Business Government and Society

BUSINESS, GOVERNMENT AND SOCIETY

Module I: The Study of Business, Government and Society Importance of BGS to Managers – Models of BGS relationships – Market Capitalism Model, Dominance Model, Countervailing Forces Model and Stakeholder Model – Global perspective – Historical Perspective

Module II: The Dynamic Environment Historical Forces changing the Business Environment – Key environments of Business – Power dimensions of Business – Theoretical perspective – Sociological perspective

Module III: Corporate Governance Introduction, Definition, Market model and control model, OECD on corporate governance, A historical perspective of corporate governance, Issues in corporate governance, relevance of corporate governance, need and importance of corporate governance, benefits of good corporate governance, the concept of corporate, the concept of governance, theoretical basis for corporate governance, obligation to society, obligation to investors, obligation to employees, obligation to customers, managerial obligation, Indian cases

Module IV: Public Policies The role of public policies in governing business, Government and public policy, classification of public policy, areas of public policy, need for public policy in business, levels of public policy, elements of public policy, the corporation and public policy, framing of public policy, business and politics levels of involvement, business, government, society and media relationship government regulations in business, justification of regulation, types of regulation, problems of regulation

Module V: Environmental concerns and corporations History of environmentalism, environmental preservation-role of stakeholders, international issues, sustainable development, costs and benefits of environmental regulation, industrial pollution, role of corporate in environmental management, waste management and pollution control, key strategies for prevention of pollution, environmental audit, Laws governing environment

Module VI: Business Ethics Meaning of ethics, business ethics, relation between ethics and business ethics, evolution of business ethics, nature of business ethics, scope, need and purpose, importance, approaches to business ethics, sources of ethical knowledge for business roots of unethical behavior, ethical decision making, some unethical issues, benefits from managing ethics at workplace, ethical organizations

Module VII: Corporate Social Responsibility Types and nature of social responsibilities, CSR principles and strategies, models of CSR, Best practices of CSR, Need of CSR, Arguments for and against CSR, CSR Indian perspective, Indian examples

Module VIII: Business Law Law of contract, meaning of contract, agreement, essential elements of a valid contract, classification of contracts, proposal and acceptance, free consent, void agreements Negotiable instruments act 1881: Nature and Characteristics of Negotiable instruments, Kinds of Negotiable Instruments – Promissory Notes, Bills of Exchange and Cheques. Parties to Negotiable Instruments, Negotiation, Presentment, Discharge and Dishonor of Negotiable Instrument, Law of agency, Bailment & Pledge Sale of goods act 1930: Definition of Sale, Sale v/s Agreement to Sell, Goods, price and Time, Condition and Warranties, Express and Implied Condition, “Doctrine of Caveat Emptor”, Performance of Contract of sale, Right of Unpaid Seller. Intellectual property law, law relating to patents, law relating to copyrights, law relating to trade mark

Module I

WHAT IS THE BUSINESS–GOVERNMENT–SOCIETY FIELD

In the universe of human endeavor, we can distinguish subdivisions of economic, political, and social activity—that is, business, government, and society—in every civilization throughout time. Interplay among these activities creates an environment in which businesses operate. The business–government–society (BGS) field is the study of this environment and its importance for managers. To begin, we define the basic terms. Business is a broad term encompassing a range of actions and institutions. It covers management, manufacturing, finance, trade, service, investment, and other activities. Entities as different as a hamburger stand and a giant corporation are businesses. The fundamental purpose of every business is to make a profit by providing products and services that satisfy human needs.

Government refers to structures and processes in societies that authoritatively make and apply policies and rules. Like business, it encompasses a wide range of activities and institutions at many levels, from international to local. The focus of this book is on the economic and regulatory powers of government as they affect business.

A society is a network of human relations that includes three interacting elements:

(1) Ideas, (2) institutions, and (3) material things.

Ideas: or intangible objects of thought include values and ideologies. Values are enduring beliefs about which fundamental choices in personal and social life are correct. Cultural habits and norms are based on values. Ideologies —for example democracy and capitalism—are bundles of values that create a certain world view. They establish the broad goals of life by defining what is considered good, true, right, beautiful, and acceptable. Ideas shape every institution in a society.

Institutions are formal patterns of relations that link people together to accomplish a goal. They are essential to coordinate the work of individuals who have no personal relationship with each other. In modern societies, economic, political, cultural, legal, religious, military, educational, media, and familial institutions are salient. There are multiple economic institutions including financial institutions, the corporate form, and markets. Collectively, we call this business.

Figure 1.1 shows how a range of institutions supports markets. Capitalism as an economic system shows wide variation in the nations where it exists because supporting institutions grow from unique historical and cultural roots. In developed nations these institutions are highly evolved and mutually supportive. Where they are weak, markets work in dysfunctional ways. An example is Russia, which introduced a market economy after the fall of communism. Institutions that had evolved under Soviet political repression and state planning were ill-suited to support a free market. The story of labor is an example. In the old system workers spent lifetimes in secure jobs at state-owned firms. There was no unemployment insurance and, since few workers ever moved, housing markets were undeveloped. A free market economy requires a strong labor market, so workers can switch from jobs in declining firms to jobs in expanding ones. But in Russia the development of a labor market was arrested. The government did not yet provide unemployment benefits to idled workers, so there was no safety net. And housing markets were anemic. Company managers, out of basic humanity, were unwilling to lay off workers who got no benefits and who would find it difficult to move elsewhere. As a result, restructuring in the new Russian economy was torpid. The lesson is that institutions are vital to markets. Each institution has a specific purpose in society. The function of business is to make a profit by producing goods and services at prices attractive to consumers. A business uses the resources of society to create new wealth. This justifies its existence and is its priority task. All other social tasks—raising an army, advancing knowledge, healing the sick, or raising children—depend on it. Businesses must, therefore, be managed to make a profit. A categorical statement of this point comes from Peter Drucker: “Business management must always, in every decision and action, put economic performance first.” Without profit, business fails in its duty to society and lacks legitimacy. The third element in society is material things, including land, natural resources, infrastructure, and manufactured goods. These shape and, in the case of fabricated objects, are partly products of ideas and institutions. Economic institutions, together with the extent of resources, largely determine the type and quantity of society's material goods. The BGS field is the study of interactions among the three broad areas defined above. The primary focus is on the interaction of business with the other two elements. The basic subject matter, therefore, is how business shapes and changes government and society, and how it, in turn, is molded by political and social pressures. Of special interest is how forces in the BGS nexus affect the manager's task.

Figure 1.1

WHY IS THE BGS FIELD IMPORTANT TO MANAGERS?

To succeed in meeting its objectives a business must be responsive to both its economic and its noneconomic environment. ExxonMobil, for example, must efficiently discover, refine, transport, and market energy. Yet swift response to market forces is not always enough. There are powerful nonmarket forces to which many businesses, especially large ones, are exposed. Their importance is clear in the two dramatic episodes that punctuate ExxonMobil's history—the 1911 court-ordered breakup and the 1989 Exxon Valdez oil spill.

In 1911 the Supreme Court, in a decision that reflected public opinion as well as interpretation of the law, forced Standard Oil to conform to social values favoring open, competitive markets. With unparalleled managerial genius, courage, and perspicacity, John D. Rockefeller and his lieutenants had built a wonder of efficiency that spread fuel and light throughout America at lower cost than otherwise would have prevailed. They never understood why this remarkable commercial performance was not the full measure of Standard Oil. But beyond efficiency, the public demanded fair play. Thus, the great company was dismembered.

In Alaska a sudden crisis changed ExxonMobil’s political and social environments, leading to billions of dollars of sanctions. Today ExxonMobil operates its tanker fleet with extreme care. It has new environmental safeguards and randomly tests crew members for drugs and alcohol. Remarkably, it is now so disciplined that it measures oil spills from its fleet of tankers in teaspoons per million gallons shipped. In 2003 it reported losing less than one teaspoon per million gallons.

Recognizing that a company operates not only within markets but within a society is critical. If the society, or one or more powerful interests within it, does not accept a company’s actions, that firm will be punished and constrained. A basic agreement or social contract exists between the business institution and society. This contract defines the broad duties that business must perform to retain society's support. It is partly expressed in law, but it also resides in social values.

Unfortunately for managers, the social contract is not as clear-cut as are the economic forces a business faces, as complex and ambiguous as the latter often are. For example, the public believes that business has social responsibilities beyond making profits and obeying regulations. If business does not meet them, it may suffer. But precisely what are they? How is corporate performance measured? To what extent must a business comply with ethical values not written into law? When meeting social expectations conflicts with maximizing profits, what is the priority? Despite these questions, the social contract contains the expectations of society, and managers who ignore or violate it are courting disaster.

Social contract

An underlying agreement between business and society on basic duties and responsibilities business must carry out to retain public support. It may be reflected in laws and regulations.

FOUR MODELS OF THE BGS RELATIONSHIP

Interactions among business, government, and society are infinite and their meaning is open to interpretation. Faced with this complexity, many people use simple mental models to impose order and meaning on what they observe. These models are like prisms, each having a different refractive quality, each giving the holder a different view of the world. Depending on the model (or prism) used, a person will think differently about the scope of business power in society, criteria for managerial decisions, the extent of corporate responsibility, the ethical duties of managers, and the need for regulation.

The following four models are basic alternatives for seeing the BGS relationship. As abstractions they oversimplify reality and magnify central issues. Each model can be both descriptive and prescriptive; that is, it can be both an explanation of how the BGS relationship does work and, in addition, an ideal about how it should work.

The Market Capitalism Model

The market capitalism model, shown in Figure 1.2, depicts business as operating within a market environment, responding primarily to powerful economic forces. There, it is substantially sheltered from direct impact by social and political forces. The market acts as a buffer between business and non market forces. To appreciate this model, it is important to understand the history and nature of markets and the classic explanation of how they work.

Markets are as old as humanity, but for most of recorded history they were a minor institution. People produced mainly for subsistence, not to trade. Then, in the 1700s, some economies began to expand and industrialize, division of labor developed within them, and people started to produce more for trade. As trade grew, the market, through its price signals, took on a more central role in directing the creation and distribution of goods. The advent of this kind of market economy, or an economy in which markets play a major role, reshaped human life.

The classic explanation of how a market economy works comes from the Scottish professor of moral philosophy Adam Smith (1723–1790). In his extraordinary treatise, The Wealth of Nations, Smith wrote about what he called “commercial society” or what today we call capitalism. He never used that word. It was adopted later by the socialist philosopher Karl Marx (1818–1883), who contrived it as a term of pointed insult. But it caught on and soon lost its negative connotation. Smith said that the desire to trade for mutual advantage lay deep in human instinct. He noted that the growing division of labor in society led more people to try to satisfy their self-interests by specializing their work, then exchanging goods with each other. As they did so, the market's pricing mechanism reconciled supply and demand, and its ceaseless tendency was to make commodities cheaper, better, and more available.

The beauty of this process, according to Smith, was that it coordinated the activities of strangers who, to pursue their selfish advantage, were forced to fulfill the needs of others. In Smith's words, each trader was “led by an invisible hand to promote an end which was no part of his intention,” the collective good of society. Through markets that harnessed the constant energy of greed for the public welfare, Smith believed that nations would achieve “universal opulence.” His genius was to demystify the way markets work, to frame market capitalism in moral terms, to extol its virtues, and to give it lasting justification as a source of human progress. The greater good for society came when businesses competed freely.

In Smith's day producers and sellers were individuals and small businesses managed by their owners. Later, by the late 1800s and early 1900s, throughout the industrialized world, the type of economy described by Smith had evolved into a system of managerial capitalism. In it the innumerable, small, owner-run firms that animated Smith's marketplace were overshadowed by a much smaller number of dominant corporations run by hierarchies of salaried managers. These managers had limited ownership in their companies and worked for shareholders. This form of capitalism has now spread throughout the world. Nowhere does it work exactly like Smith's theory. Nevertheless, the market capitalism model continues to exist as an ideal against which to measure practice.

The model incorporates important assumptions. One is that government interference in economic life is slight. This is called laissez-faire, a term first used by the French to mean that government should “let us alone.” It stands for the belief that government intervention in the market is undesirable. It is costly because it lessens the efficiency with which free enterprise operates to benefit consumers. It is unnecessary because market forces are benevolent and, if liberated, will channel economic resources to meet society’s needs. It is for governments, not businesses, to correct social problems. Therefore, managers should define company interests narrowly, as profitability and efficiency.

Another assumption is that individuals can own private property and freely risk investments. Under these circumstances, business owners are powerfully motivated to make a profit. If free competition exists, the market will hold profits to a minimum and the quality of products and services will rise as firms try to attract more buyers. If one enterprise tries to increase profits by charging higher prices, consumers will go to a competitor. If one producer makes higher-quality products, others must follow. In this way, markets convert selfish competition into broad social benefits.

Other assumptions include these: Consumers are informed about products and prices and make rational decisions. Moral restraint accompanies the self-interested behavior of business. Basic institutions such as banking and laws exist to ease commerce. There are many producers and consumers in competitive markets.

The perspective of the market capitalism model leads to these conclusions about the BGS relationship:
(1) government regulation should be limited,
(2) markets discipline private economic activity to promote social welfare,
(3) the proper measure of corporate performance is profit, and
(4) the ethical duty of management is to promote the interests of shareholders.
These tenets of market capitalism have shaped economic values in the industrialized West and, as markets spread, they do so increasingly elsewhere.

There are many critics of capitalism and the market capitalism model. As promised by its defenders, capitalism has created material progress. Yet there is trade-offs: It is argued that capitalism creates prosperity only at the cost of rising inequality. Karl Marx believed that owners of capital exploited workers and used imperialist foreign policies to spread markets. Others believe that markets erode virtue. The avarice, self-love, and ruthlessness that energize them are base values that drive out virtues such as love and friendship. Another enduring fear is that markets place too much emphasis on money and material objects. Pope John Paul II, for example, cautioned against a “domination of things over people.” Critics see these problems as inherent to markets. Still other criticisms focus on the flaws that sometimes, perhaps inevitably, appear in them. Without correction they may reward conspiracies and monopoly. Also, the profit motive has led companies to pollute and plunder the earth.

All these criticisms of capitalism are pronounced today, but none are new. They represent a series of recurrent attacks that wind through the Western philosophical tradition. Adam Smith himself had some reservations and second thoughts. He feared both physical and moral decline in factory workers and the unwarranted idolization of the rich, who might have earned their wealth by unvirtuous methods. In his later years, he grew to see more need for government intervention. But Smith never envisioned a system based solely on greed and self-interest. He expected that in society these traits must coexist with restraint and benevolence.

The ageless debate over whether capitalism is the best means to human fulfillment will continue. Meanwhile, we turn our discussion to an alternative model of the BGS relationship that attracts many of capitalism's detractors.

The Dominance Model

The dominance model is a second basic way of seeing the BGS relationship. It represents primarily the perspective of business critics. In it, business and government dominate the great mass of people. This idea is represented in the pyramidal, hierarchical image of society shown in Figure 1.3. Those who subscribe to the model believe that corporations and a powerful elite control a system that enriches a few at the expense of the many. Such a system is undemocratic. In democratic theory, governments and leaders represent interests expressed by the people, who are sovereign.

Proponents of the dominance model focus on the defects and inefficiencies of capitalism. They believe that corporations are insulated from pressures holding them responsible, that regulation by a government in thrall to big business is feeble, and that market forces are inadequate to ensure ethical management. Unlike other models, the dominance model does not represent an ideal in addition to a description of how things are. For its advocates, the ideal is to turn it upside down so that the BGS relationship conforms to democratic principles.

In the United States, the dominance model gained a following during the late nineteenth century when large trusts such as Standard Oil emerged, buying politicians, exploiting workers, monopolizing markets, and sharpening income inequality. Beginning in the 1870s, farmers and other critics of big business rejected the ideal of the market capitalism model and based a populist reform movement called populism on the critical view of the BGS relationship implied in the dominance model.

Populism is a recurrent spectacle in which common people who feel oppressed or disadvantaged in some way seek to take power from ruling elite that thwarts fulfillment of the collective welfare. In America, the populist impulse bred a sociopolitical movement of economically hard-pressed farmers, miners, and workers lasting from the 1870s to the 1890s that blamed the Eastern business establishment for a range of social ills and sought to limit its power.

This was an era when, for the first time, on a national scale the actions of powerful business magnates shaped the destinies of common people. Some displayed contempt for commoners. “The public be damned,” railroad magnate William H. Vanderbilt told a reporter during an interview in his luxurious private railway car. The next day, newspapers around the country printed his remark, enraging the public. Later, Edward Harriman, the aloof, arrogant president of the Union Pacific Railroad, allegedly reassured industry leaders worried about reform legislation, saying “that ‘could buy Congress’ and that if necessary he ‘could buy the judiciary.’” It was with respect to Harriman that President Theodore Roosevelt once noted that “men of very great wealth in too many instances totally failed to understand the temper of the country and its needs.

The populist movement in America ultimately fell short of reforming the BGS relationship to a democratic ideal. Other industrializing nations, notably Japan, had similar populist movements. Marxism, an ideology opposed to industrial capitalism, emerged in Europe at about the same time as these movements, and it also contained ideas resonant with the dominance model. In capitalist societies, according to Karl Marx, an owner class dominates the economy and ruling institutions. Many business critics worldwide advocated socialist reforms that, based on Marx's theory, could achieve more equitable distribution of power and wealth.

In the United States the dominance model may have been most accurate in the late 1800s when it first arose to conceptualize a world of brazen corporate power and politicians who openly represented industries. However, it remains popular. Ralph Nader, for example, speaks its language. Over the past 20 years, big business has increasingly dominated our political economy. This control by corporate government over our political government is creating a widening “democracy gap.” The unconstrained behavior of big business is subordinating our democracy to the control of a corporate plutocracy that knows few self-imposed limits to the spread of its power to all sectors of our society.

In recent years fear of transnational corporations has given the dominance model new life in a global context. Running for president in 2004, Nader tried “to rescue our public authorities from the corporate government of big business,” particularly “large multinational corporations” that are “increasingly and pervasively replacing the sovereignty of the people.”

The Countervailing Forces Model

The countervailing forces model, shown in Figure 1.4, depicts the BGS relationship as a flow of interactions among the major elements of society. It suggests complex exchanges of influence among them, attributing dominance to none. This is a model of multiple or pluralistic forces. Their strength waxes and wanes depending on factors such as the subject at issue, the power of competing interests, the intensity of feeling, and the influence of leaders. The counter- with democratic traditions. It differs from the market capitalism model, because it opens business directly to influence by non market forces. Many important interactions implied in it would be evaluated as negligible in the dominance model.

What overarching conclusions can be drawn from this model?

1. Business is deeply integrated into an open society and must respond to many forces, both economic and non economic It is not isolated from its social environment, nor is it always dominant.

2. Business is a major initiator of change in society through its interaction with government, its production and marketing activities, and its use of new technologies.

3. Broad public support of business depends on its adjustment to multiple social, political, and economic forces. Incorrect adjustment leads to failure. This is the social contract at work.

4. BGS relationships continuously evolve as changes take place in the main ideas, institutions, and processes of society.

The Stakeholder Model

The stakeholder model in Figure 1.5 shows the corporation at the center of an array of mutual relationships with persons, groups, and entities called Stakeholders. Stakeholders are those whom the corporation benefits or burdens by its actions and those who benefit or burden the firm with their actions. A large corporation has many stakeholders. These can be divided into two categories based on the nature of the relationship. But the assignments are relative, approximate, and inexact. Depending on the corporation or the episode, a few stakeholders may shift from one category to the other.

Primary stakeholders are a small number of constituents for which the impact of the relationship is immediate, continuous, and powerful on both the firm and the constituent. They are stockholders (owners), customers, employees, communities, and governments and may, depending on the firm, include others such as suppliers or creditors.

Secondary stakeholders include a possibly broad range of constituents in which the relationship involves less mutual immediacy, benefit, burden, or power to influence. Examples are activist groups, trade associations, and schools. Exponents of the stakeholder model debate how to identify who or what is a stakeholder. Some use a broad definition and include, for example, natural entities such as the earth's atmosphere, oceans, terrain, and living creatures because corporations have an impact on them. Others reject this broadening, since natural entities are represented by conventional stakeholders such as environmental groups. Some include competitors because, although they do not work to benefit

the firm, they have the power to affect it. At the furthest reaches of the stakeholder idea lie groups such as the poor and future generations. But in the words of one stakeholder advocate, stakeholder theory should not be used to weave a basket big enough to hold the world's misery.” If groups such as the poor were included in the stakeholder network, managers would be morally obliged to run headlong at endless problems, taking them beyond any conceivable economic mission.

The stakeholder model reorders the priorities of management away from those in the market capitalism model. There, the corporation is the private property of those who contribute its capital. Its immediate priority is to benefit one group— the investors. The stakeholder model, by contrast, is an ethical theory of management in which the welfare of each stakeholder must be considered as an end.

Stakeholder interests have intrinsic worth; they are not valued only to the extent that they enrich investors. Managers have a duty to consider the interests of multiple stakeholders, and because of this, “the interests of share owners . . . are not always primary and never exclusive.” Stakeholder management, then, creates duties toward multiple constituents of the corporation—duties not emphasized in the practice of market capitalism, which tends toward domination of the environment and enrichment of share owners Management must raise its gaze above profits to see and respond to a spectrum of other values. One group of scholars, for example, urges that corporations “should adopt processes and modes of behavior that are sensitive to the concerns and capabilities of each stakeholder constituency.” The stakeholder model is intended to redefine the corporation. It rejects the shareholder-centered view of the firm in the market capitalism model as “ethically unacceptable.” Not everyone agrees. Critics of the stakeholder model argue that it is not a realistic assessment of power relationships between the corporation and other entities. It seeks to give power to the powerless by replacing force with ethical duty, a timeless and often futile quest of moralists. In addition, it sets up too vague a guideline to substitute for the yardstick of profits for investors. Unlike traditional criteria such as return on capital, there is no single, clear, and objective measure to evaluate the combined ethical/economic performance of a firm. According to one critic, this lack of a criterion “would render impossible rational management decision making for there is simply no way to adjudicate between alternative projects when there is more than one bottom line.” 35 In addition, the interests of stakeholders so vary that often they conflict with shareholders and with one another. With respect to corporate actions, laws and regulations protect stakeholder interests. Creating surplus ethical sensitivity that soars above legal duty is impractical and unnecessary. Some puzzles exist in stakeholder thinking. It is not clear who or what is a legitimate stakeholder, to what each stakeholder is entitled, or how managers should balance competing demands among a range of stakeholders. Yet its advocates are compelled by two arguments. First, a corporation that embraces stakeholders performs better. A corporation better sustains its wealth-creating function with the support of a network of parties beyond shareholders. Put bluntly by one advocate of the stakeholder perspective, executives ignore stakeholders at the peril of the survival of their companies.” Second, it is the ethical way to manage because stakeholders have moral rights that grow from the way powerful corporations affect them. Irrespective of academic debates, in practice many large corporations have adopted methods and processes to analyze their stakeholders and engage them.

MODULE 2: THE DYNAMIC ENVIRONMENT

Historical Forces Changing the Business Environment

We believe that, in a broad sense, order can be found in the swirling patterns of current events; that there is a deep logic in the passing of history; and that change in the business environment is the result of elemental historical forces moving in roughly predictable directions. Henry Adams defined a historical force as "anything that does, or helps to do, work."The work to which Adams refers is the power to cause events. Change in the business environment is the work of nine deep historical forces or streams of related events discussed below.

1. The Industrial Revolution:

The first historical force is the industrial revolution, a powerful force that grips the imagination of humanity. The term industrial revolution refers to transforming changes that turn simple economies of farmers and artisans into complex industrial economies. In thousands of years before the industrial takeoff of Great Britain in the late eighteenth century, there had been no widespread, sustained economic growth to raise living standards. The vast majority of the world's population was mired in poverty.

Industrial transformation requires specific conditions, including a sufficiency of capital, labor, natural resources, and fuels; ready transportation; strong markets; and ideas and institutions that support the productive blend of these ingredients. Britain came first because it was first to have the right mix of social, political, and economic supports. It was an open society that allowed social mobility and encouraged individual initiative. Its parliament embodied values of political liberty, free speech, and public debate. Perhaps consequently, Britain was the source of scientific advances and inventions such as the steam engine that liberated energy s in the nation's massive coal deposits. Its climate supported agriculture and its island geography put it at the hub of sea routes for world trade.

2. Inequality:

From time immemorial, status distinctions, class structures, and gaps between rich and poor have characterized societies. Inequality is ubiquitous, as are its consequences-envy, demands for fair distribution of wealth, and doctrines to justify why some people have more than others. The basic political conflict in every nation, and often between nations, is the antagonism between rich and poor.

As the industrial revolution accelerated the accumulation of wealth, it worsened the persistent problem of uneven distribution. Explosive economic growth widened the gap between rich and poor around the globe. Global income inequality is measured by the 6. Nation- States:

In the international arena, the nation-state is an actor formed of three elements, a ruling authority, citizens, and a territory with fixed borders. The modern nation-state system arose in an unplanned way out of the wreckage of the Roman Empire. The institution of the nation-state was well-suited for Western Europe, where boundaries were contiguous with the extent of languages. However, the idea was subsequently transplanted to territories in Eastern Europe, Southwest Asia, and the Middle East, partly by force of colonial empires and partly by mimicry among non-Western political elites for whom the idea had attained high prestige. Where it was transplanted, nations were often irrationally define^ and boundary lines split historic areas of culture, ethnicity, religion, and language.

7. Dominant Ideologies:

Thought shapes history. An ideology is a set of reinforcing beliefs and values that constructs a worldview- The industrial revolution in the West was facilitated by a set of interlocking ideologies, including capitalism, but also constitutional democracy, which protected the rights that allowed individualism to flourish; progress, or the idea that humanity was in upward motion toward material betterment; Darwinism, or Charles Darwin's finding that constant improvement characterized the biological world, which reinforced the idea of progress; social Darwinism, or Herbert Spencer's idea that evolutionary competition in human society, as well as the natural world, weeded out the unfit and advanced humanity; and the Protestant ethic, or the belief that sacred authority called for hard work, saving, thrift, and honesty as necessary for salvation.

Ideologies are more than the sum of sensory perception and rational thought. They fulfill the human need for concepts and categories of meaning that explain daily life. Ideologies in accord with experience and current conditions often spread widely. Their belief systems lead adherents to feel a collective identity and to follow common norms that direct social behavior, thereby promoting cooperation and stability. And they give institutions that represent them, such as churches, and corporations, the power to interpret events and resolve human problems.

8. Great leadership:

Leaders have brought both beneficial and disastrous changes to societies and businesses. Alexander imposed his rule over the ancient Mediterranean world, creating new trade routes on which Greek merchants flourished. Adolf Hitler of Germany and Joseph Stalin in the Soviet Union were strong leaders, but they unleashed evil that retarded industrial growth in their countries.

There are two views about the power of leaders as a historical force. One is that leaders simply ride the wave of history. “Great men”, writes Arnold Toynbee, “ are precisely the points of intersection of great social forces”.When oil was discovered in western Pennsylvania in 1859, John D. Rockefeller was a young man living in nearby Cleveland, where he has accumulated a little money selling produce. He saw an opportunity in the new industry. His remarkable traits enabled his to domineer over a rising industry that reshaped the nation and the world. Yet is there any doubt that the reshaping would have occurred nonetheless had Rockefeller decided to stick with selling lettuce and carrots.

9. Chance:

Scholars are reluctant to use the notion of chance, accident, or random occurrence as a category of analysis. Yet some changes in the business environment may be best explained as the product of unknown and unpredictable causes. No less perceptive a student of history than Niccolo Machiavelli observed that fortune determines about half the course of human events and human beings the other half. We cannot improve on this estimate, but we note it. Its significance is that managers must be prepared for the most unprecedented events and have faith in Machiavelli’s counsel that when such episodes arrive those who are ready will prevail, as fortune “directs her bolts where there have been no defenses or bulwarks prepared against her.” No doubts Machiavelli would think Shell’s Scenarios are praiseworthy.

index, a statistic in which 0 percent stands for absolute equality, that is, a theoretical situation in which everyone has the same income, and 100 percent represents absolute inequality, where one person has all the income. Using this measure, inequality becomes greater as the percentage figure rises toward 100.

3. Population growth:

The basic population trend throughout human history is growth. As shown in Figure 2.3, world population inched ahead for centuries, then grew a little faster beginning about 1,000 years ago with the inception of large-scale crop cultivation. After eight more centuries, population growth began a rapid new acceleration in the late 1800 s that turned into a skyrocketing rise through the twentieth century. It took until 1825 for the world population to reach 1 billion; then each billionth additional person was added faster and faster—first in 100 years, then in 35, then in 15, then in only 12.This astonishing growth had two causes, both related to the industrial revolution. First, advances in water sanitation, hygiene, and scientific medicine reduced deaths from infectious disease, leading to rapid mortality decline. Second, mechanized farming expanded the food supply to feed record numbers.

4. Technology:

Throughout recorded history new technologies and devices have fueled commerce and reshaped societies. In the 1450 s the printing press was an immediate commercial success, but its impact went far beyond the publishing business. Over the next 100 years the affordable, printed word reshaped European culture by creating a free market for ideas that undermined the doctrinal monopoly of the Catholic Church. Printed pamphlets spread Martin Luther's challenge to its scriptural dogma and brought on the Protestant Reformation. Galileo was placed under house arrest in Florence for holding heretical views about astronomy, but his theories prevailed because they were published in Protestant Holland. A Europe opened to the exchange of new ideas based on experience and observation was primed for the scientific revolution.

The invention of the steam engine in the late 1700 s and its widespread use be-ginning in the early 1800 s, along with increased use of the waterwheel and new iron-making methods, triggered the industrial revolution.

5. Globalization:

Globalization occurs when networks of economic, political, social, military, scientific, or environmental .interdependence grow to span worldwide distances.In the economic realm, globalization occurs when nations open themselves to foreign trade and investment, creating world markets for goods, services, and capital. The current rise of such a system began after World War II, when the victor nations lowered trade barriers and loosened capital controls. Over the next 50 years, international negotiations led more nations to open themselves to global flows of goods, services, and investment until today no national economy of any significance remains isolated from world markets.

6. Nation- States:

In the international arena, the nation-state is an actor formed of three elements, a ruling authority, citizens, and a territory with fixed borders. The modern nation-state system arose in an unplanned way out of the wreckage of the Roman Empire. The institution of the nation-state was well-suited for Western Europe, where boundaries were contiguous with the extent of languages. However, the idea was subsequently transplanted to territories in Eastern Europe, Southwest Asia, and the Middle East, partly by force of colonial empires and partly by mimicry among non-Western political elites for whom the idea had attained high prestige. Where it was transplanted, nations were often irrationally define and boundary lines split historic areas of culture, ethnicity, religion, and language.

7. Dominant Ideologies:

8. Great leadership:

There are two views about the power of leaders as a historical force. One is that leaders simply ride the wave of history. “Great men”, writes Arnold Toynbee, “ are precisely the points of intersection of great social forces”. When oil was discovered in western Pennsylvania in 1859, John D. Rockefeller was a young man living in nearby Cleveland, where he has accumulated a little money selling produce. He saw an opportunity in the new industry. His remarkable traits enabled his to domineer over a rising industry that reshaped the nation and the world. Yet is there any doubt that the reshaping would have occurred nonetheless had Rockefeller decided to stick with selling lettuce and carrots.

9. Chance:

Key Environments of Business

1. The economic Environment

The economic environment consists of forces that influence market operation, including overall economic activity, commodity prices, interest rates, currency fluctuations, wages, competitors’ actions, technology change, and government policies. Continuing long-term growth in output, consumption, and investment characterizes the global economic environment. World GDP increased 310 percent in the years between 1982 and 2005, rising from $10.9 trillion to $ 44.7 trillion. Growth briefly slowed in 2001 and 2002 because of economic repercussions from the September 11, 2001, terrorist attacks and the sudden acute respiratory syndrome epidemic in Asia. However, after a rough patch of several years the world economy picked up again, led by recovery in the United States and rapid expansion in china and India. Underlying this strong and continuing overall economic growth are two basic sub trends.

The first is raising trade. Three years after the end of World War II, in 1948, the global sum of all merchandise exported was $58 billion. In 2004 it was $10.2 trillion; an increase of 17,586 percent. This spectacular rise has been enabled by a trading system created at the end of World War II. Nations within the system have been encouraged to lower tariffs and other trade barriers because other member nations promised to reciprocate this openness. The system has evolved into an institution called the World Trade Organization (WTO) that embodies an ongoing process of negotiation and trade liberalization in which 149 nations now participate. In addition, several hundred regional trade agreements promote freer exchange among countries that are parties to them.

The second sub trend underlying continued economic growth is a major expansion of foreign direct investment (FDI) by transnational corporations. Foreign direct investment is capital investment by private firms outside their home countries. Between 1982 and 2005, global FDI inflows (that is, corporate investments moving into foreign countries) rose from $59 billion a year to $916 billion, a 1,553 percent increase There are about 78,000 multinational corporations and, through FDI, they own or control about 778,000 foreign businesses. Many foreign affiliates are acquired by merger and acquisition and between 1997 and 2002 there was an unprecedented burst of cross-border merger activity both in the number of deals and in their dollar value. Figure 2.6 shows the remarkable rise of FDI, the consequences ofthe post-2001 slowdown in the world economy and resumption of the upward trend in 2003. It also reveals that most investment flows to and from developed nations.

2. The Technological Environment

Today new scientific discoveries create a business environment filled with mind-ling technology. For example, nanotechnology allows manipulation of objects the size of atoms. New materials and tiny machines invisible to the naked eye can be engineered at the molecular level. Semiconductor makers can now make microchips with components the size of one ten-millionth of a meter. When this ability is harnessed to practical manufacturing, it will create chips that operate on an atomic scale comparable to the photosynthesis process in plants. Users with such circuits could store all information in the Library of Congress in the space of a sugar cube. Human genome mapping promises new bio genetic products that will cure intractable diseases. Fuel cells and methods of harnessing renewable energy may dramatically reduce use of fossil fuels.

Digital telecommunications technology now creates a global network of computers, software, and electronic devices. This network has led to radical innovations such as open sourcing, which allows numbers of individuals to participate in the creation of complex knowledge products. Wikis, or Web sites open to collaborative editing by multiple or innumerable parties, have been used to create browsers, encyclopedias, dictionaries, and news sites.

3. The Cultural Environment

A culture is system of shared knowledge, values, norms, customs, and rituals acquired by social learning. No universal culture exists, so the environment of a transnational corporation includes a variety of cultures, each with differing peoples, languages, religions, and values.

On one level, this variation causes conflicts of business custom, and managers in foreign countries must absorb both subtle and striking differences in employee loyalty, group versus individual initiative, the place of women in organizations, ethical values, norms of giving and gratuities, attitudes toward authority, the meaning of time, and clothing worn in business settings. The consequences of cultural differences are often trivial, even humorous. Thus, a consulting firm that helps American managers avoid social blunders in foreign countries counsels them not to force the custom of name tags at business meetings on Europeans, who feel they are being treated as schoolchildren when wearing them. However, consequences can be serious too. In France, the notion is widespread that American fast food causes obesity and, worst of all, is bad tasting and insults the refined French palate. President Jacques Chirac said that national ways of eating should be preserved in the face of an assault by cross-Atlantic invaders; and a minister of agriculture once said that the United States was "home to the world's worst food." For McDonald's, these cultural feelings turned deadly. A mob wrecked one of its restaurants and another was bombed, killing an employee.

On a deeper level, although no uniform world culture exists, there is a fundamental divide between the culture of Western economic development and the rest of the world's cultural groupings. The culture of the advanced West promotes a core ideology of markets, individualism, and democratic government. It is sustained by Western nations that dominate international organizations, contain the most powerful corporations, and have the strongest milliliters However, although developing nations tend to adopt elements of Western culture, some nations and cultures have resisted its spread. Islamic nations and China see spreading Western values as a form of cultural aggression. They have resisted adopting them, particularly participatory forms of government.

Over the last half of the twentieth century, some cultural values in developed nations began to shift, creating changes in the global business environment. In these societies, beginning in the 1960 s, traditional values based on historical realities of economic scarcity were transformed. In their place came what are called postmodern values, or values based on assumptions of affluence. For example, in older industrializing societies materialism was a dominant value. People sacrificed other values such as leisure time and environmental purity to make money and buy necessities, then luxuries. While consumption is still a powerful value in developed nations, their affluent citizens grow more concerned with quality of life and self-expression.

4. The Government Environment

Governments have simultaneously stimulated and constrained business. In this regard, two long-term global trends in government are central.

First, government activity has greatly expanded. One way of measuring this is by comparing a government's spending with the size of its economy. Around the world, the percentage of this spending has risen, from single digits in 1900 to an average of 29 percent in 2002.50 In the United States, in 1913, spending was 8 percent of GDP, but by 2005 it had risen to 35 percent.51 The percentages have risen highest, up to 40 percent and more, in European welfare states and are lower in developing countries, but broadly the trend is up because governments have taken on new functions. For one, they promote social welfare with a range of transfer payments to their citizens. This role grew in the twentieth century as many nations expanded their electorates. New voters included women and the less privileged, groups that voted to enlarge government assistance programs. Another source of government growth is expanded regulation of industries to protect citizens from abuses. In the United States, for example, there is today practically no aspect of business that governments cannot and will not regulate if the occasion arises and popular support exists. New laws, added to past laws, result in more constraints on business.

The second long-term trend is rising democratization. In 1900 no nation was a full democracy with multiparty elections and universal suffrage. The United States and Britain were close, but both lacked female suffrage, and the United States additionally lacked black suffrage in practice. Yet by 1950 there were 22 democratic and by 2006 there were 90.52.

5. The Legal Environment

The legal environment consists of legislation, regulation, and litigation. Five en-ring trends in this environment work to constrain business behavior. First, laws and regulations have steadily grown in number and complexity. The second legal duties to protect the rights of stakeholders, such as employees, consumers, and the public, have expanded. These rights derive from the steady flow of laws and court decisions on, for example, discrimination, sexual harassment, advertising, antitrust, the environment, product liability, and intellectual property. Third, globalization has increased the complexity of the legal environment by exposing corporations to international law and laws of foreign nations, hi addition, advocacy groups promoting human rights and environmental causes push corporations to adopt so-called soft law, or voluntarily adopted codes of conduct that set forth rules for corporate behavior based on emerging international standards of conduct. These rules often exceed requirements in specific laws of nations. Fourth, although the requirements of ethical behavior and corporate social responsibility go beyond legal duty, they are continuously plucked from the voluntary realm and encoded into law. For instance, saving money by firing a long-time employee the week before he or she qualified for a pension was always ignoble. In 1974 the Employee Retirement income Security Act made it illegal as well.

6. The Natural Environment :

Economic activity is a geophysical force with power to change the natural environment. Just as it has strained the ability of human institutions to adapt, so also has it sometimes overwhelmed the ability of ecosystems to cleanse and regenerate. Spectacular economic growth in the twentieth century came at a high cost to the planet. It depleted mineral resources, reduced forest cover, killed species, released artificial molecules, unbalanced the nitrogen cycle, and altered the chemistry of the earth's atmosphere enough to trigger climate change.

7. The Internal Environment

In a corporation, the internal environment consists of four groups, as shown in Figure 2.9. Each group has different objectives, beliefs, needs and functions that managers must coordinate to achieve overall company goals. In this process, a corporate culture that transcends the values of any single internal group is created.

Forces in external environments have recently reduced the power of these internal groups. Managers are limited in their decisions by government and forced to accommodate a range of outside stakeholders having the power or claiming the right to influence them, Employees are losing power over management because of globalization of labor markets that puts them in competition with lower-wage workers elsewhere. In the United States, new financial regulations designed to protect shareholders from dishonest managers have given boards of directors more power and greater independence from top management. However, there is also some erosion of shareholder power by external groups demanding socially responsible actions that conflict with profit maximization.

BUSINESS POWER

The Nature of Business Power

Business has tremendous power to change society, and the extent of this power is under appreciated. In past eras, companies in ascending industries changed societies by altering all three of their primary elements—ideas, institutions, and material things. This effect is visible in the stories of dominant companies such as the American Tobacco Company, the American Fur Company, and the Standard Oil Trust. The cumulative power of all business is a massive, irrepressible shaping Force. In this chapter we explain the underlying dynamics of this power to change society. We then discuss its limits.

What is Power?

Power is the force or strength to act or to compel another entity to act. In human society it is used to organize and control people and materials in order to achieve individual or collective goals. It exists on a wide spectrum ranging from coercion at one extreme to weak influence at the other. Its use in human society creates change. Although power is sometimes exerted to prevent change, such resistance is itself a force that alters history. There are many sources of power, including wealth, position, knowledge, law, arms, status, and charisma. Power is unevenly distributed, and all societies have mechanisms to control and channel it for wide or narrow benefit. These mechanisms, which are imperfect, include governments, laws, police, cultural values, and public opinion. Also, multiple, competing formations of power may check and balance each other.

Business power is the force behind an act by a company, industry, or sector. The greater this force, the more the action creates change or influences the actions of other entities in society. Its basic origin is a grant of authority from society to convert resources efficiently into needed goods and services. In return for doing this, society gives corporations the authority to take necessary actions and permits a profit. This agreement derives from the social contract.

Levels and Spheres of Corporate Power

Corporate actions have an impact on society at two levels, and on each level they create change. On the surface level, business power is the direct cause of visible, immediate changes, both great and small. Corporations expand and contract, hire and fire; they make and sell products.

On a deep level, corporate power shapes society over time through the aggregate changes of industrial growth. At this level, corporate power creates many indirect, unforeseen, and invisible effects. Multiple lines of events converge and interact in complex networks of cause and effect. At this deep level, the workings of corporate power are unplanned, unpredictable, and slow to appear, but they are far more significant. Corporate power "is something more than men," wrote John Steinbeck. "It's the monster. Men made it, but they can't control it." This is a poetic but accurate description of business power at a deep level.

· Economic power is the ability of the corporation to influence events, activities,and people by virtue of control over resources, particularly property. At the surface level, the operation of a corporation may immediately and visibly affects stakeholders, for example, by building or closing a factory. At a deeper level,the accumulating impact of corporate economic activity has sweeping effects.For example, over many years corporations have created enough wealth to raise living standards dramatically in industrialized nations.

Technological power is the ability to influence the direction, rate, characteristics,and consequences of physical innovations as they develop. On a surface level, in 1914, assembly lines run by new electric motors allowed Henry Ford to introduce transportation based on the internal combustion engine. Using this method, he turned an expensive luxury of the rich into a mass consumer product. But at a deeper level, as the auto took hold in American society it created un-anticipated consequences. One juvenile court judge in the 1920 s called the automobile a"house of prostitution on wheels," something that the puritanical Henry Ford doubtless never intended to create.

· Political power is the ability to influence governments. On the surface, corporations give money to candidates and lobby legislatures. On a deeper level, around the world industrialization engenders values that radiate freedom and erode authoritarian regimes.

· Legal power is the ability to shape the laws of society. On the surface, big corporations have formidable legal resources that intimidate opponents. On a York; Harper & Brothers, day. At a deeper level, the cumulative impact of ads has altered American society by reinforcing values selectively, for example, materialism over asceticism, individualism over community or personal appearance over inner character.

· Environmental power is the impact of a company on nature. On the surface, a power plant may pollute the air; on a deeper level, since the seventeenth century,emission of gases in the burning of wood, coal, and oil to power industry has altered the chemistry of earth's atmosphere. One study found that since 1882 the Standard Oil Trust and its successor companies have contributed between 4.7 and 5.2 percent of worldwide carbon dioxide emissions.

· Power over individuals is exercised over employees, managers, stockholders,consumers, and citizens. On the surface, a corporation may determine the work life and buying habits of individuals. At a deeper level, industrialism sets the pattern of daily life. People are regimented, living by clocks, moving in routes fixed by the model of an industrial city with its Streets and sidewalks. Their occupation determines their status and fortune.

Monday, June 3, 2013