The effects of the organizational restructuring of Tylenol

Exercise

The case McNeil, the maker of pain-killer Tylenol and a subsidiary of Johnson & Johnson, provides a good example of the changes that can result after organizational restricting.

Historically, McNeil was a profit center of its mother company Johnson & Johnson. Under this organizational structure, Johnson & Johnson had to manage the consequences of various attempts to sabotage with cyanide one of its start products Tylenol, sold in supermarkets as a non-prescription medicine, that killed several of its users. Thanks to the fact that Johnson & Johnson enjoyed a good reputation and managed the crisis skillfully, Tylenol recovered 90% of its pre-crisis market share in just three months. Specifically, the company responded rapidly, sharing with the public all information available in each moment, recalling from the market 31 million Tylenol capsules, and refunding clients for products already purchased. The total cost was around 100 million dollars. Moreover, when after a few months it re-launched its product, it not only made a major advertising campaign, but also strengthened the packaging of the bottle so that it would be harder to manipulate and provided 2.5 dollars with each one with which users could get another.

But reputation is a volatile asset: like all productive assets, it requires careful maintenance. Between September 2009 and August 2010, McNeil, still a subsidiary of Johnson & Johnson, had to make eight market recalls for products sold under the names Tylenol, Motrin, Benadryl, and Zyrtec, most of which were for children. Some of these products contained metal particles and could have been contaminated with bacteria. These incidents made apparent a systematic sloppiness in quality control.

In 2006, Johnson & Johnson had bought the pharmaceutical company Pfizer’s consumer health products division which included Listerine, an antiseptic mouthwash, and Zyrtec, a painkiller up until that point sold with prescription. One of the attractions of the purchase was exactly the imminent possibility to sell Zyrtec in supermarkets as a consumer product without prescription. Another advantage was saving between 500 and 600 million dollar after merging McNeil with the old consumer health products division of Pfizer. From then on, McNeill stopped being an independent pharmaceutical division and was integrated into the acquired Pfizer division, which was organized as a profit center oriented toward consumer products. Because of all this, McNeil went from being an independent profit center to a cost center within the newly establish consumer products division.

Hints for discussion: (1) What were the causes of McNeil’s problems in 1982 and in 2009-2010? Are they similar? (2) How would you explain this change in quality management in a business previously considered outstanding? Why were the problems of 1982 managed better than those of 2009-2010? (3) What would you recommend to remedy the current situation?

Case prepared in collaboration with Mircea Epure.