Expanding the core business: Understanding how to grow in the non-core business

IN

DEGREE PROJECT MECHANICAL ENGINEERING, SECOND CYCLE, 60 CREDITS

STOCKHOLM SWEDEN 2020,

Expanding the core business

Understanding how to grow in the non-core business

CARLOS GONZÁLEZ-TARRÍO AGUILAR

KTH ROYAL INSTITUTE OF TECHNOLOGY

SCHOOL OF INDUSTRIAL ENGINEERING AND MANAGEMENT

Expanding the core business: Understanding how to grow in the non-core business

Carlos González-Tarrío

Master of Science Thesis TRITA-ITM-EX 2020:416 KTH Industrial Engineering and Management

Machine Design SE-100 44 STOCKHOLM

Examensarbete TRITA-ITM-EX 2020:416

Utöka kärnverksamheten: Förstå hur man växer inom icke-kärnverksamheten

Carlos González-Tarrío

Godkänt

2020-06-22

Examinator

Sofia Ritzén

Handledare

Jens Hemphälä

Uppdragsgivare

Atlas Copco

Kontaktperson

Nadia Dayi

Sammanfattning

Genom historien har stora företag anpassat sig till nya tider genom att ändra innehållet i deras erbjudande. I de flesta fall har det erbjudande de nu har ingenting att göra med vad de erbjöd initialt. Med andra ord var de tvungna att utvidga sin kärnverksamhet. Det innebär att bytt

huvudinkomstkälla. Detta kan t ex göras genom att hitta en annan marknad, skapa nya produkter, och att gå från ett produkt- till ett serviceföretag.

Många företag som tidigare ledde marknaden har försvunnit på grund av sin brist på

framtidsvision. Efter att ha använt alla dess resurser i sin nuvarande kärnprodukt, glömde de att investera i framtiden. När produkten blev föråldrad misslyckades företaget. Det är inte enkelt att ta hänsyn till framtiden och bestämma vilken riktning erbjudandet ska ta. Det finns heller ingen standard formel för att veta vilken riktning man ska ta för att bli framgångsrik, men det finns några faktorer som kan bidra till att minska risken.

Resultaten från denna studie visar att brist på fokus och strategi är de största utmaningarna för företag att utöka kärnan. Slutsatsen är att det inte bara finns ett sätt att utöka kärnan, och varje företag bör anpassa sina strategier efter företagets situation. Fyra huvudrekommendationer ges för att förbättra den faktiska utvidgningsprocessen.

Master of Science Thesis TRITA-ITM-EX 2020:416

Expanding the core business: Understanding how to grow in the non-core business

Carlos González-Tarrío

Approved

2020-06-22

Examiner

Sofia Ritzén

Supervisor

Jens Hemphälä

Commissioner

Atlas Copco

Contact person

Nadia Dayi

Abstract

Throughout history, large companies have been adapting to the new times. For this, they have had to be able to evolve and change the direction of their offer. In most cases, the offer they have now has nothing to do with what they offered. In other terms, they had to expand their core business.

That means changing the main source of incomes. This can be done by moving to another market, creating new products, changing from a product to a service company etc.

On the contrary, many companies that led the market have disappeared due to their lack of future vision. After using all its resources in their current core product, they forgot to invest in the future.

Once that product became obsolete, the company failed. Looking to the future and deciding which direction to take is not easy. There is no standard successful formula for knowing which direction to take, but there are some common factors that can help reduce the risk.

The results from the study show lack of focus and strategy as the main challenges for companies to expand the core. The conclusion is that there is not only one way to expand the core, and each company should adapt their strategies according to the status of the company. In the case of the case company, the strategy is aligned with their status, but the way it is applied should be improved to increase the speed and success rate. Three main recommendations are given to improve the actual expanding-the-core process: Isolate the non-core to increase the focus, better use of their brand position and the competitive advantages it can bring, and to improve the overall knowledge of the company in the non-core products.

FOREWORD

I would like to express my sincere gratitude to my Atlas Copco supervisor Nadia Dayi, as well as all the TWS team for their support, help, guidance and positiveness! I don’t want to forget the support from KTH and Jens, my academic supervisor.

Also, I would like to thank all the interviewees for being open and ready to share their knowledge.

It has learned a lot from all the interviews both for my thesis and for my personal life.

Finally, I would like to thank my family for allowing me to be here and that together with my friends have been able to show me the light in my darkest moments!

Carlos Gonzalez-Tarrio Stockholm, May 2020

TABLE OF CONTENTS

SAMMANFATTNING (SWEDISH)

ABSTRACT

FOREWORD

TABLE OF CONTENTS

1 INTRODUCTION 1

1.1 Background 1

1.2 Purpose and research questions 2

1.3 Delimitations 2

1.4 About the case company 2

2 LITERATURE REVIEW 3

2.1 Core business 3

2.2 Core capabilities 4

2.3 Expanding the core 5

2.4 Management when expanding the core 12

3 METHOND 14

3.1 Research setting 14

2.2 Research process 14

2.3 Data collectionExpanding the core 15

2.4 Data analysis 16

2.5 Method assesment 17

4 RESULTS 18

2.4 Results from the interviews 18

2.5 Results from the survey 26

5 DISCUSSION AND CONCLUSIONS 33

5.1 Discussion 33

5.2 Conclusions 38

6 RECOMMENDATIONS AND FUTURE WORK 40

6.1 Recommendation 40

6.2 Future work 41

7 REFERENCES 43

APPENDIX A: INTERVIEW GUIDE 1

APPENDIX B: SURVEY 1

1 INTRODUCTION

This chapter describes the background, the purpose and research questions, the limitations and the method used in the presented project.

1.1 Background

The main competences of a business, where most of the efforts and needed processes to create a competitive advantage are focused, is called core business. Most of the competitive advantages come from it, this means that it is directly related to the main source of income (Leonard-Barton, 1992). Zook & Ormiston (2007) state that 90% of public companies fail to achieve sustained growth. When focusing on the core business to bring competitive advantages or benefits from it, it is called exploiting the core. For that reason, it is of great importance that the core business focuses on opportunities that can bring economic benefits to the company. If not, the core can turn into a big issue (Leonard-Barton, 1992). Sometimes, companies identify opportunities that are outside their core, then there is a need to expand their core business to keep growing with those opportunities (Rumelt, 1982). Another reason for a company to expand the core is when there is no possibility of growth with the current core. This can happen for many reasons: high market share, obsolete technology or low-profit market (Zook, 2007). The challenge comes on how to do it. According to the survey performed by F. Caudillo, S. Houben & J. Noor (2015), most companies are not using the best practices to expand the core, especially when looking for new opportunities, evaluating and integrating them.

It is not easy for a company to predict when to expand or in what direction, thus, there is no clear strategy or formula to do it. Zook & Allen (2003) state that a consistent, predictable and repeatable formula should be applied to reduce the risks. Learning from previous experiences, both successful and failure cases can help a company to identify trends and key facts that should be applied in future cases to create that repeatable formula.

To succeed in a new business, there is a need for having a competitive advantage. Using the capabilities of the company is a key factor to achieve a competitive advantage (Ljungquist, 2010).

core capabilities are closely linked with the core business, consequently, knowing where you are good at is very important to drive your new core business (Papula & Volná, 2013).

Trying to exploit an eroded core and abandoning the core business when it is still growing are the most common mistakes (Zook, 2007). Kodak case is one of the most studied cases where they failed due to trying to exploit and eroded core. Exploiting an eroded core means that this core cannot bring value or competitive advantage anymore. Kodak didn’t realize that the focus of their core was becoming obsolete, and they did nothing to change it. Thereby, they missed the opportunity of digital photography and lost their dominant position (Mui, 2012). On the opposite side, Yahoo started diversifying its business with multiple acquisitions in different directions and no clear goals. They abandoned their core to look for new opportunities and growth, and they ended by not having any clear core, reducing their value, and losing their leading position against Google (Saurel, 2019).

In a world where technology and business are changing so fast, companies must maintain their competitive advantages to keep growing. To do so, in many cases there is a need to expand their core business. Doing that it is not easy, and it is hard to find previous research focusing on the different factors that enable expanding the core business. Therefore, there is an important area to be investigated.

1.2 Purpose and research questions

The academic literature on how to expand the core business is limited, and most of the time related to specific study cases. That makes this literature hard to apply since every company is different.

Thus, this thesis aims to better understand how companies behave when expanding the core, and give an overall perspective of the process and steps needed, as well as some key success factors that may help.

The thesis is based on two main research questions:

i. How to increase the success rate and agility when expanding the core business?

ii. How to leverage the core business skills, techniques and relationships to expand?

1.3 Delimitations

One of the first limitations encountered is little research on this subject. This means that the study couldn’t be only based on previous research, thus other companies were involved to create a better picture of how expanding the core is done outside the study case company. This means that part of the investigation will be based on own-performed interviews, and not on thoroughly investigated cases from previous literature.

Finally, the selection of the interviewees has been chosen to try to cover all the people involved in the decision making, but in such a large company, it is difficult for everyone involved to have the same vision. The recommendations are made based on the fact that the information extracted through the interviews/questionnaires is relevant for all the people involved.

1.4 About the case company

Atlas Copco Industrial Technique delivers the best assembly tools and controllers to the automotive industry. To increase customer’s loyalty, Atlas Copco believes that only tools are not enough. Thanks to its close relations with customers, Atlas Copco has also detected the need to provide a complete work-station solution. For this purpose, Atlas Copco created a new team called Total Workstation, which is focusing on the new transition to Industry 4.0 and Smart factories to provide their customers complete solutions to increase their productivity, efficiency and flexibility.

To do so, the Total Workstation team is working on developing complementary goods around Atlas Copco Tools (core business), such as error-proofing solutions, operator guidance or solutions for automated stations.

Atlas Copco has identified the need to work on non-core business products and intends that Total Workstation incomes represent a higher percentage of the total incomes, with the hope that this will become their core in the future. That means that they are trying to increase the focus on a business area outside their core business to maintain their leading position and sustained growth.

The problem they are facing is that the core expansion is seen as very slow and sometimes never reaching the targets.

2 LITERATURE REVIEW

The literature review is a summary of the existing knowledge and former performed research on the subject. This chapter presents the theoretical reference frame that is necessary for the performed research, design or product development.

2.1 Core business

The first step to understanding how to grow in the non-core business is to know what is the core and the non-core business. The core business concept is normally defined as the area in which a company focuses most of its business operations and resources. Thus, understanding where the main resources are going and who are the most important stakeholders of the business operations is needed for a company to keep growing. To grow, a company needs to increase its profit. That can be done by reducing costs or increasing sales. To increase the sales, companies need to deliver value to its customers and to be better than the competition you need a competitive advantage (Leonard-Barton, 1992) thereby, being able to develop products that lead to a competitive advantage is key for company growth (Kavadias & Chao, 2008). To obtain a sustained competitive advantage there is the need to exploit the strengths of the company, looking for external opportunities and reducing threats and internal weaknesses (Barney, 1991). The core business focuses on understanding those internal strengths and weaknesses, which is a part that a company can control and using them to fit the external opportunities.

As mentioned, a good understanding of the core business of a company is needed. Atkinson &

Graber (2013) suggest 7 questions that may help a company to define its Core business:

 What do you sell?

 To whom are you selling?

 Where are your customers?

 How do you acquire customers?

 How do you serve customers or distribute products and service?

 What are your competitive advantages and disadvantages?

 How are you differentiated in the market?

Knowing well your core business is the first step. Focusing on the core is proven to be a key success factor for sustained growth since the company is working in an environment where is comfortable and with stakeholders (customers, supply chain etc.) that they know. The company is aware of the competitive advantages and how to benefit from them (Bain & Company, 2001). But as mentioned before, sustained competitive advantage is also linked to external factors. When the environment changes, your core business may become stale or obsolete. You can keep your competitive advantage, but if this advantage is in a non-profitable market, your company will not grow. That means that companies should be able to expand their core to grow in new profitable environments (Luenendonk, 2015). Bain & Company (2001) also defends that core business is not forever and needs to be redefined when industry changes are damaging the core and consequently their business. Thus, deciding when and how to expand the core are critical factors to achieve sustained growth in the non-core business.

2.2 Core capabilities

Every company has specific skills, competences or knowledge that is difficult to copy. Those are the attributes that strengthen the company. There are many different types. It can be technical skills, marketing, brand positioning etc. Those key competences are called core capabilities. As described by Leonard-Barton (1992), core capability is the knowledge within a company that provides a competitive advantage.

Papula & Volná (2013) defends a resource-based development strategy. They suggest that it is more important to look at the resources of the company and its core capabilities to create competitive advantages. “Internal resources and capabilities of the company are more critical factors for determining the organizational strategy as the outputs from the analysis of the external environment”(Papula & Volná, 2013. p3”. In the same way, Shoemaker (1992) suggest that after a deep external analysis, it is necessary to analyze the company internally, by understanding its core capabilities, to create new and sustained competitive advantages.

A good alignment between internal resources and skills with the external environment is key to create a good growth strategy. When these two components are added to the mix, a new core business will come up. Prahalad & Hamel (1990) describe corporations as a tree, where the trunk represents the core products, branches are business units and fruit are the end products. But the most important thing and what will drive how much the tree will grow and how strong it is will be the root system. And the root system in a company is Core Capabilities (Figure 1). Let’s take for example the Honda example, where their competence is very good technical skills on combustion, thus they create their core product, four-stroke engines, and with those engines, they have different businesses, like motorbikes, cars or gardening machines.

Figure 1 Prahalad & Hamel (1990) modified representation corporation tree representation

According to Leonard-Barton (1992), there are four dimensions of core capability: Skills and knowledge base, technical systems, management systems and values and norms (Figure 2). If those four are not well aligned to expand, the core will become a rigidity and will play against the expansion.

Figure 2 Four dimensions of core capabilities (Leonard-Barton, 1992)

2.3 Expanding the core

Exploring outside the core business and focus on business operations out of the comfort zone is called expanding the core business. The aim of expanding the core business is to improve the skills in the areas where a company is not feeling comfortable to reach new opportunities to grow.

2.3.1 When to expand the core

Many companies are not able to understand or foresee what is best for the sustained growth of the company. According to Zook & Ormiston (2007), 90% of the public companies failed to achieve a sustained profit growth due to the expansion strategy. One of the important factors when looking to the future is deciding what to do with your current core business: Can it continue to be exploited or an alternative should be found? This decision is crucial for the company. Focusing on the core is related to an exploitation strategy since is focused on using the actual skills and competencies to create value. Exploitation strategies are seen as the best way to have a good profit in short term, but being too engaged to exploitation can lead the company to have obsolete competitive advantages in the long term (Kyriakopoulosa & Moormanb, 2004). A good example of this problem is the Kodak case (Mui, 2012). Kodak core business was film-based photography. In 1975 a Kodak engineer developed the first digital camera, and management told him not to talk about that since this could be a trouble for their core. When Sony launched its first digital camera, Kodak performed a deep analysis and they realized that this new technology could be a potential competitor in the future and that there was a 10-year window for this technology to be competitive.

The problem was that during these 10 years, Kodak performed an exploitation strategy, focusing all its resources on their core business (film-based photography) and did nothing to develop that technology. When this new technology was good enough to compete in quality and price with film-based photography (Kodak core business), Kodak competitive advantage was obsolete, since their films were not needed anymore, and they were too late to compete in this new digital photography era

To reduce the risks of becoming obsolete when performing an exploitation strategy, Zook (2007) suggests that it is needed to be aware of the core status. If the core still has potential to grow, the company can focus on exploiting it. But once the core is being eroded or with few possibilities to

grow, some resources need to go to the non-core to ensure long term growth. To do so, Zook (2007) suggests that there are three main topics to be analyzed to know if Core Business is deteriorating:

- Profit pools: the places along the total value chain of an industry where attractive profits are earned. If your company is targeting a shrinking or shifting profit pool, improving your ability to execute can accomplish only so much.

- Inherently inferior economics: Sometimes the economics are driven by laws or entrenched arrangements that a company cannot change.

- Non-sustainable growth formula: A manufacturer of a specialized consumer product—cell phones, say—might find its growth stalling as the market reaches saturation or competitors replicate its once unique source of differentiation. In such circumstances, finding a new formula for growth depends on finding a new core.

In the same article, Zook (2007) presents five questions to answer to better understand the status of your core (Table 1):

Table 1 Understanding the status of the core business (Zook, 2007)

Question Take a close look at

1- What is the state of our core customers?

 Profitability

 Market share

 Retention rate

 Measures of customers loyalty and advocacy

 Share of wallet 2- What is the state of our core

differentiation?

 Definition and metrics of differentiation

 Relative cost position

 Business models of emerging competitors

 Increasing or decreasing differentiation 3- What is the state of our

industry’s profit pools

 Size, growth and stability

 Share of profit pools captured

 Boundaries

 Shifts and projections

 High costs and prices 4- What is the state of our core

capabilities?

 Inventory of key capabilities

 Relative importance

 Gaps vis-à-vis competitors and vis-à-vis future core needs

5- What is the state of our culture and organization?

 Loyalty and undesired attrition

 Capacity and stress points

 Alignment and agreement with objectives

 Energy and motivation

 Bottlenecks to growth

Thus, expanding the core is necessary when the core is deteriorating or there is a bad forecast to keep growing with the core. To do so, it is very important to understand what is happening in the core environment, from stakeholders to technologies.

On the other side of the balance, there is an exploration strategy. This strategy is focused on continuously looking for new capabilities, new opportunities and new knowledge, that turns into continuously expanding the core. This kind of strategy can lead to low returns on investments and low profitability (Kyriakopoulosa & Moormanb, 2004). A good example of this approach is analyzed by Sadler (2014) where explains how Yahoo failed due to the low focus on their core and continuous expansion. Yahoo never used the competitive advantage they had when leading, and they tried to expand to new and different business without developing and taking profit from its core. Continuously acquiring companies and looking for new opportunities instead of exploiting their core led to low profitability levels. Meanwhile, Google (not the lead at that time) focused on its core and ended up leading and growing much more. Everything due to the different strategies when expanding or exploiting their cores.

In between, the ambidextrous approach tries to balance exploitation and exploration. This approach focuses on exploiting the core to have enough profitability in the present at the same time that some resources go to non-core projects to ensure long term growth (Kyriakopoulosa &

Moormanb, 2004).In the same paper Kyriakopoulosa & Moormanb (2004) talk about the risk and problems of this strategy, that are very related with the loose of focus and internal fit, That means that this strategy focuses on expanding the core while the core still has the potential to grow. When doing that, it is very important not to forget on focusing on the core. The core is the one that feeds resources to the expansions, if the company forgets about it when it can still grow, the company will end up being negatively affected.

2.3.2 How to expand the core

Once the decision to expand has been made, it is important to create a good strategy for it. It is necessary to know where, with what resources, and how to do it. According to MacKensey &

Company (2015), companies fail due to a lack of best practices when scanning and evaluating opportunities (deciding where to go) and integrating these new opportunities., Again companies are faced with very difficult questions to answer, and that needs time. This is the reason why the previous step is very important: when to expand. A late decision will cause these questions to be answered without being well analyzed, increasing the risk of failure.

- Where to go: It may well be simply using the same products in new markets up to creating new products for new markets. Within this range, there are many intermediate options, and each company must choose the one they consider most suitable for their future (Sadler, 2014). This step is probably the one that takes the longest. A good analysis of the market, competition and the needs of potential customers is needed, as well as a good understanding of the skills and core capabilities within the company. This part is covered more in deep in the chapter 2.3.3

- What resources: How to allocate the resources in new product/business development have always been a tough decision. Being able to develop products that lead to a competitive advantage is key for company growth (Kavadias & Chao, 2008). This decision is very important since an excess of resources in the new product development can lead to abandon the current core business and the company cannot support the new developments in the long term. On the other hand, if it is too small, development may be too slow, be late on the market and miss the opportunity.

- How to do it: The strategy to enter new markets is very complex. It is important to know how to take advantage of the current status and customer relationships to sell new products or enter new markets. This section will be covered more deeply below in chapter 2.3.4.

Once these questions have to be answered, Zook & Allen (2003) suggests that it is a matter of following a stable and repetitive formula. “Growing a business is normally a complex, experimental, and somewhat chaotic process. Repeatability allows the company to systematize the growth and, by doing so, take advantage of learning-curve effects (2003; 1)”. This formula needs to be home-made and takes time. It has to be an iterative process where all the experiences of the company should be analyzed to pinpoint the success factors. Having a repeatable formula has multiple benefits. It helps reducing risks, increases the speed and drives the decisions with a clear strategy. In the same way, King & Tucci (2002) support that having experience with market entry creates routines to better identify new market opportunities.

Zook & Allen (2003) also states that is important to reduce the number of variants to deal with in every step to just one. Going step by step is a key factor. Furr & Ahlstrom (2011) state similar opinion on their book. The Nail it then Scale it strategy is based on start small and growing step by step. They propose what Zook calls a repeatable formula. At this point is where their opinions are different since Zook states that the formula should be custom made and that it takes time to create it, while Furr & Ahlstrom propose a standard formula. It is important to note that Zook process is focused on how to expand the core, while Furr & Ahlstrom formula is product-based.

The Nail it then Scale it could be integrated into the Zook process, but still, there is the need to create a process to see when is needed to expand and in what direction before applying it that is not taken within the Nail it then Scale it process.

2.3.3 How to find the right market

As mentioned before, there are many ways to expand the core. One of the biggest discussions when talking about expanding the core is: should the company be aggressive and create new products for new markets? Should the company go for a new product for the same market? Or new markets with the same products? This is the adjacent vs diversification debate. “Diversification is about looking widely for opportunities while adjacency is more controlled and focuses on finding opportunities that are much closer to the core of the business (Di Somma, 2015; p1). That means that diversification is done when the new product/service is not related to the core at all. On the other hand, adjacencies can be many, but always having a relation with the core. As seen in (Figure 3), Zook (2013) proposes many different adjacencies.

Figure 3 Adjacencies tree (Zook, 2013)

Zook (2003) states that adjacency is the best way for continuous growth. He claims that the further from the core, the smaller the success factor (Figure 4).

Figure 4 Succes rate within distance from the core (Zook, 2003)

Extending the strength step by step seems to be more successful, and you can also reach diversification with this strategy. The Nike example (Zook & Allen, 2003) can well explain that.

For Nike, that its core business was selling running shoes, moving to produce golf club’s was a diversification move. But instead, they managed to move to that market with an adjacency approach. They started with golf shoes, then moved to golf apparel, and once they knew a lot about the market, they developed the golf clubs, again starting only with irons, since drivers needed higher technology. On the other hand, this process is much slower than diversification and can cause you to be late to the market.

Figure 5 Nike golf example. Adjacency (Blue) vs Diversification (Green)

If the capabilities are only focused on the core, it will be hard to succeed with a diversification strategy, while these capabilities could be easily used for adjacent expansion. On the other hand, if the company is in a strong position, there is always the possibility to acquire new capabilities.

Zook (2015) reviews and upgrades what he stated in 2003, and he claims that nowadays it is easier to acquire new knowledge, and that turns into increasing the success factor when moving further from the core. Di Somma (2015) defends that diversification is a strategy only for brands in positions of strength and with a clear strategy. Companies that diversify with the only focus in revenue tend to fail. Diversification should be done to achieve a systematic expansion and cover customer needs, and by having in mind to develop further products in this new line. Yahoo case is one of the most commons where the company diversified with no clear strategy. Sadler (2014) talks about the 6 main reasons why Yahoo failed. One is exactly what Di Somma (2015) mentioned. Yahoo has never had a clear vision, and they made acquisitions to diversify without any clear strategy. They were just following trends and basing decisions on the possible immediate revenues, and they could never add value or further develop those acquisitions. Roberts & Berry

0%

10%

20%

30%

40%

50%

60%

70%

1 2 3 4 5

Odds of succes

Steps away from Core

Odds of success in pursuing

adjacencies

(1984) defends that acquisition is much faster and the payback is usually shorter than doing the same with internal development. The approach of internal ventures can be also a good option. This means using internal resources, but the unit works as an independent company and has no dependency on the core. That enables the company to focus, but at the same time, it is losing the benefits of mass production and scalability.

2.3.4 How to enter a new market

A new market does not necessarily mean a new customer. Thus, is it possible to use the core business skills and relations to grow in the non-core?

“A market is any place where sellers of particular goods or services can meet with buyers of those goods and services” (Moffatt, 2019; p1). According to this description, a new market can be reached by changing what you sell (even if the buyer is the same) or changing to whom you sell (even if the product is the same) or both things at the same time (Roberts & Berry, 1984). A market has 3 main parts: someone willing to buy some goods and with resources to do it, someone producing that thing and willing to sell it for a certain price, and some institutions in between to distribute those goods (Sarasvathy, 2005).

Entering a new market places the company into the exploratory territory. Exploration is seen as a risky environment, with low certainty in the potential returns and usually far from the focus area of the company. To succeed in that territory there is a need to be open to take a risk, enable flexibility and being innovative (March, 1991). To achieve that, there is a need to create an appropriate working environment. The core business is usually run to improve efficiency, reduce costs and increase the margins. This exploitation way of working is the opposite of what is needed when exploring new markets. This routines and ways of working can restrict the company to produce new products or reach new markets (King & Tucci, 2002).

On the other hand, it is important to use as much as possible the business skills and position from the core. Using the existing stakeholder's network to exploit the new capabilities or products of the company can help to reduce the risk. Sarasvathy (2005) defends this theory with a very easy to understand example:

If you are very good at cooking and you want to take profit from it, the first thing you have to do is to look around you. If you go and create a new restaurant the risk is very high since you know how to cook but maybe not how to manage the restaurant. On the other hand, if you have a friend that works in media, maybe s/he can help you to create a cooking channel. If you have a friend working in a grocery, ask her/him to partner and sell some pre-cooked food there. Learning how to use your network can help you to get into new markets with lower risk (Sarasvathy, 2005).

A partnership is seen as a good way to enter a new market. It increases the chances of having a first customer and close collaboration with a potential customer can help to better identify its needs. Campbell & Cooper (1999) suggest that partnership is not a key success factor in new product development but helps to enter new markets. According to their empirical study, there is no difference between developing the products alone or with a partner but concludes that partnerships are beneficial for new market entry and long-term learning.

A similar approach is seen in the Bonaccorsi & Lipparini (1994) study. A partnership can help to decrease the development time, enables better information sharing that turns into a better understanding of the customer needs as well as providing continuous learning in the long term. On the other hand, it creates a lot of managerial challenges, and selecting the right partner has a high impact on the outputs. From the customer perspective, there is a trend of willing to be involved in the supplier development process. This enables them to have an impact on it and have the possibility to get more customized solutions (Fang, Palmatier & Evans, 2008).

Convincing customers of new products is not easy. To enter a new market there is a need to show the customer the superiority of the solution against its competitors. One way to do it is by using previous success stories. In case of firsts customers, it is key that not only salespeople are involved, but all marketing and technical team support the firsts approach at customers to convince the customer about the superiority from a technical perspective (Lehtimäki, Simula & Salo, 2009). For them, brand positioning can help as a passive convincing element, but if it is something very new, both for the customer or from the supplier, there is a need to convince the customer about the superiority of the product. Previous studies from Aaker & Keller (1990) concluded that brand positioning is useful to enter new markets when the company has a good reputation on its quality when there is a “fit” between what their core and non-core and when the new product is seen as difficult to make (need some expertise to do it). Ambler & Styles (1997) suggest that there is a big link between brand equity and brand extensions. They conclude that brand position can have a positive impact when expanding the core, but the non-core can also have a big impact on the brand position. It is also stated that using the brand position has a higher success rate in mature markets, while for the new markets it is not as relevant.

2.3.5 How to train a company

To succeed in expanding the core, it is not only about product development. As mentioned before, there is a lot of work to enter a new market. Lehtimäki, Simula & Salo (2009) mention how important is to be able to convince the customer about product superiority. In this same study, they conclude that customer put a lot of pressure on salespeople to ensure that there is a good enough technical understanding and there is a need to proof this technical superiority against competitors.

To do so, there is a big need to train sales-force. Hultink & Atuahene–Gima (2000) exploratory study also states that new product adoption by sales-people is positively related with performance on selling those new products, but there is a big impact on the commitment of the salesforce to adopt this new knowledge. Internal marketing is closely related to the success of the training and big effort on internal launch before going to the market should be done. Román, Ruiz & Munuera (2002) also defends that training has a big impact on new product introduction and that well trained sales-people performance is better than those “born” sales-people. In an environment where the company does not have success stories, the importance of having well-trained salespeople to introduce new products is even higher, thus, when expanding the core business, well-trained salespeople are needed.

When looking for the best way of training people there is no perfect answer. Combining different types of training is seen as something very important to reach a good knowledge: “it is important to combine this method with others, such as in-house training (lectures, group discussions, case studies, role-playing, etc.), external training or own-house training that equip the salesperson with the necessary product knowledge, market and company information” (Román, Ruiz & Munuera, 2002; p17). Learning is very related to motivations, and salespeople will only learn if this ensures it will bring personal profit. That can be both due to intrinsic or extrinsic motivations. Intrinsic motivations are usually seen as the most powerful and that last longer, but also the ones that are harder to achieve (Benabou & Tirole, 2003). Salespeople can be extrinsically motivated to learn about new products if, for example, the company includes a bonus by selling those products. But this is not sustainable for the company. Finding the intrinsic motivation to learn for all the sales is hard. A way of doing it can be by including organizational learning in the culture of the company (Pérez, Montes & Vázquez, 2004).

2.4 Management when expanding the core

Strategy and management have an important impact on how a company behaves. The decisions related to the strategy have a direct impact on company outcomes (Dean & Sharfman, 1996). In fast-changing environments where being agile is needed, decentralized decision making together with a clear strategy from top management is proven to be a good solution (Bourgeois and Eisenhardt, 1988). A different approach is described by Mintzberg & McHugh (1985), where it is claimed that a strategy should go from bottom to top, being the ones in the field the responsibility of taking the first decision on what can be a potential strategy and then top management the one deciding what should be killed and whatnot. Bourgeois & Eisenhardt (1998) defend that this strategy is not focused on fast-changing environments since this way of working is slow due to the bottleneck created by centralized decision making.

Figure 6 Modified model for a brand extension by Ambler & Styles

Ambler & Styles (1997) suggest a model for brand extensions (Figure 3), which can be applied to core expansion since at the end expanding the core is a way of extending the brand. The figure has been modified to show the three main phases on how to expand the core: When, how and market introduction. In their research, there is a lot of emphasis on the management and decision making part. The suggestion is that new brand extension should be driven by the marketing team together with R&D, being this second the one that should develop the solution. As seen in Figure 3, the process is very similar to what has been described before: When and how to expand, as well as how to enter a new market is the 3 main phases.

The approach from the management perspective is similar to the one defended by Bourgeois and Eisenhardt (1998):

- Top Management & Marketing: Responsible for decisions on strategy (When)

- Marketing and R&D: Responsible for the decisions related to the development face (How).

- Top management & Sales: Responsibles on launch decision (How to enter the market).

Thus, Top management is only involved when aligning the new products with the strategy (both before developing and when the product is developed) but is not involved in the decision making during the development phase, that enables agility and increases the development speed.

3 METHOD

In this chapter, the working process is described.

3.1 Research setting

The project aims to better understand how to grow in the non-core business and investigate what factors can help to reduce the time and to increase the success rate when expanding the core. To perform the study, a single-case study at Atlas Copco, a global company with a focus on different industries, has been performed. The studied company is a market leader in the tooling industry and with high experience on expanding the core. The study is focused on a team called Total WorkStation (TWS), that is in charge of non-core products. This particular case is focused on creating complementary goods for the core, that means that TWS is focusing on creating new products to support and add value to the tools themselves. To give an example, TWS is in charge of different feedback devices, such as stack lights, that help the operator to know if the tool has performed well or not, or socket selector, that guides the operator to use the right socket and only enables the tool when that happens.

The company is currently facing a slow grow in non-core business, and that is having a big impact on the overall growth of the company. This is not only a problem in TWS but in most of the non- core business units within the company. Thus, in a segment where they are leaders in the core business and with high market share, it is needed to perform well in the non-core to keep growing.

3.2 Research process

The project started in December 2019, and it is described also in Figure 7. The main focus at the beginning was to understand Atlas Copco problem and its way of working. It is key to understand the challenges and goals to have a good overview of the company, not only from the analyzed team, as well as the typical customers and stakeholders involved. Once the goal was clear, deep research on the topic was conducted. The research is a combination of articles, literature studies, books and previous case studies. After reviewing the articles, a few key topics were selected for further investigation. The case study was divided into two different parts. One was a qualitative study based on interviews. That part aims to understand how the company behave on the selected topics identified in the literature part.

Due to the little previous research on the topic, the interviews were also performed within external companies. The aim of doing that is to have a different perspective to compare the data. By interviewing people with high experience on expanding the core, the possibility to compare Atlas Copco results with how other successful companies in expanding the core was enabled. All that under the umbrella of the previous case studies.

On the other hand, a quantitative study was performed to evaluate the status of the company in one of the selected topics. When expanding the core business, it is seen as a key factor in having a well-trained company and salespeople. To analyze how well trained and the knowledge status of the company within the non-core products, the decision to create a survey was taken. Performing a survey enabled to have a bigger sample.

When all data was collected, the results where analyzed and compared, both within the different companies and with previous research, as well as the data collected from the survey. That led to the results and future research topics.

Figure 7 Process followed during the project

3.3 Data collection

The data collection has been divided into two phases. First, the qualitative study has been run both within Atlas Copco interviewees and the external interviews, with a total of 11 interviewees. The qualitative research has been done with a semi-structured interview (Appendix A) through phone- call or in-person. Within Atlas Copco, 6 interviews were performed to people that have a direct impact in the TWS development. Both, people from Marketing and R&D has been interviewed, as well as top management. To have a better picture on how Atlas Copco behaves when expanding the core, two people involved in the management of other non-core business units within Atlas Copco have been interviewed. In this case, those two interviewees are working in acquired companies (Synatec and BLM), that enables the study to compare between acquiring and being acquired. The interviews outside Atlas Copco have been performed to 3 different CEO. Since the idea of performing these interviews was to get a different perspective, selected companies are from 3 very different industries. One of them is in the same field than Atlas Copco, while the other two have nothing to do. This has been done to investigate if different approaches are used depending on the industries and see if yes, see if those can be applied within Atlas Copco. The interviewees can be seen in Table 2:

Table 2 Interviewees

Interviewee Position Company

A R&D Manager Atlas Copco

B Business Manager Atlas Copco

C Division VP Atlas Copco

D Division President Atlas Copco

E Global Product Manager Atlas Copco

F R&D Team Manager Atlas Copco

G Business Manager BLM (AC Acquired company)

H Division VP Synatec (AC Acquired company )

I CEO Automotive Industry

J CEO Food Industry

K CEO Customs and Shipping

The survey was sent to around 200 people that are relevant in the knowledge sharing of the company. The survey was closed with 79 respondents (39.5% response rate) involving Product Managers to Sales representatives (Figure 8)

Figure 8 Survey respondents distribution

The survey was divided into two main parts (Appendix B). First 3 questions put the focus the knowledge about TWS portfolio. The aim of this part is understanding what is the actual knowledge. To do this, different products where shown and described. Only a few of them were part of the TWS portfolio. The second part is about the feelings in their knowledge about the non- core and how can this be improved. Several questions were asked with the possibility to answer on a scale from 1 to 5. Finally, an open question where all the respondents had the chance to explain what could or should be improved to help them increase the sales in non-core products.

3.3 Data analysis

The data analysis is divided into two main parts. First, the qualitative study coming from the interviews, and the second part is the survey analysis.

3.3.1 Interviews data analysis

The data collected with the interviews will be transcribed and thematic analysis will be

conducted. This will be done based on the main topics selected before doing the interview and well-differentiated during the interview. The data analysis will also split the information within Atlas Copco and the one from the external companies. Thus, all the data will be differentiated into 2 different sources:

- External companies - Atlas Copco

6%

18%

5% 26%

6%

10%

24%

5%

Business Line Manager Product Manager Sales Representative Project Manager Other Key Account Manager Sales Manager Marketing Manager

The thematic analysis will be performed by splitting the data into the 5 selected topics from the research:

- When to expand the core - How to expand the core - How to find the right market - How to enter a new market

- Management when expanding the core 3.3.1 Survey data analysis

The survey is created to learn from it and not to prove anything, thereby, will be analyzed qualitatively. That means that the results will be analysed from the company perspective and other factors will be taken into account, not by only looking at the numbers. Many facts can affect the results, thus a qualitative analysis is needed to benefit from all the value. To do so, the survey analysis will be performed together with the Atlas Copco supervisor. Factors such as on-going projects, old products or customized solutions can lead to confusion. At the same time, some questions put the respondents in an uncomfortable position, since some answers could be seen as a criticism of the company. Thus, even though the survey is completely anonymous, can drive to answer more positive responses than what it is.

3.4 Method assessment

Due to the few previous research on the topic, a case-study approach has been conducted.

Eisenhardt (1989) defends that the case study approach is good for those first study phases. Baxter

& Jack (2008) defends that a case study is good to answer research questions that start with “How”, and when the contextual conditions may have an impact on the study. A case study focuses on understanding the different points of view and to give voice to those that have less voice in the daily work.

Due to the research is done and the results on the qualitative study, the need to understand the status of the knowledge of salespeople and the level of the training has led to doing a quantitative study. The quantitative study enables the possibility to involve more people in the study and have a bigger data collection. Then, a convergent methodology will be used (Jick, 1979). Qualitative research will be done to understand and investigate what are the main factors in real-world that affect the process to expand from the core. On the other hand, the quantitative part will be implemented to test and measure how much of these factors are integrated into the actual training process. Thus, the survey has been designed to quantify the level of knowledge of the involved stakeholders (Morgan, 1998).

4 RESULTS

In the results chapter, the results that are obtained with the process/methods described in the previous chapter are compiled and analyzed and compared with the existing knowledge and/or theory presented in the frame of reference chapter.

4.1 Results from the interviews

The results from the interviews are written below, both within Atlas Copco and from the external interviews. Note that when talking about interviewees I, J and K, it is related to external companies.

The results will be written impartially, trying to show what was said in the interviews. The interpretations of the results and its discussion are made in section 5 - Discussion.

4.1.1 The core business and what is expanding the core

What is the core business

Within Atlas Copco, there is a clear understanding of what is the core business and all Atlas Copco respondents agree that the core business is assembly tools or handheld tightening systems.

Nowadays, most of the incomes are coming from electric tools. It is mainly described as the products that they feel more comfortable to sale and where the main incomes of the company come from.

“The biggest core business for us is Industrial Tools, but the biggest segment is screwdrivers and advanced tightening tools.”

- Interviewee A Interviewees D and G also describe the core business as part of the company where there is a deep knowledge of all the stakeholders, from supply chain and technologies to the customers.

When talking about core capabilities there are different answers, but all of them agree on one thing:

Service. One of the most important competitive advantages comes from its powerful and worldwide service. Interviewee E claims that one of the main core capabilities is the engineering quality. Similar to that, Interviewee B believes that the most important capability of Atlas Copco is its capacity to have the right people everywhere.

Outside Atlas Copco, there is a similar description of what is the definition of core business. It is seen as the main functions and products done within a company. Where the company feels more comfortable and the main reason why the company is known in the market.

For the interviewee I, the core of its company is divided into two. One is the vision systems such as mirrors and the other are mechanical actuators for shifting or braking systems. All of it focused on the vehicle industry. Both core businesses are in the process of being changed. Gearbox and handbrake systems are moving from manual systems with mechanical actuators to wired systems.

This is forcing the company to move from mechanical solutions to software and electrical solutions. With the vision system is happening something similar. In this case, the company is the one leading the change for all the industry from mirrors to camera systems.

“We are now in the process of core expansion since the market trends forced us to move from mechanical solutions to electronics and software.”

- Interviewee I

Interviewee J company core business is breakfast meals based on the Spanish market. Their core products are soluble chocolate and cookies. The last years it has been a switch in the core due to the health trends. That has caused a lot of people to change their breakfast habits, so the company had to expand its core to fit the needs of these new trends to survive. They claim that their main capability is marketing and that this is completely needed in their market since the customers are not the consumers, thus there is the need to convince them through marketing campaigns.

Interviewee K core business is a bit fuzzy, since the company has been continuously expanding and how it’s covering many different markets. The approach of the holding is that each company has its core. Everything started by being a shipping agency, which is still considered the main core business.

What is expanding the core

Expanding the core is not new for Atlas Copco nor the other companies. They are all aware that the core of the company has been changing during its life. The ones that have been in Atlas Copco for a long time has been able to see how the core business changed from compressed air tools to the electric tools. Now, all of them are aware of the need to move to a more complete solution together with software integration.

The non-core is defined as those parts of the business that are out of the comfort zone. Where there are some uncertainties or variables where the company is not expertise. It can be both from the suppliers, technologies or that the customer is not welk known. Interviewee A point of view is a bit different. Non-core is seen as those activities that have nothing to do with the core business. A new product that is created add something to the core product is seen as an add-on to the core, but considered still core.

“Expanding the core is challenging in a lot of areas, from technology and supply chain to the sales side.”

- Interviewee D A common definition of expanding the core is according to all the interviews could be described as trying to integrate that non-core into the core. In other words, increase the knowledge to integrate those non-core parts of the company into the comfort zone.

4.1.2 When to expand the core

Atlas Copco strategy is focused on continuous growth and profitability, as well as maintaining its high quality and top price status. Thus, the core expansion comes when a good opportunity is detected. As a market leader in the core product, it is hard to gain market share. That means that the reason to expand the core is not growing, but trying to maintain the status. Atlas Copco is aware that is hard to differentiate from the competitors in the core since the technologies used are the same. That creates the need to differentiate in another way to keep being the market leader.

The same approach is described within Interviewee K, where the company tries to be continuously evolving and growing.

“With 5% of market share, it is easy to double it, but when you have 40% it is very hard to keep growing.”

- Interviewee D Interviewee I and H have a different point of view and defends that Atlas Copco defensively expands the core. This means that the expansion is not done based on opportunities to grow, it is done when growing with the core is not possible anymore. While the core is still profitable and

growing it is not easy to invest outside the core, since the risk is higher. Interviewee C also supports that expanding the core is needed when there is market saturation, but also believes that Atlas Copco is continuously looking for growth. According to Interviewee H, Atlas Copco only focuses on expanding the core when they see there is no other option and describes the situation with the following quotation:

“You only jump through the window when there is a fire in the room.”

- Interviewee H To meet both requirements, expanding the core by introducing new products or solutions that are related to the core is seen as the best solution. That creates competitive advantages within the core, since competitors can not provide the same complete solution, and at the same time it increases the income due to selling more products.

“To continue being number one it is not enough with the tools.”

- Interviewee A On the other hand, there it is also very important to select in what directions to expand the core.

To do so, Atlas Copco main drivers are customer needs and market trends. The main market for Atlas Copco is the automotive industry, which is changing very fast. It is important to be aware of the new trends and technologies of the market since those will drive the future needs of the customers. It is very important to be close to the customer and collaborate to have a closer view of the needs and trends.

“We have to be aware of the overall value chain. If there is a big technology change in this chain, that will somehow affect us, and we need to be ready..”

- Interviewee G The other interviewed companies have a more defensive approach when expanding the core. That means that the company focuses on exploiting the core, and the need for expanding the core always come to survive. If there is a good forecast for the core, the resources are focused on the core. Even though the market position in their cores is very strong, there are not enough resources to expand the core if it is not needed. Then, there is a big need to understand how the core is behaving and how the market is moving. Interviewee I has a similar point of view than the quote from Interviewee G and notes that it is very important to understand all the value chain to understand future trends and see how can it affect the core of the company.

In the case of the Interviewee I, most of the core expansions come due to new technology trends.

Creating a new core instead of adding complements to the core is the common way to do it. Even if it looks more challenging, it is important to keep as many variables similar to the old core. To do it, the non-core product can be different in terms of technology, capabilities and supply chain, but both interviewee G and I believe that it is very important to keep the same customers and sales channels since they know how to move within them.

“We are well known for producing car mirrors, and now we are expanding our core because we see the trend of the cameras. As suppliers of vision systems for the cars, we have to be ready for this new technology. We are solving the same need but with different technology. For us makes more sense to change to this technology than change to a new market where they use mirrors.”

- Interviewee I Interviewee J market is very different, but the way of thinking is very aligned with interviewee I.

There is a clear focus market and the new non-core products are aligned to the trends in this market.

In this case, it is not driven by technology changes, but lifestyle changes have a huge impact on

their business. As mentioned before, their core business is breakfast meals, and they need to adapt their portfolio and capabilities based on the trends of these market.

“Our core product has always been chocolate and cookies, but now with the healthy-life trend we have to adapt our products and learn how to produce more healthy food to keep being leaders in the breakfast market.”

- Interviewee J 4.1.3 How to expand the core

Within all the interviewees, expanding the core is seen as going out of the comfort zone and face new problems that the company is not used to. Being aligned with the strategy, values and capabilities of the company is seen as something completely needed to succeed when expanding the core. That happens both for Atlas Copco and for the other companies. In the same line, interviews show the importance of not going too far from the core and have a strategy aligned with their current business. Atlas Copco division president explains that idea of not going too far from the core strategy with the following statement:

“If R&D comes with the idea to sell fans, even if I know there is a lot of potential markets and we have the knowledge to do it, it is not aligned with our strategy and we don’t know how to sell it.”

- Interviewee D Starting small and following the Nail it then Scale it process It is seen as a key success factor for all the interviewees within Atlas Copco. Starting small is seen as a way to ensure that in the worse case, it will be a small failure. Atlas Copco identifies one of the key failure factors as starting big from the beginning. They have proved that too many problems come up and it is too hard to manage all them successfully. Interviewee B and H adds to this that it is very important to be reactive with the customers and be quick at solving the problems. If every iteration of the Nail it then Scale it process takes too long can end up with an unsatisfied customer.

A common success factor for all the interviewees is to have the right capabilities, that is linked to have the right people. If there is no knowledge to create a good enough solution for the customer it can not succeed. But that happens not only in the development phase. If the marketing or sales team are not good in understanding the customer needs, even with the best engineers or R&D team, the solution will not be adapted to the customer needs.

“We can't use the engineers developing a mechanical gearbox to develop a shift-by-wire system.”

- Interviewee I Interviewees I, J and K agree on focus as a key success factor. It is proven for them that when trying to run many different projects they end up by not doing good none of them. Interviewee K suggests that even if there are resources to run multiple projects outside the core at the same time, it is better to focus and prioritize. That lowers the risk and increases the success rate.

“When we have been running many different non-core projects at the same time the steering team couldn’t guide all of them and ended up in chaos.”

- Interviewee K All the Interviewees outside Atlas Copco can describe a standardized process when talking about core expansion. It is not a step-by-step process or something that is the same for every case, but there is a clear overall structure about how to proceed. The first step is, of course, to identify the opportunities and make the decision to expand, but this is not within the process. The process starts

when the decision and the direction are taken. Then, both interviewee I, J and K describe a very similar approach. The idea is to isolate as much as possible the non-core business and run it as a stand-alone company. In the case of interviewee J and K, this is done by creating a new company within the holding, but in the case of interviewee I it is still a business unit, but running in the same way than if it was a holding. To do so, the first step is to analyze what capabilities are needed to succeed. Then, a new decision making and management team is created. It has to be built by people with a very open mind or with people that have not been involved in the core business. This is important because it is not possible to manage in the same way the core business and the non-core business. Finally, it is important to have the right people in the right place.

“We have been using the same process since 35 years ago. We run the new business units as a new company in the holding. It is like a fleet of ships, where I indicate where to go but each captain makes his decisions to arrive.”

- Interviewee I Atlas Copco does not have a specific process on it, but all of them agree that is very important to have the right people in the right place. Atlas Copco expansions are very linked to the core and it is important to create synergies. Interviewee E and F complain about how difficult are to create those synergies without being involved in the core business team, but at the same time keep running the projects without being affected by the core. Where a process is followed is within the new product development. Atlas Copco follows the Nail it then Scale it strategy. This approach is very important in non-core products. It is hard to create the perfect product from the beginning in something it is not your core, and the experience has shown that big failures come from trying to achieve big goals or creating big expectations from the beginning. This process is seen as slow and there is a need to improve it to be faster.

“There is a need to nail it quicker.”

- Interviewee A There are also processes to acquire new companies to expand their core. It consists of analyzing if the acquisition has the knowledge to meet capabilities required by the new trends, and it's potential to add value in both directions. Interviewees B, C, D and H agree that there is a problem when integrating the acquired companies into Atlas Copco. It takes so much time and resources to align the ways of working and that turns into a slow growth for the acquired company.

“When we acquire a company, we both have to create value for each other. 1+1 needs to be 3 .”

- Interviewee A 4.1.4 How to find the right market

All the interviewees describe their core expansion with an adjacency approach. In the case of Atlas Copco, the adjacencies are done by complementary goods. That means that the focus of the core expansion is to support and add value to the core. By doing this, the incomes are higher and is a way to differentiate from competitors and keep being the market leader. Interviewee I also uses an adjacency approach, but in this case, it is usually a core substitution. That means that they keep solving the same problems, but with new technologies. Interviewee J and K have a similar approach, where they expand by adding new products or service for the same markets and very close to the core, but not to support the core, but to have value themselves.