Illinois Tool Works: Extreme Decentralization
Building a conglomerate with operations in 57 countries one customer at a time.
Illinois Tool Works (ITW) is a manufacturing conglomerate that makes a diversified range of industrial products and equipment with operations in 57 countries. 聽The fact that ITW is a conglomerate might lead you to believe that they operate as a large, cumbersome organization which imposes it鈥檚 mile-long list of best practices on every business unit and new acquisition but that is not so. 聽ITW is highly effective at rapid and sustainable innovation due to extreme decentralization聽uncommonly seen in such a large organization.
ITW鈥檚 Business Model:
The business model at ITW is defined by three core elements:聽80/20 business process, customer-back innovation and a decentralized entrepreneurial culture.
- The 80/20 business process has been in use for 30 years. 聽The idea is for all of ITW鈥檚 business units to focus on the 20% of the customers that generate 80% of the profits. 聽This focus provides two main聽benefits: maximum impact of dollars spent serving the customer, and greater awareness of customer needs at the small unit level.
- By leveraging聽deep customer聽empathy聽gained through the 80/20 process, ITW is able to devote a lot of energy and resources at building relationships with their best customers, hence their focus on customer-back innovation. 聽Rather than innovating and then attempting to find customers for their new innovation, ITW first works on developing deep empathy with their 80/20 customers and then innovating solutions to problems their聽current customers have. 聽This enables ITW to keep their聽expenditures for R&D low when compared to the manufacturing industry and their output of innovation (measured in patents) high.
- Enabling this deep customer empathy is ITW鈥檚 extreme focus on it鈥檚 decentralized聽entrepreneurial聽culture. 聽The company operates through seven separate divisions: Automotive OEM, Test & Measurement and Electronics, Food Equipment, Polymers & Fluids, Welding, Construction Products, and Specialty Products. 聽These divisions are encouraged to 鈥渢hink and act like smaller companies鈥� allowing them to react quickly to their customer鈥檚 ever-changing demands ().
ITW鈥檚 Operating Model:
ITW focuses operations on their high volume products, dedicating entire production lines to only three or four products supported by their 80/20 business model. 聽This enables long production runs with obvious costs savings by limiting changeovers of the lines. 聽Another aspect of their operating model is that they choose to manufacture where they sell. 聽This local production focus further supports their customer-back innovation business model, allowing for a more flexible approach to serving their customers.
Recently, ITW undertook a Portfolio Management initiative which focused on “product line and customer base simplification鈥� (). 聽This initiative is working towards decreasing the focus on the smaller product lines and customers through increased divestitures and is directly linked to their 80/20 business model. 聽In the short-term, the implications of this initiative may result in decreased revenue鈥檚 but increased operating margins. 聽In the long-term, as they focus on organic growth of the 80/20 customer that they plan to retain, they expect revenue and profitability growth.
Illinois Tool Work鈥檚 business model and their operating model are extremely well aligned.聽 Furthermore, they recognized when the two models starting getting out of alignment and undertook an initiative focused on rapidly achieving realignment.
Sources:
ITW鈥檚 Formula for Innovation. (2005, October 18). Retrieved聽from聽
Very interesting post Jon. You highlighted a key component of operating models which we do not discuss as frequently, which is the governance structure of these companies. I can see how having the seven different divisions allow them to be more entrepreneurial but how do they balance the need for innovation with the benefits that greater centralization can bring? What is the communication among divisions? I can imagine an innovative product with potential that might not be developed further if it does not fit with the core business of a division or does not immediately fulfill the 80/20 focus.
The emphasis on localization for both production as well as designing for customer needs is also very intriguing. What is the quality control process like and what is the role of the central organization? I am curious to learn more about the recent changes they made to realign the business and operating models.