Johnson & Johnson Pharmaceutical Division Strategic Analysis Case Study

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Strategic Analysis of Johnson & Johnson Pharmaceutical Division

This study provides the strategic analysis of Johnson & Johnson's pharmaceutical division to assist the company developing an effective strategy to achieve the competitive market advantages. The paper uses the SWOT analysis, PEST analysis and Porter's five forces for the strategic analysis. The outcomes of the analysis reveal that Johnson & Johnson is one of the top players in the pharmaceutical industry making the company enjoying superior market advantages in the United States and outside the United States. However, the company is still facing stiff competitions with other key players in the industry. Moreover, the company has not been able to reduce its cost of operations. The study recommends that Johnson & Johnson should launch its products in China to enjoy huge Chinese markets. Moreover, the company should take advantage of Chinese low stringent laws and regulations to produce drugs for Indian and Chinese markets to reduce the costs of R&D.

Phase I: Company Overview

Johnson & Johnson is an American multinational company producing a wide range of products that include consumer products, pharmaceutical products, and medical products. Incorporated in 1889, Johnson & Johnson operates through three divisions: Consumer healthcare division, medical devices division and pharmaceutical divisions. The pharmaceutical division produces different products to treat infectious disease, neuron disease, and oncology disease. The immunology products that the company produces are antibodies Remicade and Simponi that have been used for the treatments of ankylosing spondylitis, ulcerative colitis, Crohn's disease, and other disorders. In 2013, the sales of two from these products account for the 11.3% of the company revenue and 29% of the revenue of the pharmaceutical division. Despite the company success over the years, Johnson & Johnson recorded a decline in the total revenue between 2014 and 2015 fiscal years. In 2014, the company's total revenue was $74.3 billion, however, the total revenue declined to $70 billion at the end of 2015 fiscal year. A decline in the revenue also affected the revenue of the pharmaceutical division where the total revenue declined from $32.3 billion in 2014 to $31.4 billion in 2015 fiscal year.

The objective of this study is to provide the strategic analysis of the pharmaceutical division of Johnson & Johnson to assist the company developing an effective strategy to achieve the competitive market advantages.

Phase II: Industry Overview

The U.S. pharmaceutical industry is one of the largest industries in the United States. In 2010, the industry worth $2.3 Trillion and contributing to 16% of the country's GDP. The United States is the largest market for the pharmaceutical industry with the sales of more than $307 billion, which are more than 40% of global sales. Since 2001, the U.S. pharmaceutical industry records the annual market growth rate of 2.3% and CAGR of 6.6%. However, the market value of the pharmaceutical industry reached $420 billion in 2015. Top players in the industry are Johnson & Johnson, Pfizer, Merck & Co, and GlaxoSmithKline, and over the years, the industry contributes to the growth rate of the U.S. economy. Typically, the industry provides the direct jobs of 854,000, and the total of direct and indirect jobs from the industry are more than 4.4 million where the economic contribution of these jobs are over $1.2 Trillion. In the last 60 years, the U.S. pharmaceutical industry has become the world leader in the development of new medicine leading to an increase in the high-quality jobs as well as an increase in the U.S. economic output. The immense economic contribution has made the country becoming a global leader in the pharmaceutical industry.

The continued technological and scientific innovations will make the pharmaceutical industry enjoying the growth rate of between 5 and 8% in the next three years. Moreover, the UK will record the growth rate of between 4 and 7% in the industry within the next three years. The global growth of the pharmaceutical industry in the next three years will be propelled by the United States growth rate because the U.S. will record a sale growth of 80% in the industry in the next three years. By 2019, the U.S. will assume the top position for pharmaceutical markets followed by China, Japan, and Germany. (Arnum, 2015).

Strategic Issue in the Industry

A report presented by KPMG (2011) reveals that the pharmaceutical has performed below the expectation in the last ten years compared to other industries in the United States.

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The reason has been the combination of flow of negative and positive factors, which affect both profits and revenues. Figure 1 provides the comparative analysis of the pharmaceutical industry with other key industries in the United States, and the results reveal that the share prices of the U.S. Pharmaceutical industry are below the share prices of other industries.

Fig 1: Comparative Analysis of U.S. Pharmaceutical industry with other Key Industries

Source: KPMG (2011)

An intense competition has been the major strategic issues facing Johnson & Johnson. Typically, an advanced in the internet technology and rise of emerging markets have fueled an increased in competitions that affect Johnson & Johnson's pharmaceutical segment. Moreover, the costs of R & D have been climbing in the last few years compared to the rate of benefits derived from the R & D. The FDA (Food Drug and Administration) affirmed that 61% of new drugs were approved between 2006 and 2009 compared with 68% of new drugs approved in Europe in the same period. The increase in the R&D costs to intensify the approval of a new drug has made Johnson & Johnson to record high costs of operations in the last few years. Between 2005 and 2015, the R&D expenses have amounted to several billions of dollars. In 2015 alone, the company spent approximately $9 billion in R&D. Thus, Johnson & Johnson ought to develop a new strategic roadmap that will assist the company to reduce the costs of operations to achieve competitive market advantages.

a. Table of Definitions of Strategy applied to Johnson & Johnson

Porter, (1996) defines the concept strategy as the roadmap that decides where a business intends to go and strategy to get there. Porter further points out that an organization can develop a strategy by creating values that exceed a firm's cost of operation. Gates, (2010) defines the concept strategy as an organization's intended approach and the strategy to achieve this approach. Gates argues that a strategy to win opponents in the market environment is not a strategy used in the Chess game where there are only two opponents. In the pharmaceutical industry, the strategy to be adopted should be similar to the strategy used to win opponents in a poker game where a player faces multiple opponents. A real business world is similar to the game of a poker where a firm need to face multiple opponents. To be ahead of competitors in the industry, Johnson & Johnson has intensified its effort on the R & D to achieve competitive advantages. Between 2011 and 2015, Johnson & Johnson's R & D expenses increased from $7.5 Billion to $9 Billion.

Steiner, (2008) defines strategy as a tactic to counter the competitors from their predicted and actual move. On the other hand, Tregoe, & Zimmerman, (1980) define strategy as a framework that guides the directions and nature of an organization. However, Porter (1996) definition of strategy is the best out of all the definitions outlined. Porter argues a competitive strategy is to deliberately choose a mix of activities to enhance values. Thus, the strategy is referred to a competitive position that assists firms differentiating themselves from the competitors. Over the years, Johnson & Johnson strategic method is by differentiating itself from the competitors because the company has been able to address the unmet medical and pharmaceutical needs to differentiate and outpace itself in the pharmaceutical market.

b. Current Status and Processes of Strategy

The study explores the current status of the strategic issues using the PEST Analysis, Porter 5 Forces, SWOT analysis to identify elements that do not fit in the strategic process of Johnson & Johnson. The analysis reveals both the internal and external environments that the company is operating.

PEST Analysis

Political: The U.S. government is strict about the quality of the drugs that should be produced for the U.S. community. Thus, the U.S. government has passed series of laws and regulations by authorizing FDA (Food and Drug administration) to scrutinize drugs produced by the pharmaceutical companies. Moreover, Johnson & Johnson operates globally, and the company is obliged to abide by the law and regulations of the countries that it is operating

Economic: Johnson & Johnson's major operations lie in the United States, a country with one of the best economies in the world with annual growth rate of more than 3%. Moreover, American residents enjoy one of the.....

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