Operating Margin vs. Organic Growth a Challenge – #72
ITW (Illinois Tool Works) finds that building up to 800 Divisions (over a period of 25 years), doesn’t necessarily assure organic growth. To hit an acceptable growth rate, the company shed 713 divisions, down to 87 during the period 2011 – 2018. The actual growth margin in (2018) – 44 Divisions grew at 7.6%, but in 36 divisions revenue declined 3% while other industrial companies grew. The most immediate challenge is to get the 36 Divisions to start growing at a faster rate that equals the 7.6% rate achieved by the other divisions.
“It Starts and Ends with Management” –LESSON has to ask the question where was Management in all 36 Divisions that were losing revenue?
The following would be recommendations I would be making to my friend of 15 years who was the V.P. Research & Development for TRW, and whom I had the pleasure of serving with on the Advisory Board of Directors at The McCormick School of Engineering at Northwestern University.
- Ask the Four Questions outlined in (Blog #2) to be answered by each of the 36 Divisions at (-3.6%) revenue decline in 2018. Compile answers and have strategy meetings using this compiled data.
- Develop a one page plan (Blog #9) to prioritize meeting of minimum revenue and operating margin targets for years 2020-2023.
- Try to establish and identify Culture of TRW and begin to weigh in considering future acquisitions.
- Continue adding acquisitions that are
- profitable and will contribute to meeting and exceeding objectives for years 2020-2025.
- Develop and review specific strategies for ONBOARDING new acquisitions. At the rate of adding 50-60 companies at a time, it is difficult to integrate any of these companies before TRW is off to another 50-60 acquisitions – as proven, a good fit requires time to train on processes and a clear understanding of the culture expectations of TRW. Without those two factors working for an acquired company, the acquisition is left on its own.
- Make sure that all employees have a good understanding of TRW’S 80/20 management process. Why are you only concentrating on the 36 divisions that had a decrease in revenue? I am very familiar with TRW’S 80/20 process which is derived, from the Pareto principle, where it focuses on the 20% of Customers and products that generate 80% of the revenue. I reported to a CEO for a number of years who had previously been a Director/General Manager in one of TRW’S 800 business divisions. Of course, he brought 80/20 to GBC and launched it immediately – I plan to discuss the 80/20 process in an upcoming Blog which will be dedicated to the subject. One process for 800 Divisions requires extensive training and follow up by the leadership of 80/20 implementation and results.
- Should any of the Subscribers need added info on 80/20 implementation, please call me at 847-477-9465 for free consultation on the subject.
- Keep focused on 80/20 it works in that TRW raised its operating margin from 15.9% to 24.3% in less than ten years which eclipsed the target 20.0% in 2018. However, TRW has to keep a focus on top line which, never exceeded 5.0% and wound up at 2.2% in 2018. The new growth target for revenue is 3-5% annually with gross operating margins going to 28%.
TRW is a fine company operating at the highest level of ethics and in general one, of the best employers in the country. However, they have to be willing to step back and focus on top as well as the bottom line. That is not easy to do for 87 Divisions.