Johnson & Johnson: Macroeconomic Variables Analysis

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Table of Contents

Introduction
Overview
Macroeconomic Variables
Macroeconomic Policies
Macroeconomic Conditions and Company Performance
Conclusion
References

Introduction

The effect of macroeconomic variables and policies on the performance of a company can be severe. They can have a significant effect on supply and demand of the company product which could lead to loss of revenue and reduction in performance. Johnson & Johnson is a large company, but its business is often affected by macroeconomic factors. This paper will provide an overview of the macroeconomic variables, policies and how they affect the performance of the company.

Overview

Johnson & Johnson is an international company that produces consumer and pharmaceutical products, as well as medical devices. The company was founded in 1886 with a focus on the creation of better sanitation products. The company quickly grew, and the work of Robert Wood Johnson, Edward Mead Johnson, and James Wood Johnson became an internationally known brand. Currently, the company employs more than 125,000 workers in sixty countries and its products are used worldwide. The company is focused on the production of three categories of products: medical devices, consumer health products, and pharmaceuticals.

Johnson & Johnson medical devices are used for a variety of applications including diabetes care, insulin delivery, general surgery, aesthetic uses and others. Their pharmaceuticals cover oncological products, neuroscience products, anti-infection solutions and immunology products. Perhaps the most famous line of company products belongs to the consumer care sector of the market where Johnson & Johnson provides oral health care, over-the-counter medication, skin and hair care, as well as wound and vision care. These products have generated more than $71.94 billion in 2016. The selected product for this assignment is the Neutrogena Light Therapy Acne Spot Treatment. The product is an affordable skin care medical machine that is designed to heal skin in a home environment. Its annual sales are estimated to be 300,000 units in the United States (Johnson & Johnson, n.d.).

Macroeconomic Variables

A variety of macroeconomic variables can have an effect on the supply and demand of a product. Some forces that affect business cannot be controlled by controlled by corporations. Macroeconomic variables are reliant on the macroeconomic environment of the country, and their effects cannot be prevented. Some of the most powerful effects are caused by GDP Growth, Inflation and Unemployment. While the sales data on the specific product is not publicly available, information about the sales of Johnson and Johnson skin care products is available in their reports. It will be used to show the effect of the variables on the sales of the product

GDP Growth

GDP stands for the gross domestic product which is used to represent the total demand for the goods of the nation over a specific time period. While it does not directly affect supply and demand of the local population, it can have an indirect influence on it. For example, often when the GDP of the country increases, it may lead to inflation in the long-term. The cost of goods rises because of the demand increases. A decline in GDP leads to lower demand for goods and services. The most desirable GDP status is when it grows steadily over time. In such cases, consumer demand is stable, and the country does not experience inflation which also affects business.

Inflation

Inflation is defined as a continuous increase in prices of goods and services over time. As it was mentioned earlier, sudden changes in the GDP growth can have an effect on inflation and cause the purchasing power of money become lower or higher depending on the rate of inflation. Rapid inflation can have a severe effect on the supply of goods due to high demand.

Unemployment

Unemployment is closely tied to supply and demand of products. When the demand in the market becomes smaller, the level of unemployment rises. On the supply side, the increase in unemployment is caused by an excess of human resources for the production of the products and services. Unemployment reduces the income of the individual which reduces their ability to purchase elastic income goods such as the skin care medical machine in question.

Analysis of the Factors

The data gathered from publically available sources shows that 2015 was a year when inflation began to rise after the previous period of stability. It was accompanied by the increase in the GDP growth rate of the country and a reduction of unemployment (Figure 1) (“Bureau of Labor Statistics data,” n.d.; US Department of Commerce, n.d.). These metrics correspond to the sales statistics provided by the Johnson & Johnson company over the same period of time (Figure 2) (Johnson & Johnson, 2015; Johnson & Johnson, 2016; Johnson & Johnson, 2017). These effects can be explained by the way these variables affect supply and demand of the product. It is an elastic product that requires a certain level of income from its customers. The reduction in unemployment from the year 2015 to 2016 made more people reach the required level of income to purchase the skin care product. The growth of the GDP during those years has increased the demand but it also dramatically increases inflation which could result in negative outcomes in the future sales. However, the available data shows a positive trend for the supply and demand of all the skin care products of the company including the Neutrogena Light Therapy Acne Spot Treatment medical device.

Figure 2. Johnson & Johnson sales of skin care products.

Macroeconomic Policies

Monetary and fiscal policies of the United States are designed to manage the pace of the economy and maintain high levels of employment while keeping the prices stable. The fiscal policy of the United States is based on proactive actions that are aimed to steer the economy to increase aggregate demand through increased spending. The increased spending is designed to stimulate the creation of jobs and overall prosperity. However, when the pace is accelerated beyond a certain point, the prices of export become greater, and import prices become cheaper. This results in lower demand for local goods while increasing the demand for foreign ones.

The monetary policy is also designed to control the pace of the economy. The control is performed through the Federal Reserve. It is primarily focused on creating an easy money environment. The monetary policy may be used to change the interest rate which can lead to companies being unable to support their current workers and having to lay them off, increasing the unemployment in the country. Subsequently, unemployment limits people from buying such products as the one in question.

Macroeconomic Conditions and Company Performance

The sales of the product and net income of the company have been examined in the microeconomic analysis. They have shown that the net income of the company steadily increased over the previous three years of operation. The sales of the product have risen due to the increased demand sparked by the new price and the previously discussed macroeconomic variables. The lower price coupled with the decrease in unemployment allowed for the customer base to grow, which increase the demand for the product and its sales. The increased growth rates of the GDP and inflation have also contributed to the increase in demand. However, they likely did not affect the price as that change was motivated by the need to increase the customer base of the product. These trends can be seen in the correlation graph above (Figure 3).

The fiscal and monetary policy of the United States is likely to have a positive impact on the company as the accelerated pace of the economy allows for an increase in demand for the goods and services that it provides. However, it is likely to have a negative effect on medium and long-term business.

Conclusion

Johnson & Johnson is a market leader in a variety of fields including consumer-grade medication and medical appliances. However, they are susceptible to the macroeconomic changes and policies of the United States. The results have shown that the company experienced a growth in income and third quarter sales during the times of GDP growth rate increase and a decrease in unemployment. The customer base of the company became larger due to the product becoming more affordable for the consumers. However, the rapidly increasing inflation is threatening the future performance of the company. It is likely that in the following years the results will show lower levels of performance in the skin care product sales and the overall profitability of the company.

References

Bureau of Labor Statistics data. (n.d.). Web.

Johnson & Johnson. (2015). Johnson & Johnson reports 2015 third-quarter results. Web.

Johnson & Johnson. (2016). Johnson & Johnson reports 2016 third-quarter results. Web.

Johnson & Johnson. (2017). Johnson & Johnson reports 2017 third-quarter results. Web.

Johnson & Johnson. (n.d.). About Johnson & Johnson. Web.

US Department of Commerce (n.d.). Bureau of Economic Analysis. Web.

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