Guacamole Doritos, Wasabi Funyuns, and Mountain Dew Code Red (which is targeted to African-Americans) are three fruits of PepsiCo Inc.’s diversity initiatives. These initiatives, which include mentoring programs and support groups, attempt to harness employees’ racial and ethnic heritages for competitive advantage. So far, the company’s efforts seem to be paying off: For instance, PepsiCo attributed part of its 8 percent growth in 2004 revenues to its diversity programs, reports a Nov. 14, 2005, article in The Wall Street Journal.
Like PepsiCo, many other corporations have claimed that ethnically and sexually diverse workforces generate more creative ideas, tap into more markets, and develop better solutions than do more homogeneous ones.
But the plural of anecdote is not data, and so the business case for diversity has often foundered for want of systematic evidence.
This summer, however, sociologist Cedric Herring crunched the numbers and discovered that, indeed, more diverse workplaces have higher revenues, more customers, larger market shares, and greater relative profits.
“What I’ve done is use real data from real organizations to document what people have speculated about for quite some time,” says Herring, a professor at the University of Illinois at Chicago. Results like his are “the holy grail for people who care about the return on investment for diversity.”
Herring’s real data came from a nationally representative sample of 506 U.S. businesses that responded to the 1996-1997 National Organizations Survey. He first created indexes to capture the diversity of each business’s workforce, and then classified businesses as low, medium, or high in racial and gender diversity. Next, he tested the relationship between levels of diversity and companies’ self-reported sales revenues, numbers of customers, market shares, and profitability for the past two years.
Even after statistically controlling for businesses’ legal form (proprietorship or corporation, for example), workforce size, organization age, industry, and region, Herring found that both racial and gender diversity still redound to the bottom line. He cautions, however, that his study does not establish that diversity caused the better business outcomes. “You need data over time to make the causal argument,” he says. “But I do believe that that’s the story.”
Herring’s study likewise did not test why diversity and corporate success are linked. Yet he ventures that diversity “allows companies to think outside the box by bringing previously excluded groups inside the box.” Although the mixing of demographics might initially inspire some conflict and inefficiencies, “they’re often worth it to get new ideas, better ways of thinking, and more productive practices.”
In economic downturns, diversity programs are often among the first to get the ax. But this is “short-term thinking,” says Herring. Instead, “organizations need to make that extra effort to recruit and retain all different kinds of people from different backgrounds” to tap into their talents and get an edge on competitors.
“Diversity is not just about protecting special classes of people,” he adds. “It can be beneficial to the entire organization.”
Cedric Herring, “Does Diversity Pay? Race, Gender, and the Business Case for Diversity,” American Sociological Review, April 2009.
Read more stories by Alana Conner.