Firm Diversity and Performance

Posted on November 6, 2008. Filed under: Academic Publishings, Corporate |

Richard, Orlando C. Racial Diversity, Business Strategy, and Firm Performance: A Resource-Based View. The Academy of Management Journal, Vol. 43, No. 2 (Apr., 2000), pgs. 164-177.

As is evident by the title, the author examined the correlation between companies’ racial diversity, business strategy, and firm performance. The purpose of this study was to provide insight into these relationships, and according to Richard’s results, demonstrated that cultural diversity is an added value and does have a positive impact on firm performance. Research data is relevant to the banking industry and was collected at the firm level using Sheshunoff Bank Search Database, questionnaires, phone calls, and surveys.

This article focuses on firm level impacts of diversity that are distinct from management. The author uses the term ‘cultural diversity’ to refer to racial diversity. Cultural diversity, according to Cox (1994), is defined as ‘the representation, in one social system, of people with different group affiliations of cultural significance.’ As is proposed by prior readings (Powell and Graves 2003, Elsass and Graves 1997), corporate diversity provides a positive impact on decision-making and corporate culture. According to a study by Watson, Kumar, and Michaelsen (1993), homogenous and heterogeneous groups were evaluated on process and performance effectiveness. Both groups scored the same for process effectiveness, however, heterogeneous groups scored higher in performance effectiveness, illustrating the importance and firm-enhancing impacts of diversity.

Companies compete on varying levels including capital and assets, but according to the author, one of the most important corporate assets are its people. “Strategic human resource management (SHRM) is a means of gaining competitive advantage through one of a company’s most important assets: its people…the concept of human capital are that people have skills, experience, and knowledge that provide economic value to firms (165).” This value is hard to imitate, duplicate, or substitute, thus making knowledge capital a highly valuable asset.

As companies begin to diversify their target audience, their suppliers, or international joint ventures, corporations must be prepared to address varying racio-ethnic differences and customer preferences. This is attainable by diversifying corporate decision-making groups. “As firms reach out to a broader customer base, they need employees who understand particular customer preferences and requirements (165).” The sharing of diverse perspectives will improve performance and decision-making. This led to the first hypothesis, stating racial diversity will be positively associated with firm performance. Again, human capital is a competitive advantage, as long as it remains rare, and unable to replicate, otherwise, competitors will adopt these methods, no longer making it a competitive advantage.

In order for a firm to take advantage of its resources, it must be prepared for growth. There are two forms of growth, internal and external. Internal growth can be achieved by benefiting “from market-related advantages obtained by cultural diversity (167)” by expanding and entering new markets. External growth, suggests expansion, requiring “employees who are flexible in their thinking and who are not likely to be concerned about departing from the status quo (167).” During growth stages, many assets are exploited, in which diverse human capital carry an organization throughout each growth phase. According to the author, human capital exploitation does not match with companies downsizing their personnel, thus leading to the second hypothesis that; higher racial diversity will be positively related to firm performance when the firm pursues a growth strategy and negatively related to firm performance when the firm pursues a downsizing strategy (167).”

Results show that hypothesis 1, which stated cultural diversity is positively associated with firm performance, does not hold true. According to Table 3, which provided a regression analysis for productivity, return on equity, and market performance outcomes, illustrates the lack of correlation. However, hypothesis 2 is supported by step 4 in Table 3 and is visually demonstrated in Figure 1 (pg. 173). Research proves that “racial diversity contributes to a significant change in the multiple squared correlation (R2) for growth firms…similarly, the return on equity regressions show that firms with racial diversity and a growth strategy experienced higher return on equity than firms with the same diversity and a no growth or downsizing strategy (171).” These results may direct future research to evaluate additional diverse corporate studies such as internal and external conditions that may impact diversity efforts and how to improve job design and work structure.

In conclusion, racial diversity and growth strategy bear positive results on corporate and market performance. Results are dependent upon corporate growth strategies, as was demonstrated in research results. This brings to light the importance of HR management and business strategy. Although this article demonstrates the effectiveness of overall diverse decision-making, I would like to see more research on CEO commitment to diversity and how that affects attracting and retaining diverse human capital.

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