The brand premium Johnson & Johnson (J&J) historically earned for Tylenol and its other leading brands will undoubtedly shrink following events of the last two years. Why pay for peace of mind when the quality that created the peace of mind is now in doubt?
J&J has long held a reputation as a champion of product safety that put the consumer first, even if it meant compromised profits. The company’s handling of tampering with its McNeil Tylenol brand in 1982 is a case study in crisis public relations. Yet, J&J’s recent history includes enough US Food and Drug Administration repeat visits and citations to cost J&J CEO Bill Weldon much of his 2010 bonus (if not his job this year). With product quality processes in doubt, McNeil and its parent J&J face an even graver set of concerns than those facing Toyota following the car company’s record-setting recalls and US government fines.
What happened?
Like many companies, J&J acted on assumed synergies and got them wrong. A synergy worth acting upon exists when the value of the parts together is stronger than the sum of the values of the separate parts. Since combining parts often involves added complexity and reduced management freedom, the benefit of the combination had better be high enough to offset these costs. Knowing which synergies to act on is the art of successful strategic management. In this case, J&J missed the mark.
An insightful review in Fortune points the finger at cost-cutting pressures that eroded historically good quality control, leading to 8 product recalls in the prior year alone, among them the largest children’s drug recalls in history. The article is based on interviews with current and former J&J and McNeil executives. The real root cause, if you read between the lines of the article, was a CEO who mistakenly restructured his company to capture synergies following a large acquisition in order to cover the acquisition premium.
J&J acquired the consumer-goods business of Pfizer, then combined it with McNeil. The merger moved McNeil from J&J’s heavily regulated pharmaceutical division to a new $16 billion consumer products division under the leadership of Collee Goggins. The new reporting relationship made McNeil, “a completely different company,” according to Fortune’s interviews. Despite the protestations of McNeil leaders, Goggins managed the McNeil brands as if they were consumer goods rather than off-the-shelf pharmaceuticals subject to FDA regulations. As a result, budgets, talent levels and time frames were cut in ways highly inappropriate for over-the-counter medications.
Another example of a company that assessed synergies incorrectly is a client who approached me to work on the company’s growth strategy. As I dug into the assignment, I discovered that my “one company” client was serving three unrelated businesses, all part of a very broad “healthcare” marketplace. Although each business had different and conflicting success factors, they shared the same sales, marketing, manufacturing and research and development resources. The company’s growth was stalled because functions were sub-optimized for specific business’ needs and limited investment funds could not stretch across three businesses.
We focused the company on the one business that could grow attractively, and it’s been successful since. I admired the CEO and Board Chair for going along with my recommendations, as it required them to admit that they had funded an inappropriate acquisition and low-return internal development projects.
I am certain that J&J’s Weldon has a set of questions he wished he’d asked himself and his management team before the Pfizer acquisition and during its integration. (See Sidebar below.) Save yourself his grief. Proactively ask if you are combining, separating, adding to or eliminating different parts of your company in a way that truly maximizes its future value.
When you think about the following kinds of strategy questions, you’re implicitly thinking about synergies. And the more conscious you are of which synergies are worth trying to capture and what is and isn’t synergistic, the better off you’ll be in finding answers to these strategy questions.
- Which new categories or markets should we enter?
- Who should we acquire to grow? What kind of premium can we afford to pay? What is our post-acquisition merger plan?
- Would we be better off narrowing the scope of our business or creating specialized units?
- What should be bundled together into one offering versus sold separately? What should be physically integrated into one offering versus designed as separate products?
- For larger companies, how should we structure our business units? How should we structure our divisions? What aspects of our selling is shared and managed via a matrix or specialized by business unit?
- For larger companies, what resources, processes and solutions should exist at the corporate level serving all our business units? The business unit level serving all the markets? The market level?
Kay Plantes is an MIT-trained economist, business strategy consultant, columnist and author. She served as chief economist for former Wisconsin Republican Gov. Lee Dreyfus. Plantes provides expertise in business model innovation, strategic leadership and smart economic policies. She resides in Madison.
