The Competitive Advantage Of Diversity

Competitive Advantage of Diversity 1

Running head: COMPETITIVE ADVANTAGE OF DIVERSITY

The Competitive Advantage of Diversity

Jeff Burkhardt

Julio Idrovo

Chad Torrence

University of Houston-Victoria

MGT6353

Fall 2005

November 29, 2005


Introduction

As global economies unite, new markets emerge, and corporate cost controls become

even more stringent, it is more important than ever for companies to maximize all of their

resources if they are to survive, let alone succeed, whether they are raw materials, proprietary

technologies, or even human resources. If companies are to maximize their human resources,

though, they will need to effectively manage diversity. This is easier said than done however, as

diversity management poses many challenges. Despite anecdotal evidence that diversity

management offers businesses a competitive advantage, it is difficult to isolate its impact on the

bottom line. Furthermore, diversity management requires a long-term commitment. Given

today’s lean organizational structures and the forces of Wall Street, on the other hand, most

executive managers favor short-term investments in which the returns are clear (Robinson &

Dechant, 1997). Therefore, the purpose paper is to detail the competitive advantages of diversity,

first by making the business case for diversity, and next, by identifying the necessary steps in the

development of a diversity program. Finally, it will specify some diversity program best

practices, and in the end, make a compelling rationale for the inclusion of diversity as a top

business priority.

Business Case for Diversity

Although the business case for diversity has been debated and promoted over the years, the

benefits are not in all cases tangible nor directly measurable (Orenstein, 2005). It is recognized

by many firms that a diverse workforce is of utmost importance for their continued success in the

global marketplace (“Workforce Planning”, 2003).

Furthermore, there is still growing confusion between what is compliance, such as

regulations mandated by the Equal Employment Opportunity Commission (EEOC); and what is


rather a corporate culture change, such as diversity management. Several studies have discussed

the differences between these two areas (Cassell, 1996; Wilson & Iles, 1999), and it is worth it to

list them here in order to better understand the upcoming arguments for a business case for

diversity.

EQUAL OPPORTUNITIES MANAGING DIVERSITY Externally Driven Internally Driven Operational Strategic Difference Perceived as Other/Problematical Difference Perceived as Asset/Richness Group Focused Individual Focused Supported by Narrow Positivist Knowledge Base

Supported by Wider Pluralistic Knowledge Base

Table 1: Equal Opportunities and Managing Diversity Comparison (Wilson & Iles, 1999)

From the comparison shown above, the main argument is that managing diversity is rather

a strategic and individual focused paradigm that tries to reach all groups rather than targeted

ones. The following discussion for building a business case for diversity will be based in this

context.

Several authors (Orenstein, 2005; Robinson & Dechant, 1997) have proposed various

contributing factors to the diversity business case. Among the most important are (1) cost

savings; (2) opportunity to drive business growth; and, (3) winning the competition for talent.

Other factors cited in several studies could always be incorporated within these three main

categories.

Cost Savings

As with any other business case, the strongest argument will be based on cost savings. In

the case of diversity, cost savings will come mainly from lower employee turnover, lower

absenteeism, and fewer discrimination lawsuits.


In the area of employee turnover costs, researchers estimate that additional recruiting,

staffing and training (i.e. replacement costs) run around 75 to 200% of the annual salary of the

departing employee (Robinson & Dechant, 1997).

Similarly, since organizations are realizing the high costs of absenteeism, they have been

implementing certain programs and benefits that show evidence of lowering their absenteeism

rate (Robinson and Dechant, 1997).

Finally, cost savings can also be obtained from the reduction in discrimination lawsuits

when organizations provide a diverse workplace, with established training programs and policies

geared towards the elimination of discriminatory practices.

Therefore, a properly designed, implemented and monitored diversity program can bring

tangible benefits to a corporation.

Opportunity to Drive Business Growth

By increasing creativity and innovation, producing higher quality problem-solving skills,

enhancing leadership effectiveness, improving marketplace understanding, and building effective

global relationships, diversity could help drive business growth.

Singh, Vinnicombe and Johnson (2001) as well as Orenstein (2005) cite several studies

showing that firms with the best record of promoting women to high positions, for example, are

more profitable than the median in their industry. In this case, it is perceived that women bring

more sensitivity to certain business perspectives and a more interactive and transformational

management style.

Similarly, Robinson & Dechant (1997) argue that diversity of top management teams

affects competitive advantage and financial effectiveness, citing a study in the banking industry

where organizational innovation positively correlated with team heterogeneity.


In the area of marketing, there are several reasons why diversity can be helpful. In the

public services area, for example, there is a need to have front line staff recruited from ethnic

minorities with whom the public could identify, and even deal in their own language (Wilson and

Iles, 1999).

Other areas in which diversity can contribute to drive business growth are building

market presence and position (through geographic coverage and market strength); increasing

strategic flexibility (via multiple sourcing and flexible logistics); and, improving the speed of

resource deployment (through increased speed and agility, speed to market and speed to

response). All of these reasons could be easily argued for firms whose value chain depends

largely in customer service, rapid delivery, and that participate in a very competitive

marketplace.

Therefore, unlike the aforementioned cost savings factor, which applies generally to any

kind of business, the opportunity to drive business growth as an argument to build the business

case for diversity, has to be analyzed in the context of the firm and the industry in order to decide

which of its many components is more applicable in each firm or industry particular scenario.

Winning the Competition for Talent

Another strong proposal to be included in the business case for diversity is winning the

competition for talent. A properly designed and implemented diversity program can help

organizations attract the best talent in the workforce; and more importantly, a diverse

organization should be able to retain their best employees. There are several studies that support

this argument as a component of the business case for diversity. Wilson & Iles (1999), for

example, state that better recruitment, retention, and promotion are persuasive arguments in both

the public and private sectors. Furthermore, Robinson & Dechant (1997) argue that:


“Companies that are better able to recruit, develop, retain and promote diverse employees have

an edge” (p. 25). By making the workplace more diverse and inviting, an organization could

become the employer of choice (Orenstein, 2005).

Additionally, companies that manage to optimize their human resources will be able to

sustain their competitive advantage (Robinson & Dechant, 1997). In other words, it is not

enough to allow differences in the workplace, but rather create a work environment in which all

employees feel empowered to and inspired to achieve their full potential (“Workforce Planning”,

2003). Hence, this value should be the emphasis for this argument within the diversity business

case.

Finally, in the area of intangible benefits that can be used for building the business case

for diversity are improved corporate culture; stronger customer relations; and because it is

demanded by key stakeholders.

In summary, there are enough arguments to build a strong business case for diversity,

which undoubtedly must have to be accommodated to the reality of the firm and industry as well

as the market. Although many of those arguments can not produce a straightforward and

tangible cost/benefit number, there are many intangible paybacks that must be considered and

included in the business case nonetheless. As argued by many researchers, as discussed above,

managing diversity goes beyond compliance. In this era of globalization and fast changing

markets demanding fast responses, companies must implement a strong corporate culture that

values the diversity of its workforce in everyday task. This will allow not only achieving a

discrimination free work environment, but most importantly will empower its workforce to use

their best ideas to improve productivity.

Developing a Diversity Program


Once an organization has weighed the advantages and disadvantages for having diversity

in a business and has made the decision to take the next step, the organization must then begin

developing a diversity program. In order to develop a diversity program a company must

determine business objectives, identify actions required to reach the objectives, conduct

cost/benefits analysis, and develop tracking mechanisms to assess the progress and financial

impacts (Robinson & Dechant, 1997).

Determining Business Objectives

In order to determine an organization’s business objective for developing a diversity plan

one must have a business strategy. The business strategy must map out the organization’s

market, customer, workforce, etc… As in Robinson and Dechant’s (1997) article, they gave an

example of how McDonald’s business strategy of predominately hiring teenagers in the 1980s

had to change due to the workforce shift and they no longer had the supply of teenage workers

required to run each location (29). This same example is true for knowing who your customer is

at all times and making sure that your employment diversity matches the organizations customer

profile. This diversity will allow customers to fill more comfortable conducting business. An

organization must know its customer base and diversity in order to survive and be successful in

today’s international business (Wentling, 2000). Wentling goes further by reinforcing hiring

diversity by stating, “They (multinational corporations) are also required to recruit and retain a

diverse workforce that mirrors its diverse market” (2000). By organizations understanding their

market diversity and hiring based on that diversity organizations will begin to better utilize their

workforce, begin to retain better employees and have a competitive advantage over their

competitors that are not determining business objectives with diversity as a part of their plan.

Identify Actions Required to Reach Objectives


Once a business objective is determined it is time for an organization to identify the

necessary actions to reach its objectives. The first action an organization must take is to develop

a Diversity Department or have an existing department take ownership of managing diversity

within the organization. This department would conduct the research in learning the market,

customer, workforce, etc… They would also train management and employees on how to take

advantage of having a diverse workforce. The department would also take ownership of and

review actions taken by management and/or employees and deal with any potential diversity

lawsuits that may arise. An additional action item in reaching the organizational objectives will

be ensuring the organization meets or exceeds any local, state, and/or Federal laws. These laws

are ever changing and must be met in order to meet the minimum requirements of doing business

in the city, state, or country they reside. According Gilbert and Ivancevich (2000), “When

workforce diversity is addressed, it is often solely in terms of responding to governmental

mandates rather than proactively creating programs that add organizational value.” Although

meeting the laws will keep most companies out of lawsuits, it will not give them a competitive

advantage. Finally, a major action item for any organization is to develop and create an

atmosphere of inclusion (Gilbert & Ivancevich, 2000). The major purpose for developing an

atmosphere of inclusion is to better retain exceptional employees and customers. If a business

includes many diverse groups within organization, it is evident and people will feel a higher level

of fairness and dignity while working or doing business with the organization (Gilbert &

Ivancevich, 2000). This may require a major culture change within the organization. In order to

ensure that the diversity program is developed, implemented, and maintained there must be a

buyoff from top management. If top management does not support the actions required to

develop a diversity program then it is likely that the program will fail.


Conduct a Cost/Benefit Analysis

Prior to implementing a diversity program the Diversity Department must develop a Cost/Benefit

Analysis model to explain how the program will benefit the organization. As with any change,

there will be costs incurred to study, develop, and implement the changes. These costs must be

calculated in order to help make the final decision to move forward or disband the program

before it even begins. One must also add up the expected returns of developing a diversity

program. For example in Robinson and Dechant’s article they discussed how after analyzing the

existing diversity in the available workforce that by staffing locations with senior citizens, they

would require little to no specialized training (1997). When determining a benefit for a diversity

program with this example one can review the current costs of training inexperienced teenagers

and developing a cost savings model to show a major benefit in implementing the program.

With McDonalds operating more than 529,000 locations in the United States only one can easily

determine the enormous savings on training cost if the workforce diversity began to change from

teenagers to senior citizens. Without a detailed cost/benefit analysis, it would be very unlikely

that top management would simply buyoff on the expenses of developing and implementing a

diversity program if they did not know that the initial investment would return a significant ROI.

Develop Tracking Systems to Monitor Progress and Cost

Finally, once the business objectives have been determined, the action items have been

developed, and the cost/benefit analysis has been approved, it is time to develop a tracking

system to monitor the progress, cost, and return from developing the and implementing the

diversity program. Robinson and Dechant (1997) states, “Process can be measured by involving

employees in focus groups, surveys, interviews, and various audits or needs assessments” (P.29).

By surveying the employees, organizations will be able to determine if the diversity program is


truly creating an inclusive atmosphere and allowing for higher retention of exceptional

employees. By surveying customers, organizations will be able to analyze whether the diversity

program increased or decreased their customer profile. It can also determine whether the

customer satisfaction has increased and if in turn more repeat business was achieved. Finally,

the most important tracking system is the corporate financial statements. Are revenues higher

due to increasing the customer profile? Are costs down due to lower recruiting and training

expenses? Are cost down due to lower legal cost from diversity lawsuits? With a well planned,

documented, implemented, and tracked diversity plan, are more people willing to do with a well

diverse organization or with a competitor who has not developed a program? By developing a

sound tracking system prior to implementing the diversity program one will be able to answer

these and other specific questions to the effectiveness of the diversity program and be able to

make revisions and decisions on how to improve in the future.

Diversity Program Best Practices

Once the framework for an effective diversity program has been laid out, companies must

next focus on specific measures, or best practices, to foster long-term success. Involvement and

accountability among upper management is the first of these, and not surprisingly, also the most

critical since most serious long-term initiatives emanate from the top down. For example, Chief

Executive Officer of Hoechst Celancese, Ernie Drew, the company’s self-proclaimed diversity

“steward,” stumps from plant to plant to convert doubters (Rice & Sookdeo, 1994). The added

step of management simply sitting down with employees to hear their concerns further

legitimizes the program. As Drew puts it, “When the CEO meets with employees, it signals

diversity is important” (Rice & Sookdeo, 1994). Beyond just talk, though, executives must

themselves embrace diversity. At Hoechst Celanese, the top 26 officers are required to join two


or more organizations in which they are the minority. Says Drew, “The only way to break out of

comfort zones is to be exposed to other people. When we are, it becomes clear that all people are

similar” (Rice & Sookdeo, 1994). Another way to ensure management involvement is to link

financial incentives to diversity progress. Executive bonuses are often tied to setting and

achieving diversity goals. A 360-degree performance review survey that includes questions

assessing behavior in the areas of respecting differences and diversity is another tool that has

been used to increase awareness and individual accountability (Salomon & Schork, 2003).

Next to management involvement and accountability, training is one of the most effective

means to a successful diversity program; however, companies should be aware of two potential

pitfalls. The first is that there is no such thing as one-size-fits-all diversity training. Ray Hood-

Phillips, former Vice President of Diversity Affairs at Burger King states, “You just can’t take a

program off the shelf, because every culture is unique” (Rice & Sookdeo, 1994). The second is

the threat of being divisive or combative in the process. In an effort to demonstrate what not to

do, most training programs, themselves, result in diversity offenses. Rather, diversity training

should focus on inclusion and practical conflict management. This is best accomplished through

the analysis of real-life case studies. Furthermore, diversity training benefits employees and

management alike. According to New York City consultant Richard Orange, “Most senior

executives have no frame of reference to people who are different, due to the nature of their

lifestyles, culture, and position” (Rice & Sookdeo, 1994). Frequently, Orange takes executives to

movies and plays depicting cultural differences, such as Philadelphia, Malcolm X, Thelma and

Louise, and Angels in America. Says Orange (Rice & Sookdeo, 1994), “We discuss what they

see and feel, and then we connect the theme of the movie to situations in business.” Most


importantly though, diversity training must be in depth and repeated periodically. Without

repetition, diversity lessons will fail to take root.

Another best practice of a successful diversity program is mentoring. Mentoring is

important in gaining full value from a diverse workforce. However, the programs should be

organization specific, so the embodiments vary widely (Salomon & Schork, 2003). Some

mentoring programs are highly structured with formal training for mentors and mentees. Others

involve mentoring “circles” where a single mentor meets with a group of mentees. This reduces

the time burden on mentors while providing opportunities for peer support. Still others involve

inverse mentoring, where executives sit down with those at lower levels of the organization and

experience diversity from a different viewpoint. Regardless of the form that mentoring takes,

though, it is consistent in that it opens doors, provides learning opportunities, helps to expand an

individual’s contributions to the organization, and provides a secure area in which to brainstorm

(Salomon & Schork, 2003). Simply stated, mentoring should create relationships that are cross-

gender, cross-cultural, and cross-ethnic in nature (Guillory, 2002).

Focus on work-life is yet another best practice with regard to diversity programs. Now

more than ever, managers concern themselves with the lives of their employees outside the

workplace. It is with this empathy that employers better understand that work performance is

often related to life beyond the job, and that at times, they must be willing to step in and lend

support. As explained by Jose Berrios, Vice President for Diversity at Gannett, “First, it costs a

lot more to replace effective employees who are temporarily distracted by personal matters. And

in the long run, the companies that can handle these problems extremely well will become the

employers of choice in an ever tighter labor market” (Labich & Davis, 1996). Furthermore,


work-life measures such as flexible hours result in lower absenteeism and access to a wider labor

pool, such as single parents.

A final best practice among diversity programs, for the purpose of our analysis, is the

celebration of differences. Doing so aids in eliminating fear of the unknown among employees,

and can be realized in a couple of enjoyable ways. One involves the establishment of an annual

diversity day. The idea is that employees dress in ethnic costumes, perform traditional dances,

and prepare authentic dishes. The other is a monthly diversity bulletin in which events within the

community, such as parades and festivals, are identified for employees to partake in (Rice &

Sookdeo, 1994).

In all, the development of a diversity program is an important first step for any company;

however, without the support and fortification of diversity best practices, even the best laid plans

will go awry. Involvement and accountability among upper management, training, mentoring,

focus on work-life, and the celebration of differences are some of the best of the best.

Conclusion

In conclusion, there clearly is a competitive advantage for an organization to develop,

implement, and maintain a sound diversity program. Of course, as with all programs there are

substantial costs in developing, implementing, and maintaining programs. However, as

discussed above the benefits of a diversity program far out-weigh the costs. Through cost-

savings from establishing better retain policies and lower recruitment and training costs.

Through adding value to one’s workforce by developing an inclusive diverse workforce that will

allow multiple viewpoints to business decision-making and practices. Obviously, before an

organization can implement a diversity program they must develop the program. This is

accomplished through determining the organizations business strategies and opportunities from


the program. An organization must then identify actions required to reach the objectives. This is

accomplished mainly by a group taking ownership of the development of the program and selling

the benefits to top management. As discussed many times, without top management support the

diversity program will never succeed. In order to get managements approval a sound

cost/benefit analysis must be created to illustrate the importance of the program. Once the

program is implemented, it must be embrace top to bottom and practiced throughout the

organization. This will occur by designing a customized diversity training program to focus on

inclusion and practical conflict management. By utilizing a mentoring program, diversity will

become a standard practice throughout the organization taught and backed by all employees.

Most importantly, organizations will finally be able to break down the diversity issues that

plague most organizations and be able to celebrate and prosper off the differences of every

individual within the organization.


References

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Gilbert, J., Ivancevich,J. (2000, February). Valuing Diversity: A Tale of Two Organizations.

Academy of Management Executives, 14, pp. 93

Guillory, W. A. (2002, July). The Unifying Force of Diversity. Executive Excellence, 19, 7-8.

Labich, K., Davis, J. E. (1996, September 9). Making diversity pay. Fortune, 134, 177-180.

Orenstein, E. (2005). The business case for diversity. Financial Executive 21(4), pp. 22-25.

Rice, F., Sookdeo, R. (1994, August 8). How to make diversity pay. Fortune, 130, 78-86.

Robinson, G. & Dechant, K. (1997). Building a business case for diversity. Academy of

Management Executive 11(3), pp. 21-31.

Singh, V., Vinnicombe, S., & Johnson, P. (2001). Women directors on top UK boards.

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challenge. International Journal of Public Sector Management 12(1), pp. 27-48.

Workforce Planning: How HR can make a business case for diversity initiatives (2003). Human

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