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Transforming Research on Diversity and Firm Performance: A Dynamic Capabilities Perspective Journal: Academy of Management Annals Academy of Management Annals Transforming Research on Diversity and Firm Performance: A Dynamic Capabilities Perspective

Authors:
  • Rutgers School of Business-Camden

Abstract and Figures

Despite a growing body of literature on diversity and firm performance, our review of research across fields, theoretical traditions and levels of analysis suggests that the relationship is not a simple one. However, we attempt to integrate theory and research from macro and micro research domains into one perspective on the firm-level performance effects of diversity. We review the results of research on diversity and firm performance based on the level of analysis at which diversity was examined, highlighting what we know and do not know about this relationship, and why a new approach to research in this area is needed. To set a future research agenda, we introduce a dynamic capabilities framework for studying diversity and firm performance, identifying a subset of capabilities through which we would expect firms to extract benefit (or loss) from diversity and articulate the underlying mechanisms through which such effects are likely to occur. By putting forth this framework, our goal is to offer an integrative, process-based perspective for understanding value creation and capture as it pertains to diversity, and encouraging a more systemic approach to the study of diversity and firm performance.
Content may be subject to copyright.
Transforming Research on Diversity and Firm Performance:
A Dynamic Capabilities Perspective
Journal:
Academy of Management Annals
Manuscript ID
ANNALS-2014-0019.R4
Document Type:
Article
Keywords:
DEMOGRAPHY, Organizational < PERFORMANCE, COMPETITIVE
ADVANTAGE
Academy of Management Annals
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Transforming Research on Diversity and Firm Performance:
A Dynamic Capabilities Perspective
QUINETTA ROBERSON
Villanova University
Villanova School of Business
800 Lancaster Avenue
Villanova, PA 19085
Phone: 610-519-5496
Email: Quinetta.Roberson@Villanova.edu
OSCAR HOLMES IV
Rutgers, The State University of New Jersey
School of Business
227 Penn Street
Camden, NJ 08102
Phone: 856-225-6593
Email: Oscar.HolmesIV@Rutgers.edu
JAMIE L. PERRY
Cornell University
565D Statler Hall
Ithaca, NY 14853
Phone: 607-255-6419
Email: jlp358@cornell.edu
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Abstract
Despite a growing body of literature on diversity and firm performance, our review of
research across fields, theoretical traditions and levels of analysis suggests that the relationship is
not a simple one. However, we attempt to integrate theory and research from macro and micro
research domains into one perspective on the firm-level performance effects of diversity. We
review the results of research on diversity and firm performance based on the level of analysis at
which diversity was examined, highlighting what we know and do not know about this
relationship, and why a new approach to research in this area is needed. To set a future research
agenda, we introduce a dynamic capabilities framework for studying diversity and firm
performance, identifying a subset of capabilities through which we would expect firms to extract
benefit (or loss) from diversity and articulate the underlying mechanisms through which such
effects are likely to occur. By putting forth this framework, our goal is to offer an integrative,
process-based perspective for understanding value creation and capture as it pertains to diversity,
and encouraging a more systemic approach to the study of diversity and firm performance.
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Introduction
Consistent with labor predictions, current workforces are comprised of employees with
diverse abilities, cultural backgrounds and work styles with projections for even greater diversity
(Mor Barak, 2013). Combined with rapidly changing and highly competitive environments, this
trend has spurred a need for organizational leaders to understand the effects of demography on
firm performance. An early study by Kennedy (1971) examined the effects of diversity and
financial performance using 16 teams in a business simulation. Varying team composition based
on cognitive complexity, or the level of information processing capacity, and college class,
which was considered to be a proxy for age and maturity, the results showed effects of the
former individual difference variable on average profit measures. Specifically, teams with
greater than 50% abstract thinkers experienced a smaller profit loss (approximately three times
lower) than teams with less than 50% abstract members. While several methodological issues
limited the conclusions that could be drawn from the Kennedy (1971) study, it offered some
preliminary results regarding the influence of different types of diversity on competitive
performance and set the stage for future research on diversity and firm performance. Since then,
an increasingly large body of literature has highlighted relationships between diversity at
different levels of organizations and a variety of performance indicators, including margins (e.g.,
Boone & Hendriks, 2009; Hartenian & Gudmundson, 2000), returns (e.g., Li, Chu, Lam & Liao,
2011; Richard, 2000), and valuation (e.g., Roberson & Park, 2007; Talke, Salomo & Rost, 2010).
While several reviews collectively offer a comprehensive summary of the diversity-
performance literature (see Jackson, Joshi & Erhardt, 2003; Joshi, Liao & Roh, 2011; McMahon,
2010; Menz, 2012; Milliken & Martins, 1996; Nielsen, 2010; Reis, Castillo & Dobon, 2007; van
Knippenberg & Schippers, 2007; Williams & O’Reilly, 1998), the fragmented nature of the
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literature leaves the mechanisms underlying this relationship unaddressed. For example, although
group-level research articulates the processes through which diversity affects performance
outcomes, we have a limited understanding of how such processes and outcomes become
manifested in the macro domain. Similarly, although TMT research describes how member
demographics influence strategic choice, little consideration has been given to the more micro-
level processes through which such influence occurs. Firm-level diversity research assumes that
cultural diversity is a unique and valuable resource that can be a source of competitive advantage
for firms, yet few studies have considered the ways in which it might be developed or deployed
to achieve such an advantage. Thus, the value of diversity in organizations remains a question.
Our overarching purpose is to integrate existing research across the human resource
management, strategy and group domains to advance an appreciation of the state of knowledge
in the field of diversity and firm performance and suggest ways in which the field can move
forward. However, as studies across domains have addressed different research questions, we
present an organizing framework for understanding findings to date and set a future research
agenda. Categorizing studies based on the level of analysis at which diversity was examined, we
first review the results of research on diversity and firm performance. Based on this review, we
highlight what we know and do not know about this relationship, and why a new approach to
research in this area is needed. Given a number of unanswered questions about diversity’s effects
on firm-level outcomes, we propose a shift from the notion of diversity as an organizational
resource that can lead to performance enhancements to a process-based perspective that
considers a firm’s capacity for deploying resources to adapt to environmental conditions and
thus, for impacting organizational effectiveness. Specifically, we introduce a dynamic
capabilities framework for understanding the value of diversity in firms and incorporating the
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creation and capture of value into the study of diversity and firm performance. We also identify a
subset of capabilities through which we would expect firms to extract benefit (or loss) from
diversity and articulate the underlying mechanisms through which such effects are likely to
occur. We conclude by pinpointing opportunities (and challenges) associated with this more
integrative approach to the study of diversity and firm performance, and offering a future
research agenda.
Our overall intended contribution is to change the direction of future research to better
inform the study of firm-level diversity effects. Given that dynamic capabilities reflect a firm’s
ability to leverage its resources to adapt to the changing business circumstances, our review
considers the intersection of firms’ internal and external environments. In addition, as dynamic
capabilities take into account demography as a strategic resource and its configuration and
integration into organizational routines as a source of value in organizations, our framework
advances a focus on the processes through which diversity influences performance. Although
prior research has incorporated contingency factors to resolve mixed findings regarding the
relationship between diversity and firm performance, our framework offers an approach for
investigating changes in this relationship as markets change. Specifically, by considering how
value is created in organizations as well as firm-specific competencies generated from diversity,
we attempt to examine diversity and firm performance from a complementary or fit perspective;
thus, establishing stronger links between diversity, process and performance variables. Further,
with a consideration of diversity effects on more localized firm outcomes, our review has the
potential for enhancing the explanatory power and practical usefulness of future firm-level
diversity research.
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A Review of Diversity and Firm Performance Research
What We Know
To review the literature on diversity and firm performance, we searched for articles using
a coding scheme derived from the management, human resource, and strategy literatures. Given
the absence of an established taxonomy at the firm level of analysis, we developed a list of
diversity-related terms based on existing reviews of the literature (e.g., Certo, Lester, Dalton &
Dalton, 2006; Joshi, Liao & Roh, 2011; Menz, 2012). Although a large body of work has
examined the main and moderating effects of demographic attributes on organizational
outcomes, most of them focus on unit-level performance. Our inquiry showed that although a
variety of terms have been used interchangeably to refer to diversity, researchers have primarily
relied upon five (5) keywords to refer to the diversity as a contextual property of organizations –
diversity, demography, composition, heterogeneity, and dissimilarity. Similarly, while
performance has generally been used to capture the results of a firm’s operations, researchers
have also used other indicators of goal achievement, including value or valuation, productivity,
and effectiveness. Accordingly, we used these terms to search for and identify empirical research
that examines diversity as a structural property of organizations and the subsequent effects on
firm-level performance.
Based on these criteria, we found 43 published articles exploring diversity in different
forms and within different job categories. To organize this body of work, we categorize the
studies based on the level of analysis at which diversity was examined and highlight the key
findings (see Table 1). As shown in the table, prior work has primarily focused on the
performance effects of diversity among boards of directors, top management teams (TMT),
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managers, and employees. We summarize the findings to-date at each level, highlighting what
we currently know about the relationship between diversity and performance, in the next section.
-------------------------------------
Insert Table 1 about here
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Board Diversity. Given that a firm’s board of directors is a group of individuals elected to
serve as its governing body, representing stockholders in decision-making on strategic issues and
establishing management-related policy, studies at this level focus on how board composition
influences its functioning and subsequently, firm performance outcomes. The research reviewed
here examines the diversity of boards across various countries, including the United States
(Carter et al., 2003, 2010; Erhardt et al., 2003), Canada (McIntyre et al., 2007), Spain (Campbell
& Minguez-Vera, 2008, 2010), Denmark (Rose, 2007), Australia (Bonn, 2004), and New
Zealand (Van der Walt et al., 2006). In addition, board compositional effects in firms across a
variety of industries, including non-profit sectors (Siciliano, 1996), have been examined.
In general, the findings of this body of work suggest that board diversity is related to firm
performance. More specifically, as all of the studies conducted at this level of analysis have
assessed the performance effects of gender diversity (for an exception, see McIntyre et al.
(2007), there is relatively consistent evidence that gender, both in terms of the presence and
relative proportion of women on boards of directors, is positively related to firm performance.
These studies also highlight the influence of gender on various performance indices, including
profitability ratios and valuation measures, although the results are not uniform across such
indices. For example, in a study of board diversity across YMCA organizations, Siciliano (1996)
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found gender diversity to be positively related to mission fulfillment, yet negatively related to
level of donations. Similarly, Smith et al. (2006) uncovered differential effects of board gender
composition and CEO gender on firm contribution and gross profit margins, respectively.
Additionally, Carter et al. (2003) showed an association between the presence and percentage of
women on boards and firm value, while a later study by Carter and colleagues (2010) revealed
gender diversity on boards and board committees to be positively related to firm performance,
but not to firm value. Though we might attribute these findings to differences in firm operations
captured by dependent variables, it stands to reason that the diversity-performance relationship
may also be shaped by other explanatory variables not measured in the studies.
Similar to the effects of gender diversity, the findings of the board diversity studies
reviewed here reveal a positive relationship between racial diversity and firm performance (see
Carter et al., 2003; Erhardt et al., 2003). However, when summarizing the collective findings
across all dimensions of diversity within boards, the inferences that can be drawn are more
complicated. For example, while Rose (2007) observed non-significant findings of board
functional and national diversity on firm value, Siciliano (1996) uncovered positive effects of
age and occupational diversity on firm performance. McIntyre and his colleagues (2007)
explored correlations between age and tenure diversity and firm value, and found an inverted U-
shaped relationship, such that low and high levels of diversity on each dimension were
associated with lower levels of performance while moderate levels of diversity were associated
with higher performance. Accordingly, the researchers concluded that whereas a certain amount
of age or tenure diversity on boards of directors is beneficial to firm performance, that
performance benefit dwindles in firms with substantively homogeneous and heterogeneous
boards. The findings of Van der Walt et al. (2006) further suggest that the relationship between
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board diversity and firm performance may be complex, given the moderating influence of
strategic context. In particular, the authors found lower diversity in board composition to be
associated with higher levels of performance, particularly in firms with high strategic
complexity. Thus, taken together, we are left to speculate as to whether the firm performance
effects of board diversity are dependent upon the type of diversity and/or strategic conditions
under which such diversity operates.
Top Management Team (TMT) Diversity. Several studies on diversity and firm
performance have focused on the demography of top management teams, although
conceptualizations of this work group have varied. For example, Finkelstein and Hambrick
(1996) define top management team as all corporate officers who also serve as board members,
while other researchers have included those with the title of vice president or above (e.g.,
Carpenter, 2002; Goll et al., 2001; Keck, 1997; Li-Qun et al., 2005; Murray, 1989; Olson et al.,
2006; Pegels et al., 2000; Ren & Wang, 2011; Richard & Shelor, 2002). Yet, other researchers
allowed firm CEOs to define their top management team and identify who should be included in
the study (Boone & Hendriks, 2009; Buyl et al., 2011; Simons et al., 2011; West & Schwenk,
1996). Two notable exceptions include Roberson and Park (2007), who conceptualized a firm’s
TMT to be represented by the 25 top-paid officers in a firm, which captures significant
variability in demographic data reported to the Securities Exchange Commission (SEC), and
Kilduff et al. (2000), who used a sample of experienced managers participating in a team
business simulation as part of an executive education program.
The findings of research at the TMT level of analysis suggest that diversity is positively
related to firm performance. Some studies show direct correlations between member diversity
and firm performance along a variety of dimensions, including functional background, age,
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tenure, and education diversity (e.g., Certo et al., 2006; Goll et al., 2001; Kilduff et al., 2000; Li-
Qun et al., 2005). However, as research also provides evidence of direct relationships with TMT
age and occupational diversity, yet simultaneously reveal negative impacts of education and
career experience diversity on firm performance (Li-Qun et al., 2005), the diversity-performance
relationship may not be that straightforward , but instead may be driven by internal
contingencies, such as team characteristics and firm strategic context.
Only two studies reviewed here examined the effects of TMT demographic diversity,
such as gender and racial composition, on firm performance. Ren and Wang (2011) explored the
performance effects of female participation on TMTs and found gender diversity to be positively
related to firm value, especially when the human and social capital of female members is high.
Roberson and Park (2007) considered the effects of top management racial diversity on a variety
of indicators of firm performance and found evidence of a curvilinear U-shaped relationship,
such that firm value declined with increases up to an inflection point of approximately 22%
representation by racial minorities, beyond which additional increases in diversity were
associated with improved economic value. While strong conclusions cannot be drawn from these
two studies, the results suggest that the performance effects of TMT demographic diversity may
be dependent on the degree to which such differences between members are leveraged to
enhance team and/or firm effectiveness.
One study by Boone and Hendriks (2009) considered potential effects of TMT diversity
in terms of personality and value differences on firm performance. Specifically, the authors
hypothesize that because such differences may give rise to interpersonal conflict that reduces
team effectiveness, firm performance will be negatively impacted. As expected, the results
showed TMT locus of control diversity to be inversely related to firm performance, but only
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under conditions of high decision-making decentralization within the TMT. Consequently, this
study highlights the potentially detrimental consequences of deeper-level composition variables
in TMTs, exacerbating effects of internal contingencies, and need to study the influence of team
mechanisms on the diversity-performance relationship.
Most studies of TMT diversity and firm performance have focused on member
differences that are indicative of the team’s pool of task-related resources. Researchers have
primarily investigated the performance effects of TMT age, education, functional background
and tenure diversity, which are theorized to capture differences in member knowledge,
perspectives and experiences that are relevant for the team’s functioning. Interestingly, rather
than establish a straightforward relationship between diversity and firm performance, the
findings of this subset of studies highlight the importance of external contingencies in
determining the nature of the relationship. For example, Murray (1989) found positive
associations between TMT occupational and tenure diversity and firm performance to be
especially pronounced in the oil industry, while Pegels et al. (2000) uncovered negative
relationships between TMT functional and educational diversity and performance in the airline
industry, based on the degree to which a firm differed from their competitive action group.
Likewise, the results of Keck (1997) showed industry-dependent effects, such that functional
heterogeneity was positively related to firm performance in turbulent contexts, while the
directionality of the tenure diversity-performance relationship varied in turbulent versus stable
contexts. Richard and Shelor (2002) discovered a positive relationship between TMT age
diversity and firm performance, although the form of the relationship also differed across
performance indicators and environmental contingencies. Specifically, age diversity was found
to have both positive linear and curvilinear relationships with sales growth, which are
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strengthened under conditions of environmental complexity, innovation and decentralization, and
a positive linear relationship with return on assets, which is enhanced in decentralized contexts.
Other studies that have taken a contingency approach to understanding the effects of
TMT diversity on performance have emphasized more localized contextual factors, such as firm
leadership or team characteristics. For instance, Boone and Hendricks (2009) examined the
relationship between TMT functional diversity and firm performance, and found a positive
association when team information-processing mechanisms, such as decision-making
decentralization and information exchange, were high. Similarly, Buyl et al. (2011) discovered a
positive impact of TMT functional diversity on firm performance, which became more
pronounced as the CEO had more shared experiences with team members. As this moderating
effect was mediated by the interaction of functional diversity and information exchange, the
authors conclude that the performance benefits of diversity are realized under conditions that
facilitate knowledge management within TMTs. The importance of information exchange in the
relationship between TMT diversity and performance is further highlighted by research showing
the mediating role of strategic choice variables. Consistent with the findings of the studies
reviewed above, Olson et al. (2006) found functional diversity to be positively related to firm
performance; however, this relationship was mediated by two growth decisions – internal
innovation and M&A activity. Simons and colleagues (1999) explored the performance effects of
TMT educational and perceived environmental uncertainty (PEU) diversity, or the variability in
member perceptions of uncertainty in the external environment, which is postulated to have a
key influence on strategic decision-making. Consistent with a contingency perspective, both
dimensions of diversity were found to interact with debate to influence firm performance, such
that margins were higher for firms with more diverse TMTs and that engaged in more debate.
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However, as these results were partially mediated by decision comprehensiveness, or the degree
to which teams consider multiple approaches, decision criteria and courses of action, the authors
point to the need for research to consider the roles of process variables in the effects of diversity
on firm performance.
Managerial Diversity. Another subset of the articles on diversity and firm performance
have focused on the managerial level of analysis. However, the conclusions that can be drawn
regarding the effects of manager diversity on firm performance are limited by a generalized
conceptualization of manager, which has included officials at various levels. For example,
studies have included data for supervisors and other lower-level managers, for department heads
and other middle-level managers, and for vice-presidents and other chief executive officers
(Andrevski et al., 2014; Dwyer et al., 2003; Richard et al., 2004). Other research has included
members of firm oversight bodies, such as corporate boards of directors (e.g., Shrader et al.,
1997) or centrally-located administrators and school superintendents (Pitts & Jarry, 2007).
While all of the studies conducted at this level has considered the effects of manager
gender and racial diversity on firm performance, their results vary based on contextual factors
and the measurement of performance. For example, Shrader and colleagues (1997) compared the
performance effects of gender diversity among boards, TMTs and managers, and discovered only
manager diversity to be significantly and positively related to firm profitability. Dwyer et al.
(2003) also found a positive link between manager gender diversity and employee productivity;
however, the effect was limited to firms with a strong growth orientation or clan culture. At the
same time, the authors found a concurrent negative association between manager gender
diversity and return on equity in firms with a strong adhocracy culture. These findings are
consistent with those of Richard et al. (2004), which show the relationship between manager
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gender diversity and productivity to interact with a firm’s risk posture, such that average levels
of diversity are associated with higher performance than are low and high levels of diversity in
high risk-taking firms; thus suggesting that the effects of diversity among managers may be
conditioned on a firm’s strategic and cultural orientation. This conclusion is further buoyed by
the results of studies examining performance effects of manager racial diversity, which have
been shown to be dependent on firms’ competitive intensity and innovativeness (Andrevski et
al., 2014; Richard et al., 2004).
Employee Diversity. Research exploring effects of employee diversity has focused on the
demographic composition of workforces, although there is substantive variability in the types of
samples used. For example, while some studies have employed archival data reporting the
demographic composition of firms’ labor forces (e.g., Frink et al., 2003; Herring, 2009; Leonard
et al., 2004; Li et al., 2011; Richard et al., 2007), others have surveyed firm officers regarding
the representation of different groups in their workforces (Richard, 2000; Richard et al., 2003;
Richard et al., 2006). Researchers have also relied on self-reported demographic information
provided by employee samples (e.g., Gonzalez & DeNisi, 2009; Hartenian & Gudmundson,
2000; Kunze et al., 2011).
Although research on workforce diversity and firm performance has primarily focused on
the effects of employee gender and racial diversity, the results have been equivocal. Some
studies have found direct positive and negative effects of diversity on performance (e.g.,
Hartenian & Gudmundson, 2000; Herring, 2009; Pitts & Jarry, 2007), dependent upon how
diversity and performance were assessed. Other studies have revealed that the form of the
diversity-performance relationship is based on the specific demographic composition of
workforces or the communities in which firms are located (e.g., Frink et al., 2003; Leonard et al.,
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2004). Still, the findings of most diversity-performance research conducted at this level of
analysis draw attention to the range of intervening variables through which this relationship
operates. For example, Richard (2000), his colleagues (Richard et al., 2003, 2006) and others (Li
et al., 2011) have shown organizational factors, such as business strategy, span of control and
lifecycle, to impact the nature of the diversity-performance relationship regardless of the
dimensions of diversity studied. The moderating influences of extra-organizational factors, such
as environmental stability and munificence in addition to national culture, have been highlighted
as well (Li et al., 2011; Richard et al., 2007). In contrast, based on an assumption that the
benefits of diversity may be enabled in certain internal environments, researchers have examined
the extent to which employee shared beliefs and values – specifically, diversity-related climates,
or perceptions of how supportive firm practices are of workforce diversity – alter its impact on
firm performance (Gonzalez & DeNisi, 2009; Kunze et al., 2011). The results of these studies
show the effects of employee gender and racial diversity to be stronger under supportive
diversity climate conditions (Gonzalez & DeNisi, 2009), and for the performance effects of age
diversity to operate through discrimination climate perceptions and collective affective
commitment (Kunze et al., 2011). Thus, as noted in several of these studies, the aforementioned
results substantiate an association between workforce diversity and performance, but only under
in certain circumstances; thus, highlighting ambiguities and complexities of the relationship.
Summary. As shown by our review, we have several insights into the relationship
between diversity and firm performance. First, we know that diversity at various levels of the
firm is related to performance. Focused on the composition of organizational work groups,
including boards of directors, top management teams, managers and employees, researchers have
explored the potential impact of diversity on organizational effectiveness. More importantly, as
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these studies provide evidence of associations between work group demography and
performance outcomes, the findings suggest that diversity has a firm-level impact and
specifically, on a firm’s bottom line. Second, we know that diversity’s impact is through its
influence on work group functioning. While a large literature on diversity in groups and teams
has highlighted the processes through which it affects cognitive, affective and behavioral
consequences (see Milliken & Martins, 1996; van Knippenberg & Schippers, 2007; Williams &
O’Reilly, 1998), the studies reviewed in this article extend such effects to the firm level of
analysis and suggest mechanisms through which the diversity-performance relationship may
occur. Through an examination of the mediating influences of sensemaking and strategic choice
processes, the findings highlight potential process gains and losses that may stem from diversity
and subsequently, affect firm performance. Third, we know that the effects of diversity on firm
performance are dependent upon features of the context in which it resides. With interest in the
third-variable effects of a broad range of team, organizational and extra-organizational factors
(Joshi & Roh, 2009), the studies reviewed here identify boundary conditions of the diversity-
performance relationship. By highlighting internal and external circumstances that alter the
strength and/or direction of the relationship, the findings reflect complexities in the operation of
diversity and offer a contingency approach to understanding its effects in organizations.
What We Don’t Know
While research-to-date provides useful tests of theory and evidence of a relationship
between diversity and firm performance, it also draws attention to a number of inconsistencies
that give rise to some unanswered questions. As shown in Table 2, studies across levels of
analysis seem to lack coherence in terms of the dimensions of diversity examined, indicators of
performance, theoretical and mediating mechanisms through which diversity operates, and
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contexts that facilitate (or hinder) diversity’s effects. Such variations make it challenging to
reconcile findings across levels and draw conclusions about the nature of the diversity-
performance relationship; thus constraining continued development of this literature. In the
section below, we discuss these susceptibilities and the need for a more systematic approach to
the study of firm-level diversity effects.
-------------------------------------
Insert Table 2 about here
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What types of diversity are related to firm performance? In most studies of diversity and
firm performance, researchers have focused on individual characteristics that may create
distinctions between people in organizations. Conceptualized as individual differences relative to
others in organizational work groups along certain dimensions, diversity is treated as a
compositional characteristic of boards, top management teams, mangers and workforces.
Accordingly, researchers have assessed the proportional representation of different categories
within such groups or the proportional amount of a given attribute held by members of those
groups, and the subsequent effects on firm performance outcomes.
Although the performance effects of a broad array of diversity dimensions have been
examined, some distinctions between studies at different levels of analysis are evident. For
example, while top management team research has explored the influence of knowledge-based
dimensions of diversity, such as education and functional background, research at other levels
has primarily focused on gender and racial differences between members. This bifurcated
approach to the study of diversity is consistent with the larger literature, which has separated
diversity characteristics according to their level of task-orientation, or the degree to which each
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captures the knowledge, skills and abilities relevant to the performance of cognitive tasks in
organizations (Pelled, 1996; Simons, Pelled & Smith, 1999). Alternatively, diversity research
distinguishes between observable or surface-level attributes, such as gender and race, and less
salient or deep-level attributes, such as functional background and education (Harrison, Price &
Bell, 1998; Jackson, May & Whitney, 1995). This grouping of diversity dimensions is
meaningful, as research has shown them to be differentially related to outcomes. Specifically,
surface-level characteristics have been found to be associated with outcomes associated with
intergroup relations, such as group attachment and social integration, while deep-level
characteristics tend to evoke responses related to information processing, including
communication and task conflict (Jackson et al., 2003; Milliken & Martins, 1996; van
Knippenberg & Schippers, 2007; Williams & O’Reilly, 1998). For that reason, these differential
outcomes also have ramifications for our understanding of the relationship between diversity and
firm performance.
Given the attribute approach utilized in current research, we know which diversity
dimensions are related to performance, but have limited insight into how different types of
diversity are related to performance. Because the collective findings of research reviewed here
suggest that all dimensions of diversity can, in principle, be both positively and negatively
associated with firm performance, the mechanisms cannot be assumed on the basis of the
diversity characteristic studied. Further, as studies of the effects of surface- vs. deep-level
diversity characteristics has developed in separate research traditions, we are less able to forecast
when they will occur. Consequently, a more integrative theoretical framework is needed to
enhance our ability to explain the diversity-performance relationship as well as the predictive
power of firm-level diversity research.
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How does diversity relate to different types of firm performance? Similar to the
conceptualization of diversity, firm-level research has captured performance effects in a variety
of ways. With over 30 indicators of performance included in the studies we reviewed, the
findings offer comprehensive evidence of a relationship between diversity and firm performance.
However, because much of the research employs single or unrelated indicators (Richard,
Devinney, Yip & Johnson, 2009), our ability to identify how diversity influences organizational
effectiveness is constrained. Some differentiation in categories of performance outcomes studied
across levels of analysis is also apparent. For example, board diversity research seems to focus
on stock measures, which reflect investor perceptions of a firm’s value as well as its ability to
generate future cash flows. These include such measures as Tobin’s Q and market-to-book
values, which compare the market versus replacement value of a firm’s assets, although these
measures may be manipulated by the level of intangible assets. In contrast, top management team
research overwhelmingly uses return measures, which signal a firm’s ability to generate earnings
from a given portfolio (i.e., sales, assets, equity, and investments). Accordingly, this subset of
studies examine the effects of TMT diversity on firm profitability, or efficiency in utilizing
production assets to generate earnings, and liquidity, or ability to meet financial obligations
based on cash flows generated from operations (Hamann, Schiemann, Bellora & Guenther,
2013). Among the studies exploring effects of manager and employee diversity on firm
performance, there is greater variability in performance outcomes used. While both stock and
return indices are utilized, so are measures of market access or growth, such as variations in
sales/revenues and market share, and which reflect changes in firm size (Weinzimmer, Nystrom
& Freeman, 1998).
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With the use of stock, return and growth measures as dependent variables, most of the
research reviewed here has focused on the relationship between diversity and firm financial
performance. However, as noted by Venkatraman and Ramanujam (1986), financial indicators
represent “the narrowest conception of business performance” (p. 803), as they merely signal the
achievement of a firm’s economic goals. While a focus on economic success is a rational
objective, there are several assumptions in the use of such indicators of performance, including
that the actions of boards, top management teams, managers and/or employees directly impact
financial outcomes and are the primary driver of such outcomes. Yet, because financials can be
impacted by an array of external and internal factors, such as economic conditions and
accounting policies, a more localized view of performance may more accurately capture value
creation (or diminution) resulting from a firm’s internal actions.
What are the mechanisms through which the effects of diversity occur? The research
reviewed here draws upon a wide range of theories, although it seems that the specific theories
used to develop conceptual foundations are dependent on the level of analysis at which diversity
is studied. For example, to articulate the mechanisms through which board diversity influences
firm performance, researchers have primarily drawn upon social-psychological and value-in-
diversity theories. Social psychological theories, such as social identity (Tajfel, 1978) and self-
categorization (Turner, 1985), propose that because individuals’ self-definitions are shaped by
their group memberships, they are motivated to enhance their self-concept by seeking a
positively-valued distinctiveness for those groups. Accordingly, they engage in social
comparisons to differentiate between their in-groups and relevant out-groups, which accentuate
similarities among individuals sharing group memberships and differences among those
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belonging to different identity groups. Such comparisons subsequently have both a positive and
negative influence on intergroup relations and subsequently, firm performance.
Board diversity research has also drawn upon a number of theories and perspective that
consider the unique resources that diversity provides. For example, the “value-in-diversity”
hypothesis (Cox, Lobel & McLeod, 1991) suggests that because diversity broadens the
knowledge, perspectives, and other cognitive resources to which groups have access, its benefit
is through enhanced problem-solving and decision-making performance. This is also consistent
with an information elaboration perspective, which suggests that diverse groups are exposed to a
variety of informational resources, which give rise to minority viewpoints and task conflict and
subsequently, motivate the consideration of more creative and better quality alternatives and
solutions (Williams & O’Reilly, 1998). Relatedly, resource dependence theory (Pfeffer &
Salancik, 1978) suggests that because the principal function of boards is to provide firms with
resources (including information), network ties, and other forms of support that allow them to
address issues of environmental uncertainty and gain legitimacy in external markets, board
diversity may enhance a firm’s fit with the external environment and subsequently, performance.
Studies examining the performance effects of diversity at lower levels have also drawn
upon the aforementioned theoretical perspectives, although they primarily rely on a distinctive
conceptual perspective. For example, top management team diversity research has mainly drawn
upon upper echelons theory (Hambrick & Mason, 1984), which suggests that because strategic
choices made by senior-level managers are driven by their cognitive and behavioral
characteristics, diverse TMTs have a greater capacity for generating and evaluating firms’
strategic alternatives, and thus for influencing firm performance. In contrast, employee diversity
research is largely rooted in the resource-based view of the firm (Barney, 1991), which posits
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that the specific demography of an organization can facilitate competencies that develop from
complex social relationships and cannot be perfectly duplicated by competitors (Barney, 1991);
thus, creating performance differences across firms. Notably, the few studies conducted on
managerial diversity has drawn upon several of the theories and perspectives discussed here.
Although a variety of theoretical explanations have been offered to elucidate the
connection between diversity and firm performance, only a handful of studies have tested the
processes underlying the relationship. Consistent with the theoretical perspectives used, such
research highlights the importance of strategic choice, information exchange and competitive
activity for eliciting the advantages and disadvantages of diversity, and its subsequent impact on
performance (Andrevski et al., 2014; Buyl, 2011; Olson et al., 2006; Simons et al., 1999). Still,
our understanding of the casual relationship between diversity and firm performance is limited.
We can cognize diversity both as a resource and a source of operational resources, but have little
knowledge of its value to firms. We have numerous justifications for the diversity-performance
relationship, but lack a unified framework that incorporates effects between levels of analysis.
For these reasons, a coherent approach for studying the social and operational dynamics through
which diversity’s effects on firm performance occur is needed.
In what contexts does diversity enable firm performance? Despite some patterns in theories
used, diversity characteristics studied, and performance outcomes measured across levels of
analysis, quite the opposite is true for moderators to the diversity-performance relationship. Of
the studies we reviewed, approximately 23 distinct quantitative and qualitative contextual factors
were tested. While such variables can be classified based on endogeneity (i.e., organizational vs.
extra-organizational) and level (i.e., team vs. organization), varied findings regarding the nature
and form of their effects obscure our understanding of the situational settings in which the effects
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of diversity are amplified or diminished. For example, while Richard et al. (2003) and Richard et
al. (2004) find the relationship between racial diversity and firm performance to be moderated by
innovation, the form of the relationship differs across levels of analysis. Specifically, low and
high levels of managerial racial diversity are associated with higher performance than are
moderate levels of managerial racial diversity in firms with an innovation strategy (Richard et
al., 2004), while employee racial diversity enhances performance in banks pursuing an
innovation strategy and reduce performance in those with a lower degree of innovation (Richard
et al., 2003). As both studies were conducted on samples of banks, we can extrapolate that
features of the management versus employee job categories, the former of which “set broad
policies, exercise overall responsibility for the execution of these policies, and direct individual
departments or special phases of a firm’s operations” (Richard et al., 2004: p. 259), or other
contextual factors enable the outcomes of diversity differently; thus, altering the diversity-
performance relationship. Because studies in this area have primarily adopted a contingency
perspective to the diversity-performance relationship, examining how contextual factors alter its
direction and/or strength, we have insight into how specific factors change its effects. However,
we have less insight into the conditions that enable diversity to yield its effects. Thus, an
approach to the study of diversity and firm performance that considers environmental fit, or the
complementarity between firm’s diversity resources and the contexts in which they are
embedded, is needed.
Moving from “What” to “How”
Early diversity research suggests that the value of diverse workforces is driven by the
potential effects on organizational processes (Cox & Blake, 1991). Specifically, diversity is
viewed as a resource that translates into a competitive advantage for firms through a greater
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capacity for creativity, problem-solving, and responding to changes in the external environment.
In addition, through reputation and an enhanced ability to understand the needs and demands of
diverse consumer markets, diversity is posited to improve a firm’s resource acquisition and
marketing capabilities. Given the role of capabilities in translating diversity into firm
performance, we believe that such a perspective may be key to advancing future research in this
area. Specifically, we speculate that a dynamic capabilities approach may offer an integrative
framework for studying and understanding firm-level effects of diversity.
Dynamic capability theory describes competencies that influence a firm’s resource base
in ways that it is able to respond to changes in market demand and enhance operational
effectiveness (Ambrosini & Bowman, 2009; Helfat et al., 2007; Teece & Pisano, 1994). By
distinguishing between resources, or inputs into a firm’s production processes, and capabilities,
or a firm’s capacity for deploying resources to adapt to evolving market conditions (Helfat &
Peteraf, 2003), the theory extends the resource-based view (RBV) of a firm to focus on
organizational choices and routines for achieving sustainable competitive advantage in dynamic
business environments. For example, competencies that provide firms with an ability to
transform its products and services, methods and scale of production, and markets served are
described as dynamic capabilities (Winter, 2003). It is this conceptualization of such capabilities
as firm-specific processes to adapt and create new resource positions, and subsequently facilitate
value creation and capture, which bridges the conversion gap between resource inputs and
performance outputs (Dutta, Narasimhan & Rajiv, 2005).
Because dynamic capabilities refer to a firm’s capacity for action (Teece & Pisano,
1994), the theory considers the emergent properties of organizations – specifically, the capacity
for extracting economic benefit from their resource bases. While organizational routines may
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develop from a variety of resource types, dynamic capabilities are assumed to emerge from the
social complexity of human capital resources, as they are collaborative activities for obtaining,
combining and deploying a firm’s human assets to support business goals and respond to
environmental changes (Eisenhardt & Martin, 2000; Helfat et al., 2007). Distinguished from
operational capabilities, which encompass the day-to-day activities for generating and delivering
products and services, dynamic capabilities enable firms to transform these processes in order to
take advantage of market opportunities and achieve competitive advantage (Winter, 2003). As
such, the value of dynamic capabilities is not in the control of such resources, but in their
functionality.
Capabilities are produced through knowledge-based activities, which allow a firm to
realize value through the accumulation, combination and exploitation of resources (Sirmon, Hitt
& Ireland, 2007). While a range of managerial and organizational processes may influence firm
competitiveness, research suggests that those activities with the potential for leading to
competitive advantage primarily fall within three core areas: integration, learning, and
transformation (see Teece & Pisano, 1994; Teece et al., 1997). Integration represents the
coordination of assets and competences in ways that develop firm-specific capabilities (Teece et
al., 1997). As certain competences may be complementary, integration activities are those that
organize firm assets and processes both within and between business units to take advantage of
such interdependencies. In effect, such coordination of resources and their allocation to key
business processes facilitates the development of organizational routines, which enhance a firm’s
capacity for dealing with environmental change and subsequently, its performance (Eisenhardt &
Martin, 2000; Helfat & Peteraf, 2003). Learning represents a capacity for acquiring new
knowledge and leveraging it to create new forms of strategic advantage (Easterby-Smith &
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Prieto, 2008). It involves both the examination of current practice to improve upon business
processes as well as the identification of new opportunities for integration and coordination.
Such learning activities integrate a firm’s knowledge base with its asset position in order to
streamline existing business processes and cultivate new organizational routines, which
strengthen a firm’s strategic readiness (Teece et al., 1997). Transformation represents a capacity
for sensing environmental changes and reconfiguring resources ahead of industry rivals (Teece et
al., 1997). It involves gathering or anticipating information about consumer needs, competitor
actions and other market trends, and using such knowledge to make decisions about strategic
direction. Consequently, transforming activities create value by enabling firm-specific
capabilities for analysis and agility that allow continuous adaptation to ever-changing market
conditions (Eisenhardt & Martin, 2000).
Consistent with the value-in-diversity hypothesis (Cox et al., 1991), dynamic capabilities
research suggests that the integration of individual and group competences within organizations
may serve as a source of competitive advantage for firms. However, we extend this hypothesis
by articulating how the coordination of resources and knowledge into organizational routines
may influence firm competitiveness. It is through this activity-based understanding of how firm
assets can be configured to influence strategic positioning that dynamic capabilities theory can
itself be used to integrate current conceptual explanations for the relationship between diversity
at different levels of the firm and firm performance. For example, by accounting for shifts in
market demands and conditions, it extends the more static, resource-based views of diversity and
firm performance. Specifically, as resources alone are considered to be insufficient to sustain
competitive advantages in rapidly changing and unpredictable operating conditions, a dynamic
capabilities perspective considers how firms’ internal environments may be configured and
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reconfigured to match their external environments to sustain performance gains. By
encapsulating collective processes through which organizations create and alter operating
routines to generate performance benefits (Zollo & Winter, 2002), a dynamic capability approach
extrapolates the underlying mechanisms articulated by group-level diversity theories (e.g.,
social-psychological, information processing and decision-making, CEM: Van Knippenberg et
al., 2004) to the firm-level of analysis. Thus, a dynamic capabilities framework allows the
integration of theoretical perspectives on diversity and firm performance, while offering a unique
explanation of the processes through such effects occur.
A Capabilities Model of Diversity and Firm Performance
Although many types of capabilities may influence firm performance, we focus on those
expected to be shaped by diversity. Using Cox and Blake’s (1991) arguments for how diversity
might contribute “net-added value to organizational processes” (p. 46) as a starting point, we
identified a subset of capabilities through which we would expect diversity to affect firm
performance. Specifically, we focus our discussion on the following: market access, research and
development, efficiency, knowledge management, alliancing/brokerage, and system flexibility
(see Figure 1). Below we discuss each capability and how different types of diversity may
influence each and subsequently, indicators of organizational effectiveness.
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Insert Figure 1 about here
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Market access
Diversity in firms may influence market access, or a firm’s capability for entering and
competing in specific markets (Gelos, Sahay & Sandleus, 2011). As a primary functional
activity, marketing can serve as a source of competitive advantage by adding value to firms’
goods or services (Porter, 1985). Through branding and differentiating products and services
from those of rivals, marketing capabilities also allow firms to meet competitive demands (Gelos
et al., 2011). As such, this capability for understanding and delivering on consumer needs may
facilitate the development of new customer and client relationships and trust within established
markets; thereby increasing the likelihood that consumers are willing to purchase goods and
services and for higher prices from specific firms.
Given culturally diversity in customer and client markets, Thomas and Ely (1996)
propose that matching such diversity in workforces provides firms with an ability to reach and
understand a broader range of consumers. They posit that because such segments of the market
have specialized wants and needs, having their perspectives represented and understood within
firm workforces provides access to, and legitimacy with, those segments. Thus, as cultural
backgrounds are considered assets for enhancing a firm’s capability for entering and competing
in specific markets, we would expect diversity in surface-level characteristics to be associated
with their capability for market access. Specifically, given that differences in values, beliefs, and
attitudes within a firm may enable a more comprehensive understanding of consumer markets
(including traditionally underserved groups), diversity along these dimensions may improve its
capability for connecting to a broader clientele; thus, expanding its market share and improving
market indicators of performance.
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Extant research highlights the potential for market access to emerge as a capability from
firm-level diversity. For example, Leonard et al. (2004) found retail sales in Hispanic and Asian
communities to be higher in stores with employees who culturally identified with the
surrounding communities in which they were located, particularly in areas where clients had
limited English proficiency. Consistent with Thomas and Ely’s (1996) access-and-legitimacy
perspective, these results suggest that identification with the racioethnic background of the
community may have provided firms with a greater association with that community and thus,
access to potential customers. Further, because such identification may have afforded stores an
enhanced ability to understand and meet the needs of the community, it follows that the market
access gained translated into increased store performance. Another study by Siciliano (1996) also
provides some evidence of market access as a diversity capability, as the results showed age
diversity to be positively related to the level of donations, which was considered to be an
indicator of community or public support. Interestingly, however, as the results showed gender
diversity to be negatively related to donations, the author speculated that “women may not have
access to needed economic, social and political resources” (Siciliano, 1996: p. 1319); thus
suggesting that diversity may also relate to a firm’s capability for alliancing, which is discussed
later in this section.
Research and development
Research and development (R&D) is the capability for engaging in activities to discover
and create new and/or better products, services or operational procedures (Dutta, Narasimhan, &
Rajiv, 2005; Krasnikov & Jayachandran, 2008). It involves the application of knowledge to
generate product-market innovations, such as new product design and service enhancements, or
process innovations, such as the adoption of new equipment or technologies, which enhance
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performance or cost attributes of existing products or services (Krasnikov & Jayachandran,
2008). Regardless of the type of innovation, an R&D capability can aid in the expansion of
product and service offerings in ways that are valued by consumers and therefore, can command
premium pricing and/or increased margins. Research also suggests that an R&D capability may
be regenerative in that organizations with this capability may be more likely to accrue
complementary knowledge and skills, which enhances its resource position (Cohen & Levinthal,
1990; Helfat, 1997). Accordingly, the capability for R&D has long been considered a potential
source of sustainable competitive advantage (see Capon, Farley & Hoenig, 1990; Roberts, 2001).
Based on the value-in-diversity hypothesis, Cox and Blake (1991) argue that diverse
perspectives in organizations should provide firms with a greater capacity for creativity and
innovation. Some empirical evidence provides support for this argument, highlighting a
relationship between certain forms of diversity in groups – specifically, informational differences
– and innovative performance (see Milliken & Martins, 1996; van Knippenberg & Schippers,
2004). Research has shown firms with more diverse knowledge and technology resource
positions to be more innovative and able to exploit such resources in ways that foster R&D
(Garcia –Vega, 2006; Quintana-Garcia & Benavides-Velasco, 2008). For these reasons, we
would expect deep-level diversity to be associated with their capability for research and
development. As differences in knowledge, expertise and experience may provide a firm with
unique information to discover areas of expansion and improvement for its portfolio of products
and services, diversity along these deep-level dimensions may improve its capability for taking
advantage of market opportunities, thereby increasing the likelihood of above-average returns in
terms of market indicators of performance.
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A study by Olson et al. (2006), which examines strategic choice as a mediator in the
relationship between top management team diversity and firm performance, offers some
evidence of R&D as a capability resulting from diversity. Consistent with our propositions, the
findings showed surface-level diversity to be negatively related to strategic choice, measured as
innovation inputs or R&D intensity, and deep-level diversity to be positively related to strategic
choice. As the findings also revealed the relationship between TMT functional diversity and firm
performance to be fully mediated by strategic choice, they collectively suggest that such
diversity may facilitate the development of product and process innovations that create value and
subsequently, enhance firm performance. Thus, a firm’s capability for employing its diversity
resources, particularly at higher levels, to facilitate growth through research and development
may be critical to its realization of the value of diversity.
Knowledge management
Knowledge management is defined as the process of capturing, organizing, and
optimizing the deployment of a firm’s intellectual assets (Hedlund, 1994). Differentiated from
research and development, knowledge management involves the effective coordination of
knowledge-related resources rather than the application to operational processes. It is through the
structuring and integration of people, procedures and technologies that existing knowledge is
transferred and new knowledge generated, which facilitates advancement towards organizational
objectives (Scarbrough & Swan, 2003). Research suggests that the value in this capability is in
opportunities for cooperation and mutual learning, which relate positively to other capabilities,
such as innovation and responsiveness (Tsai, 2001). These combined capabilities, in turn, allow
firms to take competitive action against rivals and achieve improved relative performance
(Decarolis & Deeds, 1999; Miller, Fern & Cardinal, 2007).
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Although the value-in-diversity hypothesis suggests that diversity should enhance a
firm’s capability for research and development, sociological theories propose an opposing effect
on its capability for knowledge management. Studies have shown the distribution of resources in
a group to be positively related to conflict and negatively associated to process variables, such as
communication and cooperation (see Milliken & Martins, 1996; Williams & O’Reilly, 1998).
Accordingly, researchers have attributed such process losses to the emergence of power and
status hierarchies, which provoke greater stratification and competition within work units (see
van Knippenberg et al., 2004). Following this logic, we would expect both surface- and deep-
level diversity to be associated with a firm’s capability for knowledge management. With
diversity along surface-level dimensions, work group members may diverge on their motivation,
interests, and perceived value of the group’s identity. However, with diversity along deep-level
dimensions, differences in the relative standing or influence of members may emerge.
Nevertheless, because resource differences within work groups may create tensions that reduce
interdependencies and coordination, diversity may lower the productivity of knowledge assets.
Two of the TMT studies reviewed earlier emphasize knowledge management as a
diversity capability. Buyl et al. (2011) examined the effects of CEO characteristics and shared
experience with TMT members on the relationship between TMT functional diversity and firm
performance, and found the association to be stronger under conditions of high tenure overlap.
More importantly, the results showed the impact to be through distributed knowledge exchange
and integration within the team. Similarly, another study revealed interactive effects of TMT
deep-level diversity characteristics and debate on decision comprehensiveness, which in turn,
positively impacted firm performance (Simons et al., 1999). Taken together, the results of these
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studies suggest that diversity must be effectively drawn out and integrated into knowledge
management processes if a firm is to derive value from it.
Efficiency
Operational capabilities represent a firm’s capacity for converting inputs into outputs
with the goals of enhancing process objectives, such as quality and reliability (Miller & Roth,
1994). Focused on the coordination of resources and execution of routines (Helfat & Peteraf,
2003), such capabilities incorporate a firm’s day-to-day operations in the production and delivery
of products and services. Research suggests that the value in operational capabilities is in the
resultant technical efficiency, which allows firms to address market demand uncertainty and/or
compete more effectively in terms of cost and quality (Teece, 2007). Thus, through the
application of knowledge-based resources to generate product and process improvements, a
firm’s capability for operational efficiency enables its ability to meet or exceed consumer needs,
thereby increasing its likelihood for competitive success in the marketplace (see Tan, Kannan &
Narasimhan, 2007).
Similar to our above argument regarding the link between diversity and a capability for
knowledge management, we would expect diversity to reduce communication and cooperation
within firms; thus, potentially reducing work group functioning and hence, firm performance.
However, research also suggests the potential for competing effects as knowledge differences
have been shown to influence efficiency measures of team performance (see Ancona &
Caldwell, 1992; Bantel & Jackson; 1989; Hauptman & Hiriji, 1996; Keller, 2001). Specifically,
the findings of such research reveal positive effects of team functional diversity on schedule and
budget performance, driven by communication external to the team. Following this logic, we
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would expect deep-level diversity in firms to be positively related to their capability for
operational efficiency, as such differences may provide access to more and unique knowledge-
related resources, which may enhance technical quality. Consequently, greater operational
efficiency may improve a firm’s schedule and budget performance, which may translate into
higher operational performance overall.
Siciliano (1996) explored the relationship between board diversity and operational
efficiency, represented by the ratio of total revenues to total expenses for each of 240 YMCA
organizations. Although the correlations between different types of diversity and efficiency were
non-significant, these results may provide some insight into where the operational value of
diversity resides. Considering that operational capabilities represent a firm’s capacity for
converting inputs into outputs, it follows that diversity in such conversion processes would
impact its capability for efficiency. At the same, we would expect that diversity among board
members would be less related to efficiency given that boards have responsibility for firm
governance rather than its day-to-day operations. Further, while Siciliano (1996) used revenues-
to-expenses to capture the efficiency with which organizations controlled expenses and managed
its staff, the metric may not have adequately captured their technical efficiency in terms of its
coordination of resources. Accordingly, additional research is needed to explore the value-
creating (or value-diminishing) potential of diversity on firms’ capability for efficiency.
Alliancing
As strategic alliances are voluntary agreements between organizations to exchange and
share resources (Gulati, 1998), the ability to form and effectively manage multiple alliances, is
considered to be an important capability in competitive markets (Ireland, Hitt, & Vaidyanath,
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2002). As alliances provide firms with access to different types of information and resources
located in the external environment, the value of this capability is in the exploitation of available
competences to create new resources and interdependencies that lead to innovative forms of
competitive advantage (Teece et al., 1997). Research findings highlight the impact of alliancing
on innovation, in terms of new product development and ventures, which have subsequently
been shown to influence value creation in investor markets (see Rothaermel & Deeds, 2006).
Accordingly, the capability for alliancing is considered to drive a firm’s ability to operate in
rapidly changing environments and thus, serves a potential source of sustainable competitive
advantage (Ireland et al., 2002).
While Cox and Blake (1991) argue for the effects of diversity on resource acquisition in
terms of a firm’s ability to attract the best human resources, the underlying logic also applies to a
firm’s capability for alliancing. Social network research has shown diversity in individuals’
network connections to facilitate access to different types of knowledge and information, which
subsequently influences knowledge diffusion and transfer (Reagans & McEvily, 2003; Reagans
& Zuckerman, 2001). More accurately referred to as network range, or the proportion of network
ties that cross organizational and institutional boundaries (Burt, 1992), such boundary-spanning
is considered to enhance the capacity for resource exchange and organizational learning
(Reagans & Zuckerman, 2008). Thus, as differences in network ties may provide access to a
wider array of and more unique resources, we would expect surface-level diversity in firms to be
associated with their capability for alliancing. Further, as the transfer of information, both within
and outside of organizations, is associated with improved performance (Burt, 1992), a firm’s
alliancing capability may influence its return on knowledge assets and subsequently,
performance in investor markets.
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In addition to considering the influence of TMT diversity on firms’ capability for
research and development, Olson et al. (2006) examined its effects on alliancing.
Operationalizing strategic choice as the number of mergers and acquisitions in which a firm
engages, the authors found TMT functional diversity to be positively associated, and TMT age
diversity to be negatively associated, with strategic choice, which mediated the diversity-firm
performance relationship. These results suggest that diversity, especially within leadership, may
provide firms with an ability to effectively form and manage partnerships; thereby enhancing
their capacity for competing in dynamic markets. Thus, as we speculate above, the performance
effects of diversity in firms may also occur through an increased capability for alliancing with
other entities.
Strategic flexibility
Strategic flexibility refers to a firm’s capability for sensing and responding to
environmental changes (Eisenhardt, 1989). It captures a capacity for adaptability, such that firms
can devise ways of dealing with potential and/or unexpected market threats and challenges, as
well as a concurrent capacity for speed, such that firms can adapt quickly to competitive changes
in the market. It also implies a capacity for dealing with complexity given that markets can be
characterized by inter-organizational connections, network alliances, and path dependencies
(Zaheer & Zaheer, 1997). Because strategic flexibility involves both environmental scanning and
response, research suggests that this capability creates value for firms through the use and
reconfiguration of knowledge assets to be responsive to competitive signals and market forces
(Teece et al., 1997). This value is supported by empirical evidence demonstrating a link between
strategic flexibility and firm performance (see Zaheer & Zaheer, 1997).
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Cox and Blake (1991) posit that diversity enhances organizational flexibility.
Specifically, they argue that because diversity engenders less system standardization and greater
system agility, organizations will be able to respond to changes in their external environmental
more quickly and at lower costs. Such effects are likely to occur through access to diverse and
non-redundant sources of information (Burt, 1992), which provides firms with greater awareness
of environmental trends. As research has shown that such environmental knowledge enhances a
firm’s capacity for reacting to market variations (Eisenhardt, 1989; Zaheer & Zaheer, 1997), we
would expect deep-level diversity in firms to be associated with their capability for strategic
flexibility. While the specific source of such diversity may vary (e.g., industry experience,
network ties, functional background), we conjecture that such strategic flexibility will improve
firms’ abilities to generate cash flows, increase market value, and enhance other investor
indicators of performance.
Andrevski et al. (2014) investigated the mediating role of competitive intensity, or a
firm’s ability to identify and exploit opportunities for generating competitive actions, in the
relationship between managerial diversity and performance. Given that the results showed racial
diversity among managers to be positively related to the initiation and variety of competitive
actions, which were subsequently related to firm performance, especially in high-growth
environments, we might conclude that diversity enhances a firm’s capability for strategic
flexibility. Because such flexibility encompasses environmental scanning and responding to
competitive changes in the market, the findings suggest that integrating diversity into such
activities may create value for firms through a greater ability to respond to market forces.
Additional research is needed, however, to explore and understand strategic flexibility as a
dynamic capability that translates diversity into firm performance.
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Organizational Effectiveness
Organizational effectiveness refers to a firm’s performance outcomes most directly
associated with its strategy, tactical objectives, and stakeholder interests (Richard et al., 2009).
Broader than measures of financial performance and economic valuation, such measures capture
value created (or reduced) by a firm’s capabilities and its subsequent impact on firm
competitiveness. While firms have divergent strategic motivations that give rise to different
measurement needs, research suggests that organizational effectiveness can primarily be
indicated by three categories of indicators: market, operational and stakeholder.
Market indicators are those outcomes that reflect a firm’s performance among customers,
clients or others who use its products or services. Operationalized via perceptual or behavioral
measures, market indicators signal consumer attitudes, intentions or purchase/consumption of a
product or service (Gupta & Zeithaml, 2006). Such indicators may include: customer
satisfaction, customer loyalty, return intentions, and customer yield (e.g., contacts-to-close).
Market indicators may also include metrics that are reflective of a firm’s market reach, or
capacity to expand or diversify its target markets, such as new product/service development (in
terms of number and rate), product/service variety, and customer diversity.
Operational indicators refer to those measures that quantify the achievement of a firm’s
goals and objectives within its value chain activities (Combs, Crook & Shook, 2005). Such
measures indicate the efficiency or effectiveness of a firm’s operational processes, which directly
influence its overall performance (Hamann et al., 2013). For example, productivity measures
such as cycle or delivery time, service processing time, lead time, utilization, effort reduction,
budget performance, and quality may provide insight into how well a firm is using its diversity
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resources. Similarly, more qualitative measures, such learning and strategic human resource
effectiveness (Huselid, Jackson & Schuler, 1997), may capture how effectively a firm is
managing such resources.
Stakeholder indicators are those outcomes that reflect a firm’s performance among other
groups that are directly impacted by a firm’s actions and have an interest in its success. For
example, as investors put capital into firms with the intent of realizing a return on their
investment, metrics such as investor satisfaction, investment intentions, and donations or funds
raised, may reflect a firm’s capacity for externally generating resources. Similarly, as firm
performance is typically dependent upon economic transactions with other entities, value
creation may be assessed via measures of partnership effectiveness, such as number of strategic
alliances, supplier performance, and total earned value. Community engagement metrics, which
include participation and local reputation, may also be useful for gauging the effects of diversity
on organizational effectiveness.
Directions for Future Research
The proposed model and its underlying assumptions introduce a new approach to
research on diversity and firm performance. Extending current perspectives of diversity as a
resource or compilation of resources that organizational action, we offer a process-based
perspective for understanding its deployment in ways that impact firm effectiveness. We argue
for moving beyond the examination of statistical relationships between diversity and firm
financial performance to focus on how firms operate and the integration of diversity into such
operational processes. By considering the potential impact of diversity on firms’ value-driven
activities, we consider both diversity as a resource in organizations as well as firms’ abilities to
extract economic benefit from this resource. We should note, however, that our proposed list of
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diversity capabilities is not intended to be exhaustive, but instead intended to stimulate thinking
about how value is created in organizations based on existing theory and research about the
effects of diversity. Thus, future studies of diversity and firm performance should consider how
diversity resources might be configured to develop capabilities for addressing competitive
demands. While the capabilities explored may be more generalized (e.g., R&D capability) or
firm-specific (e.g., patent development or commercialization), we believe that this approach can
be useful for gaining greater insight into the how diversity-related processes influence firm-level
outcomes.
While our model does not specify the level at which diversity resides, future research
may make predictions regarding the effects of different types of diversity based on the firm
capabilities of interest. For example, as a principal function of boards of directors is to enable
access to distinctive resources that can be deployed for environmental scanning and reacting to
environmental uncertainty (Pfeffer & Salancik, 1978), both surface- and deep-level diversity
may be may be particularly influential in the development of firm capabilities. However, the
their effects on specific capabilities may deviate, as surface characteristics may facilitate a firm’s
capability for alliancing given more stratified links to the external environment, while deep
characteristics may enhance its capability for strategic flexibility, or the ability to respond to
changes in that environment. Similarly, as decisions regarding how to combine resources drive
capability development (Teece et al., 1997), managerial actions to innovate new business
processes may be enabled by deep-level diversity, while surface characteristics may give rise to
coordination issues and other process losses, thereby diminishing knowledge management. As
suggested by these examples, the particular capabilities shaped by diversity may depend on the
types of diversity and the resultant effects may be either positive or negative. Accordingly, future
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research should explore diversity-capability relationships at different levels to capture the
additive effects of diversity and better account for net value creation in organizations.
While our model offers guidance for distinguishing between different types of firm
performance, it poses some advantages and challenges for assessing these effects. Given that
capabilities are more directly impacted by firm activities, our framework offers a more localized
view of performance. However, given variability in organizational routines and output, the
operationalization of diversity-related capabilities may differ across firms. For example, research
and development capability may be indicated by return on R&D investment in one firm and
patent yield in another. Likewise, efficiency may be measured as the rate of improvement in
cycle time (i.e., speed of production) or rate of improvement in yield (i.e., quality of production).
Considering the range of metrics to represent performance along capability dimensions, we
recommend the use of multiple indicators in the interest of both content validity and reliability.
In addition to reflecting measurable process factors in organizations, such an approach would
allow greater comparisons across studies at different levels of analysis as well as improve the
explanatory power of such variables on firm financial performance.
Although much of the dynamic capabilities literature explores how firms’ asset positions
can lead to competitive advantages, some researchers recommend also giving consideration to
strategic liabilities in order to fully understand firms’ net performance (Arend, 2004, 2008).
Strategic liabilities are resources that damage and/or destroy a firm’s ability to produce rents
(Arend, 2004), and therefore detract from its overall performance. It is important to note that
such liabilities are not inherently destructive, but provide less value to a firm than it does to its
rivals given variable applicability across firms (Sirmon, Hitt, Arregle, & Campbell, 2010).
Strategic liabilities are also economically inconvertible and incommutable, such that costs to
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convert the liability into a strategic asset outweigh expected economic gains to a firm and those
costs are cannot be transferred to other parties, respectively (Arend, 2004; Powell, 2001).
Consequently, such liabilities may not only provide greater value to rivals, but may reduce a
firm’s competitiveness through inefficiencies, an increased likelihood of attack by rivals, and/or
an inability to take advantage of market opportunities (Sirmon et al., 2010).
To fully examine the net firm performance effects of diversity, future research should
consider its value-creating and value-reducing potential. For example, as suggested in the
previous section, increased surface- and deep-level diversity in a firm’s R&D unit may enhance
its capability for new product development while slowing down the product development
process. Thus, research is needed to capture the aggregate impact of diversity on firm
performance through different firm capabilities. Similarly, as strategic liabilities may emerge as a
by-product of previous capabilities (Arend, 2004), research that examines changes in a firm’s
ability to realize the value in diversity may provide insight in the conditions that move diversity
from a capability to a strategic liability. For instance, while a firm may hire for specific
competencies (e.g., language skills or cultural knowledge) to gain market access and/or address
an underserved need in the marketplace, rivals may subsequently develop similar capabilities;
thus, reducing the firm’s product/service demand and market share. Alternatively, if the firm
does not have a climate to facilitate the management and inclusion of such diversity, other
potential liabilities in the form of retention issues, damage to its employment brand, or even
lawsuits may result. Accordingly, research attention to strategic liabilities and more specifically,
the balance between capabilities and liabilities resulting from diversity, may be important for
advancing the diversity-firm performance literature.
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There are important implications for future research that go beyond testing our proposed
model. Specifically, as a fundamental assumption of dynamic capabilities theory is that the value
of capabilities increases in dynamic, rather than in stable, environments (Zollo and Winter,
2002), capability models of diversity and firm performance should incorporate market or
industry characteristics. This is not to suggest the exploration of contextual variables as boundary
conditions to the relationships proposed here. Instead, our recommendation is for future research
to consider how resources should be configured to develop and deploy capabilities to drive value
creation in particular contexts. While the utility of dynamic capabilities is generalizable, research
suggests that complexity and/or uncertainty increase their value (Eisenhardt & Martin, 2000).
Accordingly, accounting for the relationships between different types of diversity and
capabilities across dimensions of dynamism and unpredictability may provide insight into
environmental fit (Teece et al., 1997) – specifically, how diversity influences capabilities that
facilitate greater adaption in changing environments.
Conclusion
Despite a growing body of literature on diversity and firm performance, our review of
research across fields, theoretical traditions, and levels of analysis suggests the relationship is not
a simple one. However, we endeavored to integrate theory and research across both macro and
micro research domains into one perspective on the firm-level performance effects of diversity.
We believe this integration represents the major contribution of our paper as it allows us to see
points of convergence and divergence, identify unanswered questions about the diversity-
performance relationship, speculate mechanisms underlying this relationship, and direct the field
towards an alternative approach to research in this area. It should be noted that our review is not
intended to criticize existing research given that such studies have been effective for providing a
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performance-based perspective on diversity. Instead, we hope to encourage an integrative,
process-based perspective to understand value creation and capture as it pertains to diversity and
firm-level outcomes. We believe that this should be the next iteration of research in this area if
we are to advance an understanding of the operation of diversity within and between firms and to
make prescriptions for how to leverage diversity resources to impact organizational performance.
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Table 1
Summary of Key Findings by Level of Analysis
Boards of Directors
S
TUDY
K
EY
F
INDINGS
Bonn (2004)
The proportion of female directors is positive related to firm performance (i.e., market-to-book ratio)
Campbell &
Minguez-Vera
(2008)
Gender diversity (i.e., % of women) positively affects firm value, although the opposite causal relationship is not significant
Campbell &
Minguez-Vera
(2010)
The announcement of female board appointments is related to positive stock market reaction (i.e., abnormal returns)
Gender diversity (i.e., % of women) positively affects firm value
Carter, D’Souza,
Simkins &
Simpson (2010)
Gender diversity on boards and board committees are positively related to firm performance, but not to firm value
The above results only hold in fixed-effect regression equations; thus, suggesting endogeneity
Carter, Simkins &
Simpson (2003)
Diversity, in terms of the presence and percentage of women or minorities, is positively related to firm value
Erhardt, Werbel &
Shrader (2003)
Diversity, in terms of the percentage of female and minority directors, is positively related to firm performance
McIntyre, Murphy
& Mitchell (2007)
Age and tenure diversity are related to firm value (i.e.,Tobin’s Q), such that low and high levels of diversity are associated with lower
performance while moderate levels of diversity are associated with higher performance
Rose (2007)
Gender, functional and national diversity are not significantly related to firm value
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60
60
Siciliano (1996)
Occupational diversity is positively related to firm performance, while age diversity is positively related to level of donations
Gender diversity is positively related to performance as mission fulfillment, but negatively related to performance as level of donations
Smith, Smith &
Verner (2006)
Board gender diversity is positively related to firm performance as contribution margin, while CEO gender diversity relates to
performance as gross profit margin)
On boards, female non-staff members have a lower effect on firm performance than do staff members
Van der Walt,
Ingley, Shergill &
Townsend (2006)
Among firms with high strategic complexity, those with low diversity perform better than those with high diversity
Top Management Teams
S
TUDY
K
EY
F
INDINGS
Boone &
Hendriks (2009)
Functional background diversity increases firm performance when collaborative behavior, accurate information exchange, and decision-
making decentralization are high
Locus of control diversity decreases firm performance only when decision-making decentralization is high
Buyl, Boone,
Hendriks &
Matthyssens
(2011)
The relationship between functional diversity and firm performance is stronger when the CEO is not the founder of the firm but has high
tenure overlap with TMT members
The moderating effect of CEO as founder is mediated by the interaction of functional diversity and information exchange & integration
Carpenter (2002)
The positive relationship between educational diversity and firm performance is stronger in firms with high levels of internationalization,
while the positive effects of background and tenure diversity are weaker in firms with high levels of internationalization
The complexity-contingent relationships between educational, background, and tenure diversity and firm performance is strongest in
short-tenured teams
Certo, Lester,
Dalton & Dalton
(2006)
Diversity, in terms of functional and tenure diversity, is positively related to firm performance (i.e., ROA)
Potential moderating influences on the above results include strategic variables (i.e., diversification, R&D expenditures,
internationalization) and TMT operationalizations
Goll, Sambharya
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& Tucci (2001)
Age, tenure, education, and functional background diversity are positively related to progressive decision-making
Age and education diversity are positively related to firm performance
Keck (1997)
Functional diversity is positively related to firm performance in turbulent contexts
Team tenure diversity is positively related to firm performance in stable contexts and negatively related to performance in turbulent
contexts, while there is a positive association in the microcomputer industry regardless of environmental context
Kilduff, Angelmar
& Mehra (2000)
Age diversity is positively related to firm performance
Cognitive diversity (i.e., interpretive ambiguity) is positively related to firm performance, but there is a reciprocal effect of such
performance changes on cognitive diversity such that ambiguity is reduced
Li-Qun, Chung-
Ming, Young &
Wang (2005)
Average age is positively related to firm performance (i.e., ROA & ROE)
Education and career experience diversity is negatively related to firm performance, while occupational experience diversity is positively
related to performance
Murray (1989)
Temporal and occupational diversity are positively related to short- and long-term performance, especially in the oil industry
Olson, Parayitam
& Twigg (2006)
Functional diversity is positively related to strategic choice (i.e., M&A and innovation), while age diversity is negatively related to
strategic choice
The positive relationship between functional diversity and firm performance is mediated by strategic choice
Pegels, Song &
Baik (2000)
Educational and functional diversity is negatively related to firm performance, such that airlines that deviate from the dominant
characteristics of their competitive interaction groups have lower future profitability potential
Ren & Wang
(2011)
Gender diversity is positively related to firm value, especially when female TMT members have high human capital (i.e., average
education level) or social capital (i.e., social and political connections)
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Richard & Shelor
(2002)
Age diversity has both a positive linear and curvilinear, inverted U-shaped relationship with firm performance (i.e., sales growth)
The relationship between age diversity and firm performance as sales growth is moderated by environmental complexity, innovation and
decentralization, while the relationship with performance as ROA is moderated only by decentralization
Roberson & Park
(2007)
Leader racial diversity has a curvilinear, U-shaped relationship to firm performance (e.g., book-to-market), such that performance
declines with increases in diversity up to approximately 22%, beyond which further increases are associated with improved performance
Simons, Pelled &
Smith (1999)
Education level diversity and perceived environmental uncertainty diversity each interacts with debate to affect firm performance, such
that performance is higher in firms with greater diversity and higher levels of debate
The results are partially mediated by decision comprehensiveness
West & Schwenk
(1996)
Diversity is not significantly related to firm performance.
Managers
S
TUDY
K
EY
F
INDINGS
Andrevski,
Richard, Shaw &
Ferrier (2014)
Racial diversity is positively related to firm performance, which is mediated by competitive intensity (i.e., initiating more competitive
actions and more competitive action variety), especially in high-growth environments
Dwyer, Richard &
Chadwick (2003)
Gender diversity is positively related to performance (i.e., productivity) in firms with a stronger growth orientation or clan
organizational culture, while it is negatively related to performance (i.e., ROE) in firms with a stronger adhocracy culture
Pitts & Jarry
(2007)
Manager ethnic diversity is not significantly related to school performance, although teacher diversity is negatively related
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Richard, Barnett,
Dwyer &
Chadwick (2004)
The relationship between racial diversity and firm performance is moderated by innovativeness, such that low and high levels of
diversity are associated with higher performance than are moderate levels of diversity in firms with highly innovative strategic postures
The relationship between gender diversity and firm performance (i.e., productivity) is moderated by risk taking, such that low and high
levels of diversity are associated with lower performance than are moderate levels of diversity in high risk-taking firms
Shrader, Blackburn
& Iles (1997)
Gender diversity is positively related to firm performance, while diversity on TMTs & boards is not significantly related to performance
Employees
S
TUDY
K
EY
F
INDINGS
Frink, Robinson,
Reithel, Arthur,
Ammeter, Ferris, &
Kaplan (2003)
Gender diversity is related to perceived market performance, such that it increases with greater diversity up to 50% female
representation and decreases with further increases in diversity
For performance (i.e., EBIT) in the service/wholesale/retail industry sector, the inflection point is 56%
Gonzalez & DeNisi
(2009)
Racial/ethnic diversity is associated with higher firm performance (i.e., productivity & return on income) is positive under conditions of
a supportive diversity climate, but negative under adverse climate conditions
Gender diversity and performance (i.e., productivity & return on profit) have an inverse U-shaped association under conditions of a
supportive diversity climate and a U-shaped association under adverse climate condition
Hartenian &
Gudmundson
(2000)
Racial diversity is positively associated with firm performance, although the results do not hold across multiple years
Herring (2009)
Gender diversity is positively related to perceived sales, number of customers and profitability, while racial diversity is positively
related to sales, number of customers and market share, after accounting for other explanatory variables
Kunze, Boehm &
Bruch (2011)
Age diversity is negatively related to firm performance through the mediating effects of perceived age discrimination climate and
collective affective commitment
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Leonard, Levine &
Joshi (2004)
The effects of racial diversity on firm performance varies based on the category examined (e.g., % of Asians in the surrounding
community is positively related, % of black employees is negatively related, % of Hispanic employees is dependent on store location in
communities where a subset of potential customers is Hispanic)
Gender (i.e., % of female employees) and age (i.e., % of older employees) diversity are negatively related to firm performance
Li, Chu, Lam &
Liao (2011)
Age diversity in positively related to firm performance (i.e., ROA) when geographic market diversification is high
The effects of age diversity are stronger for firms from Western societies than those from East Asian societies
Richard (2000)
Racial diversity interacts with business strategy to affect firm performance, such that diverse firms with a growth strategy experience
higher performance than those with a no-growth strategy or a downsizing strategy, the latter of which has the lowest productivity gains
Richard, Ford &
Ismail (2006)
Gender and racial diversity interacts with organizational life-cycle to affect firm performance, such that diversity enhances performance
in banks at earlier stages of development than in those at later stages of development
Gender diversity interacts with organizational structure to affect firm performance (i.e., ROA), such that diversity enhances performance
in banks with a narrow span of control than in those with a broad span of control
Richard, McMillan,
Chadwick &
Dwyer (2003)
Racial diversity interacts with innovation strategy to affect firm performance, such that diversity enhances performance in banks
pursuing an innovation strategy and reduces performance in those with a lower degree of innovativeness
Richard, Murthi &
Ismail (2007)
Racial diversity has a curvilinear, U-shaped relationship with short-term performance (i.e., productivity), although the relationship is
stronger in service rather than manufacturing firms and in firms operating in more stable rather than volatile environments
Racial diversity has a positive, linear relationship with long-term performance (i.e., Tobin’s Q), although the relationship is stronger in
munificent environments
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Table 2
Summary of the Study of Diversity and Firm Performance by Level of Analysis
Boards of Directors
S
TUDY
D
IVERSITY
T
YPE
O
UTCOMES
T
HEORY
M
EDIATORS
M
ODERATORS
Bonn (2004) Outsider, gender, age Market-to-book value, ROE Stewardship theory
Campbell &
Minguez-Vera (2008)
Gender Tobin’s Q Value-in-diversity, social
psychology
Campbell &
Minguez-Vera (2010)
Gender Tobin’s Q Value-in-diversity, social
psychology
Carter, D’Souza,
Simkins & Simpson
(2010)
Gender, race Tobin’s Q, ROA Resource dependence,
human capital, agency,
social psychology
Carter, Simkins &
Simpson (2003)
Gender, race Tobin’s Q Value-in-diversity,
agency
Erhardt, Werbel &
Shrader (2003)
Gender, race ROI, ROA Value-in diversity, social
psychology, upper
echelons
McIntyre, Murphy &
Mitchell (2007)
Tenure, age Tobin’s Q, economic value
added (EVA), ROA
Agency theory, group
dynamics
Rose (2007) Gender, educational
background, citizenship
Tobin’s Q Organizational control
Siciliano (1996) Gender, age, occupation Social performance,
efficiency (i.e., revenues-to-
expenses), donations
Resource dependence
Smith, Smith &
Verner (2006)
Gender Gross profit-to-sales,
contribution margin-to-sales,
operating income-to-sales,
net income after tax-to-sales
Value-in-diversity,
information elaboration
Van der Walt, Ingley,
Shergill & Townsend
(2006)
Gender, race, age, ROA, ROE, sales growth,
total net asset growth, cash
flow return on total assets
Value-in-diversity,
information elaboration,
corporate governance
Strategic complexity
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43
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66
Top Management Teams
S
TUDY
D
IVERSITY
T
YPE
O
UTCOMES
T
HEORY
M
EDIATORS
M
ODERATORS
Boone & Hendriks
(2009)
Functional
background, locus of
control
ROS, ROA Upper echelons,
information elaboration
Collaborative behavior,
accurate info exchange,
decentralized decision-
making
Buyl, Boone, Hendriks
& Matthyssens (2011)
Functional background ROS Upper echelon,
information elaboration
Information exchange
and integration
CEO characteristics
(functional background,
status as founder, shared
experience with TMT)
Carpenter (2002) Education, functional
background, tenure
ROA Upper echelons Internationalization,
TMT average tenure
Certo, Lester, Dalton
& Dalton (2006)
Organizational &
position tenure,
functional
background, education
ROA (1-year, 3-year &
growth), ROE (3-year), sales
growth
Upper echelons,
information elaboration
Goll, Sambharya &
Tucci (2001)
Age, tenure,
education, functional
background
ROA, ROI, ROE, earnings
per share (EPS)
Upper echelons
Keck (1997) Functional
background, tenure
ROA Group theory (i.e., task &
maintenance functions)
Kilduff, Angelmar &
Mehra (2000)
Cognitive, nationality,
function, age
Market share, profitability
(simulated)
Upper echelons, social
information processing
Li-Qun, Chung-Ming,
Young & Wang
(2005)
Age, education,
occupational field,
career experience
ROA, ROE Relational demography,
upper echelons
Murray (1989) Age, firm tenure, team
tenure, occupational
background, education
Earnings-to-sales, earnings-
to-total capital, earnings-to-
net worth & earnings-to-
equity; stock price-to-
earnings, stock price-to-book
value
Organizational control Competition, change
Olson, Parayitam &
Twigg (2006)
Functional
background, age
ROA Value-in-diversity M&A activity, R&D
intensity
Pegels, Song & Baik
(2000)
Function, age,
education, company
tenure,
Load factors Strategic group, strategic
choice, upper echelons
Competitive interaction
group
Ren & Wang (2011) Gender Tobin’s Q Resource dependence Human capital, social
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capital
Richard & Shelor
(2002)
Age ROA, percentage change in
sales
Social psychology,
information elaboration,
contingency
Centralization, R&D
intensity, environmental
complexity
Roberson & Park
(2007)
Race Revenues, net income, book-
to-market value of common
equity
Upper echelons,
information elaboration
Simons, Pelled &
Smith (1999)
Functional
background,
education, tenure, age,
perceived
environmental
uncertainty
Profit-to-sales, sales growth Information elaboration Decision
comprehensiveness
West & Schwenk
(1996)
Composite of 12
categories
Net profit, ROA, overall
perceived performance
Strategic consensus Industry
Managers
S
TUDY
D
IVERSITY
T
YPE
O
UTCOMES
T
HEORY
M
EDIATORS
M
ODERATORS
Andrevski, Richard,
Shaw & Ferrier (2014)
Race Market share gain,
stockholder returns
Knowledge-based view Competitive intensity Environmental
munificence
Dwyer, Richard &
Chadwick (2003)
Gender Employee productivity, ROE Upper echelons, social
psychology, contingency
Growth orientation,
organizational culture
Pitts & Jarry (2007) Race Student pass rates, SAT
scores, dropout rates
Social psychology,
information elaboration,
similarity-attraction
Richard, Barnett,
Dwyer & Chadwick
(2004)
Gender, race Employee productivity, ROE Value-in-diversity Entrepreneurial
orientation, risk-taking,
innovativeness
Shrader, Blackburn &
Iles (1997)
Gender ROA, ROI, ROE, ROS Resource-based view
Page 67 of 69 Academy of Management Annals
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Employees
S
TUDY
D
IVERSITY
T
YPE
O
UTCOMES
T
HEORY
M
EDIATORS
M
ODERATORS
Frink, Robinson,
Reithel, Arthur,
Ammeter, Ferris, &
Kaplan (2003)
Gender Perceived market
performance, employee
productivity, earnings before
interest and taxes (EBIT)
Organizational
demography
Gonzalez & DeNisi
(2009)
Gender, race Employee productivity,
return on profit; return on
income
Resource-based view Diversity climate
Hartenian &
Gudmundson (2000)
Race Revenue, net income Value-in-diversity
Herring (2009) Gender, race Sales, number of customers,
perceived market share &
relative profitability
Value-in-diversity,
“diversity as process
loss”, institutional theory
Organization
characteristics (legal
form, size, age),
industry, region
Kunze, Boehm &
Bruch (2011)
Age Composite of operational and
organizational performance
Social psychology, career
timetables, prototype
similarity
Perceived age
discrimination
climate, affective
commitment
Leonard, Levine &
Joshi (2004)
Gender, race, age Average real monthly sales
per store
Social psychology,
similarity-attraction,
Becker’s theory of
customer discrimination
Li, Chu, Lam & Liao
(2011)
Age ROA, employee productivity Value-in-diversity,
resource-based view of
the firm
Geographic market
diversification, firm
country of origin
Richard (2000) Race Employee productivity, ROE,
perceived market
performance
Value-in-diversity,
resource-based view of
the firm, contingency
Growth strategy
Richard, Ford &
Ismail (2006)
Gender, race Employee productivity, ROE,
ROA
Information elaboration,
contingency
Organizational structure,
lifecycle stage
Richard, McMillan,
Chadwick & Dwyer
(2003)
Race ROE Social psychology,
resource-based view of
the firm, contingency
Innovation strategy
Richard, Murthi &
Ismail (2007)
Race Employee productivity,
Tobin’s Q
Information elaboration,
social contact,
contingency
Industrial sector,
munificence,
environmental instability
Page 68 of 69Academy of Management Annals
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Figure 1
A Dynamic Capabilities Approach to the Study of Diversity and Firm Performance
Surface-level
Diversity
Market Indicators
Operational Indicators
Stakeholder Indicators
CAPABILITIES
Market access
Research & development
Knowledge management
Efficiency
Alliancing
Strategic flexibility
Deep-level
Diversity
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