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Copyright 1996 Thunderbird, The American Graduate School of International Management. All rights reserved.This case was prepared by Andrew Inkpen with research assistance from Chris Hormann and with assistance fromProfessor John Zerio for the basis of classroom discussion only and is not intended to illustrate either effective orineffective management. Product names in italics are registered trademarks of Warner-Lambert Company, itsaffiliates or licensors.

Warner-Lambert Company

On August 1 1991, Melvin Goodes became chairman and chief executive officer of Warner-Lambert Company (WL). In 1990, WL enjoyed the most successful year in its history.Worldwide sales rose 12 percent to $4.7 billion, earnings per share increased 18 percent,and shares in WL stock appreciated by 17 percent. Each of WL’s three core businesses—ethical pharmaceuticals, nonprescription health care products, and confectionery—gener-ated increased sales. In international markets, WL continued to make new inroads.

Despite the success of recent years, Goodes was convinced that trouble was looming atWL. In March, the U.S. Food and Drug Administration (FDA) turned down the company’sapproval application for the Alzheimer’s drug Cognex. WL had hoped that Cognex would beits new blockbuster drug. With the patent expiring on Lopid, WL’s largest selling drug, inearly 1993, the Cognex decision was a major blow. At the same time, the growth of privatelabel health care products in the United States was slowing the expansion of powerful brandssuch as Listerine mouthwash and Schick razors. Without a major new drug and with domes-tic sales slowing, restructuring at WL looked unavoidable. Of increasing priority was theneed to restructure WL’s international operations. Although a proposal to globalize thecompany had been shelved by the board in 1989, Goodes knew that he could no longerafford to wait. Given the changing configuration of global markets and pressures for in-creased operating efficiencies, globalization looked like a necessity for WL.

Warner-Lambert Background

WL’s origins can be traced to 1856 when William Warner opened a drugstore in Philadel-phia. After 30 years of experimenting with the formulation of pharmaceutical products,Warner closed his retail store and began a drug manufacturing business.

William Warner & Co. was acquired in 1908 by Henry and Gustavus Pfeiffer. Gustavuslater wrote that “we changed thinking locally to thinking nationally.” For the next 30 yearsthe company made many acquisitions and by 1939, had 21 marketing affiliates outside theUnited States and several international manufacturing plants. The largest acquisition wasRichard Hudnut Company, a cosmetics business, which was eventually sold in 1979.

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During the 1950s and 1960s, the company continued to make acquisitions, both inthe United States and overseas. In 1952, the company, now known as Warner-Hudnut,acquired Chilcott Laboratories, a pharmaceutical company founded in 1874. In 1955, withsales at $100 million, Warner-Hudnut merged with the Lambert Company to form theWarner-Lambert Pharmaceutical Company. The Lambert Company’s largest-selling prod-uct was Listerine mouthwash, a product developed in 1879.

In 1962, American Chicle was acquired. American Chicle was formed in 1899 withthe consolidation of three major chewing gum producers. The Halls cough tablets brandwas acquired in 1964. In 1970, Schick wet-shave products were acquired. Also in 1970,WL merged with the pharmaceutical firm Parke, Davis, & Company (Parke-Davis). Parke-Davis was founded in 1866 in Detroit. In the 1870s, Parke-Davis collaborated with theinventor of a machine to make empty capsules for medications. This established the fore-runner of WL’s Capsugel division, the world’s largest producer of gelatin capsules. In 1901,Parke-Davis introduced the first systematic method of clinical testing for new drugs. In1938, Parke-Davis introduced the drug Dilantin for the treatment of epilepsy and in 1946,began marketing Benadryl, the first antihistamine in the United States. In 1949,Chloromycetin, the first broad-spectrum antibiotic was introduced.

The 1980s was a period of restructuring for WL. During the decade, the companydivested more than 40 businesses, including medical instruments, eyeglasses, sunglasses,bakery products, specialty hospital products, and medical diagnostics. The divested busi-nesses accounted for $1.5 billion in annual sales but almost no profit. In 1991, WL hadoperations in 130 countries and of its 34,000 employees (down from 45,000 in 1981),nearly 70 percent worked outside the United States. WL had 10 manufacturing plants inthe United States and Puerto Rico and 70 international plants in 43 countries. Over theprevious five years, WL’s earnings grew 15 to 20 percent annually. In 1990, sales growthoccurred in both the U.S. and international markets and in all worldwide business seg-ments. About 52 percent of company sales were in the United States. Exhibits 1 and 2provide summary financial information.

Warner-Lambert Business Segments

In 1990, WL had three core business segments: ethical pharmaceuticals, nonprescriptionhealth care products commonly referred to as over-the-counter (OTC), and confectioneryproducts. Beyond these segments, WL had several other product sectors: empty gelatincapsules for the pharmaceutical and vitamin industries, wet shave products, and homeaquarium products. Exhibit 3 shows sales by region and business segment. Exhibit 4 showsa description of the segments and the leading brands in each segment.

The Ethical Pharmaceutical Industry

The ethical pharmaceutical industry involved the production and marketing of medicinesthat could be obtained only by prescription from a medical practitioner. Seven markets(United States, Japan, Canada, Germany, United Kingdom, France, and Italy) accountedfor about 75 percent of the world market, with the largest single market, the United States,

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accounting for about 30 percent of the total. The pharmaceutical industry was very frag-mented, with no single firm holding more than a four percent share of the market. The fivelargest firms—Merck (U.S.), Bristol-Myers Squibb (U.S.), Glaxo (U.K.), SmithKlineBeecham (U.K.) and Hoechst (Germany)—accounted for less than 15 percent of worldmarket share.

The pharmaceutical industry was also highly profitable. Between 1986 and 1989, theindustry ranked first in the United States on both ROS and ROI. With new medical ad-vances on the horizon and an aging population in the developed countries, the industry wasexpected to continue growing steadily. However, significant challenges were facing the drugcompanies. The cost and time to develop new drugs had grown substantially. The drugdevelopment cycle from synthesis to regulatory approval in the United States was 10 to 12years. The average development cost per drug was $230 million (up from $125 million in1987), with various phases of testing and clinical trials accounting for about 75 percent ofthe cost.

There was significant risk associated with pharmaceutical R&D. It was estimated thatfor every 10,000 compounds discovered, 10 entered clinical trials and only one was devel-oped into a marketable product. Of those brought to market, only about 20 percent gener-ated the necessary sales to earn a positive return on R&D expenditures. In 1990, the FDAapproved just 23 new drugs, 15 of which were already approved in Europe. Nevertheless,R&D was the lifeblood of the industry, as explained by a senior WL manager:

Product renewal is critical. Firms must continue to generate a stream of new products.These need not be blockbusters. The key is new products. Eventually, each of theseproducts will become a generic [unbranded] product so in any given year, there mustbe a certain percentage of new products.

If a firm did come up with a blockbuster drug, the rewards were enormous. New drugssold at wholesale prices for three to six times their cost. Zantac™, an ulcer drug sold byGlaxo, had worldwide sales of $2.4 billion in 1990. This was Glaxo’s only product in thetop 200 best-selling prescription drugs. Tagamet™, a competing ulcer drug produced bySmithKline Beecham, had 1990 sales of $1.2 billion.

Two other challenges faced the drug companies. Spiraling health care costs in themajor markets were putting increased pressure on the drug companies to hold down theirprices. The growing use of price controls and restricted reimbursement schemes in interna-tional markets was reducing the flexibility of the drug companies to recoup R&D invest-ments. Finally, there was competition from generic drugs once a patent expired. Legislationpassed in the United States in 1984 made it very easy for generic drugs to enter the marketafter the patent on the original drug expired. In the United States, 50 percent decreases insales were not uncommon in the first year after a patent expired. In Europe, the degree ofgeneric erosion was not as dramatic because once a branded drug was on a list of officiallysanctioned drugs eligible for state reimbursement, a long lifespan for the drug was reason-ably certain.

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Although the chemical compounds of the major drugs were the same around the world,the pharmaceutical industry structure varied tremendously from country to country. InEurope, each of the 12 EC member states had different regulations for registering, pricing,and marketing drugs. Government health care systems paid for a majority of the consumercost of drugs and the prices of drugs were fixed in negotiations between the drug companiesand the government. The result was different prices in different countries and a growingproblem with parallel imports. Consumers in France and Spain paid about 72 percent ofthe EC average and in Ireland and the Netherlands, prices were about 130 percent of theaverage. Most European governments had the legal authority to force the transfer of a drugpatent from one firm to another, in the event that the firm with the patent was unwilling tomanufacture the drug.

There were also national differences in the type and amount of drugs consumed. InFrance, the consumption of drugs was the highest per capita in the world. In Japan, physi-cians made most of their income by dispensing drugs. Moreover, the Japanese governmentallowed high prices for breakthrough drugs in order to stimulate medical innovation. Aswell, many of the drugs used in Japan were unique to that market. For example, several best-selling Japanese drugs dilated blood vessels in the brain, on the unproven theory that thisreversed senility. In other parts of the world, the lack of controls over intellectual propertymade it very difficult for drug companies to operate.

WL’s Pharmaceutical Business. WL’s ethical pharmaceutical line was marketed prima-rily under the Parke-Davis name. Included in the pharmaceutical sector was Warner-Chilcott,a manufacturer of generic prescription drugs primarily for the United States. Sales of WLethical products were $1.6 billion in 1990, a 17 percent increase over the previous year. WLranked 17th among the world’s leading drug firms by turnover.

WL’s largest selling drug was Lopid, a cholesterol reducing drug. In 1991, projectedsales for Lopid were more than $480 million. Dilantin, an antiepileptic drug, had sales of$145 million and was a worldwide leader in its category. Other leading drugs were Loestrin,a contraceptive, and Accupril, a cardiovascular drug. Although the FDA postponed ap-proval of Cognex by asking for more data, WL continued to have high expectations for theproduct and clinical testing continued.

The firm’s drug discovery program was focused on two areas: cardiovascular diseases,such as hypertension and congestive heart failure, and disorders of the central nervoussystem. In recent years, WL had made a major effort to strengthen its pharmaceutical R&D.Over the past five years, the number of scientists had increased 60 percent to 2,600 and1991 R&D spending for pharmaceuticals was expected to be close to $350 million, anincrease of 12 percent over 1990. These efforts were beginning to pay off: WL had severalnew pharmaceutical products awaiting U.S. FDA approval.

OTC Industry

The OTC health care industry was structured very differently than the ethical drugs indus-try. With ethical drugs, there was a unique relationship between consumer and decision

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maker: consumers paid for the drugs but physicians made the buying decisions. As a result,the marketing of ethical pharmaceuticals was directed at prescribing physicians, who werenot particularly concerned about prices. With OTC products, the consumer made the buy-ing decision, although often based on physician or pharmacist advice. To compete success-fully with OTC products, significant investments in consumer marketing and distributionwere required. Some of the largest drug companies, such as Glaxo, had a corporate policy ofstaying out of the OTC market on the grounds that selling directly to consumers was verydifferent than the medically-oriented marketing of ethical drugs.

There were two broad classes of OTC health care products: 1) drugs that were for-merly prescription drugs and 2) health care products developed for the nonprescriptionmarket, such as toothpaste, mouthwash, and skin care products. Moving a prescriptiondrug to the OTC market required regulatory approval in most countries. The shift alsorequired marketing expenditures of as much as $30 million a year and extensive consulta-tion with physicians and pharmacists. Even though a prescription was not required, manyOTC drugs would not succeed without continued physician recommendations, particu-larly in highly controlled retail environments like Germany and Japan. Pharmacists’ recom-mendations were also important. When WL switched the antihistamine, Benadryl, to theOTC market in 1985 after 40 years as a prescription drug, the company devised an exten-sive program for pharmacists based on product samples and promotional literature.

Between 1982 and 1990, global demand for OTC drugs grew at about seven percentannually and was expected to remain strong, particularly with increased pressure to reducehealth care costs. In the developing nations, shortages of more expensive prescription prod-ucts made OTC drugs very popular. Among the major types of OTC products were analge-sics, antacids, cough, cold, and sinus medicines, skin preparations, and vitamins.

The OTC drug industry was even more fragmented than the ethical pharmaceuticalindustry, particularly in Europe. According to one report, there were 15,000 registeredbrands in the European OTC market but only 10 could be purchased in seven or morecountries.1 For example, the Vicks-Sinex™ cold remedy could be purchased in Britishsupermarkets; in Germany it was available OTC but only in pharmacies; and in France itwas available only by prescription. In Latin American countries where the state paid fordrugs, there was little distinction between ethical pharmaceuticals and OTC drugs. In theUnited States, nonprescription products could be sold in any retail channel. In Canada, theUnited Kingdom, and Germany, some nonprescription drugs could be sold only in phar-macies.

WL’s OTC Business. Reflecting the increasing global acceptance of nonprescriptionhealth care products, WL’s OTC sales increased 11 percent in 1990 to $1.5 billion. Thelargest product lines were Halls cough tablets with sales of $320 million and Listerine mouth-wash with sales of $280 million. Other leading brands included Rolaids antacid (numberone brand in the United States), Benadryl antihistamine (the number one OTC allergy

1 The Financial Times, July 23, 1991, Survey, p. 1.

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product in the United States), Lubriderm skin lotion (number three brand in the UnitedStates), and Efferdent dental products.

During 1991, WL planned more than 20 new OTC product introductions in non-U.S. markets. It was often necessary to adapt products to local markets to account fordifferences in product usage and government regulations. For example, there were morethan 50 different formulations of Halls around the world. Halls was considered a coughtablet in temperate climate areas and a confection in tropical areas. In Thailand, Halls hada much higher amount of menthol than in most countries because Halls was sold as acooling sweet. In some of the Asian and Latin American countries, a large volume of Hallswas sold by the individual tablet, as opposed to the package. Benylin cough medicine alsohad more than 50 different formulations, leading to the question raised by a WL manager:“There are not 50 different kinds of coughs, why do we need 50 different formulations?”

The Confectionery Industry

The confectionery industry consisted of four main segments: chocolate products (approxi-mately 53 percent of the industry), nonchocolate products such as chewing gum (23 per-cent), hard candy (18 percent), and breath mints (6 percent). WL competed primarily inthe chewing gum and breath mint segments.

The confectionery industry was highly concentrated on a global basis with the chew-ing gum segment the most concentrated. Although WL’s American Chicle Group had oncebeen the leading firm, the largest chewing gum company in 1991 was William Wrigley Jr.Co. (Wrigley) with $1.1 billion in annual sales in more than 100 countries. Wrigley’s strat-egy had been focused and consistent for many years—sticks of gum sold at low prices.Wrigley’s three main brands, Spearmint™, Doublemint™, and Juiceyfruit™, were ubiq-uitous around the world. In the United States, Wrigley had the largest market share (48percent), followed by WL (25 percent) and RJR/Nabisco’s Beechnut™ brands. Canadawas the only English-speaking country in the world where Wrigley products did not have aleading market share. WL had about 55 percent of the Canadian gum market, comparedwith Wrigley’s 38 percent. A major trend in the food market in recent years had beentoward healthy eating. This trend was reflected in the shift toward sugarless gum. In theUnited States, sugarless accounted for 35 percent of the chewing gum market and in Canada,it was 55 percent, the highest percentage in the world.

Although most breath mints were sugared confections, the breath mint category wasreferred to as candy plus because the mints contained additional breath freshening ingredi-ents. In this segment, RJR/Nabisco was the largest firm, with brands sold by the Lifesav-ers™ division holding about 40 percent of U.S. market share. WL brands held about 36percent of the market. Tic Tac™, a brand produced by the Italian company Ferrero, had a12 percent share of the U.S. market. Several other brands with minimal U.S. sales werestrong in international markets, such as Fisherman’s Friend™, a U.K. product. In othercountries such as Germany, Argentina, and Colombia, there were strong local competitors.

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Confectionery companies operated on the premise that the majority of sales were byimpulse. There were several factors critical to success in this type of market: display anddistribution, superb value, and excellent advertising. The most important factor, accordingto WL confectionery managers, was display and distribution. Thus, there was a strongemphasis on packaging, on developing a wide distribution base, and on in-store display. Inthe United States, Germany and France, confectionery distribution to the consumer wasdominated by large, efficient retailers (such as Wal-Mart in the United States). In contrast,in Italy, Spain, and Greece, South and Southeast Asia, and Latin America, the retail envi-ronment was very fragmented with many kiosks and mom-and-pop stores. A strong retailsales force was essential in these areas.

The major challenge faced by firms producing gums and mints was the threat of newmarket entrants. Traditionally, gums and mints generated higher profit margins than otherconfectionery segments. As a result, other firms in the candy industry, as well as snack foodcompanies such as Pepsico were making an effort to penetrate the gum and mint markets.In many of the developing countries and in particular Latin America, the imitation of best-selling brands by local firms was a regular occurrence.

WL’s Confectionery Business. Although historically focused on chewing gum and breathmints, WL had begun seeking niche opportunities in other confectionery segments in re-cent years. Sales of WL confectionery products increased five percent to $1.1 billion in1990. The leading brands were Trident (sales of $225 million and the world’s leading brandof sugarless gum) and Clorets gums and breath mints ($130 million). Other major brandswere Adams brand Chiclets (candy coated chewing gum), Certs (breath mints), and Bubblicious(chewing gum). Trident was the product WL would likely lead with as a new market entry.Other brands had regional strengths. Chiclets was a major brand in Latin America andFrench Canada but a minor U.S. brand. The strongest market for Clorets was SoutheastAsia.

Overall, WL’s confectionery business had its largest market shares in the United States,Canada, Mexico, and other countries of Latin America. In Europe, the confectionery busi-ness was strongest in Greece, Portugal, Spain, and Italy. The company also had a strongpresence in Japan and Southeast Asia. WL’s customer mix varied from region to region. Inthe United States and Canada, customers tended to be adults using products with func-tional uses, such as breath mints and sugarless gum. In Latin America, where the emphasiswas on fun products marketed mainly to young people, Chiclets, Bubblicious, and Bubbaloowere leading brands.

Global product expansion had been a key objective of recent years. Outside the UnitedStates, the Clorets brand had become the largest selling confection product. Clorets wasintroduced in the United Kingdom and Portugal in 1990 and in France in 1991. Thecompany had high expectations that Trident sugarless gum could be built into a majorglobal brand by capitalizing on concerns for health and fitness. In China, where WL intro-duced its first three confectionery products in 1991, a new confectionery plant was underconstruction. Over the previous several years, an aggressive marketing effort in Japan hadestablished a solid market position in chewing gum. To increase penetration into the Italian

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market, a joint venture was formed in 1990. Alivar, the new company, became Italy’s sec-ond largest nonchocolate confectionery company.

Organizational Structure

WL was organized into four major divisions reporting to the president and COO, Lodewijkde Vink: Parke-Davis Group, American Chicle Group, Consumer Health Products Group,and International Operations. All four groups had their headquarters in Morris Plains,New Jersey. See Exhibit 5 for an organization chart and Exhibit 6 for short biographies ofthe five members of WL’s Office of the Chairman.

The Parke-Davis Group included the U.S. pharmaceuticals operations, the Warner-Chilcott generics business, and the Pharmaceutical Research Division. The Research Divi-sion, based in Ann Arbor, Michigan, operated facilities in Michigan, Canada, the UnitedKingdom, and Germany. Parke-Davis manufactured in three plants in the United States,one in Canada, and two in Puerto Rico. Warner-Chilcott production came from a plant inthe United States. Parke-Davis was responsible for U.S. pharmaceutical regulatory affairs.

The American Chicle Group was responsible for the U.S. confectionery business. Ameri-can Chicle manufactured in two U.S. plants and sourced from plants in Canada, Mexico,Puerto Rico, and the United Kingdom.

The Consumer Health Products Group was responsible for U.S. consumer health careand shaving products. Consumer health care included the OTC pharmaceuticals marketedunder the Parke-Davis name plus other OTC products such as Listerine and Lubriderm.Products were manufactured in two U.S. locations, Canada, and Puerto Rico. This groupmanaged a research and development division that performed research for both the Con-sumer Health Products and American Chicle Groups. The division also performed a sig-nificant amount of research for WL’s international affiliates.

International Operations was responsible for the manufacture and marketing of WL’spharmaceutical and consumer products outside the United States. Capsugel and Tetra, WL’stwo businesses that were run on a global basis, reported to the International OperationsGroup.

International Operations

International Operations was divided into three operating groups responsible for 45 oper-ating affiliates: Asia/Australia/Capsugel Group, Canada/Latin America Group, and Europe/Middle East/Africa Group. Exhibit 7 shows the countries in which each of the groups hadaffiliates and the number of employees in each affiliate. The general manager, or countrymanager, for each affiliate reported directly to one of the geographic group presidents, whoin turn reported to the head of International Operations. Below the geographic group presi-dents were staff managers responsible for the lines of business, such as the Europe/MiddleEast/Africa head of pharmaceuticals. Geographic group presidents also had staff functions,like sales and human resources, reporting to them.

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In some of the regions, multiple affiliates were grouped together for management andreporting purposes under one general manager. For example, the German general managerwas responsible for the Germany, Austria, and Switzerland affiliates. Other grouped affili-ates included the United Kingdom and Ireland; France, Belgium, and Netherlands; Spainand Portugal; and Italy and Greece.

Across all three of WL’s main business segments, acquisitions of confectionery or phar-maceutical firms had accounted for much of WL’s international growth. As a result, most ofthe international affiliates were dominated by either a pharmaceutical or confectionerybusiness. The result was an inconsistent mix of market penetration around the world. Forexample, the German affiliate had 95 percent of its sales in ethical pharmaceuticals, fivepercent in OTC products, and no confectionery business. In Switzerland, WL was a marketleader in several confectionery lines. In the affiliates in France, Italy, and the United King-dom, pharmaceuticals were dominant but there was also a reasonably strong confectionerypresence. In Spain, Portugal and Greece, confectionery was the primary sector. In Japan,the largest business was Schick, with about 65 percent of the wet shave market, by far thehighest share in the various countries where Schick was marketed. The affiliate in Canadawas unique in that the pharmaceutical, confectionery, and consumer health care businesseswere all mature, viable businesses with strong managers in each sector. In that sense, theCanadian unit was very similar to WL’s operations in the United States.

The country managers managed a full functional organization (marketing, finance,human resources, etc.) and were responsible for all WL products marketed in their country.In most of the affiliates, the country manager’s background corresponded with the domi-nant business sector of the affiliate. According to a senior WL manager:

In our affiliates we have only a handful of country managers capable of managing adiverse business. Very few managers can move from pharmaceuticals to consumer prod-ucts or vice versa. In one Latin American affiliate, we had a business dominated byconfection products. We put in a manager with a pharmaceutical background and thebusiness failed. In Germany, we have tried several times to expand the consumer busi-ness and failed each time. In Australia, we have problems with confectionery. Japan isone of the few exceptions. We had a country manager with a pharmaceutical back-ground who successfully grew a confectionery business.

Because the affiliates tended to be dominated by managers from either the confection-ery or pharmaceutical side of the business, managers involved in the nondominant busi-nesses struggled to get resources. As a WL manager commented:

If, for example, you are a confectionery manager in a country with a small confection-ery business, you’re treated like the poor stepchild. Because these managers are notgiven the resources to grow their businesses, there is a tremendous amount of frustra-tion. It is very hard to retain good managers because they are not given the opportunityor the resources to do the things you have to do to be successful.

To illustrate international operations, brief descriptions of the Germany and Brazilaffiliates are provided.

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Germany

WL’s operations in Germany, Austria and Switzerland were managed from Gödecke, A.G.,WL’s German affiliate. Gödecke, a pharmaceutical firm founded in 1866, was acquired byWL in 1928. In 1977, Parke-Davis’ German affiliate was merged with Gödecke. Prior tothis, Parke-Davis and Gödecke were run as separate organizations.

Within Germany, the Gödecke name was far more well known than WL. Employeesconsidered themselves Gödecke employees and the G”decke name, along with Parke-Davis,was prominent in promotional literature and corporate communications. In 1991, Gödeckehad about 1,400 employees, with 230 working in pharmaceutical R&D. Gödecke’s busi-ness was primarily in ethical pharmaceuticals. There was one sales force for OTC and ethi-cal products because in Germany, the OTC market was very small. Because prescriptiondrugs were reimbursable, Germans tended to use drugs that were prescribed by their doc-tors, even if the drug was available as an OTC product.

Gödecke had no confection business. According to a senior manager in the Germanaffiliate, “WL has never been willing to spend significant long term money to develop theconfection market, which is puzzling since Germany has one of the largest confection mar-kets in the world.” Gödecke also had a very limited business in consumer health care prod-ucts. With respect to the potential of Listerine in Germany, the manager commented:

If you bring a product like that into the market it is not enough to just advertise theproduct, you have to change people’s minds. To do that we would need to spend a lotof money, maybe as much as DM130-140 million. . . . People always see Germany asa market with huge potential but what they don’t see is that you need to invest in thismarket first. Another mistake people keep making is that U.S. tastes will work inGermany. Germans are not mouthwash users.

Brazil

American Chicle entered the Brazilian market in the 1940s. When WL acquired AmericanChicle in 1962, the confectionery business in Brazil was well established under the Adamsbrand. A strong pharmaceutical business based on Parke-Davis products was also estab-lished in Brazil. However, the hyperinflation in the 1970s and the government’s attempts tocontrol inflation through price controls resulted in significant losses in the pharmaceuticalbusiness. WL decided to discontinue manufacturing and marketing pharmaceutical prod-ucts in Brazil and licensed the Parke-Davis line of drugs to another Brazilian company.Since the products were marketed under the Parke-Davis name, WL maintained a closerelationship with the licensing company for quality assurance purposes. The licensee, how-ever, had complete control over which products to produce and how to manage produc-tion, marketing, and distribution.

The Brazil affiliate had about 1,300 employees and virtually all were involved in theconfectionery business. The largest brand in Brazil was Halls, which was marketed as aconfectionery product (a “refreshing experience”) rather than a cough tablet. The affiliatehad a small consumer health care business; Listerine was one of the products sold.

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The relationship between headquarters and the affiliate was described by a senior Bra-zilian manager:

They are in charge of the strategy and we are in charge of the operations. We have astrategic plan in place, we discuss it with headquarters, they give us direction on whichareas to engage in and which areas not to do anything, and the implementation is leftto us.

Aside from product line extensions, such as changes in flavor or packaging, very littlenew product development was done in Brazil. One exception was the development of aliquid center chewing gum called Bubbaloo. A leading brand in Brazil and several otherLatin American countries, Bubbaloo was developed by the Brazilian affiliate for the Brazil-ian market.

The Management of International Operations

The Country Managers

Within WL, the country managers were akin to “kings” because, as one manager explained:

These people are rulers. They control every asset and every decision that is made. Themindset is “I am managing France or Spain or wherever and I will manage it any wayI like.”

In the larger affiliates, country managers were usually nationals of that country. InWestern Europe, most of the country managers had backgrounds in pharmaceuticals. Inother regions, many of the country managers had confectionery backgrounds. In the smallerEuropean countries and in the developing countries, country managers were often expatri-ates using the country manager position as a training ground for higher level appointmentswithin WL.

Comments from a former country manager illustrate life at the top of an affiliate:

It was a wonderful life. I was left alone because I was growing the business by 15percent a year. I learned to run a business from the ground up and I could experimentwith ideas very easily. I turned down two promotions because I was having such a greattime being king . . . I had a great deal of autonomy and could ride over most of the staffpeople. I remember one time when we were planning a new product introduction in anarea outside our traditional product lines. Someone from the international divisiontold me “you can’t do that.” I did it anyway. Before we launched the product, I was toldthat international would send someone down to help us launch the product. I said finebut I won’t be here if you do. So they left me alone. The new product outsold thedominant product in the market and was a huge success.

New Product Development

In the pharmaceutical business new product development was critical. Some new productinitiatives in the affiliates were the result of coordinated efforts with headquarters. Othersoccurred independently in the affiliates. Drugs that were successful in the United States did

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not always achieve success in the affiliates. For example, Lopid was a huge success in theUnited States but only moderately successful internationally, despite a significantly increasedinternational marketing effort in recent years. Nevertheless, Lopid represented WL’s firsttruly international pharmaceutical product. Some drugs were introduced outside the UnitedStates because of less time consuming regulatory processes. For example, Accupril was avail-able in 23 countries outside the United States; WL anticipated FDA approval for the U.S.market by the end of 1991.

Because WL had a relatively small number of proprietary ethical pharmaceutical prod-ucts, licensing was an important developmental activity in the United States and in theaffiliates. The major affiliates had their own approaches to licensing strategy. According toone manager,

Licensing is an ad hoc process—it is done one way in the United States and one way ineach of the affiliates. The affiliates try to find products that work in their region.Germany licenses a drug from Italy, Italy from France, and so on. We’ve ended up witha hodgepodge of drugs in the different regions.

As an example, WL’s largest selling drug in Germany and seventh largest among alldrugs was Valoron N, a painkiller for chronic and acute pain. This drug was licensed by theGerman affiliate and was not marketed by WL outside the German region.

Both the background of the country manager and the dominant business segmentwithin the affiliate influenced new product development at the affiliate level. In particular,WL had experienced considerable difficulty in convincing the affiliates with dominant phar-maceutical businesses to adopt new consumer health care or confection products. Ger-many, for example, with its strong pharmaceutical business, had a series of country manag-ers with pharmaceutical backgrounds. For some time, WL had been interested in introduc-ing Listerine in Germany, even though mouthwash was not a recognized product category.The German affiliate leadership believed that the market was too small to justify the $15million it would take to launch the product, even though Listerine was WL’s second leadingbrand worldwide.

Global Integration

There was very little interaction between the senior U.S. pharmaceutical, OTC, and con-fectionery managers and their international counterparts. For instance, the U.S. head ofpharmaceuticals would meet with the European head of pharmaceuticals once a month.There was virtually no other contact between these senior managers. The affiliate managersalso rarely interacted. The affiliates reported into one of the three international groups andthere were no reporting relationships between the units. Once a year, general managersfrom the affiliates and the United States would hold an annual meeting attended by about250 people, characterized by one manager as follows:

Some silly situations happen at the meetings. For example, Uruguay, an affiliate doinga few million dollars worth of business, might have a new strategic plan. The Uruguaygeneral manager might get the same amount of air time as the head of ConsumerHealth Care Products in the United States.

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The primary objective for country managers was maximizing the performance of theiraffiliates. A senior WL manager explained:

Each affiliate is making decisions on a country basis. For example, say there is a strongshaving business in a country where the country manager is focused on building thelocal pharmaceutical business. If shaving exceeds its profit targets, the country man-ager could be tempted to shift cash from shaving to pharmaceutical. The global shav-ing industry is not his concern. In another country the opposite situation may behappening. The local shaving business is not doing well this year so the country man-ager borrows money from pharmaceuticals to do some advertising in shaving. Thiscross borrowing across business lines is sub-optimizing our business lines . . . Countrymanagers are not concerned with company growth; they are concerned with affiliategrowth. Strategic decisions are not made about products and brands; the whole think-ing process is strictly local—how do I maximize my bonus and my performance?

Manufacturing and raw materials sourcing were largely done locally by the affiliate,particularly in those affiliates that were acquired by acquisition, such as Germany, Spain,Italy, and the United Kingdom. Advertising was also done largely at the affiliate level. Be-cause the affiliates varied so much in size, the quality of the advertising was often less thansatisfactory. Although there was an effort to standardize packaging and graphics, particu-larly with confectionery products, it was not always successful. For example, when Hallswas introduced in Brazil, a third party manufacturer was used. Because the firm did nothave the proper equipment to manufacture square mints, a rectangular shape was used. Asthe Halls brand grew, the rectangular shape became the standard for mints in Brazil. In therest of the world, the Halls mint was square.

Two lines of business were exceptions to the lack of global integration—the Capsugeland Tetra divisions. In the early 1980s, the Capsugel business was organized on a geo-graphic basis with the various international units reporting through the country managers.However, because the gelatin capsule market was essentially a commodity business andextremely competitive on a global scale, the geographic structure was considered ineffectiveand inconsistent with a fast-moving global business. In the mid-1980s, a global structurewas created for Capsugel. A similar structure was already in place for Tetra.

International Operations Staff

To coordinate WL’s far-flung international businesses, there were approximately 250 Inter-national Operations staff members working in the New Jersey headquarters. Included inthis number was a small headquarters staff for Capsugel and staff for Tetra’s U.S. operations.

Officially, the role of the International Operations staff was to assist the country man-agers in implementing strategy by communicating information between HQ and affiliatesand consolidating the huge amounts of data that were generated. As one manager com-mented:

The staff function is “to make order out of chaos.” In New Jersey, the internationalstaff coordinates the three large geographic reporting organizations. Each geographicarea has its own hierarchical structure of staff managers marketing, finance, and so onworking out of New Jersey.

14 A07-97-0006

Although the international staff was expected to act in an advisory role to the affiliates,their advice was not always taken, or even wanted. A manager explained:

If a marketing manager in International Operations wants to launch a new product ina particular country, he or she must convince the country manager to make the invest-ment. The country manager may say “I don’t want it.” The international managermight be three levels below the country manager in the organizational hierarchy. Whatcan the staff person do?

The country managers run their affiliates like hardware stores. They can have 10 differ-ent people telling them we would like you to sell this particular drug or this newconfectionery product. The guy leaves and the country manager goes back to doingwhat he wants to do. Their attitude toward the staff marketing people is “I don’t needthem, what value are they bringing? Get them out of the mix.”

It has always been a blurred vision as to the responsibility of some of the internationalstaff functions. At the international operations level it is supposed to be strategic andvisionary; leave the day-to-day running of the business to the line managers in Europe,Asia, etc. The staff people would be responsible for oversight, monitoring, cross fertili-zation and linking Germany with what is going on in France, with what is going on inthe UK and hopefully, bringing that knowledge to other geographic areas by feedingthat knowledge up to International Operations. The International Operations Groupis also supposed to be coordinating with R&D, which is primarily based in the UnitedStates.

Earlier Reviews of the International Structure

Concerns that there were problems with the structure of WL’s international operations firstsurfaced in the early 1980s. At that time, a consulting report recommended that the com-pany disband its geographic structure and move to a line of business organization. Al-though senior management agreed in principle with a global-line-of-business structure,there were concerns that a full-scale reorganization of international operations was too dras-tic. WL tried a different approach to internationalization several years later. The objectivewas to put a global strategic planning process in place and merge this with local operatingplans. In other words, the strategy would be global and tactics would be local. This ap-proach was largely unsuccessful. Despite the attempt to put global plans into action, therealities were that a global vision had not been established and local objectives took prece-dence.

In 1989, a task force headed by Mel Goodes was established to develop a globalizationplan. The task force was made up of senior managers from the pharmaceutical, confection-ery, and consumer segments. A plan based on global lines of business was developed but forseveral reasons, the plan was not implemented. At some levels in the organization there wasthe belief that WL was still not ready for major international restructuring. In addition,WL was enjoying record profits with sales growth of 15 to 20 percent per year. Change wasviewed as disruptive and unnecessary. There was a sense that “if it is not broken, why fix it?”Given WL’s performance, it was not clear that the competitive marketplace had created astrategic imperative for reorganization.

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The Next Steps

As the new CEO of WL, Mel Goodes was quite prepared to act and now had the authority.From his perspective, the existing organization was inconsistent with an increasingly com-petitive global environment. As he explained:

Our decision making is too slow. For example, we had the opportunity to make anacquisition in Germany. The process started when the German country manager iden-tified the investment opportunity. After he reviewed it, it went to the European Group.It then went to the International Group. Finally, it made its way to corporate in NewJersey. By this time a year had passed and the opportunity was gone.

The next step was to identify priorities and establish an implementation plan. Therewere many issues to be resolved. Should changes in structure and reporting relationshipsinvolve the entire organization? How quickly should change proceed? What would happento the kings and the international operations staff in a new structure? Should the sameinternational structure be established for each business segment? Should New Jersey remainthe headquarters for each business segment?

16 A07-97-0006

EXHIBIT 1 Warner-Lambert Financial Information

1990 1989 1988 1987 1986(Dollars in millions, except per share amounts)

RESULTS FOR YEARNet Sales $ 4,687 $ 4, 196 $ 3, 908 $ 3,441 $ 3,064Cost of Goods Sold 1,515 1,383 1,352 1,170 1,053Research and Development Expense 379 309 259 232 202Interest Expense 69 56 68 61 67Income Before Income Taxes 681 592 538 493 446**Net Income 485 413 340 296 309**Net Income Per Common Share $ 3.61 $ 3.05 $ 2.50 $ 2,08 $ 2.09**

YEAR-END FINANCIAL POSITIONCurrent Assets $ 1,559 $ 1,366 $ 1, 265 $ 1,253 $ 1,510Working Capital 458 335 240 279 540Property, Plant, and Equipment 1,301 1,13 1,053 960 819Total Assets 3,261 2,860 2,703 2,476 2,516Long-term Debt 307 303 318 294 342Total Debt 537 506 512 444 585Stockholder’s Equity $ 1,402 $ 1,130 $ 999 $ 874 $907

COMMON STOCK INFORMATIONAverage Number of Common Shares

Outstanding (in millions) * 134.3 135.3 136.1 142.5 148.0Common Stock Price Per Share: *High $ 70 3/8 $ 59 3/8 $ 39 3/4 $ 43 3/4 $ 31 9/16Low 49 5/8 37 1/4 29 15/16 24 1/8 22 1/2Book Value Per Common Share * 10.44 8.38 7.36 6.37 6.32Cash Dividends Paid 204 173 147 127 118Cash Dividends Per Common Share * $ 1.52 $ 1.28 $ 1.08 $ .89 $ .80

OTHER DATACapital Expenditures $ 240 $ 218 $ 190 $ 174 $ 138Depreciation and Amortization $ 120 $ 105 $ 96 $ 79 $ 68Number of Employees (in thousands) 34 33 33 34 31

* Amounts prior to 1990 were restated to reflect a two-for-one stock split effected in May 1990.** Includes a net nonrecurring credit of $8 million pretax (after-tax $48 million or $0.32 per share) in 1986.

Source: Warner Lambert 1990 Annual Report

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EXHIBIT 2 Warner-Lambert Financial Information by Business Segment

Research andNet Sales (1) Operating Profit Development Expense

1990 1989 1988 1990 1989 1988 1990 1989 1988(Millions of Dollars)

Health Care:Ethical Products $ 1,555 $ 1,324 $ 1,213 $ 560 $ 465 $ 420 $ (299) $ (240) $ (204)Nonprescription

Products (OTC) 1,526 1,370 1,296 367 311 305 (38) (35) (27)

Total Health Care 3,081 2,694 2,509 927 776 725 (337) (275) (231)Confectionery 1,054 1,003 918 208 195 187 (17) (15) (13)Other Products 552 499 481 119 101 92 (25) (19) (15)

Research and Devel-opment Expense (379) (309) (259) $(379) $ (309) $ (259)

Net Sales and Oper-ating Profit $ 4,687 $ 4,196 $ 3,908 875 763 745

Interest Expense (69) (56) (68)Corporate Expense (2) (125) (115) (139)

Income BeforeIncome Taxes $ 681 $ 592 $ 538

Depreciation andIdentifiable Assets Amortization Capital Expenditures

1990 1989 1988 1990 1989 1988 1990 1989 1988(Millions of Dollars)

Health Care:Ethical Products $ 1,063 $ 892 $ 916 $ 43 $ 39 $ 36 $ 88 $ 71 $ 72Nonprescription

Products (OTC) 619 513 489 20 16 15 49 37 37

Total Heath Care 1,682 1,405 1,405 63 55 51 137 108 109Confectionery 564 490 459 23 21 20 44 33 33Other Products 442 406 387 24 20 19 41 42 40

Subtotal 2,688 2,301 2,251 110 96 90 222 183 182Corporate 573 559 452 10 9 6 18 35 8

Total $ 3,261 $ 2,860 $ 2,703 $ 120 $ 105 $ 96 $ 240 $ 218 $ 190

Source: Warner Lambert 1990 Annual Report

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EXHIBIT 3 Warner-Lambert Financial Information by Geographic Segment ($000,000)

Ethical ConsumerPharmaceuticals Health Care Confectionery

United States $871 $1066 $507

Canada 60 95 107

Mexico 11 49 88

Latin America (excluding Mexico) 47 100 127

Japan 80 122 80

Asia/Australia (excluding Japan) 66 115 16

Europe/Middle East/Africa 582 369 129

TOTAL $1717 $1916 $1054

Note: The figures in Exhibits 2 and 3 show different totals for the ethical pharmaceutical and consumerhealth care segments. In 1991, WL redefined its business segments. The Capsugel business ($162million in sales) was reclassified to the Pharmaceutical segment. The wet shave and Tetra businesses($390 million in sales) were reclassified to the Consumer Health Care segment.

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EXHIBIT 4 Warner-Lambert Core Businesses and Primary Products

Business Segment Leading Brands

1. Ethical Pharmaceutical Products (Parke-Davis)

� brand name pharmaceuticals and biologicals, including Dilantin (epilepsy), Dilzem (anginaanalgesics, anesthetics, anti-inflammatory agents, and hypertension), Lopid (lipidantihistamines, anticonvulsants, influenza vaccines, regulating), Accupril (hypertension),cardiovascular products, lipid regulators, oral Loestrin (contraceptive), Ponstancontraceptives, psychotherapeutic products (analgesic)

� generic pharmaceuticals (Warner Chilcott),manufacturer and marketer of generic pharmaceuticalproducts

2. Non Prescription Health Care (OTC)

� over-the-counter pharmaceuticals marketed under Benadryl (antihistamine), Benylin (coughthe Parke-Davis name syrup), Sinutab (sinus medication),

Anusol (hemorrhoid treatment)

� other consumer health care products Listerine (mouthwash), Efferdent (denturecleanser), Lubriderm (skin lotion), Rolaids(antacid), Halls (cough drop)

3. Confectionery (Gums and Mints)

� chewing gum, breath mints, sugarless gum, Chiclets, Dentyne (chewing gum), Certs,bubble gum, chocolate candy Clorets (breath mints and chewing gum),

Trident (sugarless gum), Bubblicious(bubble gum), Junior Mints (chocolatecandy)

4. Other Products

� empty hard-gelatin capsules for use in Capsugelpharmaceutical manufacturing (used by Warner-Lambertand other companies)

� wet shave products Schick

� home aquarium products Tetra

20A

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EXHIBIT 5 Warner-Lambert Organization

Chairman & CEO*Melvin Goodes

Human Resources

FinanceCFO*

Public Affairs

LegalPlanning, Investment,

and Development

TechnicalOperations

(Manufacturing)Pharmaceutical

Licensing

Parke DavisGroup, EVP*

President & COO*Lodewijk de Vink

Consumer HealthProducts Group

InternationalOperations, EVP*

AmericanChicle Group

WarnerChilcott

PharmaceuticalR&D

ConsumerProducts R&D

*Member, Office of the Chairman

Production: Illinois, Massachusetts, Canada,Mexico, Puerto Rico, UK

Production: Michigan,Pennsylvania, Canada,Puerto Rico

Production: Connecticut,Pennsylvania, Canada,Puerto Rico

Production: Pennsylvania

Major Facilities: Michigan,New Jersey, Toronto, UK, Germany

Facilities: New Jersey

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EXHIBIT 6 Members of the Warner-Lambert Office of the Chairman

Melvin R. Goodes was born in Hamilton, Ontario, Canada and had an MBA from the University ofChicago. After several years at the Ford Motor Company of Canada, he joined WL in 1964 as a newproduct development manager in confectionery. After various senior international positions, includ-ing regional director of European confectionery operations and president of WL Mexico, he wasappointed president of the Consumer Product Division in 1979. In 1985, he became WL president,COO and a director of the company and in 1991, chairman and CEO.

Lodewijk J. R. de Vink was a native of Amsterdam, The Netherlands. After completing an MBA atAmerican University, he joined Schering-Plough Corporation in 1969. In 1981, he was appointedvice president of Schering Laboratories and in 1986, president of Schering International. In 1988, hejoined WL as vice president, International Operations. In 1991, he was appointed president andCOO and elected to the board of directors.

Joseph E. Smith was born in Buffalo and had an MBA from the Wharton School. He worked forseveral years with International Multifoods and Ross Laboratories before joining Johnson & Johnsonin 1965. In 1986, he joined the Rorer Group and held several senior management positions, includ-ing executive vice president. He joined WL in 1989 as a vice president and president of the Pharma-ceutical Sector and in 1991, became executive vice president and president, Parke-Davis Group.

John Walsh, a native of Worcester, Massachusetts, had an MBA from Seton Hall University. Hejoined WL as a cost analyst in corporate accounting in 1967. In 1978, he became controller of theAmerican Chicle Division and in 1980, vice president finance, Consumer Products Group. In 1989,he became president of the Canada/Latin America Group and in 1991, executive vice president ofWL and president, International Operations.

Robert J. Dircks was born in New York and held an MBA from the City University of New York. Hejoined WL in 1951 as an accountant in the Nepera Chemical Company. In 1962, he joined theConsumer Products Group as an accounting supervisor. In 1974, he became Vice President, Fi-nance, Parke-Davis Group. In 1986, he was appointed Executive Vice President and CFO.

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EXHIBIT 7 Warner-Lambert International Operations1

John Walsh, EVPPresident, International Operations

Europe/Middle East/Africa Group

Asia/AustraliaCapsugel Group

Canada/Latin America Group

German Region

Tetra Werke

Jay Gwynne,President

Sam Maugeri,President

Capsugel

HQ, New Jersey

Research: Belgium, France

Production: South Carolina, Belgium, Brazil, China, France, Italy, Japan, Mexico, Thailand, UK

HQ, New Jersey

Australia (375), Hong Kong (850), India (1000)2,Indonesia (325), Japan (825), Korea (6), Malaysia (125), New Zealand (25), Pakistan (390), Philippines (505), Sri Lanka, Taiwan (180),Thailand (410)

Frank Lazo,President

HQ, New Jersey

Brazil (1330), Canada (1415),Central America (420), Chile(195), Colombia (720), Dominican Republic (140), Ecuador (300), Mexico 2685), Peru (365), PuertoRico (1915)3, Uruguay (25),Venezuela (1115)

Belgium (600), Egypt (175),France (1185), Greece (370),Ireland (210), Italy (420),Kenya, Lebanon (170),Morocco (140), Netherlands(240), Nigeria, Portugal (130),Senegal (65), South Africa(560), Spain (555),Scandinavia (50), UK (1730)

HQ, Germany

Austria (39), Switzerland (65),Germany (1750)

HQ, R&D, Production: Germany

1 The numbers after each affiliate show the number of employees in the affiliate.2 The affiliate in India was a joint venture in which WL had a 40 percent interest.3 Puerto Rico operation was primarily a manufacturing center. The actual affiliate had about 50 employees.

HQ, New Jersey

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External Information Sources

Alan Archer, “Alliances Offer a Model: Restructuring the Industry.” Financial Times, July23, 1991, Survey, p. 2.

Clive Cookson, “Pharmaceuticals: Successful but Cautious.” Financial Times, July 23, 1991,Survey, p. 1.

Michael A. Esposito, Gunnar F. Hesse, and Nicholas E. Mellor, “Survival of the Fittest inthe EC Pharmaceuticals Market.” The Journal of European Business, 1991, May/June, pp.31-38.

Matthew Lynn, “Drug Companies in a Fix.” International Management, 1991, October, pp.62-65.

Thomas A. Malnight, “Globalization of an Ethnocentric Firm: An Evolutionary Perspec-tive.” Strategic Management Journal, 1995, 16, pp. 119-141.

Brian O’Reilly, “Drugmakers Under Attack.” Fortune, July 29, 1991, pp. 48-63.

Melissa Shon, “Pharmaceuticals 94: Industry, Heal Thyself.” Chemical Marketing Reporter,March 7, 1994, Special Report.

Robert Teitelmann, “Pharmaceuticals.” Financial World, May 30, 1989, pp. 54-80.