How improving diversity can impact the bottom line

 In a recent edition of the Harvard Business Review, there was a flyer for the bestselling business strategy book Clear Blue Ocean. The flyer proclaimed how over 3.5 million copies had been sold and how it had been translated into 43 languages.

Michael Porter, an American academic, said that strategy was ‘about deliberately choosing to be different.’ There is something deeply ironic about offering an insight to the mass market – the credentials the book was using to further its sales are precisely those that will diminish its impact. If 3.5 million people all pursue the same strategy then any competitive advantage will quickly be eroded.

By contrast, ‘diversity’ books are lucky to break even. Yet anyone who has read Scott Page’s The Difference, Laura Liswood’s The Loudest Duck, or any of my books on inclusion may well gain more benefit than one of the three million Clear Blue readers. Why might that be?

Just as value is created by scarcity, value is created by diversity. New research now consolidates the already pretty robust case that diverse workforces perform better financially.

McKinsey published their latest research showing that companies in the top quartile for gender or ethnic diversity are more likely to have financial returns above their national industry medians. Companies in the bottom quartile in these dimensions are statistically less likely to achieve above-average returns. And diversity is probably a competitive differentiator that shifts market share toward more diverse companies over time.

I don’t want to overstate the case for diversity and financial returns – we can only prove correlation, and gender and other demographic differences are in one sense only a proxy for cognitive diversity. But given the increasingly competitive nature of business, increasingly volatile nature of politics and the operating environment, and increasing demands on us as professionals with information overload, it’s worth another look at the business case for diversity. This may offer us a different route to the clear blue ocean.

Fortune 500 companies in the top quartile for female representation outperform those in the lowest quartile by at least 53% return on equity. In 2014 Credit Suisse found a strong correlation between female representation at senior levels and financial performance, with return on equities (ROE) reaching 14.7% in companies where women make up more than 15% of senior managers. McKinsey’s report found a 10% increase in gender diversity was associated with a 3.5% uplift in earnings before tax.

Eiko Shinotsuka of the National Personnel Authority of Japan said that ‘the insufficient utilisation of women as human resources, particularly in their intellectual resources’ was a factor in Japan’s slow growth. Women received 45% of the PhDs in science in Europe in 2006 yet occupy only 18% of senior research positions today.

In contrast, consider the case of the London 2012 Olympics where we took diversity very seriously. Diversity in our workforce led to better customer service as we had a phenomenal skill set available to welcome the world. A junior, Muslim colleague, suggested the idea of ‘Ramadan packs.’ This became a new product line and a revenue stream at the Games, as well as delighting a significant customer segment. Diversity in our supply chain helped save £112 million of our projected £1.3 billion spend. This was largely achieved through decreasing barriers to entry, increasing transparency and competition, driving down costs, and sourcing new and innovative ideas that a closed shop arrangement would have locked out.

I teach the Harvard MBAs a class on inclusive leadership. We ask the students to have an arm wrestle, the goal being to score as many points as possible in one minute and, if at all possible, avoid litigation. After one minute the room of future CEOs splits into two camps. Most of the room, predominantly men, have scored zero points, or possibly one or two. The other 10%-20% of the room, predominantly women, have scored 30-40 points. They simply let each other win, and through cooperation as opposed to confrontation, enlarge the pie for all parties.

For some, diversity is still a half-baked idea. The Harvard classroom shows it can actually enlarge the pie for all of us. It’s time for a real discussion on diversity and to swiftly follow up the talk with concrete actions. There will never be enough time or resources. But diversity is free, in infinite supply, and largely within our own control.

Stephen Frost is the founder of Frost Included, a consultancy dedicated to helping people understand diversity and inclusion. His latest book, Inclusive Talent Management – How business can thrive in an age of diversity, is out now, published by Kogan Page. For more information go to