Will a Culture Transformation save Volkswagen?

For Volkswagen, only a crisis of epic proportions could get them to confront its deep flaws in its rigid, hierarchical structure. But as Vivienne Walt points out in the August issue of Fortune Magazine in an article titled Volkswagen Races to Put ‘Dieselgate’ in the Rear Mirror, the irony is that the scandal itself may actually be Volkswagen’s best hope for success.

“Turbulence on this scale would be daunting for any business,” writes Walt. “But at Volkswagen, it’s happening while the company is still reeling from its mammoth diesel cheating scandal, which some execs describe as its biggest trauma since Adolf Hitler launched the Wolfsburg factory as a prized Nazi project exactly 80 years ago.”

The emissions cheating itself was actually uncovered by “by sheer happenstance, when a group of graduate students from West Virginia University rode Volkswagen vehicles around Los Angeles, hopping on and off freeways, and recorded emissions on gear they had rigged up in the back. They had no expectation of finding wrongdoing; it was simply a study project. But Volkswagen’s engineers had devised the scheme to display good emission levels only during controlled tests, of the kind that most states in the U.S. require.”

Having stumbled upon an international scandal, “U.S. investigators revealed that managers in Wolfsburg had sought to stifle internal questions about emissions cheating, and that engineers who raised concerns were told to keep quiet and carry on.”

Most of Volkswagen’s employees were stunned and embarrassed not only about the scandal, but also about how this could happen in the first place.

Walt draws the conclusion in the article that the underlying reason was not corporate greed or misunderstanding of foreign laws, but “according to many insiders and outsiders, the problem was Volkswagen’s unusually insular and rigidly hierarchical culture, which had been bred over the decades.”

The article interviews experts and company insiders that draw a direct connection between enablement of the scandal and Volkswagen’s rigid culture, in which mid-level managers and low-level workers were reluctant to question their superiors’ decisions, including the decision to cheat on emissions tests.

The article further explains that “Volkswagen had for decades been dominated by leaders whose word was unquestioned and whose imperious style held huge political sway in Germany.”

“The company culture discouraged professional managers from speaking honestly about problems they knew about or suspected were going on,” said Larry D. Thompson, a former deputy U.S. attorney general, whom the Department of Justice appointed in April 2017 as the independent monitor of Volkswagen.

So to say that Volkswagen needed to rapidly shift gears would be a massive understatement. It’s more appropriate to say that needed a new transmission entirely, a fact that has not been lost on new CEO Herbert Diess, who is now charged with “taking a wrecking ball to old habits” to create a new culture. He said, “I was already quite sure this company had to change because of what was happening in the industry,” says Diess. “But the diesel crisis has accelerated our change process quite considerably.”

Diess actually arrived at Volkswagen just two months before the scandal broke and was tasked with “injecting new ideas and technology and cutting costs” as he had done previously at BMW. But now as CEO at Volkswagen he is “staking hundreds of millions of dollars on electric and autonomous technology which he sees as the key to the company’s survival.”

“For all the soul-searching in Wolfsburg, however, one question remains: Now that the company is rushing — belatedly — to embrace green technology, can it remake itself quickly enough to retain its enormous clout, or will it steadily decline, along with the old-style business models of traditional automakers?”

According to Diess, overhauling decades of ingrained habits will be a long process and that “we need a change in mindset. Many people were focused on what was said by the top five people or probably the CEO himself. To convince them that they have to take risks, responsibility, ownership — that’s not easy.”

But however long it takes to change it, Diess knows that it’s paramount for the company to continue growing and even survive.

Conclusions for organizational development:

1. 60-plus-year-old mindsets are hard to change.

Vertical Management 1.0 took hold in the 1950s based on a task-based, manufacturing workforce. That system of command-and-control is so ingrained in our way of thinking about management that we can’t see any other way to solve the problem of cross functionality other than moving boxes around on the org chart and assigning different levels of authority. Such restructuring never solves this problem, and in many cases, makes it worse.

In old power structures such as Volkswagen, change rarely occurs until the company is feeling such major pain, such as the Dieselgate scandal, that transformative change to the culture is the only panacea for survival.

Long-term sustainability requires a major change in mindset from leaders to let go of control and become coaches, mentors and facilitators of creativity and innovation, allowing workers to challenge assumptions, make mistakes, but most importantly, negotiate for their own accountability in accordance with organizational and team priorities.

2. Hierarchies are extremely inefficient

The article references evidence by industry analysts that believe that “the unchanged board structure is one explanation for Volkswagens giant workforce of 640,000 people — about one-third bigger than Toyota’s for almost equal output.”

Diess said that “it will be very difficult to survive with this kind of company culture, relying very heavily on headquarters, with central decisions. You ask many times the same questions. You get slow.”

As companies are always trying to do more with fewer resources, the issue is not of individual productivity, but rather maximizing organizational and team productivity. The change in mindset here is about managing according to the horizontal structure of the business (the flow of work) and not the vertical hierarchy, the cause of silos, and subsequently, inefficient processes, competing priorities, politics and much more.

3. Command and control prohibits innovation

Sure, leaders give plenty of lip service to employee engagement, collaboration, innovation and building cultures of success. But in most cases, they’re missing a key piece of the puzzle: Innovation and collaboration simply won’t happen in command-and-control hierarchies.

In an interview with the Harvard Business Review’s Ideacast, Robert E. Quinn, one of the researchers and writers for the article titled Creating a Purpose Driven Organization said, “Most CEOs don’t believe in purpose work. They don’t want to do purpose work. They think it’s a waste of time. But therein lies the opportunity. If you can learn to do purpose work, you are going to be different from most managers and executives in the world. You have leadership capacity they don’t have because most executives are not leaders. Many CEOs are not leaders. Your position does not make you a leader. What makes you a leader is influence. And that’s different than authority [because] purpose is all about influence.”

Control in any form creates fear and it shuts down creativity cold. When people aren’t allowed to speak freely, challenge assumptions, clarify where their initiatives are impacting the organizational priorities, the company is deferring to a culture of failure.

And sure, you can build pockets of innovation leaving groups alone to innovate in a particular area. That may work for a time if the high-performing team is where the innovation is needed instead of how. But in every case where control is inserted back into that process (at any level), the innovation gets shuts down and people become dis-empowered and dis-engaged in their work all over again, which explains how a new and motivated employee leaves a position after only a short time.