Long Range Planning 37 (2004) 525e547
www.lrpjournal.com
Innovating through Acquisition and Internal Development: A Quarter-century of Boundary Evolution at Johnson & Johnson Samina Karim and Will Mitchell
This article discusses how firms innovate within and across firm boundaries by reconfiguring their resources and business units over time. Focusing on acquisitions and internal development as key aspects of business dynamics, the authors track the evolution of 87 product lines and 88 business units in Johnson & Johnson’s medical sector from 1975 to 1997. The study highlights the dual importance of acquisitions and internal development as sources of value and innovation for a firm, along with the complementary role of business unit reconfiguration. The company commonly looked beyond its boundaries for new resources, acquiring most of its product lines and units during the period, and actively reconfiguring most acquired units in attempts to create new value, rather than simply leaving them to operate within their original boundaries. In addition, unit reconfiguration commonly preceded product line movement across unit boundaries, providing evidence of the embedded nature of resources within structure. At the same time, however, internally developed resources and units were more likely to be retained: indeed, stable internally created units, where business routines were most understood, were the most common sources of innovations. The underlying message of these evolutionary patterns is that innovation stems from maintaining a deep understanding of organizationally-embedded routines, while undertaking careful ongoing redefinition of unit and firm boundaries. Ó 2004 Elsevier Ltd. All rights reserved
0024-6301/$ - see front matter Ó 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.lrp.2004.09.008
Introduction For many in the business community, the idea of successful corporate change conjures images of firms such as General Electric, Nokia, and IBM. These highly dynamic firms regularly alter their boundaries with a mix of acquisitions and internal development, with the aim of innovating and remaining market leaders. This article explores how another such firm, Johnson & Johnson, Inc. (J&J), innovates within and across the boundaries of its health sector businesses. We study how J&J pursues innovation through the reconfiguration of both internally developed and acquired resources and medical business units.
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Figure 1. J&J Business Unit Evolution, 1975-1997 526
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A look at J&J’s medical sector business unit evolution (see Figure 1) indicates the extent to which it changed unit and firm boundaries over a twenty-three year period. Between 1975 and 1997, J&J operated 88 medical sector business units (see Appendix) of which 54 originated as acquisitions. As indicated by the arrows on the figure, J&J used several different means of changing unit boundaries. Some reconfigurations involved divesting the unit from the bounds of the firm, whereas others changed unit boundaries by combining units into a pre-existing unit or originating a new reconfigured unit. Thus, a unit could originate as an internally created unit, an acquired unit, or as a reconfigured unit. Concurrent with these unit boundary changes, J&J also reconfigured its product lines. Over the study period J&J introduced 87 unique medical sector product lines (see Appendix), of which 14 were innovations developed by the company internally and 73 were obtained as part of business acquisitions. Figure 1 illustrates the complex multiplicity of J&J’s acquisition, reconfiguration and divestiture activity over the study period. As an example, Exhibit 1 details one sequence of the active and complex pace of unit acquisition and reconfiguration within the company. The depiction of activity within J&J raises important questions about the patterns of reconfiguration and innovation. Does J&J retain more of its internally created or acquired units? Which product lines are retained? How does the firm reorganize itself after each acquisition? Are acquisitions maintained as separate business units? Are more internally created or acquired units reconfigured? Is there a pattern as to which types of unit boundaries change most? How do unit boundary changes affect product line innovation e does more innovation tend to occur within internally created units, within acquired units, or within some combination of reconfigured units? To what extent does unit reconfiguration intertwine with resource reconfiguration? Together, our research questions and analyses explore the role of acquisitions, internal development, resource and business unit reconfiguration and innovation in dynamic businesses. Our core premise is that innovation stems from an active process of redefining internal and external boundaries of the firm through acquisition, internal development and business unit reconfiguration. Analysts and managers have long recognized that innovation e by which we mean the development of goods and services that are new to a firm e can arise both by using resources within a firm’s existing business units and by acquiring new units.1 More recent arguments suggest that both internal and externally-sourced innovation commonly require reconfiguration of resources within existing units as well as reconfiguration of the distribution of units within the firm.2 What is less clear, though, is how different types of business reconfigurations e including those that occur within the boundaries of existing business units and those that change the boundaries of units and of the firm itself e contribute to the ability to develop and retain innovations within the firm. We approach this issue by studying the innovativeness and retentive capacity of internally developed and acquired resources and units, as well as the tendency to reconfigure different types of units. The study develops several general research questions, drawing on literatures that address organization and innovation. We then use the example of how J&J changed its boundaries over time to explore and extend the baseline issues.
J&J continually moved resources within unit boundaries, and updated unit boundaries within the firm, to pursue innovation. J&J suits the study particularly well. Indeed, the study may help dispel some myths about the company, that it consists of independent subsidiaries that rely on internal resource creation within the bounds of autonomous organizational business units. By contrast with this view, we demonstrate the vital importance of unit reconfiguration to the company’s innovativeness, along with the frequency of obtaining resources via business acquisitions and reconfiguring these resources. Johnson and Johnson continually moved resources within unit boundaries, and updated unit boundaries within the firm, as they pursued innovation. Long Range Planning, vol 37
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Exhibit 1
1982
Dialysis supplies product lines obtained by acquiring A&O Surgical Co Inc. (Unit 76) and Symedix Inc (Unit 77), with several tubing and infusion products in common. Units immediately combined into a previously-acquired cardiovascular accessory manufacturer Extracorporeal Medical Specialties Inc (Unit 12); 1983 Three earlier acquisitions producing cardiovascular accessories (heart valves etc) e Extracorporeal Medical Systems Inc (Unit 13), Vascor (Unit 72), and Cardio Systems Inc (Unit 73) e reconfigured into a new originating unit Hancock Extracorporeal (Unit 20); 1984 Hancock and Extracorporeal Medical Specialties Inc amalgamated to form new unit Johnson and Johnson Cardiovascular (JJC, Unit 35). (Cardiovascular lines retained, dialysis lines divested to Baxter International Inc.); 1986 JJC unit divested to Medtronic Inc. 1990’s Cardiovascular product area re-entered by innovating cardiac assist equipment in internally created unit, J&J Interventional Systems Inc (Unit 46). 1995/6 Cardiovascular accessories producers Menlo Care Inc (Unit 58) and Cordis Corporation (Unit 54) acquired.
The conceptual basis for the study is the routine-based perspective on business dynamics,3 which views firms as bundles of routines that provide value but also create constraints on how businesses change.4 This view argues that the market-for-firms complements internal innovation by helping businesses overcome failures in the market-for-resources.5 We show how one firm has accomplished these resource development strategies by redefining the boundaries of particular business units and by recombining resources through both internal development and acquisitions.6 Obtaining resources via acquisitions and internal development Recent strategy literature has highlighted how acquisitions represent a favorable mechanism for obtaining resources from target firms.7 A firm may choose to look beyond its boundaries to procure resources for several reasons: First, firms may not be able to develop new resources internally due to time diseconomies and learning constraints, such as limitations to information processing and inertial pressures;8 Second, because resources are partially embedded in a firm’s organizational structure, purchasing a discrete resource without the context within which the resource functions may not be effective;9 Further, it may not be possible to transfer intangible assets (such as knowledge) that underlie product lines and other resources without purchasing an entire business, because the transfer will require participation by a wide variety of people at the target firm.10 (For brevity, we will refer to product lines that J&J obtains by acquiring businesses as ‘acquired resources.) Although we have outlined reasons for acquiring resources rather than developing them internally, there are also drawbacks to an acquisition strategy. Constraints stem from both appropriation and coordination issues. Property rights and consequent appropriation issues are more clearly defined in the case of internal development than when a firm reaches outside its boundaries.11 In addition to easing such matters, internal development often offers greater understanding of how to coordinate the use of multiple resources; learning and synergy may be greater due to the embeddedness of the development process.12 Greater recognition of synergistic opportunities, leading to innovation, may exist when firms develop resources within their 528
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boundaries. Hence firms need to be wary of exploiting acquisitions without the balance of internal exploration and building new routines themselves.13 Thus, the issue is not whether internal development or acquisitions are the most appropriate means of obtaining resources, but how each of the two approaches provides distinct contributions that together help J&J innovate. Resource and business unit reconfiguration Resource reconfiguration refers to the addition or deletion of a product line from the boundary of the firm, or movement of a product line between unit boundaries of the firm. Business unit reconfiguration is the changing of firm and unit boundaries, including the addition, deletion, and recombination of business units.14 Resource reconfiguration and business unit reconfiguration modify the boundaries of units and of the firm, and play key roles in helping firms increase the value of their resources. Reconfiguring resources (whether of internally developed or acquired product lines) and using them in different ways or in new combinations provides firms with innovative opportunities.15 For several reasons, firms also may need to reconfigure business units in order to innovate, either to change the resources within a unit or to adjust the level of resource use among different business units. First, the process of reconfiguring business units may bring particular resources into a unit. Second, by reconfiguring business units, a firm can influence learning across units, by bringing together the results of previously independent activities in units. Some models suggest that coordination leads to doing better on average, but (as Harrison et al. report) coordinated projects are less likely to result in abnormal returns. Once one or more independent projects bear fruit, however, it often becomes necessary to adjust a firm’s organizational boundaries to diffuse the project into related units and to draw in needed complementary resources from other units.16 Strategy research has depicted various forms of business reconfiguration. Early strategy research of business reconfiguration focused on corporate restructuring through the sale or acquisition of businesses.17 These studies emphasize that firms can create new strategic positions by changing the businesses within which they operate. More recently, research by Capron et al. has addressed resource reconfiguration that arises from redeploying resources between businesses, and found that redeployment is more extensive for resources that face greater market failure or when there is greater asymmetry in resource strength of targets and acquirers. Few studies, though, have examined long-term business and resource reconfiguration, as we do here with J&J. Johnson & Johnson, Inc. Johnson & Johnson was founded in 1886 in New Jersey, and went public on the New York Stock Exchange in 1944. Listed by Fortune magazine as the 47th largest U.S. corporation in 2003, J&J employs over 110,000 employees, includes over 200 companies and markets in 175 countries, and generates annual revenues of over $40 billion. Having first produced only surgical dressings, J&J has expanded to three main business areas: consumer products: its well-known consumer personal health care products include nonprescription drugs such as TylenolÒ, shampoos and skin care products such as NeutrogenaÒ, Johnson’sÒ baby products, first aid products such as Band-AidÒ adhesive bandages, oral care products and women’s health products; professional medical devices and diagnostic products, including cardiovascular accessories, dental equipment, medical dressings, orthopedic devices, surgical instruments, contact lenses, blood processing equipment and diagnostic kits; and pharmaceutical products, including a wide assortment of drugs in the areas of cardiac medicine, pain relief, contraception, dermatology, oncology, urology and more. This study allows us to explore the degree to which J&J reconfigures its product lines within the boundaries of its business units, reconfigures pre-existing unit boundaries within the firm, and Long Range Planning, vol 37
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draws upon acquired units and resources to change the boundaries of the firm. We will return to details concerning J&J in the analysis section. The primary data for the study came from several editions of the Medical & Healthcare Marketplace Guide, published in 1975, 1978, 1983, 1986, 1989, and each year thereafter until 1997. The guides include information concerning U.S. and non-U.S. firms operating in the U.S. medical sector, including information on business units and product lines.18 We also discussed J&J’s business experience and reconfiguration strategies with company personnel following the archival study. (See Appendix for fuller details of business unit and product line data and methodology.) The medical marketplace The medical marketplace has drastically changed over the past three decades. The industry has experienced consolidation across all sectors due to increased costs but has still seen rising demand and revenue growth. In the late 1970s medical marketplace revenues were approximately $122 billion, but grew to well over $745 billion by 1997 (Table 1). The industry includes three main segments: medical devices, healthcare services, and pharmaceuticals. Healthcare services (68% to 77%) and pharmaceuticals (10% to 15%) have both grown in their proportion of the industry over the past three decades, due both to increased prices and increased usage, while the medical device arena, although growing in value, has declined as a proportion from 22% to 8%. Throughout the 1970s, expanding government regulation of medical sector products and services, coupled with growing public support for health care expenditures, was a significant driving force behind the increased acquisition activity that took place within the industry.19 Companies expanded in order to take advantage of the growing healthcare market, but those with limited longterm interest in the field commonly divested their businesses in the face of competition. The consolidation activity that began in the 1970s has continued to the present, mergers and acquisitions climbing steadily from 113 deals in 1985 to 812 deals in 1996. Whereas the late 1960s were marked by diversification, with sometimes as many as a dozen initial public offerings a week, the 1970s was a time of consolidation, with sparse investment into new firms: between 1975 and 1978 less than a dozen went public. This trend turned around in the 1980s and 1990s as IPOs regained momentum, reaching 139 in 1996. Although investments in smaller firms were low, the late 1970s saw significant growth in the larger firms, such as Johnson & Johnson, American Hospital Supply Corporation and Abbott Laboratories. The majority of multi-divisional companies pursued acquisition to buy into new technologies.
Methodology The study offers an unusually detailed examination of firm-level resource and business unit reconfiguration. By focusing on one firm, we are able to study fine-grained changes in unit and firm boundaries, movement of product lines within and across boundaries, and innovation within particular unit boundaries. In turn, this detail allows us to identify a range of potential causal threads that would be hidden in a multi-firm study that included fewer elements. Rather Table 1. U.S. medical sector 1978-1997
1978 Total sales ($ billion) Healthcare services Medical devices Pharmaceuticals
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1997 $122 $83 $27 $12
77% 8% 15%
$745 $573 $60 $112
Innovating through Acquisition and Internal Development
than generalizing statistical results to a larger population, the single case method uses analytical generalization to apply a particular set of results to broader theory.20 In this regard, our study uses inductive patterns to draw inferences and implications from the case of J&J. However, we also use a range of literatures to formulate baseline arguments in order to frame the study. We believe that a detailed, conceptually motivated investigation explores our arguments, rather than providing a definitive test. Nonetheless, although we examine a single firm, the study has substantial sample size, with product lines (87) and business units (88) at the levels at which our arguments apply. Our approach (described in more detail in the Appendix) relies on descriptive data, which is consistent with the exploratory conceptual development goal of the analysis. We compare data relative to starting quantities in the form of percentages.21 Summary tables depict the patterns that we observed.
Framing questions Our baseline arguments address several issues concerning changing unit and firm boundaries and how they enable and constrain innovation. We address three aspects of reconfiguration: resource and unit retention, unit reconfiguration, and the interplay of resource and unit reconfiguration leading to innovation.
Resource and unit retention We begin by addressing the retention of resources and units. Retention is an important issue because longer retention indicates that the company believes it has been able to use the resources fruitfully, to generate sales and to provide a base for innovation. By contrast, eliminating product lines and units suggests that the company has been unable to generate sufficient sales to justify retaining the resources. Considering resource retention, Dierickx and Cool have noted the potential constraint to internal development of resources in terms of significant time requirement, while Nelson and Winter, and March, point out that the time investment can enable innovation by leading to greater embeddedness of routines and more learning. With internal development and greater exercise of routines, individuals within the firm may understand the resources better and the firm may be able to develop greater synergy from the resources. As Penrose and Wernerfelt have noted, the better a firm’s managers understand the resources, the more likely they will be able to use the resources as stepping stones when the firm faces new opportunities. Next, consider unit retention. Internally created units tend to provide the building blocks of the firm. These units are likely to retain a greater degree of embedded routines and add to a firm’s norms, procedures, and culture.22 Embedded routines enable the firm innovation effort, as the firm is familiar with such routines and knows how to use them. Firms may be able to tap only part of the potential of resources from acquired units due to weak appropriability and the lack of experience with the target’s routines. Due to path dependence and learning constraints placed by firm boundaries, we expect that firms are more likely to retain internally created units than acquired units. Thus our first question is: Question 1: Are firms are more likely to retain internally developed resources and units than acquired resources and units? [These arguments take an open view of managerial intentionality concerning retention of internally developed resources and units. If familiarity with resources leads to recognizing their future potential, then firms most likely retain these assets intentionally. However, if the firm has become inert and familiarity with resources simply means that managers routinely continue to work with the same resources, then the retention of these resources and their units may be an unintentional consequence. In either case, though, the retention provides ongoing sales of Long Range Planning, vol 37
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established products as well as a base for innovative activity. We argue below that unit retention is particularly important because internally created units are fruitful sources of innovation.]
firms (could simply) focus on creating internal resources and units as bases for ongoing innovation. However, they must obtain new ideas (as) building blocks for internal development. If the story ended here, we would simply recommend that firms focus their innovation attention on creating internal resources and units as stable bases for ongoing innovation. However, firms must also obtain new ideas to provide building blocks for internal development. Obtaining new ideas commonly involves acquiring other businesses, which the firm must then combine with other business units in order to garner resource creation benefits. We continue by considering the reconfiguration of units and their resources, along with their implications for innovation. Unit reconfiguration We have defined business unit reconfiguration as the addition, deletion, or recombination of units. Structural design and unit boundaries may influence what and how firms learn, as information accessibility is a key factor for learning.23 Further, acquired units and their resources may fulfill resource accessibility by providing the ingredients needed for innovation by existing units. Unit reconfiguration changes the external and internal boundaries of the firm. Additions and deletions change the external boundary of the firm, while combining units entails internal boundary changes. Given that each has characteristics to enable and constrain innovation, our core question is: Question 2: Are firms are more likely to reconfigure acquired units than internally created units? On the one hand, one might expect internal units to require greater ongoing reconfiguration than acquired units which come to the firm with an existing set of products and business systems. However, as Nagarajan and Mitchell report, refinements to internal units often involve incremental changes that build cumulatively, rather than large discrete changes. Acquired units, by contrast, typically contain products and systems that the firm either does not want, or needs to recombine in ways that are relevant to its business activities. Moreover, acquired units and their resources often serve innovative purposes that require extensive reconfiguration to accomplish. Acquired resources may be the key ingredients needed for innovation by existing units. On realizing that a unit needs such resources, a firm may undertake an acquisition and expand its boundaries to obtain the resources; but extensive post-acquisition reconfiguration may be required to realize the potential of the target’s resources. We investigate four types of reconfiguration: First, a firm may dissolve an acquired unit by combining it, in whole or in part, into an internally created unit, which might provide internal units with resources needed for innovation; Second, a firm may combine an acquired unit with one or more other acquired units, which could serve to mold pieces of acquisitions together to gain scale or to develop new resources; Third, a firm may combine two or more internally created units, such as in the case when a firm is focusing its businesses and consolidating; Fourth, a firm may dissolve an internally created unit by combining it into an acquired unit. (We do not expect this fourth form of reconfiguration to be common, because this would create 532
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the risk of integration problems that stem from using a less familiar business unit as the new base and thereby losing many of the embedded routines from the internally created unit.) Of these scenarios, the third scenario involves changing only unit boundaries, whereas all the other examples involve acquisitions and changing both unit and firm boundaries. Sources of innovation: creation of resources that are new to the firm We now turn to interactions of resource and unit reconfiguration. First, consider resources that are new to the firm. If a firm contains acquired units, internally created units, and units that originated as reconfigurations, which types of units are most likely to be responsible for creating innovations? March shows that internally created units are familiar with the routines required to harness and utilize knowledge. By contrast, as Walsh notes, a firm acquiring a unit gains the physical assets but risks losing some of the underlying tacit routines due to employee turnover, as well as changed incentives, networks and cultural contexts.24 Further, difficulties may arise in absorbing new routines due to the standardization of routines and practices between acquirer and target, and the lack of common knowledge to build upon between them.25 We expect that the exploratory learning process and leveraging of routines will be more common in the structure of internally created units. Further, recombination of internal and/or acquired units represents potential for Schumpeterian recombination innovation while still maintaining internally developed routines. This may involve combining internally created units, or some combination of internally created units and acquired units. It is possible that these recombined units will develop more new resources than acquired units or combinations of acquired units, and so our question must be: Question 3: Do internally created business units and combinations of internally created units develop more innovations than acquired units?
resource reconfiguration (may be) more effective if the entire business unit is involved, rather than adding or deleting resources out of organizational context The sequence of unit and resource reconfiguration Finally, consider the sequence of unit and resource reconfiguration. Do firms reconfigure resources independently of unit reconfiguration, or do the two activities intertwine in a way that requires changes to firm boundaries in order to change the way that firms use resources? If a firm wishes to reconfigure a resource (i.e., add/delete/move a product line to/from/within the firm) one method would be to reconfigure the unit in which the resource resides. The need to protect and coordinate resource use may make this method favorable. Firms may have more effective resource reconfiguration if the entire business unit is involved, as opposed to simply trying to add or delete a resource out of organizational context and without attention to unit boundaries. Thus, if the reconfiguration of business units is common, and following Penrose’s argument that a unit’s activities stem from the resources available to the unit, the transfer of business activities between unit boundaries implies the transfer of resources, we expect that firms will reconfigure resources within the units. Thus: Question 4: Does business unit reconfiguration tend to precede resource reconfiguration? We now turn to the empirical patterns at J&J, which explore and expand the baseline questions. Long Range Planning, vol 37
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Assessing the evolution of J&J’s product lines and business units We start by considering resource retention (question 1). Over the two decades of the study period, J&J obtained most of its product lines through acquisitions, such diversification including the addition of lines such as contact lenses, contraceptive devices, lighting equipment and orthopedic devices. Meanwhile lines such as animal supplies, CT scanners and patient transport systems were deleted. Table 2 summarizes product line retention. During the study period J&J obtained 87 lines, 14 from internal development and 73 via acquisitions, of which about half (56%) had been retained by the end of the period. This figures included all of its internally developed lines, but, despite often procuring resources from outside its boundaries, the firm retained less than half (47%) of acquired product lines. Some (such as radiography equipment, mass spectrometers, nephrology treatment services and wheelchairs) came into J&J bundled as part of business unit acquisitions and were divested immediately. Others (respiratory therapy equipment, blood collection supplies, nuclear equipment, heart valves, and renal dialysis equipment and supplies) were retained for some period and reconfigured into other units before being divested. The patterns suggest that the reconfiguration and ultimate divestiture of these acquired resources signifies that the firm tried to find appropriate value for these resources within the boundaries of certain business units but failed to do so. Thus, for example, prior to 1975 J&J had acquired blood collection supplies, syringes and needles, and kits and trays from Jelco (Unit 4). In 1978 Jelco was reconfigured into another acquisition, Surgikos Inc (Unit 18), who produced medical gloves, drapes and bandages, and for some time retained all of Jelco’s lines. J&J appears to have expected that synergies (such as in distribution) would be present between these forms of common medical supplies. However, by 1986, Surgikos had divested the blood collection supplies and syringes and needles lines, keeping only the kits and trays. We infer that the retention of kits and trays created value in combination with gloves, drapes, and bandages. J&J’s subsequent actions reinforced this value, with its 1986 acquisition of Sterile Design Inc (Unit 42), another sole producer of kits and trays, and then (1990) combining Surgikos and Sterile Design into the newly created unit J&J Medical Inc (Unit 47). This example is one in which the value achieved did not result in a product line innovation, but still provided economies for the firm. Next, we want to determine the origin of the internally developed new resources (question 3). Table 3 summarizes the unit origins of the 14 internally developed lines. Eight innovations were developed in seven unique internally developed units, whereas two were developed in two unique previously acquired units. Table 3 reinforces the idea that certain boundaries, in this case of internal units, enable innovation. The patterns supports the argument that new resources are more likely to be developed in internally created than in acquired units, based on based on our calculations concerning the relative innovativeness of internal and acquired units.26 The remaining four innovations emerged from units that were a combination of units. Three of these four innovations were developed in two units that originated by combining internally created units. The remaining innovation was developed in a unit that consisted of the reconfiguration of several acquisitions. Surprisingly, there were no innovations in units that combined internally created and acquired units. These patterns do not fully follow our expectation that units with some internal portion are more likely to innovate than those units with only acquired portions. The core conclusion, though, is that internally created units generated more innovations than acquired units, even though there were far fewer internally created units. Table 2. J&J product line sources & retention
Acquired lines Internally innovated lines Total lines
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Lines #
Retained %
73 14 87
47% 100% 56%
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Table 3. Innovations by J&J Units
Source of internal innovation
Internally created unit Previously acquired unit Internal unit + Internal unit Acquired unit + Acquired unit Internal unit + Acquired unit Total
Innovations # 8 2 3 1 0 14
Within unique units % 57% 14% 21% 7% 0% 100%
# 7 2 2 1 0 12
This tendency toward internally developed lines highlights the innovative role of units that originate internally. Further, the pattern suggests that greater learning and recognition of opportunities may occur within the relatively stable boundaries of internally created units. Such innovativeness would result if greater leaning occurs when routines remain intact, without the disruption of reconfiguration. Nonetheless, since several innovations occurred in reconfigured units, we still find that reconfiguration created value in certain cases. Interestingly, of the twelve different units within which the innovations took place, eight were further reconfigured. This is true for five of the seven internally originated units that developed innovations. Thus, although we find that most innovation occurs in internally created units that have not been disrupted by changing boundaries, the firm was still trying to create further value from these and other units by pursuing additional boundary changes. According to J&J managers we consulted, such continued reconfiguration often helps the units position themselves more effectively with customers and provide more efficient and effective marketing services. At the same time, reconfiguration to meet market needs sometimes inhibited further technical innovation. Discovering that internally developed innovations are both more likely to be retained, and more likely to emerge in internally created units, highlights the importance of internal development. Although J&J obtained most product lines through acquisitions, the greater retention of internal lines and greater innovation by internally created units show that internal development is a key source of change even in acquisition-active firms. Within such firms, acquisitions seem to serve two purposes. First, acquisitions provide entry or growth in potentially profitable business segments independent of the firms’ internally created units. Second, acquisitions serve to fuel resources into internally created units as these units explore new opportunities and innovate.
Although J&J obtained most product lines through acquisitions ... internal development was the key source of change We now turn our attention to the retention and reconfiguration of business units at J&J (questions 1 and 2). Table 4 summarizes the evolution of business units and related restructuring and divestitures. J&J acquired 54 of the units that it operated during the study period, developed 12 units internally, and created 22 units via reconfiguration of other units. (With all reconfigurations, the company dissolved the original units.) Thus, whereas the internally created and acquired units are of ‘pure’ origin, these 22 reconfigured units originated as combinations of pre-existing units. Of the 12 internally created units, 50% continued without reconfiguration and 50% were reconfigured. The proportions for the 54 acquired units were strikingly different: 72% of acquired units were reconfigured, 20% continued without any reconfiguration, and 7% were divested without reconfiguration. Of the 22 units that originated from unit reconfigurations, the company subsequently reconfigured 42% again (recall that these units originated as combinations of pre-existing units to Long Range Planning, vol 37
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begin with), 37% continued without additional reconfiguration, and 21% were divested without additional reconfiguration. The core conclusion is that the company reconfigured acquired units much more commonly than internally created units, often with multiple sequential reconfigurations. The information in Table 4 is consistent with the expectations concerning unit retention and reconfiguration. First, the greatest retention in the original identity (‘continue without reconfiguration’) was for internally created units at 50% (vs. 20% for acquired units and 37% for reconfigured units).27 Second, the company reconfigured acquired units more often (72%) than internally created units (50%).28 We infer that J&J reconfigured units in the attempt to find technical and market resource synergies within different unit boundaries, which discussions with J&J personnel confirm. The repeated reconfiguration of units further supports this inference e even for the 22 units that originated as reconfigurations, 42% were reconfigured again. The fact that the firm divested none of their internally created units and reconfigured half of them (compared to divesting 7% of acquired units and reconfiguring 72%) suggests that J&J was able to generate greater immediate value within the boundaries of units with which it was most familiar. Our earlier observation that most innovations occurred in internally created units reinforces this inference. An example depicting J&J’s attempts and failure at creating value from several acquisitions illustrates this issue. In 1979, J&J obtained MRI and ultrasonic diagnostic equipment product lines by acquiring Technicare Corporation (Units 28,29,30,31). J&J reorganized the divisions, renaming the ultrasonic division (Unit 31) as J&J Ultrasonic, Inc. (Unit 37), and reconfigured the other divisions under the Technicare umbrella (Unit 28). Over subsequent years, several additional acquisitions added to J&J’s imaging base: Magnetic Corporation of America (another MRI manufacturer - Unit 78) was reconfigured into Technicare, while two further ultrasonic diagnostic equipment makers, Irex Medical Systems (Unit 79) and Echo Laboratories (Unit 80), were reconfigured into J&J Ultrasound Inc.. But, after technical failures led to Technicare losses of about $1bn., both units were divested to General Electric in 1986. It is interesting to note in Table 4 that divestitures were more common for units that originated as reconfigurations of other units (21% of the 22): J&J rarely divested ‘pure’ acquired units (4 units) or ‘pure’ internally created units (0 units) before first reconfiguring them. (The story of Technicare and other acquisitions, in which J&J reconfigured originally ‘pure’ acquisition units before divesting them, bears this out.) The pattern also supports J&J executives’ statements in our discussions with them that J&J attempted to develop synergies and greater value by changing unit boundaries. Thus, divestitures typically follow resource reconfiguration activities, rather than occurring in isolation from business change. We can interpret the patterns that emerge in Table 4 to summarize J&J’s business unit reconfiguration strategy. J&J obtained most of its units through acquisition and then reconfigured most of its acquired units. The company retained half and reconfigured half of their internally Table 4. J&J 1975-1997: business unit sources and changes and unit reconfiguration within and across unit source
Pure internally created Pure acquired Originated as a reconfigured unit Total units
536
Total Continue units without reconfiguration
Divest without reconfiguration
Reconfigured
# 12
% 50%
# 6
% 0%
# 0
% 50%
54 22
20% 37%
11 8
7% 21%
4 5
88
28%
25
10%
8
Reconfigurations Same type
Cross type
# 6
% 17%
# 2
% 33%
# 4
72% 42%
39 9
65%
35
7%
4
62%
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created units; none were divested. J&J would usually reconfigure acquired and internally created units before undertaking divestiture, and would often reconfigure units several times. The logic underlying J&J’s reconfiguration strategy emerges further when we study the kinds of reconfiguration that occurred. The rightehand side of table 4 summarizes the types of configuration pursued by J&J for the 66 ‘pure’ units (12 internally created and 54 acquisitions) that it decided to reconfigure. They fall into two types: combinations of similar types (internally created with internally created, acquired with acquired) referred to as ‘same type’ and combinations of internally created with acquired units, referred to as ‘cross type’. Thus, of the 6 J&J internally created units which were reconfigured, 4 involved combining pieces of acquired units into original internally created units, while 2 involved combining internally created units. Of the 39 units reconfigured after acquisition, only 4 involved pieces of internally created units being added to acquired units, whereas 35 involved reconfiguration with other acquired units These numbers further reinforce the inference that J&J more frequently reconfigured acquired units, most often in ‘same type’ combinations with acquired resources.
firms pursue recombinative exploration to create greater firm-specific value from beyond the firm’s boundaries. This conclusion is consistent with the argument that firms often pursue recombinative exploration to create greater firm-specific value from units and resources that arise beyond the firm’s boundaries. Moreover, the fewest cases of reconfiguration were the breakdown of familiar, internally created units’ boundaries, to combine them into unfamiliar, acquired unit boundaries. The final analysis examines the sequence of resource and business unit reconfiguration. Question 4 asks whether firms are likely to move product lines independent of their unit boundaries. Table 5 summarizes the relative timing of business unit reconfiguration and product line additions and deletions within each business unit. Of 108 product line introductions, 67 (62%) were added within four years after business unit reconfigurations, while only 41 (38%) emerged without reconfiguration. Recent unit reconfigurations preceded 20 (74%) product line deletions during the period, whereas only 7 lines (26%) were deleted without any recent unit activity. These patterns show that the majority of product line innovations and deletions follow recent business unit reconfiguration. Moreover, we observed that most unit reconfigurations led to product line changes. The patterns support the baseline argument that business unit reconfiguration tends to precede resource reconfiguration.29 In turn, the patterns reinforce the argument that reconfiguration, of both internally created and externally acquired units, is a potential contributor to product innovation. The intertwined nature of J&J’s product line and business unit evolution provides support for the idea that resources tend to embed within structural boundaries. The fact that the company moved few product lines independent of the units within which they reside implies that resources embed within business structure. This point highlights the importance of unit boundaries, because they tend to define what resources a firm will use in combination. Table 5. Line addition & deletion within continuing units
Lines added to unit Lines deleted from unit
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Total additions & deletions
Recent unit reconfiguration (within 4 years)
No recent unit reconfiguration
(#) 108 27
(%) 62% 74%
(%) 38% 26%
2004
(#) 67 20
(#) 41 7
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Overall, the patterns demonstrate greater retention of internally developed resources and units, as well as greater reconfiguration of acquired units. At the same time, counter to our baseline expectations, we did not find that acquired units reconfigured together with internally created units were more likely to develop new resources than acquired units alone. In some cases reconfigured units innovated: combinations of acquisitions innovated one line, while combinations of internally created units innovated three lines. In other cases, reconfigured units did not innovate: cross-type reconfigurations yielded no innovations. Strikingly, internally created units that had no boundary changes innovated the most. However, we observed that J&J still pursued further reconfiguration of most of their innovating units (whether internally created or of some other type), as well as for most of their acquired units. We assume that these reconfigurations are in search of some added value (efficiency, profitability, innovations, etc). The result, for J&J however, seem to be both positive and negative: reconfigured units did innovate (with the exception of cross-type reconfigurations), however they did not innovate as much as those internally created units whose boundaries were not disrupted. Divestiture usually occurred after several reconfigurations were tried. Lastly, we observe that resources most often move with unit movement, rather than independent of business unit change.
Discussion We now turn to questions concerning the bigger picture. What intriguing patterns do we observe at J&J? What are the managerial implications of this study? How does this study add to our theoretical understanding of boundaries and innovation? Intriguing patterns We stress four patterns. First, the prevalence of reconfiguration throughout J&J’s history is striking, as Figure 1 shows. Acquired and internally created units were most often reconfigured before divestiture, and units were sometimes reconfigured several times, especially in the case of acquisitions. This recurrence of business unit reconfiguration identifies a cyclical pattern of reconfiguration and innovation. Second, the company commonly used resources from acquired units to reconfigure internally created units. This confirms the paradigm of firms complementing their own resources from outside their boundaries. Further, we observe that most of J&J’s innovations occur in internally created units. Both of these patterns imply that firms are most familiar with resources within the boundaries of their internally created units. The boundary of a business unit, in this sense, enables a firm to better understand what resources it may need to innovate. Searching outside the boundaries of a business unit and reconfiguring acquired units with internal units suggests that a firm regularly attempts to adapt its boundaries, however, rather than becoming trapped within internally created borders.
The pattern revealed was of an inter-twined sequence of business unit and resource reconfiguration. Third, therefore, J&J’s unit boundaries were highly dynamic. The pattern revealed was of an inter-twined sequence of business unit and resource reconfiguration. Still, we stress the fact that one-third of product line movements between unit boundaries occurred independent of unit movement. Thus, business reconfiguration sometimes arises through focused transitions of individual sets of resources between stable units. Nonetheless, resource reconfiguration activity within the firm most commonly also involved unit reconfiguration e which highlights the dynamic nature of internal boundaries that change both through combining units and the movement of resources within the firm. 538
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Fourth, there is a striking pattern of concentrated acquisition activity. During our twenty-three year study period, most of J&J’s acquisitions took place in two focal periods e during the early 1980s and again during the mid 1990s. This leads us to speculate about the organizational investment required to acquire and reconfigure units. This variation in acquisition intensity provided a rhythm within which the company could adjust unit boundaries and attempt to create value, before investing heavily in acquisitions again. Of course, industry factors also influence acquisition activity, but our review of acquisition tendencies in the medical sector found ongoing acquisition activity throughout the full time period. Together, these patterns suggest an outline of a reconfiguration-innovation framework, which Figure 2 depicts. This framework suggests that companies benefit if they obtain new resources and business units from both internal and external sources. Internally created units exhibit particularly high innovativeness, and the firm exhibits a greater retentive capacity for internally developed resources than acquired ones. At the same time, acquired units provide reconfigurable resources that fuel immediate sales and subsequent internal innovation. The core point is that resource innovation commonly requires ongoing reconfiguration of a combination of internally created and acquired units. The framework highlights innovation and the search for resources as a cyclical process. Theoretical implications The patterns in this study of business evolution at J&J provide theoretical suggestions for how firms manage their boundaries and the innovation process, which Table 6 summarizes. Most generally, the patterns outline the reconfiguration-innovation framework in Figure 2, which depicts how firms use ongoing organizational change as a means of creating firm-specific value. In this search for firm-specific value, organizations often redefine their firm and unit boundaries. In this process, they attempt to create value by developing synergies across different product lines, complementing resources with one another, and finding opportunities to leverage these lines or develop new lines. The implicit factor driving this value creation is firms’ familiarity with their own routines and resources leading to greater learning and value creation. J&J aggressively pursued reconfiguration to create value for the firm. Although innovations occurred in several reconfigured units, we observed that J&J innovated the most in stable internally created units. Thus, when we think of value creation through the process of reconfiguration, we need to consider both positive and negative influences that can result from a firm changing unit RECONFIGURATION Q.4: Does unit reconfiguration. precede resource reconfiguration?
Business reconfiguration
Resource reconfiguration
INNOVATION Q.1: & Q.2: Compare retention and reconfiguration of internal vs. acquired resources and units
ORIGIN OF UNITS & RESOURCES Internallydevelop units and resources
Acquire units and resources
Q.3: Does more innovation occur in internal or acquired units?
Internal development of resources
Determine next direction of exploration or exploitation
Resources within organization? Reconfigure organization Organization lacks resources? Procure resources
Determine resources needed
Figure 2. A reconfiguration-innovation framework Long Range Planning, vol 37
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Table 6. Highlights for academics
Acquisitions provide a key mechanism for obtaining resources. Repeated reconfigurations indicate attempts at creating firm-specific value. The innovation process is cyclical, and may require repeated search and reconfiguration of resources. Routines and resources embed in structure. Disrupting unit boundaries may disrupt routines and hinder innovation. Internal development is a key source of innovation, even for acquisition-active firms.
boundaries. The positive influences include synergy, complimentarity and learning. At the same time, though, the negative influence of disruption may overwhelm these potential innovative benefits. Firms may be able to use their familiar internally developed routines to create value from reconfigurations. They must also be wary of destroying these same routines. Managerial implications Exploring product line and business unit evolution at J&J gives rise to six managerial implications, which Table 7 summarizes. First, value creation requires a wide spectrum of activities. It may mean continuing in currently non-profitable areas of production in order to establish critical mass, or it may mean innovating a new product. In either case, J&J’s active acquisition strategy e where the company was active both in the sense of acquiring many businesses and undertaking substantial changes to those businesses after acquiring them e suggests that firms can benefit from scouting the environment in order to seek opportunities to redefine their boundaries. Second, unit reconfiguration was more common than unit stability, even over moderate periods of time. This dynamism was gained by continually redefining the boundaries of business units within the firm. The reconfiguration of units also supports the idea that firms may create greater value by recombining resources in multiple business units. The fact that certain forms of reconfiguration were more common than others implies that the firm believed that some types of boundary changes would enable value creation more than other forms of reconfiguration. Enabling and constraining issues that arise during boundary evolution include factors affecting learning and innovation, including path dependence, knowledge bases, contextual change and appropriability. Firms need to be willing to consider the value of reconfiguration, even several times, to create greater firm-specific value before simply divesting an acquisition that may have inadequate value in its acquired form. In the case of J&J, a significant portion of acquired resources and units were reconfigured or divested, and this should forewarn companies of the uncertainty of acquisitions. Firms should be prepared to weigh the costs and benefits of investing in acquisitions and realize that creating value may take time, reorganization of unit boundaries and further investments.
Firms should realize that creating value (from acquisitions) may take time, reorganization of unit boundaries and further investments. Third, we found that the company retained internal lines and units more than acquired resources, and that internally created units were the most likely to innovate. These observations stress the value of internal development, even in acquisition-active firms such as J&J. The comparative importance of internal development implies that the firms are most familiar with the routines and resources within the boundaries of internally created units and that these boundaries best enable innovation. Finally, the discovery that resource reconfiguration occurs most often after unit reconfiguration suggests that resources are embedded to some degree within the structural boundaries of business 540
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Table 7. Lessons for Managers
Scout the environment for target units and resources. Look for opportunities to redefine firm boundaries. Consider which forms of unit reconfiguration will result in value. Redefine unit boundaries accordingly. Do not give up on resources too soon. Identify opportunities to reconfigure before divesting. Recognize the uncertainty of acquisitions; even several attempts at creating value may still lead to divestiture. Be careful of moving resources without their structural context. Invest in internal development, even in acquisition-active firms.
units. Firms should be cautious when reconfiguring resources independent of their structural container, because ignoring structural conditions risks losing embedded routines.
Conclusion In studying J&J over a twenty-three year period, we found that the firm was most likely to retain internally developed resources and units and pursued greater reconfiguration of acquired units. J&J commonly created greater firm-specific value by reconfiguring their units several times, especially in the case of acquisitions. Through these many reconfigurations, J&J regularly updated its unit boundaries. J&J was highly active in changing its firm boundaries by acquiring units. Although some reconfigured units innovated, most innovations occurred in internally created units that had no boundary changes. Thus, J&J did not disrupt the boundaries of all of its units, although, usually in the cause of trying to create greater technical and marketing value, J&J would reconfigure units it felt held potential. Moreover, the company typically reconfigured even units that had innovated at some point following the innovations. The J&J example portrays how internal development is still a key source of innovation and change, even for acquisition-active firms. Finally, we also found that J&J moved product lines between unit boundaries with the movement of units, rather than independent of this movement, which provides evidence of the embedded nature of resources within structure. Our framing questions draw from theories of organizational learning, the resource based view of strategy, and the evolutionary perspectives on innovation. The empirical patterns support most baseline expectations. The observation that firms innovate best when they are familiar with the routines around them aligns with both a routine-based perspective of the firm and the resource based view. The discovery that J&J reconfigured units, often several times, in order to create greater firm-specific value aligns with evolutionary and learning theories. Finally, the observations that most innovations occurred in undisrupted units and that lines usually moved with units support arguments in routine-based theories that routines embed within organizational structures. Of course, the study has limits. We observe only discrete product line innovations, and thus we do not capture incremental innovations that occur within a product line. Moreover, our conclusions rely on inferences from the observed patterns. It would be more concrete to witness the reconfigurations in ‘real-time’, observing the value creation process in practice. Nonetheless, we discussed the results with corporate executives, who concur with the implications that we drew from the patterns. There are several directions for future research. First, of course, significant time needs to be allocated for the long-term study of business dynamics for multiple firms. The potential generalizations need to be tested on a larger sample to see if there is a trend in resource reconfiguration strategies across firms. Second, future studies could investigate the goals that create the catalysts of reconfiguration and determine whether firms achieve the goals. Long Range Planning, vol 37
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Third, studies may investigate the specific relationship between unit reconfiguration and innovation. In this study, we identified the origin of innovations but did not explicitly test the reconfiguration and innovation relationship. Fourth, continued development and testing of a conceptual framework for reconfiguration might best be done through combining archival research with ongoing interviews with managers to determine the sequence of events and the relative roles of acquisitions and internal development. These avenues of research will help us to develop a stronger reconfiguration framework and to better understand the dynamics of change. Most generally, this study highlights the dual importance of acquisitions and internal development as sources of value and innovation for a firm, along with the complementary role of business unit reconfiguration. In the case of J&J, acquired units took the role of either an independent subsidiary or of a reconfigurable unit. The majority of acquired units were reconfigured with other units to create further value for the firm, and several did indeed innovate: a minority were not reconfigured, and several of these also innovated. The firm obviously had to make choices as to which acquired units they felt would be productive without further boundary changes, and which either required resources to stimulate innovation, or were to serve as ‘fuel’ for other units. However the majority of J&J’s innovations came from those internally created units whose boundaries were not disrupted - perhaps because they already had resources and routines in place which made them more innovative. Interestingly, J&J often took the gamble of reconfiguring such innovative units, seeking further value creation. Though reconfigured units innovated less on average than the non-disrupted units, perhaps they would not have innovated at all if the attempt at reconfiguration had not taken place - a judgment decision that J&J must have made before choosing reconfiguration. With regard to innovation, our findings suggest there is a trade-off between complementing resources from outside unit boundaries, and the disruption of routines due to this altering of boundaries. We hope that this work leads to further study on long-term business dynamics and a better understanding of firm boundaries and innovation.
With regard to innovation, there is a trade-off between complementing resources from outside unit boundaries, and the (unavoidable) disruption of routines.
Acknowledgements We thank Charles Baden-Fuller, Michael Gibbert, Liisa Va¨likangas, and the anonymous reviewers for their comments on previous drafts of this article. Much gratitude also goes to those who saw the first version (at the Tuck/CCC Conference on the Evolution of Firm Capabilities in Sept 1999) for their constructive feedback and support.
Appendix Data and methodology For each year of the guide, we noted which J&J medical sector business units existed. Apart from the parent company, there were 88 business units active sometime during the period of study (listed as Table A1). 542
Innovating through Acquisition and Internal Development
Table A1. J&J business units, 1975-1997
Sub No Name of operating unit 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44
Sub No Name of operating unit
Johnson & Johnson Corporation 45 Arbrook, Inc 46 Codman & Shurtleff, Inc 47 Ethicon Inc 48 Jelco Division 49 Johnson & Johnson Dental Products Company 50 McNeil Laboratories, Inc 51 Ortho Diagnostics Inc Ortho Pharmaceuticals Pitman-Moore Inc Stimulation Technology, Inc Extracorporeal American Catheter Corporation Extracorporeal Medical Specialties Inc Extracorporeal Medical Systems Inc Johnson & Johnson Domestic Operating Company McNeil Laboratories/Critikon Division Ortho Instruments StimTech Inc Surgikos Inc Critikon Inc Hancock Extracorporeal Immulok Inc Iolab Corp Janssen Pharmaceutica Inc Johnson & Johnson Products Inc McNeil Pharmaceuticals Ortho Diagnostic Systems Inc Personal Products Company Technicare Corp Deltascan Division Technicare Nuclear Medicine Technicare Ultrasound Division Vistakon Inc Xanar Inc Site Microsurgical Systems Inc Johnson & Johnson Cardiovascular Johnson & Johnson Hospital Services Company Johnson & Johnson Ultrasound Inc Iolab Pharmaceuticals Johnson & Johnson Professional Diagnostics Inc Advanced Care Products Division Lifescan Inc Sterile Design Inc Iolab Microsurgical Systems Inc Johnson & Johnson Consumer Products Inc
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52 53 54 55 56 57 58 59
Johnson & Johnson Health Management Inc Johnson & Johnson Interventional Systems Inc Johnson & Johnson Medical Inc Johnson & Johnson Orthopedics Inc Ortho Biotech Therakos Inc Vistakon Johnson & Johnson Vision Products Inc Advanced Sterilization Products Cordis A Johnson & Johnson Cordis Corpration Cordis Medical Products Ethicon Endo-Surgery Johnson & Johnson Health Care Systems Inc Menlo Care Inc Johnson & Johnson Professional Inc
60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81
Martin Laboratories Ortho McNeil Pharmaceutical Corp Cordis Webster Division Custom Medical Products Mitek Surgical Products Inc Johnson & Johnson Clinical Diagnostics Bactomatic, Inc. Devices Inc Bio/Physics Systems Immuno-Science Corporation Chayes Virginia Applied Medical Research Corp Vascor Cardio Systems Inc Applied Fiberoptics ‘‘A’’ Company A&O Surgical Co Inc Symedix Inc Magnetic Corporation of America Irex Medical Systems Echo Laboratories Kees Surgical Specialty
82 83 84
RoC SA Neutragena Ultra-Cision
85 86 87 88
Joint Medical Products International Biophysics U.S. Corporate Health Management Inc. Janssen Pharmaceutica NV (Belgium)
543
Table A2. J&J medical product lines, 1975-1997
PL No. Name of Product Line
PL No. Name of Product Line
A06 A09 A13 A16 A17 A18 A20 B03
Analytical Instrument Data Systems Animal Equipment and Supplies Arterial Grafts Automated Cell Sorters Automated Chemistry Analyzers Automated Immunoassay Systems Automated Microbiology Analyzers Biologicals
I06 I10 K01 L09 L10 M01 M03 M11
B04 B05 B06 B07 B09 B11 C02 C03 C05 C10 C11 C13 C14 C15 D02 D05 D06 D07 D11 D13 D15
Biomaterials Biomolecular Research and Development Blood and Blood Products Blood Collection Supplies Blood Gas Analyzers and Monitors Blood Processing Equipment Cardiac Assist Equipment Cardiac Pacemakers Cardiovascular Accessories Coagulation Testing Equipment Computed Tomography (CT) Scanners Consumable Products Contact Lenses Contraceptive Devices Dental Equipment Dental Products Dental Prosthetics Dental Supplies Diagnostic Reagents and Test Kits Digital Subtraction Radiography Equipment Disinfection Services, Equipment and Supplies Dressings and Bandages Electrodes, Cables, Leads, and Gels Electronic Blood Cell Counters Emergency Medical Products Endoscopes, Arthroscopes and Related Products General Disposables Health Care Cost Management Heart Valves Home Care Equipment and Supplies Hospital Supplies Distribution Image Recording Systems
M12 M16 M18 N02 N03 N04 N05 O02 O03 O08 O14 P07 P09 P14 P15 P16 P19 P22 R02 R04 R12
Infusion Devices Intraocular Lenses Kits and Trays Lamps and Lighting Equipment Lasers Magnetic Resonance Imaging (MRI) Equipment Mass Spectrometers Medical Educational and Training Products and Supplies Medical Educational and Training Services Medical Linens and Apparel Medical/Surgical Gloves Nephrology Treatment Services Neurostimulators Nuclear Diagnostic Equipment Nuclear Instruments Ophthalmic Diagnostic Equipment Ophthalmic Supplies and Accessories Orthopedic Devices and Appliances Outpatient Medical and Surgical Services Patient Monitoring Equipment and Accessories Patient Transport Systems Pharmaceuticals, Drugs and Medicines Physical Therapy and Rehabilitation Equipment Physicians’ Aids Physiological Therapeutic Equipment Pulmonary Function Testing Equipment Radioimmunoassay Test Kits Radiological and Nuclear Equipment Renal Dialysis Equipment
R13 R16 S09 S11 S12
Renal Dialysis Supplies Respiratory Therapy Equipment Sterilizing Equipment and Supplies Supply and Other Carts and Cabinets Surgical and Obstetric Drapes
S13 S15 S16 S17 T05 U01
Immunohematological Testing Instrumentation Implantables Incontinence Products Infection Control Products
U02
Surgical Instruments Surgical Lasers Sutures and Fasteners Syringes and Needles Tubings, Tubes and Catheters Ultrasonic and Other Transducers and Accessories Ultrasonic Diagnostic Equipment
W03 W04
Wheelchairs, Manual Wheelchairs, Motorized
D16 E03 E09 E12 E15 G03 H01 H05 H07 H11 I01 I02 I03 I04 I05
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For each unit, we observed if the company created it internally, obtained it through acquisition, or derived it by reconfiguring several existing units. We also noted which units the firm reconfigured, divested without reconfiguration, or allowed to continue without reconfiguration during the period of the study. We believe that the data from the industry guides are accurate, based on checks and clarifications from public archival sources such as Lexis-Nexis, company annual reports and interviews with J&J personnel. This is the most extensive study of resource and business unit reconfiguration that we know of at this level of detail. We also observed which product lines the company offered in each unit, for each year. There were a total of 87 medical sector product lines during the period of study (listed as Table A2). We track several changes over time. First, we track the product lines over time within the company. We are able to observe when the product line was offered, which business unit or units contained the line, and if a resource was originally an acquired resource or an internally-developed (innovated) resource. Second, we track unit evolution over time in order to determine the source and outcome of each unit. Third, we track product line changes within units during the 1975-1997 period in order to study the sequence of unit and resource reconfiguration. This study uses product lines as an indication of firms’ resources, rather than equating product lines with resources. If a firm possesses a product line, we think it is appropriate to assume that the firm possesses resources and routines that make that product line’s existence possible. Similarly, if a firm divests a product line, it is appropriate to assume that some of the resources that made that product line’s existence possible also have been divested. In this way, we believe that firms’ product lines provide indications of firms’ unique sets of resources and routines. Taking this approach, a new product line indicates the presence of new resources within the firm, which were either acquired or internally developed. If a product line was not acquired, the study assumes that resources that make up part of this product line were innovations within the firm. Thus, a new (non-acquired) product line is indicative of innovation. Clearly, such an indicator misses incremental innovations that take place in the firm, which is a limitation of the approach.
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25. R. M. Cyert and J. G. March, A Behavioral Theory of the Firm, Prentice-Hall, Englewood Cliffs, NJ (1963); R.R. Nelson and S.G. Winter (op cit at Ref 5). 26. We addressed question 3 concerning the innovativeness of internally created units as follows. There were 12 internally created units, 54 acquired units, and 22 reconfigured units (Figure 4). On average, then, internally created units created 8/12 = 0.67 lines each, acquired units created 2/54 = 0.04 lines each, and reconfigured units created 4/22 = 0.18 lines each. Tests of differences between means for line creation in the three unit source comparisons (internal-acquired, internal-reconfigured, acquired-reconfigured) are all significant (p!.01). 27. For the unit retention portion of question 1, the test of the difference between means of retention (continue without reconfiguration) for internal and acquired units is significant (p!.05). 28. For question 2, the difference between means of reconfiguration of acquired and internal units is significant (p!.05). In addition, the loglikelihood chi-square statistic for the 3!3 table of unit source (internal, acquired, reconfigured) by unit fate (reconfigure, continue without reconfiguration, divest without reconfiguration) is significant (p!.01). 29. For question 4, the difference between means of the product line additions with and without unit reconfiguration is statistically significant, as is the different between means of the product line deletions with and without reconfiguration.
Biographies Samina Karim is Assistant Professor of Strategy and Policy at Boston University. She received her PhD from the University of Michigan, Ann Arbor. Her research focuses on organizational reconfiguration and evolution of capabilities, learning and knowledge transfer between organizations, innovation in established firms, structural complexity and acquisitions. School of Management, Boston University, 595 Commonwealth Ave., Boston, MA 02215. Phone: (617) 353-2032; Fax: (617) 353-5003. Email:
[email protected] Will Mitchell is the J. Rex Fuqua Professor of International Management at Duke University’s Fuqua School of Business. His research focuses on business dynamics, studying how firms change in the face of constraint to change. Fuqua School of Business, Duke University, Box 90120, Durham, NC 27708. Phone: (919) 660-7994; Fax: (919) 6816244; E-mail:
[email protected]
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