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Professor Daniel Diermeier, IBM Distinguished Professor of Regulation and Competitive Practice

What to do when the heat is on

Companies threatened by activists have several strategic choices, says Prof. Daniel Diermeier. Ignorance is not among the options

By Aubrey Henretty

7/11/2007 - As the global economy barrels forward with unprecedented speed, non-governmental organizations are watching companies closely. If too much oil is burned, too many trees are cut, a product fails, or a baby seal is injured somewhere along the way, it’s just a matter of time before an impassioned group of activists starts distributing flyers, e-mails and other media alerts urging consumers to boycott the offending firm. What’s the firm to do, especially when blindsided by the attack, as frequently happens?

One thing it should not do, according to Kellogg School Professor Daniel Diermeier, is panic: Most boycott attempts fail. The real trouble comes from activists with a sharper awareness of market dynamics and consumer behavior.

In “Strategic Markets and Nonmarket Strategy,” research Diermeier recently co-authored with former Kellogg colleague David Baron (now a professor of political economy at Stanford University), he evaluates the tactics NGOs employ to pressure firms to change business practices contrary to NGO interests. The paper, to be published in the summer 2007 issue of the Journal of Economics and Management Strategy, posits that savvy activists have become strategic innovators using more sophisticated tactics than a simple call for a boycott.

“The problem with boycotts is a collective action problem,” Diermeier says. “Members of the public all need to bear the cost of participating in a boycott individually, but the benefits accrue to all citizens sympathetic with the cause whether they actively participated or not. The costs of participating [in a boycott] have to be very low.”

Another characteristic common to successful NGO campaigns is negativity. “Threats and punishments may reduce activity in the industry,” in ways positive campaigns wouldn’t, thereby serving the interests of the NGO, says Diermeier, the IBM Distinguished Professor of Regulation and Competitive Practice at Kellogg who also directs the Kellogg School’s Ford Motor Company Center for Global Citizenship. He adds that while NGO attack campaigns tend to take management by surprise, some firms should be aware that they are more vulnerable than others.

Well-known consumer brands make good targets even when they’re not the “worst offenders” in their industries, he says, because activists know the actions of big brands are more likely to attract public interest and, in turn, increase pressure on the industry to change. “If you’re a paper company, you may be a target for water pollution or for logging, but the activists won’t target you directly” because they will assume no one has heard of you. But if you are a large distributor of a targeted paper company — e.g. Office Depot or Kinko’s — activists may pull you into the fight because of the power you wield over your supplier.

Diermeier says it is important for managers to keep an ear to the ground for activist rumblings and to be aware of industry and company weak spots. “You’ve got to know how this connects with your business model,” he adds.

Of course, the rules vary by industry. “Oil companies are more vulnerable than entertainment companies,” says Diermeier. Many oil companies delivering identical products makes action against any one company easy and cost-effective for consumers, he explains, but entertainment companies often produce unique content not available elsewhere.

“If your kids want to go to Disneyland, it’s very costly to convince them to want to go to SeaWorld instead,” he says, noting the ease with which customers might drive a few extra blocks to fill up the gas tank at a different station and the comparative difficulty moviegoers would have finding a comparable substitute for “Pirates of the Caribbean.”

Diermeier says firms that find themselves head-to-head with activist NGOs have three choices, each with its own set of challenges — “You can fight, you can fold, or you can adopt industry-wide strategies” — but they should never assume the heat is off.