Volkswagen: Requiem for a Dream?
Crisis
management is only the first step for Volkswagen. Whether or not the company
bounces back depends on its ability to change its culture.
With
the Volkswagen logo on the front page of every newspaper, the first question
that comes to mind is how many billions will this cost? The second,
probably more fundamental question, is why did this happen? The facts are
still murky and it will probably take months, if not years, before the complete
picture can emerge. However, a few points can already be made.
While
we know that the direct cause of the scandal was the software installed on
Volkswagen cars which allowed them to cheat emissions tests, the installation
did not happen in a vacuum.
First,
Volkswagen was under pressure. Its ambition to surpass Toyota as the world's
largest automaker had been long-held and was achieved in the first half of 2015
despite a sales slump in the U.S. We now know at what cost. This goal for
supremacy was promoted by former
Volkswagen CEO Martin Winterkorn, who was notorious for using a
“command-and-control” approach to management, reverberating the pressure
throughout the organisation. A key component of his strategy was to
develop a strong presence in the U.S. where pollution standards are
particularly hard to meet for diesel cars, making the pressure very specific.
Secondly,
Volkswagen had ample opportunity to implement its fraudulent scheme. The
success of modern cars rests increasingly on the strength of their software
rather than on mechanical design. In contrast, most car technicians are
trained mechanics and a few lines of code in the millions that constitute the
complex automobile software are hard to detect.
Third,
the organisation was able to rationalise its behavior relatively easily.
It is doubtful that the fraudulent software was the first and only step taken
by Volkswagen to improve its performance during the pollution tests. In
these type of corporate scandals, fraudulent manipulations typically start
small and snowball overtime, giving rise to what psychologists call the
“normalisation of deviance”. To the extent that other companies did
something similar, industry social norms may have provided another convenient
rationalisation as they did in numerous finance-related scandals. Indeed,
Takata, General Motors, Firestone or Ford, have all sold defective
products associated with hundreds of deaths.
Getting
Volkswagen back on track
With
Winterkorn resigning under pressure from the scandal, company veteran Matthias
Mueller has been named the new CEO and faces the daunting task of rebuilding
VW’s reputation and stock price. Some of his next steps will probably
come out of the standard crisis management playbook:
First,
acknowledge the problem (something that the company has already done).
Second,
quickly implement short term measures. It’s likely an investigation will soon
be launched and a number of resignations announced. The new CEO is
likely to meet with regulators, financiers and other stakeholders. He
will probably be in the media announcing a “new” Volkswagen and asking
customers, employees and distributors to remain loyal to the brand during these
difficult times.
Third,
take long term measures to prevent the crisis from recurring. Training
sessions, functional reorganisations and perhaps incentive restructuring are
likely to be implemented.
The
crux of the VW crisis
While
the above steps will be a useful start, getting to the root of the problem
requires deeper analysis of the Volkswagen culture. At its heart, the
group is an engineering company. It excels at managing risk, i.e. known
problems, through standards, processes and procedures. It is much less
comfortable with uncertainty, or unknown problems, that may suddenly emerge and
destabilise the organisation. It is not unique in this respect. Nokia,
for example, has used a similar approach for years to fight back the steady
flow of relatively marginal innovations coming from the competition.
Unfortunately, the efficient processes, the numerous patents, the high
reliability standards that made Nokia great at managing known problems led
to its demise when
Apple redefined the market with the iPhone. Stuck in a tough but
predictable world, Nokia was unable to change its ways fast enough.
As
the former head of Volkswagen's Porsche sports car division, 62-year-old
Mueller comes with an aura of success. He is known and he knows the
group. He is perceived as a safe hand that will steer the company through
this unprecedented crisis. Unfortunately, this seemingly reassuring proximity
does not make him an obvious candidate to change the culture of a company that
is not unfamiliar with serious crises. In fact, Volkswagen and Porsche
have been
associated with three other major scandals involving
market-manipulation, bribery and prostitution allegations over the last ten
years.
Processes
and individuals can be changed. Cultural changes are more
difficult. When the American manufacturing company Tyco was embroiled in
a scandal caused by the arrest of its former CEO on charges of fraud, it hired
Ed Breen as a replacement. Breen, a company outsider, made technical
changes but, more importantly, completely restructured senior management,
engineering the departure of dozens of executives and of the entire
board. Naturally, this came at a cost in terms of business continuity but
Breen was able to significantly change Tyco’s culture.
These
difficult changes often require a sense of urgency. As former White House
Chief of Staff Rahm Emanuel famously said, "You never want a serious
crisis to go to waste.” For Volkswagen, the time is now.
Gilles Hilary, INSEAD Professor of Accounting and Control |
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