Inside-out and Outside-in Approaches in Business Thinking: What is Your Way

If our thinking is inside-out, we tend to contemplate with an issue as we see it at first and then explore solutions within that initial mindset.  Outside-in thinking, by contrast, tends to see the issue from multiple perspectives leading through external events or triggers. The Inside-out approach is guided by the belief that the inner strengths and capabilities of the organization will make the institution prevail. The Outside-in approach is directed by the belief that customer value creation, customer orientation and customer experiences are the keys to a firm’s success. What needs to be clarified is the difference between these two approaches when looked at from a customer’s point of view. This article attempts to sheds some light on these two aspects, as their appropriateness will depend on the pluses and minuses of each of them.

Inside-out thinking broadly sets our focus on processes, systems, tools, and products that are designed and implemented based on internal thinking and intuition. The customer’s needs, wants, tasks, and perspectives do not play a major role in this type of thinking. Herein, we make decisions because we think it is what is best more for the business/organization, than for customer/user. We are pushed by the basic thinking that we know what is best for the customers. Conversely, outside-in thinking depicts that we look at our business from the customer’s perspective, and consequently, design processes, tools, and products and make decisions based on what is best for the customer, and what meets the customer’s needs. We make decisions because we know it is what is best for our target segments. The reason being that we are open to listen to them, and we make every attempt to understand them as well as the tasks we perform.

Inside-out Approach (ISOA) – Emphasis on Firm-specific Internal Resources and Capabilities.

As spelt out briefly in the introduction, ISOA means that the long-term stakeholder value is a significant factor will make the organization prevail. This focuses on firm-specific internal resources and capabilities. The success of this approach is based on a firm’s ability to leverage and deploy its existing capabilities through inside-out processes. It starts within the firm and looks outward. As literature sources of economics and strategic management have indicated, ISOA is an internally oriented strategic position, where the focus lies on how a firm achieves superior performance by developing and deploying strategic firm-specific resources that are Valuable, Rare, Inimitable, and Non-substitutable (VRIN). The organization uses its internal resource base to neutralize threats/challenges that arise in the external environment, as well as to exploit opportunities. These resources are often idiosyncratic and embodied in the form of tacit knowledge within the eco-system of the firm. Research studies have laid higher emphasis on the ISOA to examine the function of resources in creating competitive advantage through innovation performance of companies.

Through a systematic review of organizational innovation literature, Crossan and Apaydin (2010) introduce Organization Dynamic Capabilities (ODC) which define as the processes through which firms integrate, reconfigure, renew, and recreate resources and capabilities over time, that play a key role in enhancing an organization’s innovation performance. They propose that ODCs reside in five types of managerial levers:

1. Organizational mission and explicit innovation strategy
2. Resource allocation (e.g., absolute and relative R & D intensity, commitment to differentiated funding, annual turnover of resources, and slack resources);
3. Structure and systems (e.g., organizational complexity and administrative intensity, formalization, specialization, and centralization; fit among organizational design and type of innovation, and number of employees);
4. Knowledge management systems (e.g., formal idea-generation tools, external links with universities, the quality of these links, formal information-gathering, and customer contact time and frequency); and
5. Organizational culture (e.g., a clearly stated, attainable, and valuable shared vision; promoting autonomy; calculated risk-taking; motivation; and the attractiveness of the organizational climate).

ISOA: Need to Observe Key Capabilities

Organizations that adopt ISOA strategy need to observe their key capabilities by examining, what they are good at: making and/or selling? Once these strengths are identified, the organization makes these products and uses substantial marketing to convince users to buy them. Apple uses the popularly known as the “Golden Circle” marketing method. As per Simon Sinek (2009) traditional marketing methods start with “WHAT” (activities) then followed by the “HOW” (strategies/processes) and ending with the “WHY” (purpose). This process of Apple starts with “Why”: the central conviction of why the organization exists. The development of such a powerful core-belief system is what attracts the unconventional practice. Once Apple was able to establish this powerful central message, they were able to sell more than just computers. They do not use customer surveys to develop products, and Steve Jobs, founder (1955-2011) once said that Alexander Bell did not conduct customer focused group-studies before he invented the telephone.

Do Organizations Get Good Insight by Asking Customers? Henry Ford is another great example. He has said “if I would ask people what they want they would come back to me with a faster horse.” The horse is the people’s reference point, and what makes the answer may be very rational, and therefore, it’s not very innovative. This questions raises the issue whether organizations are in a position to get good insights by asking customers. It is believed that one cannot just ask customers directly what they want as most consumers do not know what they really want until producers show it to them. It indicates that we need to perform things in a different and more innovative and creative way to win the customers rather than follow a mundane practice.

ISOA Works Well in Relatively Well-developed Markets?

Another argument is that the ISOA works well in relatively well-developed markets where the customers' needs and wants undergo a slow change. Companies that produce the majority of the foods, including poultry, beef, sugar, flour, etc, are a case in point. Given that market shifts for these items are slower, firms in such industries focus on applying new technologies that allow them to safely manufacture these food items faster and/or cheaper. While an ISOA generally works well, it may fail if organizations become so internally fixated that they overestimate what they are good at, underestimate the offerings of their rivals or miss changes in the industry.

Finite and Infinite Games – An Analogy

One of Simon Sinek’s (2019) new books discusses the idea of an infinite game which has a direct connection to the ISOA. The concept of finite and infinite games has been previously articulated by James Carse (1986). In finite games, like football or chess, the players are known, the rules are fixed, and the end-point is clear. The winners and losers are easily identified. In infinite games, like business or politics or life itself, the players come and go, the rules are changeable, and there is no defined end-point. There are no winners or losers in an infinite game; there is only ahead and behind. The more we explore in the finite and infinite spheres, the more we see as infinite games all around us. In this context, ISOA triggers us to overcome many of the challenges that organizations face, simply because leaders around us are playing with a finite mindset in an infinite game. The leaders, who embrace an infinite mindset, tend to build stronger, more innovative and inspiring organizations. Simon emphasizes the fact that leaders who have an infinite mind set have the resilience to thrive in an ever-changing world, while their competitors fall by the wayside. Ultimately, they are in a smarter position to lead the rest.

Outside-in Approach (OSIA) - Long-term Stakeholder Value, a Significant Factor

From an OSIA, long-term stakeholder value is a significant factor, namely, listening and providing value to customers and serving them get their jobs done better than the competition, while creating a continuous customer experience. The ideal organizational philosophy is market-and customer-oriented. The targeted customer segments – buyers as well as users – are the source of inspiration and development. There is also a strong acceptance that if the customers are not satisfied with the solutions offered, there will be issue for the business, and the shareholder value will weaken. The OSIA centers on knowledge and resources that reside outside the firm—such as customers, suppliers, competitors, and end-product market positions. perspective, firms integrate knowledge and capabilities from external sources through an OSIA in developing successful innovations.

Significance of External Environment

Day (1994) defines a market-oriented organization as flexible and adaptable but maintaining a primary focus on the external environment. An OSIA enables businesses to achieve competitive advantage by anticipating market requirements ahead of rivals, thus establishing long-term relationships with the stakeholders. An OSIA also generates knowledge about communicated and underlying customer needs, as well as competitors’ capabilities, strategies, and products, while emphasizing superior value for customers, the importance of the end-product’s market position, and the position’s direct relationship with future returns. In contrast to the ISOA, this perspective centers outside the firm, towards the markets in which it competes, suggesting that the resources arise from a firm’s interaction with entities in its external environment.

Under OSIA, the Johnson & Johnson Company can be considered as one of the best examples that uses this type of strategy. In the company's planning process, each division has to prepare a strategic plan in relation to its competitors. They are compelled to inquire about competitors, and what they are really doing. Competitors are not merely the organization's existing competition; they are also the emerging competitors. They should study the expected disruptions and other potential market entries which would finally enter the market to compete with current chains. For example, Dell Computer has a similar strategy.

They have built its initial marketplace success with a strong OSIA. Orthodox wisdom pronounces that large, powerful customers provide lower profit margins precisely because they are so big and powerful. But Dell earned higher margins from its large "relationship" customers—because it is used an OSIA succinctly. Dell later ran into trouble. It did not adapt well as customers and technologies changed—and it certainly did not anticipate these changes.

Two Paths to Strategy

George S. Day and Christine Moorman called them the two paths to strategy in their book Strategy from the Outside-In: Profiting from Customer Value. Is it ISOA or OSIA? Some companies that had once been OSIA faltered later unable to sustain good OSIA habits. Tesco can be considered as one example – the OSIA transformed the U.K. grocery chain from a mediocre performer that was losing market share each year to the leading grocery retailer in the country, known for its strong focus on customers. However, industry reports indicate that they were not able to keep their accomplishment continuing, as currently a strong threat is posed by Waitrose, Aldi and Lidl who are doing a better trade at the consumer level, applying years of research, Day and Moorman illustrate that an OSIA requires constant vigilance and focus on four customer value imperatives; namely,

• i.    be a customer value leader;
• ii.  innovate new value for customers;
• iii.  capitalize on the customer as an asset; and
• iv.  capitalize on the brand as an asset.

Only companies that operate with an OSIA from the C-suite to the front lines can expect to maximize and profit from customer value. The strategy of OSIA puts you ahead of the competition.

Amazon is a fascinating case for OSIA. In essence, rather than dwelling on what they were good at, selling books, they inquired 'Who are our customers and what do they need?' By shifting their focus, they were able to leverage their brand to seize opportunities in other areas. It is a new standard for OSIA brand strategy. They began as an online bookshop, and built an exceptionally strong brand around it.  But they put themselves in their customer's shoes, and asked what else their customer-base wanted. This allowed them to propagate into the Kindle, and then into cloud computing, web services for their channel partners and massive online retailing of a range of products outside their initial offering. This is how some organizations see the changes, look at the needs of their customers, and adapt. Social media would be a good source of information in shaping the OSIA strategy. Organizations closely study social media and pick up trends in the external environment. That is one way of finding out customers’ likes and dislikes and responding accordingly.

Need for a Management Model Embracing Continuous Change

In the book Sense and Respond, Jeff Gothelf and Josh Seiden (2017), leading tech experts and founders of the global Lean UX movement, vividly show how these companies operate, highlighting the new mindset and skills needed to lead and manage them, and to continuously innovate within them. It states that we need a management model that doesn't merely account for, but actually embraces, continuous change. Yet the truth is, most organizations continue to rely on outmoded, industrial-era operational models. They structure their teams, manage their people, and evolve their organizational cultures in the oft-trodden ways. Now, organizations are emerging, and thriving, based on their capacity to sense and respond instantly to customer and employee behaviours. This shows that companies should be able to read and react to a fast-changing environment, and respond to new customer behaviours which are primarily an OSIA. Based on an in-depth empirical research on thousands of companies, McKinsey Partners Chris Bradley, Martin Hirt, and Sven Smit (2019) provide a data-driven “outside view” to overcome social dynamics, and create effective strategies in their book on Strategy Beyond the Hockey Stick. This book offers ten performance levers that dramatically increase our chances to outperform competitors and create breakout growth in the context of OSIA.

What Works versus What Doesn’t?

Strategy – A History book written by Lawrence Freedman (2013) set a fascinating insight for us to select either ISOA or OSIA. His impressive historical journey shows that strategy is not only about analysis, positioning, clever planning and effective implementation, but also about the experiences, convictions and beliefs of the people behind it. It is built on ideologies, belief systems, mental constructs, etc., as that govern the way goals are pursued to meet an end. Subsequently, binding to one ideology almost makes us immune to the arguments at the other end of the spectrum, and even immune to change. Elisabet Lagerstedt, the Founder, CEO, and Executive Consultant at Inquentia Group, proposes two simple questions one could ask to evaluate whether organizations lean more towards an ISOA or OSIA.

Question one: Whether we know about our targeted customer segments, what needs and behaviours they have, how best to solve their relevant problems, and what kind of value you provide them?

Question two: Whether there is a strong fit between our target segments’ needs, our value proposition, our overall business model, internal processes and a customer-oriented organizational culture, with focus on creating value for our customers?

Do we feel that it is a fundamental necessity to run a successful business? As per this classification, if the answer is yes, there is a high probability that organizations lean towards an OSIA, whereas if the answer is no, it is more probable that organizations lean towards an ISOA.

Drucker: OSIA Predominantly Important for Knowledge-based Innovation

Drucker (1985) proposes that the need for OSIA is predominantly important for knowledge-based innovation, such as those seen in most high-tech firms/industries. It may seem paradoxical, but knowledge-based innovation is more market-dependent than any other kind of innovation. Sharp analysis of the needs, and above all, the capabilities of the intended user are essential. Thus, OSIA is particularly important for high-tech firms, where the ISOA based on technology capability, that creates innovation in the first place, can take on a higher standing relative to that of the needed OSIA marketing competence. Such a preference can lead to rigidity, and be a barrier to innovation performance.

As per the nature of the industry it becomes clear that we need to play our game of choosing ISOA or OSIA. Let me keep it open to explore further. However, if we pay our attention on the HR strategy in an organization, in essence, some firms create functions that are almost entirely internally focused on the HR function, while other firms attempt to have their focus out of the function and toward the people of the firm. Some organizations make the connections from the HR function, through the people, to the business. A few other organizations represent an unconventional shift in this perspective, rather than starting with HR, and linking forward to the business, they begin their process and thinking with the business, and that drives the HR strategy. Whether in HR or business strategy, it is compelling to follow OSIA as a better option for choosing corresponding strategies to add value to firms. Analysis of ISOA also, occupies a very strong footing in driving businesses. However, it is our belief system that governs to select what works and what does not. It is a contextual phenomenon.