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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.

How is 80/20 reflected by the organization? How is consensus built across the organization?

The key is always talent. Successful implementation of ITW’s methodologies is led from the top of the org chart making a true and visible commitment to the process. Leaders are the change agents. With them committed to the process, we build consensus around specific improvement objectives. We track progress and, over time, demonstrate success.

As leadership is aligned on strategy, the different segments of the business provide 80/20 improvement input that is then consolidated into one-year operating plans with specific objectives. This forms the basis for achieving consensus in the organization.

Consensus is rarely ever achieved in a leap of faith. We do not expect people from newly acquired businesses to convert to ITW's methods on day one. The integration process takes time and starts with good training and winning the hearts and minds of the organization with the early wins that demonstrate the power of the concept. Over time, annual successes achieved by the different segments keeps motivation high and drives the 80/20 culture into the organization.

What is an example that truly illustrates the power of 80/20 when effectively implemented?

The best example is the Return On Invested Capital for ITW over time. Since 2012 the ROI has doubled from 14% to 28%. Operating margins in individual segments have seem similar growth. The data doesn’t lie.

How does 80/20 play out in the day to day of business operations?

In addition to the Operating Plan, every business has a Long Range Plan. From a multi-year vision down to annual specific improvement objectives that impact day to day operations as ITW people pursue these objectives using the 80/20 tool kit for analysis and execution.

Analysis and implementation are not driven by one business function in isolation. All functions work as a team (cross functional teams) led by general managers/owners to determine the most effective way to focus and run the business including assessing the value of the accounts, products, inventory, margins, etc. and to hone in on what processes and products are most successful and/or profitable. Overtime, this organizational involvement results in the adoption of the 80/20 culture that impacts all aspects of the business to the point that any proposals for new products, new manufacturing, new accounts, etc. are filtered accordingly by most individuals.

How does a business begin implementing the 80/20 methodology?

This is a process that must be led from the top. The owner and shareholders drive the process and will need someone to assess the business, train the organization, and set up the framework to get their key people in the right mindset.

With the right leaders in place, the first step of implementation is for the principals to commit to the process. Still, transforming business operations is not an overnight endeavor.

Leadership needs to be personally involved driving the change they wish to see in the business; otherwise, there will be a relapse and the transformation to an 80/20 profitable growth culture will not stick.

The biggest barrier to success is people that do not or will not buy into the process. Adapting to 80/20 requires a cross functional team approach to get everyone on board, this begins with the owners buying into the concept and committing to the process.

When you examine and assess leaders, what traits do you look for?

I look for integrity, high energy, quick moving people with the ability to profitably grow the business. They will have good leadership skills, interpersonal skills, and a drive for results. They must be articulate and able to craft a compelling 80/20 vision for the future and instill accountability in their team. They will be able to delegate effectively, track progress, and follow up to ensure results are being achieved.

Good leaders know that profitable growth is achieved by team effort, understand team coordination, and can make tough decisions for the good of the business.

Clear and efficient communications is a key leadership trait at ITW. Leaders need to have practical 80/20 implementation experience to coach and mentor their teams. The right manager is somebody that clearly and effectively understands how to guide their teams in setting strategy, agreeing to specific objectives and time to achieve. Then effectively delegates, follows up, and gets involved hands on as needed through day to day implementation.

We look for people with high energy, good people skills to motivate and inspire the team, and the willingness to get their hands dirty. Even as a Group President, I was happy to visit the lines and directly communicate and get feedback from operators doing the work.

What advice do you have for leaders considering adopting an 80/20 mindset for their operations?

There are three critical steps:

  1. Do your research and ensure that you 100% know what you are getting into and wholly buy into the concept. If needed, use outside support to help you and your team to understand the process, train the organization, and put a road map together to get the process started

  2. Find / hire the right manager to run the business and lead implementation

  3. Commit to the process

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