Specialization and Uncertainty

Do you remember
When you got your lucky break?
You're looking back now
And it seems like a mistake
--John Waite

In previous missives we discussed the benefits and risks associated with specialized work. Specialization promotes higher productivity through learning by doing and lower switching costs. Fully realizing these benefits requires free trade with other specialists in order to satisfy each producer's spectrum of needs. If trade is restricted, then some needs will go unmet--unless producers diversify into multiple lines of work, thereby reversing in full circle fashion the productivity gains from specialization.

Specialized producers also face elevated risk of obsolescence compared to more diversified producers. Due to technological change, competition, or evolving consumer tastes, particular lines of work may, at some point in time, no longer be necessary. Because specialized work typically requires commitments such as expensive schooling, investment in expensive narrow purpose equipment, and engrained work routines, adapting to changing environments can be difficult.

How can producers manage the risks associated with specialization? 

First, let's note the crucial role that the environment--particularly environmental uncertainty--plays in answering this question. While many conceptualizations of environmental uncertainty have been developed, an important one in our context involves what is called state uncertainty. Specifically, environmental uncertainty can be seen as the extent to which current or future states of the world can be understood or predicted. When events are understood or foreseen with less clarity, then environments are said to be more uncertain.

The central proposition for our purposes can be stated as follows:

Proposition: The higher the level of environmental uncertainty, the lower the appropriate level of specialized work.

If environments are completely certain and predictable, then high levels of specialization are appropriate. There is little risk of change, or at least surprise change, that could not be anticipated in ways that would place specialized producers in vulnerable positions.

As uncertainty increases, however, so does vulnerability. Due to the irreversibility of their production commitments, specialized producers may be incapable of responding to unforeseen events or conditions in a timely manner, thereby threatening their adaptability to changing conditions.

Consequently, degree of specialization should go down as level of environmental uncertainty goes up.

But what implications does the relationship between specialization and uncertainty have on production planning and work design? What strategies are available to producers that allow them to be as productive as possible--while maintaining adaptive capacity essential for coping with uncertainty?

We'll discuss next time.