FEKH23 Brands and Branding Words: 4371

The Volkswagen emission

scandal

By Group 2: Miren Adarraga, Inés Campos, Lucila Casto, Blanca Cardiel

INDEX

INTRODUCTION 2

ANALYSIS 3
BRAND MANAGEMENT PERSPECTIVE 3
CUSTOMER PERSPECTIVE 6

CONCLUSION 11

REFERENCES 12
 1. INTRODUCTION

The Volkswagen Group is one of the international leaders in the automotive industry.
For more than a decade, its marketing strategy has been based on environmental
awareness. To achieve this, the group created new diesel engines for the cars of some of
its brands. The aim was to position itself in the consumer's mind as a brand that respects
and protects our planet. To support this idea, they also carried out some campaigns that,
for example, ensured that for each vehicle purchase a tree would be planted. The
advantages of this brand positioning and of promoting themselves as a "green" brand were
many. Among consumers, those concerned about the environment saw that their car
shared their interests and principles, and in countries such as the United States, consumers
were allowed to claim tax relief for buying a low-polluting vehicle.

But problems soon followed. The new diesel engines relied on a substance called
"AdBlue" to reduce the production of nitrogen dioxide, which had to be refilled.
However, in countries such as the United States, regulations prohibited this refueling to
be carried out by the user, which the company saw as a possible factor that would
negatively affect sales. The company's technicians programmed the AdBlue sprayer to
only activate when it was undergoing an emission test. This solved the problem, the liquid
had to be refilled over long periods of time and they were not forced to increase the size
of the tank containing the liquid. By recognizing when it was undergoing a test, the car
activated the atomizer, achieving the optimum levels of pollution to be evaluated as a
low-pollution car.

Competitors began to voice their doubts about the legality of diesel engines.
Practically all the companies in the sector had the same technologies and could not
achieve emission levels as low as those of Volkswagen, and this was not reflected in the
price of mid-range cars sold by the brand, making them more accessible and desired by
consumers. But it was not long before this manipulation was discovered, when the
University of Virginia requested a study of some of the company's car models. By
comparing the results of gas emissions of the cars in the laboratory to the same car on the
road, it was found that some models that in the laboratory had obtained optimal results
on the road exceeded 29 times the legal limit. It would be in 2015 when, through a
statement from the EPA, the world would know about Volkswagen's manipulation of the
gas emission tests.

This scandal meant a hard blow to the company's image and many institutions would
denounce the fraud. The economic effects would not take long to arrive, sales in the
United States and Europe dropped and fines and sanctions were added to this, some
countries even banned the sale of cars that could have the illegal device. The company
lost credibility, consumer confidence, and a large percentage of sales.

From the information provided it is important to highlight two things:

In the first place, how the Volkswagen Group based its brand image on its respect
for the environment, how it built its identity on values that it would later betray. If a
company betrays the pillars of its identity, what should be its response? What is the best
way to mitigate the damage to its image?

Secondly, it is worth noting the influence of different groups on the brand's

performance. Consumer opinion on such important issues as environmental awareness
positively affects "green" companies but can be devastating for companies that betray
these beliefs and values. This is because consumers have changed, it is no longer
consumption for consumption's sake, they are now looking to self-identify with products.
But there are many other groups that can influence in the same way, in this case
governments, which as we have mentioned even banned the purchase of the affected
vehicles in the face of the scandal. It is therefore important to be aware of the interests of
each of the company's stakeholders.

It is clear that their deception destroyed the trust and loyalty of their consumers,
institutions and even governments. The characteristics of this case are perfect to put into
practice and apply some of the theories and models seen in class and the response of this
company to the scandal is also an interesting object of study and analysis.
2. ANALYSIS
a. BRAND MANAGEMENT PERSPECTIVE

As a foundation for developing branding strategies, classical theories of brand

management highlight the importance of focusing on customers’ perceptions of a brand
(Keller & Lehmann, 2006). However, in recent years the shareholder model focused on
customers and shareholders is changing; and to create strong brands with great value,
companies are increasingly convinced about the importance of adopting a stakeholder
model. This new theory refers to any individual or organization that has an interest in a
company and can affect or be affected by the company's actions. In addition, this approach
is also very important in the development of the brand strategy, because not only
customers and employees can influence the results, but all the people who have to do
directly or indirectly with the company.
In the context of Volkswagen's crisis, stakeholder analysis is important to know which
of these stakeholders have the most power and can significantly influence the decisions
made by the company. Volkswagen is an organization based in Germany and with an
international presence, therefore, the number of stakeholders that were affected by the
fraud was massive. In the thesis prepared by Rostislav Sapozhnikov (2018) an
identification of these groups is carried out, which are as follows:

1) Society: The illegal device incorporated in the engines of Volkswagen Group

cars had serious consequences for the environment and for the health of citizens.
Society was affected by the group's actions in violating environmental regulations.
2) Customers who purchased the cars involved in the fraud: They were harmed
both by the harmful consequences of the emissions and by being victims of
deception. Here we could also include the dealers, who were also damaged
because they thought they were selling cars of prestigious brands with great added
value.
3) Shareholders and investors: share value plummeted following the
announcement of the scandal. What many saw as an investment in a stable, long-
 term growth company was a major failure for them, contributing to a loss of
confidence.
4) Activists and NGOs: we can contextualize Volkswagen's practices within the
term "greenwashing" coined by Greenpeace. This practice of " pseudo-
environmentalism" consists of the act of misleading consumers about a company's
environmental practices or the environmental benefits of a product or service
(Zhang y Kotkov, 2016). For the specific case, Volkswagen carried out
greenwashing through marketing campaigns proclaiming that its cars were "clean
diesel", in order to appear environmentally friendly. As a consequence of
"greenwashing" in 2016 the US Federal Trade Commission sued the company for
misleading advertising (Ewing, 2017). In addition to these organizations,
associations for the defense of consumer rights played a decisive role in assisting
those affected, as well as in legal proceedings.

When analyzing this case, we think that the problems that led to the Volkswagen
scandal were exacerbated because the company failed to take into account its
stakeholders, who are fundamental to the successful development of its business. Thus, it
failed to consider the growing importance currently given to environmental care not only
by society but also by governments. The population is becoming increasingly aware and
wants to reduce its carbon footprint, and instead of looking for a solution that would meet
these needs, they limited themselves to fulfilling their goal of becoming the world's
largest automobile company without caring about how they did it. The company forgot
that people don't choose them or a competitor for what they sell, but for the reason they
sell it.

Another interesting aspect to analyze in this case is how the scandal influenced
stakeholders' perceptions of the company and how this had an impact on the brand
reputation. For this purpose, we have drawn on the research prepared by Matthew Tidwell
in 2017 on stakeholder perceptions of the Volkswagen Group. The author conducted
interviews with a sample of the company's customers to find out whether there had been
a change of opinion about the company after the crisis and Volkswagen's response. The
conclusions obtained are divided into three blocks:
 1) The first block is based on feelings of remorse and deception, mainly due to
misleading advertising on the part of the company (to which a large part of the
interviewees referred). The feeling of disappointment also appears, as many
people were happy with their vehicle and the brand before the scandal.
2) The second block deals with distrust, which increased due to the intentionality
of the actions carried out by the company. Respondents' answers were divided in
two: on the one hand, those who considered that the company's answers (which
we will explain later) were insufficient, since they considered that Volkswagen
was only trying to diminish the magnitude of the scandal. On the other hand,
another part of the sample considered that the assumption of responsibility was
important, but that the brand did not regret the acts committed. As a result, buyers
in general developed a negative feeling towards the company, which led to them
not wanting to continue owning their vehicles.
3) Finally, the third block refers to brand loyalty. Consumers who based their
choice of car on the environmental factor showed great distrust and disinterest in
buying another car of the same brand. In addition, it also influenced the purchase
intention of potential customers, who preferred to change their choice and
purchase vehicles from other companies.

This change of opinion about the company had a big impact in its reputation. In the
aftermath of the scandal, the company suffered a large loss in its rating on different
indexes, such as the Global RepTrack, the World’s Most Admired Companies ranking
and the MERCO index. For example, in the first one, the company dropped from 14th
place in 2015 to 123rd place in 2016. In 2015, it was the third best reputed company in
the automotive sector, surpassed only by BMW and Daimler, while the following year, it
ranked last in the sector.
 Figure 1: Top 10 RepTrack in Latin America and Europe

Source: Reputation Institute (2015)

This index is very interesting as it relates reputation to company performance. It

associates behaviors such as buying products or speaking positively about the company
with companies that achieve a strong reputation, with stakeholder support of more than
50%, and 80% for companies that achieve an excellent reputation. In the case of
Volkswagen, it went from a strong to an average reputation, although to a point of being
considered a weak reputation, leading to a considerable reduction in value-generating
behaviors (buying its product, recommending it, working in the company, investing in
it...) by stakeholders towards the company. However, the strategy followed by the
company helped to improve results in subsequent years, as can be seen in figure 2.
 Figure 2: Volkswagen’s Global Reptrack evolution 2015-2019

Source: Reputation Institute (2019)

b. CUSTOMER PERSPECTIVE

To make the analysis of the second perspective we will be focusing on the

customer perspective and more specifically in the brand culture theory. The brand culture
is related to the fact that the products today are bought not merely because of their
utilitarian functions but rather for the symbolic meanings connected to these products;
symbolic meanings often embodied through a brand (Tarnovskaya and Bertilsson, 2017)
Therefore, using the theory of brand culture adapted to the Volkswagen case and the issue
they had, we will be explaining how the brand in contemporary consumer culture is
employed as a significant symbol of meaning when consumers construct their identity
and how this affected the firm.

Before starting with the analysis, we would like to remark the importance of the
identity of the consumer culture in today's society. As we said before, we had experienced
a development in our purchasing habits in the last few years. in the early years of the 20th
century companies were focusing on the products they were producing. They wanted to
sell good quality products to their consumers and the main goal was to satisfy this need
for them. However, society swiftly changed year by year, with technological innovations
and an increased commercialization leading to a new customer purchasing behaviour.
Customers started to look for products with more utilities as a way of communicating
their self-identity. The effect of this development was that individuals (strongly
encouraged by the marketing discourse) needed, and still need, to consider themselves as
brands, using symbolic meanings to differentiate themselves from their peers, in ways
similar to the development of products (Tarnovskaya and Bertilsson, 2017). At the same
time and considering the changes on their market target brands have also to build a strong
brand identity.

The brand identity is necessary or the companies who want to differentiate

themselves from their competitors and have a competitive advantage. They have to focus
on offering their clients more than just a product, as the customers, in order to build their
own identity; they now require the companies more terms in this aspect. To truly
understand the role brands, play in the construction of identity one must acknowledge the
central role of authenticity (Tarnovskaya and Bertilsson, 2017). This is connected to the
fact that as customers have the need to be different from the people, they have around
them and they want to feel authentic, they are asking the brands to do the same, asking
for authentic brand symbols.

In the case of Volkswagen and the scandal they suffered with their CO2 emissions,
their brand image was really damaged and therefore, the authenticity of the company was
also harmed. After the scandal, the company's reputation fell through the cracks. The
message they conveyed “powerful and at the same, better in the environment” had been
tarnished. This unfortunate event had a bad influence on the customers' perspective
regarding the brand. The problem was that Volkswagen was not being honest about their
own culture brand, as they were pretending to be something that they were not.

This case is a really good example of manipulation, consciously and intentionally,

by the company with the aim of obtaining a competitive advantage towards their
competitors. Thus, calling into question the organization´s morale and its commitment to
business ethics. When the hoax was discovered, the company's reputation was
compromised, and its competitiveness seriously affected. Its responsibility and
commitment to the environment, which as we all know is a very important issue nowadays
in our society and is part of the identity of a lot of customers in the market, was shown to
be unrealistic and the case shows that Volkswagen ignored the consequences and social
costs that its actions were going to have, focusing only on its own interest and financial
benefits as a company.

The company was in a bad situation after the scandal because they lost the trust of
lots of their loyal customers due to the fact that they were lying about their brand culture.
To solve this problem and become a competitive company again, they decided to make
some changes.

The first change was related to the group-wide strategy. Volkswagen used the tool
of communication, opting for transparency to regain the public's trust. The first step
towards change was the resignation of the head of the group, Prof. Dr. Martin Winterkorn,
who said in his statement: "As CEO, I take responsibility for the irregularities discovered
in the diesel engines" and added "I am not aware of any wrongdoing" (Ewing, 2015). In
addition to personnel changes, a five-point plan to restructure the Volkswagen Group was
drawn up and published in a company statement. The priority of this plan was to find a
solution for customers affected by the scandal. The second point of the plan was a
commitment to the truth. The automotive group launched its own internal investigation
to clarify the facts and learn from the mistakes so that they would not be repeated in the
future. The third objective was to carry out a reorganisation. Among the measures adopted
was to give more independence to the companies that make up the group, with the aim of
making smarter and faster decisions, and to this end they took the initiative to reduce the
number of department directors who report directly to the CEO to simplify management
(Welch, 2019). Finally, the strategy started in 2007, Strategy 2018, to make Volkswagen
the "most successful, exciting and sustainable automotive company in the world"
(Winterkorn, 2013) was continued. This goal was specified in four objectives: innovation
and technology to achieve customer satisfaction; increasing the level of production and
sales, aiming to reach ten million units per year; acquiring a solid financial position; and
finally, attracting and retaining the talent of the workforce to build a qualified and
motivated team.

The second change is related to the strategy pursued by Volkswagen. In 2015, it

began implementing the new group-wide strategy for the next decade, "Together 2025+"
(Volkswagen, 2016). This programme is based on innovation, sustainability, and safety
to offer a new driving experience. This strategy reflects the company's concern for the
environment, considering itself, as the largest automotive group, responsible for the
protection of air and nature, hence its commitment to electric mobility. This programme
was carried out and approved for 2016 and had to fulfil a series of phases. The first of
these consisted of a restructuring and revision of the company's value chain. In addition,
during this same phase, a large offer of electric vehicles will also be made, because of the
investment in innovation and development. The second phase of the programme
proposes, by 2025, Volkswagen's leadership of the electric car market and, in turn, an
increase in the company's profits by offering this alternative to traditional cars. In their
quest for e-mobility "dominance", they are creating their own digital platform. The last
phase of the process of becoming the leader in the new world of mobility and having a
key position in shaping the industry, characterised by constant changes, new consumer
trends and revolutionary technological advances.

One of the most important changes the company made was to change its brand
image. In order to implement the commitment to transformation, a change of slogan was
chosen. Since 2007, during Winterkorn's leadership, the slogan had been "Das auto"
("The car") a self-confident message, to the simpler "Volkswagen". The change is
believed to be due to the desire for a less forceful slogan, highlighting the change of
leadership and the beginning of a new era for the company. As well as the slogan, the
logo was also changed in 2019. The aim of the new logo was to convey Volkswagen's
changes and values after the scandal, with a clearer, two-dimensional, simple, modern
logo.

Figure 3: VOLKSWAGEN LOGO CHANGE

Source: Volkswagen Group (2019).

 Given the crisis situation in which the group found itself, publicity and social
networks were a tool with a double purpose. On the one hand, the scandal had gone viral
through these networks, where fake accounts also appeared and contributed to
diminishing trust in the company. With the growing popularity of these media, companies
can lose control of the message they convey, which makes organisations vulnerable. On
the other hand, the group used social media and other platforms to communicate with its
customers and apologise. Newspapers and magazines carried this message (FIGURE 2).
This new approach was corroborated by the firm's marketing director, Jochen Sengpiehl,
who stated in a press release (Volkswagen Group, 2019): "As a general principle, the aim
in the future will not be to show a perfect advertising world. In our presentation, we want
to be more human and more alive, to adopt the customer's perspective to a greater extent
and to tell authentic stories”.

Figure 4: VOLKSWAGEN ANNOUNCEMENT IN THE BEGINNING OF

SCANDAL.

Source: Volkswagen Group (2015).

 Diermeir (2011) argues that there are four elements whose alignment is of
particular relevance in a crisis communication strategy in the communication strategy
during a crisis. These give rise to what the author calls the "trust radar", a tool to preserve
and protect stakeholder relations. The elements that make up the "trust radar" are:
empathy (authenticity and closeness in the message), transparency (sharing relevant
information with the public); expertise (transmitting experience and knowledge) and,
finally, commitment (the feeling that an organisation is behaving correctly). For a
communication strategy to be most effective, the above elements must be
aligned,expressed graphically in the form of a diamond. In practice, however, many
companies only focus on one of these dimensions when establishing a communication
strategy. In the case of Volkswagen, Tidwell (2017) considers that the dimensions of
expertise and transparency were not as well addressed in the same way as the other
dimensions. Volkswagen showed great interest and involvement in resolving the damage
caused by the scandal and through its communications it expressed a great deal of
empathy with the affected consumers. On the other hand, consumers claim that on many
occasions the company failed to transmit or delayed the transmission of relevant
information.

Even though we have chosen the brand management and customer perspectives
for the analysis of this case, we would like to briefly mention the critical perspective and
more specifically the theory of "brand as violence"; because given the nature of this case,
we believe it is interesting to analyze this aspect as well. In this case, violence regarding
the brand Volkswagen was because the brand was being symbolically violent in itself
because of its performance. The company manipulated the gas emission test consciously
and this can be considered as violent performance because they were putting their
economic interest before everything else. In addition, consumers, who not only buy the
product but also buy everything that involves the production process, were being deceived
since they did not know what was happening at all.

3. CONCLUSION

Analyzing this case, we have learned a wide range of things related to reputation.
Corporate reputation is a strategic intangible asset for companies and therefore, more and
more attention is being paid to its management. management of corporate reputation is
receiving increasing attention. Charles Fombrun wrote in 2005 "If competition is the
engine of the economy, reputation is the fuel that makes it run". A well-managed
corporate reputation can become a competitive advantage for the company, as it is a
source of distinction vis-à-vis competing companies.

Reputation, if not properly managed, can become a threat to the company. There
is an inherent risk to reputation, reputational risk, caused by two factors: the expectations
of stakeholders and the performance of the company. What can be an opportunity can
also become a threat or a risk to the company when the actions taken by the organization
do not exceed the expectations of the stakeholders and the public. A poor reputation can
lead to the loss of customers, employees, investors and, therefore, the generation of value
is reduced.

Volkswagen, like many other organizations, in the pursuit of higher revenues, put
the interests of stakeholders on the back burner and engaged in unethical business
practices. These actions have severely damaged corporate reputation, which has
consequences in various organizational spheres. It is important to be aware of the power
of stakeholders, the value-creating behaviors they perform are voluntary acts, and the
reason behind their performance is to share the beliefs and values of the company. It is
therefore important that organizations commit to the principles they stand for, that they
act in a way that is consistent with them, so that corporate culture and values are not seen
as an obligation, but as the parameters of the company's actions, the way in which it acts
with and for society.

In order to prevent dishonest actions from taking place within a company and thus
avoid crises such as the Volkswagen crisis, awareness at all levels of the organization is
essential. Reputation is based on a company's decisions, which is why all employees and
managers of the company must take the interests of stakeholders into account in order to
reduce reputational risk. Defining a corporate vision and values, recognizing the
importance of stakeholders and investing in improving its accountability to society are
measures that protect an organization from reputational risks.

In conclusion, we should mention that we have chosen two perspectives that have
caught our attention and that fit our case perfectly. Firstly, we have analyzed the brand
management perspective as we believe that brand image and reputation are very important
for a company. However, we have also analyzed the case from a consumer perspective
since one of the main objectives that companies have to fulfil and which is very difficult
is to try not to forget their customers, since as we have mentioned, they are a fundamental
pillar for their business.

4. REFERENCES

Diermeier, D. (2011) Reputation rules: Strategies for building your company's most
valuable asset. Nueva York, Estados Unidos, McGraw-Hill.

EPA (2015) Notice of Violation. Recuperado de

https://www.epa.gov/sites/production/files/2015-11/documents/vw-nov-2015-11-02.pdf

Ewing, J. (2017) El escándalo de Volkswagen. Cómo, cuándo y por qué Volkswagen

manipuló las emisiones de sus vehículos. Barcelona, España. Deusto.

Fombrun, C. (2005) “Building corporate reputation through CSR initiatives: Evolving

standards”, Corporate Reputation Review, pp. 7–11.

Keller, K.L. & Lehmann, d.R. (2006). Brands and branding: Research findings and future
priorities. Marketing Science 25(6): 740–759.

Reputation Institute (2019) Global RepTrack 2019. Retrieved from

https://insights.reputationinstitute.com/homepage/global-reptrak-2019

Reputation Institute (2015) Global RepTrack 2015. Retrieved from

https://www.reputationinstitute.com/sites/default/files/pdfs/2015-Global-RepTrak.pdf

Sapozhnikov, R. (2018) Stakeholder Relationships in International Crisis: Focus on

Volkswagen Emissions Scandal. [Academic paper] Zurich University, Zurich, Suiza.
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branding. 1st ed. Lund. Chapter 10.

Tidwell, M. (2017) May I offer you a gift card? An analysis of Volkswagen`s crisis
response strategy in the wake of its Dieselgate scandal. Syracuse University, Nueva
York, Estados Unidos. Retrieved from
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Welche, J. (2019) The Volkswagen recovery: leaving scandal in the dust. Journal of
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