Automotive Benchmarking

Running head: MACROECONOMIC IMPACT ON BUSINESS OPERATIONS

Introduction

Understanding macroeconomics may help managers make better decisions within their organizations. This knowledge will help them to understand pricing, analyze their costs, and realize demand (University of Phoenix, 2006). "Organizations that care about how the strength of the economy might affect their ability to raise prices or how it might determine the price of goods and services they must buy will pay close attention to fiscal and monetary policy" (University of Phoenix, 2006, p.1). The following paper will discuss the tools used by the Federal Reserve to control the money supply. Because organizations should not only look at the economy as a whole but also take into consideration industry specific knowledge, it will then take a look at the automotive industry specifically and show what actions can be taken to maintain profitability as well as discuss best practices and how to apply them.

Tools used by the Federal Reserve

The Federal Reserve uses both fiscal and monetary policy in order to influence the economy. Both are aimed to achieve full employment, and encourage economic growth (McConnell and Brue, 2005). Fiscal policy also aims to control inflation while monetary policy looks to achieve price level stability.

Declines in aggregate demand can lead to a recession and high unemployment, the government can through fiscal policy use changes in government spending and tax collections to influence the economy (McConnell and Brue, 2005). Increases in government spending increase aggregate demand and equilibrium GDP as do decreases in taxes. In theory using fiscal policy could cure any recession. However there are problems with this model. First, timing can be off, it may take awhile for the change in the economy to be realized, then once realized it takes time to put this policies into place. Politics can also affect fiscal policy, a candidate may choose a tax cut in order to help his or her reputation thinking of themselves first rather than the economy (McConnell and Brue, 2005).

Monetary policy influences the interest rate which in turn influences spending. It uses three instruments to do so; open market operations, the reserve ratio, and the discount rate (McConnell and Brue, 2005). Monetary policy works through a complex model starting with the commercial bank reserves with the interest rate changes flowing through the system down to the individual. Using the discount rate, excess reserves are created, making it easier for banks to extend credit. Likewise, decreasing the reserve ratio creates more money to lend. When the government buys stocks on the open market more money is also available (McConnell and Brue, 2005). Monetary policy creates several ways for the government to influence interest rates and the availability of money. However, like fiscal policy can also be set back by time lags. Another factor that can have a negative impact on monetary policy, is the reluctance of firms to borrow.

Automotive companies must take these policies into consideration when looking at its strategy and how to better or maintain their position within the market.

Actions Taken to Maintain Profitability

The automobile industry in America is currently in a downturn that can be attributed to many different issues including, but not solely, competition. Between February 2005 and February 2006, non-farm payroll employment was up in 48 states, the only two states that experienced a decrease in employment were Louisiana and Michigan (stats.bls.gov, 2006). Louisiana's decrease can be attributed to Hurricane Katrina and Michigan's decrease to a downturn in the auto industry. With recent layoffs by General Motors, Ford and Delphi, Detroit's auto business is starting to show signs of despair.

One company that is excited about the new manufacturing processes Simon Boag, Vice President of Manufacturing and Assembly, has introduces is the Chrysler Group. "Other competitors have great quality but not great manufacturing prowess design, like GM and Toyota.

People ask, 'can anything stop Toyota?' but quality you can ultimately match, and costs you can match. Design, you can't. There's no reason why we can't match the manufacturing cost and quality of the best if we're focused on doing what needs to be done (Buss, 2005). We have to figure out how to share it - how to capture what's going on that is right and move it around to all the other plants, benchmarking and sharing stuff off the shelf (Buss, 2005). One thing many automakers have accomplished over the years is empowering the employees all the way down the chain.

Boag and Chrysler have been able to use ideas from their employees in order to

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