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Johnson & Johnson HELPED BY THE HEALING POWERS OF INNOVATION, THE JOHNSON FAMILY FOUND A HEALTH-CARE EMPIRE INSIDE THE FAMILY MEDICINE CHEST. THAT'S OPENED UP ENDLESS OPPORTUNITIES.
By Paul Lukas Reporting by Maggie Overfelt

(FORTUNE Small Business) – Earle Dickson's bride was learning to cook--and constantly cutting and burning herself in the process. So Dickson, a cotton mill worker for surgical supplier Johnson & Johnson in 1920, created makeshift bandages she could apply herself, using small patches of J&J gauze attached to adhesive tape. They were so successful that Dickson presented the idea to J&J management, which in 1921 came out with Band-Aids. Sales the first year were only $3,000 and remained so sluggish throughout the 1920s that in 1928, J&J's ad agency, Young & Rubicam, ruefully noted, "Not even a combination of sampling, advertising, and window display is sufficient to create a popular demand for Band-Aids to justify the cost of the effort." But improvements to the product helped, most significantly the production of individual bandages instead of a single long strip that required users to snip off what they needed. Band-Aids were soon on their way to securing a spot in every household's medicine cabinet. Dickson was promoted to vice president. And that ad exec faded into obscurity.

More than just the tale of the humble beginnings of a successful brand, the Band-Aid story in many ways encapsulates much of what has made Johnson & Johnson one of the world's largest health-care companies. The 117-year-old business, founded by Robert Wood Johnson and then run by his son, has rarely relied on traditional top-down decision-making, preferring to try decentralized management despite the strong-willed personalities of the men who ran it. Innovation has flowed from all over, and J&J has taken advantage of it, bringing surgical tools into the modern era and now-familiar products like baby powder into the home.

Forty-year-old robert Johnson, a salesman and former pharmacist's apprentice, joined his brothers, James and Mead, in 1886 in their nascent surgical-supply business and set about imposing his will. "Modesty was not one of Robert Johnson's strengths," wrote Lawrence G. Foster in his biography of Robert Wood Johnson II, The Gentleman Rebel (1999). "He did not hesitate to say that his brothers had gotten off to 'a feeble start' without him." As a believer in the then-radical findings of British surgeon Joseph Lister, who had discovered airborne germs, Johnson quickly moved to expand the company's offerings of plaster casts with an antiseptic surgical dressing made from absorbent cotton gauze. Sterility and disinfection weren't yet prevalent in operating rooms, and many patients perished from infections introduced during surgery. J&J published Modern Methods of Antiseptic Wound Treatment in 1888, gathering information from leading doctors to educate its customers--physicians--about the future of surgical procedures. It discreetly offered its products for sale in the back pages. The book soon became the authoritative source on the topic, and within six years J&J was producing 3.5 million yards of gauze annually.

Just as Earle Dickson would later develop the Band-Aid, the ideas for two of J&J's most famous products didn't come from the top. As reported in A Company That Cares, J&J's centennial history, the chief surgeon for the Denver & Rio Grande Railway complained to Johnson in 1888 about the high accident toll that resulted as the rail network expanded, and how surgeons were rarely there to help. Within two years the company had invented the original first-aid kit. Not only did J&J produce the kits, but its chief scientist, Fred Kilmer, defined "first aid" so that samaritans wouldn't make things worse. "First aid," he said, "is meant to prevent an extension of an injury rather than its treatment."

Dr. Kilmer developed another J&J staple after a doctor wrote to the company in 1890 regarding a patient who'd developed a skin irritation from one of J&J's medicated plasters. Kilmer responded by sending a small tin of talcum powder and suggested applying it to the affected area. It worked so well that J&J began including the talc with many of its plaster mixes, which in turn led to the discovery that it also alleviated a more common type of skin irritation: diaper rash. Soon there was demand for a retail version, and Johnson's Baby Powder was born.

Johnson & Johnson cemented its reputation as a guardian of the public health by its response to three calamitous events between 1898 and 1906. The U.S. military turned to J&J for medical supplies during the Spanish-American War, and the company provided everything from compressed surgical dressings to a newly developed cloth stretcher for carrying the wounded. Then, in the wake of the mighty Galveston hurricane of 1900, J&J replaced all damaged company goods for druggists at no cost. And after the great San Francisco earthquake of 1906, J&J canceled all druggist invoices under $100 and became the largest single donor of supplies to the devastated city, foreshadowing how it would later deal with the Tylenol crisis in 1982. These good deeds just happened to be good business too: J&J's revenues tripled from $1 million to $3 million during this eight-year period, typifying Robert Wood Johnson II's later statement, "We are not in business to make profits; we are in business to earn them by serving our customers."

Robert Wood Johnson died in 1910, and his brother James took over until Robert's son, Robert Wood Johnson II (also known as General Johnson because of his service in World War II), was ready to take the helm, a position for which he'd long been groomed. The General's sister told his biographer that their father took his oldest son to business meetings before he was 5. "Father was very anxious to have Bob grow up," Evangeline Johnson recalled. The General was 17 when his father died, and he started working part-time in the factories until finishing high school, when he went full-time. He worked his way up through the ranks, reaching a top management position at age 33 and then formally succeeding his uncle in 1932, when he was 39 years old.

General Johnson could be dogmatic and autocratic like his father, but his beliefs about how J&J should be run were anything but. Instead of a seamless business monolith with a traditional hierarchy, he preferred decentralization, creating discrete, semi-autonomous units and letting them develop their own product lines while relying on the parent corporation for marketing and distribution muscle. When a division reached critical mass, it would simply be spun off into its own subsidiary. That is how Ortho Pharmaceutical Corp. and the Personal Products Co., among many others, were launched. Johnson believed the precept worked because "each department is given a responsible head, who has authority to make his own decisions, formulate plans in consultation with employees, and build up a real working group," he said in a company address in 1948. Following those principles, he built "man-sized factories," one-story structures small enough to be managed by one person, and expanded the company internationally. "Perhaps the most important factor of all is the absence of excuses."

Somehow Johnson's impulses to micromanage didn't interfere with the development of his overall philosophy. "If the General became interested in a particular product," wrote Lawrence Foster, his biographer and a 33-year veteran of J&J, "it usually sent chills down the product director's spine. There were moments of silent prayer for the brand manager and the advertising agency in their encounters with the General." Johnson's pet product was Baby Powder, which he felt defined the company in customers' eyes even though it was a small fraction of worldwide sales. Johnson ultimately agreed to changes like plastic instead of tin containers, but not without putting his managers through a grilling and not without his input on details like the size of the sprinkle holes. Chimed one longtime colleague: "The General was not as autocratic as many thought. But they construed what he was saying as inflexible and a mandate."

One mandate from the General, however, truly was inflexible: his 1943 codification of the company's philosophy into a 291-word manifesto of moral obligation that became J&J's mission statement and remains so today. "Robert Wood Johnson made it very clear that J&J would stand for something as a corporation," says consultant Jim Collins, who wrote about J&J in the bestseller Built to Last. "But Robert Wood Johnson II codified it in a format that people could grasp and understand. Most important, they built mechanisms to bring it to life." Known as the credo, it lists the company's four primary responsibilities in order of importance--first to its customers, then to its employees, then to the community, and finally to its shareholders. The credo may sound a bit corny--and so may J&J's devotion to it: It's posted in every J&J facility around the world and carved in an eight-foot chunk of limestone at company headquarters in New Brunswick, N.J. But Johnson made sure everyone bought into it. "As long as he was running the company, it would be followed to the letter," wrote Foster in The Gentleman Rebel. "Anyone who didn't comply could look for another job."

In any case, it's hard to argue with the financial results. By the time General Johnson retired in 1963, after 31 years at the tiller (he died five years later at age 74), he had expanded his father's business from about $15 million to $500 million in annual sales. J&J has delivered 59 consecutive years of rising sales and 70 years of increased dividends, and Foster calculated in 1999 that a 100-share block of stock bought in 1944 for $3,750 was then worth $12 million, not counting dividends. J&J has achieved this in the face of crises, deftly handling the 1982 and 1986 Tylenol poisonings to further its bond with customers. "They did a number of positive things," says Stephen Greyser, a Harvard Business School professor and author of the study "Johnson & Johnson: The Tylenol Tragedy." "But most important were the company's timeliness in clearing the product off shelves and the way it appeared to be stepping up to bat." It has also responded to the maturing of its core consumer products by expanding into higher-growth markets like pharmaceuticals and biotech.

Even so, General Johnson's structure remains intact. The number of subsidiaries in what's known as the Johnson & Johnson Family of Companies now totals 198. And that is no accident.