McGraw-Hill/Irwin

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

Chapter 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.

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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

Wages

Commodity prices

Competitors actions

Interest rates

Technology change

Currency fluctuations

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

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
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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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The Dynamic Interaction of Historical

Forces, Business Environments, and
Corporate Actions

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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.
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