Analysis of the environment
Johnson and Johnson currently operate over 250 subsidiary companies in 57 countries. It is the world’s largest healthcare company comprising of three segments: pharmaceuticals, medical devices and diagnostics and consumer products.
There are two sets of forces that Johnson and Johnson’s faces in its current environment: competitive and contextual environments.
The competitive environment can be analyzed using Michael Porter’s five forces model while the contextual environment can be analyzed using PEST (Political, Economic, Social and Technological).
Contextual Environment- PEST analysis
Political environment- Dynamic policies and political regimes: The political scene on the local, regional and national front affects the operations of businesses. Given that Johnsons and Johnsons is an international company, it is important to keep track of the political changes taking place wherever its subsidiaries are located. Healthcare policies are subject to the government of a given country.
If a subsidiary of Johnsons and Johnsons is located in a country like Czech Republic, a change in the regime would mean that the major players in the healthcare might change.
Therefore, the company needs to lobby in order to ensure that policies that are affected are beneficial to the company.
For instance, the Obama administration made very significant changes in the health care sector. First, the administration introduced Obama Care. Obama care basically implies that the federal government shall have the power to regulate insurance company and consequently the type of care that American access.
In addition, as a direct consequence of Obama care, the federal government cut spending on Medicare and Medicaid to the tune of $791million per year. This money used to fond its way into the hand Big Pharmaceuticals such as Johnson and Johnson.
On the hand, Romney, the Republican presidential candidate is on record several times indicating that if elected president, he shall repeal Obama care. In case of such scenario, Johnson and Johnson and other pharmaceutical companies shall be thrown confusion again under the next government.
The past three administrations have established also an incentive framework to encourage companies such as Johnson and Johnson to manufacture specialty or orphan drugs. These include incentives to reduce operating costs in the pharmaceutical industry, tax cuts and seven-year exclusivity despite the fact that the patent has expired. Such incentives allow Johnson and Johnson monopoly over its orphan drugs as far pricing and patents are concerned. A change administration could result repealing of such health policies.
Economic environment- the economic crisis - The economic recession experienced since the year 2007 to date has had adverse impacts on all sectors of the economy the pharmaceutical industry included.
Unemployment as a result of the economic recession implies that less people can afford medical cover and healthcare in general. This is further exuberated by the fact at least 60% of workers in the US are covered by their employers. The unemployment rates in the US have declined steadily since August from 9.1% to 7.8% in September 2012. This implies that the employment situation is improving thereby presenting a better business environment for Johnson and Johnson as indicated in the graph below.
In addition to unemployment, confidence and purchasing power are key economic indicators for the pharmaceutical sector. Consumer confidence in Johnson and Johnson’s products is improving as the economy recover though at a slow rate. The graph below indicates the trends consumer confidence in the past decade in the US
Finally, the GDP growth rate of the economy in the US has been extremely slow and inconsistent. This has presented mixed fortunes for Johnson and Johnson given that return on investment in the pharmaceutical industry is directly related to the growth rate of the economy. Below is an overview of the GDP growth rate for the past five years
The social environment- aging population - The baby boomer generation which is comprised of people bore between 1946 and 1964 presents an opportunity for a gigantic boost in Johnson and Johnson sales in the future.
As this generation ages, there will be an increased need for medical products, pharmaceuticals and consumer products which are all provided by Johnson’s and Johnson’s. The aging population is prone to a myriad of health problems which include: diabetes, cancer, obesity and mental disorders such as Alzheimer’s disease.
Given that Johnson’s and Johnson’s has heavily invested in research, the medical products develop could cater for these medical problems therefore greatly boosting the profits of the company in future.
In fact according to the Centers for Disease Control, the world population of elderly citizens aged above 60years is set increase in the next four decades by double digits from 11.0% in 2010 to 21.8% in 2050. Such a case implies that pharmaceutical products marketed to the elderly have a strong long-term growth potential.
Technological environment- emergence of new fields - Johnson and Johnson has a strong research division which is a critical component in the transition from “standard” models of health care to emerging models. In the future, Johnson and Johnson could venture into emerging forms of medicine such as predictive medicine and personalized healthcare. Predictive medicine focuses on the prediction of a predisposition of an individual to disease based on factors such as genetics and the environment with the aim of preventing the disease. Personalized healthcare focuses on the health of an individual.
Demographic - In the developed nations, the general demographic trends indicate that people are living longer as a result of the raised standards of living. The ageing population faces numerous health challenges which offer Johnson and Johnson an opportunity to extend their research towards finding ways to manage or cure conditions that the ageing population suffers from
Global - On the global front, both developing and developed nations have a renewed commitment towards healthcare in line with the Millennium Development Goals. Faced with a myriad of health challenges, nations are geared towards adopting novel models of healthcare which offers Johnson and Johnson an opportunity to step up and fill the gap which could considerably increase the company’s profit margins.
Competitive environment- Michael Porter’s Five Forces Model
Threat of new entrants - Currently, new entrants do not pose a threat to Johnsons and Johnsons. This is because the establishment of a pharmaceutical company or a company is a highly capital intensive affair which would present a challenge to new entrants. In addition to this, companies that have been in existence for long like Johnson and Johnson have patented most of their products thus would challenge any infringement of the patent in court. The consumer goods sector has a vast number of players which the new entrant would have to contend with.
The threat of the bargaining power of buyers - The bargaining power of buyers goes hand in hand with the availability of substitutes. In the pharmaceutical industry, once a company such as Johnson and Johnson patents a product, they have the exclusive rights to set the price hence can enjoy huge profit margins. Buyers who include patients and doctors have no choice but to buy the drugs. The presence of cheaper generic versions of the drugs gives them greater variety and by extension greater bargaining power.
The threat of substitutes - According to the Food and Drug Administration, once a patent expires the generic version of the drug can be made available. This threatens to eat into the profits of major industry players such as Johnson and Johnson. For instance, Risperdal which is a drug used to by schizophrenics was a major source of profits to Johnson and Johnson until 2007. Once the patent expired in 2007, the generic form became available; a move that marked the plummeting of the sales of the original drug. As a result, Johnson and Johnson had to lay off some of its workforce citing the losses made.
Rivalry from competing firms - Stiff competition for Johnson and Johnson comes from companies that are located in the United States of America and Europe. These companies are driven by the need to innovate drugs and quickly recuperate their investments from the sale of their drugs given that “me too” drugs are not that profitable. However, firms located in China and India which manufactures generic forms of the drugs are also proving to be a source of competition for the company.
The bargaining power of the suppliers - In the recent times, the cost of doing business has significantly gone up. Most businesses therefore pass the cost to the consumer. For Johnson and Johnson, this could prove to be a challenge given that it pushes their running costs upwards hence they have to factor that in when doing business. The firm’s operating cost increased by 8.8% against 6.3% increase in sales.
Below is a summary of Porter’s competitive factors.
External driving forces
In the recent past, there are factors that have significantly shaped the healthcare industries: Patent policies: The Food and Drug Administration (FDA) allows for generic forms of drugs to be made available once the patent of a particular drug expires. This has proved to be detrimental to pharmaceutical giants such as Johnson and Johnson who invest heavily in research yet their profits are eaten into by companies that offer generic versions of their drugs.
In addition to this, the stringent regulation measures that has in places before approving few new pharmaceutical products slows down research and development in the industry.
Finally, price control is another major challenge in the pharmaceutical industry. This is especially a challenge synonymous to the European Union and the United States which are the two largest markets in the world presently. Of the two, the EU hast stricter price regulation policies and as a result these consequently eats the profits of companies in the industry and result in very significant price variations across the globe.
Key success factors
i. Attract and retain customers
The aim of any business is to make a profit which can only be realized once the goods or services have been sold to the consumers. For a business to succeed, it must not only attract customers but also retain them. Efficient customer service and proper packaging of the goods/ services offered by a firm are some of the factors that attract customers. Maintaining a relationship with the customer is the key to retaining customers.
ii. Develop and retain a well trained workforce
The people working in an organization play a major role in the success of a business. A well trained workforce ensures that the quality of the services or goods is desirable and finds innovative ways to maintain the standards therefore keeping the business ahead of the competition.
iii. Acquire and apply knowledge
A business ought to keep up with the emerging trends less it is rendered obsolete. It is becoming increasingly important for businesses to keep up with technological changes in order to remain relevant to the customers. It is also important to keep tabs on the policies that have been affected which affect the operations of the business.
iv. Capitalize on emerging markets
As earlier mentioned, United States and the EU are the two largest markets for pharmaceutical companies. However, this soon to change given that new markets are emerging from the wood work as more countries and region of the world given healthcare provision the attention it deserves. For instance the pharmaceutical industry in China grew by 27% in the 2011 and since major pharmaceutical companies have international operations, they are bound to capitalize on the emerging markets including China.
The pharmaceutical/ medical products industry remains one of the most attractive industries due to the following reasons:
Both developing and developed nations are faced with a myriad of health challenges as a result of modern day lifestyles. This has resulted in an increase in the incidences of lifestyle diseases such as obesity and diabetes. The need to manage or cure such disease presents an opportunity for pharmaceutical companies to innovate new products that will help in curbing the problem.
Secondly, countries across the world have pledged to improve to their healthcare systems in order to attain the Millennium Development Goals by 2015. The medical products are therefore a necessity hence making the provision of such goods a viable business option.
In addition, terminal disorders have increased sporadically in the last decades of the 20th century. As such, the world relies on the pharmaceutical industry to develop innovative products that can be used to manage such diseases such cancer, some STIs, and mental disorders among others.
Finally, the demographic trends in the developed countries present a unique opportunity. An ageing population is faced with numerous health challenges hence constantly require products from pharmaceutical companies in order to surmount these challenges.
Boston Consulting Group Matrix
As far as its dermatology and hematology portfolios are concerned, Johnson and Johnson is dominant player in the pharmaceutical industry.
In fact, the firm has no competitor in these two segments and human health disorders increase, these two segments are bound to become cash cows in the new future.
Presently, the firm has two segments that can be categorized as cash cows; the infections and analgesics segments.
However, the firm faces stiff competition in these segments from other pharmaceuticals in the industry.
On the other hand, Johnson and Johnson’s immunology segment presents a unique opportunity for the pharmaceutical company to grow its market share and hence become an overall dominant player in the pharmaceutical industry.
Finally, as far as neurology and oncology are concerned, Johnson and Johnson can either do away with these segments altogether or they can decide invest more in their research and development if the segments are to be relevant in this competitive and dynamic pharmaceutical industry.
Johnson & Johnson
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Source: Yahoo Finance
As a result Pfizer is Johnson and Johnson’s leading competitor and all business strategies should be directed at wrestling market dominance off Pfizer’s grip.
However, it must be mentioned that despite the fact that Pfizer and GlaxoSmithKline present the most competition to Johnson and Johnson, their business models are not ideal.
This is because Pfizer business portfolio is concentrated in the pharmaceutical segment while ignoring other segments such as Consumer Health & Nutritional products and Medical Devices and Diagnostics of which Johnson and Johnson is dominant player in.
On the other hand, GlaxoSmithKline’s geographical coverage is dominant in Europe despite the fact the US is the largest pharmaceutical market in the world. This implies that Johnson and Johnson has a competitive advantage over two of its major competitors on the two aforementioned fronts; diversity and geographical visibility.
Merck on the other hand, which is the second largest pharmaceutical company, has cut down its workforce by 12,000 – 13,000 a move which has reduced the firm’s profitability
Strategic Group Map
According to the strategic group map, Pfizer, Merck and GlaxoSmithKline are the major competitors to Johnson and Johnson as far as the pharmaceutical industry is concerned.
Pfizer has the most comprehensive product line breadth and therefore naturally is the dominant player in the industry by revenues and sales. On the other hand, GlaxoSmithKline has the lowest geographical coverage of the four.
Merck is yet to catch-up with the big three players in the industry but it is definitely a company to watch out for in the future given that the firm has increased its research and development budgetary allocation by 10%. Finally of the four, Johnson and Johnson has the most diversified product line and therefore has one of the most balanced portfolios in the industry
Since Johnson and Johnson’s strengths far outweigh weaknesses and opportunities far outweigh threats, the firm should adapt offensive and diversified strategies.
This combination will not only ensure that Johnson and Johnson maintain its market share but also grow exponentially thereby maintaining its dominance in the pharmaceutical industry.
Congressional Budget Office. (2006). Research and Development in the Pharmaceutical Industry. Washington, DC: Congressional Budget Office.
Dikshit, R., Hauptman, J., Lam, J., & Han, S.-H. (2010). Johnson & Johnson:: Evollence. Washington, DC: Columbia University Press.
Johnson and Johnson. (2007). 2007 Sustainability Report. New Jersey, NJ: Johnson and Johnson.