Supplier Diversity and Competitive Advantage: New Opportunities in Emerging Domestic Markets
6 Strategies for Partnering with Key Minority Stakeholders
We live in an economy ripe with change. One prominent change facing businesses in the U.S. is the burgeoning growth of the minority population and its implication for business success. The U.S. population is becoming more diverse as minority populations quickly grow. Given current population growth rates, the minority population will most likely surpass the non-Hispanic, Caucasian population by 2050. To be exact, the U.S. population is expected to increase to 374 million by 2050, with the minority population accounting for nearly 90 percent of the total growth.
Minority businesses are also starting up at unprecedented rates, and we can expect these businesses to play a key role in the health of our national economy in the years ahead. Minority business start-ups, increased spending power within minority communities, and supplier diversity are creating new opportunities for astute companies to realize first-mover advantages in emerging domestic markets.
The Growth of Minority Business
Over the past 10 years, minority-owned businesses have grown at approximately double the rate of all firms in the U.S. economy. There are over 2 million minority firms in the United States, generating an excess of $205 billion in sales annually (see Figure 1). In fact, between 1997 and 2002, 50 percent of the growth of all firms came from minority businesses alone.
This growth is important because minority businesses create jobs in minority communities and help build wealth among minority families. Wealthy families can buy more goods and services from corporations. What insightful company wouldn’t be interested in that?
Minority Spending Power
In 2000, total purchasing power in the United States was over $6.5 billion, with white non-Hispanics accounting for nearly 80 percent of that purchasing power. This number will drop significantly as minority purchasing power rises from approximately 20 percent in 2000 to over 45 percent by the year 2045. In fact, between 1990 and 1997, buying power in African-American, Hispanic, and Asian communities rose by 54 percent, 58 percent, and 72 percent, respectively. This trend is expected to continue, as seen in Figure 2, with minority purchasing power surpassing $2 trillion by 2015 and $3 trillion by 2030.
These pockets of demand have considerable profit potential. Current estimates indicate that at least 30 percent of inner city retail demand is unmet, equaling approximately $25 billion in unrealized sales. Yet, it has been demonstrated that businesses can succeed in these areas.
Consider Magic Johnson Enterprises: this corporation has enjoyed remarkable success in many underserved urban areas with franchises such as Starbucks Coffee, TGI Friday’s restaurants, and Burger King. Through strategic alliances, Magic Johnson and Johnson Development Corporation have been able to combine critical market knowledge and the ability to identify areas with sales potential. The results have been quite impressive.
Johnson Development Corporation (JDC) focuses on underserved markets across the country by providing entertainment complexes, restaurants, and retail centers in these markets. JDC has 50/50 partnerships with several of the most successful businesses in their market categories. JDC has over 100 Starbucks, 30 Burger Kings, and 26 home loan centers, which provide more than 15,000 jobs to minorities. This type of strategic alliance is important because as traditional domestic markets become saturated and larger companies merge, growth will be a challenge for both the large company and the smaller minority firm. Exploring new markets will be essential to continued prosperity and growth.
Supplier Diversity and Strategic Business Opportunity
The most promising opportunity to explore new markets is through supplier diversity. Supplier diversity is the process of sourcing supplies from minority businesses and presents, perhaps, the most rousing opportunity for companies facing changing demographics: the chance to gain a competitive advantage in minority communities by partnering with key stakeholders. With increasing population and business growth rates, it is imperative that corporations learn how to infuse minority employees, customers, and suppliers into their business processes in order to gain and maintain a long-term competitive edge.
As such, supplier diversity has become an important management practice at corporations around the nation, and most Fortune 500 companies have supplier diversity programs. In 2006, the National Minority Supplier Development Council (NMSDC) reported that America’s largest corporations purchased more than $100 billion in goods and services from minority-owned businesses, up from $94.6 billion in 2005. This is significant given that purchases from minority-owned businesses were just $86 million in 1972.
According to a recent Purchasing.com poll, 65 percent of respondents said that supplier diversity was either a mid- or high-level priority. Most leaders in supplier diversity met the challenge to source from minorities because they recognized that a diverse supply base provides an opportunity to gain a competitive advantage in the changing multicultural business economy. Those few companies seasoned in supplier diversity are positioned to reap first-mover advantages of brand loyalty and increased profits. However, once demographic changes are in full force, late movers may be at an insurmountable disadvantage.
Supplier Diversity in Practice
Forward-thinking companies are leading the way in a multicultural marketplace by infusing supplier diversity into their main business processes in unique and creative ways. Some have developed strong relationships with minority business owners and are reaping the benefits.
Consider the world’s biggest retailer: Wal-Mart spent more than $3.9 billion with nearly 2000 minority-owned suppliers in 2007 and used community outreach to help develop suppliers. For example, in 2006, Wal-Mart held a Minority Construction Summit, which included sessions for minority construction firms interested in building new stores, remodeling existing stores, and conducting facility maintenance programs. Since then, over nine sessions on how to do business with Wal-Mart have been held. These sessions are part of a nationwide initiative to help small businesses grow and foster economic opportunity in neighborhoods in need. Wal-Mart also gave executives at local chambers of commerce training and best practice tools to contribute to the success of local Hispanic-owned businesses. As Hispanic businesses scale up, Wal-Mart is able to rely upon them to meet customer needs. For example, Ruiz Foods, the largest Mexican frozen food company in the United States, is one of Wal-Mart’s largest domestic product suppliers. Lee Scott, president and CEO of Wal-Mart Stores, Inc., said, “As part of our continuing effort to become a leader in diversity, we will increase the amount of business we do with minority companies, using our size and leverage to create companies of size and stature.”
Then there’s International Business Machines Corporation (IBM), the first information technology company to spend over $1 billion with minority businesses. In 2007, the company spent $2.3 billion with diverse companies in business services, facility management, travel, and technical subcontracting. One approach the company takes to succeed is to match minority suppliers with IBM executives or managers through a mentoring program that lasts 12 to 18 months. Companies like Eclaro, Frontier International, Springboard Technology, Telamon Corporation, and ZeroChaos have participated in the mentoring program.
Supplier Diversity and the Bottom Line
Contrary to misconceptions, supplier diversity does not have to cost more and may provide tangible benefits to the bottom line. According to recent research from the Hackett Group, there is no evidence that companies that pursued supplier diversity programs had less effective operations. This finding was based on a study of 50 companies from both the service and manufacturing sectors. Leading procurement organizations had slightly higher adoption rates of supplier diversity than the typical company, yet generated 133 percent greater returns in the cost of procurement than the average performer, driving an additional $3.6 million to their company’s bottom line. While those leading companies may have had better performance without supplier diversity, they did not perform any worse than companies with lower adoption rates of supplier diversity. “Companies that focus on supplier diversity, driven by a sense of social responsibility, government mandates, or a range of other factors, are just as able to run effective procurement operations as their peers that ignore supplier diversity,” said Hackett Senior Business Advisor Kurt Albertson.
For companies who wish to work with minority suppliers, the first step is to identify them. There are a number of national organizations that provide lists of diverse suppliers to potential buyers. In addition, here are some strategies designed to help your company capitalize on the opportunities presented by supplier diversity.
6 Supplier Diversity Strategies
1. Work from the Inside Out
Success with supplier diversity starts with organizational culture. An organization that values diversity and makes a commitment to view diversity as an ingrained aspect of doing business is positioned to succeed with supplier diversity. Companies must settle the philosophical debate about the value of diversity. This can be accomplished by engaging in dialogue and providing information and data about population trends to everyone in the organization. Companies should seek to change employee mindsets by challenging beliefs about supplier diversity and creating a climate where procurement professionals are supported and rewarded for diversifying the supply chain. The organizational culture must be one that is enthusiastic about supplier diversity and actively pursues it. That is, a culture in which buyers are encouraged to seek creative ways to partner with minority suppliers, who are then oriented to the buying processes of the firm, encouraged to express their opinions, and allowed to learn from their mistakes.
Commitment to supplier diversity must start at the top; commitment at the executive level is required to fully leverage supplier diversity benefits. A study conducted by the NMSDC found that ten of 11 of the top supplier diversity organizations had an active or moderate level of participation from the president and or CEO. Leaders must demonstrate their belief in supplier diversity and procurement professionals must help leadership understand how achieving supplier diversity goals will deliver business results and position the company for growth.
3. Align Efforts
Supplier diversity is successful when it is incorporated into the business planning process of the company and clearly communicated, both internally and externally. Executive and line management must align supplier diversity goals, including demographic trends, procurement goals, and benefits with overall corporate goals. This can be accomplished through:
- Tracking Expenditures: Supplier diversity expenditures should be tracked by department or cost center and reviewed with senior management on a regular basis. This will help to keep supplier diversity goals on track and identify key areas for attention and future goal setting.
- Using the Internet: Use information technology as a dynamic tool to identify and communicate with diverse suppliers. Any company that is serious about supplier diversity should have a highly visible link on their website providing information about their program. An internet presence can aid in reaching supplier diversity goals if suppliers are able to register, certify, and submit proposals online.
- Holding Conferences: Conferences provide opportunities for buyers and suppliers to interface in person. They enable potential suppliers to get a feel for doing business with a company and serve as excellent forums for information exchange and dialogue. Delta Airlines, for example, has implemented an annual Supplier Diversity Procurement Exchange event, which links customers, purchasing representatives, and Delta’s first-tier suppliers to minority businesses.
- Formalizing the Process: Tie supplier diversity to the main processes of the firm to long-term strategic, compensation, and evaluation plans. This is important because we know that whatever gets measured usually gets done.
4. Take Risks
New times call for new approaches. It’s necessary to make strategic use of supplier relationships to reach supplier diversity goals. Look for innovative ways to develop and assist minority suppliers in accessing the capital they require to scale up and meet sourcing demands. This is particularly important because access to capital has been identified as a barrier for diverse suppliers. Seek new ways of doing things that enable diverse suppliers to be successful. Engage minority businesses as key allies and partners. Do not approach supplier diversity the same way you always have or you will get the same results you have always gotten.
5. Use Partnerships
Creative solutions for supplier diversity may come from joint ventures, strategic alliances, or outsourcing arrangements. One phenomena affecting businesses is the continued proliferation of mergers and acquisitions. Merger activity has critically impacted the procurement process by decreasing the number of suppliers and increasing the size and capacity of suppliers, particularly first-tier suppliers. The result is that purchasers are entering into longer-term, exclusive arrangements with a limited number of suppliers. Currently, many minority businesses do not have adequate size, capital, expertise, or infrastructure to compete for these selective supplier positions. Minority suppliers and contracting companies alike must seek out opportunities to partner, collaborate, and form strategic alliances with other firms in order to enter larger markets and gain a competitive edge.
The benefits of strategic alliances for minority businesses are tremendous, whether they partner with other diverse suppliers or majority-owned firms. These firms will be better able to provide the scale and scope of their services without additional capital requirements and to position themselves to seek equity investment in the future. In addition, national certifying agencies, such as NMSDC’s, have now made it possible for minority firms to certify firms—even with a non-minority partner—as long as the minority partner had at least 51 percent ownership in the company. While mergers and acquisitions are not for every firm, evidence suggests that these strategies could be vital for supplier diversity success.
Challenges with Supplier Diversity
Despite the promise of first-mover advantages with supplier diversity, both minority firms and large companies face challenges in building successful business relationships. Minority businesses are usually smaller and may not have the financial or physical resources to compete with large suppliers, therefore, companies may find it difficult to obtain minority suppliers who can provide sufficient scale and service. Moreover, the trend toward consolidation and streamlining the supply base creates even greater hurdles for the minority supplier to overcome as contracts and larger companies become dependent on fewer suppliers. To help minority suppliers overcome these obstacles, large companies can actively recruit diverse suppliers by advertising in supplier diversity publications, such as Minority Business News, Diversity Monitor, and Diversity Inc., using their companies’ websites to attract minority suppliers, and utilizing intermediary organizations to identify qualified minority suppliers.
The minority population is increasing in number, purchasing power, and business development activity. This record growth is enabling minorities to wield significant economic power as consumers and business owners. Their clout positions them to be invaluable strategic suppliers and business partners in the years ahead. Companies that are forward-thinking have recognized this status and are implementing thorough supplier diversity plans to stay ahead. Successful plans consider organizational culture, senior-level commitment, strategic alignment, and appropriate risk-taking. There is also significant promise in strategic alliances with diverse suppliers. These alliances have the potential to pay huge dividends down the road.
While progressive companies have been building a diverse supply base for many years, others may need to play catch up—starting today. In the words of Nobel Laureate Dr. Martin Luther King, Jr., “The time is always right to do the right thing.” And supplier diversity is more than the right thing: it is the smart thing.
 U.S. Census Bureau. “Dynamic Diversity: Projected Changes in the U.S. Race and Ethnic Composition: 1995 to 2050,” commissioned by the U.S. Department of Commerce, Minority Business Development Agency, (12/1999).
 U.S. Department of Commerce, Minority Business Development Agency. “Minority Purchasing Power: 2000 to 2045,” (09/2000).
 Timothy Bates. “The Urban Development Potential of Black-Owned Businesses,” Journal of the American Planning Association, 72, no. 2, (07/2006): 227–37.
 Michael E. Porter, Mark Blaxill, and Jean Mixer. “Inner Cities are the Next Retailing Frontier,” Opportunities for Action, The Boston Consulting Group, Inc. (01/1998).
 Babson College. Babson College Presents 2008 Founder’s Day, www3.babson.edu/Events/FoundersDay/johnson.cfm. (no longer accessible).
 National Minority Supplier Development Council. NMSDC Annual Report 2006, (New York: National Minority Supplier Development Council, 2007).
 Paul Teague, David Hannon. “The Changing Face of Supplier Diversity,” Purchasing.com (August 11, 2005).
 The Hackett Group. “Supplier Diversity Pays Off,” Purchasing, 135, no. 12, (09/07/2006): 27.
 Yankelovich Partners, Inc. “Minority Development Programs,” National Minority Supplier Development Council, (1994).
About the Author(s)
Gwendolyn Whitfield, PhD, is an assistant professor of strategy at Pepperdine University's Graziadio School of Business and Management. Dr. Whitfield specializes in business growth strategies, new-venture strategies, and supplier management and diversity for small and medium-sized firms and governmental entities. Her research on public policy and entrepreneurship in high technology won an award from the Consulate of Sweden and the Swedish Institute. Dr. Whitfield is the author of numerous articles that have been featured in such publications as the Journal of Supply Chain Management, Purchasing Today, and the Journal of Systems and Information Technology. She was recently named editor of the forthcoming practitioner journal Global Supply Chain Review, formerly the GSCLG Update.