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Outside-in & Inside-out Strategies

May 6, 2015

Selecting the best fit approach to build/response to the market dynamics is one of fundamental strategic choices; both Outside-in and Inside-out are underpinned and tested, the logic behind each one will drive the selection. The firm’s objectives and the market factors in addition of industry characteristics usually shape the way of strategists’ minds. This article describe both approaches and set them in practices. Before going to practices, let us briefly explain each strategy approaches.

Outside-in Strategy

The original Industrial Organization (IO) economics emerged to help policy-makers to set regulations and government the dynamics of industries , even though, firms used it later to develop competitive advantages that ensure greater return on investment better than competitors. later on, Michel Porter provided three main thoughts combined to Outside-in strategies, (a) ‘five forces’ for industry’s external factors analysis, (b) generic strategies for business-level strategy, and (c) the value chain for internal analysis.

  • Five Forces Model

Porter’s model aimed to analysis the whole industry not a firm level. Model assumed that there are five competitive forces are common. These forces shape the industry structure and competition as well. Porter, however, uses the five forces, such as power of suppliers, competitive rivalry, power of buyer, threat of substitute industry, and the threat of new entrants .

  • Generic Strategies

In 1986, Porter present the generic strategies and claimed that the generic cost leadership or differentiation strategies can be operated on a global scale . The cost leadership means to be the lowest cost producer, whereas, the differentiation strategy strives to offer distinct products or services that different to those offered by competition, differentiation might be achieved by a number of front, including brand design, innovated products and services, and a specific distribution channel

  • Value Chain

Porter developed the value chain technique to act as linkage between internal and external forces, and it helps firms to implement its generic strategy, either cost leadership or differentiation. Porter stated that, the firm’s ability to add value comes out through its activities, and he divided these activities into primary activities that directly contribute to the production process such as operations; and supportive activities that support the primary activities but do not directly add value themselves such as human resources and procurement.

Inside-out strategy

Inside-out strategy is opposite to IO economics , it is focusing on assets, resources and capabilities of firms. in the 1950s, Edith Penrose, developed the Resource-Based Value (RBV) , and stated that it is the embedded competences and capabilities achieved through the existing resource base, that will direct future growth. The RBV resources classified into three main types, (a) tangible resources, e.g. physical resources, (b) intangible resources, e.g. know-how; and (c) human; the firms’ capabilities refer to these resources deployment effectiveness. The firm’s resources are immobile and cannot be transferred and capabilities will shape the profitability and competition

RBV framework views firms as bundles of resources tied with firm’s core competencies, and the combination of these capabilities are basically defines the strategy and determine the firm’s performance . The differences in firms’ capabilities play a crucial role in formulating long-term competitive advantages. Widely, the strategists are facing the challenges of dynamic resources and capabilities. Resources and capabilities do not constitute a, ‘static’ pool but, may be creatively reorganized, improved and upgraded, taking an organization on to another level of competitiveness .

Similarities and Differences

In light of similarities, both Outside-in and Inside-out are sharing the concept of the possibility of achieving above normal returns, both strive for understanding the sustained competitive advantage phenomenon.

In contrast, hereunder, three differences, firstly, in Outside-in strategy, Porter’s model stresses the concept of market power, and basically care about positioning a firm in a particular industry structure, this argument assumed that the industry structure is stable which not usually true. In contrast, the RBV is concerning with acquiring and use resources efficiently, especially superior resources that enable a firm to produce more economically and/or better satisfy customer wants, using existing resources to achieve sustainable competitive advantages not enough, resources shall be stretched and leveraged for superior performance. Secondly, Porter’s strategy mainly focused on analyzing business unit. Unlike RBV which analyzed the firm’s resources that enable them to adopt strategic ploys. Thirdly, regarding the articulation between resources and strategy, the Outside-in advocated that resources are part of strategy implementation, and they are being controlled by conditions in the external forces. In opposition, the Inside-out draws that firm’s resources allow the firm to exploit them to sustain its competitive advantages.

Outside-in and Inside-out in practices:

Malaysia Airlines (MAS) is a good example here, it’s strategists used outside-in approach to response on Air Asia, by increasing industry barriers to enter, dealing with the best supplier, building customer relationship to manage the buyers’ power, using its financial power to buy recent aircraft, and its governmental relationship to secure the primary airports and best schedules. in contrast, once Air Asia moved into new intra-Asian market by using franchise – it used the new brand “Thai Air Asia” to operate outside Malaysia , the MAS’s strategists used inside-out approach working on increasing its core competencies via networks and joint the ‘Oneworld’ alliance.