“Existence-threatening Crisis”
I don’t own a car, so generally any news about automakers is low on my radar. However, the recent scandal with Volkswagen (VLKAY), Europe’s largest automaker, certainly caught my attention as the company now faces its worst business crisis in its 78-year history. The company’s CFO described the scandal as “an existence-threatening crisis for the company”.
Recently, the company was forced to admit rigging diesel emissions tests for 500,000 cars in the U.S., and it has also been accused of similar practices in Europe. The company has reportedly set aside 6.5 billion euros ($7.3 billion). Analysts, however, say the final bill will be much higher, with Credit Suisse estimating the total cost could hit 78 billion euros ($87 billion) in a worst-case scenario.
The Real Costs of the Scandal
The scandal, however, touches a much bigger problem. The company knowingly violated the regulations and engaged in an illegal business practice, and deceived key stakeholders, such as customers, dealers, investors, and not to mention, employees.
Ultimately, the financial damage is not just about recalls, fines, and compensations. The long-term damage to the brand and reputation means the loss of sales opportunities.
Volkswagen took out full pages in major German newspapers and placed this message: “We will do everything possible to win back your trust.” The company certainly can buy advertisement space, but not trust.
The damage, however, goes far beyond sales opportunities. New CEO Matthias Müller spoke to about 20,000 employees at the Wolfsburg plant that the car maker will cancel or postpone planned investments. This means the delay in new product development and an inevitable loss of the competitive edge.
If I were one of the employees at the plant, I certainly would have felt deceived and gotten angry about an employer that put all of the employees at risk of losing their jobs. Forget about loyalty and productivity. What’s more, who would invest in the company that will fall behind the competition and will be forced to give up a big chunk of market share?
Three Lessons That We can Learn from This Scandal
Should we look at this scandal as an isolated case?
Not really.
We should examine how and why a global brand like Volkswagen allowed this to happen.
Volkswagen has been struggling to gain a foothold in the U.S. market, especially in the diesel car segment. The diesels are known for its fuel-efficient properties. The typical diesel car can travel up to 30 percent farther on a gallon of fuel than its gasoline counterpart. But, there is a catch (as always). The cars emit more nitrogen oxides, and they’re heavily regulated, especially in U.S.
It was a tall order for management to gain market share in this heavily regulated market segment. Unrealistic expectations from senior management likely created an impetus for the company to deceive millions of people. In other words, the company was facing business as usual: (1) pressure from the top; (2) fierce competition; and (3) an ever-changing regulatory environment.
Under such circumstances, it’s easy to lose sight. This scandal, however, teaches us that we must move away from a short-term vision. Here are three lessons that I think we can all learn from the Volkswagen scandal:
1. Aligning with a Company’s Value and Culture
You may ask, wouldn’t some people have been aware of the company’s wrongdoing earlier? I suspect that there may be a good number of employees who knew about it, but perhaps there was no way that they could come forward without retaliation. The root cause of this kind of problem is most likely related to the organization’s closed culture. We can address this by setting up a system that rewards good behavior and open communication, such as setting benchmarks that are non-financial but align with a company’s value and culture. Also, we could track and create a reward mechanism for open and sustainable behavior in the same way as we would for financial successes. To be successful, we could make sure that the program is sponsored by the right stakeholders, being careful to especially get buy-in from the board members and top executives.
2. Striving to Be Transparent
When regulations are constantly changing, companies should establish mechanisms to track all the regulatory changes that affect the organization and its products. Also, establishing well-thought out processes for collecting information related to compliance becomes critical. Most importantly, train employees to share accurate information. For many companies, collecting, reporting and sharing information is a manual exercise, and the information tends to stay in a silo or within a department. Setting up data gathering, reporting and information sharing processes and enforcing the best practices not only reduces risk and improves efficiency but also increases transparency.
3. Encouraging Open Communication and Collaboration
Sharing information among employees across departments and various functionalities has another benefit: innovation. When companies live by the principle of transparency and integrity, employees are encouraged to share their discoveries among peers. This is when new ideas are born and might lead to the development of new products and services. With today’s marketplace constantly changing, taking a leading position in the market is critical for survival. Again, establishing processes to share information across a company is crucial to nurture an innovative environment.
What do you think? I would love to hear your thoughts on Volkswagen’s scandal and what you learned from its mistakes.
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