2-1

II
The
Environment of Management
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-2

1-Managing Ethic and Diversity

1.1 Social Responsibility and Ethics
Stakeholders: people or groups that have an interest in the organization.
Stakeholders include employees, customers, shareholders, suppliers, and others. Stakeholders often want different outcomes and managers must work to satisfy as many as possible.

Ethics: Moral principles or beliefs about

what is right and wrong.
-Ethics guide people in dealings with stakeholders and others, to determine appropriate actions. -Managers often must choose between the conflicting interest of stakeholders.
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

Stakeholder
Any

2-3 2-3

group inside or outside the organization that can affect or be affected by the organization's activities.
Creditors Customers Local government Local community

State/federal government Foreign government

Suppliers

The Organization

Employees

Colleges and universities

Interest groups

Courts

Figure 2.1
Irwin/McGraw-Hill

Owners/ investors

Trade associations

The McGraw-Hill Companies, Inc., 2000

1-Managing Ethic and Diversity

Ethical Decisions
A key ethical issue is how to disperse harm and benefits among stakeholders. Some other issues managers must consider.

2-4

-Should you hold payment to suppliers as long as possible to benefit your firm?
This will harm your supplier who is a stakeholder.

-Should you pay severance pay to laid off workers?

This may decrease the stockholder's return.

-Should you buy goods from overseas firms that hire children?
If you dont the children might not earn enough money to eat.

2-4
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

1-Managing Ethic and Diversity

Why Behave Ethically and Unethically?
Managers should behave ethically to avoid harming others.

2-5

Managers are responsible for protecting and nurturing resources in their charge. An important safeguard against unethical behavior is the potential for loss of reputation.

Unethical managers run the risk for loss of reputation.

managers put their personal interest above the interest of other organizational stakeholders or choose to ignore the harm that they are inflicting on other.
This is a valuable asset to any manager! Reputation is critical to long term management success. All stakeholders are judged by reputation.
Irwin/McGraw-Hill

2-5

The McGraw-Hill Companies, Inc., 2000

Sources of an Organizations Code of Ethic

Figure 2.2

2-6

Societal Ethics:
The values and standards embodies In a societys law, customs, practice And norm, and values

Organizations Code of Ethics

Professional Ethics:
The Values and standard that groups of Managers and workers use to decide how to behave appropriately

Individual Ethics:
Personal values and standard that result from the influence of family, peers, upbringing, and Involvement in significant Social institution
The McGraw-Hill Companies, Inc., 2000

Irwin/McGraw-Hill

1-Managing Ethic and Diversity

Ethical Origins
Societal Ethics: standards that members of society use when dealing with each other.
Based

2-7

on values and standards found in societys legal rules, norm, and mores. Codified in the form of law and society customs. Norms dictate how people should behave.
Strong beliefs in one country may differ elsewhere. Example: bribes are an accepted business practice in some countries.

Societal ethics vary based on a given society.

All stakeholders are judged by reputation.
2-7
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

1-Managing Ethic and Diversity

Ethical Origins Professional ethics: values and standards used by
groups of managers in the workplace.
Applied when decisions are not clear-cut ethically. Example: physicians and lawyers have professional associations that enforce these.

2-8

Individual ethics: values of an individual resulting

from their family& upbringing.
If behavior is not illegal, people will often disagree on if it is ethical. Example: Ethics of top managers set the tone for firms.

2-8
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

1-Managing Ethic and Diversity

Social Responsibility

2-9

What Is Social Responsibility? A firms practices with other parties such as customers, competitors, the government, employees, supplier, and creditors. the managers duty to nurture, protect and enhance the welfare of stakeholders. There are many ways managers respond to this duty: Obstructionist response: managers choose not to be socially responsible.

Managers behave illegally and unethically. They hide and cover-up problems.

2-9
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

1-Managing Ethic and Diversity

Social Responsibility

2-10

Defensive response: managers stay within the law but make no attempt to exercise additional social responsibility. Accommodative response: managers realize the need for social responsibility. Proactive response: managers actively embrace social responsibility.
oGo oTry oPut shareholder interest above all other stakeholders. oManagers say society should make laws if change is needed.

to balance the interests of all stakeholders.

out of their way to learn about and help stakeholders. 2-10

The McGraw-Hill Companies, Inc., 2000

Irwin/McGraw-Hill

2-11

Figure 2.3

Levels of Responsibility

Obstruction response

Defensive response

Accommodative response

Proactive response

Low

Social responsibility

High

2-11
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-12

Managerial Ethics
Employees

Conflicts of interest Secrecy and confidentiality Honesty

Organization
Hiring and firing Wages and working conditions Privacy and respect

Three basic areas of concern for managerial ethics are the relationships of the firm to the employee, the employee to the firm, and the firm to other economic agents.

Subject to ethical ambiguities Advertising and promotions Ordering and purchasing Bargaining and negotiation Financial disclosure Shipping and solicitation Other business relationships

Economic Agents Customers Competitors Stockholders Suppliers Dealers Unions

Copyright by Houghton Mifflin Company. All rights reserved.

Irwin/McGraw-Hill

Figure 2.4
The McGraw-Hill Companies, Inc., 2000

1-Managing Ethic and Diversity

Why be Responsible?

2-13

Managers accrue benefits by being responsible. Whistleblowers: a person reporting illegal or unethical acts.
Whistleblowers now protected by law in most cases. Social audit: managers specifically take ethics

Workers and society benefit. Quality of life in society will improve. It is the right thing to do.

and business into account when making decisions.

2-13
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-14

Arguments For and Against Social Responsibility

Arguments For Social Responsibility
1. Business creates problems and should therefore help solve them.

Arguments Against Social Responsibility

1. Business lacks the expertise to manage social programs.

2. Corporations are citizens in our society.

2. Involvement in social programs gives business too much power.

Social Responsibility
3. Business often has the resources necessary to solve problems. 3. There is potential for conflicts of interest.

4. Business is a partner in our

society, along with the government and the general population.

4. The purpose of business in U.S.

society is to generate profit for owners.

Copyright by Houghton Mifflin Company. All rights reserved.

Irwin/McGraw-Hill

Figure 2.5
The McGraw-Hill Companies, Inc., 2000

1-Managing Ethic and Diversity

Managing Diverse Workforces

2-15

1.2 The Increasing Diversity of the Workforce

The workforce has become much more diverse during the last 30 years.

Diversity refers to differences among people such as age, gender, race, religion. Diversity is an ethical and social responsibility issue.

Manager need to give all workers equal opportunities Not following this is against the law and unethical. When all have equal opportunity, the organization benefits.
2-15
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-16

Types of Diversity
Capabilities Disabilities Age

Socioeconomic background

Gender

Sexual orientation Religion Ethnicity

Race

Figure 2.6
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-17

How to Manage Diversity

Increase

diversity awareness: managers need to become aware of their own bias. Understand cultural differences and their impact on working styles. Practice effective communication with diverse groups. Be sure top management is committed to diversity.

2-17
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-18

Age Distributions
By 2025, more than one-third of the population will be over age 50:
40
Under 15 15 to 24 25 to 34 35 to 49 50 to 64 65 or older 1999 2025 13.9% 13.1% 21.4% 20.1%

The median age will climb to 38:

39

38

38
14%

12.9%

37
23.5% 18.2%

35.5

36
14.6% 17.2%

35
12.7% 18.5%

0 1999 2005 2010 2015 2020 2025

Copyright by Houghton Mifflin Company. All rights reserved.

Irwin/McGraw-Hill

Figure 2.7
The McGraw-Hill Companies, Inc., 2000

2-19

Ethnicity Distribution Trends in the U.S.

Figure 2.9
By 2025, Hispanics will be the largest minority group in the United States. The share of the population of each group now and projected in 2025
1999 2025

72%

62.4%

28%

37.6%

Racial or ethnic breakdown Hispanics 11.5% Blacks 12.1% Asians 3.7% Native Americans 0.7% W h ite

Racial or ethnic breakdown Hispanics 17.6% Blacks 13% Asians 6.2% Native Americans 0.8%

O th e r ra c ia l o r e th n ic g ro u p
Irwin/McGraw-Hill

Copyright by Houghton Mifflin Company. All rights reserved. The McGraw-Hill Companies, Inc., 2000

2-20

Figure 2.10

How Diversity and Multiculturalism Promote Competitive Advantage

Resource acquisition argument Cost argument

Creativity argument

Competitive Advantage

Marketing argument

Systems flexibility argument

Problemsolving argument

Copyright by Houghton Mifflin Company. All rights reserved.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

2-Managing in a Global Environment

2.1 What is the Organizational Environment ?

2-21

Organizational Environment: those forces outside its boundaries that can impact it.
set of forces and conditions that operate beyond an organizations boundaries but affect a managers ability to acquire and utilize resources. Environment consists of all forces with the potential to influence the organization and its performance. The environment can help or hurt managements efforts to attain the goals.
Irwin/McGraw-Hill

2-21

The McGraw-Hill Companies, Inc., 2000

2-22

How Organizations Respond to Their Environments

General Environment Task Environment Information management

Social responsibility

Mergers, takeovers, acquisitions, alliances

The Organization
Strategic response Direct influence

Organization design and flexibility

Copyright by Houghton Mifflin Company. All rights reserved.

Irwin/McGraw-Hill

Figure 2.11
The McGraw-Hill Companies, Inc., 2000

2-Managing in a Global Environment

How Environment Influences the Organization
Environmental Uncertainty
-Environmental Change, -Environmental Complexity

2-23

Environmental Interaction
-Environmental Munificence, -Resource Dependence

How Managers Respond?

Boundary Spanning Adaptation to the Environment : Organization Structure,
Buffering, Forecasting, Smoothing and Rationing Influence on the Environment : Political and Legal Activities, Joint Ventures, Advertising and Public Relations, Domain Shifts. 2-23
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2.2 Forces in the Organizational Environment

General Environment
Technological Task Forces Environment
Suppliers

2-24

Sociocultural Forces

Global Forces

Firm

Customers

Economic Forces

Distributors Competitors Political & Legal Forces Demographic Forces

Figure 2.12
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-25

2-Managing in a Global Environment

Internal Environment: The factors within an
enterprise (such as Board of Directors, and employees, structure, Organizational Culture, Owners & Shareholders, policies, and reward) that influence how work is done and how goals are accomplished.
- Culture (a system of behavior, rituals, and share meaning held by employees that distinguishes the group of organization from other similar units. 2-25
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-26

2-Managing in a Global Environment

External Environment: a wide variety of forces and institutions outside the organization that may affect its performance

Partners, Customers, Competitors, Suppliers, Labour Supply, and Regulators Forces Politic legal, Economic, Technological, Sociocultural, and International General Environment Task Environment

2-26
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-27

2-Managing in a Global Environment

The Task Environment:
The set of forces and condition that originate with supplies, distributors, customers, and competitors and affect an organizations ability to obtain inputs and dispose of its outputs because they influence manager on a daily basis.

2-27
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-28

2-Managing in a Global Environment

The Task Environment
-Suppliers: individuals and organizations that provide material and equipment that it needs to produce goods and services.
Managers need to Suppliers provide

secure reliable input sources. raw materials, components, and even

labor.
-Working with suppliers can be hard due to shortages, unions, and lack of substitutes. -Suppliers with scarce items can raise the price and are in a good bargaining position.
Managers

often prefer to have many, similar suppliers of

2-28
The McGraw-Hill Companies, Inc., 2000

each item.
Irwin/McGraw-Hill

2-29

2-Managing in a Global Environment

The Task Environment
-Distributors: organization that help others
organizations sell their goods and services to customers.
Compaq Computer first used special computer stores to sell their computers but later sold through discount stores to reduce costs. Some distributors like Wal-Mart have strong bargaining power.

They can threaten not to carry your product.

-Customers: individuals and groups that buy the goods and services that an organization products.
Usually,

there are several groups of customers. For Compaq, there are business, home, & government buyers.
2-29
The McGraw-Hill Companies, Inc., 2000

Irwin/McGraw-Hill

2-30

2-Managing in a Global Environment

The Task Environment
-Competitor: organization that produce goods and services that are similar to a particular organization goods and services
Rivalry between competitors is usually the most serious force facing managers. High levels of rivalry often means lower prices.

Profits become hard to find.

Barriers to entry keep new competitors out and result from:

Economies of scale: cost advantages due to large scale production. Brand loyalty: customers prefer a given product. 2-30
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-31

Industry Life Cycle

Reflects

the changes that take place in an industry over time. Birth stage: firms seek to develop a winning technology.

VHS vs. Betamax in video, or 8-track vs. cassette in audio.

Growth

stage: Product gains customer acceptance and grows rapidly.

New firms enter industry, production improves, distributors emerge.
The McGraw-Hill Companies, Inc., 2000

Irwin/McGraw-Hill

2-32

Shakeout

stage: at end of growth, there is a slowing customer demand.

Competitor rivalry increases, prices fall. Least efficient firms fail and leave industry.

Maturity

stage: most customers have bought the product, growth is slow.

Relationships between suppliers, distributors more stable. Usually, industry dominated by a few, large firms.

Decline

stage: falling demand for the product.

Prices fall, weaker firms leave the industry.
The McGraw-Hill Companies, Inc., 2000

Irwin/McGraw-Hill

2-33

The Industry Life Cycle

Figure 2.13

Birth

Growth Shakeout Maturity Decline

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

2-34

2-Managing in a Global Environment

General Environment : includes the broad
conditions that may affect organizations. -Forces have profound impact on the firm. -Managers usually cannot impact or control these.

Economic forces: affect the national economy and the organization.

-When there is a strong economy, people have more money to spend on goods and services. -Includes interest rate changes, unemployment rates, economic growth, inflation, and other factors that affect the general health and well being of a nation or world region
2-34
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-35

2-Managing in a Global Environment

Technological forces: outcomes of changes in the
technology that manager use to design, produce or distribute goods and services.
Result in new opportunities or threats to managers. Often make products obsolete very quickly. Can change how we manage.

Political and Legal forces: result from changes in

law and regulations, such as the deregulations of industries, the privatization of organizations, and increase emphasis on environmental protection.
These are often seen in the laws of a society. Today, there is increasing deregulation of many state-run firms. 2-35
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-36

2-Managing in a Global Environment

Social cultural forces: result from changes in the
social or national culture of society.
Social structure refers to the relationships between people and groups in a society. Different societies have vastly different social structures. National culture includes the values that characterize a society. Values and norms differ widely throughout the world. These forces differ between cultures and over time.

Global

forces: result from changes in international

relationships between countries.

Perhaps the most important is the increase in economic integration of countries. Free-trade agreements (GATT, NAFTA, EU) decreases former barriers to trade. Provide new opportunities and threats to managers. 2-36
The McGraw-Hill Companies, Inc., 2000

Irwin/McGraw-Hill

2-37

2-Managing in a Global Environment

Demographic forces: result from changes in the
nature, composition and diversity of a population. These include gender, age, ethnic origin, social class...

For example, during the past 20 years, women have entered the workforce in increasing numbers.

Currently, most industrial countries are aging. This will change the opportunities for firms competing in these areas. New demand for health care, assisting living can be forecast.
The McGraw-Hill Companies, Inc., 2000

Irwin/McGraw-Hill

2-38

2-Managing in a Global Environment

Managing the Organization Environment
Managers must measure the complexity of the environment and rate of environmental change. Environmental complexity: deals with the number and possible impact of different forces in the environment.
-Managers must pay more attention to forces with larger impact. -Usually, the larger the organization, the greater the number of forces managers must oversee.

The more forces, the more complex the mangers job becomes.
2-38
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-39

2-Managing in a Global Environment

Managing the Organization Environment
Environmental change: refers to the degree to which forms in the task and general environments change over time.
-Change rates are hard to predict. -The outcomes of changes are even harder to identify.

Managers thus cannot be sure that actions taken today will be appropriate in the future given new changes.
2-39
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-40

2-Managing in a Global Environment

Reducing Environmental Impact
Managers can counter environmental threats by reducing the number of forces.
Many firms have sought to reduce the number of suppliers it deals with which reduces uncertainty.

All levels of managers should work to minimize the potential impact of environmental forces.
Examples include reduction of waste by first line managers, determining competitors moves by middle managers, or the creation of a new strategy by top managers.

2-40
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-41

2-Managing in a Global Environment

2.3 The Organizations Culture
Organizational culture is a collection of values,
norms, & behavior shared by workers that control the way workers interact with each other.

How Employees Learn Culture

Stories - a narrative of significant events or people Rituals - repetitive sequences of activities Material symbols essential in creating an organizations personality. Language - identifies members of a culture - organizations develop unique terminology or jargon
2-41
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-42

2-Managing in a Global Environment

Organizational Culture

Ceremonies and Rites: formal events that focus on important incidents.

Rite of passage: how workers enter firm & advance. Rite of integration: build common bonds with office parties, celebrations. Rites of enhancement: enhance worker commitment to values. Promotions, awards dinners.

Stories and Language: Organizations repeat stories of founders or events.

Show workers how to act and what to avoid. Stories often have a hero that workers can mimic. Most firms also have their own jargon that only workers understand. 2-42
The McGraw-Hill Companies, Inc., 2000

Irwin/McGraw-Hill

2-43

2-Managing in a Global Environment

Values and Norms: Creating a strong Organization culture Organizational values and norms inform workers
about what goals they should peruse and how they should behave to reach these goals.

-Values: Ideas about what a society believes to be

good, desirable and beautiful. -Provides conceptual support for democracy, truth, appropriate roles for men, and women. -Usually not static but very slow to change.
2-43
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-44

2-Managing in a Global Environment

Norms

Unwritten rules and codes of conduct that prescribe how people should act in particular situations.
Folkwaysroutine

social conventions of daily life (e.g., dress codes and social manners) Moresbehavioral norms that are considered central to functioning of society and much more significant than folkways (e.g., theft and adultery), and they are often enacted into law.

Norms vary from country to country.

2-44

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

2-45

Creating Strong Organizational Culture

Values of Founder

Socialization Process

Ceremonies & Rites

Organizational Culture

Stories & Language

Figure 2.14
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-46

Industry Environment
Figure 2.15

Thread of new entrants Competitors

Suppliers

Customers

Threat of substitute product or services

Competitive analysis: Porters Five-Force Model

Prentice Hall, 2002
Irwin/McGraw-Hill

4-46
The McGraw-Hill Companies, Inc., 2000

2-47

Environment Scanning
Apply
Analyze Recognize

Define
Figure 2.16
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-48

Scanning and Monitoring

Environmental

scanning is an important boundary spanning activity.

Includes reading trade journals, attending trade shows, and the like.

Gate

keeping: the boundary spanner decides what information to allow into organization and what to keep out.

Must be careful not to let bias decide what comes in.

Interorganizational

Relations: firms need alliances globally to best utilize resources.

Managers can become agents of change and impact the environment.
The McGraw-Hill Companies, Inc., 2000

Irwin/McGraw-Hill

2-Managing in a Global Environment

The Global Environment
In the past, managers have viewed the global sector as closed.
Each country or market was assumed to be isolated from others
Firms did not consider global competition, exports.

2-49 2-49

Todays environment is very different.

Managers need to view it as an open market.
Organizations buy and sell around the world. Managers need to learn to compete globally.

Organizations that operate and compete not only domestically, but also globally Uncertain and unpredictable environment
Irwin/McGraw-Hill

2-43
The McGraw-Hill Companies, Inc., 2000

2-50

Levels of International Business Activity

Lowest

Level of International Activity

Highest

Domestic business

International business

Multinational business

Global business

Copyright by Houghton Mifflin Company. All rights reserved.

Irwin/McGraw-Hill

Figure 2.16
The McGraw-Hill Companies, Inc., 2000

2-51 2-51

2-Managing in a Global Environment

Why Go Global?
Growing Importance of International Markets
The Search for Resources The Search for Customers

National Comparative and Competitive Advantage

Global Outsourcing
Purchase of inputs from foreign suppliers or the production of inputs abroad to lower production costs and improve product quality and design

Offshore Production
Establishing assembly or manufacturing plants in other countries where
labour and resource costs are relatively low

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

2-52

The Global Economy

The

global economy is dominated by three relatively mature market systems

Copyright by Houghton Mifflin Company. All rights reserved.

Irwin/McGraw-Hill

Figure 2.17
The McGraw-Hill Companies, Inc., 2000

2-53

Entering the Global Market

Approaches to Internationalization
Importing or Exporting

Advantages
1. Small cash outlay 2. Little risk 3. No adaptation necessary 1. Increased profitability 2. Extended profitability 1. Quick market entry 2. Access to materials and technology 1. Enhances control 2. Existing infrastructure

Disadvantages
1. 2. 3. 1. 2. 1. Tariffs and taxes High transportation costs Government restrictions Inflexibility Helps competitors Shared ownership (limits control and profits) Complexity Greater economic and political risk Greater uncertainty

Licensing

Strategic Alliance/ Joint Venture Direct Investment

1. 2. 3.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

2-54 2-54

2-Managing in a Global Environment

International Expansion
Importing and Exporting: the least complex method of expansion.
-Exporting: firm makes products and sells abroad. -Importing: firm sells products made abroad.

Licensing: firm allows foreign organization to make and distribute goods for a fee.
Helps the home firm since it does not have to set up a complete production and distribution network.

Franchising: company sells a foreign organization the rights to use brand name and know-how in return for payment and profit percentage.
Irwin/McGraw-Hill
The McGraw-Hill Companies, Inc., 2000

2-55

International Expansion
Whollyowned For. Subsidiary

Importing Exporting

Licensing Franchising

Joint Ventures Strat. Alliances

Low

Level of Foreign involvement and investment needed by a global organization

High

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

2-56

Management Approaches to Global Activities

Ethnocentric

Management

Values and interests of the parent company in its home country guide the decisions and actions of operations outside the home country

Polycentric

Management

Managers in the home country allow managers in other countries to make their own decisions in response to local needs and environmental pressures

Geocentric

Management

Managers take a global view of the organizations international operations

The McGraw-Hill Companies, Inc., 2000

Irwin/McGraw-Hill

2-57

ASEAN Members

Prentice Hall, 2002

Irwin/McGraw-Hill

4-57
The McGraw-Hill Companies, Inc., 2000

2-58

European Union Countries

Prentice Hall, 2002

Irwin/McGraw-Hill

4-58
The McGraw-Hill Companies, Inc., 2000

2-59

Economic Systems
Free

market economy: production of goods and services is in private ownership.

Production is dictated by supply and demand.

Command

economy: decisions on what to produce, how much, done by the government.

Most command economies are moving away from the command economy.

Mixed

economy: certain economic sectors controlled by private business, others are government controlled.

Many mixed countries are moving toward a free enterprise system.

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc., 2000

2-60

Figure 4.4

Changing Political and Economic Forces

Russia 1995

Democratic
Britain 1985
Britain 1995

Political Freedom

Hungary 1995

Hungary 1985 Russia 1985 China 1985 China 1995

Totalitarian

Command
Irwin/McGraw-Hill

Mixed Market Economic Freedom

The McGraw-Hill Companies, Inc., 2000