Volkswagen (VW) is a German-based automobile company, which manufactures and sells cars in over 153 countries across the globe. Ferdinand Porsche founded the firm in the 1930s with the objective of manufacturing and selling cars in Germany (Buiga, 2012). In its initial period, the company manufactured cars in small scale, which it sold in the local German market. However, following its high quality branding, the company grew rapidly and added trucks and public vehicles to its product list. Before 2015, the company was among the market leaders in the automobile industry despite the high competition in the market. In the mentioned period, the company supplied over 9.7 million vehicles annually to different countries across the globe (Boston & Houston-Waesch, 2015).
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VW profits were also high owing to the premium pricing it charged to its customers that matched the quality of its vehicles. For instance, Passat, which was launched in 2010, pushed the company ahead of the competitors owing to its innovative features. However, the company’s turnover took a downward trend in 2015 following the exposure of the emission scandal (Boston & Houston-Waesch, 2015). This paper seeks to establish the impacts of the mentioned scandal on the firm’s brand equity and its overall profits. To achieve the stated objective, the paper shall give a brief overview of the emissions scandal, its effect on the company’s reputation and brand equity, and then explore the ethical issues applicable to the case.
Overview of the VW emission scandal
The infamous VW emission scandal is a controversy revolving around a kind of software fixed in the company’s vehicles with an aim of fraudulently misleading the Environmental Protection Agency (EPA). The software, which was popularly known as the “defeat device”, was fitted in about 11 million vehicles that had already been distributed globally (Lane, 2015). The fixing of the software in the vehicles followed a requirement by the EPA for the automobile industry to regulate the amount of carbon emissions. Under the requirement, EPA would conduct carbon emissions tests before approving any newly designed vehicle (Boston & Houston-Waesch, 2015).
To pass the test, Volkswagen fraudulently fixed a defeat device that would reduce the amount of carbon emissions during such tests. The software could automatically detect when such tests were being carried out and adjust the running of the engine accordingly to minimize the carbon emissions. The fraud was unearthed in 2015 by an independent investigator causing the company great losses in term of brand equity and loss of customers.
Effects of the scandal on VW’s brand equity
Brand equity refers to the perceptions of the customers about a certain product or service. Strong brand equity, therefore, implies that the customers perceive a company’s product as superior to that of the rivals (Helm & Tolsdorf, 2013). Weak brand equity, on the other hand, implies that a company’s product is less superior compared to that of the competitors. Helm and Tolsdorf (2013) argue that strong brand equity could be a great source of a sustainable competitive advantage for the concerned firm.
The assertion is informed by the view that customers tend to procure goods and services from firms with strong brand equity. Besides, a firm with a strong brand name can invoke the premium pricing strategy to maximize the profits.
Before the emissions scandal, VW was among the global leaders in the automobile industry as evidenced by the high profits realized by the firm in the period before the scandal (see Appendix 1). However, following the publicity of the scandal, the firm started recording diminished returns apparently due to the bad public image painted amongst the customers (Farrell, 2015). Typically, the quality of a company’s products and the overall customer satisfaction were the key determinants of brand equity.
However, in the contemporary world, customers are also considering the environmental impact of the products and services when making purchase decisions. The confirmation of the negative impacts VW’s automobiles had on the environment severely damaged its brand equity causing the rivals to outsmart it regarding the turnover (Lane, 2015). The profitability of the company was greatly impacted by the revelation of the scandal, and the company recorded the first ever losses in the first quarter of 2016.
The loss of profits may be attributed in part to the loss of customers’ loyalty due to the confirmation of the pollution allegations. The other possible reason for the loss is the diminished ability of the company to charge a premium price for its products. Before the scandal, the company manufactured different types of vehicles and priced them according to the individual features. The company, for example, charged a premium price for Passat, one of the most selling brands.
Ethical issues surrounding the scandal
De Bettignies and De Cremer (2013) argue that companies are ethically bound to ensure that the environment in which they operate is free of pollution by manufacturing products that minimize the environmental pollution. Most countries across the globe have strict legislations requiring firms to be socially responsible as regards environmental conservation. In the US, the EPA is the body mandated to ensure compliance with the environmental laws. VW failed to observe its environmental conservation corporate philanthropic role by manufacturing vehicles with high nitrogen oxide emissions.
The other ethical issue relevant to this case revolves around fraudulent advertisement. The company’s marketing team colluded with the engineers to paint a picture of environmentally friendly vehicles among the customers (Farrell, 2015). Consequently, the customers purchased more of the products until it was revealed that they were harmful to the environment. The marketing ethics requires companies to give correct and factual information to the customers and refrain from giving wrongful information to increase the turnover. The company’s directors cultivated a corporate culture that promoted fraudulent marketing by failing to assess the suitability of its products before introducing them into the market.
Lastly, the company’s managers violated their fiduciary duty they owed to the company’s shareholders. Buiga (2012) claims that managers are in a principal-agent relationship with the company, and they should, therefore, act in the best interest of their employer. The managers owe the company duty of care, and they are bound to act with due diligence and professionalism to maximize the shareholders’ earnings and avoid losses for the shareholders.
The action by the managers to fix the emissions controllers was shortsighted and ill advised since the risk managers did not consider the long-term effects the exposure of such endeavor would have on the company’s balance sheet. When the scandal became public, the company lost its brand equity resulting in the loss of customers. Additionally, the firm incurred losses in the form of the money spent recalling the vehicles. Therefore, the shareholders’ interests were overlooked when making the decision to fix the defeat tools.
Ethical remedies for VW
To handle the problem effectively, VW needs to accept full responsibility as a company and avoid blame game. The company should apologize to its customers, as an organization, and publicize the measures in place to remedy the situation. Accepting liability as an organization will portray the company as ethical, which may help restore its brand equity (Boston & Houston-Waesch, 2015). The company should set aside funds to facilitate the recalling of the vehicles sold to the customers across the globe. The owners of such vehicles should be compensated monetarily for the loss suffered due to the fraudulent marketing. Alternatively, the company should replace all the vehicles with the compliant ones to facilitate the restoration of its brand reputation.
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Lessons and recommendations
Lesson 1: Internal controls are important aspects of business
One of the lessons that firms can learn from the VW’s case is that strong internal controls are inevitable for the success of business. When the emissions scandal was brought to light in 2015, it was blamed on a few irresponsible engineers who were advancing their personal interests at the expense of the company’s shareholders (Farrell, 2015). The successful installation of the device by a few engineers without being detected illustrates the failure of internal controls within the company. If there were a strong internal control system, such irresponsible action would be detected in time and the appropriate measures taken to avert the undesirable consequences.
To remedy the shortfalls in the internal control systems, the firm needs to establish a strong internal risk management department and list all the issues that may substantially affect its balance sheet as potential risks. The risk management department should work closely with the internal quality control auditors to avert the recurrence of a similar problem in the future (Lane, 2015).
Lesson 2: A strong code of ethics is inevitable
The problem that currently befalls VW may be attributed in part to the lack of a strong internal code of conduct coupled with shortfalls in communication. The assertion is informed by the view that the engineers responsible for the defeat device acted outside the scope of the business ethics. If there were a strong ethical code within the company, outlining the scope of the employees’ conduct and the personal liability for deviance, the engineers would consider the repercussions before fixing the devices.
To shield the company from similar problems in the future, the firm’ managers should formulate a strong code of ethics and communicate the same to the entire workforce. De Bettignies and De Cremer (2013) argue that involving employees in devising the ethical code promotes compliance. Therefore, the employees should be involved in the formulation process and allowed to propose the penalties for non-compliance.
The VW emissions scandal is one of the latest controversies to hit the automobile industry in the past few decades. The scandal became known in 2015 when an independent investigation body found that the company’s vehicles emitted a huge volume of the toxic nitrogen oxide gas into the environment. The investigations that followed the allegations found out that about 11 million vehicles from the company had been fitted with a defeat device that would reduce the running of the engine during environment compliance tests. Since its publicity, the controversy has cost the company huge losses in terms of loss of brand equity and the recall fees.
The company has since accepted liability and offered to recall all the non-compliant vehicles distributed across the world. This paper offers recommendations for the company that may help restore its brand equity. Among the recommendations is the establishment of a strong internal control system coupled with the formulation of an actionable code of ethics. The cited recommendations have been discussed in details in this paper.
Boston, W., & Houston-Waesch, M. (2015). Volkswagen suspends another top engineer; Berlin orders recall; Transport minister says recall of tainted diesel cars is mandatory. Wall Street Journal. Web.
Buiga, A. (2012). Investigating the role of MQB platform in Volkswagen Group’s strategy and automobile industry. International Journal of Academic Research in Business and Social Sciences, 9(2), 391-399.
De Bettignies, C., & De Cremer, D. (2013). Pragmatic Business Ethics. Business Strategy Review, 24(2), 64-67.
Farrell, S. (2015). Volkswagen loses sales top spot to Toyota after emissions scandal. Web.
Helm, S., & Tolsdorf, J. (2013). How does corporate reputation affect customer loyalty in a corporate crisis? Journal of Contingencies and Crisis Management, 21(3), 144-152.
Lane, C. (2015). Emissions scandal is hurting VW owners trying to Resell. Web.
Appendix 1: A breakdown of the financial performance of VW.