Harvard Business School 384-053

Rev. June 30, 1986

Johnson & Johnson (A): Philosophy & Culture

We believe the consistency of our overall performance as a corporation is due
to our unique form of decentralized management, our adherence to the ethical
principles embodied in our Credo, and our emphasis on managing the business for
the long term.

Statement of Strategic Direction

Our culture is really it. That’s what brought us together when the Tylenol
tragedies hit. Without it, we would not have been able to manage the crisis as
effectively as we did.

James E. Burke, Chairman & CEO

In 1983, Johnson & Johnson (J&J) was widely regarded as one of the world’s most successful
health care companies. Over a 20-year period, sales had grown at a compound annual rate of 14%,
and earnings per share (EPS) at 17%. (During the 1970s, J&J’s EPS growth rate was approximately
double the average for the Fortune 100 largest industrial companies.) By 1982, J&J’s worldwide
revenues exceeded $5.7 billion and net income $473 million, placing it 55th in sales and 28th in net
income on the Fortune 500 list of industrial companies. The underlying operations employed over
77,000 people based in 50 countries and sold products in 149 nations (see Exhibit 1 for financial data).

The company had also acquired a reputation for management excellence. A Fortune survey of
industry executives to rank the management excellence of the 200 largest U.S. corporations placed J&J
third overall and first among health care companies. This case describes the distinctive philosophy
J&J espoused and the managerial systems and practices employed to put it into operation.

Company Background

J&J began with Robert Wood Johnson, an apothecary by training. At age 31 Johnson attended
a seminar offered by Sir Joseph Lister, a noted English surgeon, who propounded the theory of
“antisepsis.” The year was 1876 and post-operative mortality rates were as high as 90%. The
following account typified accepted surgical procedures at that time: “Unclean cotton, collected from
sweepings on the floors of textile mills, was used for surgical dressings; surgeons operated in street
clothes and wore a blood-spattered frock coat like a badge of honor.”

Professor Francis J. Aguilar and Arvind Bhambri prepared this case as a basis for class discussion rather than to illustrate
either effective or ineffective handling of an administrative situation.
Copyright © 1983 by the President and Fellows of Harvard College. To order copies or request permission to
reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No
part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in
any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the
permission of Harvard Business School.

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 384-053 Johnson & Johnson (A): Philosophy & Culture

Robert Johnson, then a partner in a small firm manufacturing pharmaceutical preparations,

was impressed with Lister’s theories and nurtured the idea of applying them. For this purpose, he
joined with his two brothers, James and Edward, in establishing Johnson & Johnson to “manufacture
and sell medical, pharmaceutical, surgical and antiseptic specialties and analgesic goods.” The firm
was incorporated in 1887 with $100,000 of capital and began operations with 14 employees on the
fourth floor of what had been a wallpaper factory.

When the founder and first president died in 1910, J&J was already firmly established as a
leader in the health care field. During Robert Johnson’s tenure, the company had introduced
revolutionary surgical dressings, established a bacteriological laboratory, and, in 1888, even
published a book, Modern Methods of Antiseptic Wound Treatment, which for many years remained the
standard text on antiseptic practices.

The company grew rapidly over the years as the result of new-product introductions and
international expansion. New health care products were added through internal development and
through the acquisition of established companies. One measure of the firm’s recent performance in
this regard was given by an independent nationwide survey in 1982 comparing the ten-year record of
successful new-product launchings for 18 major health and beauty aid manufacturers, including
Bristol-Meyers, Procter & Gamble, and Kimberly-Clark. J&J was at the top of the list.

In 1982, J&J’s products spanned four major groupings: consumer (baby care, surgical
dressings, first aid, nonprescription drugs); professional (surgical dressings, sutures, diagnostic
products); ethical (prescription) pharmaceutical; and industrial (nonwoven fabrics, edible sausage
casings). The percentage sales and operating profits for these product groups in 1982 are shown in
Table A.

International expansion began with the establishment of an affiliate in Canada in 1919 and
one in Great Britain in 1924. By 1982, almost half of J&J’s revenues and earnings were produced
overseas.

The challenge of managing rapid growth in J&J was to do it in a way that would preserve the
family like atmosphere so valued in the company. When asked what it was like to work in J&J, a
senior executive described it as follows:

The prime motivator in J&J is the opportunity to grow with more

responsibility. It runs through the entire organization. When we look at people in
comparable jobs in other high-quality companies, we find that they are typically three
to five years older than our managers.

Another motivator is the climate. There is both respect for the individual and
concern for the team. This is evident in our decision making. Everyone is free to
argue his or her point of view. But once a decision is made, everyone is expected to
do his or her best to make it work. In that way, even if a plan isn’t exactly optimal, we
make it succeed. In short, it’s a nice company. People are nice to each other . . . and
it’s a nice place to work.

Table A Sales and Operating Profits (in %)

Consumer Professional Pharmaceutical Industrial

Sales 43.0 33.5 19.4 4.1
Operating profits 42.4 17.9 36.9 2.8

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 Johnson & Johnson (A): Philosophy & Culture 384-053

J&J’s Philosophy and Culture

Robert Wood Johnson, “the General,” son of the founder, and chairman of J&J from 1938 to
1963, was generally credited as the individual most responsible for shaping the company’s
philosophy and culture. Widely exposed as a young man to business around the world, he developed
strong convictions about the merits of free enterprise and the ineffectiveness of large, ponderous
organizations. Jim Burke, chairman and CEO since 1976, recounted: “He was convinced that if you
have sensible people who know each other, in a small enough group, somehow or other problems
would get worked out.”

The General also held strong convictions about the public and social responsibilities that any
business firm must assume. In 1947 he expressed his thoughts in a book, Or Forfeit Freedom:

The evidence on this point is clear . . . . Institutions, both public and private,
exist because the people want them, believe in them, or at least are willing to tolerate
them. The day has passed when business is a private matter—if it ever really was. In
a business society, every act of business has social consequences and may arouse
public interest. Every time business hires, builds, sells, or buys, it is acting for the . . .
people as well as for itself, and it must be prepared to accept full responsibility for its
acts.

These convictions about enterprise and social responsibility were reflected in J&J’s
decentralization and in its enduring statement of beliefs, the Credo.

Decentralization

General Johnson’s firm belief about the inherent superiority of small, autonomous units led
J&J on a consistent path toward decentralization. Autonomy was preserved for new acquisitions, and
new independent units were spun off from existing organizations whenever they appeared ready to
respond to new market opportunities on their own. This process continued over the years, leading to
an assemblage of some 150 companies.

The nature and purpose of J&J’s decentralization were described in the 1981 annual report:

Johnson & Johnson is not one company but many. . . . The largest has 6,300
employees; the smallest, at year-end had six. . . .

Whatever their size or location, they share a commitment to meeting the

special needs of a well-defined customer. In doing so, they create a wide variety of
innovative ways to successfully run their businesses.

We feel that the secret to liberating that productivity is decentralization—

granting each company sufficient autonomy to conduct its business without
unnecessary constraints. In short, we believe decentralization = creativity =
productivity.

Jim Burke elaborated on the concept:

The basic concept behind the decentralization philosophy is to try to organize

each business around a given market need and a given set of customers. It’s easier
said than done but that’s really it . . . Ethicon is an example of a business that’s built
around the needs of the surgeon sewing people together . . . and their success is
based upon their understanding that what they are is an extension of the skills in the
hands of the surgeon. With this approach they built this business out of nothing.

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 384-053 Johnson & Johnson (A): Philosophy & Culture

The Credo

General Johnson’s views on public and social responsibility were formalized in the 1940s as
the company’s Credo. This statement underscored the company’s responsibilities to its customers, to
its employees, to the communities in which it operated, and finally to its stockholders. Described by
J&J managers as the underlying and unifying philosophy guiding all important decisions, the Credo
was prominently displayed in every manager’s office (see Figure A).

Burke described the influence of the Credo on J&J managers as follows:

All of our management is geared to profit on a day-by-day basis. That’s part

of the business of being in business. But too often, in this and other businesses,
people are inclined to think, “We’d better do this because if we don’t, it’s going to
show up on the figures over the short term.” This document allows them to say,
“Wait a minute. I don’t have to do that. The management has told me that they’re
really interested in the long term, and they’re interested in me operating under this
set of principles. So I won’t.”

One expression of the Credo was “Live for Life,” a positive health program for J&J
employees. In 1976, Burke asked a senior line operating manager to figure out how the company
could mount a program to make J&J employees the healthiest in the world. The findings of an
exhaustive two-year study led to the introduction of a program focusing on four principal areas:
exercise, nutrition, stress control, and the cessation of smoking. “Live for Life” was designed to
encourage employees “to create their own programs for improving their life styles and getting rid of
bad health practices that lead to illness and disability.” In support of this plan, flextime arrangements
permitted employees to use new in-house health fitness facilities daily, and a variety of programs—
such as “kick the smoking habit” group sessions, classes on weight control and nutrition, and yoga—
were offered. As one senior executive noted, “It’s a great program for the participants. The company
also benefits from the feeling it engenders among our people that J&J really cares for its employees.”

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 Johnson & Johnson (A): Philosophy & Culture 384-053

Figure A

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 384-053 Johnson & Johnson (A): Philosophy & Culture

Notwithstanding the universal acknowledgment accorded the Credo within J&J, Jim Burke
perceived some degree of tokenism and a need to inculcate in the managers the values underlying
this statement. He described his actions in 1979:

People like my predecessor believed the Credo with a passion, but the
operating unit managers were not universally committed to it. There seemed to be a
growing attitude that it was there but that nobody had to do anything about it. So I
called a meeting of some 20 key executives and challenged them. I said, “Here’s the
Credo. If we’re not going to live by it, let’s tear it off the wall. If you want to change
it, tell us how to change it. We either ought to commit to it or get rid of it.”

The meeting was a turn-on, because we were challenging people’s own

personal values. By the end of the session, the managers had gained a great deal of
understanding about and enthusiasm for the beliefs in the Credo. Subsequently,
Dave Clare and I have met with small groups of J&J managers all over the world to
challenge the Credo.

Now, I don’t really think that you can impose convictions or beliefs on
someone else. However, I do believe that if I really understand what makes the
business work, then I can prompt you to think through the facts and come to see just
how pragmatic the philosophy is when it comes to running a business
successfully. . . . And I think that’s what happened here.

For some J&J managers, the strongest evidence of the Credo’s power was in the company’s
response to the Tylenol crisis. In 1982, seven people died after ingesting Tylenol capsules that had
been laced with cyanide. Even though the poisoning had occurred outside J&J premises and was
limited to the Chicago area, J&J took immediate action to withdraw all Tylenol capsules from the U.S.
market at an estimated cost of $100 million. At the same time, the company initiated with the medical
and pharmaceutical communities a comprehensive communication effort involving 2,500 employees
throughout the J&J organization. This response prompted the Washington Post to write that “Johnson
& Johnson has succeeded in portraying itself to the public as a company willing to do what’s right,
regardless of cost.”

Putting the J&J Philosophy into Operation

The key organizational units for J&J were the operating company at the business level and the
executive committee at the corporate level. The relationship between these two units was carefully
managed to produce the cohesive independence that had become a cultural hallmark of J&J’s
operating structure. Strategic planning, compensation systems, and human resource management
were among the major support systems to this relationship.

The Operating Companies

J&J’s 150 operating units were for the most part integral, autonomous, and wholly owned
subsidiaries. Each company had a well-defined mission (or “franchise”) and submitted, monthly,
quarterly, and annual financial reports, as well as dividends. The importance of the company mission
was described by the Codman & Shurtleff Company president:

We spend a lot of time talking about mission, not from the point of view of
protecting our turf but to ensure that the mission of the business is defined well
enough so that we can see that we’re not going at it helter-skelter. Our mission is to

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 Johnson & Johnson (A): Philosophy & Culture 384-053

develop, on a worldwide basis, electromechanical and electro-optical equipment and

devices to aid the physician in performing least-invasive surgery.

What this mission statement does is to make it very clear to us what fits into
our business and what would merely diffuse our resources. We think of our franchise
as one that is snug enough and neat enough in terms of technological requirements to
be managed on a worldwide basis and not implicate other J&J companies, beyond the
fact that what we’re doing here may speed up the use of their products or, for that
matter, the demise of their products.

To keep established missions reasonably focused, a new company was created when any new
or peripheral product or market handled by an operating company was deemed important enough to
warrant a separate dedicated effort. For example, McNeil Consumer Products Company was created
in 1976 to focus exclusively on the consumer product opportunity for Tylenol products. It did so with
great success, guiding the brand to a preeminent position in the over-the-counter analgesic business.
McNeil Pharmaceutical was left free to concentrate on prescription products, including Tylenol with
codeine, which became the industry leader in number of new prescriptions in the United States.

In similar fashion, Ortho Diagnostic Systems, Inc., became a separate company in the 1970s to
focus on products for blood banks and clinical laboratories while Ortho Pharmaceutical concentrated
on its products for family planning, dermatology and other fields. In 1982 Technicare Ultrasound was
split off from Technicare Corporation to concentrate on ultrasound medical diagnostics. Technicare
Corporation continued its activities in CT scanning, nuclear medicine and the newest modality,
nuclear magnetic resonance. One senior executive described his personal experience with this process
of setting apart new businesses:

I started with what was then called the Hospital and Professional Division.
Over the years, that unit was a source for some eight or nine spinoffs. Every time we
identified a new major market opportunity, we would test it and then split it off as a
new company. Our handling of disposable surgical soft goods, including gowns,
linen, and face masks is a good case in point. Originally, these products were
included in our broad product line. Along the way, we began to see a huge potential
for these disposable items. So we developed a dedicated business approach within
our unit, tested it and then spun it off, creating Surgikos, with its own mission. That’s
a good example of what has happened eight other times in just this one company,
and the same thing is happening throughout J&J.

In each of these cases, growth opportunity was the driving force for creating
a separate organization. In effect, two companies were able to develop greater sales
volume and opportunities than a single company could have done by itself.

Among the 150 J&J companies, some 20 to 25 were referred to as source companies. These
companies were leaders in developing products and markets that were the basis for new company
formation. Table B lists the principal J&J companies and their major products.

As the number of companies continued to grow, senior management began to look for ways
to bring some order to what otherwise might become an unmanageable hodgepodge. Jim Burke
described his thinking on this issue:

What we want to do is to look at each of those businesses that appear to have

a worldwide franchise opportunity and to run them as world businesses. The ideal
arrangement would be, for example, to have a world Ethicon business [surgical
sutures]. Ethicon would have independent, product-related companies in 30 or 40
countries. Where the business in a particular country wasn’t large enough to justify a

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 384-053 Johnson & Johnson (A): Philosophy & Culture

separate company, the products would be sold by a so-called umbrella company in

that country.

So, 10 or 15 years from now, we would like to have a collection of global

J&Js. It won’t be easy to do because a number of our businesses are not so simple to
segregate as is Ethicon.

Each operating company was headed by a president, general manager, or managing director,
who reported directly or through a company group chairman to a member of the executive
committee. J&J had 14 company group chairmen. The J&J organization structure is shown in Figure B.

Dave Clare, J&J president and chairman of the executive committee, described how this
management structure had evolved:

Years ago, each operating company reported directly to one of the executive
committee members. As the number of individual units multiplied around the world,
we were faced with the dilemma of how to maintain a line organization relationship
between each of the managements and the executive committee members. We had
two choices. We could expand the executive committee, or we could transfer to
another group of individuals much of the operating responsibilities which had
historically been handled by the executive committee. We chose the latter approach.

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 Johnson & Johnson (A): Philosophy & Culture 384-053

Table B Principal Domestic Operations, 1982

Company Major Products

Chicopee Fabrics for commercial and industrial customers.
Codman & Shurtleff, Inc. Surgical supplies including instruments, equipment and
disposables.
Critikon, Inc. Products for hospital critical case units, such as oxygen
monitoring systems, and cardiovascular catheters.
Devro Edible natural protein sausage casings and other collagen-
based products used by food processors.
Ethicon Products for precise wound closure, including sutures, lig-
atures and mechanical wound closure instruments.
Extracorporeal, Inc. Dialysis fitters and machines for endstage renal disease;
oxygenators for open heart surgery, and heart valves.
Iolab Corporation Intraocular lenses for cataract surgery.
Janssen Pharmaceutica, Inc. Pharmaceutical products used for anesthesiology and
systemic fungal pathogens.
Johnson & Johnson Baby Prod- Consumer baby products including powder, shampoo, oil,
ucts Company cream and lotion.
Johnson & Johnson Dental Serves dentists and dental laboratories with a broad range
Products Company of restorative products (e.g., porcelain for crowns and
bridges) and preventive products (e.g., Prophylaxis paste).
Johnson & Johnson Products, The Health Care Division provides consumers with wound
Inc. and oral care products; the Patient Care Division offers
wound care products to hospitals; the Orthopaedic Division
markets surgical implants and fracture immobilization
products.
McNeil Consumer Products Line of acetaminophen-related products, including Tylenol,
Company CoTylenol Cold Formula, and Sine-Aid.
McNeil Pharmaceutical Prescription drugs for the medical profession including
analgesics, major tranquilizers, anti-inflammatory agents
and muscle relaxants.
Ortho Diagnostic Systems Products for blood analysis in blood banks and clinical
laboratories.
Ortho Pharmaceutical Prescription and nonprescription contraception products
and dermatological products for professional skin
treatment.
Personal Products Products for female hygiene.
Pitman-Moore Products for animal health.
Surgikos Disposable packs, crowns, and surgical specialty products
for use in major operative procedures.
Technicare Products in diagnostic imaging - computed tomography
(CT) scanning, ultrasonic images, nuclear medicine
systems and digital X-ray.
Xanar CO2 surgical laser systems.

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 384-053 -10-

Figure B Organization Structure, 1983

Chairman
& CEO
J.E. Burke

President & Chairman

Executive Committee (EC)
D.R. Clare

President
VP-Science & VP-Administration
VP-Public Relations General Counsel J&J Development
Technology and EC Member
L.G. Foster G.S. Frazza Corporation
R.A. Fuller J.J. Heldrich
C.M. Anderson

a
R.E. Campbell J.C. Walcott V.J. Dankis A.M. Quilty F. DeAngeli H.G. Stolzer
I V.M. Willaman D.O. Johnston D.E. Collins
VP-Finance & EC Member EC Member EC Member EC Member EC Member EC Member EC Member EC Member
b
EC Member (4/16) (2/9) (3/6) (4/34) (3/13) (3/21) (2/20) (2/7)

to Aug 2025.
Sugikos Baby Products Janssen Chicopee Ortho Diagnostics Technicare McNeil Consumer
President Ethicon Personal Products Pitman-Moore Devro Xanar International International
J&J Dental International International Codman McNeil Pharmaceutical Umbrella Umbrella
Products Co. Umbrella Umbrella Critikon Ortho Pharmaceutical Companies Companies
Companies Companies lolab
Extracorporeal
Company Group Chairman, J&J
Austria, Germany, U.K.

VP - International, J&J
Benelux, Ireland, Italy, Sweden, Switzerland

VP - International, J&J
Colombia, Dominican Republic, Jamaica, Puerto Rico, Trinidad

President
Hospital Services

President
J&J Products, Inc.

a. Responsibilities are listed in detail for J. C. Walcott for illustrative purposes. For all other EC members, only major company responsibilities are listed.
b. Figures indicate the numbers of direct reporting relationships versus the total number of independent units under that particular EC member. Thus, J.C. Walcott
has 4 executives reporting directly to him, but is responsible for 16 operating units.

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 Johnson & Johnson (A): Philosophy & Culture 384-053

Each company group chairman reported to a member of the executive committee and was
responsible for an assigned group of operating units. Where the assigned group included a number of
smaller overseas units, the latter reported to a vice president under the company group chairman.
Some managers were concerned that this layering of management responsibilities might slow
company reaction time or reduce the autonomy traditionally accorded each operating company.
Burke acknowledged this concern:

Some of the operating managers do make the argument that there are too
many layers of decision making within the company. In some cases a company
reports to a vice president, a company group chairman, and the executive committee.

The real key is what these layers do. If they become operationally oriented—
and there are instances where they do—then we have a real problem. But there are
plenty of other instances where that’s not the case at all.

Dave Clare was on record as stating:

We don’t want the managing director of any unit, any place in the world, to
feel that he hasn’t the right, the responsibility, or the ability to go direct to his
executive committee member with his problems and his challenges. . . . We don’t
want to lose touch with the operating managers of the businesses. And we don’t want
to have them feel that they’ve lost touch with their executive committee or company
group chairman member.1

Executive Committee

The 11-member executive committee (EC) was the principal management group responsible
for the company’s policies and operations. Four of these members (the CEO, the president, and the
vice presidents for finance and administration) had corporate general management responsibilities;
the other seven were contact executives for specific operating segments. The EC met almost daily for
lunch, usually with a flexible agenda. Quarterly, it would meet for two or three days to discuss major
issues. Burke described the role he saw for the EC:

In my judgment, the executive committee should spend most of its time on

two issues: one is resolving conflicts among operating units; and two is selecting the
right opportunities to pursue. In this business, there’s no longer any problem in
finding opportunities. The problem is in sorting them out and taking the ones you
can do the best job with.

We don’t really want operating companies to worry about these issues. Their
primary job is running their businesses. Of course, they are in a good position to
identify opportunities or to sense conflicts with other units. When they do, they
should bring these issues to the executive committee.

I feel good about the way the executive committee has evolved in recent
years. Seven or eight years ago, it was 95% involved in operational matters. Today at
least 60% of its time is devoted to policy issues. It ought to stay that way or even shift
further towards policy.

1 “World Wide” (J&J company publication), October 1980, p. 6.

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 384-053 Johnson & Johnson (A): Philosophy & Culture

To illustrate the kind of policy issues addressed by the EC, Clare noted: “The major part of an
upcoming quarterly meeting will be to review the strategic plans that have been submitted by all our
units. Our emphasis is on the 5- and 10-year planning horizon and major problems and programs that
we see presented by the companies.”

Strategic Planning

In the 1970s, J&J institutionalized a bottom-up strategic planning process. Burke described
the reasoning behind this action:

We were growing very fast, but the key decisions were often being made at
the operating companies in an opportunistic, ad hoc manner. The operating
managers were growing the businesses, but the overall change wasn’t planned.

I decided we had to get into strategic planning. But we wanted the planning
to come from the bottom. We wanted the managers to understand that every
company had the responsibility for its long-term business.

The strategic planning approach that was implemented worked on a 10-year cycle. To avoid
recasting long-term forecasts each year, the 10-year projections were revised every 5 years. The
emphasis was on qualitative forecasts rather than numbers, as was indicated in Burke’s admonition to
the company managers:

If you want numbers, keep them to yourself. We don’t want them. What I
want as chairman of the corporation is a two-page summary for every J&J company
in the world. It should be a statement of your strategic mission and should explain
the convictions you have about the future of the business and a little bit of how
you’re going to get there. I’m going to read it, and everybody between you and me is
going to read it. I really only want four numbers—sales and profits for the current
year, and sales and profits for five years out. Those numbers in aggregate will help us
to see whether or not there is enough growth inherent in our current businesses to
maintain our historical growth rate. We want you to understand that we’re not going
to hold you accountable for those numbers. We are going to hold you accountable for
the strategic mission statement.

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 Johnson & Johnson (A): Philosophy & Culture 384-053

Statement of Strategic Direction

We believe the consistency of our overall • We are dedicated to exceptionally high

performance as a corporation is due to our unique growth. To achieve this we must be well-
form of decentralized management, our adherence positioned in growth markets, and each
to the ethical principles embodied in our Credo, management must be aggressively innovative
and our emphasis on managing the business for and strive to grow faster than the markets in
the long term. which it competes.

There are certain basic principles that we are • Each management must know how to invest
committed to in this regard: effectively in future earning power while
recognizing that it is easier to reduce profits
• The responsibility for our success as a short term than to increase them long term.
corporation rests in the hands of the We further believe that growth should be
presidents and managing directors of our financed primarily from earnings. This means
companies. Each must assume leadership in our companies must generally make above-
every facet of the business, including the average profits to support higher rates of
definition of strategic plans and providing for growth.
management succession.
• Acquisitions are viewed as an appropriate
• We will attempt to organize our businesses way to achieve the strategic goals of a given
based on the clearly focused needs of the end company or as a way for the corporation to
users of our products and services. In many expand the scope of its current business. Such
instances business units will be structured acquisitions - of products, technologies, or
around the worldwide franchise philosophy. businesses - will be evaluated for growth
We will continue, however, to rely on potential, fit with current or future
“umbrella” companies to develop local businesses, management capacity, and
markets for any of our franchises where this economic feasibility. There are no other
appears to be the best way to initiate cost- restrictions on the identification of acquisition
effective, long-term growth. candidates.

• We will seek, where possible, to achieve or Corporate management is responsible for

maintain a leadership position in our markets providing resources, guidance, leadership, and
of interest. It is recognized that this can only control of the various business entities within the
be accomplished through maintaining, over framework of these principles. Management’s
the long term, end benefits superior to our most important responsibility is the one it shares
competition. In this regard, we are committed with presidents and managing directors in
to improving our internal research and attracting the kind of people who can manage our
development capability, and to utilizing businesses in the future, providing them with the
external sources that provide access to new kind of environment that maximizes their
science and technology. potential and with a system that rewards them
appropriately for their accomplishments.

In keeping with its decentralization philosophy, senior management eschewed the idea of
developing an explicit corporate strategy. In 1980, however, Burke did write “A Statement of
Strategic Direction” to serve as a guideline for strategic planning. This statement is shown in the box
above.

Operating Plans

In addition to the strategic plan, the operating companies prepared two-year operating plans,
which included narrative concerning specific policies, programs, and actions as well as the financial

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 384-053 Johnson & Johnson (A): Philosophy & Culture

budget for the following year. Financial controls in J&J were characterized by managers as direct and
tight.

Operating plans were initiated in the fall as each company president reached agreement on
his proposal with an EC member or with his group chairman. Approval had to await an EC meeting
in November, where the performance of J&J as a whole was assessed and individual plans adjusted
accordingly. In May each budget was subjected to a detailed review, and in August to a less stringent
up-date review. Dave Clare pointed out the executive committee’s limited role in this process: “As a
committee we don’t examine in detail the specific short-term plans of an individual company. We rely
on the individual executive committee member with his line organization to address these things.”

Each operating company was expected to finance its own investments to the extent possible.
Investment decisions were based on detailed cash flow analysis and were normally implemented by
granting reductions in a unit’s profit-after-tax targets to allow it to retain the needed funds.

Executive Compensation

Historically, senior executives in J&J were well compensated. General Johnson had often said,
“Make your top managers rich, and they will make you richer.” In 1973, J&J’s chairman was the
highest paid executive in the United States and one of the first to earn more than $1 million a year.

The compensation package for senior executives included a base salary, bonus, stock grants
(over a period of three years), stock options, and phantom stock called Certificate of Extra
Compensation. These components are shown in Table C.

In an average year, counting only the cash bonus and the current value of the stock grant
contract along with its dividend yield, the current incentive compensation typically totaled about 30%
to 35% of base salary. Longer-term compensation, while not readily calculable, added appreciably to
that amount.

The compensation awards were the responsibility of the management compensation

committee, comprising Jim Burke, Dave Clare, and Bob Campbell (vice president for finance). Its
duties were to decide how much in aggregate to award in a given year and how the rewards should
be distributed. Its functioning was described as follows by an operating company president: “It’s an
extremely subjective evaluation but very serious. Burke and Clare spend two weeks every year on
nothing but performance evaluation.”

Table C Compensation Package

Base Salary—company commitment
Bonus—guidelines as a percentage of base salary
Stock Grants—there were no guidelines for annual awards. An executive received the grant over three equal
yearly installments. Since there were no restrictions on the sale of these shares, this grant was considered
current Compensation.
Stock Options—there were guidelines on the maximum awards for different salary categories (e.g., 2 x salary
for salaries between $50,000 and $70,000). Options were awarded deeper in the organization than for most
other companies. Options were not . vested for a period of seven years.
Certificate of Extra Compensation (CEC)—no guidelines. CEC was reserved for the top 1% of executives and
was not paid out until the executive retired, died, or otherwise left the company. The value of the ‘‘units”
was determined by a complex formula depending on the overall corporate performance. (A typical
operating company president retired with a CEC value in excess of $1 million.)

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 Johnson & Johnson (A): Philosophy & Culture 384-053

Central Staff Support Functions

J&J had corporate staff groups in human resources and personnel, legal, finance, science and
technology, and management information services. Considerable attention was given to defining their
roles so as not to undermine the philosophy of decentralized operations.

Human resources and personnel. While the individual operating companies were responsible for
all the traditional personnel functions, the corporate staff served to ensure uniformity in such areas as
compensation and personnel policies. For this purpose, the corporate HR&P staff conducted yearly
organizational planning audits. These audits required each company president to present to top
corporate management an overview of the company’s human resource situation. This overview was
to include projected personnel needs, five-year succession plans, identification of people with
advancement potential, and any anticipated changes in organizational structure.

To manage staffing requirements and executive career development, J&J maintained a

computerized managerial skills inventory form for each manager. When an open position could not
be filled from within an individual company, a comprehensive corporate wide search was conducted
for suitable candidates. Conversely, J&J also had a search program to identify opportunities for
managers desiring a change in position or in need of developing specific skills.

Legal. Legal support for domestic operating companies was provided through the general counsel’s
office at headquarters.

Finance. Each operating company had its own chief financial officer reporting to the company
president. The corporate financial staff provided budgeting and reporting guidelines and was
responsible for overall financial policy. The implementation of financial policies throughout J&J was
coordinated by a council of chief financial officers that met quarterly.

Science and technology. An office of science and technology was created in 1979 to formalize the
function of scanning the environment for technological developments. Burke described this new unit
as “our radar for new and emerging technology which might have applications to our current
businesses or which might suggest a whole new business for J&J.”

Management information services. This function revealed most clearly the underlying tensions
between central staff and the autonomous operating units. When started in 1970, the management
information center (MIC) was set up to provide large-scale, efficient computer information handling
for J&J as a whole. With advances in computer technology, each company wanted to manage its own
information system. An executive described what happened:

The computer information services was an interesting experience in

centralization versus decentralization. And it was not without its conflicts and
controversies. During the ten-year period from 1970 to 1980, there was an incredible
amount of infighting between the corporate management information center people
and the management boards of the individual operating companies. All kinds of
white papers were being written about why an operating company should do its own
thing, with MIC countering why it would cost more money. Finally, Jim Burke
stepped in and said, “Look, if the operating companies can afford to decentralize it,
why shouldn’t they?”

By 1983 each major operating company had its own computer information system. The
corporate MIC primarily served headquarter’s needs.

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 384-053 Johnson & Johnson (A): Philosophy & Culture

The Challenge to Decentralization

Reflecting on the pressures and changes he saw in J&J, Burke commented:

There’s an increasing merging and interaction between the different

segments of our business that runs counter to our decentralized approach. The
pharmaceutical business, the hospital and professional business, and the consumer
business are merging at a lot of levels that nobody even understands. The public is
getting intimately involved in health care. There has been a 1,000% increase in health
information going to the public through TV in the last seven years. There’s a
revolution in terms of consumer information and there’s a revolution in terms of
technology that cuts across our ability to market health care in any of its dimensions.

We’ve got 150 business units now. We could easily grow to 300 companies
over the next 10 to 15 years. If you look at the corporation’s central problem, it’s how
to manage an increasingly larger organization to obtain the same kind of energy that
is released from smaller units.

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 Johnson & Johnson (A): Philosophy & Culture 384-053

Exhibit 1 Financial Information, 1972–1982, Selected Years

($ millions except per share figures)

1972 1977 1980 1981 1982

Operating Statement
Sales Revenues
Domestic 880 1,714 2,634 3,026 3,304
Foreign 438 1,200 2,204 2,373 2,457
Total 1,318 2,914 4,838 5,399 5,761

b
Net earnings (after taxes) 121 247 401 468 523
b
Percentage of sales revenues 9.2 8.5 8.3 8.7 91
a
Per share data
b
Earnings 0.72 1.41 2.17 2.51 2 79
Dividends 0.15 0.47 0.74 0.85 0.97

Balance Sheet

Cash and marketable securities 83 368 359 427 365

Other current assets 564 912 1,612 1,775 1,888
Fixed and other assets 334 740 1,372 1,618 1,956
Total 981 2,020 3,342 3,820 4,209

Current liabilities 179 383 774 881 900

Certificates of extra compensation 23 30 33 38 43
Long-term Debt 31 37 70 92 142
Deferred credits and others 15 91 197 281 325
Stockholders’ equity 733 1,479 2,269 2,528 2,799
Total 981 2,020 3,342 3,820 4,209

Ratios and Other Information

b
Return on equity 17.8% 17.8% 18.8% 19.5% 19.6%
Number of employees (000’s) 43.3 60.5 74.3 77.1 79.7
Number of stockholders (000’s) 28.6 31.2 35.6 38.2 43
Average shares outstanding
a
(millions) 168.6 175.2 184.8 186.4 188.0
a. Per share data adjusted to reflect three-for-one common stock split in 1981.
b. Excluded, in 1982, an extraordinary charge of $100 million ($50 million after taxes or $0.27 per share) associated
with the withdrawal of Tylenol capsules.

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