can matthias müller's top priorities steer volkswagen back on track?

Can Matthias Müller'stop priorities

steer Volkswagen back on track?

Picture Courtesyi

In continuation of my offering a measuring device for Corporate Management Operating System I am pleased to post this third paper in the series what gets measured gets managed. This post analyses Volkswagen News: Müller Details Top Priorities and Next Steps for Volkswagen Groupii

5 Top priorities Müller has stated are analysed vis-à-vis the first two articles already posted. Can Müller steer Volkswagen back on track? Let us find out.

Links to earlier papers: #1: Slideshare: Ask not why VW failed to measure upto, Ask why am I grappled with How To Measure? Resolve with one & the Only Corporate Management Operating System: Click Here

#2: Slideshare : Who failed Volkswagen, is it Corporate Governance or Management Quality?: Click here

Thanks and Regards

Jayaraman Rajah Iyer

Copyright:

Inactivity Based Cost Management - Copyright c REGN. NO. L- 27490/2006 DATED December 1, 2006Govt. of India, Copyrights Office, by the Author, Jayaraman Rajah IyerIBCM© Research 2015

IBCM© Research 2015 VW #3 of 16

http://bit.ly/1Kf2LRu

http://www.slideshare.net/jayaraman.18/who-failed-volkswagen-is-it-corporate-governance-or-management-quality

Introduction:

Thanks, viewers:

Let me thank 1000+ viewers, including Volkswagen and other qualitative organisationsiii, from different parts of the world to have read my last week's article in Slideshare : Who failed Volkswagen, is it Corporate Governance or Management Quality?: Click here

The main theme of the articlewhat gets managed gets managed was to differentiate between Corporate

Governance and Management Quality. It firmly establishes Corporate Management Operating System in defined slots under Corporate Social Responsibility = [Corporate Ethical Responsibility + Corporate Fiscal Responsibility]. Current trend of putting all problems in a single basket calling as Corporate Governance is firmly put in the designated slot under CSR.

On 28th October 2015 Matthias Müller, Chairman of the Board of Management of Volkswagen Aktiengesellschaft, has announced the five key steps to realign the Group. “We have to look beyond the current situation and create the conditions for Volkswagen’s successful further development”, said Müller in Wolfsburg on Wednesday. He presented a five point plan that he intends to use so that Volkswagen remains one of the world’s leading automobile manufacturers in the future. Müller is confident that “Volkswagen will emerge from the current situation stronger than before”. He announced that the cornerstones of the


http://www.slideshare.net/jayaraman.18/who-failed-volkswagen-is-it-corporate-governance-or-management-quality

Group’s Strategy 2025 will be presented next yeariv.

This paper pinpoints these five key steps vis-à-vis what I had indicated in my above quoted article - who failed Volkswagen..?

Volkswagen Priority #1:

The Volkswagen CEO explained that his top priority is to support the customers affected by the diesel issue. “Our customers are at the core of everything that our 600,000 employees worldwide do”, he said. According to Müller, Volkswagen is working intensively to develop effective technical solutions. In contact with the Kraftfahrtbundesamt (KBA – German Federal Motor Transport Authority) the implementation is set to begin in January 2016.

From my published paper:

Quote:

i. The financial damage could go further. Hidden within the German firm is a big finance operation that makes loans to car buyers and dealers and

also takes deposits, acting as a bank. Its assets have more than doubled in the past decade and make up 44% of the firm’s total.v

ii. On 7th October 2015 Frank Witter (56) has been appointed Member of the Board of Management of Volkswagen AG with responsibility for Finance and Controlling with immediate effect. Witter was previously Chairman of the Board of Management of Volkswagen Financial Services AG.vi

iii. On the face of it Volkswagen had not resorted to tampering with the Accounting Quality as Toshiba had done but let go with just NOx emission, realising the damage it has done to their lungs coughing up in $billions. Tokyo's prospects dwindled after Fukushima disaster for Nuclear Power which is one of its core businesses that had hit them hard. What about Volkswagen's Accounting Quality after the tsunami of NOx emission? Watch out!

Unquote


My take on Priority #1

1. Volkswagen Priority#1 is indeed inevitable with the financial damage at its worst, not in a position to quantify it.

2. In addition the Volkswagen emission row now has a death toll forecast. By the end of 2016, VW’s cars, rigged with “defeat devices” to cheat on emissions tests, will have pumped out enough excess toxic pollution to directly contribute to the premature deaths of around 60 people in the U.S. alone, MIT and Harvard University researchers determined in a new study published Monday in Environmental Research Lettersvii. Risk of judicial penalties and class action lawsuits make the damage worse, in terms of likely financial burden for Volkswagen.

3. HACCP of Technical inability to counter the criticism of cheat software.

Central to the Volkswagen fiasco is the critical part supplier Bosch. Bild am Sonntag said auto parts supplier Bosch, which produced the device, had

warned the VW Group as early as 2007 that it was meant for test use only and that using it on the road would be illegalviii.

Bosch seems to have left Volkswagen in limbo. Two of the technically sound companies collectively could not come out with a sound product. The cause of the cheat software is the hazard triggered by Bosch device. Bosch product liability for the device supplied to Volkswagen remains and Bosch is also vulnerable.

Conclusion Priority #1

1. Müller has rightly brought out the number 1 priority to address the technical solutions, by the HACCP of the device in question. This issue, part of Fiscal responsibility, falls within the ambit of Corporate Governance.

2. However, my paper had highlighted the Accounting Quality during this stressful period. This issue, part of Ethical responsibility, falls within the ambit of Management Quality.

Müller Priority #1 has


addressed one portion of Corporate Social Responsibility but not the other. At this juncture nothing shall be left implied but shall be stated categorically, should Toshiba be a lesson to go by.


Müller’s second priority is to systematically drive forward and complete the investigation into what happened. “We must uncover the truth and learn from it”, he said, adding that Volkswagen is being extremely thorough in its analysis. For this purpose, audit firm Deloitte has been engaged in addition to the steps already announced. According to Müller, those responsible for what has happened must face severe consequences.


Quote:

i. The following is a list of the most important conventions of this kind:...

..It is clear Volkswagen has not adopted any of these above quoted conventions as

part of their Management Policy. In this paper what we emphasise and differentiate is between mandatory and non-mandatory policies, later adding value to the Management Quality. The conventions said above include UNGC that is adopted by very many global companies [12500+ from different countries] as part of their non-mandatory initiatives but not by Volkswagen.

ii. In case of Volkswagen lack of Management Quality led to Executive Intransigence whereas Toshiba's is sheer audacity to outwit the Audit profession with impunity. Toshiba acknowledged a systematic coverup, which began in 2008, LA Times states.

iii. COSO Framework of Sarbanes-Oxley states: Control environment factors include the integrity, ethical values, and competence of the entity’s people;

iv. It is a surprise the major shareholder State of Saxony, holding 12% of shares with 20% of voting rights was unaware of what was happening when a cheat software was put in motion.


v. KPMG-EIU survey findings

where 380 global organisations were considered in arriving at the conclusion: Many firms are grappling with the problem of deciding exactly what and how to measure; Deciding how to measure is more difficult than deciding what to measure;

Unquote


1. “We must uncover the truth and learn from it” Volkswagen is being extremely thorough in its analysis.

Truth involves completely opposite values; then only, it can be Truth.

2. For this purpose, audit firm Deloitte has been engaged.

?

3. According to Müller, those responsible for what has happened must face severe consequences.

?


1. In case of priority#1 the focus is on technical solutions, is on the Object and measurable. Whereas priority#2 focuses on the Subject, warns of dire consequences and not measurable.

2. The success of priority#1 would depend on the product capability of a device that reduces the NOx emission. The success of priority#2 depends on strengthening the Ethical responsibility of Volkswagen.

3. Volkswagen priority#1 seems to be tougher, given the time it had taken to replace Bosch with a better quality device whereas priority#2 looks easier given the right mentoring from top to bottom backed by a robust Management Quality.

4. Despite corrective actions promulgated such as Sarbanes-Oxley acts, Enrons and Worldcoms do pop up again and again relentlessly. That's the incurable bane on Corporate.

5. Does Priority#2 become a


boon or a bane for Volkswagen? Bane if another patchwork of corrective action report is 'read, laughed and filed code; boon if it leads to the strengthening of Corporate Atomic Structure.


Müller’s third priority is to introduce new structures in the Volkswagen Group. “The key point is that Group management will be decentralized to a greater extent in the future”, he said, with more independence for the brands and regions. Müller stated that the Board of Management will focus on addressing cross-brand strategies, leveraging synergies and ensuring that Group resources are used effectively. “We will review in detail our current portfolio of more than 300 models and examine the contribution that each one makes to our earnings.”


Quote:

i. Volkswagen Code of Conduct states: Each superior ensures that the employees

in their area know and comply with the Code of Conduct.

ii. Furthermore, Group Auditing will review compliance on a case by case and/or random basis as part of the auditing program approved by the Chairman of the Board of Management of Volkswagen AG.

iii. Self-governance is the ultimate in decentralisation not instruction from the Chairman of the Board. Chairman initiating an Audit program as to ensure code of conduct is complied by all below sounds hierarchical, assumes the organisation has one call centre.

iv. Corporate Atomic Structure:

In Corporate Atomic Structure 3 Ps Policies, Practices and the Public represent the Protons, Electrons and Neutrons respectively. Proton and Neutron form a nucleus and the electron spins around the nucleus. So is the case where Policies and the Public form a nucleus and Practices spin around the corporate nucleus. Neutron does not influence the identity of the


atom but adds mass to it. Corporate neutron i.e. the public, does not influence the identity of the corporate but adds mass to it. Policies are the protons of the Corporate Atomic Structure but the mass added to it by the public is very substantial. All mandatory regulations have come forth to corporate by the influence exerted by the public as well as the voluntary initiatives by the corporate. That is to say, mass added to the corporate nucleus by the public is indeed formidable.

v. Process Block: Each process block of an organisation is owned by a team of 5 people, with multitasking for the people or multi-team for a task. Each process block reflects the Corporate Atomic Structure the corporate nucleus, Policies and the Public and the corporate electron for practices. Each process block is isolated and made accountable.

vi. In Corporate Atomic Structure CSR is present in every Process Block.

vii. Ethical obligation in each Process Block ensures sustainable value system, insures sustainable efficiency

and assures sustainable profits. The hiccup in both the cases Volkswagen and Toshiba deprives the Society of continued profits from the companies in question.

viii. In order to ensure sustainable profits our age-old Financial Accounting methods need to be changed. Not profits but energy should be the criterion of measuring Corporate performance.

ix. Action Process also triggers Creative Process with the end product such as IPR, patents, Assets subject to depreciation, Market Share, Brand, Strategy, Project Management etc.


1. to introduce new structures in the Volkswagen Group

'New structures' is very essential. Goes by what is already stressed as Corporate Atomic Structure.

2. “The key point is that Group management will be decentralized to a greater extent in the future”,

Corporate Atomic Structure


stresses the importance of decentralisation to a greater extent with each process block having more independence for the brands and regions.

3. will focus on addressing cross-brand strategies, leveraging synergies and ensuring that Group resources are used effectively

Corporate Atomic Structure addresses these issues as part of the Action Process in order to effectively ensure Sustainability of Fiscal responsibility.

4. “We will review in detail our current portfolio of more than 300 models and examine the contribution that each one makes to our earnings.”

Not profits but energy should be the criterion of measuring Corporate performance, process block by process block.


1. new structures in the Volkswagen Group

Volkswagen has a spreadsheet corporate

structure and is entirely Object oriented. The new structure shall reorient as Subject based Corporate Atomic structure.

2. leveraging synergies

Teamwork? Collaboration? When one process block is no different from the other, each is assigned work according to his/her capabilities, yoked together but act independently, leveraging synergies is at its optimum level throughout the organisation.

3. ensuring that Group resources are used effectively

In the Subject - Object distinction of Qualitative and Quantitative elements of management chasing of data as outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities that leads to nothing, none wiser, when Subject is not brought as the denominator.

Group Resource is only one - i.e. the denominator, the human energy, that is Intangible .



As his fourth priority, Müller is driving forward a realignment of the Group’s culture and management behavior. He noted that the pursuit of perfection, the employees’ commitment and social responsibility in the Volkswagen Group must be retained. However, he believes that changes are necessary in how Volkswagen communicates and how it handles its mistakes. “We need a culture of openness and cooperation.” Müller also called on everybody at Volkswagen to display more courage, greater creativity and a more entrepreneurial spirit in their dealings with one another.


i. Risk culture should emanate from below. Knowledge should emanate from the superiors.

ii. Sustainability of efficiency provides profits, whereas sustainability of value system provides sustainability of profits.

iii. In Corporate Atomic

Structure Corporate Social Responsibility is present in every Process Block.

iv. Corporate Social Responsibility is split into two issue areas,Corporate Ethical Responsibility and Corporate Fiscal Responsibility.

v. Whereas Toshiba did not escape from the prescribed path but damaged the path itself. In case of Volkswagen Management Quality can be brought in to restrict the Executive intransigence once found out. For Toshiba it would take a longer time, as the damage caused is at the root level of shaking the Accounting Quality.


1. Müller is driving forward a realignment of the Group’s culture and management behavior

Profits Motive is a function of quantitative elements whereas ethical motive a function of quality.

Awareness of Risk Culture by the team in each process block emanates by aligning ethical responsibility with fiscal responsibility.


2. However, he believes that changes are necessary in how Volkswagen communicates and how it handles its mistakes. “We need a culture of openness and cooperation.”

Ethical Responsibility equates the highest and the lowest paid.

3. Müller also called on everybody at Volkswagen to display more courage, greater creativity and a more entrepreneurial spirit in their dealings with one another.

Conflict resolution of interest, conflict resolution of personal interest, conflict resolution of conscience would lead the way to display more courage, greater creativity and a more entrepreneurial spirit in their dealings with one another.


1. Aligning fiscal responsibility with ethical responsibility will be crucial for Priority#4 to succeed.


The Volkswagen CEO announced that the fifth priority will be to transform the Group’s Strategy 2018 into a Strategy 2025. “Many people outside of Volkswagen, but also some of us, did not understand that our Strategy 2018 is about much more than production numbers. A lot of things were subordinated to the desire to be “Faster, Higher, Larger”, especially return on sales.” According to Müller, the point is not to sell 100,000 more or fewer vehicles than a major competitor. Instead, the real issue is qualitative growth. Müller announced that the cornerstones of the Group’s Strategy 2025 will be developed over the coming months, and that it would be unveiled mid-way through next year.


i. Volkswagen Group Strategy 2018, how many process-blocks did it consider while targeting 2018? Each process-block moves forward linearly, isn't it? Did any single process-block try a


quantum jump? Are they moving in the intended direction? How many such process-blocks are in the right direction, by dT/dT1 at optimised level today? What does the Index of Inactivity show as of now, a year that passed by, since the Strategy 2018 released?


1. A lot of things were subordinated to the desire to be “Faster, Higher, Larger”, especially return on sales.”

There is no quantum jump in a manufacturing industry [that is the exclusive privilege of Banking & Finance!] but a linear movement from one space to the other. It is true for Volkswagen and also true for Bosch.

Was there a cost escalation request, on account of innovation, from the supplier improving the quality of the critical device? Would this have affected the 'return on sales' figures?

Variable cost is easy to measure but difficult to control. Fixed cost is taken for granted while

1 series of Tasks accomplished in respective Time.

accomplishing the desire to be “Faster, Higher, Larger”. The same logic applies to the supplier when Volkswagen finds its variable cost has additional buden fixed cost of the supplier. This cycle goes on between the supplier and its supplier.

This applies to every process block. When out of frustration a quantum jump is tried with a cheat software disaster strikes albeit in a reasonable time, after 11 million vehicles were sold.

2. the fifth priority will be to transform the Group’s Strategy 2018 into a Strategy 2025. .. Müller announced that the cornerstones of the Group’s Strategy 2025 will be developed over the coming months, and that it would be unveiled mid-way through next year.

3. Instead, the real issue is qualitative growth.

A CREAM Report, made up of Fiscal Responsibility - [C] Corporate Governance, [R] Risk Management, [E] Earnings and Ethical Responsibility - [A] Accounting Quality, [M] Management Quality - measured as on today


supported by an Index of Inactivity for each process block, would benefit Volkswagen to overcome the current challenges by charting a growth strategy for 2018 and then 2025.

4. It cannot be postponed. To recall: Müller also called on everybody at Volkswagen to display more courage, greater creativity and a more entrepreneurial spirit in their dealings with one another.

It would be appropriate to remember Kennedy's moon speech. "not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win"


1. the desire to be “Faster, Higher, Larger” especially return on sales implies of some smart sales guys who have let down the company. The fact remains of the enormity of the cost as a consequence. However it is

purely technical flaw that needs to be corrected. Ralph Nader had to struggle for several years trying to communicate why an automobile is unsafe at any speed. Pay the fine, recall the vehicles, come out with a proper device that helps reduce the NOx emission. Job is done.

2. However, cheat software has made a dent in the armoury of Ethical Responsibility.

3. There are several flaws in different dimensions. There is an overwhelming desire to postpone the strategy 2018. That is the first flaw.

Conclusion Priority #1 to #5

1. Shaking the corporate structure is crucial. In that respect cheat software has been a blessing in disguise.

2. Management Quality of Volkswagen is at a discount. Needs strengthening.

3. Problems faced by the company are of several dimensions. Return on Intangible converts n-dimensional problems to n-


problems of one dimension, the ultimate BPR. That accelerates profits, isn't it?

4. In dealing with the Subject, what is crucial is to bring the abstractions into reality, acknowledge value where value is due, and deconstruct what is valueless.

5. To the question of: Can Matthias Müller's top priorities steer Volkswagen back on track?

My take is: Yes, they can.

Intangible is well-definedwith everlasting metrics,

enabling the dictum 'Whatgets measured gets

managed', well measured and well

managed.

Jayaraman Rajah IyerFounder, CEOIBCM© Research

[email protected]+919487390439

4th November 2015Kodaikanal, India


i http://www.vwvortex.com/news/volkswagen-news/muller-details-top-priorities-and-next-steps-for-volkswagen-group/

ii http://www.vwvortex.com/news/volkswagen-news/muller-details-top-priorities-and-next-steps-for-volkswagen-group/

iii Volkswagen USA @VW, Volkswagen @Volkswagen and several reputable organisations and Government Ministries.iv http://www.vwvortex.com/news/volkswagen-news/muller-details-top-priorities-and-next-steps-for-volkswagen-

group/v The Economist - A Mucky Business - http://www.economist.com/news/briefing/21667918-systematic-

fraudworlds- biggest-carmaker-threatens-engulf-entire-industry-andvi Volkswagen http://www.volkswagenag.com/content/vwcorp/info_center/en/news/2015/10/Frank_Witter.htmlvii Volkswagen’s Emissions Cheating Directly Responsible for 60 Early Deaths in the U.S. http://www.newsweek.com/60-people-will-die-early-thanks-volkswagen-388117viii Staff, supplier Bosch warned VW years ago that diesel emissions software was illegal: reports: http://www.japantimes.co.jp/news/2015/09/28/business/staff-supplier-bosch-warned-vw-years-ago-diesel-emissions-software-illegal-reports/#.VjdwD6T5Ibd