The top three global automobile manufactures in 2015 were Toyota (10.23 million units), Volkswagen (10.14 million units), and General Motors (9.92 million units).¹ Senior leaders at Volkswagen (VW) had a vision of global dominance and were determined to overtake Toyota and become the worlds number one auto manufacturer. Company leaders identified diesel vehicles as a key means for reaching this goal and realizing their vision. Volkswagen has long been known around the world for its diesel vehicles, and executives saw this as an advantage over its competitors. Moreover, diesel vehicles were attractive to customers because They were cheaper than hybrids and packed more muscle under the hood yet still often got more than 40 miles to the gallon.² A major obstacle, however, was challenging emissions standards in the United States. The U.S. standards were always stringent, more so than Europe, but in 2004 were tightened dramatically. VW nevertheless decided to take on the challenge and pressed ahead, diligently attempting to innovate its designs and technologies and meet these standards. VWs competitors (Mazda, Nissan, Honda, and Hyundai), in contrast, found the standards too difficult and chose not to compete in the American diesel car market.³

VW, which also owns Porsche and Audi, applied its renowned engineering and innovation expertise to overcome the emissions hurdles. In this instance, however, effective solutions did not materialize in time and within budget. But what did emerge was a way to cheat. Engineers at the companys research and development complex in Wolfsburg Germany identified patterns of parameters associated with emission testing (steering, throttle, and other operations). They then used these patterns to program software to switch a cars emission equipment into a cheat mode when testing conditions were detected. The software became known as cheat devices and would switch back to normal mode when in non-testing (typical) driving conditions. (For perspective, the normal operation mode produced emissions that were up to 40 times the legal limit!)⁴

This begs the question: Why not simply operate in this mode all of the time? Several reasons. Compared to the normal operation mode, engine and mileage performance were substantially reduced. Engineers also determined that running cars full time in this stricter emissions mode would wear out components much faster. Adding to these challenges, alternative and more effective emission equipment would cost hundreds of dollars more per vehicle without providing noticeable performance benefits to customers. The alternatives actually would have decreased the impressive engine and fuel performance that attracted buyers in the first place. All of this was deemed unacceptable by senior decision-makers and the cheat devices were installed for nearly a decade in millions of vehicles sold around the world.⁵

The Costs Continue to Mount

Since the discovery and subsequent admission of the scandal in 2015 the consequences and costs have piled up. Approximately 11 million cars worldwideroughly 500,000 cars in the United States and 8.5 in Europeare now involved.⁶ One analyst estimates the cost to VW could ultimately exceed $86 billion.⁷ By late 2016 legal liability alone had already reached $19 billion:

• A settlement with U.S. regulators totaled approximately $15 billion.
• $9.2 billion is sought by more than 1400 complaints from institutional and individual shareholders.
• One attorney in Germany represents another $6 billion in claims^.8
• Part of the U.S. settlement involves a payment of approximately $3 billion to the Environmental Protection Agency (EPA) for damage done to the environment by these cars. This was nearly double the largest fine previously assessed to any auto manufacturer.⁹

The scandal also has damaged the reputation of the company with customers, investors, auto dealers, and regulators around the world. For instance, one survey in 2016 showed that consumers were 28 percent less likely to buy a VW because of the scandal.¹⁰ Although many costs are difficult to estimate, and some are likely to linger far beyond legal claims and settlements, the effect on sales was immediate. VW vehicle sales in the United States dropped nearly 15 percent in the first six months of 2016, compared to the same period a year earlier,¹¹ and operating profits at passenger car unit were down more than 45 percent.¹² To be fair, VW sales were lagging in the United States before the scandal but have since accelerated. This was especially problematic for VW considering that more than 20 percent of its total U.S. sales were from diesel vehicles.¹³ These troubles were further reflected in the companys stock which at one point dipped by as much as 40 percent, and more than a year later is still down 25 percent from prescandal levels.¹⁴

An Overlooked Casualty

Besides VW executives and employees one group is especially hard hit by the scandal and often overlookedauto dealers! The scandal has caused inventories at VW, as well as Porsche and Audi (both had numerous vehicle models included in the scandal), dealerships to be more difficult to move. A class action suit by 650 U.S. VW dealers resulted in a reported $1.2 billion settlement. But the fact is they have many new and used cars that cannot be sold due to stop-sale orders.¹⁵ Even models not included in the scandal are more difficult to sell (sitting on lots 71 percent longer). Combine these factors with aggressive discounting by the company means that dealers have and will continue to suffer.¹⁶

How and Why Did This Happen?

The answer to this question is not simple. Although current Volkswagen chairman, Hans Dieter Potsch, highlighted the complexity and magnitude of the scandal and its causes. He explained that when engineers couldnt find technical solutions within the prescribed timeframe and budget, they developed and opted to use a shortcut. Worse still, it was reported that When the engineers did find a solution, he said, they chose to keep on cheating rather than employ it We are not talking about a one-off mistake, but a whole chain of mistakes that was not interrupted at any point along the timeline.¹⁷

The Role of People and the Organization

Numerous executives, other leaders, managers, and employees throughout the organization clearly engaged in persistent unethical conduct. One explanation for the pervasive misconduct is that many of these same people possessed common values, such as conformity, tradition, and security. These would not only be personal values but also those long associated with Volkswagen, fostered by the companys long history and place in German society and culture. This conservation orientation clearly pervaded individual employees and the larger organization so much so that one group of New York Times reporters stated: The 78-year-old companys unusual cultureconfident, cutthroat, and insularhas come under scrutiny as potentially enabling Volkswagens lawbreaking behavior.¹⁸ It thus is clear that the organizations culture played a significant role, especially given the scandal permeated so many units, levels, and brands of the organization, and persisted over such a long period of time.

These values were reinforced by VWs structure and executive leadership. VW is headquartered in Wolfsburg Germany, one of the countrys richest cities. A Newsweek article reports that employees of the company live and work under a highly centralized hierarchy that expects him to perform, no matter what the demands. Ferdinand Dudenhoffer, an automotive industry expert based in Germany, claims that VW is a unique auto company. Its not democratic; its autocratic. Its a system focused on its roots in Wolfsburg. Its not at all global in its thinking. The culture is well known for discouraging debate and dissent. Dudenhoffer also asserts that although management may not have explicitly directed employees to do something unethical or illegal, they likely applied significant pressure by saying something like: Please think again on that, and if you dont find a solution, we may need to find another engineer.¹⁹ This account suggests that pressure, both overt and subtle forms, was a common tool leaders and managers used to get compliance from employees at all levels. Over time, these factors undoubtedly served to strengthen the culture and employees compliance.

Other Causes

Senior leaderships vision for dominance and associated lofty goals for the diesel car market, were apparent in many ways over a long period of time. Evidence for its win at any cost approach occurred at least as far back as 2006. It was then that a VW technology executive gave a PowerPoint presentation that outlined how the automaker could cheat and pass emissions standards in the United States. Investigations have yet to determine how widely the information in this presentation was shared, but it does show that a series of flawed decisions over a long period of time contributed. This was exacerbated by the centralized decision-making practices at the company. The record now shows that for more than a decade leaders across levels at Volkswagen either ignored, underplayed, or actively covered up warning signs.²⁰ This detail was described in a statement by Matthias Mller, who replaced Winterkorn as CEO after the scandal broke, but who has since been implicated himself. He contended that decision making was and is too centralized at the top, where a triumvirate of forces have too much power: (1) Porsche family members who developed the original VW Beetle, (2) the German state government in Saxony (the location of many VW factories that employ a large percentage of the workforce), and (3) labor representatives that control half the seats on the companys supervisory board. He also argues that top-down power structure and leadership style under Mr. Winterkorn was detrimental to the companys competitiveness.²¹

All the Blame Does Not Reside in the C-Suite

Certainly senior leadership deserves a large portion of the blame, as it set such challenging goals, enacted controlling leadership and decision-making styles, downplayed potential implications, and acted slowly and inadequately once the scandal was revealed. However, contributing to this was the long history Volkswagen had with the German government and regulators. The company is an iconic brand in the country and a major employer, which provided them many benefits and concessions from the government, investors, and regulators over time. It thus is possible that VW leaders may have expected regulators and others to bend the rules in favor of the organization.

These decision-making and leadership issues were reinforced by human resource policies and practices that either encouraged unethical behavior or at least didnt hold people accountable for such transgressions. Making matters worse was VWs bonus system that rewards consensus and rewards it generously. Employees are paid for individual performance and company performance, but it also rewards team performance.²² The implication is that blowing the whistle on something so significant would likely hit every employee in the pocketbook three timesindividual, team, and company bonuses. Although many outsiders find it shocking, little financial consequence has occurred for the executives involved. While Winterkorn resigned, he still received a very generous severance package in excess of $10 million. And more generally executive bonus pay was only reduced by 30 percent with little explanation provided for the public record. This motivated one reporter to ask: Why not reduce it by 100 percent?!²³

When combined these factors provided little encouragement for employees or executives to speak up, speak out, or take other actions.

How Many People Were Involved?

VW is not a monolith, it is comprised of nearly 600,000 employees. Of course not all of them were involved, but a sole actor was not behind the deception at VW. The scandal was a concert. Many individuals at all levels of VW and over many years clearly perceived risks to be lower than they actually were. This is due to the fact that vehicles often have over 50 different computers on board, which amounts to millions of lines of code. One expert said, Its impossible for any one of us to look over the whole thing, even if we wanted to. The cheat software was buried within millions of lines of codedifficult to find even if you know how and where to look.²⁴ Many also clearly showed trust in their own decisions and abilities, as well as those of their coworkers, supervisors, and senior leaders. It thus seems that the actions of VWs executive leaders over time in a way legitimized the behaviors and diminished many employees concerns.

Volkswagen has taken a number of steps to determine the involvement of employees. One example was a limited amnesty program that offered some measure of job protection to a certain group of employees. Approximately 50 employees came forward and admitted knowledge of the activities related to the emissions cheating. Outside observers however claim that a significant number of engineers, technicians and managers would be required to coordinate all of the activities involved in identifying the problem, creating the solution, and implementing it. As one EPA official said, there are many different components, and the code could in theory be written by a single person, but making it work with other parts of the engine is a more complicated task that would likely have involve more people.²⁵

If this isnt bad enough, it is been revealed that Robert Bosch GmbH, a German company and the worlds largest automotive supplier, actually wrote part of the code. They however claim that it is not their responsibility how their customers use the products that they supply. Moreover, the company says it warned VW in 2007 not to use the software in real-world driving conditions as it would/could be illegal.

Which of the following is NOT an organizational level outcome of Volkswagens emissions scandal?

Multiple Choice

• customer satisfaction

• reputation

• accounting/financial performance

• legal liability

• task performance

Assume VW hired consultants to advise them on the best way to implement change after the emissions scandal. The consultants recommended that VW senior management focus on inputs, strategic plans, target elements of change, and outputs. Based on what youve learned in the book, what model or framework are the consultants describing?

Multiple Choice

• Kotters steps for leading organizational change

• organizational development

• organizing framework

• Lewins change model

• systems model of change