Chapter 2

The Dynamic Environment

This chapter: This chapter is linked to CLO No. 1: Identify management challenges from a BusinessGovernment-Society perspective in the UAE context.

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.

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Royal Dutch Shell PLC Opening Case

The worlds second-largest private energy company. Has annual capital investments of between $15-19B, many of which have a very long-term perspective. In the 1970s 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.
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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.

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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.
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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.
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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 1820 94% 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.
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World Poverty and Income Inequality Since 1820

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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 earths ecosystems The West is in demographic decline compared with other peoples
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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
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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.
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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-states autonomy.

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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 20th century due to rising literacy and innovations that spread information.
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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

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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.

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Seven Key Environments of Business

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The Economic Environment

The economic environment consists of forces that influence market operations, including:
Overall economic activity
Commodity prices Interest rates Currency fluctuations

Wages
Competitors actions Technology change Government policies

Two basic subtrends underlying economic growth: Rising trade Major expansion of foreign direct investment by transnational corporations
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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.

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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 worlds 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.
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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 to protect citizens from abuse

More governments are becoming open

Governments increasingly respond to public demands for corporate social performance These demands reflect postmodern vales promoting human rights, the environment, aesthetics, and ethics

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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.

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The Natural Environment

Economic activity is a geophysical force with power to change the natural environment. Economic productivity in the 20th 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 earths carrying capacity in the 1980s and is now unsustainable. Managers must adapt to changed thinking, toward preservation of nature.
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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.
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