Cultural Diversity and Organisational Performance

Cultural Diversity and Organisational Performance

by Felicity Menzies

Today’s business leaders face unprecedented diversity in their markets and their workforces.

Increasingly, products and services are ‘Made in World’ rather than ‘Made in The United States’ or ‘Made in China’, with design, manufacturing, and marketing fragmented across the most cost-effective locations. Goods cross borders several times before being transformed into final products. In 2011, nearly half of world trade in goods and services took place within global production chains, up from 36 per cent in 1995(1).

Foreign trading has become more diversified, with developing nations becoming key players. Driven by rapid industrial growth and increasing per-capita income levels, developing countries accounted for around 44% of global exports in 2014, up from 26% in 1995(1).

Once dominated by the developed economies of the United States, Germany, and Japan, China overtook Japan as the leading Asian exporter in 2004 and surpassed the United States in 2007 and Germany in 2009 to become the world’s leading exporter(1). The BRICS (Brazil, Russia, India, China and South Africa) increased their share of world exports from 8 per cent in 2000 to 19% in 2014(1).

The developing world has also become a major destination of exports. The total value of world exports to developing countries was US$ 4,198 in 2014, nearly nine times as high as in 1995(1). In particular, Asia has emerged has an important trading region, accounting for a third of global merchandise trade in 2014(1).

Trading has also become more diversified within emerging markets—exports from developing economies to other developing economies has increased steadily since 2000, reaching 52 per cent of developing countries’ total merchandise exports in 2014 compared with 38 per cent in 1995(1). The volume of trade between China and Africa rose from $9 billion in 2000 to $211 billion in 2012(2).

With OECD forecasts indicating that today’s developing and emerging countries will account for an increasing share of global GDP, these trends in the growth and shifting patterns of global trade are likely to continue. The combined GDP of China and India was 33% of that of the OECD in 2010 but is expected to rise to 73% by 2060(3).

By 2025, annual consumption in emerging markets will account for 50% of world consumption rising to $30 trillion, up from $10 trillion in 2010(4). In line with these figures, Western multinationals project that the share of their business based in emerging markets will increase from some 20 percent to 50 percent or more over the next decade(5).

Asia is the single biggest growth opportunity. In 1980, the world’s economic center of gravity sat firmly in the middle of the Atlantic Ocean(6). At that time, about 70% of the world’s GDP was distributed between the United States and Western Europe(6). By 2015, the world’s economic center of gravity has moved just north of ASEAN, pulled by the rise of China and India, and by the 5% growth p.a. of the ASEAN economy(6).

By 2025, Asia will account for almost half of the world’s GDP and will be home to 4 of the largest global economies – China, India, Japan, and Indonesia(7). Twenty of the worlds top 50 cities ranked by GDP will be in Asia by 2050, up from 8 in 2007(8). By 2030, Asia will account for two-thirds of the world’s middle class, up from one-third today(9).

Not only are markets more diverse at the national level, there are significant regional variations in consumer preferences and market conditions, particularly in emerging markets. As McKinsey reports(4);

 ‘China has 56 different ethnic groups, who speak 292 distinct languages; India embraces about 20 official languages, hundreds of dialects, and four major religious traditions; Brazil’s citizens are amongst the world’s most ethnically and culturally diverse; the residents of Africa’s 53 countries speak an estimated 2,000 different languages and dialects.Even geographically proximate tier-one cities can be radically different. Consider Guangzhou and Shenzhen, two southern Chinese metropolitan centres of comparable size, separated by a distance of just 100 kilometres. In the former, the majority of consumers are locally born Cantonese speakers. In the later, more than 80% are migrants who communicate in Mandarin, and reflecting disparate regional origins, have far more diverse tastes in consumers electronics, fashion and food’.p9-10.

The shift in wealth, trade, and influence to emerging markets mirrors trends in population growth forecasts(10). In the 21st century, 97% of the world’s population growth will come from developing countries in Asia, Africa, and the Middle East.

In contrast, forecast low fertility rates in developed countries across Europe and in Japan mean that many of these countries (in the absence of increased immigration) will experience negative population growth. The United States is the notable exception with the population forecast to increase 3% per annum from 320 million to 400 million by 2050 due to immigration and a robust fertility rate.

Globally, lower birth and mortality rates combined with longer life expectancies are contributing to a gradual increase in the proportion of the world’s aged population. By 2050, one-fifth of the global population will be aged 60 or above, twice the current percentage. However, there are notable differences in the forecasts across regions.

Most of this transition to an older population will occur in developed countries across the United States, Europe, and Japan, and in developing China and Russia. In contrast, in the least developing nations, the proportion of working-age adults to the aged population is increasing.

National differences in demographic transition will result in some countries experiencing significant labour shortages whilst others will have large surpluses. By 2030, China will have more college graduates than the entire US workforce; by 2020, India will be producing four times as many graduates as the US(11).

Subject to public policy, these differences will continue to drive significant international migration as workers from nations with labour surpluses flow to plug labour deficits elsewhere. More than one billion people crossed borders in 2009, over five times the number in 1982(12).

Differing population growth rates for cultural identity groups intranationally will also influence the demographic composition of domestic communities. In the United States, for example, the working and consumer population is rapidly becoming more racially and ethnically diverse due to the combination of immigration and differences in the population growth rates of its largest identity groups(13).

As migration and demographic patterns change the face of local communities, even individuals who never interact outside their national borders are likely to come into contact with diverse others.

The Opportunity

Diversity has tremendous value.

New consumer markets offer opportunities for growth. Businesses can arbitrage talent and suppliers around the world. The global labour market increases the pool of talent a company can recruit from.

Also, workforce diversity can drive market outperformance. The greater variety of ideas and perspectives accompanying a diverse workforce increases the breadth of solutions available for problem solving(14), promotes more critical information processing in decision making(15) and stimulates innovation(16) and creativity(17). A diverse workforce can also better understand and respond to the needs of varied customers and increase access to new suppliers and other stakeholders(18).

In particular, cultural diversity offers the insight and flexibility needed for sustainable global success.

Reflecting its civil rights roots, workplace diversity has traditionally been defined and managed in terms of legally protected categories in the United States including race, gender, and disability. These ‘visible’ diversity markers trigger stereotyping and other biases.

Cultural diversity shifts the focus from visual differences to variations in behaviours and mental processes shared by a group of people connected through common life experiences. Cultural diversity intersects with other diversity categories when a group can be distinguished in terms of its shared mental framework for interpreting and responding to the world.

The impact of cultural diversity on organisational outcomes may be magnified relative to other sources of diversity(19). Cultural diversity is most likely to involve differences in perspectives, knowledge, and experience necessary for optimal information processing, decision-making, and innovation, and for understanding the needs and concerns of different consumer segments and diverse stakeholders at home and across borders.

Earlier this year, McKinsey released the results of its global study of leadership diversity and corporate financial returns(20). The results present a compelling case for cultural diversity at top management and board level—companies in the top quartile for racial and ethnic diversity are 35 percent more likely to have financial returns above their national industry median while companies in the top quartile for gender diversity are 15 percent more likely to have financial returns above their national industry medians.

With a greater focus on the strategic value of diversity, organisations across all industries are setting more aggressive diversity targets and ramping up their diversity efforts. Organisations make significant investments in recruiting and retaining diverse workforces. In Jan 2014, as many as 20% of large U.S. employers with diversity programs provided unconscious-bias training, up from 2% five years earlier, and that figure was expected to hit 50% in five years(21). Corporate communications reinforce pro-diversity norms to foster inclusive work settings that empower every employee to achieve and contribute their full potential. Market leaders extend their diversity efforts outwards, building diverse stakeholder networks. Reflecting its strategic value, accountability for diversity management often sits with the C-suite and board of directors.

Diversity Challenges

Despite these efforts, many organisations fail to achieve their diversity goals. Leaders struggle to create the inclusive work environments necessary to attract, retain, and engage diverse employees and unlock the potential value in a diverse workforce.

And established organisations continue to stumble in their global ambitions. Globalisation is not turning the world into a single homogenized market(22). Culture is embedded into the minds, behaviours, and institutions of societal groups; attempts to superimpose another culture on top of deeply held cultural values, beliefs, and customs are met with resistance(23). Whilst some have argued that the world is increasingly converging into one global (American-style) culture, most of these changes are occurring at the surface(24). Deeply embedded cultural differences in the way we think and behave are slow to change(25).

Globalisation has outpaced the ability of many organisations to manage the accompanying cultural shifts. The focus has been on overcoming legal, political, technological, and economic barriers, while cultural barriers are often unacknowledged or discounted. Half of all business leaders do not believe their organisations are flexible enough to respond to change across diverse markets(26).

Diversity has value, but increased integration across customer, talent, and supplier markets has increased the complexity of business. Individuals from different social or cultural backgrounds naturally think, feel, and behave differently. In business, the misunderstandings, tensions, and biases caused by those differences can lead to missed opportunities, legal challenges, decreased returns, and even outright failure.

Needed: A New Workplace Competency

As we become increasingly interdependent in our work lives, cultural differences in attitudes, values, beliefs, and norms for appropriate behaviour present new challenges for interpersonal effectiveness.

Diversity enhances the potential for language and other communication barriers, heightens the risk of ambiguity, value conflicts, and reasoning and decision-making differences (27) and stereotypes and other forms of bias threaten rapport and stifle the exchange of information and ideas(28). Workgroup diversity is associated with poor team integration and cohesion(29), decreased satisfaction and commitment(30), and increased turnover(31).

Those challenges can lead to failure in our dealings with individuals with backgrounds different to our own and limit the strategic potential of a diverse workforce for higher-quality problem solving and decision making, innovation and creativity, accessing diverse customers and suppliers, and attracting and energising top global talent.  A 2011 review of 108 studies across 10,632 culturally diverse teams reported that the mean effect of cultural diversity on group performance is zero(19).

Pursuing diversity in your markets and your workforce is only half of the solution. Because diversity is complex, its benefits for growth, innovation, and talent optimisation will only be realised if your workforce has the knowledge, skills, and abilities required to manage that complexity.

Cultural Intelligence

The workplace has changed dramatically over the last two decades, and skill sets must align with this new environment. To be effective in today’s business environment individuals must demonstrate Cultural Intelligence—the collection of knowledge, skills, and abilities that enable an individual to detect, assimilate, reason, and act on cultural cues appropriately(32).

Cultural Intelligence is not only important at the level of nationality. Within each national culture there are ethnic, religious, age, gender, occupational, sexual-orientation, social-class, and health-status subcultures. Subcultures create huge variations in patterns of thinking and behaving within national groups. Plus organisational, professional, cross-functional, and team-level cultural differences contribute to a minefield of potential misunderstandings, tension, and conflict.

Cultural Intelligence critically relevant at the leadership level. Today’s leaders face more complex, uncertain, and volatile environments than previous generations of leaders. Global leaders must be able to expand businesses successfully into foreign markets, strategise and manage risk globally, manage and motivate geographically dispersed and diverse employees, and develop effective relationships and negotiate successfully with a diverse range of stakeholders, including shareholders, suppliers, customers, regulators. Effective performance of these tasks requires solid intercultural skills.

Since 2004, when the Harvard Business Review published ‘Cultural Intelligence’(33), a Best Practice article by Earley and Mosakowski, a notable collection of established profit and non-profit organisations across a wide variety of industries in more than 90 countries have embraced Cultural Intelligence as a tool for raising the global effectiveness of their workforce. Google, Bank of America, Coca-Cola, IBM, BMW, Novartis, University of New South Wales, Saudi Arabian Airlines, The Tata Group, the United Nations, and many more have looked to Cultural Intelligence as a tool for enhancing international performance, managing diversity, unlocking creativity and innovation, and overcoming cultural barriers.

As markets become more diverse, diversity competence will emerge as an increasingly powerful driver of performance and profits. Cultural Intelligence can help you to build a sustainable business that captures as many customers as possible and provide them with the best products, continuously(34).

Research
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Felicity Menzies is CEO and Principal Consultant at Include-Empower.Com, a diversity and inclusion consultancy with expertise in inclusive leadership, unconscious bias, cultural intelligence and inclusion, gender equity, empowering diverse talent. Felicity is an accredited facilitator with the Cultural Intelligence Centre and the author of A World of Difference. Felicity has over 15 years of experience working with and managing diverse workforces in blue chip companies and is a Fellow of Chartered Accountants of Australia and New Zealand. Felicity also holds a Bachelor of Commerce and a Bachelor of Arts in Psychology.