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strategic management Actions taken by managers to adapt a company to changes in its market and sociopolitical environments.

theory A statement or vision that creates insight by describing patterns or rela- tionships in a diffuse subject matter. A good theory is con- cise and simpli- fies complex phenomena.

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Chapter 1 The Study of Business, Government, and Society 21

and measure its actions. Scholarship in all three areas shows increasing sophistica- tion and wider agreement on basic ideas.

Despite the lack of a grand theory to unify the field, useful theories abound in related disciplines. For example, there are economic theories about the impact of government regulation, scientific theories on the risks of industrial pollution, political theories of corporate power, ethical theories about the good and evil in manager’s actions, and legal theories on subjects such as negligence applied by courts to corporations when, for example, industrial accidents occur. When fitting, we discuss such theories; elsewhere we rely on descriptions of events. In each chapter, we also use stories at the beginning and case studies at the end to invite discussion.

Global Perspective Today economic globalization animates the planetary stage, creating movements of people, money, goods, and information that, in turn, beget conflicts as some benefit more and others less or not at all. Viewing any nation’s economy or busi- nesses in isolation from the rest of the world is myopic. Every government finds its economic and social welfare policies judged by world markets. Every corpora- tion has a home country, but many have more sales, assets, and employees outside its borders than within. For now, capitalism is ascendant. It brings unprecedented wealth creation and new material comforts, but it also brings profound risks of economic shocks, imposes burdens on human rights and the environment, and challenges diversity of values for those who stand aloof from the free market con- sensus. A fitting perspective on the BGS relationship must, therefore, be global.

Historical Perspective History is the study of phenomena moving through time. The BGS relationship is a stream of events, of which only one part exists today. Historical perspective is important for many reasons. It helps us see that today’s BGS relationship is not like that of other eras; that current ideas and institutions are not the only alternative; that historical forces are irrepressible; that corporations both cause and adapt to change; that our era is not unique in undergoing rapid change; and that we are shaping the future now. In addition, the historical record is rela- tively complete, revealing more clearly the lessons and consequences of past events as compared with current ones that have yet to play out and show their full significance.

Despite appearances of novelty, the present is seldom unparalleled and is best understood as an extension of the past. So we often examine the origins of current arrangements, finding them both enlightening and entertaining. Readers of this book, many at the beginning of long business careers, can take heart from the words of Nicolò Machiavelli, a student of history who believed that “whoever wishes to foresee the future must consult the past; for human events ever resemble those of preceding times.” 50

history The study of phenomena moving through time.

50 Niccolò Machiavelli, Discourses on the First Ten Books of Titus Livius (New York: The Modern Library, 1950), book 3, chapter 43, p. 530, written in 1513.

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Chapter Two

The Dynamic Environment Royal Dutch Shell PLC

Royal Dutch Shell is one of the world’s largest companies. It operates in 130 coun- tries. Each year it makes capital investments of between $30 billion and $40 billion, sums that exceed the annual revenues generated from Coca-Cola. Payoffs on these massive bets may come only after years or decades. Risks are large. Shell exists in an uncertain geopolitical environment stirred by forces it cannot dominate. Even a giant must bend to fortune. Are its investments right for the future?

To find out, Shell convenes teams of elite scholars and staff to write alternative versions of the future called scenarios. 1 A scenario is a plausible story of the future based on assumptions about how current trends might play out. Carefully written scenarios challenge managers to think in original ways. They are mental wind tunnels that shift environmental forces around the form of the company to see how it “flies.”

Scenarios were first used in the 1960s by scholars studying the idea of a nuclear war between Russia and the United States. With no historical precedent for an ex- change of atomic bombs, they drew up riveting alternatives about how such a battle might advance. In the 1970s, Shell pioneered the use of scenarios in corporate plan- ning and they soon proved their worth. In 1971 its planners created a scenario in which oil-rich countries cut their oil exports to raise prices. Conventional wisdom at the time held this to be unlikely. Nonetheless, thinking about the possibility changed Shell’s strategy, and when an oil embargo surprised the world in 1973 it was the only major oil firm prepared for the supply interruption.

Shell’s reward was higher profits than its competitors for years afterward. Since then, it has continuously used scenarios to shape strategy. In the 1990s, its planners saw change in the global business environment caused by three dominant forces: globalization, technological change, and liberalization (meaning relaxation of trade restrictions and regulations). According to Shell, these forces made up “a rough,

scenario A plausible story of the future based on assumptions about how current trends might play out.

liberalization An economic policy of lower- ing tariffs and other barriers to encourage foreign trade.

1 See Peter Cornelius, Alexander Van de Putte, and Mattia Romani, “Three Decades of Scenario Planning in Shell,” California Management Review, Fall 2005.

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Chapter 2 The Dynamic Environment 23

impersonal game, involving stresses and pressures akin to those of the Industrial Revolution.” 2 These three forces became the basis for multiple scenarios.

Now, Shell sees an emerging drama in the global energy system, with tensions building at the intersection of three powerful trends. First, developing nations with expanding populations are using policies of economic growth to alleviate poverty. China and India in particular will consume massive amounts of energy as they develop. Second, supplies of oil and gas cannot keep pace with rising demands for energy. Their shares in the global energy supply will shrink. Alternative sources of energy, including wind, solar, nuclear, and biofuels, will be insufficient to make up the difference. Coal remains abundant, but it is a pollution nightmare. Third, environ- mental stresses are growing. If fossil fuels maintain their current share of the global energy supply, atmospheric carbon dioxide, which has risen from about 280 parts per million (ppm) in 1800 to 390 ppm today, will bring climate warming that threatens the well-being of human society.

How will the tensions caused by the three trends play out? Shell explores the future in two new scenarios named Scramble and Blueprint. 3

In Scramble the world fumbles its response to the energy challenge. A dwindling energy supply leads to price spikes and shortages, putting nations in competition with each other for access to fuels. Politicians are pressured to maintain economic growth, so they push the use of more coal and biofuels. Action on climate change is postponed, even as coal burning releases massive amounts of carbon dioxide into the atmosphere. Rising use of biofuels absorbs much of the world’s corn crop. Soon, slowing economies, extreme weather events, and shortages of both energy and food cause political upheavals in several countries. Around 2030 advances in energy effi- ciency and the development of alternative sources bring energy shortages to an end. About this time a consensus on the need for a global greenhouse gas policy emerges. However, 20 years have passed and keeping carbon dioxide in the atmosphere below 550 ppm, a level that threatens human well-being, will be difficult.

In Blueprints the world is more prompt. As energy shortages emerge, a patchwork of responses appears in cities and regions around the world. New taxes and incentives pro- mote energy efficiency. Carbon markets develop. A growing number of local actions bring calls by corporations for clarity and predictability in markets, so national govern- ments act to harmonize policies. As they do, economies shift to less energy-intense foot- ings. With predictability in markets, investment flows to alternative energy sources. Vehicles powered by new battery and fuel-cell technologies dominate transportation. International cooperation grows. Europe, the United States, Japan, China, and India join in establishing a carbon market. Their cooperation leads to an international framework for reducing carbon dioxide emissions with a chance of stabilizing greenhouse gas con- centrations near 450 parts per million, a level that avoids catastrophic climate change.

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