The Volkswagen scandal and its causes – from the perspective of organization
Background and introduction
In the last few years, scandals in large-scale multinational companies have drawn wide public attentions and led to scholarly concern. The Volkswagen (VW) emissions test scandal is a typical example. Volkswagen was accused of installing a ‘defeat device’ in diesel vehicles to control emissions when cars were tested by the United States Environmental Protection Agency (USEPA). However, during normal driving, the device switched off and the diesel engine emitted nitrogen oxide pollutants exceeding the US standard by multiple of approximately 40 (United States Environmental Protection Agency, 2015). After the exposure of the scandal, former CEO Martin Winterkorn resigned and VW had to recall nearly 11 million cars worldwide that had a defeat device with an estimated loss of 4.8 billion dollars (Hotten, 2015).
The scandal arose from various factors. Problems relating to leadership, culture, motivation, and decision making all played a role. However, organisational structure as a deep-rooted foundation of VW had more decisive effects than other factors. Therefore, this essay is based on the perspective of organisational structure as it analyses the causes of Volkswagen’s scandal and suggests some possible solutions to avoid any recurrence in the future.
Main Cause: Bureaucratic organisational structure
The CEO Winterkorn stated that he was unaware of any wrong doing on his part and that he resigned for the good of the company (Statement by Prof. Dr. Winterkorn, 2015).
Many scholars have considered how the CEO could be unaware of such a scandal. One conclusion is that the scandal derived from a bureaucratic structure, which has a latent defect and a high risk of loss of control over the lower layers of the organisation. VW was founded with a traditional bureaucratic structure. Set up in the 1930s, VW was established by Hitler’s Third Reich in the absence of any preceding corporate development (Tolliday, 1995). In order to achieve high volumes of production, the authority at the top of organisation forced downstream sections to follow strict political rules to fill production targets, including minimising costs and maximising productivity without making a clear plan of how to achieve the goals through operational processes. As a result, from the beginning at VW, there was a systematic trend of power centralisation and vertical chain of command. The emission scandal happened in modern times but also has many deep-seated connections with the bureaucratic structure. The influences of bureaucratic structure on VW emission scandal can be reflected in two specific aspects:
Firstly, there is the bureaucratic vertical structure’s standardisation, which gives each level of employees specialised roles and tasks by defining their narrow supervisory span, leading to weak vertical supervision.
Figure 1 VW’s Bureaucratic organisational structure (Volkswagen, 2016)
Based on figure 1, VW’s modern structure was first built up by Winterkorn in 2007 (Brendel, 2006). Every type work is precisely specified. For VW’s strategic management level, there are three parts - the CEO, the board of directors, and the supervisory board – at the top of the organisational bureaucracy. The lower layer of bureaucracy consists of three subdivided sections under the control of a general director. The general director is directly under the control of CEO. In this thin and narrow hierarchy, some mistakes, even scandals, arise because of the asymmetric information and time lag between decision making and decision implementation. As for supervision, the top CEO cannot supervise the bottom of the organisation, because there are many layers between the top and the bottom of the bureaucracy. Layers are treated as barriers to obstruct and decelerate the speed of information flow. Even though there is a supervisory board to supervise the CEO, it doesn’t have the span of authority to supervise general directors, or even the inferior employees under them.
Secondly, the bureaucratic structure results in sub-unit conflicts between different layers of the hierarchy. The strategic management group is concerned with long term corporate development, but the lower level employees focus more on performing everyday asks efficiently and effectively. Besides, in the bidirectional process of managing and reporting, information or decisions will be distorted due to multi-layered management. Ultimately, the goal conflict and distorted decisional information led to the VW emission scandal.
In terms of Robbins’s (2004) theory of organisation, in a bureaucratic structure, an organisation’s overall goals may be overridden by lower functional unit objectives. Weber (1921) also propounds that the rigid bureaucratic structure is established on the identification of roles and tasks, and that correspondingly, obedience to authority is strictly requested to keep the bureaucracy solidified. Seemingly, these two theories conflict with each other, however, they both supplement Bauman’s (1991) bureaucracy theory. It suggests that bureaucracy focuses more on ‘doing the right things’ (targets and corporate goals) than on ‘doing things right’ (methods and processes), and that sometimes the individual sense of ethic will be displaced by corporate goals, as in the Nazi Holocaust.
In the VW case, at first, the CEO set strategic goals to comply with environmental law without knowing clearly whether, at current technology, a low-emission diesel engine could really be produced. As decisions uniaxially flow top-down through the hierarchy, the lower level employees have to implement those ‘compulsory’ decisions by fair means or foul, without questioning or violating the superior. In order to achieve those targets and goals under great pressure, they thought of a way out, which was to install a defeat device in the cars. They are able to comply with the targets set by their manager, but individual ethics disappear from their decision making.
Moreover, according to Robbins (2004), on the one hand, an intensive bureaucratic structure centralises the decision-making power, leading to little need for middle or lower level managers to be innovative and experienced, and on the other hand, a long-last solidified bureaucracy throttles the innovation of employees below senior executives because they concentrate more on performing particular tasks rather than on dealing with problems. It can be reflected in the fact revealed by Heath (2015): the engineers of VW tended to temporarily solve the dilemma by installing the defeat device. However, the temporary solution is not only unethical, but also kills the innovative thoughts of the engineers, which could have been used to find real technological solutions.
Possible Solutions - Brief
Two aspects of the bureaucratic structure’s flaws contributed primarily to VW’s scandal. A historical report revealed that VW also had been involved in a similar emissions test scandal in 1973. However, after being punished with a $120,000 fine, approximately four decades later, the scandal happened again (Gardella & Brunker, 2015). What’s worse, after the exposure of the scandal, the EPA (2015) claimed that defeat devices could be detected in the 2009 to 2015 model VW cars, which means that VW had cheated the EPA for 7 years. As a result, to address the internal problem of VW and to completely eradicate the scandal, fundamental, powerful and deep-rooted improvement steps must be taken.
The first should be to change the organisational structure to a more flat, flexible, and fast-responding structure, or rather the layers of management should be reduced to enhance the vertical control and supervision. At the same time, to avoid increasing employees’ workload, more employees should be hired as a support measure to fill vacant positions in horizontal layers. Moreover, adapting to the matrix structure as an alternative solution, horizontal supervisors should take charge of each function. For instance, a cross-boundary engineering manager should manage and supervise the engineering division in different regional departments and product departments. In this case, for instance, the CEO is able to contact the engineering manager directly.
Secondly, VW must change its human capital structure. Previously, to keep a bureaucracy stable, the upper layer of the labour structure had a low turnover rate. For example, the former CEO Winterkorn had stayed in the position for 8 years, which reduced the ability to deal with emergencies and weakened the manager’s alertness of thinking (Bryant & Milne, 2015). Therefore, managers’ election should be held more regularly, it not only to improve the flexibility of the structure, but also to generate a quick and affluent flow of information and managerial knowledge.
Conclusion
Therefore, even though the scandal struck a serious blow at VW, there are still several possible solutions, including the rebuilt of organisational culture, the standardisation of operations, and so on. This article only exam the problem from the perspective of organisational structure as a starting point, after discussing the problems and solutions related to organisational structure, there is one thing that still needs to be highlighted: that the scandal results from various factors within the organisation, and that as a result, keeping pace with changing factors is a feasible strategy for the sustainable development of VW.
Reference
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Bryant, C. & Milne, R. (2015)Volkswagen’s ‘uniquely awful’ governance at fault in emissions scandal.Available at: http://on.ft.com/1QEN0fn
Gardella, R. & Brunker, M. (2015) VW had previous run-in over 'defeat devices', Available at: http://www.cnbc.com/2015/09/23/vw-had-previous-run-in-over-defeat-devices.html
Heath, A. (2015) Group think and delusion: why VW lost its bearing, Available at: http://www.telegraph.co.uk/finance/newsbysector/industry/11889781/GroupthinkanddelusionwhyVWlostitsbearings.html
Hotten, R. (2015) ‘Volkswagen: The scandal explained’, BBC News, 13 January, p. 3.
Robbins, S.P. (2004) Essentials of organisational behaviour. 7th edn. 2003). Pearson Education
Statement by Prof. Dr. Winterkorn (2015) Available at: http://www.volkswagenag.com/content/vwcorp/info_center/en/news/2015/09/Statement.html
Tolliday, S. (1995) ‘Enterprise and State in the West German Wirtschaftswunder: Volkswagen and the Automobile Industry, 1939-1962’,The Business History Review, 69(3), pp. 273-350.
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