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Lessons Learned from Volkswagen Scandal

greg026 croppedBy: Gregory S. Hopper, Adjunct Associate Professor

Volkswagen is an iconic company. It employs 600,000 people worldwide and is the parent company to Porsche, Audi, Bugatti, and several other well known marques. Launched by Hitler in WWII, it worked its way out of that shadow and became known for cars built with fine German engineering – the key element of their promise of value.

Today, VW is a cheater. Their “clean diesel” engine, specifically the Type EA 189, is a fraud. The company installed software in the engine control unit that senses when a car is being tested for emissions, and turns all the emission control devices on. When the car is being driven normally, the same software senses those conditions, and turns the emission control devices off. Nitrous oxide emissions are as much as 35 times higher on the road than when under test. 482,000 cars powered by these “clean diesel” engines have been sold in the US since 2009. Further investigation has uncovered that the cheating affects 11 million cars worldwide.

What could drive this sort of egregious behavior? Here’s my theory: around 2009, VW stated that it wanted to become the #1 automaker in the world, and would do just about anything to reach that goal. In June of this year, VW passed Toyota’s shipments for the first six months of the year, becoming #1.

But at what cost?

Imagine a scenario where you are the Senior Product Manager for the Type EA 189 “clean diesel” engine. You have rigorous specifications for fuel economy, performance, and emissions. And a schedule to meet, because this particular engine is key to the strategy to become the #1 automaker in the world.

Further imagine that you learn that there is no way that you will be able to meet all three of the (competing) specifications. Do you:

(a) Inform your manager, perhaps running the risk of losing your job?

(b) Figure out how to program the engine control module to adaptively engage the emission control devices based on the driving conditions, keeping the program on schedule?

Now let’s shift the perspective in this imaginary scenario: you are the Senior PM’s manager.

Your job is to assure that the engine is developed on time and on schedule. You have a sizable bonus at stake in the company’s drive to become the world’s #1 automaker. Your PM brings you her news. You know that the company has developed adaptive emissions technology, such as described in US Patent 5,868,646 (“Control Arrangement Accommodating Requirements of Different Countries for Motor Vehicles having an Internal Combustion Engine and Automatic Transmission”). (A patent search for “adaptive emissions controls” assigned to Volkswagen returns dozens of hits.) What do you do?

(a) Report it to senior management, and risk your job and sizable bonus?

(b) Authorize the use of engine control software to have context-aware engine control?

It is situations like this that a company’s values guide its decision-making process. Years ago, Johnson & Johnson relied on its values to respond to the Tylenol scare by pulling every single tablet of the product off the market rather than risk injury or death to its customers.

Volkswagen appears to have put the goal to be #1 ahead of the need to obey the law. In a broader perspective, the company confused financial metrics with strategy. Let me state: financial objectives (market share, profit, earnings per share, gross profit margin, “shareholder value” and so on) are not strategic objectives. They are, instead, lagging indicators of the success of strategy; lagging indicators of a firm’s ability to create value for customers.

Sam Palmisano of IBM declared in 2009 that his strategy was to achieve “$20 earnings per share”. That’s ridiculous. It’s like a football coach saying that his goal is to score 20 points per game. Scoring 20 points isn’t the objective – winning the Super Bowl is. You get to the Super Bowl by winning games over a long season. And you win games by building talent, innovating in game plans, executing well, and reacting to the situation on the field. In general, being better than your competition.

You don’t even know if 20 points will be enough to win games until you see the nature of your competition. Like a football team, a successful company needs to build talent, innovate in offerings and business model, plan strategically, execute well, and react to the situation in the marketplace. In general, be better than the competition.

Unlike football, there is no “Super Bowl” in business. There is no finish line. (Well, there is, but crossing it isn’t called “winning”. Ask Borders, Blockbuster, Circuit City, etc.) Companies must plan for the long term, over several “horizons”, to create and capture real customer value.

It is not unimaginable that the drive to be the #1 automaker in the world could instead drive Volkswagen out of business. Putting that goal ahead of the law and the trust that customers, employees, and investors had in the brand, VW’s market capitalization dropped 40% in a couple days. They face $18B in fines in the US alone; fines in other countries where the other 10.5 million cheating vehicles were sold is unknown. The cost to repair the cars has not been calculated. The 2016 models have not been released for sale in the US. The collateral damage—an “anti-halo” effect, if you will—to the other VW brands, notably Audi (which also used the Type EA 189 “clean diesel” engine), may be severe.

As we saw in our imaginary scenarios, the drive to achieve goals can lead to intense—sometimes crushing—pressure to behave unethically or illegally. The values that you formulate for your company and yourself should be the basis of your decision-making process. Financial goals are not strategies, they are the score, and will reflect the success of your strategic decisions over time.

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About: Greg Hopper created and teaches “Competitive Strategy in Technology-based Industries” for MEMP. He is a strategy and product marketing executive and entrepreneur with over 30 years experience in business strategy and marketing of technology-based solutions.  He is the CEO of Strategic Edge Executive Resources, LLC, a strategic planning, consulting, and executive education firm in Raleigh, NC.  He also serves as Strategist-in-Residence for HQ Raleigh, the leading business incubator in the Capital District, and education coordinator for ThinkHouse Raleigh.


2 Comments

  1. Greg hits the bulls eye here. The industry leading companies of today have customer/market driven values at the core of their strategic & tactical decisions to drive innovation and profitable growth. Examples of such leading companies include Smuckers, Starbucks, Google, Edward Jones and SAS Institute — and they are also admired as great companies to work for 🙂

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