Volkswagen’s Leadership: Focuses, Failures, and Finding a Way Out
The following case study is an overview of Volkswagen’s plan to become the world’s largest automaker, in an effort to challenge their competition while pushing into markets where they have historically struggled. This also explores how their emission scandal was a byproduct of this competitive aggression. In January of 2007, Martin Winterkorn (pictured below) was elevated to the position of CEO of Volkswagen after successfully helping Audi challenge BMW (Welch, 2010). At the time of his elevation, Volkswagen severely lagged behind Toyota while having a poor relationship with consumers. Winterkorn would soon begin to attempt to turn this situation around.
The first part of Winterkorn’s approach was to challenge other automakers in the United States through mainstream mass production. By competing for everyday consumers, Volkswagen decided to both compete with other automakers, while reaching a greater number of consumers. Building affordable vehicles and opening a plant would allow for a greater market investment and returns in the US. Additionally, a push into the Indian and Southeast Asian markets would increase Volkswagen’s chances to get greater brand recognition in those regions, while setting up future growth. Combined with increasing product lines and new brands and car models, these strategies would position Volkswagen to be poised for growth well into the coming years. However, as we are about to see, these plans would go awry.
One key issue that Volkswagen still faces is organizational marketability. With Volkswagen’s recent emissions scandal, they still have issues reaching out to consumers and maintaining their trust (Gates, 2015). By not aligning upper management and shareholder goals, Volkswagen chose to prioritize short-term orientation of their sales, rather than their long-term orientation towards creating and sustaining the trust of American consumers. This multifaceted breakdown and indictment of Volkswagen’s culture is evident through its many consequences.
Organizational pressure put on middle managers by the top management team led to groupthink and unrealistic expectations upon Volkswagen engineers. In an effort to meet expectations, software and automotive engineers came up with a system to detect emission testing and reduce emissions accordingly, while polluting at an illegal rate during normal operation. While this allowed for greater fuel economy and power for the cars, pollutants including nitrogen oxide and carbon dioxide were released at levels over 40 times the legal levels, which have been linked to respiratory illnesses such as bronchitis and emphysema, resulting in severe repercussions.
The effect on consumers and stakeholders has been immense. Financially, Volkswagen was forced to pay 14.7 billion dollars for claims in the United States alone (Tabuchi, 2016). This included recalls of vehicles numbering close to half a million, while close to 11 million Volkswagen cars worldwide contain this mechanism (breakdown below). This led to a net 6.2 billion dollar loss, while Volkswagen’s stock dropped more than 20% in the following year. This comes at the worst possible time for Volkswagen, as they had nearly reached the 10 million worldwide car sales goal, putting them almost even with Toyota per Winterkorn’s initiative.
The organizational culture put in place revealed a cutthroat and secretive culture which led to Volkswagen’s market success, but also its eventual downfall. Litigation by European and American governments has indicted CEO Winterkorn for market manipulation and turning a blind eye to the problem when he was notified a full year before the scandal broke. Additionally, key engineers in the scandal are facing criminal charges and have been found guilty in civil and criminal cases. The key lesson to take away from this case study and its accompanying tale of scandal and abuse of power is the organizational culture that Winterkorn tried instilling. By attempting to create a competitive advantage in efficiency and innovation, Volkswagen skirted societal ethics and norms in the forms of environmental regulations, and they were forced to pay the price.
The key strategies with which Volkswagen has used to expand globally include creating a competitive advantage in an increasingly globalized marketplace. Turnaround management was the initial change with which Winterkorn decided to overhaul Volkswagen’s culture. The attempts to create a new competitive advantage using superior efficiency, speed, and quality led to massive increases in sales, but eventually led to the emission scandal mentioned earlier (Gates, 2015).
Additionally, the hiring network that they used was mostly likely the attraction-selection-attrition (ASA) framework in which managers hired employees with similar personalities and who were more likely to stay and conform into the organization and its culture. This led to the groupthink and issues with the scandal. Managerial actions of planning, organization, leading, and controlling employees led to high level of risk taking, while pursuing an aggressive plan of marketing and sales which fed into a cycle of continual growth and decentralization of the organization, ultimately resulting in massive growth while hiding problems with the organization’s culture.
Given Volkswagen’s current attempts to solve their current problems, there may be more effective alternate solutions. Instead of relying on a multifaceted plan of pursuing multiple markets which challenged their traditional opposition, Volkswagen may have had an opportunity to consolidate their market shares against upcoming competitors in an effort to increase an already dominant market share. Additionally, Volkswagen may have increased its reliance on luxury brands and high-end automotives in an attempt to increase its profit margins and its sales. Finally, a rebuilding of brand loyalty and trust throughout its entire stakeholder base is in due order. Because of the emissions scandal, as well as the company’s failure to adequately take the necessary steps to stem-the-tide of the fallout of this problem, they are faced at a crossroads and find themselves in a similar position to Toyota with major recalls and governmental issues. With respect to these alternatives, changing an organizational culture in order to implement them is extremely difficult. Turnaround management which is required and necessary in order to allow a new, positive culture to take its place. By emphasizing the justice rule, the fact that organizational decisions have serious and real effects on stakeholders and consumers, the new top management group can ensure that Volkswagen can regain consumer trust and increase global sales within the coming years. Finally, Volkswagen’s attempts to challenge smaller opposition in its preferred market spaces will allow for sustained growth and brand loyalty. By focusing on its current global markets, Volkswagen will gain a better understanding of the demographic, sociocultural, and political forces that prevented its continued growth and the organizational mismanagement which led to the emissions scandal.
With respect to these alternatives, changing an organizational culture in order to implement them is extremely difficult. Turnaround management which is required and necessary in order to allow a new, positive culture to take its place. By emphasizing the justice rule, the fact that organizational decisions have serious and real effects on stakeholders and consumers, the new top management group can ensure that Volkswagen can regain consumer trust and increase global sales within the coming years. Finally, Volkswagen’s attempts to challenge smaller opposition in its preferred market spaces will allow for sustained growth and brand loyalty. By focusing on its current global markets, Volkswagen will gain a better understanding of the demographic, sociocultural, and political forces that prevented its continued growth and the organizational mismanagement which led to the emissions scandal.
Despite the many setbacks of Volkswagen in recent years, Volkswagen’s previous plans of global growth and competition presented in the case study show a promising company ready to take on other car giants. Under a new culture of accountability and transparency, Volkswagen has taken many key, necessary steps in regards to global competition and sustainability of growth. With the emissions scandal behind them, Volkswagen will look towards the future in facing organizational challenges through the leadership of new organizational management and behavior poised to take advantage of the automotive competition.
Citations
Gates, G., Ewing, J., Russell, K., & Watkins, D. (2015, October 08). How Volkswagen Is Grappling With Its Diesel Scandal. Retrieved January 08, 2017, from http://www.nytimes.com/interactive/2015/business/international/vw-diesel-emissions-scandal-explained.html?_r=0
Tabuchi, H., & Ewing, J. (2016, June 27). Volkswagen to Pay $14.7 Billion to Settle Diesel Claims in U.S. Retrieved January 08, 2017, from http://www.nytimes.com/2016/06/28/business/volkswagen-settlement-diesel-scandal.html
Welch, D. (2010, January 13). The Transformer: Why VW Is the Car Giant to Watch. Retrieved January 08, 2017, from https://www.bloomberg.com/news/articles/2010-01-13/the-transformer-why-vw-is-the-car-giant-to-watch