One secret of J&J’s success: Diversify within a single industry

by Jessica Shambora

For this year’s Fortune 500 issue, senior writer Geoff Colvin and I had the chance to look inside one of the list’s most enduring performers: Johnson & Johnson (JNJ). The New Brunswick, N.J.-based health care giant is notoriously media shy, but in the midst of the economic doom and gloom, the company decided it was time to tell its 123-year story of success. What a story that is. (CEO Bill Weldon helps tell it, too, in a video here)

For starters, here are some financial stats that point to J&J’s strength and stability:

-Last year, J&J’s sales rose 6%, and it jumped six places in the 500 ranking, to No. 29 (amidst 12 solid months of economic decline in the U.S).

-J&J’s profit increased 22% last year even as the 500’s profits dropped 85%. That made J&J the sixth most profitable company in America and the fifth most valuable, ahead of Procter & Gamble (PG), Berkshire Hathaway (BRKB), Chevron (CVX), IBM (IBM), General Electric (GE) and many other great performers.

-J&J still holds its triple-A credit rating solidly — one of only four non-financial companies (with Exxon, Microsoft, and ADP) in that dwindling club.

-J&J stock beat the market last year, falling 8% vs. the S&P’s drop of more than 30%.

The list goes on (you can find more stats in the story). Financial discipline is key to J&J’s success, but it’s only one of five principles that Geoff and I outline in our piece. The others are: focus on the future; let the experts run the business; have a purpose beyond profits; and diversify within a single industry.

This last lesson — diversify within a single industry — was particularly fascinating to study, so I wanted to offer further detail that didn’t make it into the story. After all, this strategy helps explain how J&J grew from a maker of surgical dressings, back when the company was founded in 1886, to a broadly based health care company with three business groups, each large enough to be an industry leader on its own.

Consumer Products includes the items everyone knows, and more of them than most people realize – Johnson’s Baby Shampoo, Tylenol, Neutrogena skin care products and Listerine mouthwash (acquired when J&J bought Pfizer’s consumer business in 2006). The Medical Devices and Diagnostics group supplies operating rooms and doctors’ offices with products including sutures, blood tests and artificial joints. The Pharmaceuticals business sells prescription drugs that include Concerta for attention deficit disorder, Remicade for arthritis, Prezista for HIV/AIDS, and others.

The classic argument for a diversified approach is it reduces risk – as one industry gets hit, another may rise – and that rationale has panned out at J&J, where the percentage of revenue contributed by each business varies from year to year.

Another explanation has to do with convergence of technology across businesses. One of the earliest examples of this kind of innovation at J&J was the drug-eluting stent, a breakthrough for cardiovascular disease, which resulted from a meeting in the 1990’s between engineers from the devices group and scientists from the pharma group.

CEO Weldon also tells the story of some scientists who had hit a wall with the product they were developing. They put their problem up on an internal company site, and that same day they heard from a scientist in another business in a different location. He responded with the answer; it had been the focus of his PhD work.

“We have all this expertise in-house so we can pull on it rather than having to go out and find somebody,” says Weldon.

Last November J&J acquired Omrix biopharmaceuticals and is now exploring the use of the company’s biologic drugs in tandem with J&J’s surgical dressings to help control soft tissue bleeding. Cross-pollination can also benefit consumer products. The company applied scientific advances in sunscreen technology from its research labs to its Neutrogena and Aveeno lines, for example.

A third benefit of J&J’s diverse portfolio of health care businesses is the opportunity to follow customers through their lifetimes and across the company’s portfolio. In J&J’s world, our lives are a journey from Baby Powder to Efferdent.

Similarly, focusing on the patient rather than on any single product is the mission of J&J’s recently formed comprehensive care group. If J&J knows you have diabetes, it can show you the virtues of a OneTouch glucose monitor from the device and diagnostics group, and of Splenda sweetener from consumer products, and of health management software from a recently acquired company called HealthMedia.

In these times, when many companies are struggling for growth and trying to squeeze more value out of existing businesses, they would be wise to follow J&J’s lead: Look for opportunities across a single broadly defined industry.

What other companies have had success with this approach? Please let me know your thoughts and ideas.