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During a Feb. 19 brown bag lecture, Professor Daniel Diermeier explained the strategic value that corporate social responsibility efforts can bring to a firm.

Can firms ‘do well and good’? It depends, says Kellogg Prof. Daniel Diermeier

Kellogg expert explains the value of aligning corporate social responsibility with overall strategy

By Aubrey Henretty and Matt Golosinski

2/20/2008 - “What is Taco Bell trying to sell me?” Professor Daniel Diermeier asked a roomful of Kellogg School students during a Feb. 19 discussion on corporate social responsibility that began with a review of some brand management fundamentals.

“Burritos?” someone responded.

Yes, said Diermeier, but what else? He told those gathered in the Donald P. Jacobs Center for his talk, sponsored by the student-led Social Impact Club, that brands like Taco Bell thrive on emotional connection, the trust they build with consumers. An examination of the brand’s current catchphrase reveals that Taco Bell is selling individuality. Diermeier parsed the intended message: “You don’t go to your mom and dad’s McDonald’s. If you’re a little more edgy, you go to Taco Bell.”

Another example came from Coca-Cola. “It sells bubbly water. You can buy bubbly water anywhere,” said Diermeier, the Kellogg School’s IBM Professor of Regulation and Competitive Practice and a founding director of the school’s Social Enterprise at Kellogg (SEEK) program. “The value that Coca-Cola provides is not in the bottle. It’s in the mind of the consumer.”

But the consumer’s head is tricky terrain. Customers often are buying more than a product; they are buying into a relationship with that product and the firm behind it. As a result, companies find themselves in the business of selling trust, a commodity tough to acquire but easy to lose, said the professor. Squandering trust is as simple as making a miscalculation on how a firm cuts corners to stay competitive. Made-in-China children’s toys containing lead paint is one recent high-profile example of how a company can slip up, resulting in a PR nightmare whose components include withering online criticism through popular social networking sites.

During his hour-long presentation, “CSR and Sustainability: A Strategic Perspective,” Diermeier outlined the reasons why the world’s grown more challenging for corporate leaders whose strategic objectives increasingly mingle “doing well and doing good.”

He discussed how information technology, the global supply chain and a shift in values among many “post-materialist” consumers (those affluent enough to enjoy the luxury of fulfilling needs beyond mere necessity) are forcing firms to pay more attention to how they conduct their business at all levels of their value chain — from the suppliers with whom they work to how they treat their employees to their corporate presence in the community. Those post-materialist customers are not only looking to buy a premium product, but they are looking to do so while making a statement about their moral selves: They want more than a car, they want a Prius, a purchase that signals “I care about the environment!” As a result, for these customers a firm’s environmental or labor practices can matter as much as the company’s product.

“It becomes much more important for businesses to do things the right way” as the Internet makes companies ever more transparent to consumers who care about social responsibility and sustainability, said Diermeier, also director of the Ford Motor Company Center for Global Citizenship. One bad supplier, poorly managed retail store or unhappy customer on video can spell years of disaster for a company the instant it hits the Internet.

“Once it’s on YouTube, it lives forever,” Diermeier said, citing the power of information technology to move entire markets, including the capital markets. As an example, he noted the pressure that the Rainforest Action Network put on Citigroup in 2004 to adopt a comprehensive environmental policy on logging.

“Twelve people exploited the flattened integrated economy to force change,” said Diermeier. “As a manager, you’ve got to deal with this, even if you think the [claims behind the attack] are wrong.”

Whether corporate social responsibility as a competitive or a nonmarket strategy can increase the bottom line depends. Diermeier noted that the CSR payoff will vary based on industry, company and product line. Not all firms may find it worthwhile to sink a lot of time and resources into CSR, but clearly some cannot afford not to do so. Equating corporate social responsibility to a level of product quality, Diermeier used an analogy to explain how for a hotel chain the investment can be essential, optional or just minimal depending on the market space. A premium brand like the Four Seasons will approach value investment rather differently than a more standard brand like Holiday Inn. But for businesses in the accounting or healthcare space, it may be impossible to skimp on superior value.

“There is no market for a low-quality auditor,” Diermeier said. “There is no market for a low-quality heart pump that works some of the time.”

Diermeier’s lecture was the second featured in the Social Impact Club’s Professor Brown Bag Lunch Series. The first — an exploration of group dynamics and voting by Professors Timothy Feddersen and David Austen-Smith — occurred on Jan 22.

According to Kelly Hsieh ’09, a Social Impact Club member who helped organize the series, its purpose is “to create an opportunity for students to interact with SEEK professors outside the classroom and learn firsthand about the research they are conducting. Similar to initiatives such as Kellogg Insight, the lunches are a forum for Kellogg professors to share their research in a way that is applicable to real life and the business world.”