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The Traditional Economic Model and the Stakeholder Model 1

Research Paper

Alexa Hogan, Jarred Wade and Natalie Paige

MBA 6570: Leadership in a Global Environment

June 20, 2023

Introduction

The automotive industry is known to be an influential industry that has grown

tremendously throughout the 20 century. It is a very high-demand supply chain worldwide and can be very competitive. This industry has long followed Henry Ford's approach based on economization, standardization, and product innovation and has progressed significantly (Aminpour et al., 2023). In the past, cars were mass-produced and sold really well the traditional way. However, the need for automobiles has declined due to some of the younger consumers preferring more share-riding services for their transportation use. The traditional business model focused on an input-process-output approach, where profitability is the goal, perpetual economic growth, and unbridled consumption is encouraged, and nature’s worth is measured primarily in terms of its potential for generating economic value (Geringer et al., 2022). For the industry to remain thriving, it has to strive for the best quality products to ensure that they produce quality automobiles. There is no way that the automobile industry can survive if they only focus on making profits rather than creating amazing experiences such as the smallest decision as to which type of greenhouse gas the automobiles will endure. While keeping in mind that there is always new competition throughout this industry. The industry itself has recognized the importance of addressing the need of a target market while trying to build an ecosystem that will form partnerships with other industries that align with their overall goal. These are reasons why the stakeholder model is the best fit for the automotive industry , it can give the automobile industry the chance to embrace the competing demands within their industry (Geringer et al., 2022). From a business standpoint, it’s easy for them to find themselves at crossroads if they are not trying to satisfy the likes of the consumers as well as planning for the future of the industry.

Information on the Traditional Economic Business Model

The traditional business model has been successful for many years, but is it time for U.S. companies to start considering something non-traditional? Our book states, “the traditional U.S. business model is economic and focuses on an input-process-output approach, where profitability is the goal, perpetual economic growth and unbridled consumption is encouraged, and nature’s worth is measured primarily in terms of its potential for generating economic value” (Geringer et al., 2022). However, the traditional business model is not how the rest of the world understands business. Many of the businesses that do use the traditional model resist changing models because it has worked well, and why fix what’s not broken? In the United States, profitability is the basic purpose of business, and a business is “not assumed to have social obligations” (Geringer et al., 2022). The traditional model, however, is said to be dangerous environmentally, socially, and economically. Specifically, this model is perilous because instead of using a more cyclical and sustainable approach, the companies that use this tend to be more wasteful in the production of their products and services. Over the past decade, there has been a substantial amount of research poured into different ideas and theories about business models. Clearly, as the world around us is constantly innovating, the business model will and should too. With that said, there are many organizations that continue using some of the original characteristics of the traditional business model but have implemented new characteristics concerning how the model operates and performs. Transitioning from a traditional model to a more evolutionary development of a business model may not always be the best thing, but research does suggest that it can be successful because it is inspirational for some leaders. The traditional business model has been successful for many years, but many companies today are looking for a model that is less invasive and more sustainable for the company.

Information on the Stakeholder Business Model

The stakeholder theory was developed by R. Edward Freeman and is defined as an understanding of how a business operates that considers all identifiable interest holders. Before Freeman came up with his theory, many issues relating to stakeholders were developed under corporate social performance and have since then evolved into something much more sizable.

There are multiple definitions for the stakeholder model, but according to our book, the stakeholder model “calls for managers to identify and consider the network of tensions caused by the competing internal and external demands within which the business exists” (Geringer et al., 2022). There are also many dimensions and distinctions among stakeholder models throughout the years. One important set of dimensions is referred to as the nature of ‘normativity’, which is used when distinguishing different normative stakeholder theories. In May of 1993, Donaldson and Preston “suggested that stakeholder theory had been advanced and justified in the management literature on the basis of its descriptive accuracy, instrumental power, and normative validity ” (Friedman & Miles, 2006). With the descriptive approach, the stakeholder theory is used to describe the nature and other characteristics of the firm. This approach is also known as the empirical approach. The instrumental approach is hypothetical and provides a structure for investigating the potential relationships, if any, between the implementation of stakeholder management and the attainment of different corporate performance objectives while holding other factors constant. The normative approach is categorical and identifies the guidelines for the management of corporations. The broadly managerial approach suggests certain attitudes and attributes that work together to make stockholder management work.

The stakeholder model forces a business to address underlying values and principles. This model “pushes managers to be clear about how they want to do business, what kind of relationships they want and need to create with their stakeholders to deliver on their purpose” (Geringer et al., 2022). With the stakeholder model, instead of profitability being the main driver as it is in the traditional model, profit is a result of value creation. As previously stated, the stakeholder model has evolved into something much bigger than what it originally was. Many corporations have adopted the use of the stakeholder model and have been highly successful as a result of doing so.

How the Traditional Economic Model Effects the Automobile Industry

The economic model has affected the automakers over time by encouraging their organizations to be solely focused on only creating a profit. The key players in the automotive market are operating on a global scale in a highly competitive market. (Toma, Marinescu, Burcea, 2015) When competing globally for market share, virtually all companies want their profits to be the highest to ensure their organization can continue to prosper and benefit from their company’s success. In some countries, the automotive industry represents an economic engine for those nations, and their success represents success for an entire country. The obligation for some automobile companies to their respective countries to produce high profits offer a justifiable reason for those companies to choose the traditional economic business model. From the beginning of the automobile industry, automakers have made their profits from producing and selling gasoline vehicles. Conventional fuels commonly used in cars with combustion engines and the effects of their combustion have a very negative impact on the state of the environment. Authorities of many countries are introducing more and more stringent emission standards for cars with internal combustion engines and car manufactures are forced to meet these standards. (Rabe, Jakubowska, Draskovic, Widera, Pudlo, Lopatka, Kusminski, 2022) The economic model has always affected the automobile industry, because of its widespread use.

How the Stakeholder Model Effects the Automobile Industry

Due to automobiles’ nature of using the environment to move about the world, the automobile industry has been greatly affected by the stakeholder model. Greenhouse gas emissions are major contributors to climate change, causing harm to both the planet and people. Since transportation is a significant source of these emissions, several European countries have implemented plans to switch to electric vehicles and decrease emissions by 2050. These changes greatly affect car makers due to issues with redesigning supply chains, scarcity of raw materials, and impacts on employment, technology, mobility behavior, and infrastructure. (Demartini, Ferrari, Govindan, Tonelli, 2023) The challenges organizations face when changing from a traditional economic business model to the stakeholder model are immense, however, for a sustainable environment it is necessary. Quantifying economic profit has been fairly straightforward in regard to determining value, but quantifying social value has been difficult in practically all industries. Over the last decade, important efforts have been made to integrate economic and social value in organizations within a report. The interest and demands in society concerning not just economic, but social responsibilities has reflected a need for corporations to participate and influence social issues. (Retolaza, San-Jose, Ruiz-Roqueni, 2015) German automotive companies have faced pressure to consider social issues in global and interconnected supply chains. Social issues pose risks to supply chains since the occurrence of a social issue within their supply chain could have adverse stakeholder reactions. How automotive companies react to certain social issues could have a major effect on their reputation. Significant effort has been used to estimate and assess social risks along the global supply chain. (Zimmer, Frohling, Breun, Schultmann, 2017) With such a high number of vehicles being used in the world, stakeholders can have a major effect on the automobile industry and the Earth as well.

Conclusion

The automobile industry is one of the top leading industries in the world. Causing such a ripple effect in today’s supply chain. Automobiles have played such a huge role in our lives that we rarely stop to think about how they actually shape the world. The automobile industry has endured many changes throughout the years that have resulted in opportunities, positivity, and negativity. Some of those changes incorporated ideas that fell under the traditional and stakeholder model. These models have played such an important role in the industry. For many years, the traditional model has been a leading tactic for the industry. Many businesses have praised this model because it has brought such success for the industry. The industry realized that it was time to integrate something new, stakeholder models. The stakeholder model has brought different changes to the industry but they were necessary changes that needed to be made.

Question: Is profit by any means necessary, good for profit?

References

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