Corporate Social Responsibility: Volkswagen Scandal and Long-Term Success of Nike - Essay Example

CSR and Managerial Economics: the case of VW scandal and long-term success of Nike Inc.

Introduction

The concepts of business ethics and Corporate Social Responsibility (CSR) are gradually integrated into managerial economics courses. One of the reasons is based on the assumption that ethics is an effective tool or instrument that should guide managers in decision-making processes. As Green and Lopus (n.d.) explain “managerial economics course is a natural place to identify and discuss ethical trade-offs and dilemmas within the context of business” (89). Nowadays, the companies of different sizes and scope of activities operating in different industries and sectors increasingly adopt the principles of Corporate Social Responsibility (CSR) as an integral element of their corporate strategies. This trend inevitably impacts the economic nature of business firms, consumer demand, supply, and other business decisions made by managers. While some companies successfully integrate economic and social aspects of business functions and operations, many of them fail by getting into international scandals and legal prosecutions. These scandals are largely associated with the initial conflict between the purely economic goals and social/environmental footprint. While many organizations claim to be socially responsible businesses, only limited number of those are ready to compromise the immediate economic gains for the sake of long-term profitability. This paper aims to analyse the role of CSR in modern business environment and to evaluate how this concept fits to the theory of managerial economics with the reference to Volkswagen scandal.

Briefly about the Volkswagen scandal

Volkswagen is a famous Germany-based car manufacturer, selling its cars worldwide. The company’s brand is recognized for high quality, affordable pricing, and stylish vehicle designs. In order to strengthen the VW brand in the global automotive market, the company’s management has undertaken significant promotional and marketing efforts in order to differentiate its diesel cars from competitors by lower carbon dioxide emission levels (Hotten, 2015). Taking into consideration more stringent environmental regulations and increased consumers’ concerns about global warming and environmental pollution, this managerial decision should have to be strategically efficient and sustainable in the long-term perspective. However, in September 2015, the Environmental Protection Agency announced that Volkswagen cars sold in the US market had an installed software enabling to cheat the emission tests and to report lower emission results (Hotten, 2015). This situation has some implications in managerial economics as it challenges the existing concepts laid out in the theory of managerial economics. Below is provided brief overview of the concept of managerial economics followed by a more detailed analysis of the key theories with the reference to two different business cases: VW scandal and Nike Inc.

The Concept of Managerial Economics

Managerial economics is a study that “applies economic theory and methods to business and administrative decision making” (Hirschey, 2006: 2). It helps managers to recognize the relevant economic forces and to use economic concepts for solving managerial problems. These decisions expand across a large scope covering such aspects as: production techniques, defining product price and product output, advertising media decisions, financing and investment, internet strategy, etc. (Hirschey, 2006). For managing the above mentioned managerial decision problems, managers can apply economic frameworks, including theory of the firm, the theory of consumer behaviour (demand), production and cost theory, price theory, the theory of market structure and competition theory (Wilkinson, 2005).

The theory of the firm is the model of business. Any organization either profit or non-profit implies a combination of human resources, financial/physical assets, and intangible functions, including technical, financial, marketing, etc. The traditional economic business model of the commercially-oriented firm is based on the principle of value maximization. Managers are pressured by the principles of agency theory, whereas they act on behalf of the firm’s stakeholders in pursuit of better financial performance (Wilkinson, 2005). However, in addition to stakeholders/investors of the firm, there exist many other groups of important shareholders, including customers, employees, suppliers, local communities, and society. As businesses utilize scarce or unrenewable resources and have direct/indirect impact on many different groups of people, the concept of CSR has become an important aspect in managerial economics. Nowadays, managers strive not to maximize short-run profits/value of the firm but to generate long-term sustainable value maximization of the firm. While attempting to achieve this goal, managers face with various external constraints imposed by laws, regulators, obligations, resource scarcity, innovation, technology, limited raw materials, unethical labor practices, limited investment opportunities, etc. (Hirschey, 2006).

While referring to the VW case, it is possible to state that management has made a decision of installing deceitful devices in order to generate greater profits due to higher sales of environmentally sustainable cars. The VW management was forced to meet the regulatory requirements on carbon dioxide emissions and to meet the demand for more sustainable vehicles. The economic theory can be applied here to explain the consumer’s behaviour towards more sustainable and green choices. Being more focused with demand responsiveness, managers made a decision to install cheating devices. If this cheating would not be revealed by the regulators, VW would greatly benefit from higher demand for its cars and greater profitability. Consumers and regulators, not being aware about the real carbon dioxide emissions would be satisfied with their contribution to maintaining a sustainable development. Thus, management of VW was planning to benefit from hidden information, whereas “one or several parties to a transaction may have more information relevant to the transaction than others” (Wilkinson, 2005: 26). However, the hidden action completed by the parties aiming to ensure that the cars were being upheld and fitted the criteria and regulatory requirements have destroyed the initial plan of VW management, incurring significant financial and reputation losses on German car maker. The case of VW indicates that despite the well-planned business decisions, the public scandal incurred significant loss of value to a German automaker through unethical behaviour and adverse market reactions (Green and Lopus, n.d.). The company’s market share has declined, share prices have dropped dramatically, the overall organizational culture has been shaken and the customers’/employees’ loyalty/trust to the brand has been greatly undermined.

Success story: Nike Inc.

Meanwhile, some researchers explain that ethical and social responsible behaviour of a firm can help the firm to reduce transaction costs, contracting costs, policing costs, and enforcement costs (Arce, 2004). Furthermore, a firm’s positive reputation for being committed to CSR should be recognized as its strategic commercial asset that may be called as a good will on its balance sheet (Arce, 2004). By building on valuable resources and unique/difficult to imitate capabilities firms are enabled to gain competitive market position. In the market economy of imperfect competition where product/service differentiation is essential, true commitment to the principles of CSR should be a profitable strategy (Thomas & Shughart, 2013). Great example of the company that has managed to leverage the benefits and opportunities of CSR is the US-based sportswear manufacturer, Nike Inc. The company’s management has made a strategic focus on sustainable innovation and sustainable long-term growth. Nowadays, Nike is recognized to be one of the most sustainable global companies that focus on both social and environmental impacts of business operations. Nike actively sustains innovation throughout the whole value chain, adds value to its products, supports value of the brand and corporate reputation, increases value of long-term relationships, etc. (Thomas & Shughart, 2013).

While the company still incurs significant transaction costs associated with the R&D activities, waste management, innovations, etc., its overall financial performance and strengths of the brand are powerful drivers of sustainable profitability (Jones, 2015). While Nike invests in innovation and new technology, in medium or long-term perspective this investment allows to reduce costs and to add value to the market (Thomas & Shughart, 2013). By focusing primarily on the needs of its consumers and even outperforming these needs, the company is able to provide unique products of high quality and adopt premium pricing strategy. Moreover, the company is capable to meet the stringent environmental regulations and potential conflicts and scandals associated with social/human issues. Social responsibility, responsible product/waste management and continuous innovations add value to the firms’ products and, overall, to the brand and enable the company to set higher prices benefitting from greater margins. Thus, while balancing the main aspects of managerial economics including the product, quality, pricing and competition, Nike is able to maintain its leading position on the global market without applying deceitful or misleading schemes and asymmetric information.

Conclusion

Nowadays, the companies of different sizes and scope of activities operating in different industries and sectors increasingly adopt the principles of Corporate Social Responsibility (CSR) as an integral element of their corporate strategies. This trend inevitably impacts the economic nature of business firms, consumer demand, supply, and other business decisions made by managers. While some companies successfully integrate economic and social aspects of business functions and operations, many of them fail getting into international scandals and legal prosecutions. Two business case studies of the German car manufacturer and the US-based sportwear producer provide some useful insights to the discussed topic. As it has been discusses in case of VW, its management has made a decision of installing deceitful devices in order to generate greater profits due to higher sales of environmentally sustainable cars. The VW management was forced to meet the regulatory requirements on carbon dioxide emissions and to meet the demand for more sustainable vehicles. Managers made a decision to install cheating devices aiming thus to achieve superior market position, managing thus external constraints posed by both regulators and competitors. However, the hidden action completed by the parties aiming to ensure that the cars were being upheld and fitted the criteria and regulatory requirements have destroyed the initial plan of VW management, incurring significant financial and reputation losses on German car maker. The case of VW indicates that despite the well-planned business decisions, the public scandal incurred significant loss of value to a German automaker through unethical behaviour and adverse market reactions. On the other hand, the research indicates that there are companies that perfectly cope with emerging challenges. Great example of the company that has managed to leverage the benefits and opportunities of CSR is the US-based sportwear manufacturer, Nike Inc. The company’s management has made a strategic focus on sustainable innovation and sustainable long-term growth. While balancing the main aspects of managerial economics including the product, quality, pricing and competition, Nike is able to maintain its leading position on the global market without applying deceitful or misleading schemes and asymmetric information. Managers being guided by a goal of long-term profitability of business should make ethical and responsible decisions.