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The 80/20 Principle: Implementing ITW's Iconic Best Practice

ITW 80/20 President Luis Mateus

Illinois Tool Work (ITW), the often-benchmarked diversified manufacturing business, has built its success around the 80/20 process, customer-back innovation and a decentralized entrepreneurial culture. The 80/20 principle is straight forward: 20 percent of customers / products generate 80 percent of revenues / profits. ITW structures its business around serving and growing relationships with these key customers. However, long-term success requires the use of specific tools, organization-wide commitment and strong leadership.

Luis Mateus is an independent advisor and a globe-trotting veteran senior executive of ITW. He has led the acquisition, integration, and transformation of manufacturing businesses in multiple countries and has a stellar reputation for growing businesses globally, improving execution, and building high-performance teams.


Luis holds a Master of Management from Northwestern University in Evanston, Illinois and a Mechanical Engineering degree from the Andes University in Bogota, Colombia. He is fluent in Spanish and conversant in Portuguese.


Today, we sit down with Luis to discuss his successful career, working at ITW, and best practices for implementing 80/20.


 

Thanks for spending some time with us today. To get started, tell us about your career.

I started my career as an Engineer helping Signode expand into Latin America. The company was later acquired by ITW where I held a series of increasingly senior positions in Engineering, Sales/Marketing, and General Management, ultimately rising to Group President with full P&L responsibility for the Global Bulk Transport group, the USA Airbag group, and for Industrial Packaging operations in Latin America, Europe, India, China, Japan, Korea, Australia, MEA, and ASEAN.

During my years at ITW I directed the building of greenfield facilities in Mexico, Brazil, China and the expansion of manufacturing operations in India. I drove profitable growth by leading the implementation of 80/20 initiatives throughout my businesses, plus the identification, negotiation, and subsequent integrations of strategic acquisitions and joint ventures. My group included manufacturing facilities in the USA, Canada, Brazil, Mexico, India, Korea, Australia, Thailand, China, Japan, Denmark, and Belgium.

Overall, I am passionate about Operational Excellence, Shared Strategic Vision and Commitment, Innovation, People & Teamwork, Globalization, and Latin America.


In your view, what are the most common challenges ITW leaders face when integrating newly acquired businesses?

80/20 is an easy concept to understand, but it can be difficult to implement. Many business owners and managers that stay with ITW post-acquisition agree that the concept makes sense, but when faced with difficult decisions they doubt it will work for their business.

They have the tendency to see themselves as unique, and every aspect of their operation as necessary.

I refer to this line of thinking as the “Not Invented Here Syndrome.”


Companies can also be resistant or fearful of change. This reaction is overcome with training. When we acquire a business, we train people on the process and the tools and show them the profitable results that can be produced. Then we establish targets and dates to achieve objectives and measure progress towards implementation underway.


It is important to understand, however, that implementing 80/20 is a process and businesses will need to crawl before they can run. There are two commonly held beliefs held by business owners that can bog down an 80/20 implementation:

  • “We need all the products” – Some have low volume but great margins. We have these products for a reason. We need them all.

  • "All customers are good customers” Some have almost no margin, but buy a lot, others buy very little but have great margins. We need them all.

The reality is that not all products and customers are equal or "good" and they don't need to be treated the same. Both products and customers can consume more resources than they generate thereby reducing the profitability of the business. Alternatives include outsourcing, using alternative distribution channels, combining, eliminating products, pricing, etc.


After you have acquired a business, what does the road map to integration look like?

There is always an acquisition plan to evaluate the potential of the business driven by synergies, 80/20 profitable growth opportunities, and ROI. Core to implementing the acquisition plan is selecting the right manager. This person is not necessarily the best operations manager, but one that clearly understands and believes in 80/20, preferably with hands on experience applying 80/20. This person must be an excellent communicator that can build excitement about the process and can drive the culture into the organization. One of the primary functions of this is to clearly communicate the strategic vision, train the organization on the 80/20 approach to business, and the tools we use for analysis, decision making, and implementation.


With an effective manager in place, we assess the talent structure of the business and use workshops and one-on-one coaching to train people on 80/20 processes and tools and how they can be applied within their discipline. Once the organization is trained, we look for low-hanging fruit - easy to grasp opportunities that effectively build confidence and demonstrate the power of 80/20. These early wins help motivate and solidify their understanding and commitment to the process and its strategic goals.


Integration plans will always have clarity broken down into short term operating plans and long-term strategic plans. Cross functional teams are assigned to develop 80/20 specific objectives with time commitments to achieve which gets the whole organization operating in the same rhythm/ working towards the same goals.