Risk Management: Case study of Volkswagen

Executive summary

The concept of risk management whilst considering a global context leads this paper into focusing on the case of Volkswagen’s pollution-hidden software, meant to deceive American regulators whose role is to measure emissions from various diesel-engined cars. This case is analyzed, based on various perspectives of business risk, which relate to factors such as risk attitude, risk appetite, risk identification, risk consequences, and risk impact. Instead of the pollution-hidden software, appearing to be appealing to the company’s customers as initially intended by the organization, it is evident that it made the company to lose its reputation, incur various costs, and face lawsuits from its dwellers and customers.

Introduction

The case of Volkswagen’s use of pollution-hidden software, with an aim of deceiving American regulators that measure emissions from various diesel-engined cars, has led the company into great crisis (Lawrence et al., 2015). The major risk involved was based on manufacturing these cars and introducing them into the market. Volkswagen introduced these types of cars into the market, with the hope that they would gain much popularity and beat its competitors in the industry, such as Toyota, thereby, generating much returns, which would be more as compared to the investments, put into it initially (Seijts, 2017). Businesses engage risks, with an aim that they would possibly generate positive non-expected returns to the business. However, it is evident that for the case of Volkswagen, the risk factor involved made the business to incur much loses (fines in billions of dollars), loss of reputation, and various lawsuits (Barrett et al., 2015). There are various types of risks involved in business, and they are measured by calculating the variance of a business’ historical returns or the advantage profits that a business gains (The Economist, 2015). In a bid to manage risks, businesses should opt to allocate a significant time, and also enforce effective strategies for managing risks, which aim at creating avenues that handle risks in an investment.

Risk attitude

In Volkswagen’s use of pollution-hiding software, it is evident that the company embraced a positive risk attitude. The essence of this manufacture is that Volkswagen was aware that the pollution-hiding software could lead to environmental losses, yet it still embraced the risk of manufacturing the cars (The Economist, 2015). Volkswagen’s previous historical experience could have led it to this type of risk, owing to the fact that certain situations that businesses are facing, influence their ability towards modifying their risk attitudes. These include internal, as well as external factors (Lawrence et al., 2015). Basically, the internal factors present risks, which a business can easily identify, owing to the fact that they present risk attitudes that are relatively explicit. On the contrary, the external factors cannot be easily identified, as they often emanate from a collective subconscious (Chugh, 2016). Overall, Volkswagen’s initiative to develop a risk attitude posed as an essential factor. Owing to the fact that it decided to introduce cars into the market, with a unique feature in the industry, it needed to develop a risk attitude of cautiousness whilst minding about its environmental impacts, which would affect various concerns (Clemente & Gabbioneta, 2017). However, it is evident that regardless of the risk attitude Volkswagen had, it needed to be open to any type of outcome, which in no doubt, is what the company is currently facing (Seijts, 2017).

Risk appetite

The principles associated with risk appetite are the specific quantity of risks, as well as the nature of peril that a business is willing to persevere, in a bid to attaining its strategic objectives. In other words, it is the nature, as well as quantity of risk that a business is willing and ready to pursue or take (Franks et al., 2014). Volkswagen has engaged the concept of risk appetite, in developing its recent cars. Majorly, the risk appetite it undertook was introducing their recent cars with pollution-hidden software in the market (Oldenkamp et al., 2016). Secondly, Volkswagen has an overwhelming desire to increase its size, and this was in line with its long-term objective of surpassing Toyota and thus, becoming the biggest car company in the world, despite making high-volume products that generated little money (Seijts, 2017). It is significant to take note of the fact that when an organization projects towards specific goals, it must have some initiatives that it sets, which are similar to its objectives. In most instances, the mechanisms that companies set are majorly focused on risk-taking, owing to the fact that the concept of risk-taking relies on this notion. Overall, the development of pollution-hidden software was characterized by the production of a unique set of cars in the market, which no other company had previously had (The Economist, 2015). However much it had negative consequences to the environment, Volkswagen had a prospect of developing a positive step towards improving its products (Lawrence et al., 2015).

Risk identification

Risk identification is a process in which risk is managed through identifying its potential threats, as well as its characteristics (Schaltegger and Wagner, 2017). Risk identification provides the point in which an organization starts its risk management process, owing to the fact that necessary precautions can easily be employed while an organization purposes to take care of the risks involved. In risk identification of Volkswagen’s recent cars, was noted when America’s Environmental Protection Agency (EPA) discovered that there are several diesel-engined Volkswagens that had the software that switched NOx-controlling technology on, in an instance where it was faced with a highly predictable demand seen under set test conditions (Mansouri, 2016). Moreover, Volkswagen also revealed admittedly that there are 11million vehicles across the globe that had noticeable deviation associated with the NOx emissions that are seen in the official testing and those seen in real-world use (Lawrence et al., 2015; cited in Ewing, 2015). Overall, it is worth noting that risk identifications assist organizations to take cautious measures that would consequently assist in the late steps of risk management. This is because it ascertains the risks that can possibly affect a project. Notably, this step is vital, owing to the fact that it provides a foundation to which the remaining functions of a project are based on. Moreover, it also maximizes the positive effects, as well as aspects of a project, which consequently affects the general process. The Volkswagen manager should focus on taking full control of the involved risk factors, which are likely to affect the process of developing a new product and introducing it in the market (Ewing, 2018).

Risk consequences

Based on the risk identification, Volkswagen has faced significant risk consequences associated with the polluting-hidden software. Its major consequence is that Volkswagen has lost most of its customers, especially those that are environment-conscious. For this reason, having faced too much pressures from the public, Volkswagen’s CEO decided to resign (The Economist, 2015). In line with this, it had to take back its products from the market, when the EPA ordered the company to recall approximately half a million of its cars that were in America, in order to fix the software problem (Brand, 2016; cited in Goel, 2015). Additionally, the company’s shares have collapsed (by a third) since the risk was identified. Moreover, it is facing fines in a billion dollars, as well as other financial penalties (Lawrence et al., 2015). The Clean Air Act imposed a maximum fine of $37,500 on every car it had sold, and it is as well noted that the Department of Justice could impose a fine of $18billion in theory. Moreover, Seijts (2017) also notes that the US EPA could fine the company up to $18billion out the door, and more importantly, it will face lawsuits from its customers (aggrieved motorists), as well as dealers. The company announced that it would provide $7.3billion, to cover all the involved costs regarding the scandal. However, it was notably too little, yet at that stage, the value of the company had significantly fallen (Seijts, 2017).

Risk Impacts

The major risk impact that Volkswagen company has faced in relation to the aforementioned recent scandal is that it has lost lots of funds, as well as resources, in developing the pollution-hidden software in its cars. Moreover, another gross impact that it has faced is loss of corporate reputation (Siano et al., 2017). Notably, a project’s risk impacts are useful in the measurement of the nature of the project outcome, which is presented by risks in the process of conducting a project. In other words, the risk impacts, which an organization faces, are measured whilst referring to the external impacts that the project presents, as well as the effects of the external factors presented on the project (Sadiq and Governatori, 2015). Notably, risk impacts are connected to the negative consequences that are brought forth by risk events occurring in an organization that determine how it affects the functionality of the organization. Overall, it is worth noting that the major risk impact that arose from the case is that a substantial number of Volkswagen’s consumers and dwellers developed a consequentially negative attitude towards the recent cars produced by Volkswagen (The Economist, 2015; cited in Jung et al., 2017).

Conclusion

Based on the above indications, it is evident that the concept of risk management in business requires organizations to analyze the prospects of their markets with an objective of ascertaining various natures of risks, which organizations such as Volkswagen can face in their attempt to introduce new products in the market. The essence of this brings forth the notion that Volkswagen may at the long run, use large amount of money in the production of a unique product, which is less to the gains it expected to have from the venture. Notably, business ventures purpose to explore various factors and these include factors related to risk attitude risk identification, risk consequences, as well as risk impacts, whilst attempting to manage the risks, which may occur in Volkswagen’s business. Volkswagen Company efficiently explains the risk management factor, which follows the case of the pollution-hidden software. The company has been utilizing the factors involved in the concept of risk management in attempting to cab various losses, which it had acquired from the scandal, whilst gaining the confidence of its customers, as well as dwellers.

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