Research: Daniel Diermeier

Power Plays
Professor Daniel Diermeier explores the influence of political factors on the business environment

Say you're an executive at a company that has to dispose of a potentially hazardous material. You turn your best scientific and legal minds loose on the problem. They draw up a plan that seems environmentally, legally and financially sound. You give the green light, and disposal gets under way. But your team failed to take into account the influence of a local environmental group. Suddenly you're in the middle of a political and public-relations disaster.

How, with all your planning and research, did this happen?

Professor Daniel Diermeier would say it's because you didn't scrutinize the non-market issues surrounding your decision. The non-market environment includes the public and political factors that can affect a firm's profitability, including interest groups, public sentiment and ethical consensus. Few managers have received a thorough grounding in how to think strategically about the non-market environment. That's something Diermeier hopes to change, at least for Kellogg students.

"People base their business on their intuitions from competitive market analysis, strategy and two-person negotiations," says Diermeier, the IBM Professor of Regulation and Competitive Practices. "But if you apply those concepts to the political arena, it just doesn't work. And politics has tremendous bearing on the outcome of business decisions.

"For example, strength in market environments may lead to vulnerability in non-market environments. Market leaders are preferred targets for political activists seeking media attention, even if their business practices do not differ much from the industry standard."

Most market interactions are based on agreements, such as between a buyer and seller, or an employer and an employee. These situations can be described with two-player models, Diermeier notes. "But politics is different," he stresses. "There, the majority rules, and you can be affected by a decision even if you don't agree with it. That's why it's so important to understand the power of coalitions."

Coalitions can include lobbyists, alliances within political parties, and activist groups that seek to change consumer behavior. Diermeier develops models that help predict how these groups will behave with regard to decisions that can affect an industry or firm's profitability.

Diermeier, a former professor at the Stanford Graduate School of Business, joined Kellogg in 1997. He has won a major teaching award every year since then, most recently the 2000 Best Teacher Award from Kellogg's IEMBA program at the WHU in Koblenz, Germany. His work has appeared in the American Economic Review, The American Political Science Review, and The Journal of Economic Theory, among other publications.

Diermeier is a pioneer in the relatively new field of political economy and non-market analysis, which emerged with the recent development of game-theory tools that can incorporate politics into models of economic behavior. Leaders in ethically and politically charged fields may well find such tools useful during the next decade. Rapid advances in healthcare and bioengineered foods, for example, are likely to inspire new legislation that will impact entire industries.

"It is vital that managers take control of issues and incorporate them into every aspect of business decision-making," Diermeier says. "Most damage occurs because non-market issues are exclusively relegated to specialists like PR people or lawyers.

"Think about the potential for negative media coverage, for regulatory activity," he urges. "If you don't think about it until the damage is done, it can be very expensive and extremely difficult to regain control of the process."

--Rebecca Lindell