Change management process

In the midst of a shift towards less profitable vehicles such as electric vehicles and the worsening outlook for the European automotive industry in China, Volkswagen has just announced a €10 billion restructuring project in its volume brand business (VW, Skoda, SEAT) to achieve a 6.5% return on sales. 

This is not just about squeezing the last euro out of the "old business". This is building a new software-driven electric car company , similar to Tesla, BYD or Nio, on top of an existing, massively profitable "old" business. But the old business is not just creating money, it is alsocreating resistance to change

Volkswagen still has a good chance of surviving this change.

That's because the Group's own brands and contracted engineering service providers are staffed by exceptionally talented engineers who foster a unique workplace culture of resilience.

The German cities of Wolfsburg, Ingolstadt, Stuttgart and Munich have become synonymous with special ways of working, decision-making and communication methods. An outsider unaware of the significance of these small details may find this confusing, if not downright off-putting. To illustrate, although the predominant languages in these four cities are German and English, the common language is a local dialect combined with a mentality that varies even between these four places.

Small details are crucial in big changes.

Over the past decades, these engineers have created a technological foundation with common platforms and production methods. The potential for synergies and savings has been known for many years. To realize these synergies, Volkswagen's admirals and captains need to figure out how to get the company's outstanding engineers and employees on board.

Change is only possible when the urgency is high.

Similar groups like Stellantis have demonstrated the turnaround of a diverse brand conglomerate, despite having less platform integration than the Volkswagen Group.

Stellantis has shown how to increase profits. The Volkswagen Group faces a similar but distinct challenge: of course, ruthless discipline in the style of Carlos Tavares' leadership is required. However, the organization will reject too much of it. To overcome synergy challenges such as reducing the complexity of the product portfolio and thus redundant production lines and streamlining administration, a degree of consensus is needed to make the changes stick.

Carlos Tavares, CEO Stellantis

The teams in Wolfsburg, Ingolstadt and Stuttgart (as well as in Mladá Boleslav and Martorell) need to be approached gradually to understand the local specificities in order to accept this change.

Time must therefore be allowed for adaptation.

Good timing of all activities is crucial for success.

As history has shown, too fast a change leads to something breaking. Teams still remember names of top managers who were aiming for the right things but were too ambitious and got the timing wrong.

Diess and Müller, former CEOs of Volkswagen

To change behavior, insights, attitudes, habits and skills need to be changed. Conflicts will arise and space must be created to resolve them.

Only with a well-adjusted pace and a structured process can trust be built in the leadership and confidence in the team to achieve goals. Such transformations have happened hundreds of times. Some restructuring attempts fail mainly because the restructuring team is not able to resolve internal conflicts and to apply the necessary discipline to improve the top and bottom line.

However, most companies survive crises and emerge stronger and renewed. There is no such thing as luck; only hard work and dedication are required. Restructuring is the result of will, process and discipline, not a natural occurrence. A crisis is an opportunity that rides on a dangerous trend. The skills of leaders are forged in a crisis.

Timing of action is critical.

These phases result from the emotional cycle of change.

This is common wisdom that I consider and share because I have successfully managed restructuring projects such as reducing payroll by -20% with the same number of employees, reducing headcount by -15% while increasing capacity, saving €40 million in operating costs per year and so on. These were difficult transitions, but in the end they were great successes.

And I always used this six-step change management model.

1. Schock: The changes were announced by the management. When they are published in the press, they are true. If you notice a shock, it means there has been a significant turnaround and the news has been delivered. The emotional reaction is proportional to the difference between the old and new reality: significant new realities evoke strong emotional reactions.
2. Denial and uniformed optimism: People begin to rationalize and integrate this new information in order to cope with their negative feelings. Since most new information is an announcement of impending change, people often begin to say, "It won't be that bad." Most likely, it won't affect me. It hasn't happened in the past, so why should it be any different now? "Nothing will happen because the excitement has died down." For example, the Volkswagen Group's synergies have been known for many years. Some will argue that tackling them now is doomed to failure. Arguments about how to interpret the new reality are the order of the day here.
3. Realization and informed pessimism: This is a critical point in the process, as the initial changes will inevitably have an impact on day-to-day operations. People begin to accept the new reality and react with worry and negative emotions beyond what is real. "Okay, Wolfsburg and Ingolstadt will lose all production to other European plants because other plants are cheaper," for example. Overreactions are likely at this point, and they must be avoided, i.e. contained and controlled.
4. Acceptance and hopeful realism: After a while, people realize that they can cope with the new reality if they adapt. "There will be less production volume in Wolfsburg, but the added value will remain in the region." This is the time for the organization's informal opinion leaders to adapt to the new reality and embrace change. Once this is the case, the majority of the organization will follow.
5. Test for new concepts and informed optimism: To adapt to the new reality, people in this phase begin to implement new principles and behaviors in their work. They introduce, optimize and refine new processes and systems. As the change process has progressed to this point, it can be considered successful.
6. Introduction, full integration and performance improvement: The company is now "back in business", the change is over and everyone is fully focused on the business. The impact of the restructuring can be measured using business KPIs. The current change is one of continuous improvement.

Confusion, uncertainty and insecurity in times of change create massive negative feelings, which are the main cause of resistance to change. As a result, the emotional response needs to be managed. We need to give time and space for the new reality to be accepted so that conflicts can arise and be resolved.

The ebb and flow of emotions, typically expressed as "self-esteem", is illustrated in this conceptual graphic.

As leaders navigate the organization through this cycle, they will be able to resolve conflict and build employee trust.

Most crises can be avoided with trust in leadership.

Corporate change takes at least 12 to 18 months.

It is important to understand that these phases are sequential. There is no way to skip any of the phases. Some can be shortened, but none can be cut short. Obviously, this learning process works like a law of nature. Because this is how people generally deal with change.

However, going through these phases can be accelerated.

The aim from the outset is to reach stage 4 of this cycle as quickly as possible.

How to do this in detail, how to build the narrative, close the avoidance channels, win opinion leaders and sideline the resistance will be explained in the next issue of this newsletter.