Day: July 18, 2010

Functional Specialization

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Functional specialization may be the single most effective survival and progress strategy in the world.

At the biological level, organisms specialize within niche environments. Only the best of the best survive.

In economics, functional specialization is the winning strategy at the country, state, firm and individual levels.

David Ricardo’s theory of comparative advantage continues to apply at the country and state level.  Limited by by the size of the potential market, countries and states specialize in what they are economically comparatively best positioned to produce and use trade to improve their overall level of well-being.  The extent of international and state trade continues to grow, with no end in sight.

From Adam Smith to Alfred Marshall to Milton Friedman, many economists have focused their attention on the purely competitive market model.  Alternative monopoly, oligopoly and monopolistic competition models were developed to describe the real world where every profit maximizing firm attempts to differentiate their market position and leverage their market power.  They avoid perfectly competitive markets like the plague.

Michael Porter synthesized this in his theory of core competency, noting that firms could not be the very best at everything, but that they could become world class in a limited area.  The specialization could be in products, channels, customers, functional competencies or strategies.  Treacy and Wiersma made this more specific, observing that successful firms tended to pursue only one of three generic strategies: customer intimacy, product innovation or operational excellence.  Firms have subsequently learned to outsource nearly every functional area.

At the individual level, functional specialization has grown through time.  Classic male and female roles were differentiated in man’s history.  Hunters and gatherers.  Hunters and farmers.  Priestly and political roles.  Traders.  Warriors.  Guilds.  Professions.  Tax collectors.  Court attendants.  Scientists.  Degrees.  Doctorates.  Certificates.  Professional specialists. Industry specialists.  Business specialists.  Subspecialists.  ERP Rainmakers.  Etc.

At every level, functional specialization continues to grow because it is effective and efficient.  Functional specialization provides cost effective results in the short-run and the long-run.  It manages risk and capacity effectively. 

The use of functional specialization as an effective country, state, firm and individual strategy has become increasingly sophisticated and detailed in every half-life of history: millennia, century, decade and year!  It continues because the human population and market have grown and because transportation, politics, communications and science have advanced.

Is there no end to the application of functional specialization?

Functional Specialization Limits

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There are many costs and risks which offset the benefits of functional specialization.

As Adam Smith noted, the benefits are limited by the extent of the market.  At any point in time, there are only so many customers for a given product or service.

Functional specialization and trade are limited by transaction costs.  In an earlier age, vertical and horizontal integration strategies were effectively pursued because transaction costs were high.  Specialized internal or external providers require investments in communications, marketing, contracting, evaluation, incentives, training, negotiations, influence, hand-offs, shipping and receiving. 

Alignment of interests requires meetings, contracts, communications, incentives, negotiations, penalties and time.

Functional specialization is limited by transportation, finance and communications costs across country, state, firm and departmental borders.

Outsourced functional specialization also incurs the added costs of marketing and supplier management.

In general, firms have developed effective strategies to overcome these limitations.

Functional Specialization Conflicts

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There are many examples of inherently competing interests which limit the application of functional specialization.

The increased specialization of countries, firms and functions has provided new net benefits, but it has also begun to generate inherent conflicts.

Greater functional specialization has increased the need for generalists who define and manage processes.

It has increased the need for other individuals to span levels, translating strategy into projects and then into operations.

It has increased the level of personal specialization to deliver more advanced technical skills, thereby increasing the costs of communication and coordination, even within similar disciplines..

It has divided those responsible for short-term and long-term success.

It has resulted in the development of competing financial and quality paradigms to coordinate operations activities.

It has generated work groups with vastly different cognitive and emotional intelligence capabilities.

Greater focus on specialized entry-level capabilities has resulted in ever greater task or people management skills, but less initial screening for situational leadership skills to balance these needs.

Greater functional specialization has made functional areas ever more stereotypical.  A given company, functional area or individual is less likely to have complementary skills in long-term/short-term analysis, divergent versus convergent thinking skills, or varied personality profiles. 

Ironically, the advance of functional specialization greatly increases the demand for specialized individuals who are generalists, able to knit together the increasing number of functional specialists.

Functional Specialization Solutions

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There are many solutions strategies that can be used to maximize the potential net benefits of functional specialization and overcome the inherent limitations.

First, processes can be defined and optimized to effectively leverage functional talents.  The mechanical and modular paradigms can be refined to incorporate specialists.

Firms can adopt a portfolio strategy whereby the average success ratio largely offsets random failures.

Specialists and generalists can trade positions to increase their effective coordination skills and understanding.

Communications meetings, technologies, experiences and priorities can improve alignment.

Process management can be elevated to a meta-analysis level, with individuals responsible for the success of prospect to customer, concept to product and order to cash processes.

Countries, states and firms can develop long-term partnerships with their suppliers and customers and improve their prospecting, bidding and negotiation skills.

Individuals can improve their situational leadership skills, learning to balance task and people needs.

Firms can greatly improve their means-ends skills, improving staff delegation, board governance and supplier management skills.

In highly diverse and risky product development areas, firms can invest in specialized firms or in competing development teams.

Firms can invest in staff members who are highly skilled in translating strategy into projects and then into operations.

Finally, firms and individuals can increase their understanding of situations where there are two inherently conflicting objectives.  They can learn from the experience of statisticians, researchers and actuaries who routinely manage the alpha risk that a predicted relationship exists when it really doesn’t against the beta risk that a relationship is found to not exist when it really does.

Functional specialization is an incredible driver of incremental value.  Countries, states, firms and individuals will be rewarded for their attention to this factor.  Common tactics can be used to maximize the value of this strategy.