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.
2-3
 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.

! Nine underlying historical forces have caused

changes in the business environment over the
years.

2-4
Nine Deep Historical Forces Changing
the Business Environment
! Industrial Revolution
! Inequality
! Population Growth
! Technology
! Globalization
! Nation-States
! Dominant Ideologies
! Great Leadership
! Chance
 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 exceeded all that
produced in recorded human history.
2-5
 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.
! In 2003, the index was 67%, 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.
2-6
 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.

2-7
World Poverty and Income
Inequality Since 1820

2-8
 Population Growth
! The basic population trend throughout human history is
upward.
! Accelerated growth after 1825 due to:
! Advances in water sanitation and medicine, which
reduced the number of deaths from infectious disease
! Mechanized farming, which 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.

2-9
 Technology
! Throughout history, new technologies and
devices have fueled commerce and
reshaped societies. For example:
! The printing press
! The steam engine
! The automobile
! The computer

2-10
 Technology

! New technologies:
! Foster the productivity gains that sustain
long-term economic progress
! Promote human welfare
! Can agitate societies
 Fear of Technology—The Luddites

! The Luddites were a social movement of British

textile workers in the early 19th Century who
protested—often by destroying textile
machines—against the changes produced by
the Industrial Revolution, which they felt
threatened their livelihood.
! The term Luddite is now often used to describe
anyone opposed to technological progress and
technological change.
! The Luddite movement, which began in 1811,
was named after a mythical leader, Ned Ludd.

Source: www.en.wikipedia.org
 Fear of Technology:
Folk Music and the Automation Theme
• Allan Sherman, an American
musician, parodist, and
satirist, had a song about
encroaching automation in the
workforce ("Automation" set
to the tune of "Fascination").
• In the 1960’s, other folk
musicians wrote and sang
songs about the encroachment
of machines on the way of life
in America.
 Modern Phobias
From The Phobia List (http://phobialist.com/):
Tapinophobia- Fear of being contagious.
Taurophobia- Fear of bulls.
Technophobia- Fear of technology.
Teleophobia- 1) Fear of definite plans. 2) Fear of
religious ceremony.
Telephonophobia- Fear of telephones.

Definition of Technophobia: Fear of or aversion

to technology, especially computers and high
technology. (American Heritage Dictionary)
 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.

2-11
 Nation-States
! A nation-state is an actor formed of three elements:
a ruling authority, citizens, and a territory with fixed
borders.
! They 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.

2-12
 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.
2-13
 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
! Examples of great leaders in government,
religion, business?

2-14
 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.

2-15
Seven Key Environments
of Business

2-16
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

2-17
 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.

2-18
 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.
2-19
 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

2-20
 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.

2-21
 The Natural Environment
! Economic activity is a geophysical force with power
to change the natural environment.
! Economic productivity in the 20th century:
! 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.
2-22
 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.

2-23
The Dynamic Interaction of Historical
Forces, Business Environments, and
Corporate Actions

2-24
 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.
2-25