Case $4$: Illinois Tool Works: Retooling for Continued Growth and Profitability

Case Synopsis

Illinois Tool Works $($ITW$)$ was founded in $1912$ to manufacture and sell metal$-$cutting tools. A supplier for the U$.$S$.$ government during WWI, the company continued to grow its reputation as a leader in engineering, which is why the company was represented on the War Production Board during WWII. ITW became a publicly traded company on the New York Stock Exchange in the mid$-1960$s$,$ and it has continued to grow, primarily through a tremendous number of acquisitions.

ITW$$s business model has three important aspects: the $80/20$ management principle $($which focuses on the most rewarding business prospects$),$ customer$-$backed innovation $($meaning that ITW businesses work closely with customers to develop innovative solutions to their most pressing problems$),$ and decentralization. The company is divided into many, many business units organized around seven broad product areas: automotive, food equipment, test measurement and electronics, welding equipment, power and fluids, construction products, and specialty products.

Until $2012,$ ITW practiced an extreme form of decentralization. In fact, whenever a business unit$$s revenues topped $$50$ million, it would be split off into two units. ITW$$s top$-$level executives recognized that the company sacrificed some economies of scale with this structure, but they believed it made each unit more focused and competitive. It also created opportunities for young, smart employees to advance rapidly to unit$-$level leadership positions and beyond. Many of ITW$$s small business units were the result of acquisition. The firm typically looked for fairly small, undervalued companies, acquired them, and then often let them function largely intact except for adopting the $80/20$ management principle.

After the $2008$ recession, however, this strategy began to break down, yielding lagging returns. In $2012,$ activist investor Relational Investors responded by placing one of its team, David Batchelder, on the ITW board. He and the new CEO, E$.$ Scott Santi, quickly developed a new strategy that called for centralizing operations and divesting smaller slow$-$growth or no$-$growth divisions. The strategy worked well for the first several years, but uncertainties in the economy cast some doubts on ITW$$s continued growth as of $2016.$

Questions

$$ Describe the relationship between strategy and structure.

$$ Discuss the different functional structures used to implement business$-$level strategies.

$$ Explain the use of three versions of the multidivisional $($M$-$form$)$ structure to implement different diversification strategies.

$$ Define strategic leadership and describe top$-$level managers$$ importance.