Any corporation that has been on the market for a long time has credibility and reputation among buyers. This gives it both an advantage over competitors and allows it to attract new customers. However, this criterion is highly vulnerable to mismanagement actions and scandals that can cause significant damage to the entire business. Using the example of the Volkswagen case, it is necessary to analyze what the reputation of the organization represents and how the scandal affects this aspect, as well as how to minimize the negative consequences.
What Is Brand Reputation
Brand reputation is a set of fixed judgments about it based on criteria that are significant for the target audience. Reputation involves an analytical approach in forming an opinion and is based on reliable knowledge and assessments. Most often, this is supported by the consumer’s own experience (Nissen, 2018). Reputation is a dynamic process in which the strategic objectives of the company are implemented, designed for the long term (Clegg et al., 2019). Reputation depends on how and by what methods the entrepreneurial activity of the company is carried out. It reflects the deep economic and social characteristics of the brand.
Why Reputation Matters
Reputation is equally important for every socialized object – from a person to an international company. According to research, more than 60% of investors consider brand reputation as one of the main factors in shaping its value (Kofman, 2018, p. 101). Reputation can provide from 20 to 80% of the shareholder value of the company, representing the real asset of the company (Kofman, 2018, p. 101). Reputation is slowly formed, but, unlike tangible assets, is relatively stable and is not subject to market price fluctuations.
Reputation significantly affects the effectiveness of sales of brand products. 87% of people who shop online are sure to check for company reviews before buying a product (Minsky and Geva, 2019, p. 98). 73% of consumers are more likely to trust a company if the majority of its reviews are positive (Minsky and Geva, 2019, p. 98). 80% of online shoppers cancel their order after reading a negative brand review (Minsky and Geva, 2019, p. 98). Reputation is sometimes referred to as “credibility” – 62% of consumers believe that a company with a good reputation will not produce poor quality products (Minsky and Geva, 2019, p. 107). At the same time, reputation is important for a company when hiring employees. Potential employees are always looking for information about a future employer. Company reputation helps to attract new customers and retain existing ones, increase investment inflow and sales efficiency. In the long run, reputation sustains a company in times of economic hardship at the expense of loyal customers.
Relationship Between Reputation and Brand Image
Quite often, consumers and even brand leaders equate the concept of “image” and “reputation”. The image is a component of the reputation and has other prerequisites for its formation. Acquaintance of the consumer with the brand begins with interaction with the components of corporate identity – this is a means of objective positioning (Edmondson, 2018). When these elements are perceived, an image is formed in the human mind – this is an ideal image that is created by the brand to create a certain impression about the company in the minds of the target audience. Thus, an image is an artificially created opinion among a certain group of people (Edmondson, 2018). Its task is to create a positive image of the brand among the audience. Unlike image, reputation cannot be created, it must be earned, this process takes place throughout the life of a brand and works for the long term (Aula and Mantere, 2020). If the image depends on external characteristics, then reputation depends on a holistic perception of both internal and external qualities of the brand.
Brand Reputation Management Strategies
- Formation of reputation at the expense of the first persons and top managers of the company. In many cases, the reputation of the CEO is inextricably linked to the reputation of the brand. A public leader commands the respect of both potential customers and consumers, as well as partners and employees. A recognizable person inspires confidence in the company, confidence in its professionalism and respect (Díaz et al., 2020). Such a leader will serve as a strong motivation for the rest of the employees, who will also work to improve the brand’s reputation.
- A strong team as the basis for building a reputation. This aspect of reputation management is most important for those organizations that provide various expert services or technology solutions (Sucher and Gupta, 2021). Productivity and quality of work is maintained through effective communication between all responsible employees.
- Careful study of the mission and philosophy of the company. The brand philosophy, based on the core virtues, helps to create an image of a responsible, decent or honest company (Ferrell and Fraedrich, 2021). Over time, if the image is reinforced with appropriate events, it will turn into a positive brand reputation.
- Emphasis on the strengths of the company. The easiest way to manage reputation is through such brand value as quality. This effectively increases the loyalty of existing customers and attracts new ones (Nissen, 2018). In addition, the quality is easy to check or test. As an advantage of the company, management can use many years of experience in the provision of services and indicators of successful implementation of projects (Abbas, 2019). A big plus in favor of building a positive reputation will be confirmation of the quality of work by certificates and participation in international competitions or exhibitions.
- Corporate social responsibility of the company. It is important to take into account not only the interests of the company, but also society – from suppliers to ordinary employees. Careful attitude and care of the company about its employees plays an important role in shaping the reputation of the brand (Abbas, 2019). Voluntarily taking responsibility for improving the quality of life of its employees and society as a whole, the brand acquires additional advantages, especially against the background of inactive competitors. The best results can be achieved by integrating at least two or three strategies in the company at the same time (Uhm et al., 2018). Special attention should be paid to the development of corporate identity, which is closely related to the reputation of the brand.
Reputation Management Technologies
Organization of Special Events and Promotions
This includes the organization of exhibitions, presentations, fairs, participation in conferences or seminars, competitions, social events. This helps to implement several reputation management strategies at once. A public leader who confidently talks about the merits of a brand at a conference will attract new partners and customers. A strong team of employees represented at the competition will show the professionalism of the company (Deephouse et al., 2019). An important role is played by the holding of social actions – they best of all show the responsibility of the company. Every day, thousands of workers traveled from South Asia to Dubai to get jobs to support their families. The cost of a call abroad is $0.91/minute while the average wage is $6/day (Deephouse et al., 2019, p. 69). Workers were unable to contact their families regularly. In 2014, Coca-Cola launched the Hello Happiness Phone Booth promotion (Deephouse et al., 2019, p. 77). A special vending machine accepted cola bottle caps and provided 3 free minutes for calls abroad, allowing workers to save money.
Properly built relations with the press to a large extent influence the attitude of the public towards the brand. From time to time it is worth holding press conferences, inviting several representatives of the media to them (Wegrich and Bach, 2018). Good relations with the press is not as important for building a positive reputation as it is for preventing negative reviews of the company (Crane et al., 2019). Therefore, journalists should be provided with the necessary information about the company’s activities in a timely manner.
It is necessary to illustrate with a vivid example why the reputation of the brand does not tolerate scandals. In 2015, the machinations of the Volkswagen management caused a large-scale scandal that spread almost all over the world. In turn, this led to mass informing both the target audience and potential buyers of the company. The concern decided to promote cars with a diesel engine in the US, which are not very popular among American drivers (Uhm et al., 2018). At first, the fraud was invisible and successful, but over time, the company was convicted of falsifying data on emissions into the environment (Parboteeah and Cullen, 2018). The loudest scandal in the history of the global automotive industry affected about 11 million cars sold in Europe, North America and Asia (Lerbinger, 2018, p. 54). Problematic diesel engines, which, due to incorrect software, deceived environmentalists, were found in 5 million Volkswagen cars (Lerbinger, 2018, p. 65). The brand decided to switch dramatically to the production of electric cars and hybrids.
The reputational damage for the company became very significant, which affected several aspects of the business at once. First, Volkswagen began to lose competitiveness, as customers, concerned about the company’s actions, moved to Audi and Mercedes (Stanwick and Stanwick, 2020). Second, the company had to increase its service fees because the drastic changes entailed massive spending that needed to be offset by additional profits (Stanwick and Stanwick, 2020). Finally, brand shareholders began to sell them rapidly due to the low reputation of Volkswagen, which also negatively affected the corporation’s income (Chennattu, 2020). This led to the fact that the company was on the verge of collapse and bankruptcy. However, it is necessary to analyze the reasons why this situation happened and why the company’s management took such actions.
Influence on Niche
The environmental trend was picked up by Toyota, which intends to stop the production and sale of gasoline cars and switch to the production of hybrids and fuel cell cars. After the grand “diesel” scandal around the Volkswagen concern, the entire automotive industry as a whole received a sharp impetus towards its new development. After the incident, VW itself admitted that the automotive industry needed cleansing and rethinking – in order to quickly turn the scandalous page, the company was the first to announce a new super-ecological orientation. As for Volkswagen, the company has planned two major steps. First: use emission control systems that reflect the real level of harmful emissions (Miller et al., 2018). Step two: more and more to switch to electricity, both in production and in cars (Miller et al., 2018). Thus, VW plans to start equipping all its diesel vehicles in Europe and North America with special equipment that will eliminate up to 70-90 harmful emissions of nitrogen oxides (Miller et al., 2018, p. 43). However, at the same time, cars can significantly rise in price, becoming less profitable for buyers who doubt the reputation of the brand.
Further, the most important for the company will be the gradual transition from diesel to other, more environmentally friendly technologies. Volkswagen emphasizes that due to the growing requirements for the level of emissions of CO2 and nitrogen oxides, the company will pay increased attention to hybrids and electric vehicles (Baker et al., 2020). That is why the next generation of the premium Volkswagen Phaeton sedan will be electric. According to the official press release, Phaeton will get a clean electric drive and high range figures. As recognized by world experts, it will not be easy to take such a step. The fact is that now the electric car market is divided into two poles. On one side are expensive cars that can travel more than 420 km on a single charge, such as Tesla, for example. On the other hand, there are much more affordable urban options, which, however, have a limit of 130 km without additional charging.
Causes of Failure
The first reason was the desire to conquer a new market with minimal investment. The American community cares about the environment and introduces legislation to limit gas emissions from cars. A global modernization of all products would cost Volkswagen a lot of money and attract new specialists in the relevant technologies. The management decided to avoid such costs by changing the indicators in order to achieve their goals of conquering the US market. It should be noted that such a strategy was used not only for America, but was also relevant for France, Mexico and Russia. However, after a series of checks by local experts, the data forgery was discovered and processes began to collect fines from the company and draw public attention to the actions of Volkswagen management.
The second reason was the difference in culture between German customers and American customers. The fact is that in the comparison of the two markets in the context of 2015, Americans pay more attention to environmental issues, and accordingly, this aspect is extremely important for analysis by local experts. Volkswagen did not take this into account, focusing on the mentality of existing customers, which led to the complete failure of the entire strategy. Such actions can be called light-hearted, as this means that Volkswagen specialists and management did not research the market they planned to conquer (Johnston, 2020). Accordingly, in addition to the cultural aspect, there is also the incompetence of employees.
The third reason was the lack of concern for the environment, which means the ambiguous policy of the company. On the one hand, Volkswagen sought to produce diesel and electric cars, explaining this by the need to help ensure environmental safety. On the other hand, it can be seen from the actions of management that the main goal of the company was to make a profit and speculate with current statements. In other words, Volkswagen talked about the environment only to attract the loyalty of potential customers, but in fact they did not pursue such a goal. Therefore, another reason for the failure of the company was the discovery of deception, which not only undermined the duality of society, but also caused condemnation with suspicion. Some clients turned away from the firm forever, refusing to cooperate with the corporation (Mariscotti, 2020). Advertisers did the same, showing in this way that Volkswagen’s management policy cannot be justified.
What Should Have Been Done
It should be noted that specialists in control of the reputation and image of the company in Volkswagen are highly qualified specialists. In the shortest possible time after the scandal, they made several statements, the essence of which was not only an apology, but also an attempt to change the situation. The company has a large budget, which allowed it to respond to allegations in a timely manner and pay all fines, as well as recall several million vehicles. Finally, the firm revised its policy and strategy, refusing to falsify data and making its details transparent to outside observers. This saved the company from bankruptcy, gradually restoring the confidence of the international business community. Nevertheless, it is worth analyzing what should have been done to prevent such a situation from happening.
First of all, it should be noted that a business built on speculation and deception of potential buyers is doomed to failure, since it has great risks. Ignoring this principle, Volkswagen decided to use fraud and falsification as an effective strategy, which led to failure and a decrease in the group’s reputation. Accordingly, in order to prevent this from happening, it was necessary to develop honest and clean strategies for analysts (Doorley and Garcia, 2020). For example, Volkswagen has several competitors that were already members of the American market at that time. By cooperating and exchanging technology with such firms, Volkswagen would not have to deal with fraud, and the authority would only be strengthened due to the honest actions of management (Shelley, 2020). In addition, this would allow the company to quickly implement projects for the introduction of electric vehicles and the expansion of the diesel-fuelled vehicle fleet.
Considering that the full requalification of Volkswagen products entails high costs, this action looks impossible. Nevertheless, there is experience in the automotive industry, the essence of which is the integration of the production of one country into another. Thus, Volkswagen could conclude several contracts with American concerns for the production of German cars in America according to the environmental standards of the United States (Jacobsen et al., 2021). Such actions would be much cheaper than a complete retraining, and would also increase the loyalty of the American market (Arora et al., 2020). After all, such cooperation would entail the exchange of technologies and the increase in Volkswagen’s revenue.
The third effective action to prevent such a situation is either retraining or replacement of market research specialists. It has already been discussed above that the employees were incompetent professionals who did not study the mentality and US legislation (Ramaswamy, 2021). This is a mistake that serves as one of the root causes of the scandal that negatively affected the corporation (Andersen and Young, 2021). Competent specialists would be able to reveal such a danger to the implemented strategy, which means that the scandal could have been avoided.
Short and Long Term Recommendations
At the moment, Volkswagen has managed to fully resolve the conflict and partially restore its reputation. Nevertheless, management should continue to correct the mistakes made earlier and take a number of actions to restore customer confidence. In the short term, the company should improve electric and diesel vehicles in such a way that they occupy a leading position in the market and are accessible to the majority of users. This will emphasize the company’s strategy not only to correct the situation, but also to care for the environment and nature. In addition, Volkswagen needs to lower service prices so that distrustful customers do not continue to go to competitors. This will lead to an increase in the number of shareholders, since it will be more profitable to cooperate with such a company. However, the firm should develop a long-term strategy in order to anticipate possible risks and opportunities.
Long-term recommendations for the company should be called, first of all, cooperation with companies such as Tesla. The fact is that one of the effective tools for improving the reputation is the interaction with such competitors who have high authority among consumers. This will have a positive effect on the opinion of the society that monitors the activities of Volkswagen (Erdemir, 2018). Long-term cooperation is beneficial both for the corporation itself due to additional profits and technologies, and for its reputation, since it will mean the commitment of management to environmental protection. The effect of such a strategy is not immediate, but after a few years it will increase Volkswagen’s market performance by several times (Langham, 2018). Finally, companies should introduce more customer engagement programs such as holiday gifts, personalized discounts, and service enhancements. By studying the needs of the customer base, it is possible to implement precise programs that will be a competitive advantage for Volkswagen over its competitors. This is understandable because interactivity makes customers feel unique and useful to the firm.
Reputation is one of the most important business indicators that performs several functions at once. This is the credibility and image of the company, which allows you to attract new customers, expand your influence in the markets and increase profits. Although this criterion is one of the most useful, it is vulnerable to external factors such as scandal. The example of Volkswagen shows that a decline in reputation leads to serious consequences that disrupt the operation of the entire business and provoke criticism from the public. Volkswagen, thanks to its long history and large budget, was able to survive the crisis, but in another situation, this could lead to the bankruptcy of the corporation.
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