How Diversity is a Competitive Advantage

Updated: 13 Apr, 2021 | Bill Peatman

In 2015 McKinsey published a landmark report on the business benefits of diverse teams. "Diversity Matters" analyzed 366 public companies across various industries in Canada, Latin America, the United Kingdom, and the United States. It looked at the financial results of the companies and the composition of their boards and management.  

Diverse Companies Perform Better

"The findings were clear," the report noted.

  • Companies in the top quartile for racial and ethnic diversity are 35 percent more likely to have financial returns above their respective national industry medians.
  • Companies in the top quartile for gender diversity are 15 percent more likely to have financial returns above their respective national industry medians.

McKinsey published an update to the report, "Diversity Still Matters," in 2020 during the pandemic's first wave. A key finding:

  • Diverse companies are now 48 percent more likely to outperform the business with the lowest diversity.

"Over the past five years, the likelihood that diverse companies will out-earn their industry peers has grown," McKinsey said. "So have the penalties for companies lacking diversity."

More Innovative, Profitable, Appealing, and Resilient

"For over a decade, study after study has propagated the same conclusion: A diverse team – representing diverse nationalities, genders, abilities, ideologies, religions and more – makes organizations more innovative, profitable, appealing to workers and resilient to economic shocks," wrote the World Economic Forum's Mariah Levin.

Let's break down these business benefits of diversity:

  • Innovative: BCG found companies with more diverse management teams have 19 percent higher innovation-driven revenue.
  • Profitable: Echoing McKinsey's findings, global accounting firm Crowe found that companies that scored highest in diversity also had the highest growth in revenue per employee.
  • Appealing to workers: 74 percent of millennials said that they favor companies that a workplace that makes diversity and inclusion and priority.
  • Resilient to economic shocks: While the current shock is still in progress, during the 2008 recession, the stock prices of companies ranked high for diversity and inclusion outperformed the S&P 500 by 49.9 percent.

The public tends to focus on the soft benefits of diversity. Diversity gets a lot of lip service from companies that want to be seen as "doing the right thing" to appeal to their customers. Now, though, more attention is paid to the hard benefits of diversity.

"It's not just about trying to be nice, said Richard Warr, a finance professor at North Carolina State University. "It not only helps in terms of perception. It actually produces better outcomes."

Why Diverse Teams Perform Better

We have looked at how diversity can bring competitive advantages to businesses. Let's look at the "why." What happens within diverse teams that makes them perform better? Warr has some answers:

  • Diversity expands business networks: A diverse leadership team opens doors to new contacts in new communities. These networks create a "halo effect," attracting populations that were not in the company's ecosystem. The business is attractive to minorities and women and non-minority employees who want to work at a diverse company.
  • They make better decisions by accounting for more perspectives. Teams that share the same demographic profiles aren't likely to understand the subtle or not-so-subtle concerns and preferences of divergent communities. For example, the aggressive, action-oriented approaches characteristic of traditional U.S. businesspeople is tempered by collaboration, listening, and tolerance.
  • Diversity provides insight into more types of customers. Companies sell into more and more multi-cultural markets, and a diverse workforce can help product managers get user experience insights from a more accurate representation of their customer base. Insights are especially valuable when diversity includes workers from multiple nations. The Internet has made most products global, and global products need global users to test, validate, and enhance usability.

For many businesses, the move to all-remote work has improved access to a diverse workforce by removing geographic barriers. They can hire from anywhere in the country or world to expand their teams with full-time, part-time, or contingent workers. It's a big reason for the virtual assistant marketplace's growth before and during the pandemic—executives get fully trained and supported virtual assistants from global workers that boost productivity without adding management overhead.

To learn more about how a remote virtual assistant can work for you, check out our guide.

Discover how a virtual assistant can boost your productivity,

About the Author: Bill is Prialto's senior content marketing manager and writes about the future of work and how businesses can be more productive and successful. His work has appeared in the World Economic Forum Agenda blog and CIO magazine.

 

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