Johnson and Johnson Strategic Analysis: Business Strategy Foundations

6 min readJul 5, 2020

Analysis conducted for the Business Strategy Specialization: Business Strategy Foundations course offered by UVA Darden School of Business on Coursera

Originally published on January 16, 2020.

Introduction

Johnson & Johnson is a multinational corporation focusing on healthcare. Their business is divided into three main segments: Pharmaceuticals, Medical Devices, and Consumer Health products. In this report we will analyze the competitive position of Johnson & Johnson’s global pharmaceutical business.

The pharmaceutical industry is the part of the healthcare sector that focuses on the discovery, development, manufacturing, and marketing of new medicines or drugs. In 2018, the global pharmaceutical market was estimated to be $1.2tr and market growth is expected to continue at a rate between 4–5% CAGR over the next 5 years (Citation 1).

Industry Structure Status Quo

The pharmaceutical industry value chain is defined by the process of taking raw materials and turning them into drugs which are then used by patients. During this process, there are the suppliers of raw materials, R&D organizations, drug manufacturers, sales and marketing, the medical facilities where drugs are distributed, and the end users of the drug or patients. Besides the linear path from supplier to buyer, several outside organizations have great impact on the industry value chain. Drug researchers must receive approvals from relevant associations such as the FDA (Citation 2) to legally market drugs and companies often secure patents from USPTO (Citation 3) to secure and retain intellection property rights. Furthermore, a third external party that complicates the landscape is the presence of medical insurance providers who often relieve patients of the responsibility of covering related medical expenses.

Within this landscape, Johnson and Johnson competes as a player that is vertically integrated across research, manufacturing, and marketing enabling them to provide high quality and low-cost medical solutions to their stakeholders (Citation 4).

The pharmaceutical industry is highly competitive as a large number of healthcare companies compete for market share, yet due to the sheer size of the industry there is no clear dominant player (Exhibit 1). While Johnson & Johnson annual pharmaceutical sales exceed a staggering $40bn per annum, their totals are still surpassed by other larger players such as Pfizer ($53bn) or Roche ($57bn) (Citation 5). Like Johnson & Johnson, nearly all of the largest pharmaceutical companies are vertically integrated from research to marketing.

Johnson & Johnson competes with large pharmaceutical players and smaller bio-tech firms to research, develop, and secure related approvals / patents of new drugs. Research and discovery of new drugs is a key driver of competitive position, because once a drug is developed and has approvals, the pharmaceutical company can patent the formula and secure exclusive sales rights for 15 or more years. Once these patents expire, competitors are allowed the opportunity to develop generic versions of the drug and profits can drop considerably.

The major pharmaceutical companies are able to differentiate from each other beyond the exclusivity provided by drug patents. We see that there is a large number of areas of focus within the healthcare industry, and this diversity enables companies to specialize and further differentiate (Exhibit 2). The main specialties of Johnson & Johnson pharmaceuticals includes Immunology, Cardiovascular & Metabolic, Pulmonary Hypertension, Infectious Diseases & Vaccines, Neuroscience, and Oncology. We note that while these are crowded market segments, they also represent some of the largest segments in terms of sales revenue per year (Exhibit 2) and provide sufficient room for multiple large players.

Johnson & Johnson pharmaceuticals enjoys the advantage of operating in an industry where forward or backward integration is challenging. Integration is difficult due to the specialist nature of drug research and development and the high costs associated with drug research or marketing. For these same reasons, there are also high barriers of entry for new players. While the bio-tech industry remains active with investors who hope to score big upon discovery of a new drug, profits are challenging to come by and even more difficult to sustain given the unpredictable nature of innovation (Exhibit 3).

Over its 133-year history Johnson & Johnson has developed a number of capabilities to support its current position (Exhibit 4). The first is an advanced research network that includes internal R&D teams as well as external partners such as research institutions, universities, or biotech companies. The Johnson & Johnson legal team includes experts in obtaining approvals from the FDA, securing patents from USPTO, and defending the company against civil lawsuits. Vertical integration, a mature supply chain network, and implementation of robotics and big data ensure that the company stays competitive as a low-cost manufacturer. Meanwhile it’s diversified role in the healthcare industry beyond pharmaceuticals affords Johnson & Johnson greater alignment with the needs of external stakeholders, helping them bolster their network and ability to sell and market products. Finally, the company is able to offer extremely competitive compensation packages to retain elite talent which further fuels their performance.

Future Of The Industry

The topic of global healthcare is complex and future developments of the industry are uncertain, however, there is a general consensus that the industry will continue to expand in coming years. One of the main drivers is that rising wealth enables access to better healthcare, and better healthcare ensures that people live longer. When people become older, their need for healthcare increases (Citation 7). A secondary impact of rising wealth is the correlation with busier working schedules leading to a worse diet, higher levels of stress, sleep difficulties, or onset of other negative behaviors which create increased need for healthcare and pharmaceutical services.

However, the industry also faces significant headwinds. Politicians and civilians feel healthcare companies are earning enormous profits at the expense of everyday people (Citation 8). As such Johnson & Johnson, along with the entire industry, is often challenged by activist groups in the form of stricter regulation for pricing and transparency or civilians in the form of civil lawsuits.

As one of the older players in the category, Johnson & Johnson has a long history of sustained success and the ability to navigate future changes to the industry. They benefit from a network of legacy relationships in the industry and over time have built out their network of research partners to further solidify the capability to innovate new drugs and stay competitive. More recently, the company launched JLABS (Citation 9) to help incubate and partner with companies in the pharmaceutical space. Meanwhile the aforementioned team of legal experts and deep pockets position them to react and adjust according to legal demands.

Conclusion

Although the healthcare industry is extremely complex and difficult to enter, it is evident that the massive size of the industry allows multiple major players to co-exist. Johnson & Johnson has carved out and established a strong position within this landscape. Our strategic mapping (Exhibit 5) displays their leading position in terms of revenue and a diversified revenue stream which increases defensibility of their position.

While Johnson & Johnson has built capabilities that should help them sustain this competitive position, they will need to continue to invest in innovation and pay attention to negative industry forces such as regulation and popular sentiment (Exhibit 6).