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The business case for diversity management in the hospitality industry

American academic research, July 2014

Is diversity management more important in service industries, such as hospitality and tourism (HT), than manufacturing and technology? Recent American research demonstrates investing in diversity management predicts financial performance across all industries, but for HT, which is characterised by diverse employees and customers, it matters even more. By Juliet Bourke - Consulting, Partner.

No other industry has such a high degree of customer interface and reliance of customer service than that of the hospitality and tourism industry (HT). In the manufacturing industry, profit is significantly driven by operations and plant, and in the technology industry profit is driven by technology, but in service industries, profit is dominantly driven by people. Moreover, in service industries people (customers and staff) are diverse, hence the imperative to get diversity management right the HT industry is amplified. While this may make intuitive sense, the question remains, does increased diversity management and performance within the HT industry lead to better financial performance in fact?

This research conducted by Assistant Professor Singal (Virginia Tech, United States) explored this question, as well as more broadly commenting on the business case for diversity across all industries. Professor Singal argues that while diversity management is important in all industries, it is mission critical within the HT industry given the diversity characteristics of customers and staff, and the high level of interpersonal interaction between customers and staff. Unlike businesses in retail, which comprise the sale of a tangible product as well as customer service, Professor Singal argues that in HT service by staff generates a higher proportion of the “business value” purchased by customers.

Industries may vary in their emphasis on diversity management due to factors such as level of competition, differentiation strategies, employee skills and technology, however Professor Singal suggests that the HT industry has become more effective at diversity management than other industries because of necessity, i.e. the centrality of diversity to financial success. This theory is supported anecdotally by the fact that, according to the Diversity Inc’s Top 50 List for 2013 (one of the leading assessments of diversity management in America and globally), while the HT industry comprises 3-4% of the Standard & Poor (S&P) 500 Index, it was over-represented (8%) amongst the Top 50 companies. Four out of five HT industry companies that made the list had at least 50% female employees and 50% employees from ethnic minority groups.

Aim

Based on Singal’s hypothesis, the study aimed to explore two hypotheses:

  1. That the HT industry would outperform non-HT industries in relation to diversity management and performance
  2. That financial performance would be increased by investment in diversity management, and particularly in the HT industry.

Method

Singal analysed company data, collected from 3,645 companies between 1991 and 2001. Given the time span, 31,164 observations were captured during this period. The median value of assets across the analysed firms was US$1,652M, meaning firms were of a substantial size.

Data to measure diversity performance was extracted from the Environmental, Social, and Governance (ESG) database, which captured two dimensions of diversity (strengths and concerns) and was not a self-reported measure. Financial performance was measured using Tobin’s Q (market value of assets divided by the replacement value of assets) and credit rating according to S&P. Statistical analysis was then conducted to identify the correlations between these three measures of performance. 

Findings

After reviewing multiple studies on the business case for diversity, Singal found that arguments fell into six categories, namely;

  1. Talent pool: “Recruiting for diversity enlarges the pool of potential applicants and suppliers” resulting in a higher quality and lower cost;
  2. Performance and turnover: Diversity in the workforce energises individual performance and company identification, and reduces turnover
  3. Quality interactions: Enhanced job satisfaction improves the quality of interactions between employees, and employees when dealing with customers
  4. Access to information: Diverse networks provide access to information and networks
  5. Innovation: “Diverse thinking fosters an environment of creativity and innovation”
  6. Customer congruence: Diversity facilitates greater levels of congruence between customer needs and employee service provision.

Singal found that each of these arguments resonated across industries, but argued that the importance of customer congruence heightened the need for diversity management in HT. As a corollary, Singal suggested that the opportunity for diversity mismanagement is also heightened in HT, and may explain the number of high profile discrimination complaints against HT businesses.

In relation to Singal’s general hypotheses about the value of diversity management she found “that an improvement in diversity performance positively affects financial performance and that the impact is the same for both HT firms and non-HT firms. However, since HT firms have greater diversity performance than non-HT firms, the gross effect on financial performance due to diversity performance is larger for HT firms than for non-HT firms.” Expanding on this latter caveat, Singal found:

  1. HT organisations performed better than non-HT organisations in relation to diversity management and performance. That is, the findings suggested that HT organisations managed diversity more effectively. The results also showed that HT firms had statistically significant better overall diversity performance and higher diversity initiatives when compared with non-HT organisations. Notably, the results showed that when an organisation had higher diversity performance in a prior period, the next period showed higher financial performance for both HT and non-HT organisations 
  2. Financial performance is increased by investment in diversity management, and particularly in the HT industry. While results showed that the effect of diversity performance on financial performance was the same regardless of industry, given that HT organisations showed stronger diversity performance, this lead to a greater gross effect on financial performance for HT organisations compared to non-HT organisations.

Implications

The implications for managers, particularly those in the HT industry, are that investment in diversity management is paramount. This research only adds to the business case for diversity in that effective diversity management has a positive impact on the bottom line. This is particularly heightened in the HT industry. As this industry in particular has a high reliability on providing outstanding and memorable customer service, it is vital that investment in diversity is made, not only due to regulatory requirements but also to continue to be a strong financial performer and deliver optimum service to satisfy customer expectations. 

To read the full article, Singal, M. (2014), The business case for diversity management in the hospitality industry, International Journal of Hospitality Management, 40, pp. 10–19.

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