Innovation Revenue Through Diversity: Compelling New Evidence
| By Terence Brake
The evidence is clear: Management diversity boosts innovation
The Boston Consulting Group (BCG) and the Technical University of Munich published the results of a recent survey of diversity managers and managing directors at 171 German, Swiss, and Austrian companies. The companies represented a wide variety of industries, including chemicals, technology, consumer goods, finance, and health care.
‘Innovation revenue’ in the report refers to “the share of revenues that companies have generated from enhanced or entirely new products or services in the most recent three-year period.”
The study looked at the impact of six types of diversity:
- Gender: percentage of women in management at any level (not just executive management)
- Country of origin: percentage of managers born in other countries or who are the children of parents born in other countries
- Career path: percentage of managers who have worked at other companies
- Industry: percentage of managers who have experience in sectors other than the surveyed company’s
- Age: extent to which managers are evenly distributed across age groups
- Academic background: the differences in university degrees and other aspects of academic training among members of management
Four of the six types of diversity, positively correlate with innovation:
- Industry background
- Country of origin
- Career path
Age diversity is associated with less innovation, and academic background appears to have no impact at all on innovation, either positive or negative.
Diversity has an especially positive impact on complex companies – those that have multiple product lines or that operate in multiple industry segments. Complex companies face so many risks they cannot afford to be tied to a single source of revenue, or have a management team with members sharing the same background. Similarity in background results in less than optimal decision-making.
The positive impact of diversity also increase with company size. Up to 41% of big companies’ variation in innovation can be explained by diversity in the industry backgrounds, career paths, and gender of their managers.
The report is clear on that gender diversity needs to go beyond tokenism. Innovation performance only increased significantly when percentage of women in management positions was over 20%. A high percentage of women in the workforce doesn’t make an impact on innovation if only a small number of women are managers.
Also of great interest is the finding that having a high percentage of women managers is positively correlated with disruptive innovation, i.e. innovation in which a new product, service or business model fully replaces the older version.
Diversity has the greatest impact on innovation at companies that exhibit five conditions in the work environment:
- Participative Leadership: Managers allow employees to shape decisions
- Openness to Cognitive Diversity: Employees feel they can freely speak their mind
- Strategic Priority: Top management visibly supports diversity
- Frequent Interpersonal Communication: Teams often initiate personal conversations
- Equal Employment Practices: Equal pay for equal work
Of the five work environment conditions, participant leadership behavior appears to be the most important. Sixty-eight percent of companies said that it is a prerequisite to diversity-led innovation. The next in importance is openness to cognitive diversity, cited by 62 percent of companies.
On average, companies that ensure the existence of favorable work environment conditions, generate 33% of their revenues from innovative products and services; companies with less favorable work environment conditions get less than a quarter.
Companies with favorable work environments also have margins for earnings before interest and taxes (EBIT) of 17% and revenue growth of 3.9%; those that don’t have 13% EBIT margins and 3.4% revenue growth.
Most companies have room for improvement in creating diversity-led innovation. Of the companies studied, only 17% were above average in both diversity and innovation. Any innovation boost, of course, isn’t the result of a single type of diversity. As the report says, “The presence of managers who are female or from other countries, industries, companies can cause an increase in innovation.”
Along with diversity, we must never forget that the work environment is key in producing innovation revenue.
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