Tuesday, 22 December 2015

VW Scandal - why the goal of being No 1 is bad for business

The Australian Financial Review today published an article by Leah McGrath Goodman entitled, "VW Emissions-rigging software a team effort". The original article can be found here: http://www.newsweek.com/2015/12/25/why-volkswagen-cheated-404891.html

I recently wrote a piece on this very subject and would like to reproduce it here ..... please feel free to comment.


Why striving for the number one position in your industry is a bad goal

The recent scandal at VW had me thinking. It reminded me of all the times I have seen well-intended goals and performance measures end up producing terrible or unintended consequences. This experience has been the driving force behind my belief that you should NEVER set a goal of being number 1 in your industry. I know the great Jack Welch had a philosophy that his divisions at GE had to be either number one or two in their industry but the overwhelming evidence leads to the conclusion that under normal circumstances this isn’t a good idea. (Jack was an extraordinary leader and may possibly be the one exception that proves the rule).

As the ole saying goes – “What gets measured gets done”. The problem is more often than not what gets done is not what the measure was set up for in the first place. The business world is full of unhappy and unsatisfactory results from poorly designed KPI’s and goals.

While reaching number one is a laudable endeavour and achievement, however the achievement of reaching number one in your industry should be the result of a different set of goals than that of being number one. There have been some recent high profile examples of why specifically targeting number one is a bad idea. Take for example the following cases:

·      Toyota and their massive recall quality issues.
In around 2002 Toyota set a goal of being the largest vehicle manufacturer in the world. In doing so it targeted growth primarily in the USA as its path. Having initiated its presence in the USA with a joint venture with GM at the NUMMI plant in Kentucky it grew its USA manufacturing base to seven plants in:
o   Mississippi
o   Two separate plants in Kentucky
o   Texas
o   Indiana
o   Alabama
o   West Virginia

They also have plants in Argentina, Australia, Belgium, four in Brazil, two in Canada, two in Colombia, South Africa, France, Indonesia, sixteen in their homeland of Japan, Mexico, Philippines, Portugal, Russia, four in Thailand, Turkey and two in the UK. They also have 18 other plants in joint ventures in other countries including China and India.

As Toyota grew rapidly it lost its ability to inculcate the “Toyota Way” into its new employees and new plant processes. Previous growth was a result of a patient approach to developing people in the company with knowledge about the Toyota Way. A key component of the Toyota Way is to work closely and in some cases within the businesses of their suppliers to assist them to adapt to and adopt the new paradigm. This was not done well in a rapidly growing environment.

This resulted in quality issues sneaking into the process and was exacerbated by the level of growth the company was experiencing. My view is if the executives had a goal of ensuring the Toyota Way was successfully inculcated into every new plant – this would have ended up with a completely different result. They may not have become number one as quickly – but I firmly believe they would not have had as dramatic a crisis to deal with as they ended up having.
·      VW and their devious deception of the emission results on diesels. They too set a target of being number one. They too identified that leadership in the USA was their path to this position. In February 2007 the new CEO Martin Winterkorn was appointed and from his first day in office, he is aware that the group’s U.S. business is floundering. He believes that only diesel engines will enable VW to gain significant market share in the United States and to fend off Japanese rival Toyota and its hybrid drive.

In January 12, 2008 At the Detroit Motor Show, Matthias Wissmann, president of German automotive industry association VDA, says 2008 will be the year in which “clean diesel” achieves a breakthrough in the U.S. market. He predicts diesel cars will increase their market share from 3 to 15 percent by 2015, thanks to rising oil prices and stricter emissions standards.

In August 2008 Volkswagen announces the launch of the VW Jetta 2.0 TDI in the United States, based on the EA 189. The company highlights the car’s low fuel consumption and low emissions, which have been made possible thanks to the cheat software.

Early 2014 the environmental organization ICCT tests actual emissions figures for diesel cars and finds that the two Volkswagen models are well above the limits, exceeding the guidelines 35-fold in extreme cases. In May 2014 two U.S. authorities are informed of this, the Environmental Protection Agency and the California Air Resources Board, a state agency. They commence official investigations into Volkswagen. VW indicates that it is willing to discuss the matter, conducts its own investigations and repeatedly compares the results on both sides.

It is clear that the drive to be number one resulted in practices and decisions being made that were, at least in hindsight – however should have been known at the time, deceitful and unethical. Again my belief is if the advantage of efficient diesels were in fact the game changer they expected – the setting goals around this would have helped them become number one. No target being number one as a prime goal.

·      Sears Roebuck in the 1990s found themselves in a situation where executives mandated a sales goal for automotive mechanics of $147 an hour. Rather than work faster, as was the expectation, employees met the goal by overcharging for their services and “repairing” things that weren’t broken.
·      The 2008 financial collapse, in which “motivated blindness” (explained below) contributed to some bad decision-making. The “independent” credit rating agencies that famously gave AAA ratings to collateralized mortgage securities of demonstrably low quality helped build a house of cards that ultimately came crashing down, driving a wave of foreclosures that pushed thousands of people out of their homes. Why did the agencies vouch for those risky securities?

These four examples demonstrate the unexpected consequences of poorly thought out goals. A smaller but no less important example is where companies of all sizes mandate cost cutting programs (see my article 7 reasons why cost cutting is the worst thing for your business). Procurement cost cutting more often than not results in the purchase of inferior quality parts that leads to further expense somewhere down the supply/manufacturing/maintenance chain.

It’s well documented that people see what they want to see and easily miss contradictory information when it’s in their interest to remain ignorant—a psychological phenomenon known as “motivated blindness”. The root cause of this blindness or self-interest is in the setting of goals and the incentives attached to those goals.

So how do you avoid these consequences when you want to set goals and incentives within your business? I have developed 5 steps to setting worthwhile goals:

1.     Examining what behavours you want in your business. Leaders setting goals need to view the situation from the perspective of those whose behavior they are trying to influence and think through their potential responses. This will help head off unintended consequences and prevent employees from “motivated blindness”.
2.     Having goals such as honest reporting are just as important to reward if not more so. When leaders fail to meet this responsibility, they can be viewed as not only promoting unethical behavior but also blindly engaging in it themselves.
3.     Identify how one measures the achievement of these goals. The goal has to be quantifiable.
4.     Set up the measuring of this goal so that it occurs as part of the normal process of conducting business. Your ERP system should be able to assist here albeit it may require a modification or specific BI report to be written. It is not until we examine what behavours are occurring in the business are we in a position to understand if the consequences are unexpected or not.
5.     As with all KPI’s or incentives constant monitoring of the result and the act of asking questions around the specific KPI results, is crucial to making this process work. One must monitor if the goal or incentive is having the desired impact. Without these actions being taken – the chances of motivated blindness dramatically increase.
6.     Examine how the cognitive biases that result from the motivated blindness could potentially distort ethical decision-making. For example, the most common problem executives report around the setting of goals and incentives is that their sales forces maximize sales rather than profits. I see this every day in all the client’s businesses I work with. I ask what incentives are they giving their salespeople, and they confess to actually rewarding sales rather than profits.

The lesson is clear: When employees behave in undesirable ways, it’s a good idea to look at what you’re encouraging them to do. Examine if you have followed the six steps completely. If you do; your chances of goals and incentives being productive is greatly enhanced.

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David Ogilvie
Ph: +61 (0) 438 787 759

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