Strategy: RBV, Inside-Out, Outside-In

Wernerfelt (A Resource-Based View of the Firm, 1984) started the diffusion of the resource–based view (RBV) by focusing internally on the firm to create the foundation upon which the strategy could be built. The underpinnings of the inside-out approach to strategy formulation rely heavily upon the resource-based view (Anon, 2012). Typically this approach involved the organisation evaluating what it is currently good at, the amount of resources it needs to allocate and how it is best able to leverage its strengths to combat its weaknesses (Bower & Gilbert, 2006). Resource-based view assumes companies’ success is dependent on their capabilities alone, allocating effort based on its current resources and using push marketing to close the sale with potential buyers (Civichino, 2012). Management is meant to envisage and creates products that consumers have not yet imagined that they need (Hamel & Prahalad, The Core Competence of the Corporation, 1990). Apple after launching the iPhone in 2007 has had great success in bringing innovation beyond expectations that their customers even knew that they had (Kaipa, 2012).

The inside out approach relies on the company's ability to be able to drive change on internal areas of the company such as product development, but paying very little to no attention to the market place, competitors and customer preferences, which in turn act as external influences on the company (Hamel & Prahalad, 1990; Barney, 1991).

Barney et al. (The Future of Resource-Based Theory : Revitalization or Decline?, 2011), point to that the original resource-based view has evolved over 20 years into a resource-based theory which encompasses product life cycles and the theory now more accurately describes organisational relationships – going as far to loosely link it to Porters 5 Forces.

Limitations of Inside-Out Strategy
Critics of the Inside-Out strategy implementation argue that it could be biased around shareholder return and slow in its ability to respond to changes in an ever-changing marketplace (Financial Reporting Committee, 1999). Further, not all the company’s resources may actually be strategically relevant (Barney J. , 1991), and those actually used may be biased by management’s own tastes and preferences. Which could create a mismatch between what the company desire to produce and what potential customer actually wish to purchase (Baron, 1995). And whilst the resource-based view contains hypotheses about the exploitation of the firm’s capabilities and valuable or scarce resources, there are very few empirical studies to test the hypothesis (Newbert, 2008).

In order to be successful within a market environment that is increasingly different due to globalisation and driven by rapidly changing consumer trends, companies need to be more aware of externalities in formulating their strategy (Hamel & Prahalad, Strategy as Stretch and Leverage, 1993). They also made this concession, in that Porter in his approach of strategic fit of matching the company’s resources to that of what the external market required was not wrong – but should in fact be done in balance.

Hamel & Prahalad (Strategy as Stretch and Leverage, 1993) go on in their own findings that competition is a mindset of winners that find less resource intensive methods to meet their goals. Through his resource based theory work, Grant (The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation, 1991) proposed a modified framework to the inside-out strategy that partially builds an extra dimension of the inside-out strategy, that of first matching the market opportunities to the company’s resources and abilities and then exploiting the match. But the resource-based view strategy does not pay much attention to how resources may change and develop over time, nor does it provide a detailed execution roadmap for the organisation to follow making implementation ambiguous and difficult (Butler & Priem, 2001).

However, Butler & Priem (Is the Resource-Based "View" a Useful Perspective for Strategic Management Research?, 2001) noted that whilst resource-based view had begun as a dynamic approach, in recent years the literature has been constant with extremely few updates to the original framework and that an environment-based view would yield a more complete strategy. Butler & Priem (Is the Resource-Based "View" a Useful Perspective for Strategic Management Research?, 2001) found that in context of competitive markets that strategies need continual updating in context of the environment the firm operates in, matching it to its capabilities and resources. “The principal focus of the strategy formulation process is on the market environment and competitive strategy” (Baron, 1995, p. 63). Barney et al. (2011, p. 1307) acknowledged the need to be able to adapt dynamically to suit current circumstances, “the interaction between resource acquisition through strategic factor markets and resource building based on human capital and bricolage is an important research agenda.”

Alternative Theories
Opposite to the firm driving its resources to the market where it desires it to go, is the outside-in view. This is consumerisation, whereby the firm assesses what customers are demanding and respond accordingly by organising themselves according to the market environment (Day & Moorman, 2010). This approach recognises the customer as an important asset to the firm. By adopting a market driven outside-in strategy, companies may recognise which new resources or activities need to be developed, and in so doing so will benefit from first mover advantage (Lieberman & Montgomery, 1988).

Perhaps once of the largest arguments made against inside out strategy is by Michael Porter, who argued that companies should not be introspective but evaluate on a business level, extolling the need for planning and portfolio management (Porter, 1979; 1980).  Porter laid out different strategies: Cost Leadership, Differentiation and Focus. Overlaid he developed his five forces framework which would then include competition from external forces such as the threat of new entrants, substitutes, the bargaining power of customers and suppliers balancing it all against the intensity of the competitive rivalry (Porter, 1980; 2008). Porter in his empirical tests determined that the forces would vary by industry, but that the strongest force would result in the largest profitability and become the most important in the firm’s strategy formulation.

(Mintzberg, Lampel, Ghoshal, & Quinn, 2003) in arguing against Porter, lay out that the strategy employed by a firm needed to integrate all the goals, policies and actions into a cohesive plan. And that a well-formulated strategy would allocate resources based on the company’s competences in a responsive manor to account for any moves within the environment or competitors whether anticipated or not. "A concern, however, is that the elemental strategy of "value" remains outside RBV" (Butler & Priem, 2001, p. 36)

Kim & Mauborgne in their 2005 book on Blue Ocean Strategy, suggest that cost advantages and differentiation are obtainable simultaneously to derive a position of competitive advantage. They found that rapid change has made companies seek out new dynamic approaches beyond Porters “five forces”. Managers increasingly are seeking ways to make competitors irrelevant by creating a leap in value for the company and its customers or by creating a new market entirely. This disruptive innovation or value innovation strategy has been called a Blue Ocean strategy by Kim & Mauborgne (2004; 2005) which was to describe what the firm should do to create demand in new or uncontested markets – in contrast to a Red Ocean which would represent exiting markets where the parameters of competition are known. “Innovations resulting from disruptive technologies usually offer change either in products or in services that are typically simpler, more efficient, easy to use versions of existing products or services already in the market.”  (Islam & Ekekwe, 2012, p.27). A Blue Ocean strategy would be built and sustained through utility to the customer, cost structures and price (Kim & Mauborgne, 2005). Kim & Mauborgne (Blue ocean strategy – How to create uncontested market space and make the competition irrelevant, 2005) advocate that managers should move onto creating new markets where there is no competition if they are not able to find a gap in existing markets, criticising Porters 5 forces model. Whilst the disruptive innovation strategy introduced a number of practical tools, attempting a repeatable process requires relentless effort (Schlegelmilch, Diamantopoulos, & Kreuz, 2003).

Whilst there are many varying strategies from the inside out as promoted by Hamel & Prahalad to the market led outside-in as Porter and others have promoted, there is one constant across the literature: companies need to clearly lay out a strategy that points to the results it desires to achieve and establish a course of action for achieving them. Grant (The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation, 1991) points to balancing different strategies between allocating internal resources and skills against the opportunities and risks posed by the external market – advocating an inside-out approach together with Porters outside-in theory of looking at the market forces. To bring consistency in execution, management needs to be assessed by a balanced scorecard, which is able to clarify not only the strategic objectives but also the critical drivers (Laitinen, 2005).

To lay out a strategy for success companies should undertake both and outside-in and inside-out approach and balance these against not only what the market desires, but what the company is actually able to deliver against such expectations (Ghazinoory, Abdi, & Azade, 2011) - a SWOT analysis of internal and external factors.

[Grant Marais]

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