How Diversity Builds Tough Competitors

Holding managers accountable to reach workforce diversity goals pays off in firm performance
By: 
Alan Morantz
Coloured outdoor lightbulbs at night.

The essentials

  • Research shows that firms with highly diverse management groups are more active and successful competitors.
  • It is not enough to support underrepresented groups with networking programs, mentoring and career advancement planning. These tactics must be backed by performance appraisals, bonuses tied to diversity goals and diversity training programs for managers.

These days, there’s plenty of talk about workforce diversity, and little consensus on how to achieve it—or even its lasting significance. Some see diversity as a social imperative and others as a short-term management agenda that will fade in the move to hybrid workplaces. Firms spend millions on diversity training despite evidence that much of it is a waste of time. Diversity is said to be a key ingredient in resilient teams. But others say diversity makes it harder to reach consensus.

So it may be surprising to learn that there’s wide acknowledgement among experts—if not full-on consensus—that diversity is good business, particularly for companies that rely on innovation. One study in 2017 of more than 1,700 companies in eight countries found that firms with above-average diversity on their management teams reported innovation revenue (revenue generated from enhanced or new products or services) that was 19 percentage points higher than companies with below-average diversity.

As far back as 2014, Goce Andrevski, Distinguished Faculty Fellow of Strategy at Smith School of Business, published results from his study of 115 firms over three years that linked racial diversity with positive firm performance. He identified “competitive intensity” as a key factor in that outcome. Racially diverse management groups continually roll out new products, improve existing offerings, cut prices and generally make life tougher for rivals.

Diversity lets management teams consider a variety of viewpoints and opportunities for competitive actions as well as inside knowledge to tap underserved markets. “They’re better equipped to detect, interpret and respond to various environmental cues and market trends,” says Andrevski. “They respond more rapidly to competitive challenges than do firms with homogeneous management teams.”

The one caveat is that the benefits of management diversity are more likely enjoyed by firms in high-growth industries where corporate performance relies on competitive intensity.

Leveraging diverse workforces

Andrevski was curious about how these firms integrated and leveraged diversity management practices to improve their financial performance. So with Cristina Vlas and Orlando Richard (Isenberg School of Management), Alison M. Konrad (Ivy Business School) and Yang Yang (Rohrer College of Business), he studied a multi-industry sample of 136 U.S. firms identified by Fortune magazine as the “best companies for minorities.”

The researchers suspected that it wasn’t enough to put in place certain diversity initiatives and hope for good financial outcomes. Plenty of firms that offer diversity training are also chronic underperformers. 

They identified two sets of diversity-supporting initiatives that are mutually reinforcing. One set is designed to help underrepresented groups overcome limited access to organizational social networks and advice on job advancement. Examples are mentoring programs, employee resource groups (ERGs), internships and career-advancement planning for high-potential employees.

Research shows, for example, that for minorities at higher managerial levels, company-supported ERGs reduce the likelihood of voluntary turnover and increase perceptions of social inclusion and the probability of having a mentor in senior management. 

These diversity practices strengthen a firm’s ability to compete, as Andrevski discovered years ago. But to fully realize the benefits, this new study found, a firm needs a second set of practices, which the researchers define as “diversity cognition routines”. These ensure managers have the knowledge and, crucially, the incentives to get serious about managing diversity.

“We find that diversity management routines will not have any effect on competitive action variety or performance unless managers know how to take advantage of them and how to put them in context so that they produce positive results,” says Andrevski. 

Andrevski identifies three management practices that unlock the value of diversity efforts: performance appraisals; bonuses tied to diversity goals; and diversity training programs for supervisors.

Well-executed performance reviews and financial incentives to meet realistic targets are proven ways to get managers’ attention. Suddenly managers invest extra effort to integrate minorities and ensure they have a career succession plan, act as executive sponsors for ERGs and recruit with diversity in mind. And with specialized training, managers are equipped to understand the needs of workers from a variety of backgrounds as well as their own cognitive biases.

It’s easy to spot organizations that have made this connection. They’re the ones using workforce diversity to start a range of competitive actions and set the pace in their fast-moving industry. They’re not the ones merely talking a good game.

“Many companies will announce that they have managerial diversity management practices and network groups in place, but it doesn’t mean they will work unless managers are committed to it,” says Andrevski. “We show that when you hold managers accountable and tie incentives to those goals, that’s when they have an effect on performance.”

For Andrevski, the other message from this research—and it applies not only to diverse workforces but to all organizational assets—is that the best competitors are not satisfied with only managing the resources they currently have. Their focus is on developing, shaping and modifying those unique and diverse resources, human or material, to fit the dynamic conditions around them.

Given the times in which we live, that looks like a sound strategy.

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