A Big Company That Works

Marvin L. Woodall likes to keep his distance from the Tower. The independent-minded president of a tiny startup, Johnson & Johnson Interventional Systems Co., prefers to run his 130-person staff from a low-slung building in bucolic Warren, N.J., nearly an hour's drive from his parent company's gleaming 15-story headquarters in New Brunswick. If he wants to fashion a new marketing campaign or hop on a plane to check on European operations, he doesn't think twice. "I just go. I don't ask permission," drawls the 54-year-old Texan. "I'm almost never distracted by J&J management."

Most top managers wouldn't like being dismissed as mere distractions. But at Johnson & Johnson, the presidents of its 166 separately chartered companies are not just encouraged to act independently--they're expected to. Beyond traveling at will, they decide who will work for them, what products they will produce, and which customers they'll sell to. They prepare budgets and marketing plans, and many oversee their own research and development. While they are ultimately accountable to executives at the Tower, some presidents see headquarters bosses as rarely as four times a year.

Long before the rest of Corporate America made "empowerment" a management buzzword, J&J was practicing it. As early as the 1930s, longtime Chairman Robert Wood Johnson pushed the idea of decentralization. Believing that smaller, self-governing units were more manageable, quicker to react to their markets, and more accountable, the son of a J&J co-founder encouraged such early J&J mainstays as Ethicon Inc., a sutures maker, and Personal Products Co., the feminine-hygiene business, to operate independently. The J&J approach "provides a sense of ownership and responsibility for a business that you simply cannot get any other way," says Chief Executive Ralph S. Larsen.

Because the company has been at it for more than 50 years, J&J has become a model of how to make decentralization work. But the system isn't static. Management has had to fine-tune its approach over the years to achieve a balance of entrepreneurial spirit and corporate structure. Now, Larsen is in the middle of one such adjustment: He is seeking to share more services among units, cut out redundancies, and smooth relations with J&J's biggest customers. "Everybody is facing a very complex reality," says Harvard business school professor Rosabeth Moss Kanter. "Even if companies want to maintain the identity and autonomy of units that have built up a franchise over long periods, they are also working hard on integration. It's a tremendously tough balancing act."

CREATIVE FREEDOM. J&J's myriad products range from anesthetics and birth-control drugs to Band-Aids, baby powder, and contact lenses (table). Until it was recently sold, there was even a J&J company that made sausage casings. The unassuming Larsen likens his job to an orchestra conductor's: He must give his players inspiration and direction, but the main thing is assuring them abundant creative freedom.

Out of this dizzying variety, J&J's maverick managers make uplifting music: Last year, while so much of America barely scraped by, J&J boosted earnings 15%, to $1.5 billion, on a sales rise of 11%, to $12 billion. Although its share price has tailed off to about 100 with the recent downtrend among drug companies, J&J's stock doubled last year, to 114 1/2. Analysts expect earnings to rise at least an additional 15% this year, while sales, driven by a few important new products, could climb 11% or so. "J&J delivers on the bottom line, and that's what counts," says Rita M. Freedman, health care analyst at PNC Financial Corp.

Unfettered by headquarters bureaucracy, J&J's operating units are easily among the most aggressive marketers in America. Once they choose a market, they storm in and muscle rivals out of the way. A forceful legal department swings into action whenever J&J feels its patents are threatened, and its clout with retailers assures its products superior shelf space. Marketing budgets alone can be overwhelming. Last year, J&J followed Schering-Plough Corp. into the market for over-the-counter yeast-infection drugs by a full two months. Yet, backed by a massive ad blitz, J&J's Monistat 7 brand soon grabbed more than half of the $245 million market.

Many other companies are following J&J's lead. Desperate to make itself more competitive, IBM is breaking itself up into smaller, presumably more efficient operating units. Du Pont Co. has been gutting its middle-management ranks and giving survivors more responsibility, with the idea of cutting costs and speeding products to market. PepsiCo is pushing decision-making down to the lowest levels. And Procter & Gamble Co. is backing away somewhat from its 1980s team approach to put more responsibility on the shoulders of individual line executives.

As they will soon find out, however, the J&J idea doesn't come without risks. In this freewheeling culture, company presidents who stumble often find themselves swept aside. Chances for advancement can be hard to come by, especially in a smaller operating unit, because many individual companies want to hire only from within. Then there's the issue of supervision: Operating companies sometimes make costly and embarrassing mistakes that could have been avoided with more home-office guidance. "Entrepreneurial anarchy" is a real danger for decentralized corporations, warns Marc C. Particelli, senior vice-president at consultant Booz Allen & Hamilton Inc.

BULGING OVERHEAD. Decentralization can be especially troublesome in sales. Today, dozens of J&J representatives call on customers such as Wal-Mart Stores Inc. or Kmart Corp. But big retailers increasingly want to simplify their dealings with manufacturers by reducing the number of contacts from the home office. Another top concern for a decentralized company: overhead. Scores of units operating autonomously can lead to duplication in back-office functions. Overhead at J&J is a hefty 41% of sales, compared with 30% for its much more centralized rival, Merck & Co., and 28% for Bristol-Myers Squibb Co.

This isn't lost on Larsen. The 53-year-old CEO, who used to run the company's retail-driven consumer sector, is responding with a relentless attack on duplication. To keep large retailers happy, he has established "customer-support centers." These employee teams work on-site with retailers to ease distribution and ordering. Although giant customers such as Wal-Mart still get bombarded with sales calls from dozens of different J&J units, at least the goods from most operating companies can be delivered to retailers' warehouses in single large shipments. "We're very excited about it," says James A. Glime, manager of business development at Kmart. "This makes sense, and it certainly supports our business into the 1990s."

Since taking over as CEO three years ago, Larsen has pushed his companies to pool back-office functions, such as payroll processing, computer services, purchasing, distribution, accounts payable, and benefits. In 1989, he launched an effort among U.S. consumer companies to unite customer-service and credit functions. Code-named Pathfinder, it replaced four separate departments that used to do credit reviews, sometimes on the same customers. "If a customer has a question about a delivery, they don't have to call the baby company, then our consumer-products organization, and so on," says Larsen. "They make one phone call to one person who specializes in them, and no matter where the problem is, that person takes care of it."Meanwhile, Larsen is leaning hard on presidents to keep hiring from getting out of hand--a troublesome tendency in a decentralized system. "We've been absolutely unreasonable on the addition of head count," he says. His philosophy on hirings in general: "It is not good to add people." From 1984 to 1989, J&J's work force swelled 12%, to 83,100. Since Larsen took over, it has shrunk by about 400 people.

`INSIDIOUS.' To many at J&J, Larsen's consolidation plans are nothing short of heresy. Some promising executives have even left because of them. William C. Egan III, who quit J&J in 1990 after 17 years to become president of the Arm & Hammer division of Church & Dwight Co., argues that consolidation taken too far "is insidious." As president of Johnson & Johnson Baby Products Co., Egan disagreed with Larsen's 1989 decision to merge it with several other units to form Johnson & Johnson Consumer Products Co. While still speaking glowingly of J&J as an innovator, he complains that "the decentralization I grew up with and thrived on was being put into reverse."

In Larsen's view, he is just righting an imbalance. In its professional segment in Europe alone, J&J had 28 separate units last year because it operates in so many different countries. Now, it is paring them down to a more manageable 18. "Perhaps in the past, decentralization went a bit too far," he says. "We're bringing it back." The values that matter most in the system--freedom to be creative in research, in sales, and in staff development--are being preserved, Larsen argues. "We will never give up the principle of decentralization, which is to give our operating executives ownership of a business. They are ultimately responsible."

For this reason, J&J's headquarters is home to only 1,000 staffers, about a third of them executives. Directly overseeing the 166 operating companies are 19 company group chairmen, a few of whom work out of Europe. Strategy flows up from the bottom as individual companies set their plans and review them with group chairmen. Above the group leaders are three sector chairmen, representing J&J's pharmaceutical, professional, and consumer sectors. They report to Larsen. The CEO also hatches broad strategic plans with a seven-member executive committee, which includes himself, the three sector chairmen, and three other staff executives.

J&J's controlled chaos suits a company whose raison d'etre is innovation. Products introduced over the past five years now account for a hefty 25% of sales. When J&J develops or acquires a promising new device or product, the first step is often to set up a division in a larger company to incubate the idea, appoint a management team, and then eventually break out the unit into a freestanding company. That way, the product gets the attention of a dedicated and undistracted management, along with the financial backing of a corporate powerhouse.

SHOTGUN BLAST. The classic example is Tylenol. Seventeen years ago, the pain-reliever from J&J's McNeil Pharmaceutical was little known outside hospitals. Then, rival Bristol-Myers laid down a challenge by coming out with a lower-priced acetaminophen, Datril, and backing it with a full-bore consumer-ad push. J&J countered by unleashing a group of hard-charging marketers who matched Bristol's prices, one-upped the New York company by selling an extra-strength formulation, and used Tylenol's good name with doctors to make it the remedy of choice.

Soon, the Tylenol business grew into a division and then was spun out into the independent McNeil Consumer Products Co. Along the way, it counted Larsen among its vice-presidents for marketing and for manufacturing. Now, it's one of J&J's most important and innovative companies. It survived the Tylenol-tampering scares of the 1980s with its forthright publicity campaign. And more recently, it staved off a fierce competitive threat from American Home Prod~ucts Corp.'s Advil brand.

Tylenol's strategy has been to stretch the brand name to its limits: There are now more than 20 shapes and sizes of Tylenol in five categories--ranging from Tylenol Sinus to Tylenol Allergy and a new grape formulation of Children's Tylenol. Persistent, big-scale advertising assures that Tylenol is uppermost in consumers' minds, and good relations with hospitals keep it popular there--which makes a convincing argument to consumers. The franchise now generates an estimated $1 billion in annual sales.

`GET PEOPLE CLOSER.' When J&J's entrepreneurial managers get hold of a winning product, they rarely hit a false note. "You need to get people closer to the marketplace so they can come up with the ideas," says James T. Lenehan, 43, who has been president of McNeil Consumer for two years. Because Lenehan has worked on Tylenol on and off since joining J&J in mid-1976, he is close enough to the market that he can sense opportunities quickly. In August, 1990, only four months after Lenehan took over, he rolled out three new cold products--Tylenol Cold & Flu, Tylenol Effervescent, and Tylenol Cold Nighttime--to steal a march on the lucrative cold-remedy business.

Given the freedom to succeed or fail on their own, J&J companies can sometimes be a little too aggressive for regulators' tastes. In 1988, the Ortho Pharmaceutical unit sponsored a press conference to promote the wrinkle-fighting abilities of its acne treatment Retin-A before the Food & Drug Administration had approved any such use of the medicine. The FDA said this violated its marketing rules and, unable to come to terms with J&J, referred the matter to the U.S. Attorney in New Jersey for investigation for potential prosecution. No action has been taken, and the company declines to comment. On Apr. 9, an FDA advisory committee said a form of Retin-A, to be marketed as Renova, should be approved as a prescription wrinkle cream.

J&J's tough-guy tactics have riled competitors, too. Last year, Lenehan's team rolled out Tylenol PM, a combination painkiller and sleeping pill to compete with Bristol-Myers Squibb's venerable Excedrin PM. In no time, Tylenol's new little blue box cut into sales of Excedrin PM's nearly identical little blue box, becoming a $60 million-a-year winner. But now, J&J is in court, fighting charges that its copycat packaging was illegal. After losing a first-round fight against a temporary injunction on sales, in late February, J&J got a stay of the injunction pending court action. J&J maintains that it never intended to confuse consumers, and it contends that its packaging did not have that effect.

LOST HEADS. A cool-headed corporate overseer might have avoided a court tussle over Tylenol PM with simple packaging changes, but such a move would have gone against the grain at J&J. Corporate managers, including Larsen, will question their company presidents, but rarely does an executive in the Tower veto people on the ground. That's part of a longstanding tradition. Former Chairman James E. Burke used to love debating strategy with employees, recalls John B. Ziegler, a former J&J company president who now runs the Consumer Brands Div. at rival SmithKline Beecham. "But at the end of the day, if he disagreed, he would say: 'You're running the business, and it's your decision.' "

The risk to company presidents is that bad decisions can cost dearly--especially if they run counter to the wishes of higher-ups. "Guys who raised their heads too high out of the foxhole have had them shot off," recalls one former J&Jer, who says he was ousted from his Tower post in a falling-out with colleagues. "It's your ass if the idea fails." The upside for successful company presidents: substantial raises and J&J stock options tied to their performance.

The system isn't exactly geared for easy advancement, though. Many junior executives find it tough to move up when young presidents stand in the way, and tougher still to jump over to a separate company. Notes Ross A. Webber, a management professor at the Wharton School, who has worked with J&J executive wannabes in management-development programs: "J&J has always had a chronic problem of career-pathing."

Moves among J&J's sectors--pharmaceutical, consumer, and professional products--are especially difficult. This is disturbing to many within J&J, because aspiring Tower executives ideally need a taste of all three. A new executive-development program is supposed to combat the problem by making presidents share their yearly managerial reviews with the Tower, so group chairmen can move talented people from one sector to another. Yet many presidents still want to promote from within their organizations first. Lenehan, for instance, says flatly that he prefers to recruit college graduates and develop them internally.

UNIQUE PERSONALITIES. The separate cultures can make executives brought in from other J&J companies feel like outsiders. Larry G. Pickering joined J&J's Janssen Pharmaceutica Inc. in 1988 after 16 years at J&J, the last few as chief of Ortho Pharmaceutical's dermatology division. Like different people with kindred values, J&J companies have common standards but unique personalities, he says. The 52-year-old Ortho, narrowly focused on contraceptives, tends to approach things like most mature businesses. Its marketing, for example, sticks to a formula that has worked for years. But the younger Janssen is in everything from antihistamines to anesthetics, and as such, it has a more risk-taking entrepreneurial spirit, Pickering says.

With the help of group chairmen, J&J's disparate units can sometimes find common ground. In 1989, when Janssen introduced the antihistamine Hismanal in the U.S., an executive in the Tower knew that the sales staff of McNeil Pharmaceutical happened to have some down time. Rather than staff up excessively at Janssen, McNeil's salespeople helped pitch the drug to doctors. But, to underscore the separateness of the outfits, the marketing agreement between Janssen and McNeil was a formal contract, spelling out terms and payments. Says Pickering: "We have to keep reminding ourselves that we work for the same corporation."

This is just the sort of cooperation that Larsen is after. Decentralization "is not an end unto itself," he says. Still, he isn't giving up the idea that fast-growing businesses are better off on their own. In February, J&J added yet another company to its list by splitting off its Ethicon Endo-Surgery unit from Ethicon Inc. Endoscopic surgery, which uses small incisions and cameras to help in operations, is the rage among surgeons. But Ethicon, which makes products such as sutures and surgical needles, has been fighting intense competition from U.S. Surgical Corp., and J&J felt the fast-growing endoscopic unit would do better if it didn't have to concern itself with Ethicon's problems.

It's little wonder that Larsen wants to stick with decentralization. Since 1980, J&J's yearly profit gains have averaged over 19%, while annual sales have risen by more than 10% in five of those years, including each of the past two. But with so many businesses under his baton, Larsen has to work extra hard to keep everyone playing the same tune. In fact, the company roster can change so fast that sometimes even Larsen isn't sure how many he has. "We're always folding some company and creating others," he says. Recently, Larsen suggested that the total was 175, only to becorrected by a staffer. As long as the bottom line keeps growing, it doesn't much matter.

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