Strategy illustration Strategy theory

Specialisation, trade and exchange

Modern society is based on specialisation, trade and exchange. Employees specialise in given occupations. Machines specialise in certain tasks. Regions and countries specialise in producing goods and services. If people and other resources concentrate on things which they do relatively well, then everyone usually benefits. Specialisation results in an increase in output and well being.

It pays individuals to concentrate on what they do best. If I can earn £10 an hour from writing this website and it only costs £8 an hour to have someone paint my house, then it will make sense for me to sit and write while the decorator paints. However, things can't just be weighed up in money terms - you also need to consider the satisfaction or dissatisfaction you get from a particular activity.

Principle of specialisation

It also pays groups to let individuals specialise. For example, Jane and Roger can both cook and grow vegetables. However, Roger is twice as good at cooking as Jane, and half as good at growing vegetables. It therefore makes sense for Roger to cook and Jane to grow vegetables.

The principle of specialisation can be applied to trade between areas and between countries. It helps to explain why Scotland might specialise in whisky production and Uganda in growing cotton.

Specialisation is often explained in terms of comparative advantage. The principle of comparative advantage is that individuals, groups and nations should concentrate on those activities at which they are better, leaving others to concentrate on things at which they are worse. After all, in the real world everyone will be relatively good at something.

The principle of comparative advantage also applies to companies which concentrate on their best lines:

  • Cummins on providing engines
  • Kellogg's on producing cereals
  • Coca-Cola and Cadbury Schweppes on producing soft drinks and confectionery
  • Argos and Travis Perkins on retailing, etc.

In modern economies the principle means of exchange is money. The value of items that are traded is priced in £'s, Euros, etc. However, some exchange does still take place through a barter process where physical items are exchanged for each other without the use of money. Labour time can also be bartered e.g. a person does electrical work for someone else in exchange for carpentry work, etc.

Supporting Documents

These downloads will help to put strategy theory into context using real world examples from real businesses.

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