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Johnson & Johnson (pg. 2)

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By Geoff Colvin and Jessica Shambora
April 22, 2009: 5:46 AM ET

3) Let the experts run the business.

Because J&J is so big, with 250 operating companies in 57 countries, running the whole thing from New Brunswick, N.J., would clearly be futile. The solution - decentralization - is obvious, but J&J carries it further than most and realizes more benefits than you might imagine.

Extreme decentralization helps J&J develop leaders. Because managers know they can run their own show, they try hard for the top jobs at J&J businesses. Jesse Wu, group chairman of global markets in the consumer group, says, "It's widely perceived that the best job in J&J is to be an operating company's managing director."

All those freestanding businesses create a wide range of development opportunities for J&J managers. The careers of CEO Weldon and CFO Caruso are good examples; they zigzagged across business segments so that each man became broadly developed. The new head of pharma, Sheri McCoy, began in consumer R&D, then served in several roles in the devices and diagnostics group before being tapped to run the drug division. "The company is managed from bottom up - it's Darwinian," says analyst Wise.

In a deep recession, the temptation at any decentralized company is to yank control back to the center. J&J is resisting that. The company understands the efficiencies and cost savings afforded by its scale, and over the past decade has begun to standardize processes in staff and support areas like procurement, human resources, and IT - but not in operations. Caruso explains, "The business leaders can then be freed up to focus more on the business, and the people that take over these areas of standardization actually make those best in class."

4) Stay financially disciplined - always.

Financial success isn't complicated in theory, but plenty of companies find it difficult in practice. The big idea is to earn a return on the capital in the business that exceeds the total cost of the capital; over time, only about half of all companies manage to do it. J&J excels at it, earning a spread that beats 82% of the companies in the Russell 3000. That's the main reason why J&J, though only the 29th-biggest company in the Fortune 500, is the fifth most valuable.

The outstanding recent example of J&J's financial discipline is a roller-coaster deal with Guidant, a maker of pacemakers, defibrillators, and other cardiovascular devices. J&J agreed to buy Guidant, but then reports of problems with its products reduced the company's value, and J&J negotiated a lower price. The deal was on track to close when a new bidder, Boston Scientific (BSX, Fortune 500), suddenly made a higher offer. A bidding war ensued, and after 13 months of working on the deal J&J eventually withdrew, saying it could not justify raising its bid further. As a result, Boston Scientific bought Guidant for around $27 billion - a mountain of capital on which it was impossible to earn a sufficient return from the business. Fortune's Shawn Tully called the deal one of the worst ever, and to this day Boston Scientific stock has never risen higher than its price on the day in 2005 that it announced its bid for Guidant.

"This is where the financial discipline of J&J is so important," says Weldon. "When the price got beyond what we felt would give us a fair return, we said, 'Thank you, but no.' That's where a lot of people get kind of lost in the clouds. The testosterone starts flowing, and everybody wants to win. Well, winning could be losing. The biggest winner was the loser." That would be J&J, which not only saw a competitor hobbled financially but also collected a $705 million breakup fee from Guidant.

5) Have a purpose beyond profits.

Even people who don't know much about J&J do know about its Credo, the formal statement of its corporate purpose. It's a document that Robert Wood Johnson wrote in 1943 before the company went public, and that begins, "We believe our first responsibility is to the doctors, nurses, and patients, to mothers and fathers and all others who use our products and services." But so what? After all, loads of companies have noble-sounding guiding principles. The difference? The company actually follows its rules. As Weldon often says, "Some of the best business principles ever written were Enron's. It's just an extraordinary document." The key isn't adopting the principles, it's believing them.

Keeping the Credo alive takes work. Weldon travels around the world with J&J's HR boss and general counsel, talking with employees who are moving into leadership positions about real-life problems and how the Credo applies. Weldon says, "It's an open dialogue about 'How could this have happened? Could it have happened in your area? What do you do to ensure it doesn't?'"

The Credo still guides critical business decisions, as when J&J turned itself in to the SEC and Justice Department on unspecified possible violations of the Foreign Corrupt Practices Act in 2007. Dr. Nancy Snyderman, chief medical editor at NBC News, worked at J&J from 2003 to 2007 and says that if you're making a business proposal, "regardless of whether you have the marketing or economics, it has to wrap around that Credo or it doesn't happen."

In his book on the habits of visionary companies, Built to Last, Jim Collins relates how former CEO Ralph Larsen saw the values outlined by the Credo: "We have them because they define what we stand for, and we would hold them even if they became a competitive disadvantage in certain situations." Of course the Zen-like conundrum is that taking such a stand makes the values into a tremendous competitive advantage.

What's frustrating about J&J's imperatives for success is that you probably could have thought them up yourself. The secret turns out to be not the rules but rather the company's extraordinary insistence on following them all the time.

That's hard, of course. But instead of being discouraged by that fact, think of it as good news: The secret to performing like one of the world's most successful businesses is merely a matter of doing several identifiable things that happen to be difficult. That's demanding, yes - but it isn't a secret at all.  To top of page

Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
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Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
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