An effective strategy can determine the survival and long-term development of a company. Strategy is a firm’s long-term direction and plan of value-created activities with the aim of obtaining competitive advantage (David, 2009). Competitive advantage is the cornerstone of the firm’s success, which distinguishes a firm from its competitors and maintains or improves its position within the industry (Barney & Hesterly, 2010). The outside-in and inside-out perspectives are two major schools in strategic management theory both with the aim of gaining competitive advantage. The outside-in perspective, adopted by the positioning school, pays attention to a firm’s position in external environment, while the inside-out perspective, adopted by resource-based view and core competence theory, pays attention to the internal resources and capabilities owned by the firm (Spanos & Lioukas, 2001). This report aims to understand and critically evaluate the major theories and tools of strategic management by comparing and contrasting the two perspectives. It may help to discover the contributions and limitations of the two schools in both theory and practice. The report is structured as follows: after a brief introduction, the main ideas of both the positioning school and the resource& capability school will be interpreted respectively. Then a comparison and contrast of the two perspectives will be conducted, so that their contributions and limitations can be better evaluated. At the end of the report, conclusion and recommendations will be proposed.
2.0 Two perspectives in strategic management
2.1The outside-in perspective in strategic management
The positioning school of strategic management adopt an outside-in perspective in corporate strategy formulation and obtaining competitive advantage (Mintzberg et al., 2008). It holds the opinion that the external environment plays a prominent role in formulating strategy. Occupying an effective position in the competitive industrial market can become the source of competitive advantage (Porter, 1979). As far as the internal environment of the corporation is concerned, it should be adjusted according to the developed strategy based on external environment.
As the major representative of positioning school, Michael E. Porter develops several prominent theories, such as 5 forces model and competitive strategy model. He pays the attention to two major issues in his framework (Dagnino, 2012). The first one is strategic analysis, which is mainly about industrial structure analysis with the aid of 5 forces model. 5 forces model include the analysis of the bargaining power of the buyers and suppliers, the threat of new entrants and substitutes, and the competitive rivalry (Porter, 1979). Different combinations of these 5 forces imply different level of profit of the specific industry. This will help the organisation understand the attractiveness of the industry and so as to facilitate the next issue (Renko, Sustic, & Butigan, 2011). The second one is strategy formulation which decides the favourable position in the industrial environment. Low cost and differentiation are two kinds of favourable positions where competitive advantage comes from. As a response, there are two basic kinds of competitive strategy, namely low-cost strategy and differentiation strategy, and then it derives the third kind, focus strategy (Dagnino, 2012). The strategy choice is highly related with the external environment, and decides the position of the firm on the market, thus becomes the source of competitive advantage. When the competitive environment analysis (usually contains 5 forces model) finds out that the market environment has changed, it is time for the firm to exam its business direction and re-formulate its strategy (David, 2009). However, the 5 forces model overly relies on hard data which may be difficult to obtain and extrapolates, and the generic strategy model as well as its context has a narrow focus (Mintzberg et al., 2008).
2.2 The inside-out perspective in strategic management
The resource & capability school holds the perspective that sustainable competitive advantage or excess profits can come from specific resources or competences owned by the firm (Barney & Clark, 2007). It has a framework to analyse the allocation and usage of resources within the firm, which become a basic paradigm in the form of “resources or capabilities – strategy – performance” (Barney& Clark, 2007). This paradigm indicates the core of R&C school: the competitiveness difference comes from strategic difference, and the strategic difference comes from resources or capabilities’ difference.
There are two representative theoretical models in this school, namely resource-based view and core competence (Barney & Clark, 2007; Prahalad & Hamel, 1990). Barney and Rumelt, as the representative of resource-based view, analyse how internal resources can be allocated and utilized to become competitive advantage (Barney & Clark, 2007). Different competitive advantage stems from different strategy formulated basing on corporate resources. It is assumed that each firm have its own tangible and intangible resources, and some of them can be converted into unique ones (Leonidou, 2011). The unique resources have the potential to become the strategic resources that are heterogeneous, valuable, rare and irreplaceable to facilitate corporate development and resist external risks. This kind of internal resources can become the source of competitive advantage (Barney & Clark, 2007).
Among all kinds of resources and capabilities, core competences are of significance. The concept of core competence was firstly proposed by Prahalad, and Hamel (1990). It is the integrated knowledge and skills that become a particular competence to support the organisation maintain sustainable competitive advantage (Mintzberg et al., 2008). There is a framework can be used to identify core competence, namely the VRIO framework (Barney & Hesterly, 2010). V stands for valuablity, means that core competence can increase customer value by increasing customer utility, so as to bring competitive advantage to the firm; R stands for rareness, means that core competence is owned by a small number of firms and cannot be obtained through market transactions; I stand for inimitability, means that core competence cannot be easily imitated by competitors; O stands for organisation, core competence is the result of the whole firm’s organisation and effort. As soon as the core competence is identified, the firm’s staff and operations should formulate and implement strategy that focuses on core competence’s development and maintenance (Barney & Hesterly, 2010).
3.0 A comparison and contrast of the two perspectives
The outside-in perspective and inside-out perspective have differences in the following points.
Firstly, the nature of the firm is different in the two perspectives. In the positioning school, all the enterprises are homogeneous and their internal environment will be considered as a black box like a machine that transfer inputs into outputs while the transfer process is unknown and unimportant (Dagnino, 2012). They concern about how to make proper decision of investment such as funds, materials, equipments human resources and how to maximise the outcomes, while little attention is paid to the firm’s internal operations and maximising its value (Mintzberg et al., 2008). On the contrary, the enterprises are heterogeneous in the resource & capability school. Allocative efficiency of internal resources is highlighted and the whole firm should be united towards the development of core competence (Prahalad, & Hamel, 1990). To do so, even external homogeneous resources will be turned into internal heterogeneous resources (Barney& Clark, 2007). It is achieved by adding value to these resources by involving all the organisational activities in creating the exclusive capabilities or resources ((Barney& Hesterly, 2010). The aforementioned advantages will bring companies sustainable competitive advantage by having heterogeneous resources or capabilities.
Secondly, the present author deduces that the source of competitive advantage is different in the two perspectives. Although both schools recognise the aim of a strategy is to pursue competitive advantage, they have different opinion about where competitive advantage comes from (Porter, 1979; Prahalad & Hamel, 1990). In the positioning school, competitive advantage comes from a favourable position in the industry, namely low cost and differentiation (Dagnino, 2012). Therefore the strategy is formulated (or selected) according to the desired kind of competitive advantage. If the low cost position is desired, a low cost strategy will be chose in which large scale production will be promoted and facility with high efficiency will be introduced (Dagnino, 2012). If the differentiation position is desired, uniqueness and innovation are highlighted in their products or services. These favourable positions heighten the business barriers within the industry and surpass the rivals, so competitive advantage comes along. In the resource & capability school, competitive advantage comes from strategic resource or competence (Barney& Clark, 2007). Put it in another way, it is the strategic resource or competence owned by the firm that make it valuable. The exclusive resource and competence is hard for competitors to imitate or substitute, which become the source of competitive advantage (Barney& Clark, 2007).
Thirdly, the drive of corporate development is different in the two perspectives. In the positioning school, the motivation of development is the continuous pursuit of favourable position (Mintzberg, 2008). In order to maintain its monopolistic position, the firm must continually increase its strategic investment. But the fact is that the monopolistic advantage will gradually decrease to zero as time goes by, so the firm has to seek for another business field (Leonidou, et al., 2011). However, the resource & capability school view that the drive of corporate development comes from internal energy. In the producing process where external resources are combined with the firm’s exclusive resources, management skills and knowledge are accumulated and become competences. And the competences become the energy that drives the firm’s development (Barney& Clark, 2007).
Fourthly, the role of strategic business unit(SBU) is different in the two perspective.
In the positioning school, SBU plays a central role in the whole organisation. While in core competence theory, SBU plays a supporting role in strengthening the development of core competence (Prahalad, & Hamel, 1990). With the assistance of SBU, once the core competences are identified, top managers will require all the projects and staff focus on these core competitiveness (Barney & Hesterly, 2010).
The two schools also share connection. The core competence theory incorporates some concepts in the competitive theory. It places the low-cost strategy, differentiation strategy and focus strategy as the business strategy. There is a metaphor in core competence theory (Prahalad, & Hamel, 1990): the diversified company is like a big tree, whose trunk and major branches are core product, smaller branches are business units, and the leaves, flowers and fruits are end products, the root system that provides nutrition, support and stability is core competence (Prahalad, & Hamel, 1990). There are three levels of strategy, namely product strategy, business strategy and corporate strategy (Prahalad, & Hamel, 1990). The competition at the end product level is the major concern of marketing, which is customer-oriented. The competitive advantage can be achieved as long as more customer value is created when compared with competitors. Porter’s theory can be used to address the competition at business level, mainly about product-market portfolio and the position in the established market. Corporate level strategy is about the development of core competence. Therefore core competence strategy is more fundamental than business strategy and product strategy.
4.0 The contributions and limitations of the two perspectives
The comparison and contrast of the two perspectives can help to discover their contributions and limitations both in theory and in practice.
4.1 The outside-in perspective
The major contribution of Porter’s competitive strategy in positioning school is introducing industrial organisation theory into strategic management, and developing 5 forces model aided by the research result of industrial economics to analyse industrial structure. It is an innovative integration of industrial organisation theory and corporate competitive strategy theory, as well as the process of strategy formulation and implementation (Dagnino, 2012). Prior to Porter’s theory, though several conceptional strategic management frameworks like SWOT are quite influential, there was a lack of feasible analysis tools to identify and analyse strengths, weaknesses, opportunities and threats in the framework. Porter’s 5 forces model provides a universally applicable framework to address the external factors (Mintzberg, 2008).
In addition, competitive advantage theory provide another useful perspective to explain the new phenomena and situations of international business after world war , which comparative theory fail to explain (Dagnino, 2012). For instance, the Japanese cars and electronics did not present any advantage in the American market at first, but they found their way, accessing into this market, and eventually occupied a significant share of the market and obtained a remarkable reputation of Japanese products with a global presence. Comparative theory could not effectively explain the success of products made-in-Japan, while the strategic advantage theory clarifies that advantages do not have to be resources, competitive position in the industry can also become advantages.
However, there are some limitations in positioning school. Firstly, the nature of competitive strategy theory has static assumption and logic (Kraaijenbrink, Spender, & Groen, 2010). Based on the assumption of scarcity of market resources and entrepreneur economic rationale, it emphasises the competitive feature of strategy and relatively overlook the possibility and reciprocity of business cooperation. Besides, based on the premise of information perfectability, competitive strategy theory emphasises pre-established strategy without taking the dynamic nature of strategic management process.
Secondly, the core of competitive theory is about industry selection, but this kind of selection is confined in a structured market which has clear industrial boundary, established game rules, and mature market condition (Manikutty, 2010). When a firm enter a structured market where rules are established by the existing leading firms, the new entrant can only be the follower of these rules (Manikutty, 2010). As a consequence, it has to accept restrictions and challenges passively and has fewer opportunities to make aggressive move (Manikutty, 2010). Moreover, in the existing market, firms can only by the combination of elements like products, prices and channels to seek for competitive advantage. But normally this kind of competitive strategy is not sustainable. In other words, the selection of industry in Porter’s theory cannot include industry innovation (Mintzberg, 2008).
Thirdly, the outside-in perspective mainly focuses on the analysis of environment, especially the competitive environment within the industry (Mintzberg, 2008). Therefore it cannot explain why different firms will have different performance within the same external environment (Mintzberg, 2008). For example, the e-business market in China has high level of rivalry. But the positioning theory cannot explain the different performances of different e-business firms in the market history of approximately 10 years, in the present author’s opinion. To the present author’s knowledge, when the e-business market was in its booming phase, some companies gained enough momentum and went through rapid growth, among which Taobao, Amazon China are the typical ones in China, while some other companies like 8848.net faded in the history. These firms all operated in the same industry at the same time, namely B2C market, but had quite opposite fate. Only with the positioning theory cannot fully find out the fundamental reason. There is also another phenomenon that the outside-in perspective fails to explain. Some firms in a harsh industry can still gain significantly high profit, while some other firms in a thriving industry that has high growth rage and high profit will be bankrupt (Mintzberg, 2008).
Fourthly, the genetic competitive theory normally assumes that a firm can only choose one particular strategy, for conflicting procedures are involved in different competitive strategies (Dagnino, 2012). For example, low cost strategy entails large scale of standardized outputs, while differentiation strategy aimed at providing customized product that required high cost (Dagnino, 2012). Nevertheless, with the development of economy globalization, technology revolution as well as the diversity of customer demand, differentiated products can also achieve economies of scale with the global demand, which can be put as “Mass Customization”. Mass Customization has been successfully utilised by Dell (Mezger & Violani, 2011).
4.2 The inside-out perspective
The resource & capability school makes significant contribution to strategic management. Firstly, since the limitations of positioning school are revealed as a result of economy globalization and technology revolution, a firm should take advantage of its strategy to compete in not only the existing industry but also the future industry (Mintzberg et al., 2008). It requires that the firm should have the foresight to forecast the future industry development so as to gain the fast-mover advantage by obtaining knowledge and skills in a fast and economic way (Barney& Clark, 2007). Secondly, internal resources and capabilities are the ones that help the firm gain sustainable competitive advantage. It breaks through the assumption that “internal environment as a black box”, opening a new endogenous research (Kraaijenbrink, Spender, & Groen, 2010). This will help managers identify the resources that can bring sustainable resources. Thirdly, in this school, a firm is regarded as an assembly of resources and capabilities, being different from the traditional view that a firm as a business portfolio (Kraaijenbrink, Spender, & Groen, 2010). This innovative view can assist managers in making resources allocation decision.
However, there are some drawbacks existing in this school. First is about resource-based view. It over emphasises the corporate internal environment with little attention is paid to the external environment (Kraaijenbrink , Spender & Groen, 2010). As a result the strategy based on this view will find a hard time in adjusting to the changes in external environment. Moreover, it cannot act as a useful guide in practice. It only suggest that internal resources can become competitive advantage through strategy, but exactly how, it fail to give the answer (Kraaijenbrink , Spender & Groen, 2010). In other words, it is a process black box whose input is resources and output is competitive advantage. Therefore, it does not tell managers how to convert resources into competitive advantage.
As far as core competence is concerned, it does not clarify where the core competence comes from. The features of core competence derive from after event rationalization (Manikutty, 2010). In other words, it identifies the core competence owned or lacked by the firm based on the given story (Mintzberg et al., 2008). It is always easy to be wise after the event. Thirdly, core competence over highlights the significance of a particular capability in achieving competitive advantages and long-term performance, and this may mislead managers into ignoring the benefits of competence portfolio (Newbert, 2008).
5.0 Conclusion and Discussion
The outside-in and inside-out perspectives are two major schools in strategic management theory (Mintzberg, et al., 2008). The summary of the aforementioned opinions are as follows: The outside-in perspectives pay attention to the external environment and occupying an effective position in the competitive industrial market can become the source of competitive advantage. The inside-out perspective regard specific resources or competences owned by the firm is the source of competitive advantage and therefore the base of strategy formulation. There are several differences between the two perspectives, namely the nature of the firm, the source of competitive advantage, the drive of corporate development and the role of strategic business unit. But the core competence theory in the inside-out perspective still recognises the value of Porter’s competitive strategy theory in the outside-in perspective at the business level.
With respect to the contribution to Strategic Management discipline, the positioning school highlights external environmental analysis by the positioning logic and facilitates it by inventing the masterpiece tool, i.e. Porter’s 5 forces model, which has become the regular framework to analyse industry and been included in almost strategic management learning readings; while the resource and capability school pays attention to the internal environment that provide a new lens to Strategic Management, and its important concepts or frameworks, like core competitiveness, VRIO framework, become popular ideas that are welcome not only in micro entity level but also macro entity level like nation, city management (Mintzberg et al. 2008). For example, Chinese government incorporate these strategic management ideas into their policy formulation. However, both the two schools have some on-sided opinions to some degree. Any school alone will limit the perspective and thus the development of Strategic Management, making Strategic Management behind the reality (Mintzberg, et al. 2008). Therefore, a systematic and contingent perspective should be adopted in Strategic Management.
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