News Why diverse teams are more profitable

Why diverse teams are more profitable

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As organisations consider eliminating diversity, equity and inclusion programs, they could lose a key competitive advantage that drives innovation, talent retention and profit.

Why diverse teams are more profitable

Diversity is not just “nice-to-have.”

Diverse teams are more profitable.

A 2023 McKinsey study of more than one thousand companies across 23 countries found organisations in the top quartile for ethnic and racial diversity were 39% more profitable than those with less diversity. 

Similarly, gender-diverse teams had a 39% higher profitability than their counterparts with less gender diversity.

The push to eliminate Diversity Equity and Inclusion (DEI) programs could ultimately have a negative economic impact.

Homogeneous workforces lack the varied perspectives needed to drive innovation and profitability ultimately hurting the bottom line. 

Effective DEI programs don’t just tick a box — they help organisations create an environment that enables diverse teams to thrive.

Here’s why diversity is good for business. 

But first what do we mean by diversity?  

When we talk about diversity in teams, it can be categorised into two distinct types: surface-level diversity and deep-level diversity.

Surface-level diversity refers to the characteristics that are immediately observable, such as age, gender, race, ethnicity, and cultural background. Teams that exhibit surface-level diversity tend to include individuals from a variety of demographic groups, which can result in different perspectives and experiences.

Then there is deep-level diversity. This type of diversity is less visible and encompasses differences in values, beliefs, attitudes, socioeconomic status, and educational backgrounds. It also includes diversity in skills, functional expertise, and past experiences. Deep-level diversity tends to shape the way team members approach problem-solving and creativity, which are crucial to a team’s success.

Both types of diversity play a role in shaping a team’s dynamics and output, but it’s the combination of these two that often results in the most profitable outcomes for businesses. 

Diverse teams are more innovative 

Because of their varied background and beliefs, diverse teams bring unique perspectives, experiences, and skills to the table.

When these individuals collaborate, they are more likely to approach challenges from different angles, which leads to more innovative solutions. 

Homogeneous teams, on the other hand, are prone to “groupthink”, where everyone thinks in similar ways and settles on familiar solutions.  

Diversity helps teams break out of this mold, sparking creativity and generating novel ideas.  

With a wider range of experiences and perspectives, diverse teams are more capable of identifying problems and then coming up with effective solutions to solve complex problems. 

A diverse team understands your customers 

In today’s global marketplace, understanding the needs and preferences of a diverse customer base is critical. 

A diverse workforce can help businesses identify new product opportunities and adjust their offerings to appeal to a broader audience because they represent and understand a wider range of your customers.

By hiring employees with diverse cultural, demographic, and experiential backgrounds, organisations can position themselves as more agile and responsive to shifting market demands.

This responsiveness can result in better customer satisfaction, loyalty, and ultimately, increase your profits. 

Higher employee satisfaction and retention 

While it’s one thing to hire a diverse team, it’s just as important to ensure that all team members feel included.

Organisations that prioritise diversity are more likely to foster an inclusive environment where employees feel valued and accepted. 

Leaders play an important role in fostering a culture of inclusion and making sure that employees from all backgrounds feel that their voices are valued. This inclusion improves team cohesion and boosts employee morale. 

Employees who feel a sense of belonging are more engaged, leading to greater productivity and a more harmonious workplace.

Staff that feel a strong sense of belonging to an organisation are also less likely to walk out the door, saving you valuable time and money when it comes to hiring talent.

How businesses can foster diversity 

Quotas have traditionally been a way companies have sought to meet diversity targets. However instead of simply meeting quotas and getting people to select from drop down menus that cater to these requirements - organisations should focus on proactively seeking out and recruiting candidates from a diverse pool of applicants and broadening their search especially when it comes to leadership roles.

A commitment to diversity does not mean compromising on merit but rather, it expands the talent pool by ensuring opportunities are accessible to all qualified individuals. Choosing between diversity and merit is a false dichotomy because businesses can foster diversity while still hiring highly skilled and talented candidates from underrepresented backgrounds.  

One of the challenges that businesses face when fostering diversity is overcoming inherent biases during the hiring process. Research suggests that we tend to hire people who look like us or share similar backgrounds.

To address this, organisations can implement practices like blind recruitment, where identifying details such as names and photos are removed from resumes. This reduces the likelihood of bias creeping into hiring decisions and allows recruiters to focus on the qualifications and merit of candidates.

Formal mentoring programs are another useful tool for organisations. Pairing employees from minority backgrounds with senior leaders can help them navigate the workplace and overcome potential barriers. This mentorship helps to foster a sense of belonging and ensure that diverse voices are supported and heard.

By embracing diversity and fostering a culture of inclusion, companies can unlock higher levels of innovation, creativity, and problem-solving. Businesses will better understand and meet the needs of their customers, leading to improved market share and customer loyalty.

Diversity is not just a buzzword. The research shows - a diverse company is a profitable company. 

Dr. Rohit Piplani is an Assistant Professor of Management at Melbourne Business School, University of Melbourne. Rohit teaches Managing People and Business Essentials on the Full-time and Part-time MBA programs at MBS.