Codman & Shurtleff, Inc.

Introduction and Issues

Codman & Shurtleff was launched in 1838, focusing on the design and fabrication of surgical supplies. Years later, Johnson & Johnson acquired it in 1964. Today, Codman & Shurtleff, Inc. is still one of many subsidiaries of Johnson & Johnson. It continues to supply the medical profession with surgical tools, equipment, implants, disposable materials and many other medical supplies.

This case discusses the planning and control system of Codman & Shurtleff, Inc. It focuses on the reporting relationships, five and ten-year plans, financial planning, and budget revisions and reviews. One major issue is that the company is dealing with an unfavorable profit objective. They are currently two million dollars short of their projection for the year. The weakening of the dollar, a poor mix variance and unexpected high start-up costs have all contributed to the underperformance of the company.

In order to understand the position of Codman & Shurtleff, this paper will analyze the culture and the organizational structure of Johnson & Johnson, as well as Codman & Shurtleff. It will also analyze how well the company coordinates their financial planning and what problems they may encounter as the company implements changes in order to adhere to the corporate mission statement.

Analysis

The Culture of Codman & Shurtleff, Inc. / Johnson & Johnson

Per the case, when Johnson & Johnson acquired Codman, they had to achieve a compromise on a new mission statement. Codman & Shurtleff’s current focus “is in the neuro-spinal surgery business.”[i] This new mission allows the Codman & Shurtleff division to be in the same frame of mind as corporate headquarters. They now have a common goal and must base their decisions according to what will help them to achieve their goals.

A major contribution to the success of the company is due to the culture of Johnson & Johnson and the divisions of the company. They have a shared philosophy that guides the policies of each division. Per the case, those philosophies are “a basic belief in decentralized management, a sense of responsibility to our key constituents, and a desire to manage for the long term.”[ii] The case has made it very clear that short-term profits are not a focus of the divisions. To instill this philosophy throughout the employees, bonuses are not based on profits only. They are based on an overall performance over many years.

Another important attitude of Johnson & Johnson is that decentralization should not eliminate challenges and healthy conflicts from corporate headquarters. “Healthy conflict is about what is right, not who is right”[iii] is an important philosophy that they instill at the corporate and subsidiary levels. This statement says a great deal about Johnson & Johnson, as well as Codman & Shurtleff and the other subsidiaries. It is a company that doesn’t appear to be as political when an employee comes up with an idea or new strategy. It says that anyone can express his or her ideas and he or she will be taken seriously, rather than discarded before even considering the idea. It also says that the company will not allow itself to become stagnate, which could be detrimental to its existence. Today’s environment has become very complex; thus, the existence of companies is dependent upon new strategies and ideas. Instilling this philosophy throughout the organization will enable the company to thrive in its business.

Organizational Structure

The structure of Johnson & Johnson’s organization is of the divisional form. The diverse groups are divided into separate divisions. As a division of Johnson & Johnson, Codman & Shurtleff is completely autonomous, as are all of the other divisions of Johnson & Johnson. Because they are held accountable for their performance, the company must have a high degree of control. Key players in Codman & Shurtleff are Gus Fleites (vice president of Information and Control) and Roy Black (president).

Although Codman & Shurtleff is treated as an independent operating company, it still must report to the corporate headquarters. Stated in the case, Roy Black reports directly to Hebert Stolzer at Johnson & Johnson. He must sell the ideas and concepts to Johnson & Johnson. The five and ten-year plans are drawn from the bottom line and worked up to sales. Per the case, corporate is only interested in estimates for unit sales, sales revenue, net income and return on investment. The strategic plans must enable the company to reach these goals; therefore, a written plan of how the objectives would be met is a requirement.

Within Codman & Shurtleff, there is a functional structure, which includes the following departments: manufacturing, marketing, new business development, information and control, human resources, international, finance and research and development. Each department is expected to possess efficiency, quality and functional expertise.

Rather than the corporate headquarters having one strategic plan, each division has specific strategic goals and there are considerable resource commitments involved in their decisions. Codman & Shurtleff’s market segment consists of hospitals and surgeons worldwide and their strategic goals relate to those particular markets. In order to overcome the disappointing profit level, they may want to reevaluate current strategies.

Coordination of Codman & Shurtleff’s Departments

In order to make up for Codman’s shortfall in this year’s bottom line, the departments must get together and reevaluate their budgets. Each division must coordinate with each other in order for it to be successful. For example, they must cut enough expenses to adhere to the goal of the current year’s profit. However, they need to coordinate within the departments so that they do not cut the wrong expenses that may end up forfeiting the current year’s goals or the long-term growth of the company.

Research and development was a target of cuts for the revised budget. One suggestion was to decrease the number of prototypes to save money. However, the realization was that they would end up spending more in the long run if they would decrease the number of prototypes. Rather than risk future problems with new products, they decided to choose the top priority projects and cut the low priority projects to save money.

Another target was the topic of inventory carrying costs. To save money, they could reduce the inventory substantially; however, the problem of servicing the customers was an important issue. Without top-notch service to its customers, a company will not be able to sustain its life. Therefore, it is essential for them to come up with a plan to satisfy the service requirements while enabling the inventory costs to be alleviated. Coordination plays an important part in inventory. The suggestion of providing fast service to the core products and “made to order” for the non-core products will require interfirm coordination with suppliers and customers, which will be addressed in the following section.

Problems From Implementing Change

Implementing some of the proposed changes to the budget is a strategy that is intended to make the company better and stronger. However, these proposed changes could cause just as many negative as well as positive factors within the organization.

Cutting research and development could open the door for other competitors to develop and market innovative products before Codman & Shurtleff, which could leave the company with a competitive disadvantage. Although the cuts may need to be made, the company needs to be sure that the short-term cut will not hinder the long-term goals of the company. This is not an easy decision. Careful consideration is an essential factor. They need to prioritize and go with the projects that will be the most beneficial to the company.

If the inventory is set at a low level, it may save dollars in the short-term; however, it could hurt the company’s reputation if they are not careful to address issues that could arise with a limited inventory. Uncertain events are major problems when dealing with “made to order” products. Suppliers may not be timely, the equipment may not work properly and other problems may arise. However, good forecasting techniques could alleviate these problems, as well as having backup suppliers and highly maintained equipment. Addressing these types of issues could prevent service problems in the future. However, implementing interfirm coordination can help the constraint of low inventory levels. The following describes some difficulties that are associated with interfirm coordination.

Some problems with depending on interfirm coordination with suppliers and customers include the following: First, there could be a lack of communication with the suppliers. The company will have to work on establishing trust and communication. Second, the companies must be able to spend a lot of time exchanging information in order to have a better understanding of each other’s operations. Third, fluctuations in the exchange rates, language differences and ethics can also hinder the implementation of interfirm coordination.

Reducing commercial expenses and staff were other targets to cut in the budget. This will create morale problems throughout the organization. When employees see that commercial expenses are being cut, it can create chaos because they will think that human resources will be next. People may become defensive and nervous; thus, productivity will be hindered. Careful consideration is vital when cutting human resources.

Conclusions and Summary

The management of Johnson & Johnson and Codman & Shurtleff appears to be effective due to several reasons. First, the corporate vision was clear and concise. It was communicated between them with no misunderstandings and has become a shared vision. Second, the autonomy of Codman & Shurtleff enables them to take charge of their own destiny. They are held completely accountable for their performance; therefore, they cannot blame corporate headquarters for any shortfalls that they may have. They also know that credibility comes from long-term success, not short-term; therefore, negating them from implementing tactics that will look good in the short-term that may end up hindering the long-term goals of the company. Third, the coordination of the budgets appears to work well for the company. In the meetings, they all interact and listen to each other’s ideas. Everyone is encouraged to voice his or her opinions and concerns.

The hardest part to dealing with the changes of the budget is deciding what to cut and how much. It appears that the people involved in this decision are thinking about the consequences in each department. Therefore, the implementation of the new budget should be justified once they decide what needs to be done to counter the failing profit margin.

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[i] Simons, Robert, Codman & Shurtleff, Inc.: Planning and Control System, Harvard College, 1987, page 3.
[ii] Simons, page 4.
[iii] Simons, page 7.