CHAPTER 12

STAMINA: SURVIVING FOR THE LONG RUN

One of the things I have become a student of is how institutions outlast the generations who created them. How they live up to the ideals that first made them successful but also question the status quo.

—Satya Nadella, CEO of Microsoft

Longevity is the ultimate challenge for any business. Countless start-ups fly high for a few years on the strength of a breakthrough innovation, only to crash when competitors catch up or their industry takes an unexpected turn. Despite the start-up world’s faith in “failing fast” and then pivoting to new business models, that kind of strategic nimbleness is much more easily said than done.

But some companies do figure out how to adapt and evolve, decade after decade. They steadily build a reputation and brand image through both good times and bad, long after their founders have retired or died. As times change, these companies make a sharp distinction between the products or services that originally put them on the map but may need to be left behind, as opposed to the fundamental values and mission that can and should remain consistent as the core of their identity.

I call this skill stamina, and I’ve grouped it with the brawny competencies because it often requires driving change on a massive scale. It’s one thing when the founders of a start-up like Instagram or Slack explain a strategic pivot to 20 or 30 staffers in a single location. It’s quite another when an executive team tries to transform products, business models, and especially mindsets across an organization of tens of thousands (or hundreds of thousands) of employees, many of whom have grown comfortable with the old ways of doing things and will resent or oppose innovation. Exercising one’s stamina can be especially tough when circumstances require closing decades-old factories or doing mass layoffs.

Consider the companies we’ve discussed that were born in a very different world, decades or even more than a century ago: Daimler, Michelin, Walmart, John Deere, AB InBev. Or consider some other long-term survivors that Jim Collins and Jerry Porras profiled in their 1994 classic, Built to Last: 3M, Walt Disney, Boeing, Sony, Procter & Gamble. For all of their differences, these companies share a clarity about which parts of their history and culture are still relevant and essential, and which can safely be jettisoned. They all had the stamina to survive tough times and regroup to make the most of new opportunities, often by adding products or services that their founders wouldn’t recognize. They all took advantage of the fact that you don’t have to be perfect once you’ve established a strong reputation; consumers will have a certain amount of patience while you recover from missteps or reinvent your offerings for a new era.

In this chapter we’ll start with three brief examples of the power of stamina. National Geographic proved that an organization that became famous in the nineteenth century could still thrive in the twenty-first. Microsoft, which achieved unprecedented success and market power in the 1980s and 1990s, found the stamina to recover after a series of strategic mistakes in the early 2000s. Even Netflix, a relative newcomer founded in 1997, has been around long enough to survive two major pivots in its business model, despite internal and external skepticism to both transformations.

Then our featured example is Johnson & Johnson, which has evolved continuously for 135 years and counting. J&J draws its stamina in part from its famous Credo, written by chairman Robert Wood Johnson in 1943, to make decisions in line with its values. Its leaders see new technology as a tool, never a panacea, as it fights to stay competitive in a huge range of markets. It’s also facing a series of daunting legal and public relations challenges that threaten its brand and reputation.

National Geographic: New Outlets for Old Values

The National Geographic Society was founded in 1888 in Washington, DC, for “the increase and diffusion of geographical knowledge.” Its 33 cofounders were a diverse group of geographers, explorers, teachers, lawyers, cartographers, military officers, and financiers who wanted to encourage Americans to become more curious about the world around them. They launched National Geographic magazine nine months later, and circulation boomed to two million in the early 1900s, after it switched from overly technical articles to general interest articles accompanied by photographs. National Geographic soon became known for its stunning and pioneering photography, including the first color photos of the sky, the oceans, and the North and South Poles.¹

The National Geographic Society grew over the decades to become one of the world’s largest nonprofit scientific and educational institutions. It still sees itself as a guardian of the planet’s resources and focuses on ways to broaden its reach. It has provided more than 14,000 grants since 1890, for work across all seven continents. This includes, as its website notes, “the most comprehensive scientific expedition to Mount Everest, working to better understand human-carnivore conflict in Gorongosa National Park in Mozambique, telling stories that help explain the world and all that’s in it, and groundbreaking work that has transformed our understanding of the great apes and what it means to be human.”²

The Society has stuck to its core mission—“using the power of science, exploration, education and storytelling to illuminate and protect the wonder of our world”³—while adapting to a wide range of new outlets, including television channels, books, websites, documentary films, and in-person events around the world. National Geographic is still consistently one of the top-selling 10 magazines in the United States, with a circulation of about four million and a total reach of 28 million.⁴

In 2015, the nonprofit Society started National Geographic Partners as a for-profit joint venture with 21st Century Fox to reorganize its many properties and publications. (Disney took over Fox’s role in the joint venture after a 2019 deal.) The joint venture returns 27 percent of its proceeds to the nonprofit Society. Thanks to its huge portfolio of media assets, National Geographic now reaches millions of people, with television networks in 172 countries and publications available in 41 languages.⁵

I’ve loved National Geographic magazine for its great writing and stunning pictures since I was nine years old. I had a National Geographic poster of the known universe on my bedroom wall; it’s now framed on the wall of my Stanford office. That kind of nostalgia can help drive brand loyalty while an organization builds new generations of fans. For instance, my son only knows National Geographic as a producer of cool videos that he streams on his phone. But the brand’s stamina will endure as long as the content it generates is outstanding, in any format.

Microsoft: Finding the Stamina to Recover from Dark Times

Microsoft’s origin story is the template for every tech entrepreneur’s fantasies. A brilliant geek (Bill Gates) drops out of college, starts a business with his best friend (Paul Allen) on a shoestring budget, commercializes software for the growing personal computer market (MS-DOS), outsmarts one of the world’s biggest companies (IBM) in a contract negotiation, leverages each successful new product into the next (Windows and Office), makes a fortune in an IPO, becomes the world’s richest and most influential businessperson, then rides into the sunset to save humanity via bold philanthropy. The end. Roll credits.

Of course, the real story of Microsoft’s first 25 years is more complicated, but let’s focus on what happened after Gates retired as CEO in January 2000, handing the baton to Steve Ballmer. The next 14 years are generally seen as the darkest period in Microsoft history, when it almost completely lost the technological and strategic high ground it had enjoyed in the 1990s. Under Ballmer, the company seemed stuck on a treadmill, producing bloated and uninspiring upgrades of existing products, such as the widely disparaged Windows Vista operating system of 2007. Even when Microsoft tried to innovate, the results were often dismissed as inferior to those of cooler companies like Apple. Remember the iPod versus Zune comparisons of 2006?*

As the stock price stagnated for a decade, Ballmer went through increasingly harsh shareholder criticism and press coverage, including a 2012 Forbes column that called him “the worst CEO of a large publicly traded American company” because he had “steered Microsoft out of some of the fastest-growing and most lucrative tech markets.”⁶ The board finally nudged Ballmer into retirement in late 2013, replacing him with Satya Nadella, then the head of Microsoft’s Cloud and Enterprise Group.

Since 2014, Nadella has been widely praised for reaching back to the values that originally made Microsoft great—not slavish devotion to old products but the aggressive, technology-led spirit that had once driven Gates and Allen. The company’s focus on cloud-based software, especially its wildly successful subscription model for Office 365 and other key applications, has helped revive its stock price along with its reputation. Its Surface tablet PCs and other hardware products have drawn great reviews.

Asked by the Wall Street Journal in 2019 where he finds inspiration, Nadella replied, “In the hard work that leaders in companies and institutions do to stay relevant. One of the things I have become a student of is how institutions outlast the generations who created them. How they live up to the ideals that first made them successful but also question the status quo.”⁷ That’s a good summary of stamina: surviving tough times by distinguishing the permanent essence of an organization from the unessential details that can and should be challenged.

Netflix: The Courage to Reinvent a Brand, Twice

Compared to the other companies discussed in this chapter, 23-year-old Netflix is still a newbie. But its relative youth makes it a great example of how to build stamina, and why it matters. Even young companies can find it hard to distinguish their core mission from the products and services that should be subordinate to the mission. It takes stamina (as well as insight and courage) to pivot to new business models—ideally before adversity forces you to make those pivots.

Reed Hastings and Marc Randolph started Netflix in 1997 in Santa Cruz County, geographically removed from the dotcom frenzy then consuming the San Francisco Bay Area and Silicon Valley. They knew there would be demand for a service that let people skip the hassle of driving to a video store to rent movies and TV shows, and then back again to return them. Netflix users could simply visit the website to create a queue of DVDs they wanted to watch, wait for them to arrive in their mailbox, then easily mail them back in the postage-paid envelopes provided.⁸

It may not sound innovative in retrospect, but Netflix was truly groundbreaking, designing and refining sophisticated warehousing and tracking systems to keep all those DVDs circulating around the country, with minimal glitches or delays. People who tried the service loved its convenience, as well as the fact that there was no extra charge for keeping DVDs indefinitely; you simply wouldn’t receive the next items in your queue until you returned the previous ones. By eliminating late fees, logistical hassles, and virtually all out-of-stock frustrations, Netflix created an appealing alternative to Blockbuster, the dominant movie-rental platform. By 1999, with about 100,000 US subscribers, Netflix shifted from pay-per-rental to a monthly subscription model with unlimited rentals.⁹ That shift drove word-of-mouth and growth even faster.

By 2006, with more than six million US subscribers, Netflix was riding high, as was its stock price following its 2002 IPO. No competitors were even close to its dominance of the rentals-by-mail market. But Hastings and his team knew that the company wouldn’t stay on top if it defined itself around physical DVDs. They started an internal push to innovate video streaming on demand. This new option launched in 2007, just when a critical mass of US homes were getting high-speed internet access.

At first, Netflix’s streaming option offered far fewer movies and TV shows than its DVD service, and the user experience wasn’t always smooth. Some critics and shareholders questioned why the company was pouring millions into streaming while consumers were still very happy with the DVD service. Criticism intensified in 2011, when Netflix announced a plan to spin off DVD rentals as a separate company, to be called Qwikster. Hastings’s blog post announcing the change drew 27,000 mostly harsh comments, including one that said, “Splitting Netflix in two so that you have Netflix and Qwikster is the worst business decision since New Coke.”¹⁰ The stock price plunged for two months, until the plan was scrapped.

But despite the Qwikster fiasco, Hastings was right that streaming was the future, even if DVDs at that point still offered users a much broader range of entertainment. The company topped 26 million US subscribers by 2012. Today, of course, the overwhelming majority of US Netflix subscriptions (60.1 out of 62.5 million in 2019) are exclusively for its streaming service.¹¹ The company made the right strategic pivot at the right time to sustain its core mission of delivering great entertainment.

Netflix’s other major shift was producing its own original content, beginning with a $100 million deal in 2011 to acquire House of Cards, featuring A-list talent such as director David Fincher and actors Kevin Spacey and Robin Wright. Hollywood was stunned by this move, as the New York Times reported: “The deal immediately makes Netflix a player in premium television programming. House of Cards, a serialized political drama, will look and feel like a traditional TV show, but it will not be distributed that way. . . . It will be marketed through Netflix’s recommendation engine. And it will probably be released in batches, several episodes at a time, since subscribers like to binge on serialized shows. . . . By licensing House of Cards, Netflix is essentially selling itself to Hollywood as an alternative to networks like HBO—and indicating that it is willing to pay high prices for high-quality shows.”¹²

As with the shift toward streaming, this huge investment drew skepticism, especially from Hollywood moguls who believed that betting on entertainment properties required specialized experience and intuition that Netflix’s data geeks and algorithms lacked. But again, Hastings and his team showed the insight and courage to recognize the need to evolve while still ahead, rather than waiting until they were in trouble. They knew that Netflix couldn’t thrive for the long run as a platform for other people’s content. As competitors began building their own streaming platforms, they would surely restrict Netflix’s access to the movies and TV shows that users really wanted. Long-term survival would require building a library of high-quality content that Netflix fully owned,

Today, as Hastings predicted, virtually every major media company has its own streaming video platform. But Netflix continues to thrive, adding 15.8 million net new global subscribers just in the first quarter of 2020, as the COVID pandemic dramatically increased demand for streaming. As the Wall Street Journal reported, “Usage was boosted in the quarter by several popular original efforts, including the third season of the drama Ozark and the documentary series Tiger King: Murder, Mayhem and Madness. Netflix said Tiger King was sampled by 64 million member households.”¹³

Netflix is a role model for thinking and training like a marathoner, not a sprinter. Its efforts to build up its stamina should continue to pay off as its industry becomes even more competitive in the years ahead.

Johnson & Johnson: An Old Incumbent Facing New Challenges

Johnson & Johnson was founded in New Jersey in 1886, by three brothers who sold ready-to-use surgical dressings and later first-aid kits, baby powder, and various personal products. It expanded to the United Kingdom in 1924 and later to Mexico, South Africa, Australia, Argentina, Brazil, and the Philippines.¹⁴ In 1959, it acquired McNeil Labs in the United States and Cilag in Europe, becoming a major pharmaceutical producer.¹⁵ Then with its acquisition of Janssen Pharmaceuticals in 1961, J&J solidified its position as one of the world’s leading research-based pharma companies. It has continued to grow its consumer, medical, and pharmaceutical businesses around the world.

Today it’s hard to grasp the sheer size and breadth of this conglomerate, which generated $82 billion in revenue in 2019. Many of its more than 250 brands are iconic, or at least would be impressive stand-alone businesses. They include:

Over-the-counter drugs and consumer products like Tylenol, Motrin, Benadryl, Bengay, Imodium, Pepcid, Sudafed, Listerine, Band-Aid, Stayfree, and Mylanta.

Food brands like Splenda and Lactaid.

Cosmetics and skin care brands like Clean & Clear, Neutrogena, Aveeno, bebe, Rogaine, and Lubriderm.

Vision care products like Acuvue and Visine.

Medical device brands like Acclarent, Cerenovus, and Mentor.¹⁶

But despite all those powerful consumer brands, fully half of J&J’s revenue comes from its pharmaceuticals subsidiaries, which make prescription drugs like Remicade (for rheumatoid arthritis), Stelara (for psoriasis), and Zytiga (for prostate cancer), to name just a few. Pharmaceuticals are even more important to the bottom line, with pretax profit margins of about 31 percent, far greater than the 17 percent and 16 percent margins of J&J’s consumer and medical device groups.¹⁷

As we saw in our discussion of 23andMe, the prescription drug industry’s business model is high risk, high reward. It takes billions in investment capital to research and test a significant new medication. But a US patent is only valid for 20 years after a drug’s invention, which includes however many years are required for testing, for surviving the FDA’s notoriously tough approval process, and for winning a patent. In practice, a company like J&J often has just a decade or so to cash in on an innovative new medication, before other companies can produce generic versions that will undercut its power to charge premium prices.¹⁸

Alex Gorsky, J&J’s CEO since 2012, spoke to my The Industrialist’s Dilemma class in February 2018. He has a profound awareness of the weight of J&J’s past successes, and deep pride in its role in fighting diseases like Alzheimer’s, HIV, and cancer. But he’s also deeply aware that success is never guaranteed in any of J&J’s three industries (pharmaceuticals, medical devices, and consumer products). In addition to competing with disruptive biotech start-ups as well as its traditional Big Pharma rivals, J&J has been working hard to restore its public reputation in the wake of lawsuits, the opioid crisis, and public outcry over prescription drug prices.

The Credo as J&J’s Foundation over Time

Gorsky’s focus on customer outcomes is in line with J&J’s 77-year-old Credo, which serves as the guiding document for what the company will and won’t change. It’s a key element in the company’s stamina. Robert Wood Johnson, chairman from 1932 to 1963 and a member of the founding family, wrote the Credo in 1943, just before J&J went public and long before anyone was discussing “corporate social responsibility.” As the company notes, “Our Credo is more than just a moral compass. We believe it’s a recipe for business success. The fact that J&J is one of only a handful of companies that have flourished through more than a century of change is proof of that.”¹⁹

The Credo is about priorities, not tactics or products. It intentionally puts stockholders and profits last, behind the people who use J&J’s products, the employees who make them, and the public good. R. W. Johnson was essentially advising his future successors on how to balance these obligations in every future decision. As a landmark document of American business, it’s worth reading in full:

We believe our first responsibility is to the patients, doctors and nurses, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. We must constantly strive to provide value, reduce our costs and maintain reasonable prices. Customers’ orders must be serviced promptly and accurately. Our business partners must have an opportunity to make a fair profit.

We are responsible to our employees who work with us throughout the world. We must provide an inclusive work environment where each person must be considered as an individual. We must respect their diversity and dignity and recognize their merit. They must have a sense of security, fulfillment and purpose in their jobs. Compensation must be fair and adequate and working conditions clean, orderly and safe. We must support the health and well-being of our employees and help them fulfill their family and other personal responsibilities. Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development and advancement for those qualified. We must provide highly capable leaders and their actions must be just and ethical.

We are responsible to the communities in which we live and work and to the world community as well. We must help people be healthier by supporting better access and care in more places around the world. We must be good citizens—support good works and charities, better health and education, and bear our fair share of taxes. We must maintain in good order the property we are privileged to use, protecting the environment and natural resources.

Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programs developed, investments made for the future and mistakes paid for. New equipment must be purchased, new facilities provided, and new products launched. Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realize a fair return.²⁰

Unlike some companies that write and then ignore similar mission statements, J&J engraved the Credo on a large wall in the entrance of its headquarters. It’s also prominently displayed at other locations around the world. Every new hire is taught about it, and every employee is asked to fill out an annual survey about how well the company has lived up to the Credo. Veteran J&J executives swear that it’s not just lip service. As one of them told me in a conversation, “The longer you work for the company, the more you see how important it is and how it actually does factor into decision making. It leads to a culture where differences of opinion are valued, and patients truly are put first.”

Gorsky knew that public mistrust of large corporations, especially in the pharmaceutical industry, is much greater now than in R. W. Johnson’s day. He told my class that the Credo’s principles remind everyone at J&J to treat big data, AI, genomics and other new technologies as tools, never as ends in themselves. Gorsky reminds his executives to stay focused on patient outcomes as their top priority. He knows that technology can’t save the company if it ever forgets its original purpose.

Business Line Expansion as the Key to Long-Term Growth

Gorsky stressed that another key aspect of J&J’s stamina is its massive portfolio of product lines and consumer brands. “When you’re in a business for over 130 years, there are going to be cycles when some businesses are up and others are down. We’ve experienced it across all of our businesses. It’s one of the reasons we’ve had 55 consecutive years of dividend increases and 34 consecutive years of a AAA credit rating.”²¹ While it’s hard to grow an $82 billion conglomerate, Gorsky’s growth strategy is to leverage its technology and global resources wherever the best opportunities can be found, whether in pharmaceuticals, medical devices, or consumer products.

He noted that as the CEO overseeing all that diversity, he might spend a single day in various meetings about advanced cancer treatments, about a new approach to robotic surgery, and about whether a forthcoming Neutrogena commercial should star Jennifer Aniston or Kerry Washington. Even far below the CEO level, product diversity helps employees: “You can work in Johnson & Johnson and be part of a start-up, in a small group, and then you can scale it and be running a multi-billion-dollar division.”²²

The late 2000s brought transformational breakthroughs in the understanding of the human genome, diagnostics, biologics, and the underlying cell biology of diseases. Pharma companies began prioritizing the development of specialty medicines, which had far fewer potential patients than primary care therapies but could often be commercialized at a lower cost and command a higher price. Such drugs also didn’t require the vast marketing dollars spent on primary care treatments.

Johnson & Johnson was initially unprepared for this change in the market. By 2009, the company was about to see revenue drop by almost $9 billion due to patent expirations, which would reduce its pharmaceutical revenues by a third. Even more alarming, J&J’s pipeline lacked major new drugs to replace these expirations, in part because its organizational structure wasn’t built to ride the new wave of specialty medicines. It was too focused on potential mass market drugs that might eventually reach millions of patients, rather than allocating resources and talent to niche drugs that might reach only 100,000 patients but could still be highly profitable.

Under Gorsky, J&J shifted its expansion focus from primary care medications to areas such as cardiovascular, metabolism, immunology, infectious diseases, and oncology. The company added pulmonary hypertension with its acquisition of Actelion in 2017. By 2020 it had 12 pharmaceuticals worth more than a billion dollars each, plus a coronavirus vaccine nearly ready for clinical trials.²³

Embracing and Nurturing Innovation to Build Stamina

Gorsky believed that if R. W. Johnson were still running the company today, he would hire data scientists to find the secrets hidden in huge data sets of genetic information, and AI specialists to work on detecting early warning signs of diseases that doctors might otherwise miss. He would never allow existing products to hinder the research and development of new ones.

One new process that excited Gorsky was CRISPR, which allows medical professionals to “edit” compromised DNA segments that cause genetic diseases. By modifying target cells to “self-destruct,” CRISPR can be used to destroy antibiotic-resistant bacteria.²⁴ Another exciting new technology was a sophisticated cancer treatment called CAR-T therapy, which extracts a patient’s immune system T-cells, responsible for determining the specificity of the body’s immune response to foreign antigens.²⁵ The extracted T-cells are then genetically engineered to produce synthetic receptors that can recognize and attach to tumor cells, after being reinfused into the patient’s body.

As J&J raced to develop these and other high-tech treatments, it faced a slew of new competition. Venture capitalists had started investing heavily in biotech start-ups, which were better positioned to gamble on unproven technologies, as their leaner structures allowed them to pivot more quickly than Big Pharma. Meanwhile, Amazon began reaching into multiple segments of the healthcare market, acquiring the online pharmacy PillPack in 2018, seeding the nonprofit healthcare entity Haven, investing in AI medical tools, and partnering with the Pittsburgh Health Data Alliance to innovate in cancer diagnosis, medical imaging, and precision medicine. Apple invested in both software and hardware technologies like the Apple Watch, which could store a patient’s medical information and perform basic tests like pulse rate and an EKG. Google launched an effort to collect and analyze US health records, collecting tens of millions of patient records by 2020.²⁶

While the tech giants don’t currently compete with Big Pharma on drug development, their ownership of patient data could pose a future challenge to J&J. But at least for the short term, J&J’s deep expertise provides strong protection against all these newcomers. It would be almost impossible for a biotech start-up or even a tech giant like Apple or Google to quickly master the vast complexities of getting new drugs developed, tested, approved, and distributed. J&J’s deep relationships with the FDA and other regulators are a huge competitive advantage.

When he spoke to my class, Gorsky’s enthusiasm about emerging innovations in genomic analytics was (forgive the pun) contagious. He spoke about J&J’s efforts to combine different oncology diagnostics to make it possible to detect cancer earlier than ever. He gushed about the power of cloud computing to link scientists around the world, and the power of the web to deliver useful content directly to consumers.

As he put it, “I’ve been in this business for almost 30 years and I can’t think of a more exciting time to be in this industry, because of the explosion that’s taking place in science and technology. We’re literally on the cusp of curing things like HIV and hepatitis C. You can have a hip procedure like I did a couple of years ago and be walking with a walker around the recovery floor within a couple of hours. It’s pretty remarkable.”²⁷

Partnering to Avoid “Not Invented Here Syndrome”

Many well-established companies fall prey to an affliction known as “not invented here syndrome” when their history of innovation leads them to disparage outside sources of innovation. But J&J has shown the confidence to make partnerships a bigger part of its business model, recognizing that nothing in the Credo implies that innovation needs to be generated internally. The important thing is for the company to keep learning from any available source, including the biotech start-ups that J&J invests in.

As Gorsky noted, “I am incredibly lucky to work with about 134,000 associates who are very smart, committed, hardworking, values-based. They’re the people who make us who we are, and we couldn’t do it without them. But we also know that we can’t do everything. So if you look across Johnson & Johnson, be it in the pharmaceutical group or the medical device group or the consumer group, about 50% of the time we discover and develop things internally. The other 50% of the time we go external, and that’s been the case for the last twenty years. We’re agnostic about the source of the best science and technology. Especially in today’s world of science, if you’re not constantly making connections, building relationships with academic centers, with the venture community, with other start-ups, you’re never going to be at the cutting edge.”²⁸

In its partnerships with biotech start-ups, J&J brings all the benefits of its global manufacturing operations, its clinical development and regulatory expertise, and its distribution muscle to reach millions of potential consumers. These advantages can complement the strengths of new biotech companies, which can pivot more quickly than Big Pharma in pursuing scientific leads. Over the past two decades, J&J set up four different partnership programs to identify the most exciting external discoveries and fold them into its manufacturing machine:

JLABS was a network of eight life science incubators that gave start-ups access to lab space, mentorship, and a research community for a monthly fee. While this program was no-strings-attached, J&J formed relationships with the start-ups that used the space, giving it an advantage over other Big Pharma companies seeking to capitalize on their discoveries.

Innovation Centers were located in four research hotspots: Boston, South San Francisco, London, and Shanghai. These hubs reached out to local, very early-stage healthcare start-ups.

JJDC was J&J’s strategic venture arm, tasked with investing in promising start-ups at every stage from the earliest seed-level to second round (“Series B”) financing and beyond.

Janssen Business Development (named for the pharma company acquired in 1961) sought partnerships or acquisitions with established pharmaceutical companies or midsized to large biotech companies.

To maximize the impact of these partnerships, J&J committed to killing internal research projects whenever an external alternative was making faster progress. That helped reassure outside companies that J&J wasn’t playing favorites with its in-house researchers.

Legal and PR Challenges: Using Stamina to Survive Crises

Despite its progress on all these fronts during Gorsky’s tenure as CEO, J&J has faced a series of legal and public relations problems over the same period. It has been sued more than 100,000 times over its product safety and marketing practices, related to products such as talc-based baby powder, the antipsychotic drug Risperdal, and opioids.

The entire pharmaceutical industry has gone through similar problems, losing its formerly great reputation as the source of lifesaving medications. Perhaps the worst example of perceived broken values was demonstrated by “Pharma Bro” Martin Shkreli, who egregiously raised prices on a lifesaving drug and defrauded investors with his activities.²⁹ It is no exaggeration to say that in some circles Big Pharma is almost as maligned as Big Tobacco—allegedly reckless, greedy giants who care only about profits, not how their products may hurt people. When politicians as far apart as Bernie Sanders and Donald Trump attack the same industry for price gouging, that’s a bad sign. By 2018, only 38 percent of Americans trusted pharmaceutical companies, according to the Edelman Trust Barometer.³⁰

Even within an unpopular industry, J&J faced a unique set of terrible headlines. For instance, in 2019, it was ordered to pay $572 million to the state of Oklahoma for its alleged role in the opioid crisis; a month later, it had to recall 33,000 bottles of Johnson’s Baby Powder over asbestos concerns that had led to thousands of lawsuits. The company also faced tens of thousands of lawsuits over its Pelvic Mesh products and lost an $8 billion jury verdict over allegedly inappropriate marketing of an antipsychotic drug, Risperdal. While J&J contested these allegations, the headlines fueled a precipitous drop in its reputation, from near the top among all pharma companies to 57th out of 58 in 2019.³¹

This reputational collapse was especially troubling because, with privacy laws progressively restricting corporate access to consumer data, J&J depended more than ever on earning consumer trust and consent. It was trying to deepen its direct relationships with customers, via tools like social media and niche websites. But could any of those tactics work if some people were starting to see J&J as basically evil?

Perhaps the most significant factor in the industry’s reputation problem stemmed from the public outcry over soaring drug prices. As presidential candidate Bernie Sanders said in 2019, “The United States pays by far the highest prices in the world for prescription drugs. This has created a health care crisis in which one in five American adults cannot afford to get the medicine they need.”³² His proposal to create a single-payer healthcare system is slowly gaining support. Even many Americans who oppose single-payer healthcare tend to support a public insurance option that would have stronger negotiating leverage over Big Pharma.³³ Under the status quo, more than 900 health insurance companies negotiate separately with the drug makers, with little leverage because the top 10 insurers combined account for just over 50 percent of the insurance market.³⁴ Add in the fact that most Americans are tied to their employer-provided healthcare plans, and it’s clear why the drug companies are under little competitive pressure to bring down prices for drugs under patent.

Big Pharma often blames pharmacy benefit managers (PBMs)—companies like Express Scripts, Caremark, and Optum that manage prescription drug benefits on behalf of health insurers—for hiding their culpability in rising drug costs. The PBMs often add a steep but invisible markup to the prices charged by the drug companies. To show the flaws in this system, J&J led a movement toward price transparency. In 2019, it became the first drug company to disclose its list prices in its TV commercials. It also published the groundbreaking Janssen U.S. Transparency Report, which publicly listed prices, rebates, discounts, and net prices for major drugs. Never before had this level of drug pricing detail been disclosed, earning praise from the media. But even with transparency, J&J knew that the debate over drug pricing would only get worse in the years ahead, as more people lived into their eighties and needed more medicines than ever.

Recent signs suggest some positive momentum for the company’s reputation. In 2020, a new US government study concluded there was no strong evidence linking baby powder to ovarian cancer.³⁵ J&J’s efforts to combat the verdict in the Risperdal lawsuit also resulted in a public win, with a reduction in its fine from $8 billion to $6.8 million.³⁶ And J&J’s stock outperformed other large-cap pharmaceuticals in 2019, even as its litigation issues peaked.³⁷ The stock price has roughly doubled overall since Gorsky took over in 2012. While that’s not the hypergrowth of a Silicon Valley unicorn, it’s impressive for a behemoth with $82 billion in revenue.

J&J believes that in the long run, most consumers care more about great products than about any headlines regarding litigation, pricing, or government regulation. As the company continues to roll out innovations that improve people’s lives, from the simplest over-the-counter products to the most complex cancer treatments, Gorsky believes that most people will again see J&J as a positive force in the world.

Ultimately, he has faith that the company’s stamina will carry it through tough times. As he concluded in front of my class, “You’ve got to be constantly thinking about your strategy, your resources, and your model—as your customers evolve, as they make decisions in different ways, as new capabilities get introduced. If you’re not constantly evolving, then there’s no way you can be successful.”³⁸

Getting Stamina Right

It’s almost a paradox that stamina and strength, which imply consistency, can only be achieved through relentless change and with a culture that enables ongoing variations. Like an athlete, a great company can’t keep doing the exact same exercise routines over time; it has to keep adding mileage on the treadmill or weight on the resistance machines.

Organizational stamina must also be consistent throughout the company. In a firm like J&J, every business unit seeks to stay competitive in discrete areas, and each aspires to be best-in-class against its competition, regardless of sector. In some cases it might make sense to share back-end platforms or best practices, but rigidly enforcing uniformity across a company might damage its stamina.

Finally, a company’s culture and values can serve as a North Star that guides employees toward actions that reinforce their dedication to a long-term mission. For National Geographic, that mission is disseminating knowledge. For Microsoft, it’s developing software that helps people work and communicate. For Netflix, it’s entertaining the world by being the best global media distribution service. And for Johnson & Johnson, it’s serving the patients, doctors and nurses, and all others who use their products. This kind of public-spirited mission can inspire employees to keep doing the hard work that builds stamina, leading to an enduring legacy that survives the inevitable ups and downs of any company’s life.

THE SYSTEMS LEADER’S NOTEBOOK

* Zune was an ill-fated MP3 player that was supposed to challenge the iPod but was widely mocked by tech experts and critics. A typical review by Engadget concluded, “Ever hear the phrase go big or go home? The only thing big about the Zune right now is the marketing campaign.” (https://www.engadget.com/2006-11-15-zune-review.html)