An investigation into The Volkswagen Scandal including its Effects and Implications to the Company's Reputation
Researchable Topic Area
Academically, it is important to understand the effects of widespread business malpractice in both the short term business operations and the company's long term reputation.
With the pressure to produce more efficient and environment-friendly car engines becoming enormous across the globe, some companies have struggled to operate, therefore resulting in cutting corners. Volkswagen is a perfect example after its exposure in the US market. Once caught, the effects on the companies can be disastrous in the short term and the long term.
Importance of the Problem
The Volkswagen emissions cheating scandal began in September 2015 when it was discovered by a team of researchers at West Virginia University that Volkswagen had installed defeat devices in its cars sold worldwide with 600,000 ending up in the US market. The cheat device was software inside the car's computer that was able to detect when the car was being tested in a laboratory and differentiate that from when driven in the streets. The software would command the car to operate less than optimally when being tested in a lab, therefore emitting fewer exhaust gases. However, the computer would command the car to open up when in the streets optimally, therefore emitting more polluting gases from its engine.
Over 10 million more diesel cars had eventually ended up in various other countries across the globe (Hotten 2015). While the software activated the emissions of the cars in the laboratory, the cars would be released up to 40 times more nitrogen oxides on the road than the regulators in the US allowed. The cheating was much more widespread than earlier thought because over 8 million of these disease cars had been sold in Europe including France, Italy, the UK, Germany, and even Canada and South Korea. As a result of the scandal, Volkswagen's share value fell by about a third.
The emission scandal was specific to Volkswagen and did not involve other companies in the auto industry. The scandal cost the company over 30 billion pounds in restitution, penalties, fines, and lawsuit settlements. An investigation revealed that Renault-Nissan, BMW, and Ford had complied with the law and had no defeat devices (Milne 2015). However, the revelations were a big blow to the extensive diesel market. Over the course of the last ten years, various companies in the car production have enjoyed a lot of financial success in the manufacturing of diesel cars believing that they are good for the environment.
The Volkswagen scandal is likely to roll back such gains due to the belief that diesel cars may not be environment-friendly and this has not been helped by the fact that authorities are contemplating on prohibiting diesel from entering in some cities. Hence, the revelation is likely to cause a sharp decline in the demand for diesel cars, especially in the European market as people switch to petrol cars. However, the effects of the emissions extended well beyond the demand and fines. The cheating scandal affected health outcomes across the world where the units were sold. According to the Federal Reserve Bank of Chicago, the emissions increased rates of acute asthma attacks and low birth weight by 8% and 1.9% respectively (Joselow 2019).
Hence, knowing what pollution means to the health of society, normally, people are unlikely to go out due to the fear of inhaling the noxious fumes. However, the case of Volkswagen is a situation where pollution was happening at a large scale and people were not aware of its health implications. With pollution going on for a significant amount of time unnoticed, a lot of damage was done on the heath of foetuses and young children because they were the most vulnerable.
In summary, there are several important things to be highlighted by the Volkswagen scandal. First, cheating in business can have enormous financial implications for a business in the short run and the long run. Things like penalties, fines, and settlements can amount to tens of billions of pounds. Secondly, malpractice can reduce the confidence that the consumers have on a certain product, thereby affecting the demand for that product. Thirdly, cheating does affect closely related products and industries. For example, Volkswagen's scandal has negatively affected the diesel car industry that was emerging as promising (The Economist 2018). Lastly, business malpractice can have serious health implications for the people who are affected especially in terms of diseases.
Aim Of The Research Project
This research will aim to investigate the Volkswagen scandal and how the malpractice has affected the company financially in the short run and the long run. Therefore, the proposed study aims to investigate the Volkswagen scandal including its effects and implications to the company's reputation.
Research Objectives and Research Questions
How has the Volkswagen scandal affected the company financially in the short term?
How is the Volkswagen scandal likely to affect the reputation of the company in the future?
What are the environmental lessons that have been learned from the Volkswagen scandal?
How has the Volkswagen scandal affected closely related industries?
The objective of this research will be to demonstrate that business malpractice has serious ramifications to the company or companies involved as well as the societies that the companies operate in. For the companies, the ramifications are mostly financial in the short run and the long run while for the societies involved, the impacts can be both financial and psychological including fear and mistrust. The other objective that this study will demonstrate is that businesses cannot be trusted to regulate themselves and are more likely to break laws and endanger lives as long as a financial incentive exists. The last objective that this study seeks to demonstrate is that due to the spillover effects, malpractice in one industry can have significant implications to closely related industries due to the closely linked industries in an economy.
One of the important revelations by a study done by Foy and Politi (2015) immediately after the scandal was revealed is that it would negatively affect Volkswagen suppliers of parts. While Volkswagen was forced to pay fines and penalties, its suppliers such as the Boryszew Group in Poland that supplied Volkswagen with door handles, plastic parts, wires and air-conditioning faced a shrink in business and had to lay off some of its workers. In a 2018 study carried out on the Volkswagen's Turkish market, the researchers revealed that corporate reputation is a valuable and intangible asset that enhances value creations and can sustain competitive advantage over a long period (Kircova & Esen 2018). As revealed, even in the face of stiff competition, companies with high reputation have a competitive advantage because of their ability to influence the behaviours and attitudes of their customers (Terry-Armstrong 2016).
With its reputation battered, the Turkish customers' trust and loyalty waned and the demand for its cars went down. With this intangible asset seriously battered by the emission scandal, the company faces an uncertain future especially in the US market that was quick to respond and indications are that it might lose in its competition with other car manufacturers such as BMW and Ford (Bernhard 2018). Among those countries that had purchased many cars from Volkswagen, it is revealed that many if not all were angry and reported that they were less likely to engage with Volkswagen in the future in a 2018 article published in the Journal Consumer Behaviour. The article reveals that perceptions among customers after a major corporate scandal have enormous effects on the future of a company. As revealed by the article, after exposure, the customers who had already dealt with VW perceived future wrongdoing by the company and are unlikely to purchase any cars from the company soon (Phau, Guckian, Chapman, Lickel & Markowitz 2018).
It was also revealed that among those that had not dealt directly with the company, there was a feeling that the scandal was brought about by "a few bad apples" in the company. However, they still maintained that in the future, the company should be keenly supervised and its ethics scrutinized. This means that for the foreseeable future, VW would be under a microscope from various authorities meaning that its reputation will almost certainly be questioned. The argument is that immediately after an ethical scandal, the brand is likely to suffer due to a significant fall in demand. Coupled with the fact that a company may be forced to pay penalties, fines, and restitution, a company suffers significant financial damage (Boston 2018).
In the article "beyond a one-time scandal" (2016), the author observes that the VW emission scandal is likely to negatively affect closely related industries for a long time into the future. It also highlights the environmental concerns of the diesel technology revealed by the scandal. First, Schmidt (2016) explains that diesel cars are simply not friendly to the environment because they put public health at risk from the particulate matter and nitrogen dioxide.
Secondly, the article reveals that diesel technology is likely to become more costly because new standards will be put in place by governments across the world that will ultimately result in little and expensive diesel technology assets in the market. Hence, this scandal not only curtailed the growth of emerging technology, but it also placed its very survival in jeopardy (Mendoza 2015). Ronald Sim (2017) offers an important contribution to the discussion about the long term reputation of a company after a major ethical scandal. The book examines the experiences of new leaders who take over following an ethical scandal to turn an organization around. Who emerges is that new leaders face a lot of difficult at almost all phases of the turn-around process. This difficulty translates to financial losses or reduced sales due to low sales that the company experienced in this process (Jung & Alison- Park 2017).
Considering that the new leaders for VW will have to deal with the perceptions of millions of people across various continents and cultures, it is safe to say that the company faces a challenge the size of a mountain in trying to turn the company around. In a new study, Abdurakhmonov, Bolton and Ridge (2019) explain that many organizations simply ignore to research management. The authors observe that new regulatory requirements create a business context whereby organizations must continuously adapt to the various requirements. However, as revealed by the article, many of the leaders do not conduct research into management that can help them in leading organizations in an era where compliance is of utmost importance for a business organization. Using the institutional theory, the article offers insight into how to manage a business profitably and how to best comply with the introduction of new regulatory requirements at the same time.
3.1 Theory of the Firm
In trying to understand the Volkswagen emission scandal in-depth, the research will adopt the theory of the firm. This neoclassical microeconomic concept states that firms make decisions to maximize profits. This theory holds that the overall nature of companies is to maximize their profits by creating as much gap between costs and revenue as they possibly can (Hotten 2015). The goal of the firm is, therefore, to determine demand and pricing within the market and allocate its resources towards maximizing the net profits. Thi...
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