Competitive Advantage of Diversity

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

Competitive Advantage of Diversity

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
todays 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

Competitive Advantage of Diversity

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
Externally Driven
Operational
Difference Perceived as Other/Problematical
Group Focused
Supported by Narrow Positivist Knowledge
Base

MANAGING DIVERSITY
Internally Driven
Strategic
Difference Perceived as Asset/Richness
Individual Focused
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.

Competitive Advantage of Diversity

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.

Competitive Advantage of Diversity

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:

Competitive Advantage of Diversity

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

Competitive Advantage of Diversity

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 organizations business objective for developing a diversity plan
one must have a business strategy. The business strategy must map out the organizations
market, customer, workforce, etc As in Robinson and Dechants (1997) article, they gave an
example of how McDonalds 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
todays 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

Competitive Advantage of Diversity

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.

Competitive Advantage of Diversity

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 Dechants 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

Competitive Advantage of Diversity

10

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 companys 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

Competitive Advantage of Diversity

11

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 HoodPhillips, former Vice President of Diversity Affairs at Burger King states, You just cant 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

Competitive Advantage of Diversity

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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
individuals contributions to the organization, and provides a secure area in which to brainstorm
(Salomon & Schork, 2003). Simply stated, mentoring should create relationships that are crossgender, 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,

Competitive Advantage of Diversity

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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 costsavings from establishing better retain policies and lower recruitment and training costs.
Through adding value to ones 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

Competitive Advantage of Diversity

14

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.

Competitive Advantage of Diversity

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