The Case for Dynamic Specialization
By John Hagel III and John Seely Brown
Most executives react negatively to arguments for specialization. Specialization for many of them implies shrinkage and stagnation. Who in their right mind could want that? Successful companies grow and evolve rapidly – specialization takes companies in the opposite direction. Or does it?
Others have made the case for specialization largely in static terms. Companies should specialize for greater efficiency, so the argument goes, by shedding what they do unexceptionally well and concentrating on what they do distinctively well. But specialization based on today's capabilities is static specialization.
Executives facing this argument often obsess over the perceived risks of specialization in a dynamic economy. If my company specializes in one area, then what happens if something disrupts the marketplace and renders my specialization worthless? Images of buggy whip manufacturers haunt these executives. After all, a diversified portfolio of activities would more effectively manage the risk of business obsolescence, right? In this view, specialization favors deeper exploitation of increasingly narrower capabilities, whereas diversification favors broader exploration of new capabilities.
But, if we focus on dynamic specialization rather than static specialization, then we can turn this argument on its head. In fact, dynamic specialization may be a far superior way to accelerate the development of new capabilities and the best way to protect against business obsolescence.
By dynamic specialization, we mean the commitment to eliminate resources and activities that no longer differentiate the firm and to concentrate on accelerating growth from the capabilities that truly distinguish the firm in the marketplace. Consequently, firms cannot simply focus on differentiation but must also shed non-differentiating activities. But how can one grow by shedding assets and activities? In fact, dynamic specialization increases the incentive, opportunity and capability for businesses to intuit their environment and to grow rapidly through innovation. ...
Dynamic specialization creates innovation incentives
Companies that specialize in one business area cannot afford to fail in that business activity. This focus, combined with a grasp of both the opportunities and the challenges created by rapidly evolving markets, fosters throughout the organization a sense of urgency that larger, diversified companies rarely replicate. This urgency drives both faster performance improvement and alertness to potential threats from changing market needs. Companies with diversified activities often grow complacent – after all, if one element of the business fails or falls short, then other elements will probably prevail, even in very dynamic markets.
For example, a product or service company that runs a call center internally may worry about call center performance, but not obsess over it, especially if the company is succeeding in other dimensions of its operations. On the other hand, a focused call center service provider operating in this highly competitive business will continually strive to reach new levels of performance. This specialized company will also have a strong incentive to search out new technologies to enhance its operations, as well as look at potential substitutes for its current services.
Dynamic specialization opens innovation opportunities
Highly specialized companies can work with a broader range of customers in their area of specialization than would be feasible for comparative operations in larger, diversified companies. This may seem paradoxical – after all, doesn't a more diversified company by definition serve a broader range of customers than a more specialized company serves?
Consider a call center embedded within a larger company. The call center really has only one "customer" – the parent company. The center is supporting only that company's products and services. No matter how good the call center operation is, that company still provides only one set of experiences to drive learning and performance improvement, whereas a specialized call center provider working with a broad range of companies can offer a more diverse set of products and services to the marketplace. This provider not only achieves greater scale but also realizes more variance in the customers served. A broad range of customers can offer much greater diversity in practices, policies and processes as a context for the call center operator's learning and innovation. This diversity provides an excellent early-warning platform to alert the specialized provider about potential shifts in the marketplace or disruptive technologies that might threaten its business. By explicitly targeting and working with leading-edge customers, the specialized provider will likely see potential changes in its relevant market sooner than would a captive provider.
But, you might argue, the call center that is operating as a part of a larger corporation could serve other companies as well and access similar learning opportunities, right? Of course, relatively few captive operations do so. Significant internal organizational challenges confront companies that seek to make their internal operations available on the marketplace. Somebody will probably lose – either the external customers or the internal customers. Even if these challenges can be overcome, these "hybrid" operations confront an external difficulty as well. They will not attract the competitors of the parent company – thereby significantly limiting their customer reach relative to specialized, independent service providers.
Specialized software services providers like Wipro and Infosys in Bangalore are working with a diverse set of customers to rapidly enhance their own software development capabilities. The companies are implementing systematic performance feedback processes that help them continually refine their software development methodologies. More fundamentally, Wipro and Infosys are also developing insight regarding the fit between specific development methodologies and specific customer environments. Thus, not only are the methodologies themselves rapidly refined by exposure to a broad range of customers, but the choice of methodologies to provide the most value is also enhanced. Software development operations within traditional companies would typically have more limited opportunity for testing and refining their methodologies.
Dynamic specialization builds innovation capabilities
Companies that are more specialized are also better positioned to act on the innovation opportunities they identify. In part, this innovative flexibility is because these companies have less organizational inertia than do companies that are less operationally focused. Executives of these specialized companies usually have more freedom than do their counterparts embedded in the larger organizations. Along with enjoying more freedom, senior executives of specialized companies typically have a much deeper understanding of the operational details of their business and are therefore more able to assess the opportunities and risks of specific innovations. These executives also have organizations that need not balance the conflicting needs and interests of the other businesses. The organizations are more aligned around a single set of economics, skills and culture. Though they may have legacy issues of their own, these executives need not confront the legacy issues of a more diversified company.
In general, specialized companies serving a broad range of customers have probably developed more loosely coupled interfaces between their own activities and the activities of their customers. These specialized companies can better modify their own operations without causing unanticipated disruptions in the operations of their customers. They can also test new approaches to their business without adverse consequences. In contrast, captive operations are generally more hardwired into the broader business processes of their parent company so that introducing innovation is difficult.
