Five Strategic Lessons from the Volkswagen Emissions Scandal

The resignation of Martin Winterkorn as chief executive of Volkswagen on 23 September has so far been the climax of the emissions cheating scandal. On 22 September, Volkswagen admitted to using software to change emissions test results for 11 million of its diesel engine cars sold between 2009 and 2015.

The cheating and the emissions violations had came to light through investigations of Volkswagen’s diesel engines by the U.S. Environmental Protection Agency (EPA) and the California Air Resources Board. Volkswagen had used software to manipulate test results in order to get emissions compliance of its TDI diesel engines approved in the US.

2009 Volkswagen Jetta Diesel Sedan

Snapshot from happier days: 2009 Volkswagen Jetta Diesel Sedan, Green Car of the Year.

Many questions are yet to be answered, in order to fully understand what drove the behavior of Europe’s largest car maker: Who developed the scheme? Who knew about it? Why haven’t European regulators discovered the emissions cheating?

In view of the large amount of unknown information, it may be too early to draw final conclusions from the case. Nonetheless, I venture to draw some early strategic lessons from the Volkswagen emissions scandal. I am aware that I may need to revise one or the other conclusion, while new facts emerge. So please take the following five lessons as my initial and by no means conclusive insights.

Lesson 1: Failing to think through the possible consequences of your actions can lead to bad decisions.

Whoever at Volkswagen is responsible for this massive cheating did not consider the possibility of getting caught by the authorities, or at least did not give this possibility sufficient weight. This perfectly human behavior of wishful thinking and not sufficiently considering adverse outcomes may have been exacerbated in this particular case by two factors: hubris and experience.

Being Europe’s and in the first half of 2015 even the world’s largest car maker can get to some peoples head and make them believe they are more clever than anyone else and can get away with anything. Such a self-delusion may have been supported by the experience of rather tame authorities in Europe that did not seem to have questioned the emission tests for Volkswagen’s diesel engines seriously enough.

Lesson 2: An inferior strategy cannot be fixed with tactical measures.

The interesting question is why a successful car maker is doing such systematic cheating on a grand scale. One possible explanation could be that Volkswagen ran into the limits of its Diesel strategy: fulfilling tightened emissions standards with its so-called clean diesel technology and at the same time stay within the cost limits for middle-class cars seems to have posed a strategic problem for the corporation to which it didn’t find an appropriate answer.

Compensating the shortcomings of the clean diesel strategy with cheating may have been more tempting than admitting the the strategy was wrong. However, in retrospect it might have been better to have an honest re-evaluation of the clean diesel strategy at the headquarters in Wolfsburg, Germany, instead of trying anything to justify the clean diesel strategy.

Lessons 3: Seemingly remote events can affect your business.

One might think that Volkswagen’s European competitors have now every reason to be happy about the deep fall of the market leader. However, the opposite is true, particularly for German car makers.

The emissions scandal has not only damaged Volkswagen, but also raised suspicion against other German car makers. All major European car makers have invested heavily in diesel technology and are dependent on the sales of diesel cars. The emissions scandal may undermine the customers’ trust in diesel cars in general.

However, the effects of ‘dieselgate’ may even go further and could damage the good reputation of all German tech firms, as Volkswagen has been a beacon of tech products made in Germany.

Lesson 4: Corporate values are an important strategic factor.

Volkswagen, like other multinational corporations, is officially promoting commendable values: “For the Volkswagen Group, sustainability means that we conduct our business activities on a responsible and long-term basis and do not seek short-term success at the expense of others.” (Volkswagen Sustainability Report 2014)

Having corporate values written down in glossy brochures is one thing, implementing them on all levels worldwide is another thing. While some may still think that corporate values are something for do-gooders and not for successful executives, the truth is that implementing values in a credible, transparent way, can lead to a strategic advantage. Failing to implement corporate values, on the other hand, can have disastrous consequences, as ‘dieselgate’ illustrates.

Lesson 5: Investing in strategic thinking is cheaper than paying for strategic failure.

There is no guarantee for avoiding strategic failure. However, it is quite feasible to avoid strategic failure on an epic scale, as just experienced by Volkswagen. It requires that on all levels where decisions are made, the decision makers are trained in strategic thinking, which involves having the competence to rationally discover and compare options as well as foresee consequences of those options. The decision makers at Volkswagen directly responsible for ‘dieselgate’ have demonstrated, that a lack of strategic thinking in combination with a lack of responsible, value-based behavior can lead to dire consequences for themselves, their company, and even an entire industry.

About Milon Gupta

Milon Gupta is an international business strategy coach and consultant from the Heidelberg, Germany area.
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