Managing a Business in a Recession. Or Not. Lessons from Johnson & Johnson.

The most recent Fortune Magazine has an excellent story titled J&J: Secrets of Success.

I love the intro:

Are you having a tough year at your company? Sorry to hear it. If it makes you feel any better, they're also having a tough year at Johnson & Johnson. How tough? Well, it appears - though it's not certain - that sales may actually decline in 2009, and that hasn't happened in 76 years. Profits will probably decline too, which hasn't happened in 25 years. But don't worry about the dividend. The company will almost certainly manage to raise it this year, just as it has done annually for the past 46 years.

Okay, that probably doesn't make you feel any better. Those facts show the extent of the damage at J&J during the economic collapse, and if it seems laughably mild, then you're beginning to see why this company is worth much more attention than it usually gets.

J&J easily makes my top five list of best managed businesses in the world. It would also make my top five list of stocks I want in my investment portfolio.

After getting my MBA back in the 1990s I spent four years at J&J so the company is near and dear to my heart. I learned a lot at J&J and still reap the benefits from those lessons.

The Fortune article discusses how J&J doesn't seek the spotlight, but its extraordinary track record - and how it pulls that off - is a wonder to behold.

How extraordinary?
"The Fortune 500's profits dropped 85% last year. J&J's profit increased 22%. As remarkable as that record seems, you get a more impressive perspective by stepping back - way back. Not many companies can give you their 100-year compound annual growth rate, but J&J can. It's 10.5%....if you'd bought a single share when the company went public in 1944 at its IPO price of $37.50 and had reinvested the dividends, you'd now have a bit over $900,000, a stunning annual return of 17.1%.....".

So what are the company's secrets to success and what can HR vendors learn from J&J about managing a business in a recession? The Fortune article gives five lessons:

1. Diversify within a single industry. J&J realizes benefits by staying within one broadly defined industry - healthcare. I remember a former CEO of J&J stating "Our approach is very straightforward: protect and strengthen the leadership positions we have established in our base businesses, and use them as foundations for building new platforms for growth". Brilliant.

2. Focus on the future. Too many companies are obsessed with the short term. Not J&J. Their R&D spending within the pharmaceutical business is the highest in Big Pharma. There are too many HR vendors in this recession who are in panic mode and making decisions that will hurt their long term success.

3. Let the experts run the business. J&J consists of about 250 operating companies. And J&J management lets to business heads run their units. Even a small HR vendor can learn from this decentralization strategy - it's how you develop leaders, and get things done. Note to CEO's: let your managers run their business.

4. Stay financially disciplined - always. Robert Wood Johnson (founder of J&J) insisted that "reserves must be created" and "adverse times must be provided for." The Fortune article states "That's why J&J borrows little and won't even go near endangering its triple-A credit rating. Says Leerink-Swan analyst Rick Wise: "They're thinking 10 or 20 years out. They have the financial flexibility and staying power so that even when they make a mistake short-term, they have the ability to hang in there."

5. Have a purpose beyond profits. J&J invented the mission statement and has the most famous "credo" in business. But lots of companies have these things right? Yes but unlike most businesses J&J actually lives their credo. J&J's CEO Weldon says, "Some of the best business principles ever written were Enron's. It's just an extraordinary document." The key isn't adopting the principles, it's believing them."

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

Read the article - it's a good one.

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