Businesses are always looking for ways to increase profit margins. Research from the last decade or so has revealed yet another way for them to meet this need: be more diverse.
A 2009 study by the American Sociological Association reported in Science Daily found that one of the most significant predictors of a company’s profitability is workplace diversity. The researcher, sociologist Cedric Herring, discovered that both gender diversity and racial diversity produced desirable business outcomes. Among the specific results of this research was a sales revenue increase of nearly 10-15 times on average for companies with high diversity levels as compared against those with low diversity levels. Additionally, more diverse businesses tended to have larger customer bases and report a higher-than-average market share.
Another study, conducted in 2015 by McKinsey Consultants, discovered some of the ways in which workplace diversity serves to improve business outcomes such as profitability. These include improvements in the areas of decision making, attracting talent and understanding customers.
Diversity improves a business’s decision-making capabilities by bringing a wider range of perspectives to the table and encouraging debate. This results in more savvy risk-taking, increased innovation and improved overall business practices.
In terms of attracting talent, the top talent available for employment these days tend to prefer working in diverse workplaces. This is likely because most top talent is college educated, and college campuses are renowned for their diversity. As a 2014 MIT study found, diversity in the workplace translates to a more diverse skill set for the business overall. Educated and experienced workers know that it takes a wide range of perspectives, skills and experience in order to make a company successful, and they shy away from any employment opportunities with businesses lacking in that regard.
As for understanding customers, unless a company’s target market is decidedly lacking in diversity, representing the same diversity as your target market in your employee pool arms you with access to intimate insight into these various market segments. For example, if one of the demographics who purchases your products is Latin American women, then you’d better have some Latin American women on your workforce to help you best understand their needs and considerations.
The Social Paradox
Ironically, the MIT study on workplace diversity also found that individual workers preferred more demographically homogenous workplace environments. But, despite that people felt more comfortable in a workplace environment filled with other people of similar ethnic and social backgrounds, an employee’s social satisfaction at work, as a measure of overall value for workplace productivity and profitability, is actually not a particularly influential factor. Similarly, while workers generally felt more pleased with their jobs and more willing to participate in the workplace when they perceived their employers as promoting and supporting diversity, those factors didn’t have much influence on office productivity or company profitability.
The MIT study also found that businesses with an all-male or all-female workforce were able to increase their revenues 41% simply by changing to a mixed-gender workforce. The explanation the researchers gave for this phenomenon was that each gender offered a different genetically-predisposed skill set that complemented the other. Without it, the team was lopsided, with too much of some skills and not enough of others. Another way of putting it is that the collective knowledge of the group makes each individual unit within the group more knowledgeable and, therefore, more powerful and effective.
Research published in “Personnel Psychology” on the “Top 50 Companies for Diversity” found that minorities in companies with a culture that promoted diversity performed better than those in companies that did not. For example, African-Americans produced a $20-per-hour sales increase, for an annual gain of almost $21,000, when placed in a pro-diversity workplace. Under the same conditions, Hispanic workers raised sales numbers hourly by $26, for a $27,000 annual gain. Even white employees improved their sales numbers when placed in pro-diversity working environments, although their sales increases weren’t as dramatic as those seen from the minorities studied.
Before slashing overhead or throwing money at the problem of profitability, take a moment to step back and examine your company’s culture of diversity. Are there ways you can make your workplace more diverse or better promote the diversity already present? If so, you could dramatically increase profit margins without dramatically cutting costs or increasing spending.