Approaches to Strategic Management
The consideration of strategic management as a key to business success makes this concept extremely essential in the corporate set-up. While most proposals on how to carry out strategic management processes give directions based on various particular frameworks, the integration of a variety of frameworks into a single strategic management model has been confirmed as the most profitable concept in strategy formation. Various authors have made proposals on how to view the concept of strategic management from either an inside out approach or an outside in approach to strategy formation. Each of these perspectives has its own particular pros and cons and the key objective is to settle for an approach that is most likely to result in the greatest shareholder value for the business. The integrated approach to strategic management is best described by Mintzberg et al (1998) through the description of strategy formation as an elephant with different parts.
Despite being recommended as a form of effective and profitable approach to strategic management, the integrated perspective still proves challenging to comprehend amidst volatile and highly changing corporate environments. As a consequence, organizations opt to adopt either an outside-in approach or an inside – out approach to strategic management, through which they intend to gain shareholder value. Both perspectives have been associated with different levels of success in the business context and are confirmed most applicable to varying situations. However, it cannot be said that both perspectives tend towards the integrated approach in equal measure. From the point of view of the present essay, the outside in approach to strategy formation can be described as having the greatest tendency towards the integrated approach. This is based on the consideration of the approach’s key concepts as well as comparison of the perceived benefits of both approaches to the business context. Moreover, the approach is also considered more inclusive of various aspects of strategic management which align with diverging organizational characteristics.
Inside Out Approach to Strategic Management
The inside out approach to strategic management as proposed by Prahalad and Hamel (1990) incorporates the consideration of organizational features such as resources and the competence of the organization. The approach has as a result been described as the resource based approach to strategic management since it takes into account the key objectives of the organization, its key resources as well as the core competence areas associated with the organization. Hamel and Prahalad (1993) describe the inside out approach to strategic management as being instrumental in achieving shareholder value due to its reliance on organizational factors that outsiders find difficult to emulate and/ or reproduce. This makes it a suitable approach for the maintenance of competitive advantage for organizations. It is undeniable that when considering the internal features of an organization, it is possible to come across various unique features that the organization can always use for its own growth and for increasing the shareholder values of the organization.
While each organization seeks to increase the shareholder value and to increase profitability, the objectives of each organization are not merely to formulate a strategy that will last until resources are changed but to create sustainable value. This somehow makes the inside out approach to strategic management limited in its relevance to the business context unless the target market is more or less steady in expectations. According to Grant (1991) sustainability can be achieved while using the inside out approach to strategic management through taking notice of both skills and talents within the organization and making use of them to effectively initiate and uphold changes necessary for incremental shareholder values. The process is described more succinctly by Hayes (1985) who purports that making use of internal skills and talents requires an in depth understanding of the organization’s strategic capabilities, threshold resources, threshold competencies and the unique competencies particular to that organization. It is only through an understanding of these aspects that an organization can effectively apply the inside out approach to strategic management successfully.
While explaining the effectiveness of the inside out approach, Hamel and Prahalad explain that this approach to strategy formation involves three key stages which include: resource assessment, identification of key competencies, evaluation of the potential of those key competencies and strategic resources and the definition of the formed strategy (1993). Each of these concepts involves an intense look into the internal organizational environment to understand operational dynamics and how the available competencies and resources can be best allocated for the achievement of organizational objectives. The building of a strategic architecture based on the inside out approach to strategy development depends on the values and the goals of the organization (Garrett 2010). After due consideration of the organizational goals and values, the process of strategic management using the inside out approach is based on capitalization on the core organizational competencies which give competitive advantage to the organization. The core competencies are described by Garrett as those which provide access to wider market sizes, improve customer perceptions on the brand and the company as a whole and are difficult to copy or reproduce by other organizations.
The inside out approach to strategic management is thus an essential outlook to organizational profitability due to its ability to enable optimization of the available resources for the achievement of grater shareholder values in the company.
Outside – In approach to Strategic management
While the inside out approach to strategic management focuses on the available resources and key competencies of the organization, the outside in approach concentrates more on the capability of the organization to create value for the customers. The objective of this approach to strategic management is that it aims at providing value to the customer through incorporation of customer needs and feedback into the strategic management process. According to proponents of this approach to strategic management such as Porter (1990), the outside in approach makes the customer the center point of operations in the organization. The concentration on value creation through customer satisfaction makes this approach to be directed such that decision making in the organization is dependent on the external environment.
The outside in approach to strategic management has been described as a position based approach due to the importance associated with brand positioning during strategy making. The customer, being the organization’s asset is considered to be extremely important with regards to the achievement of shareholder value. Through observation of the brand orientation in the market, the organization can effectively capitalize on the available opportunities to close the gap between the intended performance and the achieved performance in brand equity (M’zungu et al 2009). The development of brand orientation is therefore dependent to a large extent on the effective application of this approach to strategic management.
According to Day and Moorman (2010), the outside in approach to strategic management involves to a large extent reaction to environmental changes. Reacting to environmental changes implies that the approach makes it mandatory for organizational target market to be considered continuously through a process of never ending research and development which aims at learning the market dynamics and making in the organizational processes, cultures and structures in way that enable the organization to maintain their competitive advantage through addressing customer needs which enables the organization to create additional value for the shareholders (Louw and Venter 2006). Engaging in the outside in approach to strategic management therefore means that the organization has to spend more in Research and development since continuous innovation is also required to keep up with the constantly changing trends in the customer behaviors (Day and Moorman 2010).
While it may not be possible to keep in line with the entire customer demands at all times, the application of the outside in approach to strategy formation enables organizations to make use of the available resources with the key objective of achieving customer value. Compared to the inside out approach to strategic management, this approach can be said to be more demanding as it is not limited to finding the optimum allocation of resources for the achievement of added value to operations. According to M’zungu et al (2009), the application of this strategy translates to the ability to match brand promises to the available resources and subsequently to deliver on those promises. Because of this capability, the application of this approach to strategic management can result in greater customer value and thus to higher shareholder value through increased profits.
Reaction to the environment is described by Hill and Jones (2004) as being inclusive of listening to the customers and providing value that is aligned to the needs of the particular market segment that is targeted by an organization. An outside in view to strategic management provides an opportunity for organizations to collect sufficient information regarding the market characteristics and thus providing value that is relevant to the market characteristics that have been noted. As such, Hill and Jones assert, the outside in approach to strategic management is capable of providing long term shareholder value as opposed to the inside out view which may not provide value that is sustainable.
The integrated Approach: Comparison of the outside in and the inside out perspectives
Integrated strategic management is best described by Mintzberg et al (2009) through the provision of ten key concepts involved in strategic management. Since the concept of strategic management itself is multi-dimensional, a singular perspective cannot effectively qualify a strategy as relevant to particular organizational needs. As much as it is necessary to understand the opportunities, core competence and resources held by an organization and to use all these productively towards incremental value creation, it is also necessary to create value that will last as long as the company and which will help the company to maintain competitive advantage through years. This calls for an approach that integrates aspects of both inside out and outside in views to strategic management (Alagirisamy 2015). In many occasions, it may not be possible to find models of strategic management that incorporate both aspects in the same degree. Consequently, choosing among the two approaches may be dependent on the ability to make the choice concerning which of the approaches best suits the present needs of the organization.
Both outside in and inside out approaches to strategic management are suited to different organizational contexts. While the inside out approach may be suitable for organizations where changing customer needs do not characterize the market, volatile market conditions may require the application of the more robust and versatile outside in approach to strategic management. The integrated approach to strategic management is described by Grunig and Kuhn (2015). According to these authors, the integrated perspective takes into consideration the long term guidelines of the company. Moreover, the approach should relate to the company as a whole rather than its parts and should be determined by the management. In light of these descriptions, the outside in view to strategic management forms an important foundation for the strategic manager. This is because the link between strategic management and the customer as an asset that is developed through the outside in approach enables strategic management to be achieved for the attainment of long term objectives (Louw and Venter 2006).
The long term outlook of the outside in approach is further enhanced by the fact that through constantly studying the business environment, an organization can put in place strategies that help uphold strong market shares throughout (Day and Moorman 2010). This means that despite changes in the trading environment, an organization that employs the outside in approach to strategic management can stand strong due to the ever present awareness of customer needs. On the other hand, the inside out approach focuses on the internal environment which may lead to the loss of awareness of the market conditions. This means that competitive advantage will only be held by a company practicing inside out strategic management as long as the use of resources and application of key competencies give results that are required in the market (Hayes 1985). This me and that even though an organization may have in depth understanding of its key competencies and resources, blindly applying these resources and competencies in the business operations may result to loss of shareholder values rather than their increase.
In addition to this, the integrated approach as described by Ohmae (1982) involves a lot of conceptualization and has potentials for building up. These characteristics also fit the description of the outside in approach to strategic management which asserts that understanding market conditions and predict customer behaviors under various market conditions can be difficult and requires a lot of concept building (M’zungu et al 2009). However, through understanding and predicting customer behaviors, it is possible for organizations to understand gaps in product design and manufacturing and thus address these gaps through innovative products. It is only through understanding how customer needs can be met differently and the nature of the present unmet needs that an organization can effectively align its production processes and/ or sales and marketing operations with customer needs. This ultimately results in greater value for the customer which translates to higher profitability and subsequently greater shareholder values. This level of flexibility is not observed in the application of the inside out approach to strategic management.
Although inside out approach to strategic management also involves a lot of conceptualization, it is still difficult to estimate the potential that can be build up to achieve greater customer value. The expansion of value is limited by the availability of resources and the limits of the core competencies of the organization. Grunig and Kuhn (2015) assert that integrated strategic management should guarantee a permanent accomplishment of organizational objectives and values. This may be possible with the outside in approach since most company objectives and values are stated from an inward reward perspective, whose overall drive is to increase shareholder value, a feat that can only be achieved through customer satisfaction.
Lynch (2003) opines that knowledge creation and continuous innovation give organizations sustainable competitive advantage. This however cannot be achieved without thorough internal and external analysis as said by Grunig and Kuhn. This means that any strategic management plan that does not incorporate both internal and external analyses cannot achieve continuous innovation. The outside in approach to strategic management gives organizations sufficient drive to carry out both internal and external analyses since understanding the customers’ needs is not the limit of research in the outside in organization. Apart from understanding customer needs, an organization cannot run without analyzing its competencies and resources and allocating both efficiently (Lagerstedt 2016). Therefore, it can be said that the outside in approach makes it implicitly mandatory for the organization to make both internal and external analysis, while the inside out approach makes it a requirement to carry out only internal analysis. From this point of view, the outside in approach proves to be more integrated than the inside out approach to strategic management.
Strategic management, as described by Mintzberg et al (1998) is a function of several concepts and wholly understanding it may not be possible. However, there are various points of view that have been developed to explain strategic management. The outside in view and the inside out views to strategic management are the most common approaches to strategic management. Consideration of the characteristics of each of these approaches and their comparison with the integrated approach described by various authors gives the picture that the outside in view is more integrated than the inside out view to strategic management (Grunig and Kuhn 2015; Lynch 2003). The outside in view is more conceptualized, has more potential for building up, guarantees permanent achievement of values and objectives and makes it mandatory to carry out both internal and external organizational analysis.
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