How a Sales Driven Culture led Volkswagen Astray
Volkswagen learns that customers, not sales, need to be at the heart of its core business. Lessons for pharma?
The ripple effect from the Volkswagen (VW) emissions scandal continues to prompt businesses globally to self-reflect and learn from the mistakes of one of the world’s biggest commercial players. It is becoming increasingly clear to all sectors, including the pharmaceutical industry, that structuring a business around chasing targets and achieving sales is no longer effective or sustainable.
The customer is in charge
Looking at VW’s behavior over the past several years, it’s as though they’ve been stuck in a time warp and haven’t adjusted to the social and business changes that have been gathering momentum this century. Indeed, according to Steve Denning, Forbes contributor and author of The Leader’s Guide to Radical Management, “The 20th century was a time when the customer was a thing to be manipulated … to buy the products and services generated.” It was an era of mass production and a relentless urge to drive up consumer spending regardless of the environment. “Today, that world is gone,” he says. “As a result of a variety of factors, the customer is in charge.”
Greater accountability and transparency are high on the customer agenda, with consumers increasingly demanding that brands are more responsible. This has increased competition within all sectors – be that car manufacturing, pharma, airline, or other service providers. As Denning notes, “Now, unless a firm is delighting the customer, the customer can, and will, go elsewhere. Firms like VW would do well to keep in mind the 1973 dictum of Peter Drucker: ‘There is only one valid purpose for a corporation: to create a customer. Making money and maximizing shareholder value are results, not the goals of the corporation.’” This will come as no surprise to those pharmaceutical companies that have already begun to center their businesses around patient experience, such as LEO Pharma, Sanofi, and UCB.
The VW emissions fiasco
The problems for VW began when discrepancies were noted between the level of emissions from their diesel vehicles achieved in controlled tests and their output in real-world driving. This led to further studies revealing that the actual emissions of nitrogen oxide (NO2) from the VW vehicles were up to 30 times higher than previously shown when the cars had been tested in a controlled environment. Subsequent to this, the US Environmental Protection Agency (EPA) has conducted further testing and has found that emissions were up to 40 times higher than VW was reporting.
It has since been uncovered that VW was unable to engineer a diesel vehicle that would meet US emissions standards, which led the company to fit a software system that operated as a ‘defeat device.’ This device would be activated whenever the vehicle detected a test for emissions. It would then switch the engine performance to a leaner mode, making it temporarily less polluting than it actually was on the open road.
An organization like VW, that lies to both its customers and its staff, that chases sales at the cost of the environment, that puts research efforts into defeating consumers’ wishes, and pumps noxious gases into the atmosphere while advertising their vehicles as being ‘green,’ epitomizes an outdated ‘push up sales at any cost’ mode of business. It demonstrates an arrogance and greed that harkens back to an industrial age, and it certainly isn’t in line with the customer-centric culture of today’s businesses. This can be likened to the sales-driven reputation of those pharma companies who are slower to adapt to a need for culture change.
A loss of trust
While the VW fiasco has many underlying organizational flaws, perhaps the most damaging to their reputation will be their deceit and the damage this has caused to public trust. This is something that the pharma industry can relate to. Indeed, trust in the pharma industry has been negatively affected by a range of news stories, most recently the steep price hike for the drug Daraprim by Turing Pharmaceuticals, which Hillary Clinton famously challenged via her tweet, “Price gouging like this in the specialty drug market is outrageous. Tomorrow I’ll lay out a plan to take it on.” Valent Pharmaceuticals has also been in the news with allegations of fraud being levied which precipitated stock to plunge by 40 per cent recently after an influential short-seller accused the company of using speciality pharmacies to inflate its revenue, an allegation that the drugmaker denied.
Not a week goes by when the pharma industry isn’t under suspicion for some misdemeanor. Subsequently, one of the key challenges for pharma is to gain and maintain public trust, which it is trying to achieve via customer-centricity. Equally, the problem now faced by VW is that trust is earned, and once lost, can be difficult to regain. VW’s customers trusted them and VW failed to value this.
Needless to say, VW’s stock has dropped dramatically since September, and the company has promised to do everything possible to make amends and to win back the trust of its customers. Over $7 billion has been set aside for recalls and refits to the vehicles that have the ‘defeat device’ installed. But will this be enough?
According to David Bailey, Professor of Industrial Strategy at Aston Business School, “Even before the scandal erupted, some analysts had been questioning Volkswagen’s dash for global growth, which had ramped up costs and made the company overly complex. Like Toyota a decade ago, the firm had got ‘big company disease’ where growth itself became the target.”
It seems difficult to conceive how the company can suddenly change its culture to one that is driven by customer satisfaction as opposed to merely sales. After all, we have seen within the pharma industry that changing an organizations culture is a long and arduous feat, requiring motivation from everyone within the company, most notably the organizations key leaders.
Bigger isn’t better
Denning observes, "When any company starts talking about becoming the biggest, rather than the best, that's when you should worry about the future of that company. We saw this with Toyota ten years ago, and now we see it with Volkswagen.”
Fortunately, many pharma companies have started to grasp the value of being better rather than the biggest, such as can be seen by those companies focusing on tailored drugs rather than trying to be everything to all patients. For example, after failing to break into the immune-oncology market, GSK swapped its oncology unit for a portion of Novartis’ vaccine portfolio. Instead of trying to be an expert in everything, many pharma companies have realized that it better to develop deep solutions for narrow disease areas.
It is clear that the ethos of VW has been supporting an aggressive growth strategy, a reputation that the pharma industry continues to try and break free from. Some go as far as describing a ‘culture of fear’ within VW, while others with insight into the company speak of a tough management style in which failure isn’t an option. In this type of environment, communication to senior levels is often blocked because it’s clear that management isn’t interested in hearing about problems – only that targets have been met. Once VW had embarked on a path of developing clean diesel technology, with no other plan for success in place, there was enormous pressure on company engineers to deliver results. This culture of fear is far removed from efforts to build high-performance pharma organizations, where risk-taking and mistakes are seen as fundamental to innovation.
Goodbye to VW?
“VW will survive this. It is one of the biggest car firms in the world, with an annual turnover of over €200 billion a year, and is supported by the German government. However, the short to medium term hit will be severe,” says Bailey. To this end, the car manufacturer has already started cutting costs and investment. “To restore its image, the firm has to genuinely show that it’s sorry (and not just sorry it has been caught), cooperate fully with regulators, communicate with customers, open up, and change its strategy and structure so that this isn’t possible again,” he advises.
It took the CEO of Gruenenthal 50 years to apologize for the thalidomide disaster, but fortunately VW’s ex-CEO, Martin Winterkorn, apologized the same month the scandal emerged and proceeded to step down from his role. The true cost, however, is the loss of trust and the damage to the VW brand. Just as pharma are continually seeking ways to improve and protect its reputation, this will now be an overriding factor for the previously trusted VW. Despite the impressive image that VW has built up over many decades, a scandal of this magnitude, that demonstrates carefully planned duplicity, shows how rapidly a good reputation can be wiped out.
Responsibility for culture change and the maintenance of an effective culture rests with leaders at all levels in an organization. It’s the leader who ensures the selection of the ‘right’ employees - those who subscribe to a set of shared values and behaviors, who makes sure that human resource practices reflect the values and behaviors of the organization, and who enlists help from consultants but does not delegate responsibility to them for implementing a culture change. It’s the leader that ‘acts out’ the culture in ways that are emulated by others.
Toyota and General Motors have also had their scandals and recalls. Their problems with safety and quality were serious, but there was no premeditation. Bailey explains, “Toyota brought in outsiders to challenge it on quality issues.” It made sweeping changes and decided to focus on value instead of growth. VW, on the other hand, by appointing an insider as the new CEO doesn’t send a clear message that it is really open for change.”
Indeed, in order to achieve customer-centricity, all indicators suggest that VW could do with some outside input, as well as a new leader who can help embed customer-centricity into the organization. As James Heskett, UPS Foundation Professor Emeritus, Harvard Business School, and author of The Culture Cycle: How to Shape the Unseen Force That Transforms Performance, told eyeforpharma, “Responsibility for culture change and the maintenance of an effective culture rests with leaders at all levels in an organization. It’s the leader who ensures the selection of the ‘right’ employees - those who subscribe to a set of shared values and behaviors, who makes sure that human resource practices reflect the values and behaviors of the organization, and who enlists help from consultants but does not delegate responsibility to them for implementing a culture change. It’s the leader that ‘acts out’ the culture in ways that are emulated by others.”
A new commercial strategy
However, other signs are more positive. Most importantly, VW has already openly committed to a totally new commercial strategy, and has abandoned its previous focus on diesel engines. As Bailey explains, “VW has announced a strategy overhaul to focus more on electric and hybrid vehicles – that’s long overdue and maybe some good can come out of this for the firm and the wider industry.” They are finally listing to their customers and giving them what they want – ‘green vehicles.’
I understand that if the value is placed on the patient, not the sale, you are half way there.
Perhaps one of the biggest lessons that VW need to learn from this is that sales can be customer-centered. As Victoria Williams, Sales Director at GSK France, recently told eyeforpharma, “Selling isn’t a bad word if it’s done right.” Indeed, GSK have a patient-focused selling model to prove this, with Williams sharing, “I understand that if the value is placed on the patient, not the sale, you are half way there.” The same could be said of any customer service organization.
A cautionary tale
The VW debacle should serve as a cautionary tale for any large corporate and should prompt soul-searching in the pharma industry as well. An autocratic culture where unrealistic sales targets are the end goal isn’t going to work in a networked age of information where customers are in control. Instead, there needs to be a focus on driving value for the patient or consumer; profits will surely follow if you are listening to your customers and giving them what they want. The old adage that the customer is king has never been more valid than it is in the business world of today, and up there with the customer is organizational purpose. As highlighted by Roch Doliveux, former CEO of UCB, “If you deliver superior value to patients, it delivers superior value to shareholders.”