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.

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.

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.

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.

World Poverty and Income Inequality Since 1820

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.

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.

Environments of Business Six external environments with the internal environment creates a dynamic system that impacts (an is impacted by) the BGS relationship. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

The Economic Environment 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 Overall economic activity Wages Commodity prices Competitor’s actions Interest rates Technology change Currency fluctuations Government policies

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.

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.

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

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

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.

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.

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