Macroeconomic Impact on Business Operations
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Macroeconomics explores trends in the national economy as a whole considering the study of the sum of individual economic factors. Industry is affected by factors such as GDP, unemployment, inflation, interest rates, and consumer price index. Fiscal (government) policy can help guide the economy toward a particular track without dictating a specific ending affecting tax, interest rates, and government spending (McConnell and Brue, 2005). Monetary policy attempts to achieve vast economic goals by regulating the supply of money through influencing outcomes like economic growth, inflation, and unemployment.
Both policies attempt to control or regulate the economy. “If monetary policy is doing its job, the government should maintain a relatively neutral fiscal policy, with a full-employment budget deficit or surplus of no more than 2 percent of potential GDP” (McConnell and Brue, 2005). Businesses face challenges accurately assessing the effects of GDP on their business, staying abreast of current economic trends, and employing strong forecasting firms (University of Phoenix, 2006). The pharmaceutical industry and others have been challenged with maintaining economic profitability and have emerged with best practices to respond to macroeconomic factors.
The pharmaceutical industry and others have been challenged with maintaining economic profitability and have emerged with best practices to respond to macroeconomic factors. Higher medicine expenses, an aging population that is living longer, and the additional use of costly technology contribute to increasing healthcare costs. “The United States spends a greater share of its GDP on healthcare than any other country in the world…” however this has not resulted in the highest human development rankings nor overall health system performance (EIU, 2006). Increased healthcare premium portions and prescription co-pays have been passed on to the consumer. This contributes to increasing healthcare costs which affect the consumer price index measure of a change in the cost of basic goods or services. Consumers become more astute as competition increases thus maintaining profitability in economic downturns could become challenging.
Once drug patents expire, other companies can produce generic versions less expensively since there is little research and development and risks are decreased since the benefits and side effects are already known. In order to maintain profitability, the pharmaceutical industry justifies brand name drugs rising faster than the rate of inflation due to the upgrades and value of research and development (EIU, 2006). Companies such as Pfizer have devoted millions of dollars towards direct-to-consumer advertising (Pfizer, 2006). Pharmaceutical companies believe that advertising helps to educate the consumer about disease symptoms and promotes conversation with their family doctor thus leading to early diagnosis. A Harvard School of Public Health study showed that 25% of patients who visited their doctors as a result of direct-to-consumer advertising were diagnosed with a new condition (Pfizer , 2006).
United Health Group has developed more affordable prescription programs for senior citizens who often live on a fixed income. United Health Group boasts “the nation’s largest and most popular pharmacy discount card program…serving nearly 2 million people” (United Health Group, 2006). In addition to lowering the cost of certain prescriptions, mail services and wellness products are offered. Aging baby boomers worldwide will continue to fuel growth due to older patients being prescribed more medicines.
By working together to achieve the same goal of developing promising new drugs to treat disease, Johnson & Johnson and their operating companies help to share costs and intellectual properties towards increasing profitability. Johnson & Johnson has a dedicated focus to biotechnology (the industrial use of living organisms to produce drugs and other products.) The pharmaceutical groups are committed to uniting with others, developing long-term relationships that leverage each company’s strengths and bringing advances to patients and physicians worldwide. (Johnson & Johnson, 2006) Some limitations of these best practices include: overwhelming consumers with too much advertising leading to decreased attention, consumer fraud in discount card programs, and the risk of failure in biotechnology efforts leading to a loss of funding. Evaluating other industries’ best practices can lead to in-house successes.
The ice cream, automobile, and steel industries are worthy of review for best practices since “organizations worldwide are growing more similar” (Varner/Beamer 2004) In 2005 the US ice cream market was valued at 9.2 billion dollars. Projections and forecasting are several of the best practice tools used by the ice cream companies to look at future sales. Nestle SA (Nestle) Company is the largest global food processing company manufacturing products such as baby food, water, ice cream, and suppying catering services. Nestle holds the distinction of leading the global market with ice cream sales of 1.8 billion in 2004 which was 19.9%of the total market value. Nestle administrators forecast a 10.1 billion dollar market in ice cream sales by 2010 and increased market share.
Nestle established a program called Global Business Excellence (Globe) to enhance their operational functions and highlights their best practices. “Creating common business process architecture so that we have a common, best way for activities such as purchasing, sales forecasting, production planning and customer service.” (Nestle, 2004) The ice cream industry has not been adversely affected by taxes, unemployment and variable interest.
Best auto industry practices dictate that the automobile industries use hybrid technology, implement emission control measures and create new energy saving products. GM, AB Volvo, Asian companies and others have either developed or have plans to develop smaller hybrid cars. In an economy of rising interest rates and rising prices, one can expect decrease purchases. One best practice strategy GM used was changing from having 27 purchasing organizations to one global purchasing organization using a world wide sourcing procedure GM centralized their engineering company into one global product development organization. GM has had the highest level of productivity improvement for the past 6 years according to the Harbour Report for North America. (Marketline, 2005) Unemployment has negatively impacted GM sales. Contractionary fiscal policy results in a tight money market and increased taxes. Consumers employ opportunity costs and the substitution effect options by delaying new car purchases, repairing old cars and resorting to alternative transportation. (McConnell/Brue 2004).
The steel industry also continues to face economic stress. “As a result of last year’s  30% increase in steel tariffs, more Americans lost their jobs than were employed in the entire U.S. steel industry, according to a new study by the Consuming Industries Trade Action Coalition (CITAC).” (Goliath, 2003) This was bad for the economy for the same reasons as unemployed people will not spend money to fuel market growth. Tariffs were imposed attempting to slow down the foreign consumption of steel and stem further erosion of jobs. As a result of the tariff the consumers anticipated a shortage. Best practices included putting a surcharge on steel, collecting the money when the steel was delivered and renegotiating some contracts to raise rates offsetting steel costs. (Marketline 2005) With steel competition increasing, many steel companies have since filed bankruptcy. The economic tool to turn this around would be to decrease steel supply to drive up demand.
There are several problems weighing on the pharmaceutical industry that can be solved by best practice application similar to those best practices used by the auto, ice cream, and steel industries. Best practices that can be applied to respond to economic indicators are lobby regulatory commissions which results in inflation effects, acquisition of new companies and joint forces with co-pharmaceutical companies which affects GDP, leveraging vast financial resources to manage changing interest rates, and marketing new drugs to maximize R&D investments which affects CPI. (McConnell−Brue 2004)
The auto industry lobbied against air bag regulations in spite of the fact that their own research proved air bags save lives in order to hold manufacturing costs low and resist inflation (Suzuki, 2002). While the auto industry lobbies to hold prices low, the pharmaceutical industry spends over $100 million to lobby against lower drug prices, according to the Center for Public Integrity, and keep drug prices within their control. This has resulted in a freeze on legalized import of cheaper drugs, a new Medicare drug program, and $139 billion in profits to drug manufacturers. Rapid growth in the United States pharmaceutical market has contributed to unprecedented drug price inflation and increase medical expense.
Medical care expenditures eligible for CPI include out-of-pocket expenses paid by the consumer and US inflated medical expense is a far greater portion of its GDP as compared to the rest of the world. Other westernized countries’ healthcare is heavily subsidized or covered completely by centralized payer systems. The US has implemented managed care and its presence created more effective channeling for consumer demand (i.e., toward generic drugs instead of branded drugs) through the use of best practice mechanisms such as 3-tier drug programs. Pharmaceutical companies must also win the hearts and minds of physicians and patients, and managed care organizations. The best practices to accomplish these are similar to those used in the auto industry: to have a truly differentiated product in a given disease category, to compete on price to secure a spot on formulary, and to educate the consumers on their products.
The ice cream industry reduces costs and increases marketing in response to increased interest rates, and the pharmaceutical industry responds by repositioning their current fixed liabilities and assets. If a possible decline in interest rates is forseen, assets are moved to more secure investments which ensure that the company remains in control of present and future interest positions (McConnell−Brue 2004). “Financial markets are extremely sensitive to forecasts of changes in interest rates, firms’ profits, and the rate of inflation” (2001 Morrison).
New London, CT welcomed Pfizer’s new research and development headquarters because of the influx of jobs (Pfizer is their largest employer) lowering the unemployment rate. L. Morrison (2001), states that business planners need to know the likelihood of an increase or decrease in the economy over the next several years to decide on issues such as how much to increase labor force or whether the demand for a proposed new product is likely to be sufficient. “In the U.S., the pharmaceutical industry is a significant employer. The biotech industry alone provided jobs for 413,000 in 2004. According to a study from the Milken Institute in October, supported in part by PhRMA, the biotech industry will add 122,000 jobs and $60 billion in real out put to the U.S economy over through 2013.”
However, best practices indicate an increasing number of administrative functions and clinical trial work to be transferred to developing nations. Like the auto and steel industries, the pharmaceutical industry expects more outsourcing to developing nations, though on the administrative, not on the manufacturing front. As the auto industry employs technology best practices to develop hybrids and air bags, the pharmaceutical industry relies on the advancements of technology and R&D to develop, advance, and create new delivery systems. R&D is one of the most important characteristics of the industry and dictates new product’s research and analysis.
Drugs are a necessary part of health care and the R&D associated with their development fuels an industry large enough to illustrate macroeconomic factors via trends in the national economy. GDP, unemployment, inflation, interest rates, and consumer price index are key factors that affect and effect industry resulting in best practices. Fiscal (government) policy guides the economy toward a particular track influencing, but not defining outcomes. Outcomes are influenced by monetary policy by regulating the supply of money through economic growth, inflation, and unemployment. Business responds to macroeconomic factors in the US economic cycle. Industries remain challenged to maintain profitability in times of economic downturn and can learn from competitors and different industries how to survive utilizing best practices.
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