Chapter 2

The Dynamic
Environment

McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Royal Dutch Shell PLC

o One of the worlds largest companies
o Each year it makes capital investments of between
$30 billion and $40 billion
o In the 1970s pioneered the use of scenarios in
corporate planning

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Royal Dutch Shell PLC

o When an oil embargo surprised the world in 1973
Shell was the only major oil firm prepared for the
supply interruption
o Shell sees an emerging drama in the global energy
system, with tensions building at the intersection of
three powerful trends
o Developing nations with expanding populations are
using policies of economic growth to alleviate poverty

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Royal Dutch Shell PLC

o Supplies of oil and gas cannot keep pace with rising
demands for energy
o Environmental stresses are growing

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Figure 2.1 - Nine Deep Historical

Forces

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The Industrial Revolution

o Historical force: An environmental force of
unknown origin and mysterious action that provides
the energy for events
o The discussion divides this force, somewhat
artificially, into nine separate but related forces
causing distinct chains of events

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The Industrial Revolution

o The Industrial Revolution: An economic
metamorphosis in England in the late 1700s
o It occurred when certain necessary conditions were
present and shifted the country from a simple agrarian
economy into a growing industrial economy

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The Industrial Revolution

o Requirements for industrial growth:
o Sufficiency of capital, labor, natural resources and
fuels
o Adequate transportation
o Strong markets
o Ideas and institutions that support the productive blend
of all the above ingredients

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The Industrial Revolution

o Industrial growth remakes societies in positive ways,
but also generates strains in the social fabric
o 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
o The basic political conflict in every nation, and often
between nations, is the antagonism between rich and
poor
o The industrial revolution accelerated the
accumulation of wealth and widened the persistent
problem of its uneven distribution
o Global income inequality is measured by the Gini
index

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Inequality
o Gini index: A statistical measure of inequality in
which zero is perfect equality (everyone has the same
amount of wealth and 100 is absolute inequality (a
single person has all wealth)

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Figure 2.2 - World GDP Growth in 50- Year

Intervals

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Figure 2.3 - World Poverty

and Income Inequality since 1820

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Population Growth
o The basic population trend throughout human history
is upward
o Accelerated growth after 1825 due to:
o Advances in water sanitation and medicine, reduced
the number of deaths from infectious disease
o Mechanized farming, expanded the food supply

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Population Growth
o Rapid growth now declining due to declining fertility
o Implications of current population trends:
o The wealth gap between high- and low-income
countries will widen
o Growth will continue to strain the earths ecosystems
o The West is in demographic decline compared with
other peoples

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Figure 2.4 Historical World Population Growth

and Projections: 1 A.D. to 2300

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Technology
o Throughout history new technologies and devices
have fueled commerce and reshaped societies
o Printing press
o Steam engine

o New technologies:
o Foster the productivity gains that sustain long-term
economic progress
o Promote human welfare
o Can agitate societies

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Figure 2.5 - Waves of Innovation since the

Beginning of the Industrial Revolution

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Globalization
o Globalization: The creation of networks of human
interaction that span worldwide distances
o Consequences of globalization:
o Increased economic activity
o Changed cultures

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Globalization
o Globalization has been accelerated by new
technologies, and sometimes slowed by national
rivalries and wars
o Transnational corporations are the central forces of
current economic globalization

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Nation-States
o Nation-state: An international actor having a ruling
authority, citizens, and a territory with fixed borders
o Arose out of the wreckage of the Roman Empire
o In the past, nations increased their power by seizing
territory from other nations
o Today, nations use trade to increase their power

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Nation-States
o Trade through world markets is a new source of
power, but it also limits the ability of regimes to
control their economies
o Other forces such as epidemics, climate change,
terrorism and international norms also limit a nationstates autonomy

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Dominant Ideologies
o Ideology: A set of reinforcing beliefs and values that
constructs a worldview
o The industrial revolution was facilitated by several
ideologies:
o Capitalism
o Constitutional democracy protection of individuals
rights

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Dominant Ideologies
o Progress the idea that humanity was in upward
motion toward material betterment
o Darwinism constant improvement characterized the
biological world
o Social Darwinism evolutionary competition in
human society weeds out the unfit and advances
humanity

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Dominant Ideologies
o Protestant ethic hard work, saving, thrift and
honesty lead to salvation
o Many doctrines have perished as a result of
globalization
o The capitalism ideology accelerated in the 20th
century due to rising literacy and innovations that
spread information

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Great Leadership
o Leaders have brought both beneficial and disastrous
changes to societies and businesses
o Two views of historic leaders:
o Leaders simply ride the wave of history
o Leaders themselves change history

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Chance
o Some changes in the business environment may be
best explained as the product of unknown and
unpredictable causes.
o Machiavelli observed that fortune determines about
half the course of human events and human beings
the other half.

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Figure 2.6 - Six Key External

Environments

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The Economic Environment

o The economic environment consists of forces that
influence market operations, including:
o Overall economic activity
o Commodity prices
o Interest rates
o Currency fluctuations
o Wages
o Competitors actions
o Government policies

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The Economic Environment

o Two basic subtrends underlying economic growth:
o Rising trade
o Major expansion of foreign direct investment by
transnational corporations

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Figure 2.7 - Worldwide FDI Inflows:1980

2009

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The Technological Environment

o New technologies create both threats and
opportunities
o Technologies such as nanotechnology, open sourcing,
and collaborative computing will have a significant
impact on business

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The Technological Environment

o New technologies have unforeseen consequences for
society when they are put into widespread use for
commercial gain
o 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

o Culture: A system of shared knowledge, values,
norms, customs, and rituals acquired by social
learning
o The environment of a transnational corporation
includes a variety of cultures
o This variation causes conflicts of business customs

o There is a fundamental divide between the culture of

Western economic development and the rest of the
worlds cultural groupings
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The Cultural Environment

o The rise of postmodern values has uniformly shifted
the social, political, economic, and sexual norms of
wealthy countries
o Postmodern norms are a strong influence in the
operating environments of multinational corporations

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The Government Environment

o There are currently two long-term global trends in the
government environment of major importance to
business:
o Government activity has greatly expanded
o Larger social welfare roles
o Expanded regulation of domestic industries

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The Government Environment

o More governments are becoming open and democratic
o Governments increasingly respond to public demands
for corporate social performance
o These demands reflect postmodern vales promoting
human rights, the environment, aesthetics, and ethics

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Figure 2.8 - The Rise of Democratic

Regimes

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The Legal Environment

o The legal environment consists of legislation,
regulation, and litigation
o Five enduring trends:
o Laws and regulations have steadily grown in number
and complexity
o Corporations have expanding duties to protect rights of
stakeholders
o Globalization has increased the complexity of the legal
environment and expanded the application of
voluntary codes of conduct
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The Legal Environment

o Ethical behavior and corporate social responsibility
often become codified in laws
o The law is constantly evolving

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The Natural Environment

o Economic activity is a geophysical force with power
to change the natural environment
o Economic productivity in the 20th century has:
o Depleted mineral resources
o Reduced forest cover
o Killed species
o Released molecules not found in nature
o Unbalanced the nitrogen cycle
o Possibly triggered climate change

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The Natural Environment

o The human ecological footprint moved beyond the
earths carrying capacity in the 1980s and is now
unsustainable
o Managers must adapt to changed thinking, toward
preservation of nature

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Figure 2.9 - Measures of Human Impact on

Nature

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The Internal Environment

o In a corporation, the internal environment consists of
four groups: employees, managers, the board of
directors, and owners
o Each of these groups has different objective, beliefs,
needs, and functions that must be coordinated
o Forces in external environments have recently
reduced the power of these internal groups

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Figure 2.10 - The Internal Environment

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Concluding Observations
o The environments of business have profound
implications for managers
o The actions of business constantly influence not only
current environments but, in addition, the deeper
course of history
o 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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Figure 2.11 - The Dynamic Environment of

Business

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