‘Inside-out’ and ‘Outside-in’ approaches to Business Strategy
For organisations to have a competitive advantage, they need sufficient power to counterbalance the demands of buyers and suppliers whilst using strategies to outcompete competitors. This article will outline the two ruling paradigm approaches: the ‘inside-out’, which the RBV theory can further explain, and the ‘outside-in’ approach outlined by Porter and explain the benefits of using them.
Within organisations managers are often concerned with having a competitive advantage against other organisations. This is where strategies are introduced. Strategies help set direction and goals for businesses. In addition, there are two paths to strategy, which are the ‘inside-out and the ‘outside-in’ approach. Both offer different outcomes and can be separate from one another or combined. It is up to debate which approaches, if not both, are more preeminent in seeking a competitive advantage.
‘Inside-Out’ Approach to Strategy
The inside-out approach is internally orientated and focuses on the future of innovation. The organisation will effectively make use of company resources, core competencies as the driver of shareholder value. Although the inside out approach can sometimes distract companies from their true purpose and gaining customer value, innovation can help businesses grow beyond competitors, depending on the extravagance of the innovation introduced. However, innovation does come with risks. If customer needs are not understood or met, they will go elsewhere where they feel they are being listened to.
RBV Theory supporting ‘Inside-Out’ approach
The Resources Based View (RBV) is more an inside out approach because it distinguishes one firm from another. The theory concentrates on; core competence, resources, and capabilities within a business. It is a way of researching factors to gain a competitive edge. This is done by continuous innovation and creating new technology that competitors have not thought of or introduced yet in the hope it will create a competitive edge.
There have been criticisms of this theory. To achieve a competitive advantage, resources should be valuable or at least hard to come by. However, what is valuable, rare to one person, may not be to the next. RBV is an excellent simplistic framework to be worked upon but not solely relied upon. Learn more about this theory here.
The ‘Outside-in’ Approach to Strategy
The outside-in approach is externally orientated, focused on the market, and looks at customer needs and what other competitors are doing to keep in the loop. It concentrates on customer needs and reviewing experiences. This is because it prioritises understanding customers to provide a direction of where to focus within the market.
The ‘outside in’ approach is when the management looks outside and beyond the organisation itself and analyses the market concerning change and the customer’s needs. Having an outsider point of view can often open the employees’ eyes in order for them to the organisation from a different perspective, one they may not be aware of unless being open to this mindset of the customer and creating a focused view.
If customers are not satisfied and listened to, an organisation will suffer, and customers will go elsewhere. Having an external approach is more proactive and looks at the needs and minds of the customers because there is a difference between what you make and what you need. The outside-in approach is beneficial to companies because they always know what constitutes value to their customers. As a result, their actions are targeted and precise, rather than wasteful and unfocused. It is crucial to keep up to date with customer requirements so that an organisation can expand or adapt to the appropriate needs of the customer.
Porter’s 5 Forces Theory supporting ‘Outside-In’ approach
It is essential to consider how competitors may respond so organisations are ahead and up to date with what other organisations are doing. Porter has made a significant contribution to understanding the economics of competition, demonstrated in his 5 forces theory. Porter’s model outlines the five competitive forces which shape the industries and markets. The model was made to manage these forces to enable the organisation to improve its positioning and understand its competitors.
The first force is the barriers to entry. The higher the barriers to entry, the lower the threat. To become a competitor, a lot of investment, licencing, and experience are required. Therefore, to enter an industry successfully, the company should be able to challenge other competitors. The second is the purchasing power of customers. Customers want to pay less to get more. For example, customers compare prices and go with the cheapest as long as the quality is mediocre and gets the job done.
An example of this could be comparing airline prices online via several providers and going with the cheapest ticket. The third is suppliers, and the more suppliers, the cheaper raw materials will cost due to competition.
The fourth is competitors and more competition (rivalry); therefore, this emphasises how competitive advantage is reduced to outcompete rivals. Lastly, that there is the threat of substitutes. The more similar the product, the more competition so in business, you should try and aim to stand out and accommodate the customer. The five forces can help shape and structure the industry, and although the market is not always stable, predictions can be made to increase profitability. Learn more about Porter’s theory here.
Incorporation of both approaches to strategy
Overall, most organisations will be in-between approaches. The Inside-out and outside-in approaches make it difficult to conclude which one is more beneficial than the other. Porter concentrated on the industry as a whole, whereas The RBV theory looked at resources as a whole. Both approaches offer different situations that look at what you want and already have. A competitive advantage is sustainable if it cannot be replicated or not replicated on the same level. However, the market and customer demands will always fluctuate; therefore, keeping up to date with trends and adapting is key to any business.
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