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.

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 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.
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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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 Inequality in LA

Income distribution in Los Angeles:

where is our middle class

1. Middle class is defined as families earning 80%-120% of

national median family income of $60,000

2. In LA that is $50,000 - $70,000/year

3. Our distribution (having lost most heavy industry)

Lower class middle class upper class
40% 20% 40%
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 earth’s ecosystems
 The West is in demographic decline compared with
other peoples

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 Trends in World Development

Example of modern
data visualization
Hans Rosling at the TED Talks
 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-state’s 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  Competitor’s 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
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.
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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
earth’s 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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And the result of all this?

See the Power of Technology

 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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