WL Pharma Company

On August 1st 2015, Goodes became chairman and chief executive officer of WL Pharma
Co. Ltd. (WL). In 2014, 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—generated
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
company’s approval application for the WL’s drug Cognew. WL had hoped that Cognex
would be its new blockbuster drug. With the patent expiring on Cogold, WL’s largest
selling drug, in early 2017, the Cognew 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 Lester dietary supplement and Smoothie razors.
Without a major new drug and with domestic sales slowing, restructuring at WL looked
unavoidable. Of increasing priority was the need to restructure WL’s international
operations. Although a proposal to globalize the company had been shelved by the board
in 2013, 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.
WL Pharma Co. Background
WL’s origins can be traced to 1856 when William Watson opened a drugstore in
Philadelphia. After 30 years of experimenting with the formulation of pharmaceutical
products, Watson closed his retail store and began a drug manufacturing business. For the
next 30 years, Watson Pharma & Co. made many acquisitions and by 1960, had 21
marketing affiliates outside the United States and several international manufacturing
plants. During the 1970s and 1980s, the company continued to make acquisitions, both
in the United States and overseas. In 1979, with sales at $100 million, Watson Pharma &
Co. merged with the Lester Company to form the Watson- Lester Pharmaceutical
Company. The Lester Company’s largest-selling product was Lester dietary supplement,
a product developed in 1963.
In 1986, American Chelly was acquired with the consolidation of three major chewing
gum producers. The Fresh cough tablets brand was acquired in 1988. In 1994, Smoothie
wet-shave products were acquired. Also in 1994, WL merged with the pharmaceutical
firm SenCell Company. This established the forerunner of WL’s Capsules division, the
world’s largest producer of gelatin capsules. SenCell introduced the first systematic
method of clinical testing for new drugs. It also specialized in the treatment of epilepsy
and the production of antihistamine. The 2000s was a period of restructuring for WL.
During the last 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 2015, WL had operations in 130 countries and of its 34,000
employees (down from 45,000 in 2006), 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, WL’s earnings grew 15
to 20 percent annually. In 2014, 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 2014, 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
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 firms, from U.S., U.K., and Germany—accounted for less than 15
percent of world market share.
The pharmaceutical industry was also highly profitable. Between 2010 and 2013, 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 four years ago), 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 2014, 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 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 2013. This was Glaxo’s only product in the
top 200 best-selling prescription drugs. Tagamet™, a competing ulcer drug produced by
SmithKline Beecham, had 2014 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
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.
WL’s Pharmaceutical Business
WL’s ethical pharmaceutical line was marketed primarily under the SenCell name.
Included in the pharmaceutical sector was Watson-Chilcott, a manufacturer of generic
prescription drugs primarily for the United States. Sales of WL ethical products were
$1.6 billion in 2014, a 17 percent increase over the previous year. WL ranked among the
world’s Top 20 drug firms by turnover.
WL’s largest selling drug was Cogold, a cholesterol reducing drug. In 2015, projected
sales for Cogoldwere more than $480 million. The antiepileptic drug had sales of $145
million and was a worldwide leader in its category. Other leading drugs were a
contraceptive and a cardiovascular drug. Although the FDA postponed approval of
Cognew by asking for more data, WL continued to have high expectations for the product
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 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
2015 R&D spending for pharmaceuticals was expected to be close to $350 million, an
increase of 12 percent over 2014. 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 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 2009 after 40 years as a prescription drug, the company devised an
extensive program for pharmacists based on product samples and promotional literature.
Between 2006 and 2014, 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. 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.
WL’s OTC Business.
Reflecting the increasing global acceptance of nonprescription health care products,
WL’s OTC sales increased 11 percent in 2014 to $1.5 billion. The largest product lines
were Fresh cough tablets with sales of $320 million and Lester dietary supplements with
sales of $280 million. Other leading products included antacid, antihistamine, skin lotion,
and dental products.
During 2015, 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 for
differences in product usage and government regulations. For example, there were more
than 50 different formulations of Fresh 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 Fresh was sold as a
cooling sweet. In some of the Asian and Latin American countries, a large volume of
Fresh was sold by the individual tablet, as opposed to the package. 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 WL’s American Chelly Group had once
been the leading firm, the largest chewing gum company in 2015 was William Wrigley
Jr. Co. (Wrigley) with $1.1 billion in annual sales in more than 1200 countries. Wrigley’s
strategy 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 ubiquitous
around the world. In the United States, Wrigley had the largest market share (48 percent),
followed by WL (25 percent) and RJR 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 Wrigley’s 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 was the largest firm, holding about 40 percent of U.S.
market share. WL brands held about 36 percent of the market. TT, 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 Fisherman,
a U.K. product. In other countries such as Germany, Argentina, and Colombia, there were
strong local competitors
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.
WL’s 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 2014. The leading brand
of WL’s chewing gums was Chelly. Candy coated chewing gum and liquid-filled
chewing gum are the products WL would likely lead with as a new market entry. WL’s
brands had regional strengths. Candy coated chewing gum was a major product in Latin
America and French Canada but a minor U.S. product. The strongest market for breath
mints, under the brand Orchids, was Southeast Asia.
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
business was strongest in Greece, Portugal, Spain, and Italy. The company also had a
strong presence in Japan and Southeast Asia. WL’s 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, the candy coated
chewing gum and liquid-filled chewing gum were key products.
Global product expansion had been a key objective of recent years. Outside the United
States, the Orchids brand had become the largest selling confection product. Orchids was
introduced in the United Kingdom and Portugal in 2014 and in France in 2015. The
company had high expectations that 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 2015, 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 market, a joint venture was formed in 2014. The new company became Italy’s
second largest nonchocolate confectionery company.

Organizational Structure
WL was organized into four major divisions reporting to the president and COO,
Lodewijk de Vink: SenCell Group, American Chelly 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 WL’s Office of the Chairman.
The SenCell Group included the U.S. pharmaceuticals operations, the Watson-Chilcott
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. SenCell manufactured in three plants in the United States, one
in Canada, and two in Puerto Rico. Watson-Chilcott production came from a plant in the
United States. SenCell was responsible for U.S. pharmaceutical regulatory affairs.
The American Chelly Group was responsible for the U.S. confectionery business.
American Chelly 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 SenCell name plus other OTC products such as Lester dietary supplements.
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 WL’s international affiliates.
International Operations was responsible for the manufacture and marketing of WL’s
pharmaceutical and consumer products outside the United States. Capsules and home
aquarium products, WL’s 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/Capsules 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.
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 WL’s main business segments, acquisitions of confectionery or
pharmaceutical firms had accounted for much of WL’s 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 Smoothie, 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 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 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, you’re 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.
Germany
WL’s operations in Germany, Austria and Switzerland were managed from Decke,, WL’s
German affiliate. Decke, a pharmaceutical firm founded in 1890, was acquired by WL in
1973. In 2001, SenCell’s German affiliate was merged with Gödecke. Prior to this,
SenCell and Decke were run as separate organizations.
Within Germany, the Decke name was far more well known than WL. Employees
considered themselves Decke employees and the Decke name, along with SenCell, was
prominent in promotional literature and corporate communications. In 2015, Decke had
about 1,400 employees, with 230 working in pharmaceutical R&D. Decke’s 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.
Decke 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.” Decke also had a very limited business in consumer health care
products. With respect to the potential of Lester 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 people’s 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 don’t 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 dietary supplement users. They prefer getting nutrients from
natural food.”

Brazil
American Chelly entered the Brazilian market in the 1970s. When WL acquired
American Chelly in 1986, the confectionery business in Brazil was well established under
the Adams brand. A strong pharmaceutical business based on SenCell products was also
established in Brazil. However, the hyperinflation at that time and the government’s
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 SenCell line of drugs to another
Brazilian company.
Since the products were marketed under the SenCell 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 Fresh, which was marketed as a
confectionery product (a “refreshing experience”) rather than a cough tablet. The affiliate
had a small dietary supplement business; Lester was one of the products sold.
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. A leading brand of liquid center chewing gum in Brazil and
several other Latin American countries, Buloo, 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 can’t 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
won’t 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 not always achieve success in the affiliates. For example, Cogold was a huge success
in the United States but only moderately successful internationally, despite a significantly
increased international marketing effort in recent years. Nevertheless, Cogold represented
WL’s first truly international pharmaceutical product. Some drugs were introduced
outside the United States because of less time consuming regulatory processes. For
example, one of WL’s cardiovascular drugs was available in 23 countries outside the
United States; WL anticipated its FDA approval for the U.S. market by the end of 2015.
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 process—it 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. We’ve ended up with a
hodgepodge of drugs in the different regions.”
As an example, WL’s largest selling drug in Germany and seventh largest among all
drugs was 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 Lester dietary supplements 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
Lester was WL’s 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.”
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 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.
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 Fresh 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 Fresh brand grew, the rectangular shape became the standard for mints
in Brazil. In the rest of the world, the Fresh mint was square.
Two lines of business were exceptions to the lack of global integration—the capsule and
home aquarium divisions. In the early 1980s, the capsule 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-
2009, a global structure was created for Capsules. A similar structure was already in
place for home aquarium.
International Operations Staff
To coordinate WL’s far-flung international businesses, there were approximately 950
International Operations staff members working in the New Jersey headquarters.
Included in this number was a small headquarters staff for Capsules and staff for the U.S.
operations of home aquarium.
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.”
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 don’t 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 don’t 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 WL’s international operations
first surfaced in the early 2004. 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 2013, a task force headed by 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 WL’s performance, it was not clear that the competitive
marketplace had created a strategic imperative for reorganization.
The Next Steps
As the new CEO of WL, 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?
Exhibit 1 WL Financial Information ($000,000)

* Amounts prior to 2014 were restated to reflect a two-for-one stock split effected in May
2014.
** Includes a net nonrecurring credit of $8 million pretax (after-tax $48 million or $0.32
per share) in 2010.
Source: WL 2014 Annual Report
Exhibit 2. WL Financial Information by Business Segment ($00,000)

Source: WL 2014 Annual Report

Exhibit 3. WL Financial Information by Geographic Segment ($000,000)
Exhibit 4. WL Business Segments
1. Ethical Pharmaceutical Products (SenCell)
• Brand name pharmaceuticals and biologicals, including analgesics, anesthetics, anti-
inflammatory agents, and hypertension antihistamines, anticonvulsants, influenza
vaccines, regulating cardiovascular products, lipid regulators, oral contraceptives,
psychotherapeutic products
• Generic pharmaceuticals (Watson-Chilcott), manufacturer and marketer of generic
pharmaceutical products

2. Non-Prescription Health Care (OTC)

• Over-the-counter pharmaceuticals: antihistamine, cough syrup, sinus medication, and
hemorrhoid treatment.
• Other consumer health care products: Lester dietary supplements, Fresh cough drop,
denture cleanser, skin lotion, and antacid.

3. Confectionery (Gums and Mints)

• Chewing gum, bubble gum, breath mints, sugarless gum, candy coated chewing gum,
and liquid-filled chewing gum
• Chocolate candy

4. Other Products
• Empty hard-gelatin capsules: Capsules (used by WL Pharma and other companies)
• Wet shave products: Smoothie
• Home aquarium products
Exhibit 5. WL Organization
Exhibit 6. Members of the WL Office of the Chairman
Michael 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 1988 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 2003. In 3009, he became WL president, COO and a
director of the company and in 2015, chairman and CEO.
Lodewijk de Vink was a native of Amsterdam, The Netherlands. After completing an
MBA at American University, he joined Schering Corporation in 1993. In 2005, he was
appointed vice president of Schering Laboratories and in 2010, president of Schering
International. In 2012, he joined WL as vice president, International Operations. In 2015,
he was appointed president and COO and elected to the board of directors.
Joseph 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 1989. In 2010, he joined the Rorer Group and held several
senior management positions, including executive vice president. He joined WL in 2013
as a vice president and president of the Pharmaceutical Sector and in 2015, became
executive vice president and president, SenCell 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 1991. In 2002, he
became controller of the American Chelly Division and in 2004, vice president finance,
Consumer Products Group. In 2013, he became president of the Canada/Latin America
Group and in 2015, executive vice president of WL and president, International
Operations.
Robert Dircks was born in New York and held an MBA from the City University of
New York. He joined WL in 1975 as an accountant in the Nepera Chemical Company. In
1986, he joined the Lester Group as an accounting supervisor. In 1998, he became Vice
President, Finance, SenCell Group. In 2010, he was appointed Executive Vice President
and CFO.
Exhibit 7. WL International Operations