GlaxoSmithKline Company’s Economic Factors

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Introduction

This paper will critically examine the analysis of internal and external influences on contemporary businesses globally and with particular regard the GlaxoSmithKline Company based in the United Kingdom and has its headquarters in Brentford, London. This will entail a thorough analysis of GlaxoSmithKline Company in line with the ever increasing ambiguity and uncertainty that may come up due to effects of the ever changing business environment. (GlaxoSmithKline, 2010)

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Company Description

GlaxoSmithKline Company is reported to be the second largest listed producer of pharmaceutical products in the world after Pfizer; it’s based in the United Kingdom and has its headquarters in Brentford, London. It produces products such the medicines used in the treatment of asthma, malaria, diabetes among other health conditions. It also manufactures various vaccines such as those used in the treatment of various diseases such as hepatitis and tetanus. GSK Company is among the top market leaders in the Pharmaceuticals Industry. The Company is also reported to be employing over fifty five thousand employees and its annual revenue is estimated to be ₤9,762 million from each subsidiary. (GlaxoSmithKline, 2010)

Firm’s Organisation

The objectives of the company include the increase of its products in the market. The GSK Company also offers various consumer healthcare products such as health dentals, and the over the counter medicines. The other objective is to implant the main beliefs of corporate social responsibility in all the branches of the company, the vision of the company is to be the leader of the worldwide pharmaceutical industry. The company has Board of Directors who has played the role of ensuring that the company is directed to a success. (GlaxoSmithKline, 2010)

Product pricing

Research indicates that for the GlaxoSmithKline Company to achieve its success it should consider pricing as a very important tool in achieving the firm’s goals. Pricing form part of the marketing mix commonly referred to as the four Ps, others include product, place, and promotion. Pricing is simply defined as the physical practice of allocating prices to products in order to sell in a given market. The company therefore should be keen enough in order to come up with prices that will foster the performance of the business in terms of increasing sales thus achieving high productivity. (Salvatore, 2006)

Factors to Consider In Pricing

The GSK organisation should therefore carry out extensive research related to these pharmaceutical products and it should consider the following factors:

Utility

Utility is defined as the determinant of the comparative contentment from utilization of given commodities in the market this factor is said to be occurring as either increasing or reducing, it normally exists in two types of utilities, that is cardinal utility and ordinal utility. Economics define the cardinal utility as a benefit achieved from a product in the market, for example what consumers benefit from drugs sold by pharmaceuticals. They claim that this utility is used to make the comparison between the satisfactions achieved from a product among the consumers; it is normally measured in utils which are said to carry a fixed size. For example we may find that Jean gets 200 utils from a drug while Jane receives 100 utils from the same drug, here we find that Jean gets more utility than Jane. The ordinal utility is a theory which comes up with an argument that the utility of a product can not be measured by the use of scales, but by the use of bundles and baskets in this case the preferences of the consumers is determined through the comparison of their purchases of the goods. (Besanko, David, and Mark, 1996)

The Law of Diminishing Marginal Utility

Marginal utility is defined as the increase in benefits got from using an extra component of that product in relation to the price that the product is sold at. The law of diminishing marginal utility can be termed as the concept that marginal utilities are losing ground across the series related to process of decision making in an organization. (Salvatore, 2006)

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This law simply seeks clarification for diminishing marginal rates of substitution, laws of supply and demand, and the indispensable features of imperfect substitution in relation to commodities in the market. Economists argue that customers are enthusiastic to buy and sell depending on the extra benefits they will gain from the business transactions, for example customers will buy drugs depending on the benefits they will gain and with particular regard to the price of the product in mind

Determinants of Demand

There are many determinants of demand which normally apply the SWOT methodology the importance of SWOT analysis should be emphasized in order to get rid of unnecessary shortcomings that involve business transactions. Using the SWOT analysis technique, business environment examination is very crucial and can be divided in to two types of analysis; the external environment analysis and internal environment analysis. Under economics it may include tastes and preferences of consumers, their income, price of related products, and their expectations as discussed in the table below.

Table 1: showing determinants of demand

Determinants of Demand
Determinant How Event Affected Determinant Effect on Demand
Consumer’s tastes People has shifted from using herbs to prescribed drugs Increase in demand for drugs
The number of consumers in the market This have forced pharmaceuticals to produce more prescribed drugs Increase in demand of prescribed drugs
Consumers’ income Forces the pharmaceuticals to tailor the prices to fit level of consumers income Rise in income leads to increase in demand and vice versa
Prices of related goods Increase in price of related goods Decrease in demand
Consumer’s Expectations of Future Prices and Incomes Rate of inflation subjected to pharmaceuticals If inflation goes up demand will decrease while if inflation is stable demand increases

Substitutes and Complements

In every sector of the economy, products have substitutes and complements and prescribed drugs are not exceptional to this rule. Research indicate that substitutes are products that can serve the same purpose with the original product being sold in the market, for example, prescribed drugs from the GSK company sold at pharmaceuticals may have substitutes that include herbs sold by traditionalists or those who do not believe in the prescribed drugs. (Besanko, David, and Mark, 1996) Research indicates that herbs have become common globally recognized because they are considered to be cheap and effective when compared to the prescribed drugs. And complements are product that can be used together with other products. For example certain foods e.g. fruits and vegetables are recommended when someone is using prescribed drugs. Over time the price of these foods have gone up and this has been affecting the demand of the prescribed drugs especially if the customer cannot afford to buy to purchase the recommended food products that go along with these drugs. (GlaxoSmithKline, 2010)

Cost analysis

Cost analysis is significant to the running of any business including the GSK Company and its managers have to ensure that products are produced using the minimal costs in order to attract high profits in the market place. In business terms, a cost is always defined as the worth of wealth used in producing services or products this means that the cost associated with is that of producing pharmaceutical prescribed drugs produced by the Company. A cost may include; accounting costs which correspond to the sum of money indicated by the business in its processes of record keeping. In this case we find that the GSK Company has to record there transactions on invoices and record them well in order to avoid future conflicts. (Salvatore, 2006) Another cost is the opportunity cost which refers to the worth of the most excellent option not selected so that a business can utilize the present venture. It is normally referred to as economic cost, for example GSK Company may choose not to produce and sell other products and instead concentrate on some which can only profit the business.

Private costing also needs to be considered by the pharmaceuticals and this represents the costs the customer part with in order to purchase the prescribed drugs. The other type of costing is the external cost which is clearly regarded as the opposite of the private cost because these costs are met by other persons as an outcome of the business dealings involved in the sale of drugs for example pollution menace as a result of manufacturing process of these drugs which affects the society at large. (Salvatore, 2006)

Another type of costing needed to be considered by the management of the GSK Company is that of social costs which many economists belief that it is the total addition of both private costs and external costs. A good example here is that of entire manufacturing process of drugs by the GSK Company, whereby the costs of producing the drugs that is costs of all materials needed to manufacture them are considered to be private costs while that of pollution as a result of manufacturing process are considered to be external cost. (Besanko, David, and Mark, 1996) A cost benefit analysis should be carried out by the GSK Company management in order to predict the success of the business that is the success of the prescribed drugs in the market.

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The Law of Diminishing Returns

The law of diminishing returns states that as the input cost of any production increases its output decreases, this law only applies in any production using the fixed and variable inputs for example as the GSK pharmaceutical plant uses more money and labor in the production of medical products such as drugs and in return we find that the drugs produced are of a poor or lower quality far from what was excepted thus lowering the output of the production (Besanko, David, and Mark, 1996). The diminishing marginal returns law confirms that an organizational short term marginal curve will ultimately rise in order for the firm such as the GSK Company to increase its output i.e. in terms of sale, they should minimize there cost of production that is they should look for ways to source for cheap materials used in manufacture, pay fair and not high wages to there employees among others, this implies that they will be able to produce more of the products thus supply will increase and may have the capacity to meet the demands of the customers.

Determinants of Supply

There are many determinants of supply which include resource prices, technology and prices of other goods, taxes and subsidies, number of sellers and price expectations. As discussed in the table below:

Table 2: indicating determinants of demand in the GSK Company

Determinants of Supply
Determinant How Event Affected Determinant Effect on Supply
Resource Prices Unavailability of raw materials Reduce supply
Technology Prices of Other Goods quality and prices of competitors drugs that is if of high standard with low or reasonable price Increase in supply because people will buy more of the drugs
Taxes and Subsidies If taxes and subsidies are high or low in the market because cost will increase or decrease. If high result is low supply while low means higher supply
Prices of Other Goods Availability of substitutes and complements With substitutes supply will decrease and with complements supply will increase
Price Expectations If anticipated price is high or low If high supply goes up if low supply goes down
The Number of Sellers Increase or decrease in number of sellers in the market Increase mean high supply; decrease implies low supply

Market analysis

GSK Company has been facing stiff competition from its main rivals like the Pfizer Company, which has seen the company drop some of its markets in order to concentrate on some other markets which the company does not encounter stiff competition. GSK is faced with several political hindrances that include pressures from governments to meet certain regulations in its course of business and this also comes in hand in hand with the legal issues such as expiring of the acquired patents as well as other regulatory matters have proved to be the hindrance to GSK’s business operations in different locations. For instance GSK in various target markets like Africa has been facing constant pressures from respective health providers to provide quality products at cheaper prices thus making its business operations more risky as well as less profitable. GSK is further faced with the issue of producing medicines that assist immensely in healing and curing modern diseases. It is for this reason that GSK Company has been aiming to provide quality products that in essence reflects on the desired values by the respective healthcare providers in certain locations. (Bardsen and Jansen, 2005)

Overall Competitive Strategy

to beat its competitors the GSK Company should consider the prices of the same products offered by its competitors and also the business should be keen not to charge high prices because it might lead to realizing low sales and at the same time not to charge too low because these may affect its level of profitability and thus continuity of the business in the long-run. (GlaxoSmithKline, 2010)

Another key factor to be considered by the GSK Company before pricing these drugs is that of the pricing aims, for example the business may engage itself in pricing competition with other producers of the products and in an attempt to achieve desired profit levels it decides to set suitable prices to the business and may not be favorable to its competitors e.g. selling the pharmaceuticals prescribed drugs at relatively low prices as compared to other producers of these drugs. (Bardsen and Jansen, 2005)

Risk management

Risk management is all about the processes or procedures that are used by an organization in managing the risks therein. These risks are mostly in relation to the objectives of the organization including the GSK Company. In risk management there is identification of the risks that are likely to hinder or negatively impacting achievement of organizational objectives. In risk management the firm has to evaluate the magnitude of risks involved in business. The responses of strategies used are clearly determined.

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Management in GSK has to put in place distinct processes that will help in setting of organizational objectives. Objective setting by the GSK management can be done in the following ways.

  • Strategic-This is whereby the management in GSK sets goals that are high level in nature and those that support its mission as a company.
  • Operations-The objectives set have to be very effective such that the resources in the Company are efficiently used.
  • Reportin: there has to be reliability in reporting the objectives to the entire organization.
  • Compliance-When the management in the GSK Company puts in place objectives, they should comply with regulations and laws therein.

Risk management is very important in any organization it enhances effectiveness and efficiency in dealing with the risks. These risks normally exist both internally and externally.

Capital structure and Budgeting

Planning assumptions

The company has to make assumptions that will foster attainment of goals. The planning of activities has been outlined in a way that employees get satisfied with their allocated tasks and thus led to attainment of the firm financial goals.

Forecast sales and costs

The use of times series method of forecasting by the company is adopted and the company it has the ability to forecast the sales and costs for future years with certainty.

Forecast profitability

The use of break-even analysis is always utilized in order to forecasts profitability of the company. The company’s revenue is fully outlined and the expected costs ascertained.

Sensitivity analysis

The company’s sensitivity analysis is considered to be fair and that is the reason why the GSK Company has grown and performed well in the Pharmaceutical industry. The methods of sales and forecasting have been argued to be the best and thus evaluation and monitoring of company’s activities have been made easy in the process.

Promotional Budget for GSK Company

Type of Promotion By When Cost (US Dollars)
Additional of features to the GSK’s website April 2010 2,800.00
Training facilities and expenses of promotional team to market GSK products in other cities April/May 2010 800.00
Traveling and Accommodation for two weeks for marketing team April/May 2010 10,500.00
Stand registration fee April 2010 1,850.00
Miscellaneous Expense April 2010 1,000.00
Total 16,950.00

Monthly Budget

Monthly Planning Budget for GSK Company April 2010 to March 2011 (USD)
April
2010
May
2010
June
2010
July
2010
Aug 2010 Sept 2010 Oct 2010 Nov 2010 Dec 2010 Jan 2011 Feb
2011
March 2011
Revenues
Proceeds from Sales 0 3000 3500 4000 4500 5000 5500 6,000 6,500 7000 7500 8000
Costs
Wages and Salaries 1,400 1,400 1,400 1,400 1,400 1,400 1,400 1,500 1,400 1,400 1,600 1,600
Advertising Costs 500 500 500 600 400 300 500 400 300 300 300 300
Fixed costs 800 800 800 800 800 800 800 800 800 800 800 800
Other Expenses (Utilities e.t.c) 50 50 50 80 50 80 80 50 80 50 50 50
Earnings Before Tax (2750) 250 750 1120 1850 2420 2720 3250 3920 4450 4750 5250
Corporate tax (30%) 0 75 225 336 555 726 816 975 1176 1335 1425 1575
Earnings After tax (2750) 175 525 784 565 1694 1904 2275 2744 3115 3325 3675

Conclusion

From this study, we can therefore conclude that before allocating prices to products the GSK Company should critically examine the marketing environment that they are involved in. The management should also know that a good price should also reflect the entire process of marketing mix that is it should cover all the costs related to product, place, and promotion. The estimation of costs to be used in the entire business ranging from initial costs to market costs should be carefully evaluated by the management in order to avoid losses in the future transactions of the business. Strategic planning should be done in order to avoid harmful effects to the running of the business for example underestimation of costs which will lead to overrun costs. The use of cost benefit analysis should be utilized in order to minimize such risks. (Salvatore, 2006)

References

Bardsen G and Jansen E 2005; the Econometrics of Macroeconomic Modeling; Oxford University Press Pp 56-98

Besanko D, David D. and Mark, S. 1996. Economics of Strategy, New York; John Wiley and Sons Pp 54-78

GlaxoSmithKline, 2010; About GSK, Company Overview: Web.

GlaxoSmithKline, 2009; Grow a diversified, global business. Web.

Salvatore D. 2006 6th Edition, Managerial Economics in a Global Economy USA Oxford University Press.

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