Decency in human conduct is defined by ethics and this applies even to organizations and companies in the process of doing business. Volkswagen “defeat device” scandal is one of the most publicised crises in the recent times that nearly cost the organization many years of building a customer base and business reputation. The company failed to instantly admit guilt when the scandal first went public but management later admitted wrong doing in installation of “defeat devices” as organizations reputation nosedived. Ideally, the objective of this report is assessing to what extent the situation described in the case study damaged the reputation of Volkswagen as an organization and recommend what it can do to rebuild it. In examining this, subject data will be analysed from Volkswagen’s emission scandal analysis and Reputation Institute’s (RI) especially after revelations emerged that the company has not done much to regain stakeholders trust considering it has not been implementing correct steps in management of reputational risk. Moreover, as per RI research, Volkswagen needs to specifically focus on clients who previously believed the automaker as well as quality of its vehicles before the scandal was made public.
TABLE OF CONTENTS
Introduction .........................................................4
Analysis................................................................5
Conclusion........................................................... 9
Recommendations................................................9
References............................................................11
Introduction
Ethics refers to fundamental principles and basic concepts that define decency in human conduct. It further entails universal values including human or natural rights, equality of men and women, obedience to the law, health and safety concerns, morality and most recently natural environment. In September 2015, Volkswagen admitted publicly that close to 600,000 cars produced for the US market had ‘defeat devices’ installed. After this announcement, the company went ahead to announce same devices had been fitted on approximately 11 million cars globally. When Michael Horn, Volkswagens Head of Operations in the US sat before the Congressional Committee he claimed the attempt geared at deceiving regulators had been hatched by “a couple of software engineers.” This would later turn out to be untrue as the company admitted upon publishing “statement of facts” through an agreement with US Department of Justice. Through the statement, Volkswagen clarified its engineers faced difficult assembling a diesel engine capable of high performance achievement and at the same time keep emissions within standards allowed by the regulators. Therefore, a mechanism was engineered to reduce emissions when testing was being done but allowed emissions beyond limits legally allowed while the cars are on the road.
Ideally, Volkswagens case is comparative to Banks that were accused to have rigged London rate offered for interbank referred to as Libor. Similar to Volkswagen case, the banks pointed to rogue individuals acting personally to enrich themselves in an effort to mitigate negative impact. For this reason, the issue of “defeat devices” significantly damaged Volkswagens reputation in the automobile industry. Therefore, the aim of this report is to assess to what extent the situation described in the case study damaged the reputation on the organization as well as what can the organization do to rebuild their reputation.
Analysis
US Environmental Protection Agency (EPA) on September 18, 2015 made an announcement on Volkswagen, a corporation that had coined “clean diesel” that had installed sophisticated software to cheat tests on diesel emissions (Kretchmer 2015, par.3). Thus, cars were producing close to 40 times of pollution than what is allowed by US standards. This meant Volkswagen cars were no longer environmentally friendly. Besides, the company’s reputation in the US and globally had already been dented and was on a free fall (Michael par.2-4). This paper examines how this situation damaged the reputation of the organization and recommends what the organization could do to rebuild their reputation.
Volkswagen’s emission scandal analysis together with Reputation Institute’s (RI) data revealed the company didn’t do much to regain stakeholders trust considering it has not been implementing correct steps in management of reputational risk (Reputation Institute par. 2). Moreover, as per RI research, Volkswagen needs to specifically focus on clients who previously believed the automaker as well as quality of its vehicles. Before the situation was announcement in September 2015, Volkswagen had always topped the list of the most reputable organizations in the world (Stanwick and Stanwick 2017, p.18). According to GlobalRepTrak list of most reputable organizations in 15 countries across the world in 2015, the company was ranked 14th accompanied with strong RepTrak pulse score equal to 75.0. This was 4 points more than global average for 2015 which is remarkably a significant lead. Again, other than overall company reputation, it was recognized in 2015 global on Corporate Social Responsibility (CSR) RepTrak by being ranked position eleven (Moravcsik 2017, p.183). One week before EPA made the announcement, Dow Jones Sustainability Index (DJSI) had declared Volkswagen as the most sustainable automaker globally.
However, the reputation of the organization was significantly damaged after the scandal was made public (Russell par.3). Reputation Institute (RI) mandate is to measure reputation of companies in more than 15 countries continuously. RIs measurement service-The National Tracker on reputation continuously enable companies to see immediate impact as issues occur around the world. The most significant tools on management of reputational risk remain continuous measuring of risk. This enables early detection of problems and thus mitigates potential adverse impacts as a result of events that threaten organizations reputation (Siano, Vollero, Conte and Amabile 2017, p.27). Thus, a month after the emissions scandal in Volkswagen was made public; there was a drastic drop in the company’s reputation. For instance, in October 2015, reputation recorded initial 22 point drop in Germany which is the home country for the company. Elsewhere in the US where the scandal was first announced, a lower drop was recorded at 11 points. However, analysts were in agreement that both drops for the company’s reputation were statistically significant (Bachmann, Ehrlich and Ruzic 2017, p.2). Besides, the drop in the company’s reputation didn’t stop at that but continued throughout the last three months of 2015. However, at the start of 2016, Volkswagen managed to enjoy excellent reputation in UK and Germany, strong reputation in France, Italy and Spain as well as strong borderline reputation in United States. RepTrack Pulse classifies reputation scores as weak, poor, average, excellent or strong by using RIs normative scale which is research based (Jung, Chilton and Valero 2017, p.3). Accordingly, by end of 2016, the company’s reputation had dropped by 9 points in US and more than 20 points in Europe.
Reputation of the Volkswagen is driven more by the company’s ability in delivery of tangible results. Ideally, the most critical dimension on reputation of Volkswagen and what members of public care more has been the company’s products, corporate governance and citizenship (Blackwelder, Coleman, Colunga-Santoyo, Harrison and Wozniak 2016, p.1113). Statistically, these dimensions have strong impact on the company’s reputation and overall score. As a result, 50 percent of the company reputation is through high quality products, good corporate citizenship and responsibility in running the company. Likewise, these dimensions were the most affected through Volkswagens scandal on diesel emissions (Preston 2015, p.377). For the first time, the secrecy through which the scandal was handled and the aspect of insider-job openly exposed poor of governance in the company, lack of transparency and poor ethical behaviour. Secondly, a “defeat device” was installed to temper with the cars and change emission levels for compliance with US standards on environmental pollution. This significantly compromised on the quality of products. Thirdly, the diesel vehicles that were seemingly friendly to the environment were not safe. The engines were emitting pollutants up to 40 times of levels allowed for the environment in the US hard hitting on the company’s citizenship dimension (Krall and Peng 2015, p.12). Consequently, failure by the company to address stakeholder needs in the mentioned dimensions has resulted to dramatic decline in product scores, citizenship and Volkswagen’s governance.
Accordingly, Volkswagen “defeat scandal” had severe consequences on the company reputation. When a company fails in delivering of rational reputation dimensions, an emotional bond is mostly broken and stakeholder’s company support drops with a big margin affecting business outcomes negatively (Gates, Ewing, Russell and Watkins 2016, p.19). Therefore, following Volkswagen bad reputation, support for the company dwindled. At the beginning of 2015 when respondents were asked if they would give Volkswagen benefit of doubt if faced with a crisis, one in two respondents drawn from Italy and United Kingdom agreed strongly that they will do. However, by end of 2015, only one in five respondents agreed strongly to give Volkswagen benefit of doubt when crisis occurs. Apart from decline on trust by the general public for the company, the willingness to purchase products from Volkswagen dropped significantly (Ewing 2017, p.10). Therefore, Volkswagen needs to address customers’ lack of trust so that they can be able to regain market leadership for their products.
Moreover, loss of reputation for Volkswagen resulted to business disruption across the value chain and for many stakeholders (Kollewe 2015, p.10). VW production was halted or limited affecting sales associated with first-tier suppliers of engines, wheels and fenders. Hence, this suppliers stopped normal deliveries from own suppliers of engine blocks and spark plugs. As a result this chain reaction from loss of business due to lost reputation increased the magnitude of company disruption (Blackwelder, Coleman, Colunga-Santoyo, Harrison and Wozniak 2016, p.17). VW had gotten used to one of the best management practices supply chain like the lean inventory-in time system that highly depends on single suppliers for each car part intensifying speed and accompanying harshness to suppliers.
The extent of lost reputation affected customers even more than suppliers. Customers were affected through loss in resale value of their cars; customer loyalty was significantly affected as well as repurchasing behaviour (Cavico and Mujtaba 2016, p.303). As a result, Volkswagen positioned clean diesel to ensure a balance on trade-off through reduction of emissions by about 97 percent and 30 percent improvement on fuel economy. The effect was to encourage buyers pay price premium for acquisition of fuel efficiency and green image. When VW scandal was unveiled, it meant customers had to tighten their belts as resale value for cars affected was supposed to come down by an amount equivalent to $5,000.25 (Burki 2015, p.838). At the very onset, and in an effort to regain trust of customers, Volkswagen came up with a “TDI Goodwill Program” offering compensation to customers who were adversely affected through gift cards as a way of showing remorse “We’re sorry and we hope you’ll let us back into your lives.” All this efforts were made for regaining reputation globally including giving customer’s gift cards worth $500 for a prepaid card to use anywhere and another $500 card that could only be redeemed across VW dealerships (Rhodes 2016, p.1501). The company assured customers of that they will get assistance on cars that were affected for three consecutive years. However, this $1000 gifts failed to go down well with some US senators who termed the amount as “insultingly inadequate” as well as being an attempt to conceal Volkswagen deception (Schiermeier 2015, p.30). The senators proposed the company offer full compensation for loss in resale value, damages through purposeful deception and fuel economy.
Conclusion
It was dubbed “diesel dupe” when Environmental Protection Agency (EPA) realized many VW cars sold in American market were fitted with a “defeat device” or software within the diesel engines to detect when being tested and consequently changing performance to improve on test results. Moreover, the car giant has since admitted having cheated emissions in the US. Volkswagen was then having a push to enter the diesel car market in the US on the background of its campaign for cars with low emissions, a strategy that had been considered successful. However, this strategy to cheat on emissions backfired on the face of the company, finding it handling huge reputational and financial risk around the globe. This loss of reputation affected customers, suppliers and the whole distribution chain greatly. Customers were worried of their cars in view of loss in resale value. Suppliers lost business since the market had dipped and the demand for VW cars was not as high as before EPA findings.
Recommendations
Full details of how the “defeat device” worked has always remained sketchy even as EPA confirmed that VW car engines had been fitted with computer software that were able to sense test scenarios through monitoring engine operation, speed, air pressure and position of steering wheel. Thus, when cars were operated under laboratory conditions that were controlled, put in stationary mode, the device appeared to switch the car to a soft mode where by the engine would run below performance and normal power. Consequently, when on the road, engines would switch out of the test mode.
One of the recommendations is to tighten environmental rules in Europe. European standards have not always been strict like those implemented in the US. This will help car dealers comply with rules across markets and therefore will not need to cheat. Ideally, tight rules across nations will help VW assure its customers that rules are now the same across board as they try to win back the market lost. Volkswagen needs to learn from best practices on reputation crisis. Ideally, Reputation Institute’s study shows most successful companies in management of reputation crisis have some unique characteristics including: transparent and continuous communication, top leadership taking responsibility for the mistakes done, immediate action and response to make situations better and take remedial measures. Through these actions, the company will be able to take control of the crisis as well as practising ideal stakeholder communication. Again, VW should establish an internal framework on crisis management where the management can admit wrong doing and address emerging issues before they escalate into a crisis. Therefore, there is need for VW to be sufficiently transparent and consistent in communication to gain customer trust and confidence. Admitting guilt and being accountable is one way of regaining customer trust and regaining reputation.
References
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Reputation Institute: Case study: Volkswagen; How VW Lost the Public’s Trust MAY 2016
Moravcsik, A., 2017. Faster, Higher, Farther: The Volkswagen Scandal. Foreign Affairs, 96(5), p.183.
Russell Hotten. “Volkswagen: The scandal explained” BBC News 10 December 2015 https://www.bbc.com/news/business-34324772
Siano, A., Vollero, A., Conte, F. and Amabile, S., 2017. “More than words”: Expanding the taxonomy of greenwashing after the Volkswagen scandal. Journal of Business Research, 71, pp.27-37.
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Cavico, F.J. and Mujtaba, B.G., 2016. Volkswagen emissions scandal: a global case study of legal, ethical, and practical consequences and recommendations for sustainable management. Global Journal of Research in Business " Management, 4(2), pp.303-311.
Kollewe, J., 2015. Volkswagen emissions scandal-timeline. The Guardian, 10.
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