Understanding Economic Systems and Business
- Which trends are reshaping the business, microeconomic, and macroeconomic environments and competitive arena?
Trends in the business and economic environment occur in many areas. As noted earlier, today’s workforce is more diverse than ever, with increasing numbers of minorities and older workers. Competition has intensified. Technology has accelerated the pace of work and the ease with which we communicate. Let’s look at how companies are meeting the challenges of a changing workforce, the growing demand for energy, and how companies are meeting competitive challenges.
Changing Workforce Demographics
As the baby boomer generation ages, so does the U.S. workforce. In 2010, more than 25 percent of all employees were retirement age. Fast forward to the U.S. labor force in 2017, however, and millennials have taken over the top spot in the labor market, with more than 40 percent of the total workforce. Although older workers are now retiring closer to the traditional retirement age of 65, many plan to keep working beyond 65, often into their 70s. No longer is retirement an all-or-nothing proposition, and older workers in the baby boomer generation are taking a more positive attitude toward their later years. A surprising number of Americans expect to work full- or part-time after “retirement,” and most would probably work longer if phased retirement programs were available at their companies. Financial reasons motivate most of these older workers, who worry that their longer life expectancies will mean outliving the money they saved for retirement, especially after retirement savings took a hit during the global recession of 2007–2009. For others, however, the satisfaction of working and feeling productive is more important than money alone.
These converging dynamics continue to create several major challenges for companies today. And by 2020, additional generational shifts are projected to occur in the U.S. labor force, which will have an even bigger effect on how companies do business and retain their employees. Today’s workforce spans five generations: recent college graduates (Generation Z); people in their 30s and 40s (millennials and Generation X); baby boomers; and traditionalists (people in their 70s). It is not unusual to find a worker who is 50, 60, or even 70 working for a manager who is not yet 30. People in their 50s and 60s offer their vast experience of “what’s worked in the past,” whereas those in their 20s and 30s tend to be experimental, open to options, and unafraid to take risks. The most effective managers will be the ones who recognize generational differences and use them to the company’s advantage.
Many companies have developed programs such as flexible hours and telecommuting to retain older workers and benefit from their practical knowledge and problem-solving skills. In addition, companies should continually track where employees are in their career life cycles, know when they are approaching retirement age or thinking about retirement, and determine how to replace them and their knowledge and job experiences.
Another factor in the changing workforce is the importance of recognizing diversity among workers of all ages and fostering an inclusive organizational culture. According to a recent report by the U.S. Census Bureau, millennials are the largest generation in U.S. history, and more than 44 percent classify themselves as something other than “white.” In addition, women continue to make progress on being promoted to management, although their path to CEO seems to be filled with obstacles. Recent statistics suggest that fewer than 5 percent of Fortune 500 companies have female CEOs. The most successful organizations will be the ones that recognize the importance of diversity and inclusion as part of their ongoing corporate strategies.
As older workers continue to leave the U.S. labor force and younger individuals begin work or move to other jobs to further their careers, businesses must recognize the importance of diversity and inclusion as key corporate strategies. This is particularly critical as multicultural millennials become the dominant group in the U.S. workforce. One leader in embracing diversity as an important part of corporate life is EY (formerly Ernst & Young), a global leader in assurance, tax, and advisory services.
EY believes its core values and business strategies are firmly based on diversity and inclusiveness, as evidenced by the company landing in the top spot of DiversityInc’s 2017 list of the top companies for diversity. This recognition for EY is no accident; the company has made diversity and inclusion key goals for its more than 214,000 employees around the world. With a diverse workforce becoming the norm, it is no longer acceptable for companies to simply hold a random seminar or two for their managers and employees to discuss diversity and inclusion in the workplace.
Karyn Twaronite, EY’s global diversity and inclusion officer, believes that a simple, ongoing approach is the most effective way to address diversity and inclusion in the workplace. The company uses a decision-making strategy called PTR, or preference, tradition, and requirement, to help managers think about diversity and inclusion. The strategy challenges managers to examine preferences toward job candidates who are similar to themselves, asks them whether their decision about hiring a specific candidate is influenced by traditional characteristics of a certain role, and urges them to make their selection based on the requirements of the job rather than on their personal preferences. In other words, the decision-making tool gives people a way to question the status quo without accusing colleagues of being biased.
Another way EY fosters inclusiveness is sponsoring professional network groups within the organization. These groups provide members with opportunities to network across various EY divisions, create informal mentoring relationships, and strengthen leadership skills. Some of the established networks within EY include groups for LGBT employees; blacks, Latinos, and pan-Asians; women; veterans; and employees with disabilities.
As a global company that works with clients in many countries, EY knows the importance of acknowledging different perspectives and cultures as part of its daily business. The company is committed to making sure employees as well as clients respect different viewpoints and individual differences, including background, education, gender, ethnicity, religious background, sexual orientation, ability, and technical skills. According to EY’s diversity web page, research shows that a company’s diverse teams are more likely to improve market share and have success in new markets and that they demonstrate stronger collaboration and better retention.
- How does EY’s approach to diversity and inclusion translate to additional revenues for the company?
- Would a company’s commitment to diversity make a difference to you when interviewing for a job? Why or why not?
Sources: Company website, “A Diverse and Inclusive Workforce,” http://www.ey.com, accessed May 29, 2017; “DiversityInc Top 50: #1—EY: Why They’re on the List,” http://www.diversityinc.com, accessed May 29, 2017; “Founded on Inclusiveness; Strengthened by Diversity: A Place for Everyone,” http://exceptionaley.com, accessed May 29, 2017; Grace Donnelly, “Here’s EY’s Simple But Effective Strategy for Increasing Diversity,” Fortune, http://fortune.com, February 10, 2017.
Global Energy Demands
As standards of living improve worldwide, the demand for energy continues to rise. Emerging economies such as China and India need energy to grow. Their demands are placing pressure on the world’s supplies and affecting prices, as the laws of supply and demand would predict. For example, in recent years, China and India were responsible for more than half of the growth in oil products consumption worldwide. State-supported energy companies in China, India, Russia, Saudi Arabia, and other countries will place additional competitive pressure on privately owned oil companies such as BP, Chevron, ExxonMobil, and Shell.
Countries worldwide worry about relying too heavily on one source of supply for energy. The United States imports a large percentage of its oil from Canada and Saudi Arabia. Europeans get 39 percent of their natural gas from Russia’s state-controlled gas utility OAO Gazprom.
This gives foreign governments the power to use energy as a political tool. For example, continuing tensions between Russia and Ukraine in November 2015 caused Russia to stop sending natural gas to Ukraine, which also causes gas disruptions in Europe because Russia uses Ukraine’s pipelines to transport some of its gas deliveries to European countries. In 2017, Russia announced plans to build its own pipeline alongside Ukraine’s gas line in the Baltic Sea, which would allow Russia to bypass Ukraine’s pipelines altogether and deliver gas directly to European countries.
Countries and companies worldwide are seeking additional sources of supply to prevent being held captive to one supplier. For example, the relatively new technology of extracting oil from shale rock formations in the United States (known as fracking) has help create an important resource for the country’s oil industry. This innovative approach to finding new sources of energy now accounts for more than half of the country’s oil output, which can help reduce U.S. dependence on foreign oil and create new jobs.
Meeting Competitive Challenges
Companies are turning to many different strategies to remain competitive in the global marketplace. One of the most important is relationship management, which involves building, maintaining, and enhancing interactions with customers and other parties to develop long-term satisfaction through mutually beneficial partnerships. Relationship management includes both supply chain management, which builds strong bonds with suppliers, and relationship marketing, which focuses on customers. In general, the longer a customer stays with a company, the more that customer is worth. Long-term customers buy more, take less of a company’s time, are less sensitive to price, and bring in new customers. Best of all, they require no acquisition or start-up costs. Good long-standing customers are worth so much that in some industries, reducing customer defections by as little as five points—from, say, 15 percent to 10 percent per year—can double profits.
Another important way companies stay competitive is through strategic alliances (also called strategic partnerships). The trend toward forming these cooperative agreements between business firms is accelerating rapidly, particularly among high-tech firms. These companies have realized that strategic partnerships are more than just important—they are critical. Strategic alliances can take many forms. Some companies enter into strategic alliances with their suppliers, who take over much of their actual production and manufacturing. For example, Nike, the largest producer of athletic footwear in the world, does not manufacture a single shoe.
Other companies with complementary strengths team up. For example, Harry’s Shave Club, an online men’s grooming subscription service, recently teamed up with retail giant Target to improve sales and boost its brand presence among Target shoppers. Harry’s products are now available in Target’s brick-and-mortar stores and on Target’s website as part of an exclusive deal that makes Target the only mass retailer to carry Harry’s grooming products. The men’s shaving industry accounts for more than $2.6 billion in annual sales.
- What steps can companies take to benefit from the aging of their workers and to effectively manage a multigenerational workforce?
- Why is the increasing demand for energy worldwide a cause for concern?
- Describe several strategies that companies can use to remain competitive in the global economy.
Summary of Learning Outcomes
- Which trends are reshaping the business, microeconomic, and macroeconomic environments and competitive arena?
To remain competitive, businesses must identify and respond to trends in the various sectors of the business environment. As the population ages, large numbers of baby boomers are approaching retirement age. Companies must plan for this exodus of employees and find ways to retain the vast amounts of knowledge they represent. Many older workers are choosing to continue working after traditional retirement age, creating a five-generation workforce. Worldwide demand for energy, especially from China and India, is challenging oil companies to increase supplies or to find alternative technologies to produce more oil, such as fracking. U.S. vulnerability to disruptions in energy supply became painfully apparent when Hurricane Katrina put Gulf Coast refineries and offshore drilling rigs out of commission. Companies are using relationship management and strategic alliances to compete effectively in the global economy.
Preparing for Tomorrow’s Workplace Skills
- Select a not-for-profit organization whose mission interests you. What are the organization’s objectives? What resources does it need to achieve those goals? Select a for-profit business that provides a similar service, and compare the two organizations. How does each use the factors of production? (Resources, Information, Systems)
- Team Activity Form seven teams. Each team is responsible for one of the sectors of the external business environment discussed in the chapter (economic, political/legal, demographic, social, competitive, global, and technological). Your boss, the company president, has asked each team to report on the changes in that area of the external environment and how they will affect the firm over the next five years. The firm is the Boeing Company. Each team should use the library, the internet, and other data sources to make its projections. Each team member should examine at least one data source. The team should then pool the data and prepare its response. A spokesperson for each team should present the findings to the class. (Interpersonal, Resources, Information)
- If a friend claimed, “Economics is all theory and not very practical,” how might you counter this claim? Share your rationale with the class. (Interpersonal, Information)
- Team Activity Create two teams of four people each. Have one side choose a communist economy and the other capitalism. Debate the proposition that “capitalism/a command economy is good for developing nations.” (Interpersonal, Information)
- What are the latest actions the federal government has taken to manage the economy? Has it used monetary policy or fiscal policy to achieve its macroeconomic goals? Summarize your findings. Choose one of the following industries, and discuss how the government’s actions will affect that industry: airlines, automobile manufacturers, banking, biotechnology, chemical manufacturing, home building, oil and gas, retail stores, and telecommunication services. (Information, Systems)
- As a manufacturer of wireless headphones, you are questioning your pricing policies. You note that over the past five years, the CPI increased an average of 3 percent per year but that the price of a pair of wireless headphones increased an average of 8 percent per year for the first three years and 2 percent per year for the next two years. What does this information tell you about demand, supply, and other factors influencing the market for these headphones? (Resources, Information)
Historically, diesel cars have not been big sellers in the U.S. auto market, mainly because their engines couldn’t pass the strict emissions standards set up by the Environmental Protection Agency and the California Air Resources Board. But that all changed in 2005, when German automaker Volkswagen made a decided push to develop “clean diesel” engines, specifically manufactured to meet strict U.S. emissions standards.
By 2010, VW had introduced several models of diesel cars in the United States, and their sales helped propel Volkswagen to the number-two slot in global auto sales, after Toyota and ahead of GM. While VW was receiving major media attention for its clean diesel models, researchers from West Virginia University discovered that these so-called clean engines had been constructed with a “defeat device”—software that could actually tell when the car was being tested off road for emissions and lower the level of emissions that harm the environment.
By December 2014, Volkswagen agreed to voluntarily recall more than a half-million clean diesel cars in the United States to address the emissions issues. But the scandal continued to escalate, with accusations that senior management knew about the rigged engines, and VW’s CEO resigned and several other executives were fired.
Class-action lawsuits and other litigation followed, and in April 2017, VW agreed to a $4.3 billion settlement, which included a criminal fine of $2.8 billion, as well as various buyback plans for the affected diesel cars. In addition, over the last several years, VW has experienced a significant decline in U.S. sales and is now trying to win back customers.
Using a web search tool, locate information about this topic, and then write responses to the following questions. Be sure to support your arguments and cite your sources.
Ethical Dilemma: How can VW ensure that its diesel cars now comply with U.S. emissions standards? What can VW do to regain consumers’ confidence after this worldwide scandal? Do you agree with the billions of dollars in fines that VW will have to pay to move beyond the emissions debacle?
Sources: “VW Diesel Crisis: Timeline of Events,” https://www.cars.com, May 19, 2017; Jack Ewing, “Inside VW’s Campaign of Trickery,” The New York Times, http://www.nytimes.com, May 7, 2017; Christoph Rauwald, “How a Top-Secret Deal Could Have Stopped VW’s Diesel Scandal,” Bloomberg, http://www.bloomberg.com, January 12, 2017; “6 VW Execs Indicted as Carmaker Agrees to $4.3 Billion Diesel Cheat Settlement,” Fortune, http://fortune.com, January 12, 2017; Geoffrey Smith and Roger Parloff, “Hoaxwagen: Inside Volkswagen’s Diesel Fraud,” Fortune, http://fortune.com, March 7, 2016.
Working the Net
- The Bureau of Labor Statistics compiles demographic data. Visit http://www.bls.gov/bls/demographics.htm, and describe the different types of information it provides. What kinds of changes are likely to occur in the United States over the next 25 years? Click on Spending & Time Use and select How Americans Spend Time to read about the American Time Use Survey. What trends can you identify?
- Go to either the Red Herring (http://www.redherring.com) or Wired (http://www.wired.com) site and research technology trends. Compile a list of three trends that sound most promising to you, and describe them briefly. How will they affect businesses? What impact, if any, will they have on you personally?
- Use the Bureau of Labor Statistics site (http://stat.bls.gov) to determine the current trends in GDP growth, unemployment, and inflation. What do these trends tell you about the level of business activity and the business cycle? If you owned a staffing agency, how would this information affect your decision-making?
- What’s the latest U.S. economic news? Go to the CNBC website, and select the Economy page, which categorizes news about the world economy, the U.S. economy, and other important topics (http://www.cnbc.com/economy/). Read the various articles about the U.S. economy, and then do the same for GDP Outlook. Prepare a summary of what you learned, and use it to discuss where you think the economy is headed for the next 6 to 12 months.
- How would you spend the national budget if you were president? Here’s your chance to find out how your ideas would affect the federal budget. Go online to Committee for a Responsible Federal Budget, at http://www.crfb.org, and under Tools, click on Stabilize the Debt, which is an exercise in making difficult decisions and how government officials make trade-offs when they prepare the federal budget. Experiment with your own budget ideas at the site. What are the effects of your decisions?
Creative Thinking Case
Walmart Gets Serious about E-Commerce
As the world’s largest retailer, Walmart has built thousands of brick-and-mortar stores in the United States, Mexico, and elsewhere. Although a success story when it comes to traditional retail locations, Walmart has struggled with its e-commerce efforts, with recent online sales accounting for about 3 percent of the company’s $300 billion in annual sales. The company has tried several different e-commerce strategies in the past, but none of them was an overwhelming success. Some company insiders objected to the pricing strategy used for online purchases; they were fearful that Walmart’s lower prices online would take customers (and sales) away from the retail locations.
Doug McMillon, Walmart’s CEO since 2014, believed a significant change was needed in the company’s e-commerce business, and he recently made changes in a big way. Over the past two years, Walmart spent billions to acquire several online companies to expand its e-commerce business in an effort to take a small bite out of retail giant Amazon’s success. In 2016, Walmart purchased Jet.com, an e-commerce site that sells a little bit of everything (books, clothing, electronics, etc.) at discount prices. Once the $3 billion acquisition was completed, Jet’s cofounder and CEO, Marc Lore, who now runs Walmart’s e-commerce platform, worked with McMillon to identify other established online companies to add to their e-commerce portfolio, and add they did.
First Walmart purchased footwear e-tailer ShoeBuy for $70 million in January 2017. The following month, Walmart bought outdoor specialty retailer Moosejaw for $51 million. Then in March, Walmart paid $75 million for ModCloth, an eclectic shopping site for women’s fashions. Walmart is also said to be in negotiations to buy Bonobos, a hip fashion retailer geared to millennial males.
Reaction to the acquisitions has been mixed, depending on whom you ask. Retail analysts applaud the company’s radical move, pointing out that several well-known traditional retailers have closed their doors or filed bankruptcy because they failed to take part in the e-commerce revolution. Fashionistas, on the other hand, are lukewarm about the move. However, McMillon’s decision to allow the online retailers to operate independently may help retain loyal customers. The new e-commerce strategy may also lure typical in-store shoppers to take advantage of the expanded offerings available through both Walmart.com and Jet.com.
- What are some advantages of Walmart purchasing established web businesses?
- What impact is Walmart’s acquisition of nontraditional retailers likely to have on the shopping habits of Walmart’s customers?
- How will the aggressive e-commerce plan implemented by Walmart affect operations at its retail locations?
Sources: Brad Stone and Matthew Boyle, “Amazon Won’t Know What Hit ’Em!” Bloomberg Businessweek, http://www.bloomberg.com, May 8–May 14, 2017; “What an Acquisition of Bonobos Would Signal About Wal-Mart’s Strategy,” Forbes, http://www.forbes.com, May 9, 2017; “Walmart Acquires Niche Online Retailers, to the Dismay of Hipsters,” Denver Post, http://www.denverpost.com, March 24, 2017; Alana Abramson, “Walmart Acquires Online Women’s Retailer ModCloth,” Fortune, http://fortune.com, March 17, 2017; Phil Wahba, “Walmart’s 29% Online Holiday Season Growth Sends Shares Jumping,” Fortune, http://fortune.com, February 21, 2017; Laura Heller, “Take That Amazon: Walmart Buys Moosejaw for $51 Million,” Forbes, http://www.forbes.com, February 15, 2017; “Walmart Acquires ShoeBuy for $70 Million,” Business Insider, http://www.businessinsider.com, January 6, 2017.
- relationship management
- The practice of building, maintaining, and enhancing interactions with customers and other parties to develop long-term satisfaction through mutually beneficial partnerships.
- strategic alliance
- A cooperative agreement between business firms; sometimes called a strategic partnership.