A New Model for Economic Specialization

Friday, June 1, 2018

It all started with a question

A couple of weeks ago, I wrote about one entrepreneur's failed attempt at specialization. Although she made a strategic misstep in her approach, the general consensus in the business world is that specialization is key to building highly-successful enterprises. Once specialized, firms can earn higher profits, reduce competition, and expend fewer resources to reach their goals.

Why are so many specialists failing?

I often turn to the biological sciences to understand business problems. We all know that many species are going extinct on a daily basis, but did you know that a large number of them are specialists? This fact should call into question the view that niching down is a universal cure to every business ailment. These lifeforms are perishing even though they had seemingly done everything right by specializing: they had adapted their bodies to the types of food they ate, changed their behavior to suit the habitats they lived in, and fine-tuned the ways in which they interacted with other organisms.

If specialization provides a great advantage in the business world, why does it seem so ineffective in the natural world? Why do generalists like cockroaches thrive while specialists like the giant panda are threatened with extinction?

For a while, I found myself unable to come up with a solution to this puzzle. Was there a secondary factor that needed to be considered when specializing?

The answer to my question was a resounding yes.

A burst of insight into specialization

I soon realized that specialization only proves worthwhile when it takes advantage of some aspect of the surrounding environment. For instance, penguins found advantage in specializing in swimming (rather than flying) because they were surrounded by a plentiful supply of fish in the water. Similarly, termites found advantage in specializing in the consumption of wood because there were a great many trees where they lived.

However, many other organisms have been limited because of their specializations. For instance, the rhinoceros stomach bot fly faces a bleak future due to its specialization. The insect has adapted itself to the extreme in order to use the mighty rhinoceros as a host for its eggs. As the number of rhinos dwindle, the fly finds itself a victim of its adaptations and an unwilling participant in a potential coextinction event.

The four quadrants of the specialization model

Certain that I was on the right track, I plotted two variables on a grid:

Specialization can be risky or safe
Specialization Possibilities

The quadrants, and their representatives, are as follows:

A bit of fine print

Although the diagram above uses four distinct quadrants to increase readability, it should be noted that the two axes exist as spectrums. Some members of a quadrant may be more specialized or find themselves in more stable environments than others.

Additionally, the position of a participant within the framework need not be permanent. Members may invest in (or divest from) specialization or find that the natures of their environments have changed. As such, a given entity may find (or intentionally shift) its placement within a given quadrant - or into a different one entirely.


It's true that specialization can be a powerful technique for achieving success. That said, it would be both dangerous and foolhardy to consider specialization to be a panacea for every business problem. A strong understanding of the environment in which one operates is necessary when determining if a given specialization will lead to oodles of profit or a relegation to the dustbin of history.