Over Diversification and Risk Management

ITW Case Study

1. In its first 100 years, what type of diversification strategy did ITW use, and how has it changed since 2012? Do you think managers were encouraged to over diversify? Explain your answer.

Founded in 1912, Illinois Tool Works (ITW) is a global manufacturing company with a long history of diversification. In its first 100 years, ITW used an aggressive diversification strategy, acquiring hundreds of small companies in a wide range of industries. However, this strategy began to change in the early 21st century, and by 2012 ITW had sold off many of its non-core businesses and refocused its attention on its core businesses of welding, automotive, and construction. This new strategy has been successful, and ITW has continued to grow and prosper in the years since. While its portfolio of businesses may have changed over time, ITW remains a diversified company with a long history of success. Today, it focuses on businesses that meet “the needs of large customers with specific solution requirements” and it also produces “specialty products businesses included consumer packaging products such as zippers on re-sealable bags and multi-packaging carriers (six-pack rings); software and equipment for warehouse automation; single-use products for the medical industry; aircraft ground support equipment; and, coating and metalizing businesses for the branding and security markets” (ITW Case, n.d., p. 3). On top of all that, it still does its food equipment, automotive OEM, test measurement and electronics equipment, welding equipment, power and fluids, and construction products. It is very well-diversified and manufactures a range of industrial products.

In recent years, however, the company has come under criticism for allegedly encouraging its managers to over diversify. Over-diversification can be the result of a manager’s attempt to reduce risk. This accusation is based on the fact that ITW's subsidiary businesses are often very different from one another and that the company has acquired a large number of businesses in diverse industries. While it is true that ITW's subsidiary businesses are quite diverse, I do not believe that this necessarily means that the company's managers are encouraged to over diversify.

Instead, I believe that ITW's management team is experienced and capable of handling a variety of different businesses. Moreover, the company's strategy of acquisitions and divestitures suggests that it is not afraid to make changes in order to stay competitive. As such, I believe that ITW is a well-managed company that is not excessively diversified, but that has diversified itself in a way to respond to external pressures accordingly.

2. If the firm’s diversification strategy has changed since 2012, does that mean its structure has changed as well? Explain your answer.

In 2012, Illinois Tool Works (ITW) embarked on a new strategy of diversification, which involved acquisitions outside of its core businesses. This shift in strategy led to a change in ITW’s organizational structure, with the creation of new business units that were focused on specific industries. While this diversification strategy has changed over time, it is not clear whether ITW’s current structure is any different from what it was in 2012.

Given the changes that have taken place within the company, it is likely that ITW’s structure has also undergone some changes. However, it is difficult to say definitively without further information about the company’s organization. There are certain points to consider on this matter.

For instance, as manufacturing has become more globalized and competitive, many firms have adopted a more flexible organization structure known as matrix organization. In a matrix organization, employees are grouped not only by function but also by product or geography. This allows firms to respond quickly to changes in demand and to take advantage of opportunities in new markets. As the world of manufacturing continues to evolve, it is likely that the relationship between organizational structure and diversification will continue to change as well.

However, in the past, most manufacturing firms were organized into functional departments, with each department responsible for a specific stage in the production process. This appears to have been the case with ITW. But now that it has incorporated more specialty products into its manufacturing, it very likely has changed its organizational structure. For as manufacturing processes become more complex, organizations tend to adapt their structures to support the diversification of production. In many cases, this has meant moving away from the traditional hierarchical model in favor of a more flat and decentralized approach.