In 2008, Johnson spent $7. 6 billion on research and development. The reinvestment of of sales in to R, versus the industry average of 3%, demonstrates a source of competitive advantage for the company.
Synergies between product branches are yet another source of opportunities for Johnson & Johnson. Through the well-coordinated efforts of its pharmaceutical and consumer products divisions, Johnson & Johnson was able to make the formerly prescribed drug Cortez available as an over-the- counter drug, which came to be the company’s most successful product launch in 2008. This is yet another example of how the company is able to pool its resources in order to find ways to fulfill both the needs of both its customers and stakeholders. Other opportunities for Johnson & Johnson are present in emerging arrests such as Brazil, Russia, India and China.