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Environmental scanning can not be separated from the strategic management process as it is an integral section (Pizam 2005). As an organization decides to keep on its business in an environment, it should scan and observe the business environment by reviewing the business strategy on a continuous basis (Jain 1990). Jain (1990) also suggested that scanning can help the organization to cope with the problem derived from the changing environment. Besides, the organization should formulate strategic priorities and develop strategies. So that it provides competitive advantage and enable the organization to adjust to the condition (Chapman 2005). Two perspectives are identified: outside-in and inside-out approach. The first considers the external environment to identify potential opportunities and threats. The inside-out perspective concerns the development of internal resources which provides strengths and identifying weaknesses (Wit et al. 2005).
Using the outside-in perspective, an organization should fit in the external environment of the selected industry and position itself within this to create a competitive advantage. Also, the outside-in approach takes a broad view of the outside environment facing the organization. It concerns about all the elements or sub-environments, the longer-term trends and the development of alternative views (Olsen et al. 2008).
The outside-in perspectives provide insights into the nature of the external environment. There is a variety of outside-in approaches which include an analysis of the nature of markets and the structures using, such as product life cycles, Porter's five forces model, and the implications of globalization (Chapman 2005). This issue will be focusing to discuss the studies from Porter.
Porter (1985) has developed a five force model which seeks to provide organization with the basis for understanding the impact upon organization competitiveness of industry structure (Enz, C.A. 2009). The five forces of competition are: threat of new entrants, power of buyers, power of suppliers, threat of substitutes, and competitive rivalry; which affect the prices, costs, and required returns. To deal with these five forces, Porter suggests that the organization must develop sustainable competitive strategy by effective business strategic. Although strategies are never exactly the same, types of strategies can be classified by identifying the common strategic characteristics. Porter (1987) identified three generic business strategies: cost leadership, product differentiation and focus. Cost leadership aims to achieve advantage through provision of the product or service at the lowest cost. Differentiation strategies aim to create value through uniqueness. And focus refers to the strategy concentrate in a narrow segment (Enz, C.A. 2009).
For the outside-in approach firm, developing strategy begins with an analysis of the environment to recognize the potential market opportunities (Wit et al. 2005). As the potential customers have chosen to consume in a firm, a market position has been established to that firm. The organization should adjust and fit itself to the changing environment so that to create and build up its position in the market. To the outside-in approach firm, the game of strategy is about market positioning and understanding and responding to external developments. As a result, the outside-in perspective is also known as the 'positioning approach' (Mintzberg et al. 1998). Positioning is not a short-term and opportunistic behavior as the superior market positions are difficult to attain. However, once success can be the source of sustained profitability (Wit et al. 2005). For example, Porter (1985) suggests that as a firm focus on a niche market and the companies strongly differentiate their product, it can achieve strong and profitable market positions, even when the others has the lowest cost position.
Using the inside-out perspective, the organization should take its resources as the starting point and select an appropriate environment. Also, the inside-out approach takes a narrow view of the environment. It looks for the most relevant elements in the outside environment as it is forced by the internal influences of the organization (Pizam 2005).
As the inside-out perspective derives competitive advantage from the organization's internal strengths, a resource-based or competencies view of strategy would be used. Under the resource-based view, competitive advantage comes from an aggregation of resources, which are translated by management into strengths and weaknesses of the organization and that allow the production of unique goods (Lerner et al. 2002). Barney (1991) described resources as 'all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness' (Fayolle et al. 2005). To achieve efficiency and effectiveness, it needs to sustain long run competitive advantage and four criteria should be met: (1) the resources must be rare, valuable to customers and superior to competition, (2) they must be imperfectly imitable, (3) they must be substitutable, and (4) they must be non-tradable (Barney 1991). There are six categories of the resources: financial resources which are about all of the monetary resources from the firm, physical resources, such as plant and equipment, human resources, such as production supervisors and sales personnel, organizational resources, technological resources and intangible resources (Enz 2008). The uniqueness of the resources provides the organization with core competencies (Prahalad et al. 1990). Competencies can be provided by tangible assets, such as machines and materials, or intangible, including reputation, brand, goodwill, employees' knowledge, skills, attitudes and so on. As assets can be separated into tangible and intangible, optimal competitive advantage can be achieved when organizations coordinate tangible capabilities with those intangible capabilities (Prahalad et al. 1990).
However, resources alone may not sufficient to achieve competitive advantage (Enders 2004). The organizations have to select an appropriate strategy which can use the resources and capabilities in the most effective way (Grant 1991). The different ways to identified and exploited the core resources and capabilities by the strategy will affect its performance. Porter developed a framework, known as the value chain analysis which is a useful tool to identify the potential sources of competitive advantage. It helps to identify the basic building blocks and the value added by each. Value-adding activities through the service value chain are a source of competitive advantage as they meet the requirements (Enz 2009).
Table 1. Outside-in perspective Versus Inside-out perspective.
Source from: Strategy synthesis: resolving strategy paradoxes to create
competitive advantage, Wit (2005) pp. 127
To sum up the nature of outside-in perspective and inside-out perspective, the two are totally contrary (as shown in table 1).
Outside-in approach is externally-oriented and market driven as external analysis is a critical task. The central concept of this approach is that of 'positioning' which is the long-term commitment to the position and fit into the market. Moreover, it focuses on generic strategies, for example Porter's generic business strategies, and market share. The structure of external environment is particularly markets and industries with emphasis upon understanding the 'rules of the game'. As it is potential to influence structure of the market to benefit firm, dynamic perspective is essential. Resources are important, but not the starting point, this approach is 'resource base follows market position'.
On the contrary, inside-out perspective beliefs that organization's strengths are the basis for strategies. Internal analysis is the critical task. The central concept is that of 'competences' which is the long-term commitment to build and sustain critical resources. Besides, it focuses on putting core competences into the new markets. The organization may need a unique resource base upon which to establish strategies. Thus external dimension is secondary to this perspective. In this approach, competencies drive the strategy, therefore 'market position follows resources base'.
Application and Assessment
A firm that using outside-in perspective usually believes that it should not be self-centered. It should take the environment as the starting point when deciding its strategy. A successful outside-in based company has clearly setting the target on developments in the market-place and is decided to adjust the unfolding opportunities and threats encountered. It may take the hits from customers and competitors to determine its own game plan (Jaworski et al. 1993). For the successful companies, markets are leading, resources are following.
Using Hong Kong Disneyland Hotel as an example, the Hotel operates the business along the markets. As more people like the characters of Disneyland, the hotel arrange the characters shown around the hotel area to attract the guests. Besides, the decoration of the hotel is full of the magic feeling. In this case, Hong Kong Disneyland Hotel implements outside-in perspective as it designs the hotel building, even decorates the guest rooms, according to the market trends.
Using another example, The Empire Hotel Hong Kong, that is located in Wanchai, the Central Business District on Hong Kong Island. It is just within minutes of walking distance to the Hong Kong Convention and Exhibition Centre. As the convention centre is nearby, the hotel targets the business market and provides a lot of meeting facilities in the hotel, such as multi-purpose and versatile meeting rooms, advanced meeting equipment including 47" LCD TV panel, audio and video conferencing and internet broadband access. Apart from those tangible amenities, it provides different business packages to suit the guests, for example, Special 'Meet &Â Stay' Offers and Elite Meeting Packages. The Empire Hotel Hong Kong establishes its position by providing the superior products and service to satisfy guests' needs. As a result, it is using the outside-in approach. (The Empire Hotel 2010)
On the other hand, as a firm adopts an inside-out perspective, its strategies would build around the company's strengths. To achieve business success under the inside-out approach, building up a strong resource base over a long period of time is necessary. For such firms, the beginning point of the strategy formation process is about which resource base the firm wants to have. The second issue is which competences and exclusive assets should be acquired, i.e. difficult-to-imitate. To the inside-out oriented firm, market positioning must take place together with the context of the resource-based strategy. In other words, market positioning is important but it must take place within the areas set by the resource-based strategy. For the business success, resources should be leading, and markets following.
For example, The Peninsula Hong Kong, it is a famous brand hotel in Hong Kong. It has a great loyalty of the internal customers; both of the staffs have distinguished experience and business knowledge. Moreover, the company has a strong financial condition to support. Besides, it provides excellent equipment and facilities. Another example, The JW Marriott Hotel Hong Kong, it is an exquisite 5-star hotel in Hong Kong. It provides a great reputation and brand name as it provides the best service. As a result, these two hotels have sufficient resources which are always rare and difficult to imitate to achieve the inside-out perspective strategy.
To review the situation in Hong Kong, Hong Kong is an international financial center; the economy condition is changing everyday. Moreover, the travel purpose of the most travelers may not be vacation. Thus, most of them would have demands. Under the inside-out approach, although those unique features can provide a competitive advantage over competitors, this can lock the organization into its competencies and limit or slow its ability to adapt to different market situation. In other words, because of constant environmental changes, managers need to make the decision about the strategic alternatives. However, the options may be limited within the established framework of available resources (Spanos et al. 2001).
On the other hand, if the companies with a high market share and profit more from economies of scale, benefit from risk among customers, increased bargaining power towards buyers and suppliers, and can more easily to prevent the new entrants and block the competitive attacks. Therefore, if the hotels use outside-in perspective, they can provide products and service which match with the guests' demands.
Outside-in perspective and inside-out perspective are opposite approaches as the first determines with the market situation and the other determines with the resources the firm own. In fact, it is difficult to identify which approach is the best. It can only say which is more applicable to the case. For the Hong Kong hotel industry, outside-in perspective is more applicable as Hong Kong is a financial based city rather than a resort city.