The Impact of Diversity on Business Performance

In profit-making organizations, maximizing the difference between revenues and costs optimizes performance. This same goal exists in many non-profit organizations, except that the result is called surplus instead of profits. The question therefore is “How is workforce diversity and its management related to revenues, costs, or both?” To answer this question, we can explore several concepts and strategies that illustrate the impact of diversity on business performance. These concepts and strategies include items such as marketing strategies, problem-solving strategies, and creativity and innovation that can be viewed as important factors in revenue generation.

Marketing Strategies

We live and work in an increasingly global marketplace, making diversity a crucial issue. Whether your business includes marketing financial services, computers, telecommunications products, social services, health care equipment, manufacturing processes, engineering expertise, or the like, expertise in addressing a diverse customer market will be essential to your success. For example, an automobile manufacturer in Japan cannot afford to ignore the fact that nearly half of all new car buyers in the United States are women. This is true regardless of the gender makeup of car buyers in Japan. Likewise, no reasonable person in the consumergoods industry can afford to ignore the fact that roughly a quarter of the world’s population is Chinese, and immigration to the United States from mostly Asian and Latin American countries is occurring at a rate of more than one million people per year.

In the United States today, Asians, African Americans, and Hispanics combined to collectively represent nearly $1 trillion annually in consumer spending. The Selig Center for Economic Growth’s (from the University of Georgia Terry School of Management) estimates and projections of buying power for 1990–2007 show that minorities—African Americans, Asians Native Americans, and Hispanics—definitely share in this success and together wield formidable economic clout. As these groups increase in number and purchasing power, their growing shares of the U.S. consumer market draw avid attention from producers, retailers, and service providers alike.

The buying power data presented here and differences in spending by race and/or ethnicity suggest that one general advertisement, product, or service geared for all consumers increasingly misses many potentially profitable market opportunities. As the U.S. consumer market becomes more diverse, advertising, products, and media must be tailored to each market segment. With this in mind, new entrepreneurs, established businesses, marketing specialists, economic development organizations, and chambers of commerce now seek estimates of the buying power of the nation’s major racial and ethnic minority groups. The Selig Center projects that the nation’s total buying power will rise from $4.3 trillion in 1990 to $7 trillion in 2000, to $7.6 trillion in 2002, and to $9.9 trillion in 2007. The percentage increase for the 17-year period of 1990–2007 is 130.8 percent, which far exceeds cumulative inflation. The spending habits of racial and ethnic minority groups accounts for a great deal of this substantial growth.

Buying Power Statistics by Race

In 2007, the combined buying power of African Americans, Asians, and Native Americans will be more than triple its 1990 level of $453 billion and will total almost $1.4 trillion, a gain of $912 billion or 201 percent. In 2007, African Americans will account for 62 percent of combined spending, or $853 billion. Over this 17-year period, the percentage gains in minority buying power vary considerably by race, from a gain of 287 percent for Asians to 197 percent for Native Americans to 170 percent for African Americans. All of these target markets will grow much faster than the white market, where buying power will increase by only 112 percent.

The combined buying power of these three groups will account for 13.8 percent of the nation’s total buying power in 2007, up from 10.6 percent in 1990. This 3.2 percent gain in combined market share amounts to an additional $316 billion in buying power in 2007. The market share claimed by a targeted group of consumers is important because the higher their market share, the lower the average cost of reaching a potential buyer in the group. Managers in organizations must possess effective multi-cultural marketing savvy to meet specific needs of a diverse marketplace and to affect buying behavior.

If an organization plans to sell or deliver goods and services in a diverse marketplace, it must be fully capable of effectively using its diverse workforce in key strategic ways. For instance, it is important from a public relations standpoint to be viewed as a company that is known for managing and utilizing its diverse workforce assets well. There are a number of wellpublicized ratings for “The Best Company for Working Women and Working Mothers,” “The Most Admired Company,” and “The Top 50 Companies for Women and Minorities.” This fuels a public relations climate where workforce talent and consumers make choices about the organizations they would work for and buy from. This line of thinking is also supported by a study of stock price responses to publicity that changed either positively or negatively on an organization’s ability to manage diversity. The authors of this study found that announcements of awards for exemplary efforts resulted in significant positive changes in stock prices, while announcements of discrimination suits resulted in significant negative changes in stock prices (Wright, Ferris, Hiller, & Kroll, 1995).

In addition, an organization can gain a great deal from the insights of its diverse workforce to understand the cultural effects of buying decisions and to map strategies to respond to them. Depending on the product or service delivered by the organization, many employees may also represent part of the firm’s customer base. A good reputation inside the organization can help product and service sales outside the organization. Another key marketing strategy includes tapping employee network or resource groups. They can be an excellent resource for focus groups, feedback, and ideas for honing the organization’s reach into diverse marketplace opportunities.

Problem Solving

Revenue increases can also show up due to improvements in diverse work team problem solving and decision making. Diverse work teams have a broader and richer base of experience to draw on in solving organizations’ problems and issues. The presence of minority views creates higher levels of critical analysis of assumptions and implications of decisions. In addition, it also generates an increase in the number of alternatives from which the group chooses. Simply mixing people together who are culturally different does not necessarily result in diverse work groups that execute beneficial problem solving. The improved outcomes heavily depend on a diversitycompetent manager who uses key diversity management behaviors.

In one study, researchers found that properly managed and trained diverse work teams produced scores that were six times higher than homogeneous teams. Researchers also found that it is important how a diverse team uses its diversity. For example, those diverse teams that recognized and utilized their diversity had higher productivity. And even when the team was diverse, if that diversity was not used effectively, it, in some cases, caused process problems that resulted in lower team productivity. The essential variable is the ability to effectively manage and utilize the team’s diversity.

Creativity and Innovation

Creativity and innovation can be vital to an organization’s ability to perform. New product introductions, advertising, process re-engineering, and quality improvements are examples where these skills are required. Diverse work teams have also been found to promote improved creativity and innovation that generates revenue. In her book The Change Masters (1983), Rosabeth Moss Kanter notes that highly innovative companies have done a better job of eradicating racism, sexism, and classism; tend to have workforces that are more race and gender diverse; and take deliberate steps to create heterogeneous work teams with the objective of bringing that diversity to bear on organizational problems and issues.

As you read this guide, you will gain awareness, knowledge, skills, tools, and techniques that will help you improve your ability to manage diversity. This guide will help you test your awareness and knowledge, save time, facilitate difficult situations, provide techniques for teamwork and improve your interpersonal effectiveness. Now that you have had an opportunity to assess your skills, you are ready to gain a better understanding of requirements for managing diversity. Often the best place to start is with a definition of diversity, which we will explore in the next chapter.

References

Hubbard, E. E. (2001). Diversity leadership competency profile. Petaluma, CA: Global Insights Publishing.

Hubbard, E. E. (1999, 2003). Managing diversity profile. Petaluma, CA: Global Insights Publishing.

Hubbard, E. E. (2002). Techniques for managing a diverse workforce. Petaluma, CA: Global Insights Publishing.

Kouzes, J. M. & Posner, B. Z. (2001). Leadership practices inventory. San Francisco, CA: Jossey-Bass, Pfeiffer.

Moss Kanter, R. (1983). The change masters. New York: Simon & Schuster.

O’Mara, J. (1999). 101 actions you can take to value and manage diversity. Castro Valley, CA: O’Mara & Associates.

Wright, P., Ferris, S. P., Hiller, J. S., & Kroll, M. (1995). Competitiveness through management of diversity: Effects on stock price valuation. Academy of Management Journal, Vol. 38, n1, pp. 272–287.