Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2 - 2 The Dynamic Environment This chapter:  Identifies deep historical forces that create change and risk in the business environment.  Discusses key dimensions of the business environment, describing major trends and challenges. Chapter 2

2 - 3 Royal Dutch Shell PLC Opening Case  The world’s second-largest private energy company.  Has annual capital investments of between $15-19B, many of which have a very long-term perspective.  In the 1970’s pioneered a method of analyzing its environment using scenarios to challenge managers to think in original ways.  Success: prepared for the 1973 OPEC oil embargo.  Current scenarios include issues of trust and security:  Low trust globalization  Open doors  “Flags” The story of Shell illustrates how a company can find a unifying strategic direction and make better planning decisions in a turbulent world.

2 - 4 Underlying Historical Forces Changing the Business Environment  Historical force: Anything that does, or helps to do, work, where work is the power to cause events.  Order exists in current events that is driven by a deep logic in the passing of history.  This order portends roughly predictable ways in which the business climate changes.  Nine forces comprise this historical force: The Industrial Revolution, inequality, population growth, technology, globalization, nation-states, dominant ideologies, great leadership, and chance.

2 - 5 The Industrial Revolution  Requirements for industrial growth:  Sufficiency of capital, labor, natural resources and fuels  Transportation  Strong markets  Ideas and institutions to effectively combine all of these requirements  Industrial growth remakes societies in positive ways, but also generates strains in the social fabric.  The total amount of goods and services produced in the twentieth century exceeds all that produced in recorded human history.

2 - 6 Inequality  The basic political conflict in every nation, and often between nations, is the antagonism between rich and poor.  The industrial revolution accelerated the accumulation of wealth and widened the persistent problem of its uneven distribution.  Global income inequality is measured by the Gini index.  67% in 2003, an extreme level of inequality, caused by the diverging economic fortune of nations.  Top 5% receive 33% of all income; bottom 5% receive 0.2%of all income.

2 - 7 Inequality (continued)  Economic growth does not itself increase income inequity within modernizing nations.  Today about 2.5 billion people (40% of the world population) live in poverty (< $2.00 a day income).  In % of the world population lived in poverty.  If world distribution of income had not become more unequal after 1820, economic growth would have reduced the number of people living in poverty today by 80%.  If capitalism is harnessed to create economic growth, the poor will benefit.

2 - 8 World Poverty and Income Inequality Since 1820

2 - 9 Population Growth  The basic population trend throughout human history is upward.  Accelerated growth after 1825 due to:  Advances in water sanitation and medicine, reduced the number of deaths from infectious disease  Mechanized farming, expanded the food supply  Rapid growth now declining due to declining fertility.  Implications of current population trends:  The wealth gap between high- and low-income countries will widen  Growth will continue to strain the earth’s ecosystems  The West is in demographic decline compared with other peoples

Technology  Throughout history new technologies and devices have fueled commerce and reshaped societies.  Printing press  Steam engine  New technologies:  Foster the productivity gains that sustain long-term economic progress  Promote human welfare  Can agitate societies

Globalization  In the economic realm, globalization refers to the development of an increasingly integrated system based on free markets in which nations are open to foreign trade and investment.  Consequences of globalization:  Increased economic activity  Changed cultures  Globalization has been accelerated by new technologies, and sometimes slowed by national rivalries and wars.  Transnational corporations are the central forces of current economic globalization.

Nation-States  A nation-state is an actor formed of three elements: a ruling authority, citizens, and a territory with fixed borders.  Arose out of the wreckage of the Roman Empire  In the past, nations increased their power by seizing territory from other nations  Today, nations use trade to increase their power.  Trade through world markets is a new source of power, but it also limits the ability of regimes to control their economies  Other forces such as epidemics, climate change, terrorism and international norms also limit a nation-state’s autonomy

Dominant Ideologies  An ideology is a set of reinforcing beliefs and values that constructs a world view.  The industrial revolution was facilitated by several ideologies:  Capitalism  Constitutional democracy – protection of individuals’ rights  Progress – the idea that humanity was in upward motion toward material betterment  Darwinism – constant improvement characterized the biological world.  Social Darwinism – evolutionary competition in human society weeds out the unfit and advances humanity.  Protestant ethic – hard work, saving, thrift and honesty lead to salvation.  Many doctrines have perished as a result of globalization.  The capitalism ideology accelerated in the 20 th century due to rising literacy and innovations that spread information.

Great Leadership  Leaders have brought both beneficial and disastrous changes to societies and businesses.  Two views of historic leaders:  Leaders simply ride the wave of history  Leaders themselves change history

Chance  Some changes in the business environment may be best explained as the product of unknown and unpredictable causes.  Machiavelli observed that fortune determines about half the course of human events and human beings the other half.

Seven Key Environments of Business

The Economic Environment  Overall economic activity  Wages  Commodity prices  Competitor’s actions  Interest rates  Technology change  Currency fluctuations  Government policies  The economic environment consists of forces that influence market operations, including:  Two basic subtrends underlying economic growth:  Rising trade  Major expansion of foreign direct investment by transnational corporations

The Technological Environment  New technologies create both threats and opportunities.  Technologies such as nanotechnology, open sourcing, and collaborative computing will have a significant impact on business.  New technologies have unforeseen consequences for society when they are put into widespread use for commercial gain.  Businesses must carefully weigh not only the strategic impact of technologies on their business models, but also the dangers they may impose on people.

The Cultural Environment  Culture – a system of shared knowledge, values, norms, customs, and rituals acquired by social learning.  The environment of a transnational corporation includes a variety of cultures.  This variation causes conflicts of business customs.  There is a fundamental divide between the culture of Western economic development and the rest of the world’s cultural groupings.  The rise of postmodern values has uniformly shifted the social, political, economic, and sexual norms of wealthy countries.  Postmodern norms are a strong influence in the operating environments of multinational corporations.

The Government Environment  There are currently two long-term global trends in the government environment of major importance to business:  Government activity has greatly expanded  Larger social welfare roles  Expanded regulation of domestic industries  More governments are becoming open and democratic  Governments increasingly respond to public demands for corporate social performance  These demands reflect postmodern vales promoting human rights, the environment, aesthetics, and ethics

The Legal Environment  The legal environment consists of legislation, regulation, and litigation.  Five enduring trends:  Laws and regulations have steadily grown in number and complexity  Corporations have expanding duties to protect rights of stakeholders  Globalization has increased the complexity of the legal environment and expanded the application of voluntary codes of conduct  Ethical behavior and corporate social responsibility often become codified in laws  The law is constantly evolving

The Natural Environment  Economic activity is a geophysical force with power to change the natural environment.  Economic productivity in the 20 th century has:  Depleted mineral resources  Reduced forest cover  Killed species  Released molecules not found in nature  Unbalanced the nitrogen cycle  Possibly triggered climate change  The human ecological footprint moved beyond the earth’s carrying capacity in the 1980s and is now unsustainable  Managers must adapt to changed thinking, toward preservation of nature.

The Internal Environment  In a corporation, the internal environment consists of four groups: employees, managers, the board of directors, and owners  Each of these groups has different objective, beliefs, needs, and functions that must be coordinated  Forces in external environments have recently reduced the power of these internal groups.

The Dynamic Interaction of Historical Forces, Business Environments, and Corporate Actions

Concluding Observations  The environments of business have profound implications for managers.  The deep historical forces act to shape the seven key environments.  The actions of business constantly influence not only current environments but, in addition, the deeper course of history.  Although strongly constrained by its environment, business has a powerful capacity to shape society and change history in ways large and small.