ILINOIS TOOL WORKS

A Case of Diversified Business Strategy

Presented by - GROUP 1
Akshit Rastogi 19P067
Apoorv Tyagi 19P073
Binayjeet Singh 19P079
Divita Ahuja 19P082
Gitansh Malik 19P084
Shubham Jain 19P115
The Basic Definition
Diversification Theory
A diversification strategy is the strategy that an organization adopts for the development of its
business by opening up new opportunities across different products and market sectors
Types of Diversification
Concentric Diversification Conglomerate Diversification
moving to new products or services that
enlarging the production portfolio by
have no technological or commercial
adding new products to achieve
relation with current products,
strategic fit, and financial or operational
distribution channels, but may provide
synergies.
high return on investments

Horizontal Diversification Vertical Diversification

occurs when an organization enters a occurs when an organization goes back
new business (either related or to previous stages of its production
unrelated) at the same stage of cycle (backward integration) or moves
production as its current operations forward to subsequent stages of the
same cycle (forward integration).

Internal Diversification
occurs in two forms- by providing existing
products in new markets or by choosing to
market new products in existing markets
Rationales for Diversification

DEFENSIVE

01 To spread the risk of market contraction

& business risks to complementary
businesses

OFFENSIVE
To identify capabilities and competencies, bring
in the competitive advantage & conquer new
positions to take up profitable opportunities
02
.
Risks Associated with Diversification

01 02 03
Too Much Time & Resources
Entity Too Large
Diversification
 How the events unfolded - A Timeline
post 2007 global
ITW strengthened recession, ITW
In 1940, the its position in showed poor
Continued to company construction, financial
develop new implemented the industrial, and performance as
engineering strategy of packaging markets, compared to peers
Established in
products, as well decentralization, also expanded into
1912 as a
as grow its which has been its international
company that
portfolio of key ingredient of markets in 1960s
manufactured and
sold metal -cutting products through success
tools acquisitions

Struggles
Growth Via Faced
The Iconic Diversification
Gaining Decentralization
Momentum Strategy
The Genesis
Key Success Factors - Business Model & Culture
80/20 Rule
Helped them concentrate
efforts, resources and
investments in products
and customers that would
aid them in attaining
strong organic growth and
profitability
Other Cultural aspects
Continuity and stability
in leadership along with
an informal and
relationship driven
culture led to success
and attracted best talent
Customer Backed Innovation
By emphasis on solving
customer problems by
applying technology
expertise, ITW had built
a strong intellectual
property portfolio.
Decentralized Approach
ITW empowered its
business teams and its
employees thought and
acted like entrepreneurs
making them more
responsible, competitive
and result oriented
Diversifying through a focused Acquisition Strategy

Typically focused on
targets valued under
03 $100 million,
available at less Did not use
Undertook 30-50 than 1.1 times the acquisitions for
01 05
acquisitions a book value entering new
year countries

Sought targets Retained the

02 that filled gaps in 04 identity of the
its capabilities target company
 Understanding the situation clearly - SWOT Analysis
INTERNAL FACTORS

STRENGTHS (+) WEAKNESSES (–)

 Diversified product range
 Substantial geographical reach, customer base and a strong
brand name
 Entrepreneurial culture, emphasis on continuous development
 strong market position, customer centric approach
 No focus on the slow growing business units due to a large pool
of businesses
 Unable to achieve economies of scales for any business due to
decentralization
 Standard and benchmarked regulations and business procedures
for all portfolio items

EXTERNAL FACTORS

OPPORTUNITIES (+) THREATS (–)

 Competition with a wide assortment of firms in the local as well

 Expansion in emerging markets with globalization culture at peak as the international market
 Continued inorganic growth by taking up mergers and  An increasing number of independent producers and marketers
acquisitions
 International Geo-Political Factors such as US elections and Brexit
 Post recession Scenario - A fresh approach

Focus on organic Reduction in Focus on bigger Centralizing the

growth complexity of the acquisitions operations
company
Fu

Further organic Larger Increased

portfolio spread over Reduction in
45% of ITW business growth is difficult Negative impact on acquisitions to be Large acquisitions operational
seven core areas and revenues
grew organically due to external employees and implemented by posed higher efficiency, hence
was balanced across as a result of this
despite challenging political and entrepreneurial senior leaders, implementation increase
end markets and step to become
economic conditions economic culture expected to yield risks because of operating profit
geographies, lean
environment better results the scale to 21% in 2015
therefore resilient
Lesser resources
Very little scope
required for external Further cost cutting With lesser number more impact to Targets in this Lesser
New ITW is simpler of further organic
acquisitions which not an option for of divisions, the business as category were less investments, and
(smaller number of growth seems
can be internally sustainable growth leadership positions opposed to likely to be hence increased
divisions) and more possible in the
invested now would go down various smaller undervalued after tax ROIC to
focused long term
acquisitions 20% in 2015
 What do the numbers say ? - Financial Analysis
 The operating margin increased
significantly by 5.5% while revenues
 The revenues increased constantly except
during 2008 financial crisis
2012 TO 2015 declined, however operating profit
remained same. This was possible by
effective divesture of lagging business
 The operating profit increased but even
units
debt levels increased significantly
implying a more leveraged business
 4 out of 7 portfolio divisions have operating
margin improvement. While Dextar saw
 The ROIC had remained almost constant,
organic revenue CAGR of 8% since 2012.
with just a slight decrease attributable to
high debt
 ROIC increased by 5.9%.

 Debt to capital ratio had increased by

TILL 2012
 The EPS has increased by approximately
almost 10% from 2010 to 2012
65% from 2012 to 2015 with a CAGR of 17%
from the beginning.
 The Road Ahead - Recommendations

01
STRONGER RELATIONS WITH CUSTOMERS
The strengthening of the distribution network will allow the company
to work more closely with end consumers and reach them with the
same high quality of products across markets

ADAPT TO DIFFERENT CULTURAL ASPECTS OF MARKETS

Each market and target group has distinct characteristics, the
company can connect better with different target groups in
different markets 02
03
Strengthen Value Network
By adding quality and enhanced elements at different stages,
the company will be able to maintain competitive advantage

04
PERFORMANCE MANAGEMENT SYSTEM
Employees will not have the independence to experiment as
earlier in the new structure. Hence, a structured performance
management system is required to motivate them