The Competitive Advantage Of Diversity


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The Competitive Advantage Of Diversity

  1. 1. Competitive Advantage of Diversity 1Running 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
  2. 2. Competitive Advantage of Diversity 2 Introduction As global economies unite, new markets emerge, and corporate cost controls becomeeven more stringent, it is more important than ever for companies to maximize all of theirresources if they are to survive, let alone succeed, whether they are raw materials, proprietarytechnologies, 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, asdiversity management poses many challenges. Despite anecdotal evidence that diversitymanagement offers businesses a competitive advantage, it is difficult to isolate its impact on thebottom line. Furthermore, diversity management requires a long-term commitment. Giventoday’s lean organizational structures and the forces of Wall Street, on the other hand, mostexecutive 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 thedevelopment of a diversity program. Finally, it will specify some diversity program bestpractices, and in the end, make a compelling rationale for the inclusion of diversity as a topbusiness priority. Business Case for Diversity Although the business case for diversity has been debated and promoted over the years, thebenefits are not in all cases tangible nor directly measurable (Orenstein, 2005). It is recognizedby many firms that a diverse workforce is of utmost importance for their continued success in theglobal marketplace (“Workforce Planning”, 2003). Furthermore, there is still growing confusion between what is compliance, such asregulations mandated by the Equal Employment Opportunity Commission (EEOC); and what is
  3. 3. Competitive Advantage of Diversity 3rather a corporate culture change, such as diversity management. Several studies have discussedthe differences between these two areas (Cassell, 1996; Wilson & Iles, 1999), and it is worth it tolist them here in order to better understand the upcoming arguments for a business case fordiversity. 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 Supported by Wider Pluralistic Knowledge Base 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 rathera strategic and individual focused paradigm that tries to reach all groups rather than targetedones. The following discussion for building a business case for diversity will be based in thiscontext. Several authors (Orenstein, 2005; Robinson & Dechant, 1997) have proposed variouscontributing factors to the diversity business case. Among the most important are (1) costsavings; (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 maincategories.Cost Savings As with any other business case, the strongest argument will be based on cost savings. Inthe case of diversity, cost savings will come mainly from lower employee turnover, lowerabsenteeism, and fewer discrimination lawsuits.
  4. 4. Competitive Advantage of Diversity 4 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 thedeparting employee (Robinson & Dechant, 1997). Similarly, since organizations are realizing the high costs of absenteeism, they have beenimplementing certain programs and benefits that show evidence of lowering their absenteeismrate (Robinson and Dechant, 1997). Finally, cost savings can also be obtained from the reduction in discrimination lawsuitswhen organizations provide a diverse workplace, with established training programs and policiesgeared towards the elimination of discriminatory practices. Therefore, a properly designed, implemented and monitored diversity program can bringtangible 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 effectiveglobal relationships, diversity could help drive business growth. Singh, Vinnicombe and Johnson (2001) as well as Orenstein (2005) cite several studiesshowing that firms with the best record of promoting women to high positions, for example, aremore profitable than the median in their industry. In this case, it is perceived that women bringmore sensitivity to certain business perspectives and a more interactive and transformationalmanagement style. Similarly, Robinson & Dechant (1997) argue that diversity of top management teamsaffects competitive advantage and financial effectiveness, citing a study in the banking industrywhere organizational innovation positively correlated with team heterogeneity.
  5. 5. Competitive Advantage of Diversity 5 In the area of marketing, there are several reasons why diversity can be helpful. In thepublic services area, for example, there is a need to have front line staff recruited from ethnicminorities with whom the public could identify, and even deal in their own language (Wilson andIles, 1999). Other areas in which diversity can contribute to drive business growth are buildingmarket presence and position (through geographic coverage and market strength); increasingstrategic flexibility (via multiple sourcing and flexible logistics); and, improving the speed ofresource deployment (through increased speed and agility, speed to market and speed toresponse). All of these reasons could be easily argued for firms whose value chain dependslargely in customer service, rapid delivery, and that participate in a very competitivemarketplace. Therefore, unlike the aforementioned cost savings factor, which applies generally to anykind of business, the opportunity to drive business growth as an argument to build the businesscase for diversity, has to be analyzed in the context of the firm and the industry in order to decidewhich 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 thecompetition for talent. A properly designed and implemented diversity program can helporganizations attract the best talent in the workforce; and more importantly, a diverseorganization should be able to retain their best employees. There are several studies that supportthis argument as a component of the business case for diversity. Wilson & Iles (1999), forexample, state that better recruitment, retention, and promotion are persuasive arguments in boththe public and private sectors. Furthermore, Robinson & Dechant (1997) argue that:
  6. 6. Competitive Advantage of Diversity 6“Companies that are better able to recruit, develop, retain and promote diverse employees havean edge” (p. 25). By making the workplace more diverse and inviting, an organization couldbecome the employer of choice (Orenstein, 2005). Additionally, companies that manage to optimize their human resources will be able tosustain their competitive advantage (Robinson & Dechant, 1997). In other words, it is notenough to allow differences in the workplace, but rather create a work environment in which allemployees 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 businesscase. Finally, in the area of intangible benefits that can be used for building the business casefor diversity are improved corporate culture; stronger customer relations; and because it isdemanded 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 wellas the market. Although many of those arguments can not produce a straightforward andtangible cost/benefit number, there are many intangible paybacks that must be considered andincluded 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 changingmarkets demanding fast responses, companies must implement a strong corporate culture thatvalues the diversity of its workforce in everyday task. This will allow not only achieving adiscrimination free work environment, but most importantly will empower its workforce to usetheir best ideas to improve productivity. Developing a Diversity Program
  7. 7. Competitive Advantage of Diversity 7 Once an organization has weighed the advantages and disadvantages for having diversityin a business and has made the decision to take the next step, the organization must then begindeveloping a diversity program. In order to develop a diversity program a company mustdetermine business objectives, identify actions required to reach the objectives, conductcost/benefits analysis, and develop tracking mechanisms to assess the progress and financialimpacts (Robinson & Dechant, 1997).Determining Business Objectives In order to determine an organization’s business objective for developing a diversity planone must have a business strategy. The business strategy must map out the organization’smarket, customer, workforce, etc… As in Robinson and Dechant’s (1997) article, they gave anexample of how McDonald’s business strategy of predominately hiring teenagers in the 1980shad to change due to the workforce shift and they no longer had the supply of teenage workersrequired to run each location (29). This same example is true for knowing who your customer isat all times and making sure that your employment diversity matches the organizations customerprofile. This diversity will allow customers to fill more comfortable conducting business. Anorganization must know its customer base and diversity in order to survive and be successful intoday’s international business (Wentling, 2000). Wentling goes further by reinforcing hiringdiversity by stating, “They (multinational corporations) are also required to recruit and retain adiverse workforce that mirrors its diverse market” (2000). By organizations understanding theirmarket diversity and hiring based on that diversity organizations will begin to better utilize theirworkforce, begin to retain better employees and have a competitive advantage over theircompetitors that are not determining business objectives with diversity as a part of their plan.Identify Actions Required to Reach Objectives
  8. 8. Competitive Advantage of Diversity 8 Once a business objective is determined it is time for an organization to identify thenecessary actions to reach its objectives. The first action an organization must take is to developa Diversity Department or have an existing department take ownership of managing diversitywithin 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 takeadvantage of having a diverse workforce. The department would also take ownership of andreview actions taken by management and/or employees and deal with any potential diversitylawsuits that may arise. An additional action item in reaching the organizational objectives willbe ensuring the organization meets or exceeds any local, state, and/or Federal laws. These lawsare ever changing and must be met in order to meet the minimum requirements of doing businessin the city, state, or country they reside. According Gilbert and Ivancevich (2000), “Whenworkforce diversity is addressed, it is often solely in terms of responding to governmentalmandates rather than proactively creating programs that add organizational value.” Althoughmeeting the laws will keep most companies out of lawsuits, it will not give them a competitiveadvantage. Finally, a major action item for any organization is to develop and create anatmosphere of inclusion (Gilbert & Ivancevich, 2000). The major purpose for developing anatmosphere of inclusion is to better retain exceptional employees and customers. If a businessincludes many diverse groups within organization, it is evident and people will feel a higher levelof 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 toensure that the diversity program is developed, implemented, and maintained there must be abuyoff from top management. If top management does not support the actions required todevelop a diversity program then it is likely that the program will fail.
  9. 9. Competitive Advantage of Diversity 9Conduct a Cost/Benefit AnalysisPrior to implementing a diversity program the Diversity Department must develop a Cost/BenefitAnalysis 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 becalculated in order to help make the final decision to move forward or disband the programbefore it even begins. One must also add up the expected returns of developing a diversityprogram. For example in Robinson and Dechant’s article they discussed how after analyzing theexisting diversity in the available workforce that by staffing locations with senior citizens, theywould require little to no specialized training (1997). When determining a benefit for a diversityprogram with this example one can review the current costs of training inexperienced teenagersand 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 easilydetermine the enormous savings on training cost if the workforce diversity began to change fromteenagers to senior citizens. Without a detailed cost/benefit analysis, it would be very unlikelythat top management would simply buyoff on the expenses of developing and implementing adiversity program if they did not know that the initial investment would return a significant ROI.Develop Tracking Systems to Monitor Progress and CostFinally, once the business objectives have been determined, the action items have beendeveloped, and the cost/benefit analysis has been approved, it is time to develop a trackingsystem to monitor the progress, cost, and return from developing the and implementing thediversity program. Robinson and Dechant (1997) states, “Process can be measured by involvingemployees 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
  10. 10. Competitive Advantage of Diversity 10truly creating an inclusive atmosphere and allowing for higher retention of exceptionalemployees. By surveying customers, organizations will be able to analyze whether the diversityprogram increased or decreased their customer profile. It can also determine whether thecustomer 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 higherdue to increasing the customer profile? Are costs down due to lower recruiting and trainingexpenses? 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 welldiverse organization or with a competitor who has not developed a program? By developing asound tracking system prior to implementing the diversity program one will be able to answerthese and other specific questions to the effectiveness of the diversity program and be able tomake 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 mustnext focus on specific measures, or best practices, to foster long-term success. Involvement andaccountability among upper management is the first of these, and not surprisingly, also the mostcritical since most serious long-term initiatives emanate from the top down. For example, ChiefExecutive 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 addedstep of management simply sitting down with employees to hear their concerns furtherlegitimizes the program. As Drew puts it, “When the CEO meets with employees, it signalsdiversity is important” (Rice & Sookdeo, 1994). Beyond just talk, though, executives mustthemselves embrace diversity. At Hoechst Celanese, the top 26 officers are required to join two
  11. 11. Competitive Advantage of Diversity 11or more organizations in which they are the minority. Says Drew, “The only way to break out ofcomfort zones is to be exposed to other people. When we are, it becomes clear that all people aresimilar” (Rice & Sookdeo, 1994). Another way to ensure management involvement is to linkfinancial incentives to diversity progress. Executive bonuses are often tied to setting andachieving diversity goals. A 360-degree performance review survey that includes questionsassessing behavior in the areas of respecting differences and diversity is another tool that hasbeen used to increase awareness and individual accountability (Salomon & Schork, 2003). Next to management involvement and accountability, training is one of the most effectivemeans to a successful diversity program; however, companies should be aware of two potentialpitfalls. 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 aprogram off the shelf, because every culture is unique” (Rice & Sookdeo, 1994). The second isthe threat of being divisive or combative in the process. In an effort to demonstrate what not todo, most training programs, themselves, result in diversity offenses. Rather, diversity trainingshould focus on inclusion and practical conflict management. This is best accomplished throughthe analysis of real-life case studies. Furthermore, diversity training benefits employees andmanagement alike. According to New York City consultant Richard Orange, “Most seniorexecutives have no frame of reference to people who are different, due to the nature of theirlifestyles, culture, and position” (Rice & Sookdeo, 1994). Frequently, Orange takes executives tomovies and plays depicting cultural differences, such as Philadelphia, Malcolm X, Thelma andLouise, and Angels in America. Says Orange (Rice & Sookdeo, 1994), “We discuss what theysee and feel, and then we connect the theme of the movie to situations in business.” Most
  12. 12. Competitive Advantage of Diversity 12importantly though, diversity training must be in depth and repeated periodically. Withoutrepetition, diversity lessons will fail to take root. Another best practice of a successful diversity program is mentoring. Mentoring isimportant in gaining full value from a diverse workforce. However, the programs should beorganization specific, so the embodiments vary widely (Salomon & Schork, 2003). Somementoring programs are highly structured with formal training for mentors and mentees. Othersinvolve mentoring “circles” where a single mentor meets with a group of mentees. This reducesthe time burden on mentors while providing opportunities for peer support. Still others involveinverse mentoring, where executives sit down with those at lower levels of the organization andexperience 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 anindividual’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. Nowmore than ever, managers concern themselves with the lives of their employees outside theworkplace. It is with this empathy that employers better understand that work performance isoften related to life beyond the job, and that at times, they must be willing to step in and lendsupport. As explained by Jose Berrios, Vice President for Diversity at Gannett, “First, it costs alot more to replace effective employees who are temporarily distracted by personal matters. Andin the long run, the companies that can handle these problems extremely well will become theemployers of choice in an ever tighter labor market” (Labich & Davis, 1996). Furthermore,
  13. 13. Competitive Advantage of Diversity 13work-life measures such as flexible hours result in lower absenteeism and access to a wider laborpool, such as single parents. A final best practice among diversity programs, for the purpose of our analysis, is thecelebration 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 annualdiversity 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 thecommunity, 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 planswill 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. ConclusionIn 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 aresubstantial costs in developing, implementing, and maintaining programs. However, asdiscussed 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 willallow multiple viewpoints to business decision-making and practices. Obviously, before anorganization can implement a diversity program they must develop the program. This isaccomplished through determining the organizations business strategies and opportunities from
  14. 14. Competitive Advantage of Diversity 14the program. An organization must then identify actions required to reach the objectives. This isaccomplished mainly by a group taking ownership of the development of the program and sellingthe benefits to top management. As discussed many times, without top management support thediversity program will never succeed. In order to get managements approval a soundcost/benefit analysis must be created to illustrate the importance of the program. Once theprogram is implemented, it must be embrace top to bottom and practiced throughout theorganization. This will occur by designing a customized diversity training program to focus oninclusion and practical conflict management. By utilizing a mentoring program, diversity willbecome 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 thatplague most organizations and be able to celebrate and prosper off the differences of everyindividual within the organization.
  15. 15. Competitive Advantage of Diversity 15 ReferencesCasell, C. (1996). A fatal attraction? Strategic HRM and the business case for women’s progression at work. Personnel Review 25(5), pp. 51-66.Gilbert, J., Ivancevich,J. (2000, February). Valuing Diversity: A Tale of Two Organizations. Academy of Management Executives, 14, pp. 93Guillory, 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. Corporate Governance: An International Review 9(3), pp. 206-216.Wentling,R. (2000). Evaluation of diversity initiatives in multinational corporations. Human Resource Development International 3:4, pp. 435-450.Wilson, E. & Iles, P. (1999). Managing diversity – an employment and service delivery 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 Resources Department Management Report 3(6), pp. 6-7.