Volkswagen is currently faced with an issue of diesel emission scandal from the vehicles they manufacture. As a result, there is likely to be an issue of trust between the company and its customers as may be evidenced by a number of associated problems the company is now facing. The current state of affairs is such that the Volkswagen Company is suffering from an economic set back, having hit by a major problem of decrease in sales by 14 percent this year that is more concerning. The company also faces the problem of failure to release the yearly results because of the scandal for mounting emissions which has resulted to unknown costs. Another problem is the decrease in the share price, also associated with the same scandal. In addition, the company is now faced with the problem of high cost of setting high amount of finances in pounds as away of covering the damages linked to the scandal (VW emissions scandal: everything you need to know, 2016).
Discussion of problems faced by Volkswagen Company
First is the problem of decrease in sales by a factor of 0.14. The decrease in sales can obviously be attributed to decline in the number of customers responsible for purchasing the Volkswagen cars. This can directly reduce the company revenues. The lack of trust between the company and its customers may have resulted to a number of potential customers declining from purchasing Volkswagen cars due to fear of emissions that is above the limit. Trust is the foundation on which business to business relationship can advance and hence that of business to customer relationship (Kamers, 2015). In other words, this translates to saying that good business to customer relationship is not possible without trust. Therefore poor relationship in such a case results in reduced number of customers and thus sales. The emission scandal beyond the acceptable limit is thus the cause of decline in sales with considerable proportion. Nevertheless, there are also other factors such as product quality and advertisement among others which may affect sales (Schudson, 2013). The emission scandal is the major cause of reduced sales in this case given the time of occurrence.
Another problem, failure to release the annual results of the company performance by the management can also be attributed to the issue of emission scandal. The costs of mounting emissions in this case are not known. As a result, it becomes difficult to release results about company performance owing to the fact that the required financial results should be all inclusive in terms of costs and revenues. Therefore, there is possibility that failure to account for the unknown costs is what led to the delay of releasing annual results.
The problem of decrease in share prices can be attributed to reduced revenue which on the other hand is due to reduced sales. This also translates to saying that the reduced share prices has been brought about by emission scandal of the company which is a major issue as far as the current state of Volkswagen is concerned. The share price, being directly proportional to sales will have to decrease with the decrease in car sales, a problem being experienced due to lack of trust between customers and the company.
Next is the problem of high cost of covering the damages connected to the scandal. As at this point, the company image and reputation seem to have been compromised. The process of reinstating the image to the point of winning customer trust and good relationship may require the company management to set high cost of compensating for the damage. As managers, the ability to foresee future problems and/or failures is very helpful in planning for the necessary solution (Lerbinger, 2012). The company, for this reason had to take the precaution of setting aside several billions of pounds as away of getting prepared to plan for the solution of the aftermath due to the emission scandal.
The emission scandal has been made successful by the company through the use of software used to cheat the emission tests for the case of diesel engines for the previous six years. As a result, this facilitated huge emissions of carbon that exceeds the recommended standards for the nitrogen oxides in Europe and United States of America (Oldenkamp, van Zelm, & Huijbregts, 2016). This means that the tests carried out either in Europe or USA could reveal that the emissions are within the acceptable limit which in real sense is not the case. IT is thus true to say that the Volkswagen Company deliberately implemented such software in the car engine, a software they called the defeat device software that is now prominent as the open secret for the Volkswagen engine (VW emissions scandal: everything you need to know, 2016).
The problem of reduced sales has a great impact on costs, revenues and profitability. The economics of alternative will include improving car reliability, performance, fuel economy and its environmental impact since they are the most factors considered by many while choosing the car . These factors contributes to 10%, 11%,19% and 24% for the environmental impact, fuel economy, performance and reliability as far as the pole opinion is concerned(VW emissions scandal: everything you need to know, 2016). If this is the case, then the company can increase its sales by taking in to an account all these four alternatives. However, this will require the company to increase the cost of company operations if it is meet the required economic alternatives. Therefore, the consideration of all these alternatives will have the effect of reducing profits and revenues at high costs in the perspective of accounting.
The above alternatives thus have the probabilities of 0.1, 0.11, 0.19 and 0.24 for the environmental impact, fuel economy, performance and reliability respectively. In the process of setting up the cost of covering the damage, the management has estimated that the cost of emissions amounts to 4.7 billion pounds. Therefore, assuming that this estimated cost is equivalent to the total cost of meeting the four economic alternatives, the expected values of each economic alternative can be computed from this approximated cost. The expected costs will be the product of each probability and the estimated cost. As a result, the expected costs will be 0.47 billion pounds, 0.517 billion pounds, 0.893 billion pounds and 1.128 billion pounds for the environmental impact, fuel economy, and performance and reliability alternatives respectively. In this case, it becomes apparent that performance alternative has the highest expected value if the manufacture of the cars by the company is to take these four economic alternatives in to consideration.
Economics: The state of the environment determines good economic growth of country. Therefore any activity that brings about negative impacts on the environment is likely to result to economic decline. As an example, the use of energy sources that are associated with large carbon emissions above the required limit is a threat to the environment. Large carbon emissions to the atmosphere result to environmental degradation thus negatively affecting the global environment. The United States, for instance uses a large proportion of its annual budget towards environmental conservation to compensate for the effects of carbon emissions. For instance, the public health effects caused by such emissions from the year 2009 to 2015 approximates to nine million counterfeit Volkswagen cars that were sold in both Europe and in the United States. These cars resulted to cumulative emissions of 526ktonnes of nitrogen oxides that id beyond what is legally permitted by the international laws and regulations. In addition, these emissions have been linked to about 45 thousand cases of disabilities in humans and the value of life loss of at least 39 billion dollars (Oldenkamp, van Zelm & Huijbregts, 2016). Environmental conservation in this case ensures that the general environment is friendly for major economic activities such as agriculture which is the key to economic development. This means that when an environment is depleted, the agricultural activities are adversely affected, leading to shortage of produce. In addition, these kinds of emissions depleted the ozone layer with time there by exposing the life of humans in danger. Diseases such as cancer are associated with direct kind of rays that penetrates through the atmosphere to the earth. The budget of eradicating such related kind of diseases can be very expensive in terms of cost once they occur.
The effect of carbon emissions to the atmosphere is thus very dangerous to both the ecosystem and the lives of humans. The case of Volkswagens cars can be treated as a dangerous situation as far as the global environment and hence the economy is concerned. The alternative of environmental impact should therefore be given much priority when manufacturing cars to ensure that the type of cars produced have the engine types with very low carbon emissions to the atmosphere. The Volkswagen scandal emission can easily lose large market share both in the United States and in Europe if indeed it continues to manufacture the same kind of engine vehicles which it opts to sell to its customers.
The issue of fuel economy as an economic alternative also has an impact of improving economic growth both globally and in United States of America in particular. However, this happens with the condition that the right type of fuel with no or little carbon emissions are used in cars and for other economic purposes. The environmental impact and fuel economy can also be used to determine the level of performance of the car engine vehicles for this case and hence reliability part of it. Consequently, the car engine which is environmental friendly has good fuel economy and with good or better performance will be reliable for use by many customers.
It should be noted that the problem of reduced share prices in the Volkswagen Company is also due to reduced sales as mentioned earlier. All these are direct effects of the emission scandal that the company is now facing. Nevertheless, if the four economic alternatives: level of environment impact, fuel economy, performance and reliability are taken in to consideration while manufacturing cars, the sales can easily go up. It is apparent from the discussion of problems above that these four economic alternatives are the ones mostly considered by customers when opting to purchase a car. Now that the problem of sales in the company has an effect on the share prices, the decline in the share prices can easily be compensated by ensuring that the mentioned economic alternatives are put in to an account by the Volkswagen Company when manufacturing cars.
The problem of failing to release the yearly results of the company is also brought about by the scandal of mounting emissions which on the other hand has a consequence on the costs that are not known. The consideration of environmental impact of car engines by the company can really help in reducing the effect of this type of scandal. If this is done, there will be no such unknown costs that prevent or delay the release of the annual company results. The alternative of fuel economy also ought to be considered as part alleviating the effect of emission scandal. It is like the current implies that the diesel engines currently manufactured by the company are not economical to use by the customers who purchase those cars. Therefore both the environment impact and the fuel economy will be the most crucial alternative to consider in trying dealing with the issue of engines with carbon emissions. The success of this will enable the company to release the yearly results given that the problems of unknown costs will not arise.
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