Why do some enterprises consistently outperform their peers? Is the water better in their office than their competitors? How do some companies leverage innovation to consistently drive growth in revenues, profits, and customer satisfaction? Is it because their leaders, like Steve Jobs at Apple, were market savants that just knew what the market really needed? There may be another explanation. According to a study conducted by Ranjay Gulati from Harvard Business School, companies that adopt an Outside-In philosophy:
- Delivered shareholder returns of 150 percent while the S&P 500 has delivered 14 percent
- Grew their sales 134 percent while the S&P 500 has grown just 53 percent.
This post will cover four topics:
- What is the Outside-In Principle?
- Inside-Out vs Outside-In Examples
- How Can You Tell If Your Company is Inside-Out or Outside-In Driven?
- Principles of an Outside-In Market Driven Organization
What is the Outside-In Principle?
Outside-In can be defined as consistently successful companies that start with an external market orientation and vigilantly study customer trends in order to design their strategy. They look to understand customer’s needs, problems, challenges, and issues that, if solved, would provide new value that the customer would be willing to pay for.
Conversely, an “inside-out” strategy is one that relies upon an internal orientation. It starts by asking what a company can do with existing resources, and looks to streamline operations through right-sizing and repressed spending. While this approach can create short-term shareholder gains, an internal focus limits a company’s ability to notice and adapt to market changes.
Inside-Out vs Outside-In Examples
Inside-Out: Chatbots & Live Chat. In a move to reduce customer service labor costs, many firms are leveraging chatbots and live chat to displace traditional phone-based customer service. The concept that significantly lower cost technology can replace the expense of human-powered customer service is a classic Inside-Out mode of thinking. While it is true that a significant portion of Millennial, GenX & Y’ers prefer message/chat based approaches to customer service, the overwhelming majority of baby boomers and senior citizens detest it. Sometimes, even the best intentioned trials of this type of technology by leading technology giants can backfire. Microsoft launched the Tay project to learn more about conversational language and artificial intelligence. Tay was a bot designed to interact with people on Twitter and develop a personality through those interactions. It was supposed to be a cutting-edge display of the capability of artificial intelligence, but it seems humanity got the best of Tay. Within 24 hours, Tay had to be removed from Twitter for praising Adolf Hitler, denying the existence of the Holocaust and posting aggressively racist tweets.
Outside-In: Discover Card 1-800 Customer Service. Discover Card offers the credit card industry’s best customer service. You have probably seen the commercial where someone calls Discover Card customer service and is surprised to hear an actual human answer the phone in a couple of rings. People are delighted to talk to a human instead of a machine. They then extol the virtues of some true customer-centric features – free Transunion credit reports, cashback match, free FICO scores, $0 fraud liability, etc. Discover also offers live support as well as customer service via Twitter. These channels appeal to the younger users of their products, but the default option is to speak to a knowledgeable and friendly human first.
Chatbots and Live Chat can reduce costs and improve productivity, with a potential hit to customer satisfaction. This is classic Inside-Out thinking. Discover Card human-based customer service is at the other end of the spectrum – based on empathizing with consumers about their issues and challenges when seeking customer service from a multi-billion dollar company.
How Can You Tell If Your Company is Inside-Out or Outside-In Driven
Chances are that if your enterprise is Outside-In driven, you know about it. The focus on customer’s unmet needs and perspectives will pervade almost everything you do. Another way is to examine sales and executive compensation plans. Comp plans are the ultimate arbiter of what an enterprise considers to be important.
If the executive or management compensation plans contain Revenue and EBITDA components, there is a good chance your company is Inside-Out focused. Inside-out thinking emphasizes resource utilization and efficiency. EBITDA is a common compensation metric, because management generally controls the factors that make it up. Items such as effective tax rates, debt interest payments, or amortization of intangibles are usually controlled by a firm’s board of directors. EBITDA is a metric that measures management performance without penalizing them for decisions made by the board.
If the executive or management compensation plans contain Net Promoter Score (NPS) targets, and the NPS component of the bonus is equal to or greater than other components like revenue or EBITDA, there is a good chance your company is Outside-In focused. (NPS) is a management tool that can be used to gauge the loyalty of a firm’s customer relationships. It serves as an alternative to traditional customer satisfaction research and is claimed to be correlated with revenue growth. No compensation metric is perfect and almost all can be gamed to a certain extent. By placing an equal or greater value on NPS versus metrics like revenue or EBITDA, organizations are demonstrating what they truly consider to be important.
Principles of an Outside-In Market Driven Organization
George S. Day is considered the father of the Market Driven Strategy movement. He is the Geoffrey T. Boisi Professor and Director of the Huntsman Center on Global Competition and Innovation at the Wharton School of the University of Pennsylvania. He has described the following capabilities of market driven organizations:
- Diagnosis of current capabilities, using mapping and benchmarking methodologies
- Anticipation of future needs for capabilities in light of the strategy for creating customer value
- Bottom-up redesign, based on the formation of teams responsible for continuous improvement or radical redesign of underlying processes
- Top-down direction from senior managers, who demonstrate a clear, continuing commitment to putting customers first
- use of information technology to enable the organization to do things it couldn’t do before
These elements are what you should think about as you consider launching an Outside-In, Market-Driven Strategy in your organization.
