Volkswagen\'s Emission Scandal Case Study PDF

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We explore the scandal that involved Volkswagen cars cheating to pass emission tests. We discuss what went wrong and how the company should've had a contingency plan in action. ...

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Faculty(of(Business(and(Economics( THE(UNIVERSITY(OF(MELBOURNE( Group(Assignment(Cover(Sheet

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Not only did the legal and financial aftermaths that occurred in different countries made Volkswagen’s emission scandal a shocking event, but also the lasting harm to the environment and society. This scandal has created very serious repercussions for the giant automaker, whose vision is to offer “attractive, safe and environmentally sound vehicles which can compete in an increasingly tough market and set world standards in their respective class” (Volkswagen.com). The company was on a rightful track to achieving their previously set goal of becoming the world’s largest car manufacturer by 2018, however this scandal caused the conglomerate to lose one third of the company’s market cap (Atiyeh, 2016). In September of 2015, the Environmental Protection Agency discovered that numerous VW cars that were being sold in the US had a ‘defeat software’ in diesel engines that could perceive when they were being verified, changing the performance accordingly to improve results. Since then, Volkswagen admitted that 11 million cars worldwide were affected in this deception (Ewing, 2015). As a result of the scandal, the company became the target of regulatory inquiries in several countries across the world. They announced their first quarterly loss in 15 years of € 2.5 billion and the group’s CEO, Martin Winterkorn, resigned alongside distinctive important managers, including the research and development heads of Audi and Porsche. The purpose of this essay is to critically examine and evaluate Volkswagen recent predicaments. These troubles are to be analysed by four aspects. First, the essay will identify important factors that help explain the managerial decisions at VW that led to the scandal. Then, it will assess the potential impact of the car emissions scandal on VW. Followed by that, the essay will critically evaluate VW’s crisis management efforts and will propose a set of additional managerial actions that the organisation could take to get back on !

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the right path. Finally, it will present convincing arguments for key learning lessons from the case. Some of the management concepts/ frameworks that will be used in this essay are: crisis management, strategic management, scientific management, extrinsic and intrinsic motivation, ethical leadership, internal environment, external environment and task environment. Volkswagen was looking to have a competitive advantage against their competitors. They were looking to be the biggest car manufacturer in the world by 2018. When they realized that their goal was most likely to fail, they started to look for alternatives to help them accomplish their goal (Mourdoukoutas, 2015). Volkswagen was not being able to deliver an engine that could give them an advantage towards their competitors, so they implemented the defeat device to cheat and score better than the other car manufacturers. Forecasting environmental uncertainty is a huge challenge for companies like Volkswagen because they operate inside a fast and unpredictable environment (Sung et al., 2016). Technology is a part of the external environment that affect a company, and since Volkswagen was not able to keep up with their competitors in their diesel car branch, they decided to act in an illegal and immoral way to keep them in the race of becoming the biggest car manufacturer (Robinson, 2015). Volkswagen did not count with the information to know whether they were going to get caught in their carbon dioxide scheme, meaning that their environmental uncertainty was clearly an important factor in their scandal (Sung et al., 2016). Volkswagen corporate culture pressured their employees to get the work done, or they would hire someone else for the job. Their engineers implemented defeat

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devices to the computers because they were unable to find a solution to build diesel engines that complied with the standards of the United States (Hedlund, 2017). The scientific management perspective states that a set of tasks should be done in the most efficient way possible, without taking into consideration the human relations perspective of an employee (Taylor, 1914). Clearly Volkswagen employees were being exploited towards a more scientific management on which only results matter, and everything should be done to improve labour productivity (Taylor, 1914). McGregor’s Theory X and Theory Y could also be compared with Volkswagen employees because their responsibilities were not given under the right conditions. The lack of motivation from the company towards their employees played a huge part as well, asking someone to do something or they will be fired is not the correct motivation for a job to be done (Kopelman, Prottas & Davis, 2008). Employees were also being extrinsically motivated to do their jobs, they were just trying to hold on to their job instead of being punished for not delivering a good fuel economy and low emissions engine (Benebou & Tirole, 2003).

Volkswagen bonus structure kept employees from talking about the emission cheat to people outside the company (Hedlund, 2017). A company’s organisational culture is the traditional ways of doing things inside of the company, and their bonus system played an important role before the scandal was set loose. Volkswagen’s hands bonuses to all their employees for individual performance, or team performance. One could argue that their organisational culture is primarily based in the achievement culture, which is results oriented and rewards high performance. This creates an environment where employees are afraid to talk or become a whistleblower because !

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no one wants to place their economical welfare at risk (Merkel, 2015). Employees were being intrinsically motivated to perform their job for their own sake, and they were also being extrinsically motivated because they were being rewarded (Benebou & Tirole, 2003). Herzberg’s Two-factor Theory stated that there are two factors that dictate job performance inside an organisation. Motivation factors like recognition, responsibility, personal growth, and hygiene factors like working conditions, pay and security, company policies (DeShields et al., 2005). The hygiene factors of the employees were being fulfilled, but their motivators were in the wrong place (Hedlund, 2017).

It is evident that the emissions scandal impacted Volkswagen’s current financial condition and brand image. A very through plan will be needed to get back the confidence of their stakeholders. The emissions scandal has impacted businesses across the VW value chain, from the thousands of parts suppliers to the dealers across the world. In addition, there has been personal harm to many stakeholders like their employees, customers, shareholders and even regulators (Snyder, 2016).

To recover from this catastrophic scandal, Volkswagen will have to deal with both external and internal environment factors. Task environment is when a company performance is affected directly by external factors; them being: the labor market, suppliers, competitors, and customers (Samson & Daft, 2015). Volkswagen’s goal of becoming the largest car manufacturer by 2018 created excessive tension in the organisation that pushed certain executives to make unethical decisions to achieve results by conspiring with their suppliers to add illegal software (Atiyeh, 2016). No

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one in the company could write the software they needed to evade emission rules so they went to one of their partners, Robert Bosch, who supplied the software (Ewing, 2017). Given the magnitude of the scandal it would be expected that other suppliers start putting extra restrictions in their dealings with Volkswagen which could impact their future performance. In addition, since the scandal erupted Volkswagen has been trying to gain back their customer trust; customers feel betrayed because VW knowingly sold 11 million cars with faulty emissions worldwide (Rauwald, 2016). Consequently, sales have dropped dramatically since the scandal and will likely continue to be impacted until they can gain back their reputation and prove to their customers they have an engine that can comply with the stringent emissions standards. In addition to being unethical these cars caused a health problem to the public in general; it is estimated that around 36.7 million kg of excessive NOx emissions were emitted by these engines from 2008-2015 (Barrett et al., 2015). After Volkswagen was charged with cheating on diesel emission, their net loss was €1.58 billion for 2015, which is a drastic change from the previous year net profit of €10.85 billion (Sloat, 2016). Furthermore, it is expected that regulators like the EPA will increase the scrutiny of their revisions. This will likely generate additional administrative burden to the company adding incremental costs to the organisation.

In addition to the external factors, Volkswagen will have to deal with internal factors that will impact the organisation’s performance and the moral of the employees. Given the magnitude of the issue the board of directors forced the CEO, Martin Winterkorn to resign. In addition, VW fired top executives that were directly !

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involved in the scandal. However, VW was still able to come forward from the crisis without cutting jobs (Rauwald, 2016). These changes are only the first step in a long journey to gain back its reputation as a top of class car manufacturer with its stakeholders.

Volkswagen started implementing their qualified software and system to meet the U.S. emission standard in 2007 (Zhang et al., 2016). Haven operated this way for more than eight years before being discovered, the company should have developed a contingency plan. Apparently, they did not, as evidenced by an interview that HansGerd Bode, Volkswagen’s communications chief, gave to The New York Times. “A crisis like this, the company was not prepared for”, he said. Investigators were close to discovering the company’s misdeeds. After the scandal was brought to a worldwide spotlight, representatives from the company admitted to the US regulators that they had installed a cheating software to ‘some’ of its TDI models. (Gartner et al., 2015). The first thing they decided to do was to partially admit guilt in order to buy more time. By their reasoning, confessing would make investigators lessen their investigations. This would have given the company more time to analyse the situation and develop a crisis management plan accordingly so that they could try to minimize the damage that was coming their way. This was a very decent idea, however investigations did not halt or weakened. If the company had been sincere with officials at that point, the harm to the company’s reputation and finances would most likely have been severe but not devastating. Volkswagen did not exploit the opportunity to be transparent (Ewing, 2016). A month after, VW was forced to confess publicly all their wrongdoings after US regulators threatened to withdraw !

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certificates from their 2016 models. Although they apparently did not have a contingency plan, the company competently followed the ‘prevention’ stage of crisis management. By detecting signals from the environment, which were the investigations from regulators, the company decided to confess to obtain time to think.

Let’s now analyse how the company behaved during the ‘containment’ phase of the crisis management. The same day that the company admitted that 11 million vehicles were affected, they announced an immediate stop-sale of new 4 cylinder TDI vehicles in its dealer inventory (Ewing, 2016). They should have recalled all the vehicles that were affected before admitting guilt. This way, they could have elaborated an excuse for the recall that would not make customers feel cheated. At this time, Volkswagen was seen as particularly brazen. According Wendy Salomon, a vice president at Nielsen who conducted the recent Harris Poll, the public tends to show more tolerance for recalls and labor issues. However, she also said that the polling indicated that people were “least tolerant” of “lying and misrepresentation and intentional wrongdoing” (Hakim, 2016). Volkswagen stressed that the cars were safe to drive, and they apologized publicly, but they did not announce any solution. This raised the question as to whether radio silence for the time being was an effective strategy from the company. Sylvia Long-Tolbert, marketing expert from John Hopkins University, says that for an immediate reaction, that was an appropriate response. However, people want corporations to recognize that there is a problem and to hear from the company. This is an important step in the recovery for the long term. !

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The company decided to compensate their American customers with $1000. This decision backfired. While they admitted cheating in the US and started making goodwill payments to their clientele, the company claimed that cheating was not illegal under European rulebooks. Because of this Volkswagen decided not to pay European customers, even though it was recalling its cars in both markets (Hakim, 2016). Unsurprisingly many Europeans were not pleased by this decision. As a member of the British Parliament protested to Volkswagen’s executives in Britain at a hearing said, “you’ve treated European customers with disdain”.

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consumers differently in the US and in Europe was asking for trouble. The company should have offered the same good-will payments in Europe or should have not given any compensations at all. Matthias Mueller, Volkswagen’s new CEO after the scandal, developed a 5-point plan to deal with the crisis. The first thing was to bring assistance to the customers affected. Showing customers that they care about them is crucial for brand loyalty. Second, investigate and identify the actors responsible for the defeat device. This point was established with the aim of exposing those employees to the media, so that Volkswagen, as a whole, was not affected by negative comments from people, but to shift the blame to those employees instead. According to Lyons, getting rid of a C-level employee is not an effective way to redirect negative attention on the brand. “I think the average consumer is more sophisticated in understanding that it's the collective efforts of a subset of players in an organisation that drive and enact these sorts of decisions” she said (Lyons, 2015). Mueller’s third point was to give each region and brand more autonomy. Point four was to change Volkswagen’s corporate !

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culture. They were supposed to make the company one of honesty and collaboration, while still preserving their pursuit of excellence and social responsibility. The fifth and last point was to push their 2018 strategy back to 2025 (Krok, 2015). Volkswagen’s main concern now should be establishing credibility to its consumers and stakeholders. This essay proposes two possible solutions for what Volkswagen’s future action should be: restarting the company under a new name and/or joining an independent verification agency. The company should apply as many measures as possible to restore credibility to its company (Zhou, 2016). Failure to do so will most likely lead to a consumer boycott. Decrease in sales and the eventual collapse of the company would be the repercussions of those consumer actions.

Volkswagen executives have considered the prospect of resurrecting the company under a new name. If the company reopens under a new name, it may improve brand image. Re-branding could make facilitate the company to speed up efficiency programs and potentially save the company (Zhou, 2016). Rebranding could be expensive and risky, but it has great chance to potentially diminish the negative publicity the scandal brought to the company. If Volkswagen were to choose this option, they must try to create a company with more ‘green’ values and one that has superior corporate social responsibility practices. Studies have suggested that “greenwashing,” when a company tries to depict itself as more concerned with the environment than it actually is, has become progressively ubiquitous in recent years (Gelles, 2015). !

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The second action proposal is partnering up with an independent emissions verification agency. Although Volkswagen has its own internal team that examines vehicle emissions (Atiyeh, 2016), partnering up with these types of agencies could help regain customer trust. The company could also gain acknowledgements and remunerations from nongovernmental organisations that test and rank companies based on CSR practices. If Volkswagen junctures with more prestigious international organisations, their credibility would become stronger.

The first lesson that can be taken from the Volkswagen case is to encourage open communication and collaboration. This case presents the perfect opportunity for the company to consider failure as an instrument to encourage dialogue and debate. Some of the smartest engineers in the world are at the service of VW. If given the resources, these people could solve a problem like the emissions issue easily. However, they were hindered by their CEO’s management style. Instead of adapting the engine in a way for it to produce ‘eco-friendly’ levels of emissions, they were asked to develop a software that tricked emissions tests. A good leader should be transparent and accessible. By doing this, leaders can build trust among team members and enable them to be open about how things should be made and ways in which the company can improve. Sharing information between employees through departments leads to innovation. Companies that act in accord to the principle of transparency and integrity encourage their employees to share their breakthroughs amongst themselves. It is here where new ideas are conceived and could lead to the elaboration of...