The Dynamic EnvironmentThis 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

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

Royal Dutch Shell PLCOpening 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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Example of moderndata visualization

Hans Rosling at the TED Talks

Trends in World Development

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

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

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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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