The Changing Business Climate Is Causing Product Die-Offs (VW’s diesel cars are a casualty of sustainability-driven market evolution.)

A another article from MIT. *)

VW’s diesel cars are a casualty of sustainability-driven market evolution.

"A rule-of-thumb I give managers is that if your sustainability performance indicators only improve when customers use your product less often, it means you’re in trouble," writes Gregory Unruh, of George Mason University.

VW is discovering a stark Darwinian reality: Sustainability kills.

Sustainability is an evolutionary force of creative market destruction and is slowly weeding out the firms and products unfit for a sustainable future.

The recurring narrative I hear about the VW crisis is that it is an issue of corporate fraud, plain and simple. While that is true — fraud is intentional perversion of the truth for financial gain — it ignores the reason VW was driven to deceit. The underlying cause was that VW’s chosen technology, the diesel engine, failed to meet 21st century sustainability standards in key markets.

The problem for VW began with the financial crisis of 2008. With GM and the other motor giants on the verge of bankruptcy and dependent on government support, industry opponents were not in a position to oppose the stricter emission and fuel economy standards that had been in the works for a decade.

To put it simply, the standards for what constitutes a “sustainable automobile” shifted. Ford, GM, Toyota, and Honda responded by commercial investments in hybrid-electric technology. VW did not.

The loyalty to diesel power is uniquely German — after all, its was named for German engineer Rudolph Diesel. VW executives were dismissive of hybrids, but staying loyal to their diesel-fueled engines was problematic with the changing standards. Unable to consistently meet EPA emissions standards, they turned to famous German engineering — not to solve the problem, but to circumvent it. And the public finally learned what “Fahrvergnügen” actually meant.

The Great Sustainability Extinction

VW is a multi-brand behemoth and point of national German pride. As the largest auto company by volume with over $12 billion in annual profits, VW is not going to disappear anytime soon. But the “clean diesel” concept in passenger cars is unlikely to recover in the United States. And this illustrates where sustainability’s natural selection occurs. Not at the company or brand level per se, but at the product and production levels.

I remember watching managers struggle with this while leading an in-company executive development program at a European conglomerate in 2011. As we discussed the impact of sustainability standards, production managers in the engineered wood division began complaining that big customers like Ikea wanted the chemical concentrations reduced in the particleboard used for shelving. The managers had worked diligently to reduce the amount of the chemicals in their boards, annually reporting percentage reductions, but it was still not enough. They were looking for a magic bullet that would save their formulation. I had to break the news that sustainability may mean the end of their product — something that they had not considered.

This is quietly becoming true for many products. A rule-of-thumb I give managers is that if your sustainability performance indicators only improve when customers use your product less often, it means you’re in trouble. Cigarette and alcohol companies, for example, now report the number of kids that don’t smoke or drink thanks to their public campaigns. Junk food purveyors improve their sustainability performance by shrinking the serving size. Sustainable paper products perform better the less virgin pulp they contain. And so on. A business model that meets ever-higher standards of sustainability only when customers reduce consumption of the product is by definition unsustainable.

Darwinian selection like this in products and companies is a gradual process. VW is wounded but not dead. But sustainability selection is hard at work. The company’s darling diesel motors will continue to lose ground to hybrid electric and other sustainably fueled drive trains in passenger cars.

However, sustainability selection can be much faster in management ranks. Just asked recently fired VW CEO Martin Winterkorn. Failing to adapt your product to the changing sustainability ecosystem kills products — but it also can kill careers. If managers don’t want to become “fossils in the tar-pit,” so to speak, they need to recognize and respond to the realities of creative sustainability destruction.