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Warner-Lambert Company
On August 1 1991, Melvin Goodes became chairman and chief executive officer of WarnerLambert 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 WLs three core businesses ethical pharmaceuticals, nonprescription health care products, and confectionerygenerated increased sales. In international markets, WL continued to make new inroads. Despite the success of recent years, Goodes was convinced that trouble was looming at WL. In March, the U.S. Food and Drug Administration (FDA) turned down the companys approval application for the Alzheimers drug Cognex. WL had hoped that Cognex would be its new blockbuster drug. With the patent expiring on Lopid, WLs largest selling drug, in early 1993, the Cognex decision was a major blow. At the same time, the growth of private label health care products in the United States was slowing the expansion of powerful brands such as Listerine mouthwash and Schick razors. Without a major new drug and with domestic sales slowing, restructuring at WL looked unavoidable. Of increasing priority was the need to restructure WLs international operations. Although a proposal to globalize the company had been shelved by the board in 1989, Goodes knew that he could no longer afford to wait. Given the changing configuration of global markets and pressures for increased operating efficiencies, globalization looked like a necessity for WL.

Warner-Lambert Background
WLs origins can be traced to 1856 when William Warner opened a drugstore in Philadelphia. 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. Gustavus later wrote that we changed thinking locally to thinking nationally. For the next 30 years the company made many acquisitions and by 1939, had 21 marketing affiliates outside the United States and several international manufacturing plants. The largest acquisition was Richard Hudnut Company, a cosmetics business, which was eventually sold in 1979.
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 from Professor John Zerio for the basis of classroom discussion only and is not intended to illustrate either effective or ineffective management. Product names in italics are registered trademarks of Warner-Lambert Company, its affiliates or licensors.

During the 1950s and 1960s, the company continued to make acquisitions, both in the United States and overseas. In 1952, the company, now known as Warner-Hudnut, acquired Chilcott Laboratories, a pharmaceutical company founded in 1874. In 1955, with sales at $100 million, Warner-Hudnut merged with the Lambert Company to form the Warner-Lambert Pharmaceutical Company. The Lambert Companys largest-selling product was Listerine mouthwash, a product developed in 1879. In 1962, American Chicle was acquired. American Chicle was formed in 1899 with the consolidation of three major chewing gum producers. The Halls cough tablets brand was 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). ParkeDavis was founded in 1866 in Detroit. In the 1870s, Parke-Davis collaborated with the inventor of a machine to make empty capsules for medications. This established the forerunner of WLs Capsugel division, the worlds largest producer of gelatin capsules. In 1901, Parke-Davis introduced the first systematic method of clinical testing for new drugs. In 1938, 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 company divested more than 40 businesses, including medical instruments, eyeglasses, sunglasses, bakery products, specialty hospital products, and medical diagnostics. The divested businesses accounted for $1.5 billion in annual sales but almost no profit. In 1991, WL had operations 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 in the United States and Puerto Rico and 70 international plants in 43 countries. Over the previous five years, WLs earnings grew 15 to 20 percent annually. In 1990, sales growth occurred in both the U.S. and international markets and in all worldwide business segments. About 52 percent of company sales were in the United States. Exhibits 1 and 2 provide summary financial information.

Warner-Lambert Business Segments

In 1990, WL had three core business segments: ethical pharmaceuticals, nonprescription health care products commonly referred to as over-the-counter (OTC), and confectionery products. Beyond these segments, WL had several other product sectors: empty gelatin capsules for the pharmaceutical and vitamin industries, wet shave products, and home aquarium products. Exhibit 3 shows sales by region and business segment. Exhibit 4 shows a 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 medicines that could be obtained only by prescription from a medical practitioner. Seven markets (United States, Japan, Canada, Germany, United Kingdom, France, and Italy) accounted for 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 fragmented, with no single firm holding more than a four percent share of the market. The five largest firmsMerck (U.S.), Bristol-Myers Squibb (U.S.), Glaxo (U.K.), SmithKline Beecham (U.K.) and Hoechst (Germany)accounted for less than 15 percent of world market share. The pharmaceutical industry was also highly profitable. Between 1986 and 1989, the industry ranked first in the United States on both ROS and ROI. With new medical advances on the horizon and an aging population in the developed countries, the industry was expected to continue growing steadily. However, significant challenges were facing the drug companies. The cost and time to develop new drugs had grown substantially. The drug development cycle from synthesis to regulatory approval in the United States was 10 to 12 years. The average development cost per drug was $230 million (up from $125 million in 1987), with various phases of testing and clinical trials accounting for about 75 percent of the cost. There was significant risk associated with pharmaceutical R&D. It was estimated that for every 10,000 compounds discovered, 10 entered clinical trials and only one was developed into a marketable product. Of those brought to market, only about 20 percent generated the necessary sales to earn a positive return on R&D expenditures. In 1990, the FDA approved 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 these products will become a generic [unbranded] product so in any given year, there must be a certain percentage of new products.

If a firm did come up with a blockbuster drug, the rewards were enormous. New drugs sold at wholesale prices for three to six times their cost. Zantac, an ulcer drug sold by Glaxo, had worldwide sales of $2.4 billion in 1990. This was Glaxos only product in the top 200 best-selling prescription drugs. Tagamet, a competing ulcer drug produced by SmithKline Beecham, had 1990 sales of $1.2 billion. Two other challenges faced the drug companies. Spiraling health care costs in the major markets were putting increased pressure on the drug companies to hold down their prices. The growing use of price controls and restricted reimbursement schemes in international markets was reducing the flexibility of the drug companies to recoup R&D investments. Finally, there was competition from generic drugs once a patent expired. Legislation passed in the United States in 1984 made it very easy for generic drugs to enter the market after the patent on the original drug expired. In the United States, 50 percent decreases in sales were not uncommon in the first year after a patent expired. In Europe, the degree of generic erosion was not as dramatic because once a branded drug was on a list of officially sanctioned drugs eligible for state reimbursement, a long lifespan for the drug was reasonably 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. In Europe, 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 consumer cost of drugs and the prices of drugs were fixed in negotiations between the drug companies and the government. The result was different prices in different countries and a growing problem with parallel imports. Consumers in France and Spain paid about 72 percent of the EC average and in Ireland and the Netherlands, prices were about 130 percent of the average. Most European governments had the legal authority to force the transfer of a drug patent from one firm to another, in the event that the firm with the patent was unwilling to manufacture the drug. There were also national differences in the type and amount of drugs consumed. In France, the consumption of drugs was the highest per capita in the world. In Japan, physicians made most of their income by dispensing drugs. Moreover, the Japanese government allowed high prices for breakthrough drugs in order to stimulate medical innovation. As well, many of the drugs used in Japan were unique to that market. For example, several bestselling Japanese drugs dilated blood vessels in the brain, on the unproven theory that this reversed senility. In other parts of the world, the lack of controls over intellectual property made it very difficult for drug companies to operate. WLs Pharmaceutical Business. WLs ethical pharmaceutical line was marketed primarily 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 WL ethical products were $1.6 billion in 1990, a 17 percent increase over the previous year. WL ranked 17th among the worlds leading drug firms by turnover. WLs largest selling drug was Lopid, a cholesterol reducing drug. In 1991, projected sales 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 approval of Cognex by asking for more data, WL continued to have high expectations for the product and clinical testing continued. The firms drug discovery program was focused on two areas: cardiovascular diseases, such as hypertension and congestive heart failure, and disorders of the central nervous system. 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 and 1991 R&D spending for pharmaceuticals was expected to be close to $350 million, an increase of 12 percent over 1990. These efforts were beginning to pay off: WL had several new pharmaceutical products awaiting U.S. FDA approval. OTC Industry The OTC health care industry was structured very differently than the ethical drugs industry. 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 were not particularly concerned about prices. With OTC products, the consumer made the buying decision, although often based on physician or pharmacist advice. To compete successfully with OTC products, significant investments in consumer marketing and distribution were required. Some of the largest drug companies, such as Glaxo, had a corporate policy of staying out of the OTC market on the grounds that selling directly to consumers was very different than the medically-oriented marketing of ethical drugs. There were two broad classes of OTC health care products: 1) drugs that were formerly prescription drugs and 2) health care products developed for the nonprescription market, such as toothpaste, mouthwash, and skin care products. Moving a prescription drug to the OTC market required regulatory approval in most countries. The shift also required marketing expenditures of as much as $30 million a year and extensive consultation with physicians and pharmacists. Even though a prescription was not required, many OTC drugs would not succeed without continued physician recommendations, particularly in highly controlled retail environments like Germany and Japan. Pharmacists recommendations were also important. When WL switched the antihistamine, Benadryl, to the OTC market in 1985 after 40 years as a prescription drug, the company devised an extensive program for pharmacists based on product samples and promotional literature. Between 1982 and 1990, global demand for OTC drugs grew at about seven percent annually and was expected to remain strong, particularly with increased pressure to reduce health care costs. In the developing nations, shortages of more expensive prescription products made OTC drugs very popular. Among the major types of OTC products were analgesics, antacids, cough, cold, and sinus medicines, skin preparations, and vitamins. The OTC drug industry was even more fragmented than the ethical pharmaceutical industry, particularly in Europe. According to one report, there were 15,000 registered brands in the European OTC market but only 10 could be purchased in seven or more countries.1 For example, the Vicks-Sinex cold remedy could be purchased in British supermarkets; in Germany it was available OTC but only in pharmacies; and in France it was available only by prescription. In Latin American countries where the state paid for drugs, there was little distinction between ethical pharmaceuticals and OTC drugs. In the United States, nonprescription products could be sold in any retail channel. In Canada, the United Kingdom, and Germany, some nonprescription drugs could be sold only in pharmacies. WLs OTC Business. Reflecting the increasing global acceptance of nonprescription health care products, WLs OTC sales increased 11 percent in 1990 to $1.5 billion. The largest product lines were Halls cough tablets with sales of $320 million and Listerine mouthwash with sales of $280 million. Other leading brands included Rolaids antacid (number one brand in the United States), Benadryl antihistamine (the number one OTC allergy

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 United States), and Efferdent dental products. During 1991, WL planned more than 20 new OTC product introductions in nonU.S. markets. It was often necessary to adapt products to local markets to account for differences in product usage and government regulations. For example, there were more than 50 different formulations of Halls around the world. Halls was considered a cough tablet in temperate climate areas and a confection in tropical areas. In Thailand, Halls had a much higher amount of menthol than in most countries because Halls was sold as a cooling sweet. In some of the Asian and Latin American countries, a large volume of Halls was sold by the individual tablet, as opposed to the package. Benylin cough medicine also had 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 (approximately 53 percent of the industry), nonchocolate products such as chewing gum (23 percent), hard candy (18 percent), and breath mints (6 percent). WL competed primarily in the chewing gum and breath mint segments. The confectionery industry was highly concentrated on a global basis with the chewing gum segment the most concentrated. Although WLs American Chicle Group had once been 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. Wrigleys strategy had been focused and consistent for many yearssticks of gum sold at low prices. Wrigleys three main brands, Spearmint, Doublemint, and Juiceyfruit, were ubiquitous around the world. In the United States, Wrigley had the largest market share (48 percent), followed by WL (25 percent) and RJR/Nabiscos Beechnut brands. Canada was the only English-speaking country in the world where Wrigley products did not have a leading market share. WL had about 55 percent of the Canadian gum market, compared with Wrigleys 38 percent. A major trend in the food market in recent years had been toward healthy eating. This trend was reflected in the shift toward sugarless gum. In the United 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 was referred to as candy plus because the mints contained additional breath freshening ingredients. In this segment, RJR/Nabisco was the largest firm, with brands sold by the Lifesavers division holding about 40 percent of U.S. market share. WL brands held about 36 percent of the market. Tic Tac, a brand produced by the Italian company Ferrero, had a 12 percent share of the U.S. market. Several other brands with minimal U.S. sales were strong in international markets, such as Fishermans Friend, a U.K. product. In other countries 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 by impulse. There were several factors critical to success in this type of market: display and distribution, superb value, and excellent advertising. The most important factor, according to WL confectionery managers, was display and distribution. Thus, there was a strong emphasis on packaging, on developing a wide distribution base, and on in-store display. In the United States, Germany and France, confectionery distribution to the consumer was dominated 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 environment was very fragmented with many kiosks and mom-and-pop stores. A strong retail sales force was essential in these areas. The major challenge faced by firms producing gums and mints was the threat of new market entrants. Traditionally, gums and mints generated higher profit margins than other confectionery segments. As a result, other firms in the candy industry, as well as snack food companies 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 bestselling brands by local firms was a regular occurrence. WLs Confectionery Business. Although historically focused on chewing gum and breath mints, WL had begun seeking niche opportunities in other confectionery segments in recent years. Sales of WL confectionery products increased five percent to $1.1 billion in 1990. The leading brands were Trident (sales of $225 million and the worlds leading brand of sugarless gum) and Clorets gums and breath mints ($130 million). Other major brands were 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 and French Canada but a minor U.S. brand. The strongest market for Clorets was Southeast Asia. Overall, WLs confectionery business had its largest market shares in the United States, Canada, Mexico, and other countries of Latin America. In Europe, the confectionery business was strongest in Greece, Portugal, Spain, and Italy. The company also had a strong presence in Japan and Southeast Asia. WLs customer mix varied from region to region. In the United States and Canada, customers tended to be adults using products with functional uses, such as breath mints and sugarless gum. In Latin America, where the emphasis was on fun products marketed mainly to young people, Chiclets, Bubblicious, and Bubbaloo were leading brands. Global product expansion had been a key objective of recent years. Outside the United States, the Clorets brand had become the largest selling confection product. Clorets was introduced in the United Kingdom and Portugal in 1990 and in France in 1991. The company had high expectations that Trident sugarless gum could be built into a major global brand by capitalizing on concerns for health and fitness. In China, where WL introduced its first three confectionery products in 1991, a new confectionery plant was under construction. Over the previous several years, an aggressive marketing effort in Japan had established 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 Italys second largest nonchocolate confectionery company.

Organizational Structure
WL was organized into four major divisions reporting to the president and COO, Lodewijk de 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 of the five members of WLs Office of the Chairman. The Parke-Davis Group included the U.S. pharmaceuticals operations, the WarnerChilcott generics business, and the Pharmaceutical Research Division. The Research Division, based in Ann Arbor, Michigan, operated facilities in Michigan, Canada, the United Kingdom, 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 in the United States. Parke-Davis was responsible for U.S. pharmaceutical regulatory affairs. The American Chicle Group was responsible for the U.S. confectionery business. American 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 care and shaving products. Consumer health care included the OTC pharmaceuticals marketed under 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 group managed a research and development division that performed research for both the Consumer Health Products and American Chicle Groups. The division also performed a significant amount of research for WLs international affiliates. International Operations was responsible for the manufacture and marketing of WLs pharmaceutical and consumer products outside the United States. Capsugel and Tetra, WLs two businesses that were run on a global basis, reported to the International Operations Group.

International Operations
International Operations was divided into three operating groups responsible for 45 operating 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 had affiliates and the number of employees in each affiliate. The general manager, or country manager, for each affiliate reported directly to one of the geographic group presidents, who in turn reported to the head of International Operations. Below the geographic group presidents were staff managers responsible for the lines of business, such as the Europe/Middle East/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 and reporting purposes under one general manager. For example, the German general manager was responsible for the Germany, Austria, and Switzerland affiliates. Other grouped affiliates included the United Kingdom and Ireland; France, Belgium, and Netherlands; Spain and Portugal; and Italy and Greece. Across all three of WLs main business segments, acquisitions of confectionery or pharmaceutical firms had accounted for much of WLs international growth. As a result, most of the international affiliates were dominated by either a pharmaceutical or confectionery business. The result was an inconsistent mix of market penetration around the world. For example, the German affiliate had 95 percent of its sales in ethical pharmaceuticals, five percent in OTC products, and no confectionery business. In Switzerland, WL was a market leader in several confectionery lines. In the affiliates in France, Italy, and the United Kingdom, pharmaceuticals were dominant but there was also a reasonably strong confectionery presence. 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 the highest share in the various countries where Schick was marketed. The affiliate in Canada was unique in that the pharmaceutical, confectionery, and consumer health care businesses were all mature, viable businesses with strong managers in each sector. In that sense, the Canadian unit was very similar to WLs 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 managers background corresponded with the dominant 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 a diverse business. Very few managers can move from pharmaceuticals to consumer products or vice versa. In one Latin American affiliate, we had a business dominated by confection products. We put in a manager with a pharmaceutical background and the business failed. In Germany, we have tried several times to expand the consumer business and failed each time. In Australia, we have problems with confectionery. Japan is one of the few exceptions. We had a country manager with a pharmaceutical background who successfully grew a confectionery business.

Because the affiliates tended to be dominated by managers from either the confectionery or pharmaceutical side of the business, managers involved in the nondominant businesses struggled to get resources. As a WL manager commented:
If, for example, you are a confectionery manager in a country with a small confectionery business, youre treated like the poor stepchild. Because these managers are not given the resources to grow their businesses, there is a tremendous amount of frustration. It is very hard to retain good managers because they are not given the opportunity or the resources to do the things you have to do to be successful.

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

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Germany WLs operations in Germany, Austria and Switzerland were managed from Gdecke, A.G., WLs German affiliate. Gdecke, a pharmaceutical firm founded in 1866, was acquired by WL in 1928. In 1977, Parke-Davis German affiliate was merged with Gdecke. Prior to this, Parke-Davis and Gdecke were run as separate organizations. Within Germany, the Gdecke name was far more well known than WL. Employees considered themselves Gdecke employees and the Gdecke name, along with Parke-Davis, was prominent in promotional literature and corporate communications. In 1991, Gdecke had about 1,400 employees, with 230 working in pharmaceutical R&D. Gdeckes business was primarily in ethical pharmaceuticals. There was one sales force for OTC and ethical products because in Germany, the OTC market was very small. Because prescription drugs were reimbursable, Germans tended to use drugs that were prescribed by their doctors, even if the drug was available as an OTC product. Gdecke had no confection business. According to a senior manager in the German affiliate, WL has never been willing to spend significant long term money to develop the confection market, which is puzzling since Germany has one of the largest confection markets in the world. Gdecke also had a very limited business in consumer health care products. 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 the product, you have to change peoples minds. To do that we would need to spend a lot of money, maybe as much as DM130-140 million. . . . People always see Germany as a market with huge potential but what they dont see is that you need to invest in this market first. Another mistake people keep making is that U.S. tastes will work in Germany. Germans are not mouthwash users.

Brazil American Chicle entered the Brazilian market in the 1940s. When WL acquired American Chicle in 1962, the confectionery business in Brazil was well established under the Adams brand. A strong pharmaceutical business based on Parke-Davis products was also established in Brazil. However, the hyperinflation in the 1970s and the governments attempts to control inflation through price controls resulted in significant losses in the pharmaceutical business. WL decided to discontinue manufacturing and marketing pharmaceutical products 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 close relationship with the licensing company for quality assurance purposes. The licensee, however, had complete control over which products to produce and how to manage production, marketing, and distribution. The Brazil affiliate had about 1,300 employees and virtually all were involved in the confectionery business. The largest brand in Brazil was Halls, which was marketed as a confectionery product (a refreshing experience) rather than a cough tablet. The affiliate had 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 Brazilian manager:
They are in charge of the strategy and we are in charge of the operations. We have a strategic plan in place, we discuss it with headquarters, they give us direction on which areas to engage in and which areas not to do anything, and the implementation is left to us.

Aside from product line extensions, such as changes in flavor or packaging, very little new product development was done in Brazil. One exception was the development of a liquid center chewing gum called Bubbaloo. A leading brand in Brazil and several other Latin American countries, Bubbaloo was developed by the Brazilian affiliate for the Brazilian 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. The mindset is I am managing France or Spain or wherever and I will manage it any way I like.

In the larger affiliates, country managers were usually nationals of that country. In Western Europe, most of the country managers had backgrounds in pharmaceuticals. In other regions, many of the country managers had confectionery backgrounds. In the smaller European countries and in the developing countries, country managers were often expatriates using the country manager position as a training ground for higher level appointments within 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 15 percent a year. I learned to run a business from the ground up and I could experiment with ideas very easily. I turned down two promotions because I was having such a great time being king . . . I had a great deal of autonomy and could ride over most of the staff people. I remember one time when we were planning a new product introduction in an area outside our traditional product lines. Someone from the international division told me you cant do that. I did it anyway. Before we launched the product, I was told that international would send someone down to help us launch the product. I said fine but I wont be here if you do. So they left me alone. The new product outsold the dominant product in the market and was a huge success.

New Product Development In the pharmaceutical business new product development was critical. Some new product initiatives in the affiliates were the result of coordinated efforts with headquarters. Others occurred 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 the United States but only moderately successful internationally, despite a significantly increased international marketing effort in recent years. Nevertheless, Lopid represented WLs first truly international pharmaceutical product. Some drugs were introduced outside the United States because of less time consuming regulatory processes. For example, Accupril was available 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 products, licensing was an important developmental activity in the United States and in the affiliates. The major affiliates had their own approaches to licensing strategy. According to one manager,
Licensing is an ad hoc processit is done one way in the United States and one way in each 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. Weve ended up with a hodgepodge of drugs in the different regions.

As an example, WLs largest selling drug in Germany and seventh largest among all drugs was Valoron N, a painkiller for chronic and acute pain. This drug was licensed by the German affiliate and was not marketed by WL outside the German region. Both the background of the country manager and the dominant business segment within the affiliate influenced new product development at the affiliate level. In particular, WL had experienced considerable difficulty in convincing the affiliates with dominant pharmaceutical businesses to adopt new consumer health care or confection products. Germany, for example, with its strong pharmaceutical business, had a series of country managers with pharmaceutical backgrounds. For some time, WL had been interested in introducing 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 $15 million it would take to launch the product, even though Listerine was WLs second leading brand worldwide. Global Integration There was very little interaction between the senior U.S. pharmaceutical, OTC, and confectionery managers and their international counterparts. For instance, the U.S. head of pharmaceuticals would meet with the European head of pharmaceuticals once a month. There was virtually no other contact between these senior managers. The affiliate managers also rarely interacted. The affiliates reported into one of the three international groups and there were no reporting relationships between the units. Once a year, general managers from the affiliates and the United States would hold an annual meeting attended by about 250 people, characterized by one manager as follows:
Some silly situations happen at the meetings. For example, Uruguay, an affiliate doing a few million dollars worth of business, might have a new strategic plan. The Uruguay general manager might get the same amount of air time as the head of Consumer Health Care Products in the United States.
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The primary objective for country managers was maximizing the performance of their affiliates. A senior WL manager explained:
Each affiliate is making decisions on a country basis. For example, say there is a strong shaving business in a country where the country manager is focused on building the local pharmaceutical business. If shaving exceeds its profit targets, the country manager could be tempted to shift cash from shaving to pharmaceutical. The global shaving industry is not his concern. In another country the opposite situation may be happening. The local shaving business is not doing well this year so the country manager borrows money from pharmaceuticals to do some advertising in shaving. This cross borrowing across business lines is sub-optimizing our business lines . . . Country managers are not concerned with company growth; they are concerned with affiliate growth. Strategic decisions are not made about products and brands; the whole thinking process is strictly localhow 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. Because the affiliates varied so much in size, the quality of the advertising was often less than satisfactory. Although there was an effort to standardize packaging and graphics, particularly with confectionery products, it was not always successful. For example, when Halls was introduced in Brazil, a third party manufacturer was used. Because the firm did not have the proper equipment to manufacture square mints, a rectangular shape was used. As the Halls brand grew, the rectangular shape became the standard for mints in Brazil. In the rest of the world, the Halls mint was square. Two lines of business were exceptions to the lack of global integrationthe Capsugel and Tetra divisions. In the early 1980s, the Capsugel business was organized on a geographic basis with the various international units reporting through the country managers. However, because the gelatin capsule market was essentially a commodity business and extremely competitive on a global scale, the geographic structure was considered ineffective and inconsistent with a fast-moving global business. In the mid-1980s, a global structure was created for Capsugel. A similar structure was already in place for Tetra. International Operations Staff To coordinate WLs far-flung international businesses, there were approximately 250 International Operations staff members working in the New Jersey headquarters. Included in this number was a small headquarters staff for Capsugel and staff for Tetras U.S. operations. Officially, the role of the International Operations staff was to assist the country managers in implementing strategy by communicating information between HQ and affiliates and consolidating the huge amounts of data that were generated. As one manager commented:
The staff function is to make order out of chaos. In New Jersey, the international staff coordinates the three large geographic reporting organizations. Each geographic area has its own hierarchical structure of staff managers marketing, finance, and so on working out of New Jersey.
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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 in a particular country, he or she must convince the country manager to make the investment. The country manager may say I dont want it. The international manager might be three levels below the country manager in the organizational hierarchy. What can the staff person do? The country managers run their affiliates like hardware stores. They can have 10 different people telling them we would like you to sell this particular drug or this new confectionery product. The guy leaves and the country manager goes back to doing what he wants to do. Their attitude toward the staff marketing people is I dont need them, 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 international staff functions. At the international operations level it is supposed to be strategic and visionary; 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 fertilization and linking Germany with what is going on in France, with what is going on in the UK and hopefully, bringing that knowledge to other geographic areas by feeding that knowledge up to International Operations. The International Operations Group is also supposed to be coordinating with R&D, which is primarily based in the United States.

Earlier Reviews of the International Structure

Concerns that there were problems with the structure of WLs international operations first surfaced in the early 1980s. At that time, a consulting report recommended that the company disband its geographic structure and move to a line of business organization. Although 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 drastic. WL tried a different approach to internationalization several years later. The objective was to put a global strategic planning process in place and merge this with local operating plans. In other words, the strategy would be global and tactics would be local. This approach was largely unsuccessful. Despite the attempt to put global plans into action, the realities were that a global vision had not been established and local objectives took precedence. In 1989, a task force headed by Mel Goodes was established to develop a globalization plan. The task force was made up of senior managers from the pharmaceutical, confectionery, and consumer segments. A plan based on global lines of business was developed but for several reasons, the plan was not implemented. At some levels in the organization there was the 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 was viewed as disruptive and unnecessary. There was a sense that if it is not broken, why fix it? Given WLs performance, it was not clear that the competitive marketplace had created a strategic 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 competitive global environment. As he explained:
Our decision making is too slow. For example, we had the opportunity to make an acquisition in Germany. The process started when the German country manager identified 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 New Jersey. By this time a year had passed and the opportunity was gone.

The next step was to identify priorities and establish an implementation plan. There were many issues to be resolved. Should changes in structure and reporting relationships involve the entire organization? How quickly should change proceed? What would happen to the kings and the international operations staff in a new structure? Should the same international structure be established for each business segment? Should New Jersey remain the headquarters for each business segment?

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EXHIBIT 1 Warner-Lambert Financial Information 1990 1989 1988 1987 1986 (Dollars in millions, except per share amounts) RESULTS FOR YEAR Net Sales Cost of Goods Sold Research and Development Expense Interest Expense Income Before Income Taxes Net Income Net Income Per Common Share YEAR-END FINANCIAL POSITION Current Assets Working Capital Property, Plant, and Equipment Total Assets Long-term Debt Total Debt Stockholders Equity COMMON STOCK INFORMATION Average Number of Common Shares Outstanding (in millions) * Common Stock Price Per Share: * High Low Book Value Per Common Share * Cash Dividends Paid Cash Dividends Per Common Share * OTHER DATA Capital Expenditures Depreciation and Amortization Number of Employees (in thousands) $ 4,687 1,515 379 69 681 485 $ 3.61 $ 1,559 458 1,301 3,261 307 537 $ 1,402 $ 4, 196 1,383 309 56 592 413 $ 3.05 $ 1,366 335 1,13 2,860 303 506 $ 1,130 $ 3, 908 1,352 259 68 538 340 $ 2.50 $ 1, 265 240 1,053 2,703 318 512 $ 999 $ 3,441 1,170 232 61 493 296 $ 2,08 $ 1,253 279 960 2,476 294 444 $ 874 $ 3,064 1,053 202 67 446** 309** $ 2.09** $ 1,510 540 819 2,516 342 585 $907

134.3 $ 70 3/8 49 5/8 10.44 204 $ 1.52 $ 240 $ 120 34

135.3

136.1

142.5

148.0

$ 59 3/8 $ 39 3/4 37 1/4 29 15/16 8.38 7.36 173 147 $ 1.28 $ 1.08 $ 218 $ 105 33 $ 190 $ 96 33

$ 43 3/4 $ 31 9/16 24 1/8 22 1/2 6.37 6.32 127 118 $ .89 $ .80 $ 174 $ 79 34 $ 138 $ 68 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 and Development Expense 1990 1989 1988

Net Sales (1) 1990 1989 1988 Health Care: Ethical Products $ 1,555 $ 1,324 $ 1,213 Nonprescription Products (OTC) 1,526 1,370 1,296 Total Health Care 3,081 2,694 2,509 Confectionery 1,054 1,003 918 Other Products 552 499 481 Research and Development Expense Net Sales and Operating Profit $ 4,687 $ 4,196 $ 3,908 Interest Expense Corporate Expense (2) Income Before Income Taxes

Operating Profit 1990 1989 1988 (Millions of Dollars) $ 560 367 927 208 119 (379) 875 (69) (125) $ 681 $ 465 311 776 195 101 (309) 763 (56) (115) $ 592

$ 420 $ (299) $ (240) $ (204) 305 725 187 92 (38) (337) (17) (25) (35) (275) (15) (19) (27) (231) (13) (15)

(259) $(379) $ (309) $ (259) 745 (68) (139) $ 538

Identifiable Assets 1990 1989 1988 Health Care: Ethical Products $ 1,063 $ 892 $ 916 Nonprescription Products (OTC) 619 513 489 Total Heath Care 1,682 1,405 1,405 Confectionery 564 490 459 Other Products 442 406 387 Subtotal 2,688 2,301 2,251 Corporate 573 559 452 Total $ 3,261 $ 2,860 $ 2,703 Source: Warner Lambert 1990 Annual Report

Depreciation and Amortization 1990 1989 1988 (Millions of Dollars) $ 43 20 63 23 24 110 10 $ 120 $ 39 16 55 21 20 96 9 $ 105 $ 36 15 51 20 19 90 6 $ 96

Capital Expenditures 1990 1989 1988 $ 88 49 137 44 41 222 18 $ 240 $ 71 37 108 33 42 183 35 $ 218 $ 72 37 109 33 40 182 8 $ 190

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

Ethical Pharmaceuticals United States Canada Mexico Latin America (excluding Mexico) Japan Asia/Australia (excluding Japan) Europe/Middle East/Africa TOTAL $871 60 11 47 80 66 582 $1717

Consumer Health Care $1066 95 49 100 122 115 369 $1916

Confectionery $507 107 88 127 80 16 129 $1054

Note: The figures in Exhibits 2 and 3 show different totals for the ethical pharmaceutical and consumer health care segments. In 1991, WL redefined its business segments. The Capsugel business ($162 million 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 1. Ethical Pharmaceutical Products (Parke-Davis)

Leading Brands

brand name pharmaceuticals and biologicals, including

analgesics, anesthetics, anti-inflammatory agents, antihistamines, anticonvulsants, influenza vaccines, cardiovascular products, lipid regulators, oral contraceptives, psychotherapeutic products

Dilantin (epilepsy), Dilzem (angina and hypertension), Lopid (lipid regulating), Accupril (hypertension), Loestrin (contraceptive), Ponstan (analgesic)

generic pharmaceuticals (Warner Chilcott),

manufacturer and marketer of generic pharmaceutical products

2. Non Prescription Health Care (OTC)

over-the-counter pharmaceuticals marketed under

the Parke-Davis name

Benadryl (antihistamine), Benylin (cough syrup), Sinutab (sinus medication), Anusol (hemorrhoid treatment) Listerine (mouthwash), Efferdent (denture cleanser), Lubriderm (skin lotion), Rolaids (antacid), Halls (cough drop)

other consumer health care products

3. Confectionery (Gums and Mints)

chewing gum, breath mints, sugarless gum,

bubble gum, chocolate candy

Chiclets, Dentyne (chewing gum), Certs, Clorets (breath mints and chewing gum), Trident (sugarless gum), Bubblicious (bubble gum), Junior Mints (chocolate candy)

4. Other Products

empty hard-gelatin capsules for use in wet shave products home aquarium products

Capsugel

pharmaceutical manufacturing (used by Warner-Lambert and other companies) Schick Tetra

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EXHIBIT 5 Warner-Lambert Organization Chairman & CEO* Melvin Goodes Human Resources Finance CFO* Public Affairs Legal Planning, Investment, and Development Technical Operations (Manufacturing) Pharmaceutical Licensing President & COO* Lodewijk de Vink Parke Davis Group, EVP* Production: Michigan, Pennsylvania, Canada, Puerto Rico Warner Chilcott Production: Pennsylvania Pharmaceutical R&D American Chicle Group Production: Illinois, Massachusetts, Canada, Mexico, Puerto Rico, UK Consumer Health Products Group Production: Connecticut, Pennsylvania, Canada, Puerto Rico Consumer Products R&D Facilities: New Jersey International Operations, EVP*

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

*Member, Office of the Chairman

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 of Chicago. After several years at the Ford Motor Company of Canada, he joined WL in 1964 as a new product development manager in confectionery. After various senior international positions, including regional director of European confectionery operations and president of WL Mexico, he was appointed 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 at American University, he joined Schering-Plough Corporation in 1969. In 1981, he was appointed vice president of Schering Laboratories and in 1986, president of Schering International. In 1988, he joined WL as vice president, International Operations. In 1991, he was appointed president and COO and elected to the board of directors. Joseph E. Smith was born in Buffalo and had an MBA from the Wharton School. He worked for several years with International Multifoods and Ross Laboratories before joining Johnson & Johnson in 1965. In 1986, he joined the Rorer Group and held several senior management positions, including executive vice president. He joined WL in 1989 as a vice president and president of the Pharmaceutical 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. He joined WL as a cost analyst in corporate accounting in 1967. In 1978, he became controller of the American 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 of WL and president, International Operations. Robert J. Dircks was born in New York and held an MBA from the City University of New York. He joined WL in 1951 as an accountant in the Nepera Chemical Company. In 1962, he joined the Consumer Products Group as an accounting supervisor. In 1974, he became Vice President, Finance, 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, EVP President, International Operations Asia/Australia Capsugel Group HQ, New Jersey Capsugel HQ, New Jersey Research: Belgium, France Production: South Carolina, Belgium, Brazil, China, France, Italy, Japan, Mexico, Thailand, UK
1 2 3

Jay Gwynne, President

Canada/Latin America Group HQ, New Jersey

Frank Lazo, President

Europe/Middle East/ Africa Group HQ, New Jersey

Sam Maugeri, President

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)

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

German Region HQ, Germany Austria (39), Switzerland (65), Germany (1750) Tetra Werke HQ, R&D, Production: Germany

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)

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

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External Information Sources

Alan Archer, Alliances Offer a Model: Restructuring the Industry. Financial Times, July 23, 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 in the 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 Perspective. Strategic Management Journal, 1995, 16, pp. 119-141. Brian OReilly, 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.

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