The Inside – Out Approach to Strategy Formulation
Strategies are defined plans, sets of action, directions, guidelines and policy objectives intended to be executed in order to achieve specific goals. Every business has an overriding desire to maximize on profits irrespective of the competition in the industry of trade. To this effect leaders take various approaches in formulating individual firm strategies. The Inside-Out approach to strategy formulation is just but one way of doing it.
This approach bases on the premise that the realization of success or failure in a firm is influenced by its internal characteristics as opposed to external activities in the entire industry. Thus in order to be positioned for profitability, any firm must be able to develop effective business strategy by taking into consideration its own strength, weaknesses, opportunities and threats (SWOT). The leaders and team must clearly understand their SWOT analysis parameters then develop an effective strategy.
Proponents of this model argue that factors like globalization, deregulation and technological changes will greatly compel individual firms to re-organize internal structures in order to remain competitive. Advancement in technology for example improves efficiency in production and service delivery, much-less cutting down on cost of operation. This in turn brings about internal economies of scale necessary for effecting positive changes in profit margins.
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Globalization has greatly increased competition between players in same industries and possible alternatives. On one hand, some critics believe that what happens in the whole industry determines formulation of strategy to compete. This argument cites factors like resource mobility within the industry. However, according to Edward Chamberlin (1933) and others in his school of thought believe that real competition in any industry goes forward between individual firms which have different but overlapping characteristics and resources.
American economist, Edith Penrose (1959) takes a micro-economic approach to the analysis of competitiveness of firms and potential for growth. In her famous Theory of the growth of the Firm, believes that effective strategies for the growth and competitive positioning of firms depend on factors like the entrepreneurial vision of the leaders, specific knowledge and objectives by managers and including the firms idiosyncratic capacity to diversify. Thus internal characteristics should determine strategy formulation.
A classic example is the analysis of RBV brand. The success of the brand was associated with internal characteristics like uniqueness of the brand. According to Barney, believes that a resource can only be securely competitive if it is valuable, rare, imperfectly imitable and non-substitutable. However, another analyst Wernerfelt; believes that the uniqueness should be in terms of resources and skills that can ensure competitive advantage.
Experts warn that formulation of strategies thought to be effective should not wither general competitiveness in the industry. Modern business leaders have to look at a broader picture that encompasses resource allocation to opportunities, cost minimization, product differentiation, business focus, desired goals and tactics to be employed. There should be a clear line between the way to formulate and the way to implementation of desired strategy.
By the end of the day as argued by Prahalad and Hamel (1990); competitiveness should be derived from individual firms ability to build core competence that spawn unanticipated products at lower cost and more speedy than others. The argument holds that real sources of comparative advantage are to be found in management’s ability to consolidate corporate-wide technologies and skills for production to empower businesses to adapt appropriately to changing opportunities.
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Core competence of individual firms should be difficult for other competitors to imitate. Such competences do not diminish over time and are inculcated by collective learning to maintain the brands. For instance Coca-Cola brand has been very successful on this. Such an identity provides potential access to wider variety of markets and makes significant contributions to perceived value or benefits on consumers of such products.
The basic tenets of this approach include analyzing the internal environment of the individual firm, identifying key resources and competences, formulation of effective strategy and identification of attractive industry. Nonetheless, the implementation of any strategy is equally influenced by other factors. Firms do not operate in isolation as we would presume in any model analysis.
While using the Inside-Out approach to strategy formulation, business leaders must keep in mind that in real life there exist a web of interactions between the individual firms and other players like suppliers, customers and competitors. The market environment has several faces and there will be need for active collaboration with other stakeholders. Collaboration as opposed to unilateral operations can help firms in accessing resources, collective bargaining, learning or acquisition of new technology, overcoming barriers and ease market entry.