This week you are required to submit a case study analysis. Your paper analysis should be between 3 – 5 pages, not counting the title and reference page. No submission should be fewer than 1050 words.

This week you are required to submit a case study analysis. Your paper analysis should be between 3 – 5 pages, not counting the title and reference page. No submission should be fewer than 1050 words.
e&sss )orting fbr originally posits, are rckholders ry of these GOs and This trend rese banks ,. publicly :cide how poor and lelnrining ::: lnttle : I branch:r-l profits :: r deposits.:en Bank. :;.I ale;ICe.::er hanks -:- ifUe :i: poor’? B rnco i :i).]JTi]I 🙂 3l’e : rrtTld6-q cAsE .? ffi s&& $rjss iltilfi?rc*rul{:s- In Janualy 2015. executives from Samsung Electronics, the South Korean elecrronics giant. declaied that they were making a bi-e bet on the so-callecl Internet of things. This represented a return to the firm,s concept of a digi_ ta1 home. where all of the firm’s gadgets and appliances would be connected to the Internet. Samsung was just one of many players vying to sl.rape the connected home of the future. and it was far fl-om clear whose vision would pre_ vail or even il it would be profitable. The bet seemed to be necessary fbr Samsung because it faced profit pressures and strong competition from price- cuttin-9 Chinese start-ups such as Xiaomi and Huawei in the smartphone business (see Exhibits I and 2). Samsung had been a leader in sales of mobile phones. but its posi_ tion was being challenged in a growing number of markets ” Case prcpared by Jamai Shamsic. Michigan State University, l,ith the assistance o[ Prolcssor Alan B. Eisner. pace University. Matcria] has been drawn liom published sources to be used lbr purposes o[ class discussron. Copyri_rht O 2015 Jamal Shrmsic ard Alan B. Eisner. by lower-priced smartphones. At the same time. Samsung was facing stiff-er competition from Apple, which hacl been matching Galaxy phones, tablets. ancl phablets by inrr.o- ducin-e larger and cheaper. versions of its own highly popu_ lar iPhones (see Exhibits 3 and 4). Analysts claimed that the problem lay with Samsung’s reiiance on selling hardware while other competitor.s. rang_ ing liom Apple to Xiaomi, offered exclusive software ancl Internet services for their devices that set their products apart from all others. Some competitors were also begin_ ning to generate l’evenues from of1’ering these services through their own app stores. Although Samsung off-ered some customized versions of the Android system that it used. they did not help dilfbrentiate its offerings from those of others that atio offerert Android ,rnu.fl,on.r. “That’s really the difficult part for them,,, saicl Ben Baja_ rin, a consumer technology analyst. ,.Their customers are actually Google’s, they’re not necessarily theirs.”l Executives at Samsung claimed that the t)rnr,s strength lay in the diverse line of its products, which included Revenue 136,323,670 i 54,630,328 Gross profit 41 ,128,806 51 ,963,504 Operating income 10,309,038 16,352,670 165,001,771 201,103,613 228,692,661 52,856,651 14,451,682 90,996,358 15,861,224 29,049,338 36,785,013 13,734,067 23,185,375 29.821.215 lncome Statement (in billions of KRW) Balance Sheet (in billions of KRW) Net income Source: Samsung Total current assets Total assets Total current liabilities Total liabilities Total stockholders’ equity Source: Srmsung. 9,57 1,598 15,799,035 54,211 ,297 61 ,402,589 71,502,061 112,179,188 134,288,143 155,631,25.1 34,204,424 39,944,121 44,319,014 42,734,204 48,B 18,652 58,1 50,956 72,925,734 89,229,623 101,725,852 87,269,017 110,760,271 181,07 1,570 214,075,018 46,933,052 51 ,31 5,409 63,977,518 69,632,402 121,480,206 150,016,010 t CASI:8:: SAMSUNG ELECTRONTCS C2O* Smartphone Sales Worldwide, 2014 Global Market Ranking, 2014 Samsung Apple H uawel LG Lenovo Xiaomi r”,*,iiir-i,”,’ Xiaomi Samsung Coolpad Lenovo Huawei Source: Canalys. Woll Street lourrwL televisions, cameras. laptops, and even washing machines (see Exhibit 5). Although smartphones accounted for as much as two-thirds of its profits. Samsung could have increased its revenues from its other offerings. Further- more. unlike all of its rivals. Samsung made most of its own components, which could have allowed it to offer bet- ter products with lower costs. This would have enabled the firm to generate profits even if profit margins on some of these products continued to decline. In spite of its emphasis on hardware. Samsung was aware of the clear shift in electronics away from hardware to software. In 2014. the firm introduced its first smart- phone that ran on Tizen, an operating system that it had developed with lntel and other partners. Although the system was not likely to challenge existing mobile operat- ing systems such as Google’s Android, Samsung was hop- ing that it would provide it with a platfbrm on which to build its own services. The firm was well positioned to bring Tizen to the mass market by installing the software on televisions. cameras. and watches. Eventually. it might also become the system that Samsung could use to con- nect all gadgets and appliances to create the lnternet of things. eXO CASI 38 :: SAMSUNG ELECTR0NICS Memory chips Digital televisions Mobile phones Side-by-side refrigerators DVD players Washing machines Camcorders Digital cameras i;,;;;;;,;;;, Discarding a Failing Strategy Although Samsung chairman Lee Kun-hee had called for a shift in the firm’s strategy, the transformation would not have been possible without the ceaseless efforts of Yun Jong Yong, who was appointed to the position of president and CEO in 1996. When Yun took charge, Samsung was stil1 making most of its profits from lower-priced appli- ances that consumers were likely to pick up if they could not afford a higher-priced brand such as Sony or Mitsubi- shi. It had also become an established low-cost supplier”of various conlponents to larger and better-known manufac- turers around the world. Although the firm was making profits, Yun was con- cerned about the future prospects of a firm that was rely- ing on a strategy of competing on price with products that were based on technologies developed by other firms. The success of this strategy was tied to the ability of Samsung to continually scout for locations that would ailolr’ it to keep its manufacturing costs down. At the same time, it would need to keep generating sufficient orders to tnain- tain a high volume of production. In particular, Yun was concerned about the growing competition that the firn-t was likely to face tiom the many low-cost producers that were springing up in other countries. such as China. Yun’s concerns were well founded. Within a year of his takeover, Samsung was facing serious tinancial problems that threatened its survival. The company was ieft with huge debt as an economic crisis engulf’ed most of Asia in 1997, leading to a drop in demand and a crash in the prices of many electronic goods. In the face of such a deteriorat- ing environment. Samsung continued to push for maintain- ing its production and sales recolds even as much of its output was ending up unsold in warehouses. By July 1998, Samsung Electronics was losing millions of dollars each month. “If we continued, we would have gone be11y-up within three or fbur yeals.” Yun recalled.2 He knew that he had to make some drastic moves in order 1 2 2 3 aJ 5 5 4 4 32Yo 15 147″ 12 tl 12 11 Smartphone Sales in China, 2014 to turn thin-9s around. yun locked himseif in a hotel room fbr a whole day with nine other senior ntanagers to try to find a way to save the firm. They all wrote reiignation let_ ters and pledged ro resign if they failed. After much deliberation. yun and his management team decided to take several steps to try to push Samsung out of its precarious financial position. To begin with. they decided to lay otT about 30,000 employees, well over one_ third of the lirm’s entire workfbrce. They also closed down many of Samsung’s factories fbr two months so that they could eiin’rinate its large inventory. Finally. they sold ofT about $2 billion worth of businesses like pagers and elec_ tric cotfeemakers that were perceiveO to Ue of marginal si-{nif icance for the firm’s tirture. Developing a Premiurn Brand Having managed to stem the losses. yun decided to move Samsung away from its strategy of competition based largely on the lower price of its offerings. Consequently. he began to push the firm to deveJop its own products rather than to copy those that other firms had deveioped. In par_ ticular. Yun placed considerable emphasis on the devel_ opment of products that would impress consumers with their attractive designs and their advancecl technology. By focusing on such products, yun hoped that he could develop Samsung into a premium brand that would allow him to charge higher prices. To achieve this, Yun had to reorient the firm and help it to develop new capabilities. He recruited new managers and engineers. many of whom had developed considerable experience in the U.S. Once they were recruited” yun got them into shape by putting them through a four_week boot camp that consisted of martial drills at the crack of dawn and mountain hikes that lasted all day. To create incen_ tives for this new talent. yun discarded Samsung’s rigid seniority-based sysrein and replaced it with a merit_based :1 stern ltrl atlvancemenl. As a resr-rlt of these efTorts, Samsung started launch_ ing an array of products that were designed to make a big impression on consumers. They included the largest flat-panel televisions, cell phones with a variety of f.ea_ tures such as cameras ancl pDAs, e er-thinner notebook contputers, and speedier and richer semiconductors. The flrm calls them “wow products.,,and they are designed to elevate Samsung in the same way the Trlnitron television and the Walkman had helped to planr Sony in the minds of CONSUInCIS. Finally. to help Samsung chan-ee its image among consumers, Yun hired a marketing whiz, Eric Kim, who worked hard to create a more upscale irnage of the firm and its products. Kim moved Samsung’s adveitising away from 55 diff’erent advertising agencies around the worlci and placed it with one firm, Madison Avenue.s Foote, Cone & Belding Worldwide. in order to create a consistent global brand image for Samsung,s pro Kmart and place more of its products into more upscale specialty stores such as Best Buy and Circuit City. Yln initiated rhe pracrice of working closely wirh retailers to get more information about the specific needs ofprospective consunters. Unlike Apple, Samiung focused heavily on studying existing markets and innovating inside them. “We get most of our ideas fiom the market.,, said Kim Hyun-suk. an executive vice presiclent at Samsung.i The firrn was able to develop strong relationships with retailers because of this practice. Over the years, Samsung also attracted many wireless carriers becairse of its will_ ingness to work with them on tiguring out what to ofTer in their smartphones and tablets. Speeding Up New Product Development Yun took many steps to speeci up Samsung,s new prod_ uct deveiopment process. He was well aware that he woulcl be able to maintain the higher margins only as long as his firm kept introducing new products into the market well ahead of its estabiished rivals. Samsung managers who had^worked for big competitors said they had to _eo through far fewer layers of bureaucracy than they had to ln the past to win approval for new products. budgets, ancl marketing plans. speeding up their nbility to seize opportunities. Apart from reducing the bureaucratic obstacles. yun took advantage of the emerging shift to digital technolo_ gies.. He made heavy investments in key technolo-eies. ranging from semiconductors to LCD displays, that could allow the firm to push out a wide variety of revolution_ ary digital products. Santsung continuously invested more than any of its rivals in research and clevelopment, with the investmenr rising to almost $i2 billion ty 1Ol+. tt naa assembled a large force of designers and engineers who worked in several research centers that were spread arouncl the world (see Exhibit 6). Yun fbrced Samsun-9’s own units to compete with out_ siders in order to speed up the process fbr developing inno_ vative new products. In the liquid-crystal-display business. fbr example. Samsung bought half of its color filters fiom Sumitomo Chemical Company of Japan and sourced the other half internally, pitting the two teams against each other. “They really press these departments to compete,., said Sumitomo president Hiromasa yonekura.4 As a result of these steps. Samsung claimed that it had reduced the time required to go from new product concept to rollout to as little as flve months. comparetl to over a year in 2000. In large part. this resulted from the effor.t of the fir.m,s top managers, engineers, and desi-qners, who worked relentlessly in the five-story VIp center nesrled amid the firm’s industrial complex in Suwon. They workecl day and night in the center, which included clormitories and show_ ers fbr brief rests. to work out any problems that might hold back a product launch. The progress macle by ihe teams that pursued new product designs in the VIp center enabled Samsung to reduce complexity in the early stages of the design cycle. This allowed the firm to move irs I I I eA$! IS :: SAMSUNG ELECTRONTCS (;.11 Designers EmPloyed 2014 2012 2010 2008 2006 2004 2002 2000 1 998 Source: Samsung. products quickly to manufacturing with minimal problems and at the lowest possible cost. Kyunghan Jung, a senior manager of the center, explained: “seventy to eighty per- cent of quality, cost and delivery time !s determined in the initial stages of product development.”5 The speedier development process allowed Samsung to introduce the first voice-activated phones. handsets with MP3 players, and digital camera phones that sent photos oue, a gtobul system for mobile communications networks’ For an example of the firm’s speed and agility, Charles Golvin of Forrester Research talked about Samsung’s abil- iry to create four different industrial designs of its Galaxy S smartphone for four varying wireless network types around the world and deliver the phones simultaneously’ “They’ve had a long histoly oi lesponding to market trends with a lot ol alacrity.” he remarked.” Perfecting a Design Process As Yun was building the Samsung brand, he was also try- ing to position the firm to compete with all others on the Uusis o1 the irresistible design of its wide range of prod- ucts, from home appliances to handheld computers to flat-screen televisions that would all be eventually linked to each other. ln fact. the firm seemed to be well placed to develop attractive gadgets that straddled tladitional technology categories. “We have to combine computers’ “nnrr*”i electronics and communications as Koreans mix their rice with vegetables and meats,” said Dae Je Chin, the head of Samsung:s digital media division.T Although Samsung triecl to pack its products with vari- ous attractive features, it drew on the knowledge of about 900 designers with backgrounds in disciplines as diverse as psychotogy, socioiogy. economics. and engineering These O.ilgn.tt, in turn. drew on information that was collected by over 60,000 staff members working in 34 research azl: CAS$ ?8:: SAMSUNG ELECTRONICS centers across the globe, in cities such as San Francisco, London, Tokyo, Mumbai, and Shanghai. lnside these cen- ters, designeis observed the way that consumers actually used various products. The wide Galaxy Note phone, for exan’rple, .”rult”d from the responses of focus groups who wanted a device that was good for handwriting. drawing’ and sharing notes. Asian consumers said that they tbund it easier to write characters on a device by using a pen rather than typing on a keyboard (see Exhibit 7)’ “Thi research process is unimaginable,” said Chang Dong-hoon, an executive vice president of Samsung who had ied the company’s design eftorts’ “We go through all avenues to make sure we ,.Id th” trends correctly'”8 Sam- sung had been sending its growing group of designers to ,uriou. locations to spend a few months at lashion houses’ furniture designers, and cosmetic specialists to stay cur- rent with trends in other industries. Designers of the latest Galaxy smartphone said they drew inspiration fiom tlips to ruins in Camboclia, vistas in Helsinki, a Salvador Dali art exhibit in London, and even a balloon ride in Africa’ Furthermore. Samsung appointed designers to execu- tive positions in order to make sure that they could get their icleai to top managers. In 2015′ the firm recruited Lee Don- tae. who had been a top executive at a leading U’K’ design agency. He joined Chang Dong-hoon’ who was recently glren-churg” of the firm’s design strategy team, which had 6″”n ore..ieing the design of products across all of the prod- uct lines. In the tall of 2014, Samsung unveiled a slick design website to shore up its self-proclaimed status as a design powerhouse. As a result of these zrnd earlier efforts, Samsung ‘had earned 210 design awards since 2006 at contests in the United States, Europe, and Asia. Afier the firm won awards at a recent U.S. consumer elecffonics show. an executive said: “samsung strives to consistently lead the consumer electron- ics industly in product design and engineering innovation “q Samsung was relying on the attractiveness of its prod- ucts to make them the centerpiece of a digital home’ In a showroom in the lobby of its headquarters in Seoul’ the firm showed off many of its latest offerings, ranging fi’om tablet computers to digital cameras. Visitors could put on goggles to watch characters jump out on 3-D teievisions ot’ .ouiA .num” their t’eet on an interactive LED fioor’ Roger Entner. a wireless industry analvst at Neilson, said about Samsung’s efforts: “With its resources and experience’ it’s trying to capitalize on the emergence of smart connected devices. The question is, ‘Can they be a cutting-edge trentlsetter like APPIe?”‘ r 0 Creating a Sustainable Model? Samsung recently launched a l0-year Vision 2020 corpo- rate goai fbr the firm to join the ranks of the top 10 globa1 companies by achieving $400 billion in sales’ Although it already ranked as the largest technoiogy company in the world by revenue, Samsung was determined to continue to grab market share from competitors across a wide range of product categories. To reach its targeted sales 900 Bs0 750 600 s50 475 300 200 115 Samsung Milestones 1969 Samsung Electronics established as maker of televisions with technology borrowed from Sanyo. 1977 Samsung introduces its first color tejevision. 1981 Samsung begins to focus on undercutting Japanese rivals with me-too products, with little emphasis on design. 1988 Samsung launches first mobile phone. 1993 Samsung begins to reinvent the firm through design. 1994 samsung hires design consurtancy IDEO to herp deverop computer monitors. 1995 samsung sets up in-house design schoor, the rnnovative Design Lab ofsamsung. 1 996 Yun Jong Yong takes over as cEO; he declares “Year of Design Revolution,” stressing that designers should lead in product planning. ‘1998 Asian financjal crisis dents samsung’s ambitions, forcing it to cut design staff by 2B%. 2000 Samsung once again focuses on design, and CEO Yun Jong Yong calls for design- led management. 2001 Yun initiates quai’terly design meetings for top executives and opens design labs in Los Angeles and London. 2002 Samsung’s “usability laboratory’, inaugurated in downtown Seoul. 2004 Market value ofSamsung rises above $j00 billion. 2008 Lee Yoon Woo takes over as CEO from yun. 2009 Samsung is set to announce its first loss since 2000; the firm announces major reorganization. 2010 Gee Sung Choi takes over as CEO. 2013 New co-leader team is formed. Source: Samsung goal. Sarnsung was reorganizing to focus more strongly on each of its bLrsinesses, enconpassing several cliffbrent businesses. that were allocated to three major divisions: consumer electronics. IT and mobiie communications. and device solutions. However. after l-ee Kun-hee. the chairman of Samsung Electronics who had helped transform the complny into a technology giant. suft-ered a heart attack in May 20111, analysts began to question how the firm would perfbrm when he stepped down. The flrm had already changed its CEO a couple of times since 2008. after yun’s departure. before settling in 2013 on a team of co-CEOs. Lee,s health issues had 1ed the firm ro consider a major shake_up in its management ranks. Among other possibie moves, Sam_ sung was considerin,e combining the smartphone and the appliance divisions under B. K. yoon, moving away from the unusual arrangement of dividing diff’ereni brrin”rr”, among three co-CEOs. If yoon was siven this added responsibiiity, he would be well positioieci to help Sam_ sung compete in the so-called connected home referred to as the Internet of things. He had been one of the main proponents of the company,s push in this direction and was responsible fbr Samsung’s 20121 acquisition of U.S. connected-home start-up SmartThin-qs. In the meantime. Samsung continued to push on advances in hardware. It deveiopecl a foldable video dis_ play screen that could be used in smartphones or other devices. Kwon Oh-hyun. the firm,s chief executive. said that it planned to start bringing devices with fbldable display screens to the maltet. Late in 20 14, Samsung released a smartphone with a display that curvecl around one side of the phone. along with a virtual reality heacl_ set. as the firm looked beyond the traditional modei. The headset. calied the Samsung Gear”VR Innovator Eclition. was a nylon strap that allowed users to mount the Galaxy Note in front of their eyes. enabling users to play games and watch movies. But Samsung’s biggest strengrh possibly lay in its leading position in memory chips. As chip technology improved more incrementally, Samsung *r, or” of the few companies left that could make investments in new genera_ tions of semiconductors. As a result. it could become one of the biggest suppliers to other smartphone manufacturers. It was already one of the major suppliers of chips. among other components, for lirms such as Apple. Sony. and HewletrPackard. “Then Samsung will have greater control orrer the whole ecosystem,” said Sundeep Bajikar, a securi_ ties analyst. “The benefits of that can be enormous ,,i1 t C&!f 2E:: SAMSUNG ELECTR0NTCS e21i
This week you are required to submit a case study analysis. Your paper analysis should be between 3 – 5 pages, not counting the title and reference page. No submission should be fewer than 1050 words.
e,&sEs CASE ffiM pxx&ffi. After delaying the release of The Good Dinosaur, leaving Pixar without an offering during 2014, everyone at Pixar was looking forward to the release of two films during 2015. Inside Out, abovt the emotions that live inside the mind of a young girl, was due out in June’ It was to be fol- lowed in November by The Good Dinosau4 about a world in which dinosaurs never became extinct. Assuming that both films would perform well, Pixar could have a memo- rable year. “We put our hearts into these films,” said John Lasseier, the company’s chief creative officer.l Since Pixar launched Toy Story in 1995, it had released 14 films, each of which debuted at the top of the box * Case prepared by Jamai Shamsie, Michigan State University, rvith the assisrance of Professor Alan B. Eisner, Pace University. Material has been drawn from published sources to be used for purposes of class discussion’ Copyrlght O 2015 Jamal Shamsie and AIan B. Eisner’ office charts (see Exhibit 1). Its films also received critical acclaim, with nine nominations and seven wins for Best Animated Film. This was far more awards than any other studio had received since the category was added in 2001. However, despite the commercial success of Cars 2 and Monsters ()niversit1,, these recent films did not generate the rave reviews that had been accorded to all of Pixar’s earlier offerings. This led many industry observers to ques- tion whether Pixar had lost some of its creativity since it became part of the Walt Disney Company. Disney had acquired Pixar in 2006 for the hefty sum of $7.4 bil1on. The deal was finalized by the late Steve Jobs, Apple Computer’s chief executive, who also served as the head of the computer animation firm. Disney CEO Bob Iger had worked hard to eventually acquire Pixar, whose track record made it one of the world’s most successful animation companies. Both Jobs and Iger were aware, however, that they All of Pixar’s films released to date have ended up among the top animated films of all time based on worldwide box office revenues in millions of U.S. dollars’ Pixar Films 1 2 ) 4 5 6 7 B 9 10 11 12 13 14 Toy Story 3 Finding Nemo Monsters University Up The lncredibles Rototouille Monsters, lnc. Cors 2 Brove Woll-E Toy Story 2 Cors A Bug’s Life Toy Story 2010 2003 2013 2009 2005 2007 2002 2011 2012 2009 ‘1999 2006 1 998 1 995 $ 1 ,065 940 745 735 630 620 575 560 555 535 515 460 365 390 C274 CASI 36:: PIXAR Source: IMDB. Variety. had to try to protect Pixar’s creative cuiture while they also tried to car:ry some of it over to Disney’s animation efiorts. In fact, it was these pressures to maintain its past success that led Pixar to delay the release of The Good Dinosaur. The firm pulled the film away from its director as it began to search fbr new ways to rework the story. Pixar had done this before, and the lirm insisted that rethinking an ani- mated film was not uncommon, especialiy when working with fresh, untested ideas. Given that animated films could take up to three years to complete, story changes could occur in the middle of production. This could require that someone else take the lead in order to complete the film. Ed Catmull, president of Pixar, reiterated his firm,s commitment to take whatever steps might be necessary to put out the best possible film. “Nobody ever remembers the fact that you slipped a film, but they will remember a bad film,” he said.2 Catmull’s remarks indicated that Pixar was dedicated to having its lengthy process ofplay- fully crafting a film replace the standard production line approach that had been pursued by Disney. This contrast in culture was best reflected in the Oscars that the employees at Pixar displayed proudly but which had been painsrak- ingly dressed in Barbie dolI clothing. Pushing for Computer Animated Films The roots of Pixar stretched back to 1 975 with the founding of a vocational school in Old Westbury, New York, called the New York Institute of Technology. It was there that Edwin E. Catmu1l, a straitlaced Mormon from Salt Lake City who loved animation but couldn’t draw, teamed up with the people who would later form the core of Pixar. “It was artists and technologists from the very start.” recalled Alvy Ray Smith. who worked with Catmull during those years. “It was like a fairy tale.”3 By 1979, Catmull and his team decided io join forces with famous Hollywood director George W Lucas, Jr. They were hopeful that doing so would al1ow them to pursue their dream of making animated films. As part of Lucas’s filmmaking facility in San Rafael, California, Catmull’s group of aspiring animators was able to make substantial progress in the art of computer animation. But the unit was not able to generate any profits, and Lucas was not willing to let it grow beyond using computer ani- mation for special eff’ects. Catmull finally turned, in 1985, to Jobs, who had just been ousted from Apple. Jobs was reluctant to invest in a firm that wanted to make full-length feature films using computer animation. But a year later, Jobs did decide to buy Catmull’s unit for just $10 miilion, which was one- third of Lucas’s asking price. While the newly named Pixar Animation Studios tried to push the boundaries of computer animation over the next five years, Jobs ended up having to invest an additional $50 million-more than 25 percent of his total wealth at the time. “There were times that we all despaired, but fortunately not all at the same time,” said Jobs.a Still. Catmull’s team continued to make substantial breakthroughs in the development of computer-generated full-length feature films (see Exhibit 2).In 1991, Disney ended up giving Pixar a three-film contract that started with 7o1 Slor1. When the movie was finally released in 1995, its success surprised everyone in the fitm industry. Rather than the nice little film Disney had expected, Zoy Srory became the sensation of 1995. It rose to the rank of third-highest-grossing animated film of all time. earning $362 million in worldwide box office revenues. Within days. Jobs decided to take Pixar public. When the shares, priced at $22, shot past $33, Jobs called his best friend, Oracle CEO Lawrence J. Ellison. ro tell him he had company in the billionaires’ club. With Pixar’s sudden suc- cess, Jobs returned to strike a new deal with Disney. Early in 1996, at a lunch with Walt Disney chief Michaet D. Eisner. Jobs made his demands: an equal share ofthe profits, equal billing on merchandise and on-screen credits. and guaran- tees that Disney would market Pixar films as it did its own. Boosting the Creative Component With the success of Toy Story, Jobs realized that he had hit something big. He had obviously rapped into his Sili- con Valley roots and turned to computers to forge a unique style of creative moviemaking. In each of its subsequent films, Pixar continued to develop computer animation that allowed for more lifelike backgrounds, texture, and move- ment than ever before. For example, since real leaves are translucent, Pixar’s engineers developed special software algorithms that both reflected and absorbed light, creating luminous scenes among jungles of clover. In spite of the significance of these advancements in computer animation, Jobs was well aware that successful feature films would require a strong creative spark. He understood that it would be the marriage of technology and creativity that would allow Pixar to rise above most of its competition. To achieve that, Jobs fostered a campus-like environment within the newly formed outfit similar to the freewheeling, charged atmosphere in the early days of his beloved Apple, to which he returned as acting CEO. “It’s not simply the technology that makes Pixar,” said Dick Cook. lormer presidenr ol Walt Disney srudios.5 Even though Jobs played a crucial supportive role, it was Catmull who was mainiy responsible for ensuring that the firm’s technological achievements helped to pump up the firm’s creative efforts. He was the keeper of the company’s unique innovative culture, which blended Silicon Valley techies, Hollywood production honchos, and artsy anima- tion experts. In the pursuit of Catmull’s vision, this eciectic group transformed their office cubicles into tiki huts, circus tents, and cardboard castles with bookshelves stuffed with toys and desks adorned with colorful iMac computers. One of Catmull’s biggest achievements was the crearion of what was called the Pixar Braintrust (see Exhibit 3). This creative group of employees, which included direc- tors, met on a regular basis to assess each movie that the Al.< 1 CASF 36:: PIXAR e27s 1 986 1 9BB 1991 1 995 1991 2009 2011 201 1 2013 Source: Pixar. Sample of Roles Ed Catmull John Lasseter Jim Morris Brad Bird Pete Doctor Harley Jessup Bill Cone Ricky Nierva Ralph Eggleston Randy Barrett Tia Kratter Bob Pauley Jay Shuster Srrra”,-tfr”r.-” – .” firm was developing and offer their ideas for improvement. It was this emphasis on creativity that kept pixar on the cutting edge. Each of its films was innovative in many respects and made the best possible use of computer ani_ mation. “They’re absolute geniuses,” gushed Jules Roman, cofounder and CEO of rival Tippett Studio. ,,They,re the people who created computer animation really.,,6 C276 CASE 36:: FIXAR Milestones SteveJobsbuysLucas’scomputergroupandchristensitPixar.Thefirmcompletesashortfilm, LuxoJr.,whichis nominated for an Oscar. Pixar adds computer-animated ads to its repertoire, making spots for Listerine, Lifesavers, and Tropicana. Another short, Tin Toy,wins an Oscar. Pixar signs a production agreement with Disney. Disney is to invest $26 million; pixar is to deliver at least three full- length, computer-animated feature films. Pixar releases Toy Story, the first fully digital feature film, which becomes the top-grossing movie of the year and wins an Oscar. A week after release, the company goes public. Pixar and Disney negotiate a new agreement: a 50-50 split ofthe development costs and profits offive feature-length movies. Short Geri’s Gome wins an Oscar. 1 998-99 A Bug’s Life and Toy Story 2 are released, together pulling in $ t .3 billion through box office and video. 2001-04 A string of hits from pixar: Monsters, tnc., Finding Nemo, and The lncredibles. 2006 Disney acquires Pixar and assigns responsibilities for its own animation unit to Pixar’s creative brass. Cors is released and becomes another box office hit. WolLE becomes the fourth film from Pixar to receive the Oscar for a feature-length animated film. Toy Story 3 receives five 0scar nominations and wins two, including one for Best Animated Film. Steve Jobs dies, leaving Ed Catmull in charge. Brove becomes the sixth film from pixar to receive an oscar for Best Animated Film. an kr an B A de if AI AI it: SC gr o1 o1 sL rh Pi rh 1a at I€ tr t tL o It L I1 a 1’t b I hi 1 President, producer Chief creative officer, producer, director, writer Business manager Director, writer Director, writer Production designer Production designer Production designer, art director, character designer Art director Character designer, set designer, matte painter Shading art director, digital painter Character designer, sketch artist Character and environment designer Catmull was aiso working hard to build upon this pur- suit of creative innovation by creating programs to develop the employees. Employees were encouraged to devote up to four hours a week. every week, to further their education at Pixar University. The in-house training program offered 1 l0 different courses covering subjects such as live impro- visation, creative writing, painting, drawing, sculpting, b t( a. t1 o a L n .i h ts cner rls pur- ler elop ote up ilcation ot-tered impro- rlpting. and cinematography. For many years, the school’s dean was Randall E. Nelson, a former juggler, who had been known to perform his act using chain saws so students in animation classes had something compelling to draw. Becoming Accomplished Storytellers A considerable part of the creative energy went into story development. Jobs understood that a film would work only if its story could move the hearts and minds of families around the world. His goal was to develop Pixar into an animated movie studio that was known for the quality of its storytelling above everything else. “We want to create some great stories and characters that endure with each generation,” Jobs stated.T For story development, Pixar relied heavily on 43-year- oid John Lasseter, who went by the title of vice president of the creative. Known for his collection of 358 Hawaiian shirts and his irrepressible playfulness with toys, Lasseter was the key to the appeal of all of Pixar’s films. Lasseter was very passionate about developing great stories and then harnessing computers to tell these stories. Most of Pixar’s employees believed it was this passion that allowed the studio to ensure that each of its li1ms was a commercial hit. In fact, Lasseter was regarded as the Walt Disney of the 2 1 st century. When it was time to start a project, Lasseter would iso- late a group of eight or so writers and direct them to forget about the constraints of technology. The group members would bounce ideas off each other, taking collective responsibility for developing a story. While many studios tried to rush from script to production, Lasseter took up to two years just to work out all the details. Once the script was developed, artists created storyboards that connected the various characters to the developing plot. “No amount of great animation is going to save a bad story,” he said. “That’s why we go so far to make it right.”E Only after the basic story had been set did Lasseter begin to think about what he would need from Pixar’s technologists. And it was always more than the computer animators expected. Lasseter, for example, demanded that the crowds of ants in A Btrg’s Life not be a single mass of look-a1ike faces. To solve the problem, computer expert William T. Reeves developed software that randomly applied physical and emotional characteristics to each ant. In another instance, writers brought a model of a butterfly named Gypsy to researchers, asking them to write code so that when she rubs her antennae, viewers could see the hairs press down and pop back up. At any stage during the process, Lasseter might go back to potential problems that he saw with the story. In A Bag’.i Life, for example, the story was totally revamped after more than a year of work had been completed. Originally, it was about a troupe of circus bugs run by P.T. Flea that tries to rescue a colony of ants from marauding grasshoppers. But because of a flaw in the story-why would the circus bugs risk their lives to save stranger ants?-codirector Andrew Stanton recast the story to be about F]ik, the heroic ant who recruits Flea’s troupe to fight the grasshoppers. “You have to rework and rework it,” explained Lasseter. “It is not rare fbr a scene to be rewritten as much as 30 times.”e Pumping Out the Hits In spite of its formidabie string of hits, Pixar had diffi- culty in stepping up its pace of production. Although they may cost 30 pelcent 1ess, computer-generated animated films sti11 take considerable time to develop. Furthermore. because of the emphasis on every single detall, Pixar used to complete most of the work on a film beible mor ing on to the next one. Catmull and Lasseter later decided to u’ork on several projects at the same time, but the firm was not able to release more than one movie in a 5ear. To push for an increase in production, Pixar built up its workforce to well over 1,000 employees. It also turned to a stable of directors to oversee its movies. Lasseter, who had directed Pixar’s first three films, supervised other directors who took the helm of various films that the studio chose to develop. Monsters, Inc., Finding Nemo, The Incredibles, Ratatouille, and Brave were directed by some of this new talent. But there were concerns about the number of direc- tors that Pixar could rely upon to turn out high-quality animated films. Michael Savner of Banc of America Secu- rities commented: “You can’t simply double production. There is a finite amount of talent.”r0 To meet the faster production pace, Catmull added new divisions, including one to help with the development of new movies and one to oversee movie development shot by shot. The eight-person development team helped to gener- ate more ideas for new films. “Once more ideas are per- colating, we have more options to choose from so no one artist is feeling the weight of the world on their shoulders,” said Sarah McArthur, who served as Pixar’s vice president of production. 1 1 Finally, Catmull kept pushing technology in order to improve the quaiity of animation, with no more than 100 animators working on each film. Toward this end, Cat- mull oversaw the development of new animation software, called Luxo. which allowed him to use fewer people, who could be pushed to address various challenges that had to be faced. During the production of Brave, for example, the animators had to make the curly hair of the main character appear natural. Claudia Chung, who worked on the film, talked about their reaction to various methods they kept trying: “We’C kind of ro11 our eyes and say, ‘I guess we can do that,’ but inside we were all excited, because it’s one more stretch we can do.”l2 At the same time, Catmull understood that the high stan- dards of the firm could not be compromised for the sake of a steady flow of films. This was evident in Pixar’s decision to delay the launch of The Good Dinosattbecause the firm felt that it had to rethink the film to ensure that it would work well. Everyone at Pixar remained committed to Jobs’s philosophy that every one of Pixar’s films should grow out eASe 36:: PIXAR C2?7 of the best efforts of the firm’s animators, storytellers, and technologists. “Quality is more important than quantity.,,he emphasized. “One home run is better than two double,s.”i3 To preserve the firm’s high standards. Catmull worked hard to retain Pixar’s commitment to quality even as the firm grew. He used Pixar University to encourage collabo_ ration among all employees so that they could develop and retain the key values tied to their success. And he helped devise ways to avoid collective burnout. A masseuse and a doctor came by Pixar’s campus each week. and animators had to get permission fron:r their supervisors if they wanted to work more than 50 hours a week. To lnfinity and Beyond? Despite the less than stellar performance of a couple of Pixar’s recent films, expectations were high for Insicle Out and The Good Dinosau4, both of which would be released in 2015. It was quite likeiy that pixar had been experiencing some growing pains rather than compromising on its stan_ dards under Disney. In fact, Steve Jobs had been convinced that Pixar’s links with Disney would be mutually beneficial for both firms. In his own words: .,Disney is the only com_ pany with animation in their DNA.,,]4 Lasseter denie 5. Ibid.. p. 1.16. 6. Ibid. 7. Marc Graser. Pixar run by focused group. y./rlen., December 20, 1999, p. 7 1. 8. B. Barnes. It wasn’t a u,reck. not really. Nev, york Ilnes, October lg. 201 1. p. C,1. 9. Burrows & Grover. op. cit.. p. 146. !,,, ABC. , ABC ) ABC-IAberciAccen:Acce s s AccourAce H. Acer G Actii i: Adelp:r It)-. AdidasADP C AEG. ( Aer LLi AES. .: alin.iAholJ I AIG: ri Grl Airbni.Airhur. Clr Air Ch:: A[-:.jAirTr::AirTr;:.Akam”iA1 br: AIbertr..Albert:.Alcon i: Aldi. lr AlerrniAlfre,l I AIibab..Lior::Alico. l’ Alios B: Allegh::Alle_gi.:Allerge:Alhant r ALLrei:Alpha Amal,s- Crrr, Amazor. 15 L._l.q -. clt:ct6-descrip But Catmull and Lasseter cOntinued to lace a ChallenSins 10. Andrerv Bary. Coy story. Borron,s, October 13″ 2003. p.21. task. and they were still adjusting to the loss of foUs. ir,no ” ?_11]t1 Terdiman.BravelvgoingwherePirarAnimationtechhas passed away in 2011. At the saile time. everyone r, pi.” ,, ;:l-‘,1il”i;li^iilil,ffiliilllsquariry? wattsrreet understood that a large part of their success could be attrib- j”rrl,i’ti]o”trury 15,200r.p.84. uted to the talent that the firm rvas able to recruit and train to 13. petcr Burrows & Ronald Grover. Stcve Jobs, magic kingdom. work together. This led to a continuous exchange of ideas and Bttsiness l’ee,(, February 6. 2006. p. 66. fostered a collective sense of responsibility on all their prof- 1-1. Churles Solomon. Pixar-creative chief to seek to resrole rhe Disney ects. “we created the studio we want to work in,,, t_urr.tait u’..t . – :,lyi. ‘lev York Ttrnes, January 25. 2006. p. C6. remarked. “We have an environmenr thar’s wacky. It.s a cre_ ]1. il1,1;.,,0 .,, ative brain trust: It’s not a place whele I mike my movies- tz. nrchari verrier. Animarion boom may trecone glur. Los Angere,s it’s a pl;rce where a group of people make movies.,,16 Innes, Augusr 20.2013. p. 83. e278 eAS[ 36:: PIXAR
This week you are required to submit a case study analysis. Your paper analysis should be between 3 – 5 pages, not counting the title and reference page. No submission should be fewer than 1050 words.
;. a _.r.ill &&-n . ‘: r-rtrklrFl.rt’ ,l i:ai i;siiru *,,.,i {ii-.i * *l{i },i” On January 20, 2015, Johnson & Johnson CEO Alex Gorsky pl’oudly annollnced that his firm had sales of S7-1.-l billion duling the prcr iorrs )clr. r’eplesentin[: iin increase of 4.2 percent over 2013. Most of this growth came from the firm’s pharmaceutical division. wl.rich Gorsky pointed olrt wils clearly generatin-s the lar-sest reveoues and was the thstest-grou’ing such dir,ision in the dlug industry in the United States. The results ofthis divi- sion compensated the relatively modest increases in reve- nne fiom the firm’s rnedical devices and consumer health divisions. both of which were recovering fiom lawsuits and recalls. Several years earlier, Johnson & Johnson (J&J) had settled with an estimated 8.000 patients over problems with its flawed all-metal altificial hip. The device had a design flaw th:rt caused it to shed large quantities of metal- lic debrls atter implantation. It was finally recalled by the fil’rn in 2010, atler Johnson & Johnson hacl coverecl up the problems for almost five years afler they began to surf-ace. The settlement cost the tirm as much as 53 billion to coll- pensate patients who had to have the artificial hip leplaced. The problems with this device would classify it as one of the lalgest medicai failures in recent history. The problems with the medical clevices unit were com- pounded by serious issues that arose with the consumer products unit, leading it to recall many of its ploducts including the biggest children’s dlug recall of all time-that ” Cirsc prcprrcd bl Jamal Shamsic. Nlichigan Statc Llnircrsitl’. u’ith thc ilssistatrce ol Prottssor Alan B. Eisner. Pace Universitl. Nhterial hrs been drawn tl-om publishecl soLrrces to be used lbr pnrposes of clirss discussion. Copl’right O 2015 Janrl Shamsie rrd Alan B. Eisrer. were potentially contaminated with clark palticles. The Food and DrLr-s Administration also slapped a plant at one ol its business units. McNeil Consumer Healthcare. with a scald- ing inspection report. causing the company to close down the fircbry to bring it up to fbderal standards. The publicity that arose fiom these problems tarnished the name of one of the nation’s niost trusted firlns. Much of the blame for Johnson & Johnson’s stumbles lell on William C. Weldon, who stepped down as CEO in April 2012 after presiding over one of the most tumultuous decades in the tirm’s history (see Exhibits 1 and 2). Critics said the company’s once-vaunted attention to quality had slipped under his watch. Weldon. u,ho had started out as a sales lepre- sentati e at tlle firm. was believed to have been obsessed witl’r meeting tor-rgl-r perfbrmance targets. even by cutting costs that might aIlbct qr-Lality. Erik Gordon. u,ho teaches business at the Univelslty of Michi-gan. elaborated on tl.ris pl.rilosophy: “We will make our numbers fbr the analysts, peliod.”l Weldon was replaced by Alex Gorsky. who had headed thc n’redical devices and diagnostics unit. Like his pledecessor. Gorsky had worked his r’vay up by meet- ing tough perfbrmance targets as a sales representxtive, and his appointment as CEO continued the film’s 126- yeal tradition of hiring leaders from within. “The future of Johnson & Johnson is in very capable hands,” said Weldon.2 Horvever. the decision to hire anothel insider raised concerns that the firm was not vely serious about changing the colporate culture that had created so r.nany of its recent problems. ‘As somebody steeped in J.&J. culture. I would be vely surplised to see bi-g changes.” said Les Funtleyder. a porttblio manager at a firm that or,vned .l&.I stock.3 Revenue Gross profit 0perating income lncome before taxes Net income Sourcc: Johnson & Johnson 61,587 42,795 16,527 16,947 ‘13,334 65,030 44,670 1 6,1 53 12,361 9,672 67,224 45,566 15,869 13,715 10,853 71,312 48,970 18,377 15,471 1 3,831 14,331 51 ,585 20,959 20,s63 16,323 tIii -a +j:=E! Balance Sheet ($ millions) Total current assets Total assets Total current liabilities Total liabilities Total stockholders’ equity 47,307 102,908 23,072 46,329 56,579 Source: Johnsor & Johnson. Cultivating Entrepreneu rship Johnson & Johnson relied heavily upon acquisitions to enter into and expand into a wide range of businesses that fell broadly under the category ofhealth care. It purchased more than 70 different firms over the past decade. An.rong Johnson & Johnson’s recent moves was the $20 billion purchase of Synthes, a leading player in trauma surgery. In November 2014, J&l completed its $1.75 billion acquisition of Alios BioPharma, which produced therapeutics fbr viral infections. As it grew, Johnson & Johnson developed into an astonishingly complex enterprise, made up of over 250 different subsidiaries that were divided among three dif’- fbrent divisions. The most widely known of these was the division that made consumer products such as Johnson & Johnson baby care products, Band-Aid adhesive strips, and Visine eyedrops. The division grew substantially after J&J acquired the consumer health unit of Pfizer in 2006 for $16.6 billion. the biggest acquisition in its 120-year history. The acquisition allowed J&J to add well-known products to its lineup, such as Listerine mouthwash and Benadryl cough syrup. But Johnson & Johnson reaped far more sales and prof- its from its other two divisions. Its pharmaceuticals divi- sion sold several blockbuster drugs. such as anemia drug Procrit and schizophrenia dlug Risperdal. A new drug, named Zytiga, prescribed to treat prostate cancer, was selling well. The medical devices division was respon- sible for best-selling products such as DePuy orthopedic joint replacements and Cypher coronary stents. These two divisions generated operating profit margins of around 30 percent, almost double those generated by the consumer business. To a lar-9e extent, however. Johnson & Johnson’s suc- cess across its three divisions and many different busi- nesses hinged on its unique structure and culture. Most of its tar-flung subsidiaries were acquired because of the potential demonstrated by some promising new products in their pipelines. Each ofthese units was therefbre granted near-total autonomy to develop and expand upon its besrselling products (see Exhibit 3). That independence e234 CASE 31 :: J0HNSON & J0HNSON 46,116 121,347 24,262 56,521 64,826 56,407 132,683 25,615 58,630 7 4,053 59,31 1 131,119 25,085 61,367 69,752 fostered an entrepreneurial attitude that kept J&J intensely competitive as others around it faltered. The relative auton- omy that was accorded to the business units also provided the firm with the abiiity to respond swiftly to emerging opportunities. Johnson & Johnson was actually quite proud of the considerable freedom that it gave to its different subsid- iaries to develop and execute their own strategies. Besides developing their strategies, these units were also allowed to work with their own resources. Many of them even had their own finance and human resources departments. While this degree of decentralization had 1ed to relatively high overhead costs, none of the executives who ran J&J, Weldon included, had ever thought that this was too high a price to pay. “J&J is a huge company, but you didn’t feel like you were in a big company,” recalled a scientist who used to work there.a Pushing for More Collaboration The entrepreneurial culture that Johnson & Johnson devel- oped over the years clearly allowed the film to show a consistent leve1 of high perfbrmance. lndeed, Johnson & Johnson had top-notch products in each of the areas in which it operated. It had been spending heavily on research and development for many years, taking its position among the world’s top spenders (see Exhibit 4′).In2014, it spent about 12 percent of its sales on about 9,000 scientists working in research laboratories around the world. This allowed each of the three divisions to continually introduce promising new products. In spite of the benefits that Johnson & Johnson derived from giving its various enterprises considerable auton- omy, there were growing concerns that these units could no longer be allowed to operate in near isolation. Shortly after Weldon had taken charge of the firm, he realized that J&J was in a strong position to exploit new opportunities by drawing on the diverse skills of its various subsidiar- ies across the three divisions. ln particular, he was aware that his firm might be able to derive more benefits from the combination of its knowledge in drugs, devices, and 54,31 6 113,644 22,811 56,564 57.080 * € Segment lnformation ($ millions) Johnson & Johnson was made up of over 250 different companies, many of which it had acquired over the years. These individual companies were assigned to three ciifferent divisions. Consumer – United States I nternation a I Total Pharmaceutical – United States I nternationa I Total Medical Devices – United States I nternationa I Total Worldwide total $ 5,096 9,400 14,496 17,432 14,881 32,313 12,254 15,268 27,522 $74,331 $ ‘1 ,941 11 ,696 7,953 21 ,590 1,027 $20,563 5,162 9,535 14,597 13,948 14,177 28,12s 12,800 15,690 28,490 71,312 13.4% 36.2 28.9 29.0 27.1v” 5,046 9,401 14,447 12,421 12,930 25,351 12,363 15,063 27,426 67,224 13.4 32.6 18.5 23.0 21.7 Consumer Pharmaceutical Medical Devices Total Less: Expenses not allocated to segments Earnings before provision for taxes on income Source: Johnson & Johnson. 1,973 9,178 5,261 16,412 941 15,471 diagnostics. since few companies were able to match its reach and strength in these basic areas. This 1ed Weldon to tind ways to make J&J,s fiercely independent units work together. In his own words: .,There is a convergence that will allow us to do things we haven,t done before.”5 Through pushing the various far-flung unirs of the firm to pool their resources, Weldon believed that the firm could become one of the f’ew that was actually able to attain that often-promised, rar-ely delivered idea of synergy. To pursue this, he created a corporate ofilce that would get business units to work together on promising new opportunities. “It’s a recognition that there,s a way to treat disease that’s not in silos,” Weldon stated. referring to the need for collaboration between J&J’s largely indepen- dent businesses.6 For the most part. however, Weldon confined himself to taking steps to tbster better communication and more frequent collaboration among Johnson & Johnson’s dis- parate operations. He was convinced that such a push for communication and coordination would allow the firm to il CASE 31 :r ]OHNS0N & JOHNS0N C235 Soruce: Johnson & Johnson. develop the synergy that he was seeking. But Weldon was also aware that any effort to get the different business units to collaborate must not quash the entrepreneulial spirit that had spearheaded most of the growth of the film to date. Jerry Cacciotti. managing director of consulting firm Stra- tegic Decisions Group, emphasized that cultivating those alliances “would be challenging in any organization, but particular’ly in an organization that has been so successful because of its decentralized culture.”7 These collaborative efforts did lead to the introduction of some highly successful products (see Exhibit 5). Even the company’s fabied consumer brands started to show growth as a result of increased collaboration between the consllmer prodr”rcts and pharmaceutical divisions. The firm’s new liquid Band-Aid was based on a material used in a wound-closing product sold by one of J&J’s hospital- supply businesses. And J&J used its prescription antifun- gal treatrnent, Nizoral, to develop a dandruff shampoo. In fact, products that wele developed in large part ollt of such cross-fertiiization allowed the film’s consltmer business to experience considerable internal growth. Confronting 0uality lssues Even as Johnson & Johnson was trying to get more involved with the efforts of its business units” it ran into quality control problems with several over-the-counter drugs made by McNeil Consumer Healthcare. Since 2008, FDA inspectors had found significant violations of manufacturing standards at two McNeil plants, leading to the temporary closure of one of them. These problems had forced the flrm to make several recalls of some of its best-selling products. Weldon did admit that problems had surfaced. but he insisted that they were confined to McNeil. He responded to them in an interview: “This is {:34 CASE 31 :r JOHNS0N & JOHNSON , ‘, Significant lnnovations Antiseptic Surgery (1 888) Three brothers start up a firm based on antlseptics designed for modern surgical practices. Band-Aids (1921) Debuts the first commercial bandages that can be applied at home without oversight by a professional. No More Tears (‘1954) Introduces a soap-free shampoo that was gentle enough to clean babies’ hair without irritating their eyes. Acuvue Contact Lenses (1987) Offers the flrst-ever disposable lenses that can be worn for up to a week and then thrown dway. Sirturo (2012) Gets approval to launch a much-needed treatment for drug- resistant tuberculosis, the first new medication to fight this disease in more than 40 years. i;,,.”, ;;;; ;;,;;,,,,,, r”.n ru,.. one of the most dilficult situations I’l,e ever had to per- sonally deal with. It hits at the core of who J&J is. Our first responsibility is to the people who use our products. We’ve let them down.”8 Quality problems had arisen before, but they were usu- ally fixed on a regular basis. Analysts suggested that the problems at McNeil might have exacerbated in 2006 when J&J decided to combine McNeil with the newly acquired consumer health care unit from Pfizer. Johnson & Johnson believed that it could achieve $500 million to $600 million in annual savings by merging the two units. After the merger, McNeil was transferred from the heavily regulated pharmaceutical division to the marketing-driven consumer products division, headed by Colleen Goggins. Because the consumer executives lacked pharmaceutical experi- ence, they began to demand several changes at McNeil that led to a reduced emphasis on qllality control. Weldon realized the significance of the threat faced by Johnson & Johnson as a result of its probiems with quality. He was especially concerned about the FDA’s allegation that the firm had initially tried to hide the problems that it found with Motrin in 2009, hiring a contractor to quietly go from store to store buyin-t all of the packets on the shelves. McNeil’s conduct surrounding the recalls led to an inquiry by both the House Committee on Oversight and Investiga- tions and the FDA’s Office of Criminal Investigations. Various changes were subsequently made at McNeil to resolve these quality issues. Goggins was pushed out of her post as senior executive in charge of all consumer businesses. Weldon allocated more than $100 million to upgrade McNeil’s plants and equipment, appoint new manufacturing executives, and hire a third-party consulting firm to improve procedllres and systems. Bonnie Jacobs, a McNeil spokeswoman, wrote in a recent email: “We will Research Expenditures ($ millionsl 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 $8,494 8,r83 7,665 7,548 6,864 6,986 7,577 7,680 7,125 6,462 I invest the necessary resources and nlake whatever changes :rre needed to do so. and we will take the tinle to do it . – –D rr gh t.-The problerns at McNeil, couplecl with growing prob- lelrs wjth J&J’s artificial hips and contact lenses. also lecl Johnson & Johnson to make changes to its corporate oversight of its supply chain and manufacturing. ln August 2010. the firm appointed Ajit Shetty. a longtime execr”r- tive. to oversee a ne’ system of con’rpanywide quality control that involveci a single framervork for quality across all of the operating units and a new reporting systen-r. The need tbr these changes was highlighted by Erik Cordor.r, a plofessor at the Ross School of Business at the llniver- sity of Michigan: “Nothing is more valuable to Johnson & Johnson than the brancl bond of trust with consumers.”i(l PassimE the Baton In Aplil 2012. Johnson & Johnson appointed Gorsky ttl lcad the health care conglomerate out of the difficulties that it had firced over the previous few yeals. He had been u,ith the firm since 1988, holding positions in its pharma- ceutical businesses across Europe. Africa, and the Middle E,ast befbre leavin-r fbr a t’ew yeiirs to work in Novartis’ Shortly after his return to Johnson & Johr.rson in 2008, he took over its rnedical device and diagnostic group. Because of his extensive background with the firm. and with the division that was being investigated about its faulty hip replacements, Gorsky might have been regardecl as the ideal person to take over the job. When he took over, DePuy, the firm’s olthopedic unit. was alreacly running into tlouble with its newest artifi- cial hip. The tirm finally lecalled the artificial hip, amid growing concerns about its failule among those who had leceived the implant. Until then, however, executives fiom the firm had repeatedly insisted that the device was safe’ Andrew Ekdahl, the current plesident of DePuy. recently reiterated that position. “This was purely a business deci- sion.” he said.llln the trial in Los Angeles Superior Court regarcling the defective hip replacement. however. Michael A. Kelly, the lawyel making the case against Johnson & Johnson. suggested that company executives might have concealed information out of concern fbr flrm profits’ In spite of all these issues, Johnson & Johnson did not attempt to clarify what infbrmation Gorsky might have had about the ploblems associated with the artificial hip. Under the circumstances. his promotion to lead the firm sur”prised Dr. Robelt Hauser, a cardiologist and an advocate fbr improved safety of medical devices. “He’s been oversee- ing one of the major J&J quality issues and the board of J&J sees fit to name him the n”*iC.E.O..” he questioned.12 These issues raised concerns about the ability of the firm to eff’ectively deal with the quality concerns and to take steps to prevent them tiom recurt”ing in the future. Gorksy’s first.iob as Johnson & Johnson’s chief execu- tive was, in fact. to reassure shareholders that the firm would move quickly to overcome its problems with manr-rfactuling defects, product recalls. and lawsuits. “We’ve -qot to adapt faster than ever belbre, be more agile than ever before.” he statecl at rhe firm’s attnual tteeting atier taking overlJ He acknowleclged that some of the problenls could pafily be attributed to the firm’s attenrpt to continue to nreet Wall Str”eet’s increasin-uly short{erm demands. Gorsky antrounced that moving forwald. J&J was committed to managing for the long term, actively soliciting f’eedback I’rom a[] quarters and adhering to the mission that made customers the first priority. Gorsky’s biggest challenge, however, came from a pro- posal that Johnson & Johnson might be better off if it was troken into smaller companies, pelhaps along the lines of its ditterent divisions. There u’ere grouing concetns about the ability of the conglomelate to provicle sutficient sr,rpervision to all of its wor’ldwide subsidiar”ies. Gorsky dismissed the proposal. claiming that J&J drew substantial benefits tiom the divelsified nature of its businesses. He rlid concede. however. that the tirn-r would have to be more selective. careful. and clecisive about the products that it would pursue. ls There a eure Ahead? Uncler Golksy. Johnson & Johnson began to divest some of its lower-glowth businesses and ledltce annual costs by $1 billion. ln 2014. the firm sold off its blood-testing unit. cal1ec1 Ortho-Clinical Diagnostics, for $’1.1-5 billion to the private equity firm Carlyle Group. lt was actively seeking a buyer for Cordis, which made medical devices such as stents and catheters. Johnson & Johnson, which had helpecl to To repair the damage to its reputation fl’on’r the many recalls across two of its divisions, Johnson & Johnson recently announced that it would remove a host of poten- tially harmful chemicals, tike tbrnialdehyde. trom its line of consumer products by the end of 2015. It was the first major consumel products company to make such a wide- spread commitment. “We’ve never really seen a major personal care product company take the kind of move that they are taking with this,” said Kenneth A. Cook, president of ihe Environmental Working Group.ll As he tried to plot a course for the future of Johnson & Johnson, Gorsky realizedthat he had to deal rvith u lariety of issues. He was aware that much of thc firm’s success to date resulted fi’om the relative autonomy that it granted to each of its businesses. At the same time, he realized that he had to provide more direction for the businesses to collaborate ivith each other in order to pursue emerg- ing opportunities. He also understood that it was critical for J&J to clevelop sutficient controls that could lnirlirnize future problems with quality control. In overall terms. it was clear that the health care giant had to rethink the process by which it managed its I aASr:x :: J0l-lNS0N & JOHNSON d:31 diversified portfolio of companies in order to ensure that it could keep growing without creating issues that could pose further threats to its reputation. “This is a company that was purer than Caesar’s wife, this was the gold standard, and all of a sudden it just seems like things are breaking down,” said Wiiliam Trombetta, a professor of pharmaceutical marketing at Saint Joseph’s University in Philadephia.15 ENDNOTES i. Katie Thomas. J.&J.’s next chiel is steeped in sales culture. New York Iines, Februaly 221,2012, p. B6. 2. Katie Thomas & Reed Abelson. J.&J. chref to resign one role. Nerr ktrk Times, February 22, 2012. p. 88. 3. Thomas. op.cit., p. BL 4. Peter Lotius & Shirley S. Wang. J&J sales show health care feels the pinch. Wall Street Journul, January 21,2009, p.81. 5. Avery Johnson. J&J’s consurner play paces growth. WuLl Street Jotrnal, Jtmary 24, 2007. p, A3. 6. Holiy Hubbud Preston. Drug giant prot,ides ar model of consistency. Heruld Tribune, March 12-13, 2005, p. 12. 7. Amy Baffett. Staying on top. Business llrealr, May 5, 2003, p. 62. 8. rbid.9. Natasha Singer & Reed Abelson. Can Johnson & Jobnson get irs xct together? Nev, York lfuzes, Januarv 16, 201 1, p. 84. 10. Ibid., p. Bz1. I l. Thon.ras & Abelson. op. cit. I2. Michaei L, Diamond. J&J’s CEO calls for fast action. Ashburr Park Press, April 27 ,2012.. p. 13. 13, Thomas, op. cit. 1,1, Katie Thomas. Johnson & Johnson to remor,e questionable chemicals inproducts. Ne*- Ytn’k llnze,r, August 16,2012. p. B1. 15. Natasha Singer’. Hip implants il-e recalled by J&J rnrl. Neyv ktrk Ilne.r, August 27. 2010, p. B L C:3S CAS| 31:: JOHNSON &JOHNSON