1. Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 2 The Dynamic Environment

2. 2-2 Royal Dutch Shell PLC o One of the world’s 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

3. 2-3 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

4. 2-4 Royal Dutch Shell PLC o Supplies of oil and gas cannot keep pace with rising demands for energy o Environmental stresses are growing

5. 2-5 Figure 2.1 - Nine Deep Historical Forces

6. 2-6 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

7. 2-7 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

8. 2-8 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

9. 2-9 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

10. 2-10 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

11. 2-11 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)

12. 2-12 Figure 2.2 - World GDP Growth in 50- Year Intervals

13. 2-13 Figure 2.3 - World Poverty and Income Inequality since 1820

14. 2-14 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

15. 2-15 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 earth’s ecosystems o The West is in demographic decline compared with other peoples

16. 2-16 Figure 2.4 – Historical World Population Growth and Projections: 1 A.D. to 2300

17. 2-17 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

18. 2-18 Figure 2.5 - Waves of Innovation since the Beginning of the Industrial Revolution

19. 2-19 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

20. 2-20 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

21. 2-21 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

22. 2-22 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 nation- state’s autonomy

23. 2-23 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

24. 2-24 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

25. 2-25 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

26. 2-26 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

27. 2-27 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.

28. 2-28 Figure 2.6 - Six Key External Environments

29. 2-29 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 Competitor’s actions o Government policies

30. 2-30 The Economic Environment o Two basic subtrends underlying economic growth: o Rising trade o Major expansion of foreign direct investment by transnational corporations

31. 2-31 Figure 2.7 - Worldwide FDI Inflows:1980– 2009

32. 2-32 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

33. 2-33 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

34. 2-34 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 world’s cultural groupings

35. 2-35 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

36. 2-36 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

37. 2-37 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

38. 2-38 Figure 2.8 - The Rise of Democratic Regimes

39. 2-39 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

40. 2-40 The Legal Environment o Ethical behavior and corporate social responsibility often become codified in laws o The law is constantly evolving

41. 2-41 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

42. 2-42 The Natural Environment o The human ecological footprint moved beyond the earth’s carrying capacity in the 1980s and is now unsustainable o Managers must adapt to changed thinking, toward preservation of nature

43. 2-43 Figure 2.9 - Measures of Human Impact on Nature

44. 2-44 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

45. 2-45 Figure 2.10 - The Internal Environment

46. 2-46 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

47. 2-47 Figure 2.11 - The Dynamic Environment of Business