These collaborative efforts did lead to the introduction of some highly successful products (see Exhibit 5). Even the company’s fabled consumer brands started to show growth as a result of increased collaboration between the consumer products and pharmaceutical divisions. The firm’s new liquid Band-Aid was based on a material used in a wound-closing product sold by one of J&J’s hospital-supply businesses. And J&J used its prescription antifungal treatment, Nizoral, to develop a dandruff shampoo. In fact, products that were developed in large part out of such cross-fertilization allowed the firm’s consumer business to experience considerable internal growth.
Confronting Quality Issues
Even as Johnson & Johnson was trying to get more involved with the efforts of its business units, it ran into quality control problems with several over-the-counter drugs made by McNeil Consumer Healthcare. Since 2008, FDA inspectors had found significant violations of manufacturing standards at two McNeil plants, leading to the temporary closure of one of them. These problems had forced the firm to make several recalls of some of its best-selling products. Weldon did admit that problems had surfaced, but he insisted that they were confined to McNeil. He responded to them in an interview: “This is one of the most difficult situations I’ve ever had to personally deal with. It hits at the core of who J&J is. Our first responsibility is to the people who use our products. We’ve let them down.”8
Quality problems had arisen before, but they were usually fixed on a regular basis. Analysts suggested that the problems at McNeil might have exacerbated in 2006 when J&J decided to combine McNeil with the newly acquired consumer health care unit from Pfizer. Johnson & Johnson believed that it could achieve $500 million to $600 million in annual savings by merging the two units. After the merger, McNeil was transferred from the heavily regulated pharmaceutical division to the marketing-driven consumer products division, headed by Colleen Goggins. Because the consumer executives lacked pharmaceutical experience, they began to demand several changes at McNeil that led to a reduced emphasis on quality control.
Weldon realized the significance of the threat faced by Johnson & Johnson as a result of its problems with quality. He was especially concerned about the FDA’s allegation that the firm had initially tried to hide the problems that it found with Motrin in 2009, hiring a contractor to quietly go from store to store buying all of the packets on the shelves. McNeil’s conduct surrounding the recalls led to an inquiry by both the House Committee on Oversight and Investigations and the FDA’s Office of Criminal Investigations.
Various changes were subsequently made at McNeil to resolve these quality issues. Goggins was pushed out of her post as senior executive in charge of all consumer businesses. Weldon allocated more than $100 million to upgrade McNeil’s plants and equipment, appoint new manufacturing executives, and hire a third-party consulting firm to improve procedures and systems. Bonnie Jacobs, a McNeil spokeswoman, wrote in a recent email: “We will invest the necessary resources and make whatever changes are needed to do so, and we will take the time to do it right.”9
The problems at McNeil, coupled with growing problems with J&J’s artificial hips and contact lenses, also led Johnson & Johnson to make changes to its corporate oversight of its supply chain and manufacturing. In August 2010, the firm appointed Ajit Shetty, a longtime executive, to oversee a new system of companywide quality control that involved a single framework for quality across all of the operating units and a new reporting system. The need for these changes was highlighted by Erik Gordon, a professor at the Ross School of Business at the University of Michigan: “Nothing is more valuable to Johnson & Johnson than the brand bond of trust with consumers.”10
Passing the Baton
In April 2012, Johnson & Johnson appointed Gorsky to lead the health care conglomerate out of the difficulties that it had faced over the previous few years. He had been with the firm since 1988, holding positions in its pharmaceutical businesses across Europe, Africa, and the Middle East before leaving for a few years to work in Novartis. Shortly after his return to Johnson & Johnson in 2008, he took over its medical device and diagnostic group. Because of his extensive background with the firm, and with the division that was being investigated about its faulty hip replacements, Gorsky might have been regarded as the ideal person to take over the job.
When he took over, DePuy, the firm’s orthopedic unit, was already running into trouble with its newest artificial hip. The firm finally recalled the artificial hip, amid growing concerns about its failure among those who had received the implant. Until then, however, executives from the firm had repeatedly insisted that the device was safe. Andrew Ekdahl, the current president of DePuy, recently reiterated that position. “This was purely a business decision,” he said.11 In the trial in Los Angeles Superior Court regarding the defective hip replacement, however, Michael A. Kelly, the lawyer making the case against Johnson & Johnson, suggested that company executives might have concealed information out of concern for firm profits.
In spite of all these issues, Johnson & Johnson did not attempt to clarify what information Gorsky might have had about the problems associated with the artificial hip. Under the circumstances, his promotion to lead the firm surprised Dr. Robert Hauser, a cardiologist and an advocate for improved safety of medical devices. “He’s been overseeing one of the major J&J quality issues and the board of J&J sees fit to name him the new C.E.O.,” he questioned.12 These issues raised concerns about the ability of the firm to effectively deal with the quality concerns and to take steps to prevent them from recurring in the future.
Gorksy’s first job as Johnson & Johnson’s chief executive was, in fact, to reassure shareholders that the firm would move quickly to overcome its problems with manufacturing defects, product recalls, and lawsuits. “We’ve got to adapt faster than ever before, be more agile than ever before,” he stated at the firm’s annual meeting after taking over.13 He acknowledged that some of the problems could partly be attributed to the firm’s attempt to continue to meet Wall Street’s increasingly short-term demands. Gorsky announced that moving forward, J&J was committed to managing for the long term, actively soliciting feedback from all quarters and adhering to the mission that made customers the first priority.
Gorsky’s biggest challenge, however, came from a proposal that Johnson & Johnson might be better off if it was broken into smaller companies, perhaps along the lines of its different divisions. There were growing concerns about the ability of the conglomerate to provide sufficient supervision to all of its worldwide subsidiaries. Gorsky dismissed the proposal, claiming that J&J drew substantial benefits from the diversified nature of its businesses. He did concede, however, that the firm would have to be more selective, careful, and decisive about the products that it would pursue.