Introduction
The analysis of this corporation focuses deeply on how it could effectively maximize its stockholder wealth. The analysis will also focus on how the corporation will address its challenges due to a mix of different businesses. To maximize the value of their company, business managers must raise the organization’s stock price. The business’s worth and the shareholders’ wealth rise with an increase in the stock price. Corporate governance’s maximizing shareholder wealth establishes one overarching objective for business leaders. Johnson and Johnson operate with the overarching goal of building a business with endless intrinsic value and maximizing shareholder wealth. Johnson and Johnson should employ the following strategies that will assist in the maximization of the stockholders’ wealth. Building credit where Johnson and Johnson’s reputation in the banking market can be improved through purposeful borrowing, giving it access to larger capital from a wider choice of lenders with more enticing loan terms (Cardio, 2017). A corporation with more cash access can finance significant expansion, creating real wealth.
How The Corporation Maximizes Stockholders’ Wealth
The corporation has many stockholders who hold different percentages of shares. Currently, around four thousand five hundred and fifty-seven institutions hold shares in the corporation. The concept of shareholder wealth maximization holds that Johnson and Johnson managers should prioritize raising the stock price as much as feasible (Heminway, 2017). This wealth maximization objective is important as it gives the managers an aim of building on the corporation’s value. Stockholders’ wealth can also be maximized by corporations investing in various items like mutual funds, real estate, and insurance. Corporations should select extremely conservative investment instruments like government bonds, certificates of deposit, and dividend-focused mutual funds because they have a fiduciary duty to work in their investors’ best interests.
Companies’ Strategic Business Units (SBUs)
The corporation has three main strategic business units: pharmaceutical, medical devices, and consumer products. The Johnson & Johnson Family of Companies’ pharmaceuticals division concentrates on six key therapeutic areas: oncology, immunology, infectious diseases & vaccines, neuroscience, cardiovascular & metabolism, and pulmonary hypertension. Products for the consumer market include nutritional and over-the-counter pharmaceuticals and items for women’s health care, baby care, oral care, wound care, and skin care. Medical devices include products for managing circulatory diseases, orthopedic joint reconstruction and spinal care, wound care and women’s health, minimally invasive surgery, blood glucose monitoring and insulin delivery, diagnostic products, and disposable contact lenses.
Strategy of Vertical Integration
Johnson and Johnson are pursuing a vertical integration strategy to eliminate issues that can make it cut revenue. Johnson and Johnson’s vertical integration into the health services market benefited the corporation, the companies it sought to attract as clients, and the employees (Crawford, Whinston, Yurukoglu, 2018). The corporation will continue to be able to offer additional goods and services thanks to its increased expansion capabilities from buying downstream businesses. The present issue is that certain product offerings may have disregarded quality and safety standards. Poor quality control and manufacturing mistakes are to blame for product recalls. Backward vertical integration has several major advantages, including increased manufacturing control, cutting-edge technology, and more reliable industry knowledge.
Related Diversification
When a company enters a new industry that shares significant similarities with its current business or industries, this is referred to as related diversification. Johnson and Johnson focus on three closely related businesses (Menni, Jackson, & Valdes, 2017). The diversification involved was pharmaceutical, medical devices, and consumer products. All these diversifications were related since they all focused on the health of humans.
Pharmaceuticals
Pharmaceuticals include dermatology, gastrointestinal, cardiology, contraception, and hematology medications. It also included immunology, neurology, oncology, pain management, urology, and virology. Medical devices include disposable contact lenses, blood glucose monitoring, insulin delivery systems, orthopedic joint repair, spinal care, wound care, women’s health, minimally invasive surgery, and wound care and health items. Consumer goods include nutritional and over-the-counter pharmaceuticals and items for women’s health, baby care, oral care, wound care, and skin care.
Porter’s Three Tests of Diversification
Johnson and Johnson can use Porter’s Three Tests to determine whether their diversification plan can add value to the company (Saltelli, Bammer & Vineis, 2020). Porter’s tests include the Attractiveness Test, which measures how desirable a new market is; the Cost of Entry Test, which illustrates the costs associated with entering the market; and the Better Off Test, which measures how well-positioned a company is in the new market.
The Attractiveness Test
The Attractiveness Test determines whether the new market is one that the company would be interested in entering. It’s a crucial question since diversification can only benefit a company if the new market it enters has the potential to generate profits that outweigh the cost of entry.
How Macro-Environmental Factors Affect Strategic Business Unit
The term “macro environment” describes the outside influences on an economy. Macro environmental elements such as political, economic, social, technological, and legal trends affect the Strategic Business Unit of the corporation. Together with this also, porters five forces affect the business units. An industry’s vulnerabilities and strengths can be ascertained using Porter’s Five Forces, a model that identifies and examines five competitive forces that affect all business units. The first model is industry competition, where a corporation’s power decreases as the number of competitors and comparable goods and services, they provide increase.
Johnson and Johnson corporation should ensure all the pharmaceutical products are of high quality and are more effective to have added advantage over its competitors. On the side of medical devices, the corporation should come up with a different variety of medicines that meet the different needs of the customers, enabling them to compete with their competitors. Another business unit was dealing with consumers products; there was also a need to produce different varieties with high quality that would attract many customers.
The second porters’ force was the potential of new entrants into the industry. It is appropriate for Johnson and Johnson to lay out ways to prevent new entrants into the market from interfering with any of its business units. The corporation should lower the price of its pharmaceutical, medical, and consumer products to make it difficult for competitors to survive. The third model of Porter is the power of suppliers, which examines how quickly suppliers can raise input costs. It is influenced by the number of suppliers of a good or service, the degree to which these inputs are special, and the cost to a company of switching suppliers.
The last force focuses on alternatives as threats come from substitute items or services employed in place of a company’s goods or offerings. Companies with the ability to raise prices and secure advantageous terms will be those that make items or provide services for which there are no direct alternatives. Customers can avoid purchasing a company’s product when close substitutes are readily available, which might diminish a company’s position in the market. An organization can modify its business plan to utilize its resources and produce higher earnings more effectively.
The Better of Test
The Better Off Test seeks to determine whether a business or new unit will benefit from diversification and so obtain a competitive edge. The diagram shows the value chain model of each unit and how they share non-separable assets. The value chain model shown is for the pharmaceutical business model.
The value chain model for medical devices in Johnson and Johnson corporation is below.
Mobile phone company Value Chain
The value chain McKinsey model is for consumer products under John and Johnson’s business Value Chain.
Net Present Value Analysis for Non-Core Strategy Business Unit
Non-core SBU is activities within each SBU that enable the corporation to run even though they may not be the core activities of the business. Net present value analysis determines the current value of a stream of payments from a business, project, or investment.
Assumptions Used to Justify the Savings Stream
Each saving stream was based on the assumption that the interest rate was not changing throughout the years. Another assumption under NPV is that future cash flow is reinvested up to a certain level.
Cost of Entry
This enables Johnson and Johnson to evaluate whether the cost of entering a new market is lower than the profit obtained. The corporation SBU needs to be analyzed to determine the difference between the profit obtained against the cost incurred.
Conclusion
This study’s analysis helps the company stockholders to maximize wealth by investing in various items like mutual funds, real estate, and insurance. Corporations should select extremely conservative investment instruments like government bonds, certificates of deposit, and dividend-focused mutual funds because they have a fiduciary duty to work in their investors’ best interests. Renting out underutilized real estate and extra productive capacity is another way for corporations to maximize their income.
References
Cardao, T. (2017). Classes in maximizing shareholders’ wealth: Irving Fisher’s theory of the economic organization in corporate financial economics textbooks. Contemporary Economics, 11(4), 369-382. Web.
Crawford, G. S., Lee, R. S., Whinston, M. D., & Yurukoglu, A. (2018). The welfare effects of vertical integration in multichannel television markets. Econometrica, 86(3), 891-954. Web.
Heminway, J. M. (2017). Shareholder wealth maximization as a function of statutes, decisional law, and organic documents. Wash. & Lee L. Rev., 74, 939. Web.
Menni, C., Jackson, M. A. & Valdes, A. M. (2017). Gut microbiome diversity and high-fiber intake are related to lower long-term weight gain. International journal of obesity, 41(7), 1099-1105. Web.
Saltelli, A., Bammer, G., Bruno, I., Charters, E., Di Fiore, M., Didier, & Vineis, P. (2020). Five ways to ensure that models serve society: a manifesto. Web.