Racial Diversity and Firm Performance: The Mediating Role of Competitive Intensity

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DOI: 10.1177/0149206311424318
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Abstract
The authors examine the mediating role of competitive intensity in the relationship between managerial racial diversity and firm performance (i.e., market share gain and average stock return). Racial diversity relates to firm performance via firms’ capacity to compete intensively (i.e., to introduce new competitive actions frequently). An analysis reveals that environmental munificence moderates competitive intensity’s mediating effect: Racially diverse management groups compete more intensively and perform better when they compete in munificent environments. The authors also find support for a moderated mediation model that simultaneously tests all components of their framework.
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DOI: 10.1177/0149206311424318
2014 40: 820 originally published online 14 November 2011Journal of Management
Goce Andrevski, Orlando C. Richard, Jason D. Shaw and Walter J. Ferrier
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Racial Diversity and Firm Performance: The Mediating Role of Competitive
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Racial Diversity and Firm Performance:
The Mediating Role of Competitive Intensity
Goce Andrevski
Queen’s University
Orlando C. Richard
University of Texas at Dallas
Jason D. Shaw
University of Minnesota
Walter J. Ferrier
University of Kentucky
The authors examine the mediating role of competitive intensity in the relationship between
managerial racial diversity and firm performance (i.e., market share gain and average stock
return). Racial diversity relates to firm performance via firms’ capacity to compete intensively
(i.e., to introduce new competitive actions frequently). An analysis reveals that environmental
munificence moderates competitive intensity’s mediating effect: Racially diverse management
groups compete more intensively and perform better when they compete in munificent environments.
The authors also find support for a moderated mediation model that simultaneously tests all
components of their framework.
Keywords: racial diversity; competitive dynamics; competitive intensity; firm performance;
moderated mediation
Acknowledgments: We would like to thank associate editor Jeremy Short and two anonymous reviewers for their
constructive and insightful comments and suggestions. We also thank Jacqueline Thompson for editing earlier
versions of this article.
Corresponding author: Goce Andrevski, Queen’s University, Queen’s School of Business, Kingston, ON, K7L3N6,
Canada.
E-mail: gandrevski@business.queensu.ca
Journal of Management
Vol. 40 No. 3, March 2014 820–844
DOI: 10.1177/0149206311424318
© The Author(s) 2011
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Andrevski et al. / Racial Diversity and Firm Performance 821
As organizations become increasingly global and the proportion of racial/ethnic
minorities in the U.S. workforce grows rapidly, the need increases to understand how racial/
ethnic diversity (here, racial diversity) relates to organizational outcomes (Wooten, 2008).
Although scholars have referred to the increase in racial diversity within organizations as
one of the “most challenging human resource and organizational issues of our time”
(Richard, 2000: 164), the literature on racial diversity and organizational performance
remains “diminutive” (Richard, Murthi, & Ismail, 2007: 1213). Despite some advances, few
studies have gone beyond a simple direct relationship between racial diversity and
performance. Missing is an explanation of the process through which racial diversity affects
firm performance. In particular, our understanding is still limited regarding intervening
variables that mediate the relationship between racial diversity and firm performance, the
“black box” (T. Miller & Triana, 2009), and contingencies that weaken or strengthen
potential mediating effects (Joshi & Roh, 2009; van Knippenberg & Schippers, 2007). In
essence, knowledge is limited as to why and when racial diversity relates to firm performance.
We aim to make progress in these directions here.
What theoretical mechanism explains why racial diversity may relate to firm performance?
We advance one theoretical explanation and propose that the link between racial diversity
and firm performance is mediated by competitive intensity, or the frequency with which
organizations introduce newly created competitive actions such as new products, product
improvements, price cuts, new advertising campaigns, and new market entries. We argue
that managerial racial diversity enhances the capacity to discover new competitive actions
and enables firms to compete intensively. Racially diverse groups bring alternative
perspectives that stimulate creativity and innovation (Cox, 1991, 1994; McLeod, Lobel, &
Cox, 1996). Thus, firms with racially diverse management are likely to consider more
options and generate more ideas for launching new competitive moves. They should also be
better equipped to detect, interpret, and respond to various environmental cues and market
trends and thus respond more rapidly to competitive challenges. As a result, we posit that
racially diverse firms develop and introduce new competitive actions more frequently than
do firms with homogeneous management teams. Firms that initiate many competitive
actions, in turn, are more likely to gain market share and profits because rivals are unable to
respond effectively and neutralize the effect of every action. As a result, firms can create a
series of temporary competitive advantages (e.g., D’Aveni, 1994; D’Aveni, Dagnino, &
Smith, 2010; Ferrier, Smith, & Grimm, 1999; Grimm & Smith, 1997).
To build our framework, we consider and integrate existing diversity theory (Harrison &
Klein, 2007), the knowledge-based view of the firm (e.g., Cohen & Levinthal, 1990; Conner
& Prahalad, 1996; Grant, 1996; Zahra & George, 2002), and competitive dynamics research
(e.g., Chen, Su, & Tsai, 2007; Ferrier et al., 1999; Smith, Ferrier, & Ndofor, 2001; Smith,
Grimm, Gannon, & Chen, 1991). At the outset, we argue that managerial racial diversity
increases a firm’s ability to recognize and exploit opportunities for developing competitive
actions and thus to concatenate numerous short-lived competitive advantages that lead to
superior performance. Then, we specify an important boundary condition of the mediating
effect—environmental munificence. We argue that the indirect effect of racial diversity on
firm performance through competitive intensity is stronger when firms compete in industries
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822 Journal of Management / March 2014
with high growth potential (munificent environments) than in resource-scarce environments.
Thus, we address two research questions: (a) Does managerial racial diversity relate to firm
performance via the mediating effects of competitive intensity? (b) Do these mediating
effects vary as a function of the munificence of the environments that organizations face?
We offer several contributions to diversity, competitive dynamics, and upper echelons
research (Hambrick & Mason, 1984). First, our study is among the first to advance a theo-
retical mediator of the relationship between managerial racial diversity and firm perfor-
mance. We begin the process of testing a theory of why diversity and firm performance
should be related. We conceptualize managerial racial diversity as a strategically important
capability that enables firms to generate various temporal advantages that propel them to
supreme performance. Second, our study is among the first to propose and empirically test
an integrated moderated mediation model of the diversity–firm performance relationship.
We argue and attempt to demonstrate that racial diversity’s indirect effect on firm perfor-
mance through competitive intensity depends on environmental munificence.
Furthermore, we define managerial racial diversity as the extent to which managers in a
firm are from multiple racial and/or ethnic groups as opposed to belonging to one category
(T. Miller & Triana, 2009; Richard et al., 2007). We focus on the racial composition of the
entire management group, which includes all individuals with leadership roles throughout
the management chain, lower (e.g., supervisors and line managers), middle (e.g., business
unit managers and divisional managers), and top (chief executives), assuming that lower-
and middle-level managers, like top executives, are all actively involved in the process of
discovering, developing, and introducing competitive actions. Thus, the composition of the
entire management group is an important driver of competitive actions (Birkinshaw, 1997;
Rouleau, 2005). As Jackson (1992: 351) noted, “[C]orporate level decisions often require
input from executives in the business units, and business unit decisions often require input
from executives in functionally-defined subunits . . . [hence] the processing of strategic
issues permeates the organization, involving individuals at many levels in the organization.”
Finally, by focusing on racial diversity, we extend managerial demography research that has
mainly focused on demographic characteristics such as functional and educational diversity
(T. Miller & Triana, 2009; Richard, 2000).
Theory and Hypotheses
Managerial Racial Diversity and Competitive Intensity
According to the knowledge-based view of the firm, firms have varying knowledge bases,
and these differences drive their success (Conner & Prahalad, 1996; Eisenhardt & Santos,
2002; Grant, 1996). Each member brings specialized, context-specific knowledge that can
be used strategically to respond to market changes (Hayek, 1949). Therefore, the firm’s main
goal is to “create conditions under which individuals can integrate their specialist knowl-
edge” (Grant, 1996: 112). Firms with racially diverse management provide favorable set-
tings for managers with different knowledge bases to interact frequently; thus, greater
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Andrevski et al. / Racial Diversity and Firm Performance 823
diversity can be a strategic asset that enables firms to gain competitive advantages (Barney
& Wright, 1998). We propose here that one mechanism through which managerial racial
diversity can enhance firm performance is through its ability to enhance organizations’ com-
petitive intensity. There are three primary reasons for our contention.
First, the literature clearly shows that members of racially or ethnically diverse groups
hold different norms, assumptions, and preconceptions (Distefano & Maznevski, 2000);
their cognitive bases hold, often implicitly, various cultural values, beliefs, and experiences.
As a result, diverse management groups consider a wider range of perspectives and generate
more alternatives. Experiences and knowledge that managers have accumulated from their
racial and ethnic backgrounds, thus, represent rich sources of creativity and innovation (Ely
& Thomas, 2001). Supporting this reasoning are studies demonstrating that team diversity
negatively relates to groupthink and positively relates to the number and quality of generated
ideas (Cox & Blake, 1991; McLeod et al., 1996; Watson, Kumar, & Michaelsen, 1993).
Hence, racial/ethnic diversity should offer management groups an advantage in terms of
developing ideas for new competitive actions.
Second, managerial racial diversity increases competitive intensity because diverse
groups have broader “fields of vision” needed for perceiving and interpreting various envi-
ronmental signals (Hambrick & Mason, 1984: 195). That is, not only should differences in
norms, assumptions, and preconceptions help diverse managerial teams generate more com-
petitive ideas, but these cultural differences also make them more likely to detect competi-
tive threats, signals, and opportunities. By viewing the same challenges through different
lenses, they are less likely to overlook important cues (Cohen & Levinthal, 1990). As a
result, firms with racially diverse managerial teams should be able to respond to environ-
mental changes and profit opportunities more intensively than firms with more homogenous
management teams.
Third, managerial racial diversity should also positively relate to competitive intensity
because it helps organizations from falling into competence traps. A potential pitfall for
managerial teams is that they are subject to an overreliance on the distinctive capabilities
that led to their initial success. They become specialized in a narrow market or technology
domain and less able to recognize information outside their specific competences (Levinthal
& March, 1993). These consistent patterns of behavior may allow competitors to more easily
emulate their success and may also result in missed opportunities for competitive actions.
Managerial racial diversity should buffer these hazards and reduce the likelihood of falling
into competitive inertia or becoming overly simplistic in competitive action patterns. In
terms of racial diversity and competitive intensity, in particular, diverse managerial groups,
with backgrounds and experiences shaped by their racial or ethnic group identities, may
develop new insights regarding specific ethnic preferences (Cox & Blake, 1991), which can
be critical for instigating actions such as advertising campaigns designed for specific ethnic
groups, or introductions of new, improved products or product redesigns targeting ethnic
customers. In addition, culturally diverse teams have more flexible organizational and cogni-
tive structures that stimulate and facilitate implementation of new methods and practices for
providing superior products and services (Cox & Blake, 1991). Finally, managerial diversity
increases awareness of local or global opportunities for entering new market segments.
Hence, we propose that racially diverse management augments a firm’s capacity to generate
opportunities for new competitive actions.
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It should be noted that some theoretical perspectives suggest that racial diversity nega-
tively affects team outcomes through higher intrateam conflict, fault-line creation, and in-
versus out-group categorization (Byrne, 1971; Tajfel, 1978). Thus, managerial racial diver-
sity could reduce trust and increase the time for reaching consensus about competitive
actions (e.g., Hambrick, Cho, & Chen, 1996). We expect, however, that racial diversity’s
positive effects on competitive intensity outweigh potential downsides. For one, the negative
effects of racial diversity, such as negative social comparison processes and stereotypical
thinking, tend to diminish as team members have more opportunities to interact and share
information (Watson et al., 1993). Social contact is ongoing and intense in managerial teams,
which should assuage stereotypical thinking and resolve early structural issues (Harrison,
Price, & Bell, 1998). Watson et al. (1993) found that over a relatively short period (13 weeks)
heterogeneous teams became as effective as homogeneous teams in decision-making pro-
cesses and superior to homogeneous teams in a range of perspectives considered and alterna-
tives generated. Because we capture competitive actions over one-year periods, we propose
generally positive effects of managerial racial diversity on competitive intensity. Thus,
Hypothesis 1: Managerial racial diversity will be positively related to competitive intensity.
The Mediating Role of Competitive Intensity
As firms increase competitive intensity, they are more likely to expand their market share
and gain superior profits. Because intensive competition and an unprecedented pace of tech-
nological change pressure most industries (Bettis & Hitt, 1995; D’Aveni, 1994), firms can
gain superior performance by frequently recognizing and discovering new competitive oppor-
tunities (Hayek, 1949; Kirzner, 1973). Firms that recurrently recognize opportunities for
offering superior value are better able to create new competitive advantages. By the time
rivals respond to their actions, these firms are able to create new temporary advantages and
thus keep ahead of rivals (D’Aveni, 1994). Following this “Austrian” view of the marketplace,
research in competitive dynamics has developed theory and research methodology centered
on the concept of competitive action—specific, detectable moves a firm initiates to improve
or defend its market position (Chen & MacMillan, 1992; Grimm & Smith, 1997). According
to this research, a firm’s performance springs from a series of competitive actions initiated
over time (Smith et al., 2001). Each new competitive action creates a temporal advantage or
erodes rivals’ market positions (Young, Smith, & Grimm, 1996). Many successive actions
tend to overwhelm rivals by neutralizing the effects of their actions or preventing effective
responses. Therefore, because firm performance is an outcome of a series of strategic actions
launched over time (D’Aveni, 1994; Grimm & Smith, 1997; Hambrick et al., 1996), firms that
intensively “attack” rivals with forceful, multiple, strategic, and competitive thrusts gain
greater market share and profits (D’Aveni, 1994; Ferrier et al., 1999; Smith et al., 2001; Young
et al., 1996). However, because of time-compression diseconomies, frequently introducing
new competitive actions increases development costs (Pacheco-de-Almeida, 2010). Specifi-
cally, as firms compress the time for developing new competitive actions, their costs increase
exponentially (Dierickx & Cool, 1989; Scherer, 1967). Hence, to outperform rivals, firms
must simultaneously introduce actions rapidly but still reduce development costs.
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We argue that managerial racial diversity positively affects firm performance through the
mediating effects of competitive intensity by increasing the speed and reducing the cost of
developing new competitive actions. First, as noted above, racial diversity increases the
likelihood that managerial teams will have access to diverse information and perspectives,
which in turn increases their ability to recognize opportunities for new market investments,
to perceive specific needs and wants of ethnic groups or national markets, and to create
advertising and promotions more suitable to particular cultural values (Cox, 1991, 1994). As
a result, racially diverse firms are less likely to stagnate and fall into competency traps. Their
broader vision allows them to outdo rivals in seizing opportunities and in launching actions
more frequently.
Second, compared with firms with homogenous management, firms with racially diverse
management incur lower action-development costs. These advantages are accrued because
racial diversity facilitates social interactions among individuals with different cognitive and
knowledge bases, which in turn encourages more intensive learning, communication, and
coordination (Kogut & Zander, 1996). As managers exchange diverse knowledge and expe-
riences, they increase their individual and collective abilities to learn. Learning is an associa-
tive process, and prior knowledge affects future ability to learn, so firms with racially diverse
management can absorb new knowledge faster but less costly than firms with homogenous
management groups (Cohen & Levinthal, 1990). As a result, we can expect that racially
diverse firms will have lower costs of learning and making sense of new knowledge and thus
will be able to discover opportunities for new competitive actions less expensively than will
firms with homogenous management.
To summarize our mediation argument, firms gain market share and profits when they
generate a series of temporal advantages. Firms create temporal advantages by frequently
launching new competitive actions—by competing intensively. Managerial racial diversity
enables them to introduce competitive actions more rapidly and less costly. Hence, we can
expect that competitive intensity will mediate the relationship between managerial racial
diversity and firm performance. Previous empirical research can be pieced together to fur-
ther buttress this mediation argument. On one hand, researchers have found that managerial
diversity, including racial diversity, positively relates to market-based measures of perfor-
mance, such as Tobin’s Q, market share gain, and stock returns (Hambrick et al., 1996;
Richard et al., 2007). On the other hand, competitive intensity relates positively to market
share change and profitability (Ferrier et al., 1999; D. Miller & Chen, 1996; Young et al.,
1996). Hence, if racial diversity positively affects competitive intensity (Hypothesis 1), we
can expect that managerial racial diversity will indirectly affect performance through its
impact on competitive intensity.
Hypothesis 2: Competitive intensity will mediate the relationship between managerial racial diver-
sity and firm performance.
Moderating Role of Environmental Munificence
Prior research has also suggested that contextual factors shape the diversity–organizational
outcome relationship (Jackson & Joshi, 2004; Jehn & Bezrukova, 2004; Richard, 2000;
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Richard, Barnett, Dwyer, & Chadwick, 2004). A recent meta-analysis found that the direct
effects of group-level racial diversity on organizational effectiveness as much as tripled when
considering industry- and group-level contextual factors (Joshi & Roh, 2009). In this study,
we explore the effect of a key industry characteristic, munificence, on the relationship
between managerial racial diversity and competitive intensity. We suggest that the relation-
ship between managerial racial diversity and competitive intensity will be stronger among
firms operating in more munificent environments; furthermore, the conditional indirect effects
of managerial racial diversity on firm performance through competitive intensity will be
stronger in such environments.
Environmental munificence refers to the competitive environment’s capacity to support
sustained growth (Dess & Beard, 1984). Firms in high-growth industries have greater poten-
tial to discover market segments, offer new products, increase geographical and product
market scope, and enhance or expand their competitive positions. Although munificent
environments provide rich potential for new actions, not all firms have equal capacity to
exploit such potential. Environmental munificence is likely to provide greater leverage for
firms with racially diverse management teams to capitalize on growth opportunities. The
more sensitive managers are to opportunities and the more proactively they convert oppor-
tunities into actions, the more they should benefit from munificent environments. To the
extent that environments are rife with different types of opportunities and potential growth,
racial diversity should have stronger positive effects on competitive intensity. In addition, in
munificent situations, not only are opportunities for growth much greater, but often the
opportunities are nebulous; the management team must be able to identify and evaluate
original knowledge and information, link new and existing knowledge in novel ways, and
recognize innovative ways of transforming knowledge into actions (Cohen & Levinthal,
1990; Zahra & George, 2002). As argued above, racially diverse management increases the
firm’s capacity to recognize and make sense of new knowledge and information. Hence,
firms with more diverse management are expected to be more flexible and agile in taking
advantage of the strong growth potential.
Moreover, under strong market growth, firms tend to simplify and slow competitive
activity (D. Miller & Chen, 1996), a propensity that can be dangerous if the competitive
landscape changes suddenly (Park & Mezias, 2005). Managerial racial diversity should also
confer advantages in such circumstances because greater field of vision allows them to rec-
ognize threats and changes and avoid complacency. Firms with homogenous management
will lack the capacity to exploit available opportunities and thus will be unable to introduce
many competitive actions.
Finally, under low environmental munificence, firms compete in mature markets with
established products and services, adversely affecting their capacity to generate slack
resources and profits (Dess & Beard, 1984; Porter, 1980). In contrast, in munificent environ-
ments, competitive actions are more likely to lead to increased market share and profits
because high-growth markets provide opportunities for firms to increase their sales by
attracting new customers rather than stealing customers away from rivals. As a result, firms
will have more opportunities for developing feasible competitive actions and more slack
resources for acting on discovered opportunities. Consequently, any advantages associated
with higher levels of racial diversity should be amplified in munificent environments and
minimized in resource-scarce environments.
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Andrevski et al. / Racial Diversity and Firm Performance 827
In summary, we expect that firms with high levels of managerial racial diversity that are
competing in munificent environments will have greater capacity to recognize and act on
opportunities than will firms with homogeneous management or firms that compete in
resource-scarce environments. On one hand, firms competing in resource-scarce environ-
ments will have fewer opportunities for developing feasible competitive actions and will
lack financial resources for acting on discovered opportunities. On the other hand, firms with
homogenous management will be unable to identify and exploit available opportunities for
growth. Hence, we expect that the positive relationship between racial diversity in manage-
ment and competitive intensity will be weaker in resource-scarce environments and stronger
in munificent environments.
Hypothesis 3: Environmental munificence will moderate the positive relationship between manage-
rial racial diversity and competitive intensity: The relationship will be stronger for firms that
operate in highly munificent environments and weaker for firms in less munificent environments.
Moderated Mediation Model
The discussion above suggests that a moderated mediation model will depict more com-
prehensively the relationship between managerial racial diversity and firm performance.
Figure 1 illustrates our moderated mediation model. First, we propose that competitive
intensity is an important mediator of the relationship between managerial racial diversity and
firm performance, and thus racial diversity affects performance indirectly via competitive
intensity. Second, we argue that the effect of managerial racial diversity on competitive
intensity depends on how munificently the competitive environment supports growth. More
specifically, managerial racial diversity’s indirect effect on firm performance, through com-
petitive intensity, will vary at different levels of environmental munificence. We predict that
managerial racial diversity will indirectly affect firm performance more strongly for firms
competing in highly munificent environments. In contrast, for firms competing in resource-
scarce environments, we expect a small or nonexistent mediating effect of competitive
actions on the relationship between managerial racial diversity and firm performance. Thus,
Figure 1
Moderated Mediation Model
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828 Journal of Management / March 2014
Hypothesis 4: The indirect effect of managerial racial diversity on firm performance through com-
petitive intensity will be stronger at higher levels of environmental munificence than at lower
levels of munificence.
Method
We collected data from several sources to test our hypotheses. We measured competitive
intensity using the content analysis approach developed in the competitive dynamics litera-
ture (e.g., Ferrier et al., 1999; Jauch, Osborn, & Martin, 1980; Smith, Grimm, & Gannon,
1992). We used Factiva to retrieve published news articles that announced competitive
actions and collected financial performance data from Compustat, Mergent, and CRSP U.S.
Stock and U.S. Indices Database. We obtained data on managerial racial diversity and tested
our propositions on a multi-industry sample of firms that participated in Fortune’s diversity
survey from 2001 through 2003, which reported a response rate of about 14% (e.g., Hickman,
Tkaczyk, Florian, Stemple, & Vazquez, 2003; Richard et al., 2007). The sample selected in
this survey represented a broad cross-section of Fortune 1,000 firms and the largest 200
privately held U.S. companies spanning numerous industrial sectors. Some firms partici-
pated in the survey for only one or two years, so we tested our hypotheses on unbalanced
panel data of 115 firms over three years—2001 to 2003.
Measures
Managerial racial diversity. The Fortune survey asked firms to report managers’ race
using five categories—White, Black, Asian, Hispanic, and American Indian. The survey
included data for all levels of managers: lower (e.g., supervisors), middle (e.g., department
managers), and top level (e.g., chief executives). We conceptualized managerial racial diver-
sity as “variety” (or categorical variability) rather than “separation” because we wanted to
capture racial and ethnic differences among managers (and the associated diversity of
knowledge and information) rather than agreement or disagreement about particular values
or attitudes among managers (Harrison & Klein, 2007). Therefore, we measured managerial
racial diversity using Blau’s (1977) index of heterogeneity (H), which is a common formula-
tion in the literature for categorical data (Richard et al., 2007). The index is calculated as,
H = 1 – 5
a = 1 ( pα)2, where pα represents the proportion of managers in the ath race category.
The values of the index can range from 0 to .80. In our sample, this index ranged from .02 to
.60. An index value close to zero indicated only one category of employees, for example, all
White; a value of .60 implied more even managerial representation for all five categories.
Environmental munificence. This variable was operationalized as rate of industry growth
computed as industry revenuesi,t / industry revenuesi,t-1 – 1 (Richard et al., 2007).
Competitive intensity. Following researchers in the competitive dynamics area (e.g.,
Ferrier et al., 1999; Smith et al., 1992), we used structured content analysis of public news
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Andrevski et al. / Racial Diversity and Firm Performance 829
to measure competitive activity (Jauch et al., 1980). This method converted text into a firm-
by-variable matrix, which allowed quantitative analysis of the hypotheses (Ryan &
Bernard, 2000). We used Factiva, an electronic online database (www.factiva.com), to
identify relevant articles announcing competitive actions for each firm in our sample over
the three-year period, 2001 to 2003. Using Factiva enhanced our confidence that the pub-
lished news of competitive actions would not be biased toward firms that predominantly
sell in the North American market because Factiva includes about 8,000 worldwide news
sources; its news coverage is provided by Reuters—the world’s largest news agency—and
Dow Jones—the leading news agency in the North American market. In addition, it con-
tains news from specialized magazines across all industries. Factiva provides full news
articles in electronic form rather than just news headlines, which substantially increases the
reliability of the coding process.
Similar to Ferrier et al. (1999), we first identified all relevant action news using keyword
searching criteria in six action categories (signals, product improvements, advertising and
promotions, new product introduction, price cuts and sales incentives, and market and capac-
ity expansion) for each firm for 2001 through 2003. This initial search generated about
31,000 articles that were then transferred into a Microsoft Access database and screened for
repeating news and irrelevant articles and retaining the earliest chronological appearance of
an item. After screening, we identified 20,618 unique competitive actions from 115 firms.
To test our coding reliability, two independent raters separately recoded a random sample of
206 articles—1% of the total actions. We used Perrault and Leigh’s (1989) reliability index
to estimate the interrater reliability coefficient: Ir = {[(Fo / N) – (1 / k)][k / (k – 1)]}.5, where
Fo was number of correct choices, agreement between author coding and rater coding; N
was the total number of choices (N = 206 randomly selected action codes); and k was the
number of action categories (k = 6 in our study). The reliability of the coding was .82,
exceeding the .70 cutoff (Ryan & Bernard, 2000).
We operationalized competitive intensity as the total number of any newly created com-
petitive actions a firm carried out in a given year. Accordingly, we counted all identified
competitive actions for each firm in a given calendar year. High scores indicated that firms
initiated competitive actions frequently (competed intensively). Firms in our sample initi-
ated 15.96 competitive actions per year on average (min = 0, max = 324). We log trans-
formed this variable to reduce positive skewness.
Firm performance. We used two measures of firm performance: market share gain and
stockholder returns. We chose to use market-based measures of performance because com-
petitive activity is market oriented and observable to customers, investors, and competitors,
and thus directly affects the firm’s market share gain and stock prices. Market share gain was
defined as positive year-to-year change in the proportion of total sales in the focal firm’s
primary industry that its sales represented (Ferrier, 2001; Ferrier et al., 1999). We computed
this variable as Market share gaini,t = (Firm Salesi,t +1 / Industry Salesi,t +1) (Firm Salesi,t /
Industry Salesi,t).
For comparative purposes, we also tested all hypotheses using average stock return as a
measure of firm performance. We used the CRSP U.S. Stock and Indices Database to obtain
monthly holding period stockholder returns. The monthly stockholder returns were computed
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830 Journal of Management / March 2014
as [(Stock Price for Firm i in Month m) + (Dividends per Sharei,m)] / (Stock Pricei,m-1) – 1.
We computed annual stock return for each firm by averaging the 12 monthly stock returns.
This approach allowed us to control temporal fluctuations and market trends. The average
stock return was computed as Average Stock Returni,t +1 = (∑ Stock Returni, t +1, m) / 12.
Control variables. We controlled for several industry-level and firm-level confounding
factors. Previous research in competitive dynamics has shown that firm size and past perfor-
mance are important antecedents of their propensity to compete intensively (Chen &
Hambrick, 1995; Ferrier, MacFhionnlaoich, Smith, & Grimm, 2002; D. Miller & Chen, 1994;
Young et al., 1996). We approximated firm size as log of total number of employees, and past
performance using return on total assets (ROAt). In addition, prior research has demon-
strated that racial diversity relates to intermediate measures of performance such as worker
productivity (Richard et al., 2007), so we also controlled for productivity, which we com-
puted as total sales divided by total number of employees. Grimm and Smith (1997) sug-
gested that research and development, R&D spending, could be an important antecedent of
competitive actions, so we controlled for total R&D. The availability of slack resources can
stimulate risk taking and experimentation (Cyert & March, 1963), which in turn can affect a
firm’s propensity to develop and execute new competitive actions (Hambrick et al., 1996;
Smith et al., 2001). Financial slack was measured using the quick ratio, which we computed
as current assets minus inventories divided by current liabilities. Higher values of this vari-
able represent more slack resources. Firms in different industries may vary in the extent to
which they use different types of competitive actions, so we controlled for competitive
action variety. We used Blau’s (1977) heterogeneity index to compute the extent to which
firms use different competitive actions across the six action types. This variable ranges from
0 to .80. We log transformed this variable to reduce positive skewness. We also controlled
for industry concentration computed as the proportion of the total industry revenues that the
top four firms’ revenues represented (Berman, Wicks, Kotha, & Jones, 1999). We controlled
for gender diversity in management to account for and isolate other potential visible attribute
diversity effects (Richard et al., 2004). Using Blau’s (1977) index of heterogeneity, the mea-
sure theoretically ranged from 0 to .50, with higher values reflecting greater gender hetero-
geneity. Finally, we included random effects in our model to control for unobserved hetero-
geneity, which we discus in more detail below.
Model Specification
Our sample included firms across 57 industries by three-digit SIC codes. Although we
controlled for several important confounding factors, many unobservable factors may create
an omitted variable problem. When these factors are firm specific and stable over time—for
example, specific industry location, managers’ dispositions, or entrepreneurial culture—
fixed or random effects panel data models can be successfully applied (Green, 1951). The
random effects model, however, must satisfy one additional assumption: The unobserved
individual effects should be uncorrelated with the other independent variables. Hausman’s
(1978) specification test can detect violations of this assumption but was not significant for
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Andrevski et al. / Racial Diversity and Firm Performance 831
our models, indicating that the fixed effects model was less consistent and efficient than the
estimates of random effects model that we chose to use. In addition, time-specific factors
such as government interventions or economic downturns can also affect firm performance
and competitive intensity. Thus, we included a set of dummy variables for each year. Includ-
ing time dummy variables in panel data models with a large N (number of firms) and a small
T (time periods) also reduces the influence of contemporaneous correlation (Certo & Semadeni,
2006). Finally, Wooldridge’s (2006) test for autocorrelation in panel data showed the pres-
ence of serial correlation, so we used a random-effects model with time fixed effects and
autoregressive error term—AR(1). The random effects model can be formulated,
Yit +1 = a + βXit + µi + εit
where µi is a random heterogeneity specific to the ith observation and is constant over time.
Random effects µi were assumed independent of εit and Xit—a set of independent variables—
which were also independent of each other for all i and t. The autoregressive AR(1) param-
eter ρ was assumed to be with a zero mean, homoscedastic, and serially uncorrelated: εit =
εit-1 + zi,t and –1 < ρ < 1.
Our dependent variable in Hypotheses 1 and 3 is a count variable: number of competitive
actions, which contains zeros and nonnegative integers, thus exhibiting Poisson distribution.
Because the equi-dispersion property was violated (a = .69 [.082]; c
2 [01] = 5273.16;
Prob. > = c
2 = 0.000), we applied a random effects negative binomial regression model for
testing Hypotheses 1 and 3. In addition, because competitive intensity is used in the media-
tion model where the dependent variable is performance (which is not a count variable, and
thus it is tested using linear panel data model), we also tested Hypotheses 1 and 3 applying
linear panel data model using log-transformed competitive intensity as the dependent vari-
able. The linear panel data model produced similar results to those of the nonlinear negative
binomial model. We report the results of both models in Table 2.
In addition, to increase our confidence in the direction of the causality and to eliminate
the possibility that the effect of previous competitive intensity can affect current competitive
intensity, we also applied dynamic panel data model (using Arelano-Bond GMM system
estimator to deal with the presence of serial correlation because the lagged dependent vari-
able and the error term are correlated; Baltagi, 2008). The results were similar to those shown
in Table 2. The interaction effect was weaker (significant at 10%), which can be expected
given that the inclusion of a lagged dependent variable reduced our sample to 174 observa-
tions, which decreases the statistical power to detect interactions. The form of the interaction
effects was consistent with that shown in Figure 2. These results are available on request.
Results
Table 1 shows descriptive statistics and correlation matrix of variables examined in this
study. Tables 2 and 3 show the regression analysis results.
Models 2 and 5 in Table 2 show that the coefficient for managerial racial diversity in
predicting competitive intensity was positive and statistically significant (b = .29, p < .01 and
b = .17, p < .05), providing support for Hypothesis 1: Firms with more racially diverse man-
agement initiated more competitive actions.
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832 Journal of Management / March 2014
Figure 2
Moderating Effect of Munificence on the Relationship between
Managerial Racial Diversity and Competitive Intensity
1
2
3
4
Low Racial Diversity (-1sd)High Racial Diversity (+1sd)
Competitive Intensity
Low Environmental Munificence (-1sd)
High Environmental Munificence (+1sd)
Table 1
Descriptive Statistics and Correlations
Variable M SD 1234567891011 12 13
1. Productivity (log) –1.26 0.96 1.00
2. Financial slack 1.13 0.66 .13* 1.00
3. Number of
employees (log)
10.50 1.22 –.56* –.15* 1.00
4. Industry
concentration
0.60 0.19 –.18* .09 .33* 1.00
5. R&D intensity (log) 1.85 2.99 .01 .22* .26* .25* 1.00
6. Past performance
(ROA)
0.04 0.12 –.12* .01 .05 .03 .09 1.00
7. Action variety (log) –0.60 0.39 .02 .12* .34* .21* .10* –.08 1.00
8. Environment
munificence
–0.12 1.51 .03 .02 .02 –.01 –.07 –.02 .13* 1.00
9. Managerial gender
diversity
0.41 0.09 .00 .00 .16* .19* –.26* –.02 .28* .03 1.00
10. Managerial racial
diversity
0.31 0.12 –.09 .06 .25* .19* –.15* .02 .40* .11* .38* 1.00
11. Competitive
intensity (log)
2.77 1.30 .18* –.04 .48* .36* .31* .03 .33* .03 .09 .25* 1.00
12. Market share gain 0.01 0.03 .03 .02 .04 .18* –.06 .09 .11 –.02 .02 .19* .21* 1.00
13. Average stock return 0.01 0.03 –.03 .06 .10 .04 .04 –.14* .09 .04 .03 .16* .18* .07 1.00
Note: N = 287.
*p < .05.
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Andrevski et al. / Racial Diversity and Firm Performance 833
Table 2
Random Effects Model for Competitive Intensity
Linear Random Effects Panel Data Model Negative Binomial Panel Data Model
DV: Log Competitive Intensity DV: Competitive Intensity
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Year 2001 –0.04 (0.07) –0.01 (0.07) –0.01 (0.07) –0.08 (0.05) –0.06 (0.05) –0.07 (0.05)
Year 2002 –0.04 (0.07) –0.01 (0.07) –0.01 (0.07) –0.08 (0.05) –0.07 (0.05) –0.07 (0.05)
Productivity
(log)
0.77** (0.09) 0.76** (0.09) 0.77** (0.09) 0.68** (0.08) 0.66** (0.08) 0.67** (0.08)
Financial slack –0.1 (0.08) –0.12 (0.08) –0.12 (0.08) –0.11 (0.07) –0.13(0.07) –0.13(0.07)
Number of
employees
(log)
0.82** (0.11) 0.77** (0.11) 0.79** (0.11) 0.67** (0.10) 0.62** (0.10) 0.64** (0.10)
Industry
concentration
0.20** (0.07) 0.17* (0.07) 0.18* (0.07) 0.10(0.06) 0.10(0.06) 0.10(0.06)
R&D intensity 0.18* (0.08) 0.23** (0.08) 0.22** (0.08) 0.24** (0.07) 0.26** (0.07) 0.25** (0.07)
Past performance –0.07 (0.04) –0.07(0.04) –0.09* (0.04) –0.05 (0.03) –0.06(0.03) –0.07* (0.03)
Action variety 0.01 (0.05) –0.01 (0.05) –0.01 (0.05) 0.01 (0.05) 0.01 (0.05) 0.02 (0.05)
Managerial
gender
diversity
0.03 (0.08) –0.02 (0.08) –0.04 (0.08) 0.12 (0.07) 0.08 (0.08) 0.06 (0.08)
Environment
munificence
(EM)
–0.01 (0.04) –0.01 (0.04) 0.53* (0.24) –0.01 (0.03) –0.01 (0.03) 0.39(0.20)
Managerial racial
diversity
(MRD)
0.29** (0.09) 0.25** (0.09) 0.17* (0.08) 0.14(0.08)
MRD × EM 0.49* (0.21) 0.37* (0.18)
Intercept 2.74** (0.09) 2.73** (0.09) 2.67** (0.10) 2.17** (0.16) 2.15** (0.15) 2.14** (0.16)
R2.47 .51 .52
Wald c2120.48 129.16 134.64
Observations 287 287 287 287 287 287
Number of firms 115 11 5 115 115 115 115
p < .10. *p < .05. **p < .01.
Note: Standard errors are in parentheses.
To test the mediation, we followed Baron and Kenny’s (1986) criteria. Table 3 illustrates
the results for the mediating role of competitive intensity on the relationship between mana-
gerial racial diversity and market share gain. We multiplied market share gain by 100 to
interpret the coefficients within two decimals. The coefficient for competitive intensity was
statistically significant (b = .73, p < .01) in predicting market share gain (Model 2). The
coefficient for managerial racial diversity in Model 3 was also statistically significant (b = .32,
p < .01) when we did not control for competitive intensity. However, when we regressed
market share gain on competitive intensity and managerial racial diversity (Model 4), the
coefficient of managerial racial diversity was not significant (b = .20, p < .138), whereas the
coefficient for competitive intensity remained statistically significant (b = .68, p < .05).
Table A1 in the appendix shows similar results for average stock market return as a measure
of performance. These results provide support for Hypothesis 2: Competitive intensity is an
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834 Journal of Management / March 2014
Table 3
Random Effects Model for Market Share Gain
DV: Market Share Gain
Model 1 Model 2 Model 3 Model 4
Year 2001 –1.57** (0.55) –1.56** (0.54) –1.50** (0.55) –1.51** (0.55)
Year 2002 –1.71** (0.47) –1.71** (0.46) –1.67** (0.47) –1.69** (0.47)
Productivity (log) 0.26 (0.25) –0.18 (0.27) 0.25 (0.25) –0.16 (0.27)
Number of employees (log) 0.08 (0.27) –0.43 (0.29) 0.04 (0.27) –0.43 (0.29)
Industry concentration 0.62** (0.23) 0.43 (0.24) 0.56* (0.22) 0.41(0.23)
R&D intensity –0.54* (0.25) –0.56* (0.25) –0.47 (0.26) –0.52* (0.26)
Past performance 0.45* (0.19) 0.42* (0.18) 0.43* (0.19) 0.41* (0.18)
Action variety 0.26 (0.17) 0.2 (0.14) 0.2 (0.17) 0.16 (0.15)
Environment munificence –0.17** (0.06) –0.15 (0.09) –0.18* (0.07) –0.16 (0.09)
Managerial gender diversity –0.38 (0.24) –0.34 (0.23) –0.43(0.24) –0.37 (0.22)
Competitive intensity 0.73** (0.26) 0.68* (0.28)
Managerial racial diversity 0.32* (0.16) 0.20 (0.18)
Constant 1.78** (0.43) 1.76** (0.42) 1.74** (0.43) 1.74** (0.43)
R2.19 .23 .20 .24
Observations 285 285 285 285
Number of firms 115 115 115 115
p < .10. *p < .05. **p < .01.
Note: Standard errors are in parentheses.
important mediator of the relationship between managerial racial diversity and performance.
Table 2 shows the results of the moderating role of environmental munificence on the
relationship between managerial racial diversity and competitive intensity. The coefficients
for the interaction between managerial racial diversity and munificence in predicting com-
petitive intensity (Table 2, Models 3 and 6) are positive and statistically significant (b = .49,
p < .05 and b = .37, p < .05), providing support for Hypothesis 3. The form of the interaction
is shown in Figure 2 (we used the estimates of the linear regression model to plot the interac-
tion effects). As predicted, the effect of managerial racial diversity on competitive intensity
was positive at high-level munificence and not significant at low-level munificence.
Table 4 illustrates the results for the moderated mediation model for market share gain
(the results for average stock returns are similar and shown in Table A2 in the appendix). We
followed Preacher, Rucker, and Hayes’s (2007: 186) procedure to estimate the conditional
indirect effect of managerial racial diversity on firm performance through competitive inten-
sity at different levels of the moderating variables. Preacher et al. referred to the conditional
indirect effect as “the magnitude of an indirect effect at a particular value of a moderator”
and offered two approaches for computing the conditional indirect effects and their standard
errors: normal theory-based and bootstrapping methods. As these authors advocated, we
applied the bootstrapping method. We also applied the normal theory approach, with equiv-
alent results, but report only the bootstrapping results here. The results of the normal theory
approach are available on request. As Table 4 shows, the indirect effect of managerial racial
diversity on market share gain increased from 0.09 at low-level industry growth to 0.16 at
high-level industry growth, supporting Hypothesis 4.
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Table 4
Moderating Role of Munificence on the Indirect Effect of Managerial
Racial Diversity on Market Share Gain through Competitive Intensity
DV: Market Share Gain
Mediator: Competitive Intensity
Observed Coeff. Bias Bootstrap SE 95% CI
Racial diversity at low industry growth (–1 SD)0.09 0.01 0.22 –0.29 0.66 P
–0.22 0.77 BC
Racial diversity at moderate industry growth (M)0.13 0.00 0.07 0.02 0.28 P
0.03 0.31 BC
Racial diversity at high industry growth ( +1 SD)0.16 –0.01 0.19 –0.21 0.60 P
–0.09 0.73 BC
Note: CI = confidence interval; P = percentile CI; BC = bias-corrected CI.
Supplemental Analysis
For parsimony, we did not hypothesize about gender diversity in management. Expecting
a similar pattern of results to emerge, we tested all four hypotheses for gender diversity in
management in a separate set of equations. Consistent with our finding for racial diversity
in management, Hypotheses 1 and 3 were weakly supported at a 10% level (in this article,
we apply the more conservative two-tailed t test). However, Hypotheses 2 and 4 were not
supported. Full results and tables are available on request. Our findings show that our theo-
retical framework holds much better for racial diversity than for gender diversity.
In addition, competitive dynamics research has suggested that both competitive intensity
and action variety can enhance market share (e.g., Ferrier et al., 1999). Competitive action
variety refers to the extent that a firm uses a wide range of action types. As discussed,
managerial racial diversity increases a firm’s potential to recognize and assimilate diverse
knowledge and information, which in turn enhances its capacity to recognize a broad range
of opportunities for new competitive actions. Hence, we could hypothesize and find support
that racially diverse firms will develop wider ranges of competitive actions. Both racial and
gender diversity in management positively and significantly affected competitive action
variety (b = .08, p < .01, and b < .06, p < .04, respectively). Our additional analysis showed
that the relationship between managerial racial diversity and competitive action variety was
curvilinear; it sharply increased from low diversity levels to moderately high levels, and then
the rate of increase decelerated (the zero-slope point was found at about +2 standard devia-
tions from the mean). We also tested whether action variety mediates the relationship
between managerial racial diversity and firm performance and found no support for the
moderated mediation model. One reason for these insignificant results is that action variety
was also related in curvilinear fashion to firm performance (at 10% level), which substan-
tially increased the complexity of our model.
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836 Journal of Management / March 2014
Discussion
This study examines the process through which managerial racial diversity influences
firm performance. We show that competitive intensity is an explanatory mechanism of the
relationship between racially diverse management and firm performance. Racially diverse
firms perform better than homogenous firms because they can launch new competitive
actions more frequently. Greater managerial racial diversity provides favorable conditions
for individuals with diverse knowledge bases to exchange knowledge and information,
which in turn increases the capacity to recognize and exploit opportunities for new com-
petitive actions. This capacity reduces the development costs and hastens the introduction of
competitive actions. Hence, compared to firms led by homogenous management, firms with
racially diverse management can create more temporal advantages and increase market share
and profits.
We find that competitive intensity completely mediates racial diversity’s effect on market
share gain. These results empirically support Cox and Blake’s (1991) reasoning that firms
with culturally diverse managements gain competitive advantage because they enjoy (a) cost
advantages enabling them to offer frequent competitive actions such as price cuts and sales
incentives; (b) greater marketing ability leading to discovery, increased promotions, product
improvements, more creative advertising, and entrance into new markets; (c) superior cre-
ativity and innovativeness resulting in development of new products and services; and
(d) enhanced flexibility that hastens product development, for example, and increases novel
product introductions. Thus, our study provides empirical support for previously untested
assumptions that racial diversity affects firm performance by enabling firms to compete
more effectively. Our supplemental analysis further corroborates these results, showing that
both racial and gender diversity in management positively affect a firm’s capacity to intro-
duce a wide range of action types.
Furthermore, we find that managerial racial diversity relates to competitive intensity
more strongly and positively for firms operating in highly munificent environments. Given
that munificent environments provide many growth opportunities, firms with more racially
diverse management are better able to exploit their abundant growth potential. For example,
our results show that firms with highly diverse management (+1 SD from the mean) that
competed in highly munificent environments (+1 SD from the mean) introduced 50.90
competitive actions, which was well above the sample average of 15.96. The predicted val-
ues were anti–log transformed because our dependent variable was the log of the number of
competitive actions. Firms with homogeneous management introduced fewer than aver-
age competitive actions—10.70 competitive actions in resource-scarce environments and
11.59 competitive actions in munificent environments. In addition, our findings suggest that
managerial racial diversity confers no competitive advantages for firms operating in envi-
ronments that lack munificence. For example, firms with diverse management competing in
environments with low growth potential introduced only 6.62 competitive actions.
We also test whether the effect of competitive intensity on firm performance is stronger
in munificent environments, but find no support for this conjecture. Our results suggest that
more aggressive firms gain superior performance across industries with different growth
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rates. Racial diversity in management enables firms to compete intensively in high-growth
industries, whereas ability to compete intensively in low-growth industries should rely on
other sources of competitive advantage (e.g., economy of scale and scope, total quality man-
agement, or human resource management practices). Future research is needed to examine
the antecedents of competitive intensity in stable, low-growth industries.
On a separate note, these results suggest that the relationship between managerial racial
diversity and firm performance is not spurious. An alternative interpretation might be that in
high-growth industries, competitive intensity stimulates firms to employ more diverse man-
agers and at the same time competitive intensity can positively affect firm performance.
Thus, the observed indirect relationship between racial diversity and firm performance may
exist because the firm’s propensity to compete intensively causes both variables. However,
if that is true, then both competitive intensity and managerial racial diversity should behave
similarly and more strongly affect firm performance in high-growth industries than in low-
growth industries. In contrast, we find that competitive intensity positively relates to firm
performance regardless of the industry growth, whereas racial diversity positively relates to
firm performance through competitive intensity only in high-growth industries.
Limitations and Future Research
Our study cannot completely rule out reverse causality; that is, firms that compete more
intensively may employ more diverse workforces. Although controlling for previous com-
petitive intensity failed to change our results, suggesting that reverse causality is not a seri-
ous issue here (e.g., Makadok, 1998), we encourage future research to explore the causality
of the relationship between competitive intensity and managerial racial diversity over longer
periods. Longitudinal studies can reveal a better understanding of the relationship among
racial diversity, competitive intensity, and firm performance over time. For example, mana-
gerial racial diversity can positively affect competitive intensity in initial periods, but as
competitive intensity increases so does the need for racially diverse management, so that
firms may increase their racial diversity in the next period and in turn increase their capacity
to compete intensively.
Furthermore, we took several actions to assess and expand the generalizability of our
findings. First, to ensure that our companies represented the population, we included firms
from the 50 Best Companies for Minorities list, the Diversity Elite, and others the list
excluded. In fact, about 60% of the firms in the sample were not in the Diversity Elite,
increasing our confidence that our sample composed firms with different racial diversity
levels. Our diversity index provided near maximum variation on our major variable of inter-
est: from 0.02 (practically no diversity) to 0.60 (high diversity). A list of companies in our
sample is available on request.
In addition, we performed tests for assessing the impact of media coverage bias on our
results. We analyzed two types of media coverage bias: interfirm coverage bias and North
American bias. The former bias refers to unequal coverage of competitive actions across firms.
Larger firms may attract more media attention and thus exhibit disproportionally more com-
petitive actions. To reduce the interfirm media coverage bias, we focused on large corporations
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838 Journal of Management / March 2014
(Fortune 1,000 firms and the largest 200 privately owned corporations). However, this
approach limits the generalizability of our findings to large corporations. Future research
should empirically test our moderated mediation model in small businesses.
The North American bias refers to the unequal coverage of firms’ competitive actions
within and outside of North America. To address this issue, we collected data on the number
of articles published for each firm within and outside of North America. We searched Factiva
for articles using three keywords: firm name (in the headline), time period (2001–2003), and
region (North America or outside of North America). We created two variables: number of
articles within North America (WNA) and number of articles outside of North America
(ONA). First, we checked whether WNA and ONA have equal means (i.e., whether firms in
our sample have equal media coverage within and outside of North America). We ran a
simple t test on the equality of means. The t test was statistically significant at p < .0001
(WNA M = 893.15, ONA M = 432.68), which indicates that the firms in our sample gener-
ated more media coverage within North America than they did outside of North America
(alternatively, Factiva may report more news from North America than it reports from out-
side North America). However, a more serious concern for our study is whether interfirm
variability in media coverage within North America is different from such coverage outside
North America. To test this possibility, we regressed several firm-level characteristics that
are likely to draw media attention such as firm size, R&D investments, and firm perfor-
mance on both WNA and ONA. We tested whether the estimated coefficients for WNA and
ONA are statistically different from each other (i.e., H0: bWNA = bONA). The null hypothesis
was not rejected for any model: R&D, c2(1) = .21; Prob > c2 = .64, firm size, c2(1) = .04; Prob
> c2 = .84, and performance, c2(1) = .87; Prob > c2 = .35. This analysis suggests that inter-
firm media coverage in North America is not different from that outside North America.
Although these additional tests increase our confidence that North American bias does not
seriously affect our findings, future research is needed to examine how specific character-
istics of national and geographical markets affect our moderated mediation model.
Another study limitation is that we failed to account for other diversity dimensions,
except for controlling and testing the effects of managerial gender diversity on competitive
intensity and firm performance. Future research might employ a moderation mediation
approach to study comprehensively both visible characteristics—for example, race—and
invisible characteristics—for example, functional background. Such analysis could provide
greater understanding of the differential effect of visible and invisible characteristics on
competitive activity and performance.
Future research should also examine how other characteristics of the external and internal
environment moderate the effect of competitive intensity. For example, our understanding is
still limited as to how firm-specific moderators such as nominal group techniques, shared
rewards, and diversity climates affect the relationship between managerial racial diversity
and firm performance (Ely & Thomas, 2001; Joshi & Roh, 2009; Klein & Harrison, 2007).
In addition, nearly 75% of large companies in the United States offer some form of diversity
training (Anand & Winters, 2008; Galvin, 2003) in efforts to facilitate positive intergroup
relations, reduce prejudice and discrimination, and improve interactions among dissimilar
coworkers (Pendry, Driscoll, & Field, 2007). Diversity training teaches employees about
cultural subgroups, improves their attitudes toward diversity, and ultimately develops skills
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Andrevski et al. / Racial Diversity and Firm Performance 839
for interacting successfully with diverse others (Hayles, 1996; Kulik & Roberson, 2008). As
a result, diversity training stimulates greater social interaction between individuals with
diverse knowledge bases. Thus, we can expect that diversity training will expand the collec-
tive capacity to discover and develop new competitive actions, and we should examine
whether competitive intensity will have a stronger mediating effect for firms that have
implemented diversity programs.
Prior research suggests that industry context—service, manufacturing, and high technology—
is an important contingency of the relationship between managerial diversity and firm per-
formance (Joshi & Roh, 2009). For example, Richard et al. (2007) found that racial diver-
sity’s effect on firm performance is stronger in service industries than it is in manufacturing
industries because racial diversity contributes to building marketing competence, which is
critical for service-oriented firms. In contrast, manufacturing firms are highly capital inten-
sive and thus rely less on human capital and more on technology and equipment. In addition,
racial diversity can positively affect firm performance in high-technology industries because
it contributes to building intellectual capital, which is critical for competing successfully in
industries such as information technology, consumer electronics, and biomedical technology
(Joshi & Roh, 2009). Consistent with previous studies, we expect that competitive intensity’s
mediating effect will be stronger in service and high-technology industries and weaker in
manufacturing industries. Future research is needed to provide empirical support for this
proposition.
Future research should also examine other mediating factors. For example, van Knippenberg,
De Dreu, and Homan (2004: 1011) emphasized the role of elaboration of task-related infor-
mation as an important mediating factor of the diversity–outcomes relationship; elaboration
refers to “the exchange of information and perspectives, individual-level processing of the
information and perspectives, the process of feeding back the results of this individual-level
processing into the group, and discussion and integration of its implications.” Although our
model does not directly test managers’ elaboration of relevant information and expertise,
elaboration is closely related and/or antecedent to competitive intensity. For example,
describing the elaboration process, van Knippenberg et al. (2004: 1011) noted,
[H]igh-quality performance requires that team members inform the team on the basis of their
own expertise about the different issues involved (e.g., customer wishes, design and program
possibilities, costs), carefully process the perspectives introduced by other team members to
understand the implications for their own area of expertise, feed these implications back to the
team, and through integration of perspectives design the optimal product.
In fact, recent group research has found that elaboration of task-relevant information
mediates visible attribute diversity including age and nationality, particularly when a
transformational leader leads the team (Kearney & Gebert, 2009). This suggests that
firms may be better able to frequently introduce new competitive actions when racially
diverse management groups engage in effective elaboration but also emphasizes that
CEO leadership style may play a moderating role. Racial diversity provides greater
potential to recognize opportunities for competitive actions, but whether firms can exploit
that potential will depend on their ability, through elaboration, to develop and introduce
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840 Journal of Management / March 2014
competitive actions. In this sense, competitive intensity is actually a manifestation of
effective elaboration, suggesting close connection and complementarities between the
moderated mediation model developed in this article and the model developed by van
Knippenberg et al. (2004). Future research should examine how van Knippenberg et al.’s
(2004) other moderating factors such as CEO leadership style may affect competitive
intensity.
Finally, our study provides some practical implications for executives. We find that
managerial diversity at every organizational level (lower, middle, and top levels) can be a
source of competitive advantage in industries with high growth potential. Racial/ethnic
diversity increases a firm’s capacity to recognize and act on opportunities for developing
new competitive actions, which is critical for creating temporal competitive advantages.
Therefore, top managers might consider specific recruitment, selection, and promotion prac-
tices for a more balanced representation of managers from various racial and ethnic groups
at every organizational level, especially if their firms compete in highly munificent com-
petitive environments.
Although our study supports competitive intensity’s mediating effect only in high-growth
industries, managerial diversity may be relevant also for industries with limited growth
potential. Our findings suggest only that market-based, observable competitive activity does
not carry the effect of racial diversity on firm performance in low-growth industries. Con-
sistent with competitive dynamics research, we focused on observable competitive moves,
which fail to capture internal competitive moves that often go publicly unannounced. The
intensity in initiating internal competitive actions such as implementing new human resource
management practices, improving manufacturing processes, and undertaking other undis-
closed innovations might be critical drivers of firms’ competitive success in low-growth
industries. We encourage future research to explore other mediating mechanisms relevant to
competition in low-growth industries and to examine whether internal, undisclosed initia-
tives mediate the effect of managerial racial diversity on firm performance in both resource-
scarce and munificent industries.
Conclusion
This study advances two research streams regarding organizational performance: effects
of racial diversity grounded in the knowledge-based view of the firm and competitive
dynamics and temporal advantages theory. We illuminate the process through which racial
diversity in management relates to market share and stock returns by increasing a firm’s
capacity to compete intensively and gain temporal advantages. Thus, managerial racial
diversity represents an organizational capability that enables firms to discover and exploit
opportunities for developing new competitive actions through active participation of manag-
ers who bring different cognitive and knowledge bases to every organizational level. In
addition, we find that managerial racial diversity indirectly affects firm performance through
competitive intensity, depending on environmental munificence. Racial diversity in manage-
ment enhances the capacity to develop new competitive actions in competitive environments
with high growth potential.
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Andrevski et al. / Racial Diversity and Firm Performance 841
Appendix
Table A1
Random Effects Model for Average Stock Market Return
DV: Average Stock Market Return
Model 1 Model 2 Model 3 Model 4
Year 2001 –1.70** (0.35) –1.71** (0.26) –1.62** (0.35) –1.65** (0.35)
Year 2002 0.91** (0.34) 0.90** (0.29) 0.96** (0.34) 0.94** (0.34)
Productivity (log) 0.18 (0.21) –0.18 (0.20) 0.17 (0.21) –0.15 (0.24)
Number of employees (log) 0.42(0.24) 0.00 (0.26) 0.36 (0.24) 0.01 (0.28)
Industry concentration 0.10 (0.19) –0.04 (0.16) 0.03 (0.19) –0.08 (0.19)
R&D intensity 0.01 (0.18) –0.02 (0.18) 0.09 (0.18) 0.04 (0.18)
Past performance –0.36* (0.16) –0.37 (0.27) –0.38* (0.16) –0.39* (0.16)
Action variety 0.12 (0.18) 0.08 (0.15) 0.04 (0.18) 0.02 (0.18)
Environment munificence –0.13 (0.14) –0.12 (0.18) –0.14 (0.14) –0.13 (0.14)
Managerial gender diversity –0.11 (0.19) –0.11 (0.17) –0.18 (0.19) –0.15 (0.18)
Competitive intensity 0.61** (0.22) 0.55* (0.22)
Managerial racial diversity 0.41* (0.20) 0.31 (0.20)
Constant 1.20** (0.28) 1.20** (0.20) 1.15** (0.28) 1.17** (0.28)
R2.09 .14 .12 .15
Observations 287 287 287 287
Number of firms 115 115 115 11 5
p < .10. *p < .05. **p < .01.
Note: Standard errors are in parentheses.
Table A2
Moderating Role of Munificence on the Indirect Effect of Managerial
Racial Diversity on Average Stock Return through Competitive Intensity
DV: Average Stock Market Return
Mediator: Competitive Intensity
Observed Coeff. Bias Bootstrap SE 95% CI
Racial diversity at low industry growth (–1 SD)0.10 0.03 0.12 –0.03 0.42 P
–0.07 0.36 BC
Racial diversity at moderate industry growth (M)0.12 0.00 0.06 0.03 0.25 P
0.03 0.26 BC
Racial diversity at high industry growth ( +1 SD)0.14 –0.02 0.11 –0.08 0.31 P
–0.01 0.45 BC
Note: CI = confidence interval; P = percentile CI; BC = bias-corrected CI.
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    This study contributes simultaneously to research on women board members and competitive dynamics by investigating two unresolved research questions: What is the effect of female directors on the firm’s competitive repertoire? Under what conditions is this effect more pronounced? Leveraging the “Awareness-Motivation-Capability” (AMC) framework, we predict that having women on the board of directors should impact the complexity, heterogeneity, and volume of the firm’s competitive moves. Relying upon a sample of U.S. pharmaceutical firms for the years 2000 to 2017, we find that adding female directors on the board positively affects the complexity and volume of a firm’s competitive moves, but negatively impacts the heterogeneity of competitive actions. In addition, the presence of a female CEO moderates these effects, leading to more complex competitive actions and increased volume. Thus, our study lends a greater understanding of how female board members influence competitive dynamics and shape the strategic direction of the firm.
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    Research summary Drawing on the demographic faultline perspective and the concept of attribute‐specific faultlines, we investigate the effect of top management team (TMT) relationship‐based (gender, age, educational level) and task‐based (functional background, tenure) faultline strengths on strategic change. In a panel study (2003‐2015), we find that TMT relationship‐based faultline strength (especially educational‐level) negatively influences strategic change whereas TMT task‐based faultline strength positively affects strategic change. Environmental dynamism reduces the negative effect of TMT gender and educational‐level faultline strengths on strategic change while in fact revealing a notable positive effect between TMT age‐faultline strength and strategic change. Additionally, environmental dynamism strengthens the positive effects of task‐related TMT faultline strength on strategic change. We offer theoretical and practical implications to both the demographic faultlines and upper echelons research domains. Managerial summary Top management teams (TMTs) in firms can fracture into subgroups based on demographic characteristics (e.g., age, gender, and education level) as well as based on task‐based characteristics (e.g., functional background, and tenure). We call the former relational based faultlines and the latter task‐based faultlines. We predict and find that stronger relationship based faultlines hinders between subgroup cohesion, reducing TMTs’ ability to initiate strategic change. We also predict and find that stronger task‐based faultlines facilitate inter‐subgroup knowledge sharing, improving TMTs’ ability to initiate strategic change. We find that environmental dynamism reduces the negative effect of most relationship based faultlines (except age where this effect is positive) on strategic change, while strengthening the positive effect of task‐based faultline strengths on strategic change.