Question

For ten years, Illinois Tool Works (ITW) has followed an acquisition strategy where it focused on growing from 800 to 1,000 businesses, each of which sought to follow an 80/20 rule where 80% of revenues business came from 20% of its products or customers. In support of this strategy, ITW sent hundreds of managers for training to sharpen their negotiating and deal making skills. As a result, ITW bought 201 companies between 2004 and 2008. Indeed, new acquired companies added $1 billion a year to annual revenues totaling nearly $18 billion.

Now, however, company leaders believe they’ve focused too much on acquisition. Former CEO David Speer said, “I can buy a lot of companies and fix them, but are they something I want to own four or five years from now?” So ITW is switching to a divestiture strategy aimed at making the company stronger through subtraction rather than addition. Divesting, or selling companies or their parts, is often done to get rid of business units that no longer fit strategic plans. The goal is to raise cash, streamline operations, and focus on the remaining core businesses. Research ITW’s divesting strategy, summarize it, and explain its goals and tactics. Find out the latest developments from the last few years. Do you think the divesting strategy will work?

Answer 1

The Illinois Tool works is one the firms that focuses on its strategies to compete in the business market.In 2012, the company introduced the Enterprise Strategy including Business Structure Simplification, Portfolio Management and Strategic Sourcing. While Business Structure Simplification and Portfolio Management strategies helped in strengthening Illinois Tool's organic sales, Strategic Sourcing aided in managing costs and improving margins.Enterprise Strategy boosted first-quarter 2019 margin by 100 basis points while similar contributions are predicted for the full year.The major focus and objective of the firm was to generate the cash /revenue by divesting the firms. The another goals may include use of realized cash on the existing firms. Streamlining and simplification are also important goals of divesting strategies. It also tried to achieve competitive advantage on focusing major business concerns.The company effectively uses capital for making acquisitions, growing investments and rewarding shareholders handsomely. For rewards, it pays dividends and buys back shares. It is worth mentioning here that it increased the quarterly dividend rate by 28% and announced a $3-billion share buyback program in August 2018.In the first quarter of 2019, the company repurchased shares worth $375 million and paid dividends totaling $328 million. In 2019, it anticipates buying back roughly $1.5 billion or more shares.Of the total 87 business divisions, Illinois Tool believes that seven divisions are challenged by long-term growth. It aims to divest these seven divisions in the best interest of shareholders.The company believes that the potential divestitures of these divisions, as and when completed, will boost organic sales growth by 50 bps and add 100 bps to its operating margin. Earnings impact will likely be neutral. I think divesting strategy will be helpful in improving the competitiveness of the firm provided they are applied in proper way and the realised cash is used rationally. The firms should focus on its prime business and misuse of resources .