The Paradoxical Effects of Diversity

Is diversity good for business performance? Well, it depends.

That's the conclusion reached by the Diversity Research Network, a group of scholars drawn from six universities who recently completed the largest field-based study of this topic to date. “The Effects of Diversity on Business Performance: Report of the Diversity Research Network,” appears in the Spring 2003 issue of Human Resource Management. After examining four Fortune 500 companies in depth, the researchers found that a variety of contextual variables, including an organization's culture, strategy and human resource practices, helps to determine whether diversity boosts performance or drags it down.

In the first case study, which involved an information-processing company with more than 26,000 employees, professor Karen Jehn and lecturer Katerina Bezru-kova of the University of Pennsylvania's Wharton School found that racial diversity was associated with poor performance in business units that shared three traits: a competitive organizational culture, a growth-oriented business strategy and human resource practices that focused on honing job-related skills. However, this relationship disappeared when groups promoted collective achievement, emphasized stability or customer relationships rather than growth, and used training opportunities to impart diversity-related values to employees.

Similarly, an analysis of a large financial services firm, conducted by associate professor Robin Ely and professor David Thomas, both of the Harvard Business School, suggested that how groups approach diversity is at least as important as the degree of diversity they display. On the basis of employee surveys and sales and customer satisfaction data collected from 480 of the company's retail branches, Ely and Thomas concluded that racial diversity enhanced performance in units that treated diversity as a resource for innovation and learning. But diversity typically had a negative impact in groups that showed no evidence of what Ely and Thomas term the “integration-and-learning perspective.”

These effects were substantial. When Ely and Thomas focused on branch offices with equal numbers of white and nonwhite employees, they found that on average, groups that appeared to endorse the integration-and-learning approach outperformed units lacking this perspective by 37%. What's more, the same high scorers outperformed racially homogeneous branches by a margin of nearly 30%. (In all cases, performance was measured against branch-specific goals, which allowed the researchers to control for local factors that might affect sales and customer satisfaction, such as the wealth of the surrounding community.)

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