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Develop and post an analytical discussion of ITWs approach to innovation. How does this compare to actions taken by direct competitors, new market entrants, and indirect competitors (i.e., substitutes)?the following documents are the analyzes I did before to help for this assignment week_3___itw_s_swot_analysis__strategic_issues__strategy_canvas_and_actions__1_.docx illinois_tool_works___assignment_1__2_.docx itw_external_and_internal_analysis___assignment_2__1_.docx Unformatted Attachment Preview Week 3 - SWOT Analysis, Strategic Issues, Strategy Canvas and Actions ITW’s SWOT Framework SWOT analysis is a strategic planning tool that can be used by Illinois Tool Works managers to do a situational analysis of the organization . It is a handy technique to understand the present Strengths (S), Weakness (W), Opportunities (O) & Threats (T) Illinois Tool Works is facing in its current business environment. 1. Strengths of Illinois Tool Works As one of the leading organizations in its industry, Illinois Tool Works has numerous strengths that enable it to thrive in the marketplace. These strengths not only help it to protect the market share in existing markets but also help in penetrating new markets. ● Successful track record of developing new products – product innovation. ● Strong Brand Portfolio – Over the years Illinois Tool Works Inc. has invested in building a strong brand portfolio. The SWOT analysis of Illinois Tool Works Inc. just underlines this fact. This brand portfolio can be extremely useful if the organization wants to expand into new product categories. ● Strong Free Cash Flow – Illinois Tool Works Inc. has strong free cash flows that provide resources in the hand of the company to expand into new projects. ● Strong distribution network – Over the years Illinois Tool Works Inc. has built a reliable distribution network that can reach the majority of its potential market. ● High level of customer satisfaction – the company with its dedicated customer relationship management department has been able to achieve a high level of customer satisfaction among present customers and good brand equity among the potential customers. ● Good Returns on Capital Expenditure – Illinois Tool Works Inc. is relatively successful at execution of new projects and generates good returns on capital expenditure by building new revenue streams. ● Strong dealer community – It has built a culture among distributors & dealers where the dealers not only promote the companys products but also invest in training the sales team to explain to the customer how he/she can extract the maximum benefits out of the products. ● Automation of activities brought consistency of quality to Illinois Tool Works Inc. products and has enabled the company to scale up and scale down based on the demand conditions in the market. 2. Weakness of Illinois Tool Works Weaknesses are the areas where Illinois Tool Works Inc. can improve upon. Strategy is about making choices and weakness are the areas where a firm can improve using SWOT analysis and build on its competitive advantage and strategic positioning ● ● ● ● ● ● ● The company has not been able to tackle the challenges presented by the new entrants in the segment and has lost small market share in the niche categories. Illinois Tool Works Inc. has to build internal feedback mechanisms directly from the sales team on ground to counter these challenges. The marketing of the products left a lot to be desired. Even though the product is a success in terms of sale but its positioning and unique selling proposition is not clearly defined which can lead to the attacks in this segment from the competitors. Days inventory is high compared to the competitors – making the company raise more capital to invest in the channel. This can impact the long term growth of Illinois Tool Works Inc. Need more investment in new technologies. Given the scale of expansion and different geographies the company is planning to expand into, Illinois Tool Works Inc. needs to put more money in technology to integrate the processes across the board. Right now the investment in technologies is not at par with the vision of the company. Not very good at product demand forecasting leading to a higher rate of missed opportunities compared to its competitors. One of the reasons why the days inventory is high compared to its competitors is that Illinois Tool Works Inc. is not very good at forecasting demand this end up keeping higher inventory both in-house and in channel. There are gaps in the product range sold by the company. This lack of choice can give a new competitor a foothold in the market. High attrition rate in the workforce – compared to other organizations in the industry Illinois Tool Works Inc. has a higher attrition rate and has to spend a lot more compared to its competitors on training and development of its employees. 3. Opportunities for Illinois Tool Works ● Opening up of new markets because of government agreement – the adoption of new technology standards and government free trade agreement has provided Illinois Tool Works Inc. an opportunity to enter a new emerging market. ● ● ● ● ● ● ● Decreasing cost of transportation because of lower shipping prices can also bring down the cost of Illinois Tool Works Inc.’s products thus providing an opportunity to the company - either to boost its profitability or pass on the benefits to the customers to gain market share. New customers from online channels – Over the past few years the company has invested a vast sum of money into the online platform. This investment has opened a new sales channel for Illinois Tool Works Inc.. In the next few years the company can leverage this opportunity by knowing its customer better and serving their needs using big data analytics. New trends in consumer behavior can open up a new market for the Illinois Tool Works Inc. . It provides a great opportunity for the organization to build new revenue streams and diversify into new product categories too. Government green drive also opens an opportunity for procurement of Illinois Tool Works Inc. products by the state as well as federal government contractors. Organization’s core competencies can be a success in similar other products. A comparative example could be - GE healthcare research helped it in developing better Oil drilling machines. Economic uptick and increase in customer spending, after years of recession and slow growth rate in the industry, is an opportunity for Illinois Tool Works Inc. to capture new customers and increase its market share. Lower inflation rate – The low inflation rate brings more stability in the market, enables credit at lower interest rate to the customers of Illinois Tool Works Inc. 4. Threats Illinois Tool Works Facing ● Intense competition – Stable profitability has increased the number of players in the industry over the last two years which has put downward pressure on not only profitability but also on overall sales. ● Rising pay level especially movements such as $15 an hour and increasing prices in China can lead to serious pressure on profitability of Illinois Tool Works Inc. ● No regular supply of innovative products – Over the years the company has developed numerous products but those are often responses to the development by other players. Secondly the supply of new products is not regular thus leading to high and low swings in the sales number over a period of time. ● Changing consumer buying behavior from online channels could be a threat to the existing physical infrastructure driven supply chain model. ● New environment regulations under Paris agreement (2016) could be a threat to certain existing product categories . ● Growing strengths of local distributors also presents a threat in some markets as the competition is paying higher margins to the local distributors. ● Increasing trends toward isolationism in the American economy can lead to similar reactions from other governments thus negatively impacting international sales. ● The demand of the highly profitable products is seasonal in nature and any unlikely event during the peak season may impact the profitability of the company in short to medium term. Firm’s views on Successes and Setbacks ● Successes: ○ The company remains focused on the core principles of portfolio discipline, during this pandemic. This includes, enterprise strategy initiatives, 80/20 Front-toBack practice excellence, and organic growth. All these strategies are strong in terms of long term organic growth, however they will be a short term loss. ○ The company still finds its Customer-back Innovation strategy wildly successful and profitable still after multiple decades. Customer insights and learnings drive innovation at ITW and have contributed to a portfolio of approximately 18,000 granted and pending patents ○ Another attributing factor to the firm’s success is ITW’s decentralised entrepreneurial culture which enables the business to work in a fast, focused, and responsive format. ○ The Strategic Sourcing initiative established sourcing as a core strategic and operational capability at ITW, delivering an average of one percent reduction in spend each year from 2013 till today ● Setbacks: ○ In the risk section companys 10-q, ITW stated, downturns in the markets served by the Company could adversely affect its businesses, results of operations or financial condition. The unforeseen Covid-19 pandemic created massive downturns in the market, which became a major setback for ITW ○ Since 50\% of net sales are derived outside of the USA, the Covid-19 pandemic has created transportation delays and interruptions that could slow down the quarterly earnings reports for the rest of the year. The current global geopolitical and trade environment has resulted in raw material inflation and potential for increased escalation of domestic and international tariffs and retaliatory trade policies. Strategic Issues and Challenges The strategic issues faced by ITW are any issues within its control, that relate to the company business model and affect financial performance. In ITW’s “Enterprise Strategy” as outlined in its most recent 10-Q, ITW has needed to “shift its primary growth engine to organic”, and “leverage the company’s business model to deliver best in-class margins and returns”. As part of this first initiative, ITW has begun to reconstruct its business portfolio through existing “businesses that were operating in commoditized market spaces” and instead, prioritize “sustainable differentiation” for businesses acquired by ITW. This process also included exiting specific commoditized product lines in “otherwise differentiated divisions”. ITW has begun simplifying product lines as a multitude of smaller lines and customers create complexity in the ITW business model and overhead costs that don’t pay out. This initiative emphasizes customers and products with growth potential, via targeting differentiated products and businesses. ITW has also begun emphasizing sourcing as one of its most important business strategies. Its “Strategic Sourcing Initiative” has helped save the company 1\% a year. ITW has realigned its focus through re-applying its 80/20 process. Currently, companies also have to respond to COVID-19, and devise a strategy to survive. Through portfolio realignment, and divesting companies without growth potential, as well as dropping smaller customers, ITW will be in a better position to respond to the challenges of the Coronavirus. Illinois Tool Works business model is a model that directly responds to elements present in a SWOT analysis. Threats and weaknesses to ITW but also the industries they operate in, are what inform ITWs strategy. As we have outlined, a lack of innovation is a threat to ITW, but is addressed through company strategy. ITW highlights its “Customer-Back Innovation” strategy as a main priority. ITW’s Strategy Canvas We found it a little difficult to find industry-wide qualitative metrics for ITW’s and its competitors’ strategy canvas. However, with the publicly available financial information, we were able to use certain quantitative factors as proxies for qualitative metrics like management effectiveness, efficiency and business diversification. This was due to the fact that these are industrial conglomerates and only 2 or 3 of them are ITW’s direct competitors while the rest operate in business segments different from ITW’s. We analysed the following competitors due to the comparable size of the businesses like 3M, Stanley, Black & Decker (SWK), GE, Dover Corp and Ingersoll Rand Plc. The metrics that we used to compare the value curves of the companies are: i) Revenue Growth, ii) EBITDA Profitability - These companies have certain overlapping business segments and certain segments unique to each company, therefore, it is very likely that every company’s depreciation, amortization and financing costs might vary. Therefore, EBITDA has been considered as a proxy for profitability, in order to make the metric as comparable as possible, iii) Management Effectiveness - Averages of every company’s receivables turnover ratio, inventory turnover ratio, and asset turnover ratio, (Higher the average, the better) iv) Efficiency and Liquidity - Averages of every company’s quick ratio, working capital ratio, and asset turnover ratio, (Higher the average, the better) v) Net Income per Employee - instead of revenue per employee as this metric is calculated after the employees have been paid their wages and salaries, thereby giving us the net value created per employee, vi) Business Diversification - Number of businesses each company is involved in. As there are 6 companies in total, every company is ranked based on points from 1-6 (6 being the highest and best, 1 being the lowest and worst). This was an interesting analysis as it gave certain insights into which companies within this strategic group are closer competitors compared to their other counterparts. (Check comments after the graph for analysis) (source: data collected from 10K reports available on www.sec.gov, Atom Finance, CSIMarket) Comments: ITW lagged considerably in terms of revenue growth coming in last with (-21\%) revenue decline as of the latest quarter, while Ingersoll Rand plc proved to be the fastest growing company with a revenue growth of 102.5\% as of the latest quarter. 3M had the best EBITDA margins (25.9\%) in the industry group followed by ITW (24.3\%) while GE (9.3\%) came in last due to some business segments that have generated considerable losses over the past few years thereby weighing down overall company profitability. Based on a ratio analysis, ITW is by far the best managed company with higher efficiencies than its close competitors. SWK is a close second in management effectiveness ratios showing strength in its receivable turnover ratio, while 3M followed ITW showing good efficiencies due to a strong working capital ratio. GE has performed poorly in both these metrics as it fights an gruesome restructuring battle. In terms of profitability per employee, 3M outshined its competitors by a considerable margin though ITW remained a close second while GE struggles with an abysmal performance. Finally, it is indeed difficult to say that higher the diversification the better as we found contrasting stories for this metric. ITW and GE have 7 business segments but ITW has outperformed GE by a mile over the last decade. However, this metric does give the reader an idea about the degree of diversification for each company. From our analysis, we also found out that Dover Corp. and Ingersoll Rand plc are very close competitors with identical ratios in management effectiveness and efficiencies and a similar level of diversification. The same can be said about 3M and ITW. List of possible strategy actions An analytical framework is created in a way that they construct an analysts thinking that will assist logical thinking in an organized manner. They are models aimed at guiding and facilitating understanding and sense-making. The internal analytical framework looks at various internal resources of a firm and categorizes them based on their overall value to the firm. The external analysis looks at the industry environment of the firm, such as competitive position, dynamics, history, and competitive structure. This includes factors that are global, social, demographical, technological, and political. The analysis is used to determine threats and opportunities that exist in the industry that will drive the growth, volatility, and profitability of the firm. VRIO is a tool that will help ITW to recognize their competitive advantage and support the growth of the competitive advantage identified to sustainable competitive advantage. ITW aims at creating value in the market so that it can increase its sales, market share and size. In a rarity, IWT is one of the top performers globally with high-quality products and one of the mostrespected firms across the globe. Its products are perfect and non-substitutable, offering the firm global expansion .Finally, the resources of ITW are organized in a way that they capture value, long-term competitive advantage and thus boosting its sales. PESTEL Analysis is used to round off the external analysis of the company. The company should look at its political, economic, social and technological factors that affect the industry. This will help the firm to identify and test major external shifts that may occur in the industry. Through PESTEL analysis, the firm will be able to update its strategies and plans so that they can conform to the prevailing market trends. Illinois Tool Work operates on a business model of competitive advantage. The firm believes that for them to grow, they must value the quality of goods produced over quantity. The company does what it says. It assumes that for them to be differentiated in the market, they must execute their plans The company only invests in markets where they have a compelling competitive advantage. ITW is dedicated to working with all its suppliers who are also specialized in sustaining the global environment. The company aims at integrity and having ethical standards and thus fostering responsibility across the value chain. This can be achieved through partnering with all its suppliers on the accountability, responsibility and efficiency, eliminating modern slavery, and ensuring that products are mined responsibly SWOT analysis is used to analyze the internal resources of a firm once the external factors have been considered. It looks at the strength that includes customers satisfaction, steady free cash flow, and strong brand portfolio, an excellent track record on new products development, robust distribution network, and strong dealer community. The weaknesses include lack of product demand, a gap in the product range, high daily inventory, and top employees attrition rate, among others. ITWs opportunities include new markets, new trends, and decreased transaction costs online channels offering a unique customer platform, procurement opportunities through the green drive, among others. Lastly, treats include competition, increasing pay levels, lack of regular supply on innovative products, among others. Preliminary Evaluation of Illinois Tool Works (NYSE: ITW) Strategic Direction Vision “We believe the future of good business is deeply rooted in the past. By following our guiding principles designed to enhance customer focus, productivity, innovation, and profitability, we are able to make the continual process and product improvements for customers, while producing solid results for our shareholders. Our ability to produce commercial innovations on a continual basis for our customers is the foundation of our success. Our main guiding principles include the following: Decentralization 80/20 Process Innovation” http://www.makingafortune.biz/list-of-companies-i/illinois-tool-works.htm ITW Mission Statement With this structure, we are able to act locally but with a global vision, actively practicing lasting teamwork with customers and suppliers. It is our mission to be the most valued group to our customers, employees, and suppliers. Purchase answer to see full attachment