Johnson & Johnson Macro-Environmental Factors

Part 1

Read about the macro-environmental factors influencing the external environment of the company in ‘Materials’, ‘Part 1’. Considering what you have studied in Week 6, analyse the macro-environment of the organisation.

STEEPLE ANALYSIS OF J&J (PHARMACEUTICAL INDUSTRY)

POLITICAL

Government has a high level of influence and power in the pharmaceutical industry. This impact can affect pricing, taxes and duty. Although the FDA cannot control the cost of drugs, it has the power to approve generic versions of drugs, offering cheaper alternatives. There are ‘drug companies abusing government processes to block generic competition and keep drug prices rising’. It is evident that although the government and federal agencies are attempting to keep the price of medication down, their processes are sometimes flawed and can be manipulated, at detriment to the consumer.

LEGAL

Factors such as product efficacy and safety concerns over ingredients can have a detrimental impact on a company within the pharmaceutical industry. Linking in with Political factors, the healthcare industry is often falling under scrutiny from government bodies. This can result in legal investigations and prosecutions. Pharmaceutical companies such as Johnson and Johnson are often embroiled in patent related disputes. The expiration of existing patents from competitors can impact the company massively.

SOCIOLOGICAL

It is important to understand how society has an impact on the culture of an organisation within its environment. The populations attitude plays an important role in how an organisation understands its customer base. Demographics of the population, surging rates of health issues and falling birth rates as well as financial circumstances, educational levels and attitudes towards health and the environment are all impacting factors. In the case study we see how ‘the demand for pharmaceuticals and innovative medicines will increase, driven by a growing and ageing population’.

TECHNOLOGICAL

With the fast pace of technological change, coupled with the advancement of technological research, it is important for the pharmaceutical industry to stay ahead. The introduction of AI enables companies to make smarter, faster, and more strategic decisions. ‘AI will increase drug development efficiency by not wasting research efforts’.

ECONOMIC

Pricing pressures and volume slowdowns affect markets globally and as a result, generic players are finding it difficult to source growth from traditional means market expansion. The changing foreign exchange current rates and the risk of global inflation can often mean loss but as Johnson and Johnson is a company that operates in multiple global markets, it may be in a position to balance its loss from the profits made in other markets around the world. Biosimilar competition and the placement of substitutes in the market will inevitably have an impact on revenue.

ENVIRONMENTAL

As ‘the pharmaceutical industry is one of the most wasteful, it needs to increase efficiency’. Linking technological factors here through the use of AI will ‘enable companies to make smarter, faster and more strategic decisions’ which should benefit both the company but also the end user of its products. R&D into waste management will ensure that the risk posed by the company to the environment is minimal.

ETHICAL – Link to Sustainability in Environmental

Go green Products that are Environmentally Friendly

Part 2

Analyse the industry context of the company, considering both the competition and the other forces, and discuss the attractiveness of the industry. Refer to the theories and frameworks presented in Week 7 and 8 and apply them to the specific case.

Being a diversified company, Johnson & Johnson operates primarily in the well-defined pharmaceutical industry. The pharmaceutical industry is one that discovers, creates, develops and brings new drugs to the market. Its function is to create value through the discovery of new medications via research and development, which should improve the quality of the end user’s life as well as bringing in profit to the organisations operating within the industry.  The pharmaceutical industry has been infiltrated with the emergence of generic drugs. Research tells us that products that are close substitutes of each other can quite often satisfy the same customer needs and this is most certainly the case in the pharmaceutical industry. ‘Generic drugs contain the same ingredients, strength and dosage as the branded drug and are FDA approved as bioequivalent to the branded version’ mostly at a fraction of the cost to the consumer. When considering Porters (2008) two questions and thinking about the scope of products offered on the pharmaceutical market, it is clear to see that the pharmaceutical industry is penetrated with competitors offering similar products, some branded and some generic, some cheap and some more expensive. The scope of this industry is global although competition in some countries can be highly regulated. Kilian O’Driscoll reports that ‘as biopharma manufacturing becomes increasingly globalised, complex and more highly regulated, the sector must become more streamlined and cost efficient at manufacturing its products’.  It could be argued that the more competitors within an industry, the tougher the competition will be however, this is not always the case as this very much depends on the level of control a competitor has over its markets shares.

Using the market shares for the companies within the pharmaceutical industry Pharmaceutical Executive (2018), we can calculate the level of concentration. Given that the H Index is 0.0369 and is therefore less than .2 in accordance with Bankso et als (2013) structure, it is identified that the industry type is one of perfect competition operating at an unconcentrated level. The theory of perfect competition suggests that the pharmaceutical industry offers homogenous products, its consumers are price focused and that the entry and exit barriers are non-existent. The manufacturing of generic or unbranded products for the pharmaceutical market means that if one manufacturer ceases trading then another can easily take its place. Conversely, perfect competition necessitates that there are no complex entry requirements, however evidence suggests that there is a level of intervention involved within the pharmaceutical industry. Therefore, it could be argued that there is an element of oligopoly here as ‘the FDA has to oversee the development of and approve a drug before it can be brought to the US marketplace’. When considering the life cycle of the pharmaceutical industry, it is easy to assume that the industry lays in the growth phase as Grant (2016, p. 207) suggests ’that it is when there is a convergence towards a dominant design that the industry moves from the development to the growth stage. This is because customers feel less risk in adopting a widely accepted solution, and companies are more likely to invest in creating production capacity’. Yet, it could also be argued that the pharmaceutical industry can be at different phases of the life cycle depending on its location. For example, the pharmaceutical industry in its maturity stages in America may only be in the introduction or growth stages is developing parts of the world. Not all industries are ecosystems following a life cycle. Professor D’Aveni (1994) called this hypercompetition.

Evidence suggests that technology and market knowledge only provide temporary advantage. Research and Development through innovation and competitive manoeuvring paved the way for the introduction of new drug ingredients thus giving way to biotechnology. It is important to note here that the evolution of key competencies within the industry, often leads to the emergence of new competitors with identical competencies, meaning that a new competitive advantage must be gained.

By adopting and applying Porters Six Forces model to the pharmaceutical industry (see diagram below) we can see what it means to compete within it. The model shows trends in the market which allows companies to adapt their products to better suit the market’s needs, expectation and interest. By analysing the pharmaceutical industry in this way, companies can formulate a relevant and effective strategy to help them compete effectively. The pharmaceutical industry is competitive with ‘the sales of biopharmaceuticals in China expected to grow at a rate of 25% annually to an estimated $48.8 billion’. However, larger pharmaceutical companies with the majority market share make it difficult for new competitors. If a lower level competitor exited the industry and someone took their place, this would likely not have a major impact on concentration and profitability (Schmalensee, 1989; Salinger, 1990). Many smaller companies may even consider selling to a larger pharmaceutical firm once they get a product through its development stage. This could be used as an exit strategy. Supplier power is low due as the industry is somewhat fragmented. Large pharmaceutical players outsource more and more of its manufacturing activity therefore, investors may see an opportunity here to consolidate and evolve the business sector. Buying power is Low/Medium because patients/end users have no power where pricing is concerned. However, the lower cost of alternative drugs makes prices more competitive and the buyers can choose to purchase generic rather than branded.

In summary, the pharmaceutical industry was attractive by many standards in the past. However, this attractiveness has diminished slightly over the years and may diminish more in the coming years with the ongoing debate surrounding healthcare legislation. Recent industry trends suggest that profits could soon be affected by increasing buyer power and lower entry barriers. Unless you can enter the market with millions of dollars, a new idea or a fully granted patent then this may not be the most lucrative industry to be in when coming up against the bigger more well-known players.

Part 3

Read the documents you can find in ‘Materials’, ‘Part 3’. Analyse the resources and capabilities of the company and how they contribute to a position of sustainable competitive advantage. Refer to the theories and frameworks presented in Weeks 9, 10 and 11 and apply them to the specific case.

In identifying the resources and capabilities, it is important to know what they are and the role they play in an organisation. Resources are defined as assets we have whilst capabilities are what we do with the resources. Both are separate distinct concepts and any organisation that possess these can gain a competitive advantage. They are internal to the firm. Grant and Barney (1991) believes that the RBV puts together the idea that resources and capabilities are the principle basis for strategy and are a firm’s primary source of profitability. The key concept behind the RBV is that the basis for competitive advantage lies in the application of the valuable resources at the firm’s disposal. One of these sources of profit is that of competitive advantage, which according to Grant (1991) is ‘the development and deployment of resources and capabilities’. When a firm is adaptable, they are capable of slotting into whichever market best suits their capabilities. They don’t need to let the markets dictate what it must deliver. This shows the importance of having a competitive advantage. Furthermore, it could be suggested that a greater competitive advantage can be gained from within an organisation. Johnson and Johnson are an example of this and owes much of its success to nurturing talent, developing technologies and building capabilities that allow adaptability to their changing business environments.

Many of the resources at J&J are linked to each other e.g. (tangible) financial resources have an impact on (intangible) R&D and innovation, as well as the ability to develop and market their products. Johnson and Johnson leverage their strategy off their resources and capabilities, and it is for this reason they have a great competitive advantage and their reputation is world renowned. We see this in the global recognition of its brand in the pharmaceutical industry. Of course, in order to innovate and develop products, manpower is needed, and it is here that the human capital of J&J comes to light. Without the education, knowledge and passion of its employees, especially on the R&D team, J&J perhaps wouldn’t have such a high standing in the industry. 

The framework below shows the resources and capabilities of Johnson and Johnson, the importance of them and how they are linked to strategy. It reinforces the fact that everything must be in place in order to try and gain a sustainable competitive advantage. Achieving excellence in product development is one of the toughest challenges yet in the hierarchy of capabilities, J&J have many individuals in their workforce that possess a broad range of specialist knowledge in their field. The higher-level capability of J&J is based around its R&D, Innovation and Technology area. This bears a strong link to their use of capital. 

Identifying the resources and capabilities of J&J sets the groundwork for an evaluation. By using the VRIO framework below to evaluate J&Js resources and capabilities, we can see if the company is capable of withholding a sustainable competitive advantage in the pharmaceutical industry.

 Johnson and Johnson are among the top pioneers of the pharmaceutical industry thanks to their ground-breaking innovation and patents which gives them a sound competitive advantage over may of their peers. However, coming up with an idea doesn’t mean that another company won’t imitate it or replicate it down the line therefore rendering it unsustainable. From the VRIO framework it is evident that Johnson and Johnsons sustainable competitive advantage comes from their global brand recognition and their patents for medical devices and pharmaceutical products.

J&J is a household name and a trusted one at that, given its market share in the industry. With its 133 years of success and achievement, J&J are constantly motivated to bring new ideas, approaches as well as products to market for years to come. J&J have already proved that they can create sustainable consumer products such as their sulphate free AVEENO Shampoo. J&J used cutting edge technology and science as well as consumer insight and green chemistry to create this product.  Over the years, J&J has actively managed its portfolio and invested heavily in its defence against the impact of the patent pressure present in today’s pharmaceutical industry. This centres the focus of J&J to develop and deliver to the patients and consumers who depend on their products to make their lives better therefore giving it a sustainable competitive advantage over others in the market. 

It is important to consider the structure and the framework of an organisation when thinking about (sustainable) competitive advantage. Porters (1985) Value Chain Analysis looks at this structure and its links to procurement, technology development, HR management, firm’s infrastructure. The chain shows how a firm will benefit the end user and how it has to manage and follow through with all the variables to make sure they get it right as an organisation.

The value chain was created to better understand the internal configuration of an organisation. Through its analysis, senior key players within the organisation can identify where value is created or conversely, where it is being missed. J&J want to ensure that patients receive the correct medicine, at the appropriate time and from a convenient location but this requires a complex value chain involving three major components, manufacturing, distribution and dispensing. These are all part of the primary activities carried out by the company however, if we apply the support activities from Porters (1985) Analysis, the support activities are the elements that add the most value. Innovation coupled with R&D allows J&J to generate new medications. It is the value added from this new medication that directly relates to patient treatment. These advances may cure diseases or improve the patient’s health. In doing so, this lessens the burden on the health service and has societal benefits too in that people who are ill can return to work and school.

Value for J&J is not only added by the medication it produces, but also in the high level of scientific knowledge and technological research involved in the development of its products. This value is backed by the ‘Support Activities’ outlined in Porters (1985) analysis.  Without HRM for example, J&J wouldn’t have the specialist people in key roles. Similarly, if wasn’t for the use of Technology and AI, J&J wouldn’t be able to discover and develop life changing drugs. All of these value creating activities are interlinked and are integral to the creation of the sustainable competitive advantage that J&J has within the pharmaceutical industry. It is this linkage between activities that Porter (1985) stresses in his framework. Building relationships between functions within an organisation is an activity that can yield a sustainable competitive advantage. In the case of Johnson & Johnson, the connections between HRM, Innovation and Technology shows an element of unicity. Because of their casual ambiguity, it is difficult to imitate these connections. The value chain helps to highlight not only the value creating activities but also how those activities are connected to create sustainable competitive advantage.

In summary, it is easy to distinguish how the competitive position of J&J is influenced by its resources and competencies in comparison with its rivals. Particularly the application of the Value Chain Analysis has identified the activities that enhance the value perceived by customers. 

Part Four

Building on your work on Block 2, reflect on the skills you have developed so far and how the activities you have carried out in Block 2 have enhanced those skills.

An activity that I feel has helped contribute to my skills development is Activity 9.7. This activity taught me how to define and classify resources of an organisation as well as helping me to develop my ability to critically analyse theories and frameworks as set out in the module materials. Although this case study was based round Starling Bank, I also took the framework in the activity and used this to apply the concept to the organisation I currently work for.

Another element of Block 2 that I now find it much easier is systematically analysing data.  Analysing data was something that I was not really familiar with before embarking on B302 and if I’m honest, the idea of it scared me a little but since analysing data for both TMA01 and TMA02, I am becoming more comfortable with it and have definitely found that practice makes perfect. The market shares and concentration indexes activities 7.6 and 7.7 really helped me to grasp the concepts better.

In addition to the activities mentioned above, I have also learned to value and appreciate the opinions of my peers also embarking on the same journey. Reading peoples view on the TGF has opened my mind and in turn assisted me in my own learning. Sometimes seeing things from another’s perspective, makes things clearer or easier to understand. I have found that the skills I have developed over the module so far, have also allowed me to become more active in my own workplace in terms of voicing my views on the strategy process within our own company, to senior management. 

On the flip side of my development, I have found managing time more difficult with this being my first level 3 module. However, I am learning quickly that there are benefits to drawing up a comprehensible timetable. This allows me to structure my study time into my daily schedule.

References

1. Barney, J. B. (1991) ‘Firm resources and sustained competitive advantage’, Journal of Management, vol. 17, no. 1, pp. 99–120.
2. Besanko, D., Dranove, D., Shanley, M. and Schaefer, S. (2013) Economics of Strategy, 6th edn, International Student Version edn, Hoboken, NJ, John Wiley & Sons.
3. D’Aveni, R. (1994) Hypercompetition: Managing the Dynamics of Strategic Maneuvering, New York, Free Press, pp. 217–18.
4. Grant, R. M. (1991) ‘The resource-based theory of competitive advantage’, California Management Review, vol. 33, pp. 114–35.
5. Grant, R. M. (2010) Contemporary Strategy Analysis: Text Only, 7th edn, Hoboken, NJ, Wiley.
6. IMS Institute for Healthcare Informatics (2014) Understanding the pharmaceutical value chain [Online]. Available at https://www.ifpma.org/wp-content/uploads/2016/02/IIHI_Report_Pharma_Value.pdf  (Accessed from OU Materials 17th January 2019).
7. Pharmaceutical Executive (2018) Top 50 global pharmaceutical companies by prescription sales and R&D spending in 2017 (in billion U.S. dollars), Statista, Available at https://www.statista.com/statistics/273029/top-10-pharmaceutical-companies-sales-and-rundd-spending-in-2010/  (Accessed from OU Materials 17th January 2019).
8. Porter, M. E. (1980) Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York, Free Press.
9. Porter, M. E. (2008) ‘The five competitive forces that shape strategy’, Harvard Business Review, vol. 86, no. 1, pp. 78–93.
10. Salinger, M. A. (1990) ‘The concentration-margins relationship reconsidered’, Brookings Papers on Economic Activity, vol. 21, pp. 287–335.
11. Schmalensee, R. (1989) ‘Inter-industry studies of structure and performance’, in Schmalensee. R. and Willig R. D. (eds) Handbook of Industrial Organization Volume 2, Amsterdam, Elsevier, pp. 951–1009.
12. The Open University (2019) ‘B302 Week 10: Internal analysis: assessing resources and capabilities’ [Online]. Available at https://learn2.open.ac.uk/mod/oucontent/view.php?id=1522976 (Accessed 16th January 2020).
13. The Open University (2019) ‘B302 Week 11: Internal analysis: Internal analysis: from capabilities to strategy’ [Online]. Available at https://learn2.open.ac.uk/mod/oucontent/view.php?id=1525814  (Accessed 16th January 2020).
14. The Open University (2019) ‘B302 Week 6: External analysis: the macro environment’ [Online]. Available at https://learn2.open.ac.uk/mod/oucontent/view.php?id=1488386  (Accessed 16th January 2020).
15. The Open University (2019) ‘B302 Week 7: External analysis: the competition in an industry’ [Online]. Available at https://learn2.open.ac.uk/mod/oucontent/view.php?id=1492808  (Accessed 16th January 2020).
16. The Open University (2019) ‘B302 Week 8: External analysis: evaluating the competitive forces in an industry’ [Online]. Available at https://learn2.open.ac.uk/mod/oucontent/view.php?id=1504001  (Accessed 16th January 2020).
17. The Open University (2019) ‘B302 Week 9: Internal analysis: identifying resources and capabilities’ [Online]. Available at https://learn2.open.ac.uk/mod/oucontent/view.php?id=1516337  (Accessed 16th January 2020).