Illinois Tool Works Inc. History

Company Perspectives:

ITW strives to improve our customers' competitive positions by increasing productivity and quality while reducing manufacturing and assembly costs. ITW achieves this goal through its decentralized operations in 34 countries. These units respond to customers' needs by establishing production facilities in proximity to the markets served and create close working relationships with our customers. ITW's many businesses around the world are focused on serving their customers' and industries' diverse requirements. Despite the variety of markets served, the underlying goals that drive all ITW businesses are common: to create value and improve operating efficiencies for every customer.

Company History:

In 1912, four Smith brothers advertised for experienced manufacturing workers to help them set up a new business producing metal-cutting tools to serve expanding midwestern industry. With the backing of their wealthy and influential father, Byron Laflin Smith, the brothers formed Illinois Tool Works Inc. in Chicago. The company prospered. Under Smith family management through much of its history--the family still owned about 28 percent of the company in the late 1990s--Illinois Tool Works became known as a company with conservative management and innovative products that made big profits on small items. By the 1990s the company was somewhat changed with management placing a greater emphasis on acquisitions, even if it meant going into debt. ITW, as the company is generally called, operates 365 decentralized businesses that are organized into two main business segments--Engineered Components, and Industrial Systems and Consumables.

Early History

In 1857, just 20 years after the city of Chicago was incorporated, Byron Laflin Smith's father set up Merchants' Loan & Trust to help fledgling businesses get off the ground, becoming the first Chicago resident to own a Chicago banking institution. The city's population was approximately trebling each decade as railroads and the Great Lakes made it a transportation and manufacturing center. As the city grew, the corresponding real estate boom made rich men richer. The elder Smith took advantage of all these opportunities to make his family one of the wealthiest and most influential in the Midwest.

After graduating from the University of Chicago, Byron Smith went to work for his father at Merchants' Loan & Trust. Working in the family business did not last long, however. When he was 25 years old, Smith struck out on his own, founding the Northern Trust Company in 1879, which was to become one of the city's premier banking institutions.

A successful man in his own right by the early years of the 20th century, Smith saw other opportunities in the growing city. Through his business connections, Smith realized that there was an increasing need for large-scale production of machine tools for the growing transportation and communication industries. These emerging industries needed more parts than small machine shops could provide, and Smith thought he and his sons Solomon, Harold C., Walter, and Bruce were just the men to fill the need.

In 1912 the Smiths placed an advertisement for experienced manufacturing workers. They chose Frank W. England, Paul B. Goddard, Oscar T. Hegg, and Carl G. Olson to help get Illinois Tool Works off the ground, and Harold and Walter Smith managed the new company. Solomon Smith continued to work at Northern Trust--he succeeded his father as president when Byron died two years later--and Bruce went to work in New York.

In 1915 Harold C. Smith became president of Illinois Tool Works, and Walter and Solomon Smith continued to serve on the board of directors. Harold built on the company's initial success in selling tools to manufacturers and soon expanded the company's product line into truck transmissions, pumps, compressors, and automobile steering assemblies. While investing heavily in modern plants and equipment, Smith insisted on the conservative financial approach that ITW became known for, maintaining cash reserves and eschewing debt. Under Smith, ITW also became known for producing high-quality products. Smith's strategy served the growing company well when World War I broke out; the war years boosted company profits handsomely.

Expansion into Fasteners in the 1920s

In 1923 ITW engineered a new product that brought it into a different industry niche. The Shakeproof fastener, the first twisted-tooth lock washer, was to lead ITW into the profitable area of industrial fasteners. Shakeproof became a separate operating division offering a full line of related items, including preassembled washers and screws and thread-cutting screws. Each item in the Shakeproof division's product line sold for an average of less than one cent a piece, but ITW took the leadership position in the industry and its sales volume produced strong profits.

Harold C. Smith died in 1936. He had built ITW into an industry leader in metal-cutting tools, manufacturing components, and industrial fasteners. Smith had been an industry leader as well, serving as director of both the Illinois Manufacturers Association and the National Association of Manufacturers. After Smith's death, his son, Harold Byron Smith, became president of ITW. The oldest of four boys, Harold B. Smith had joined the company in 1931. Harold B. Smith followed his father's successful, conservative management practices, but he introduced some innovations as well. Smith emphasized research and development, encouraging engineers to develop new products, even outside of ITW's traditional product areas. He also decentralized the company, setting up separate divisions to pursue specific markets. This philosophy, followed by Smith's successors, meant forming individual operating units that concentrate only on their own product niche.

Under Harold B. Smith, ITW became known as a problem solver. Its salesforce developed new products to answer customers' specific needs--even when customers had not requested a solution--a practice that led to increased sales.

World War II, like World War I, produced a boom for the company, which by this time manufactured components for almost every type of equipment needed for the war effort. Even the wartime labor shortage could not prevent ITW from increasing its cash reserves.

Continued Expansion in the 1950s

Smith put some of the company's wartime profit into research and development, leading directly to expansion in the 1950s. One new and profitable area was plastic and combination metal-plastic fasteners. The company already had extensive expertise in the fastener industry with its Shakeproof division. Successful plastics manufacture and marketing led to the formation of another new operating unit, Fastex, in 1955.

Another area of expansion after the war, based in part on ITW's experience with plastics, was into the production of electrical controls and instruments. ITW's Licon division was formed in 1959 to produce electric switches and electromechanical products. ITW became a leader in miniaturizing these components. Its solid-state switches and preassembled switch panels brought the company into the computer and defense industries in addition to increasing sales in its traditional industrial base.

It was clear by this time that Illinois Tool Works was outgrowing its name; it no longer manufactured just tools. Smith set up a separate Illinois Tools division during the 1950s to concentrate on the original cutting-tool business and the company's initials, ITW, became the more frequently used, although unofficial, name for the business as a whole.

ITW's special expertise in gears led to two other developments during the 1950s. The company set up the Illinois Tools Division Gear School in 1958 to train engineers--especially those of customer firms--in the intricacies of gearing. ITW's development of the Spiroid right-angle gear led Smith to found the Spiroid operating unit in 1959 to produce specialty gearing for defense and general industries.

Introduction of Plastic Six-Pack Holders in the Early 1960s

A new opportunity emerged from ITW research and development in the early 1960s. Company engineers had been looking for less bulky, lower-cost packaging than the traditional cardboard boxing used for six-packs of beverages. Metal holders cut both the fingers of the customers and, occasionally, the cans they were meant to hold. ITW's increasing familiarity with plastics led to the invention of a flexible plastic collar to hold the cans. This simple patented invention generated substantial savings for beverage makers, from 40 percent to 60 percent according to ITW estimates. It led to the formation of another new operating unit, Hi-Cone, in 1962. In the decades since, plastic drink packaging has virtually replaced cardboard packaging for six-packs. The six-pack holder became one of ITW's most important moneymakers, and earnings from the Hi-Cone division offset fluctuations in profits from the company's products that served heavy industry.

In 1970 Harold B. Smith stepped down from the chairmanship of ITW. By this time ITW was an internationally recognized name. The Smith family's emphasis on decentralized operation meant that many of the company's production facilities were near large overseas customers, often under the control of local subsidiaries in the country where they were located. ITW components supplied heavy industries, the food and beverage industries, and the packaging industries in West Germany, Belgium, Australia, Spain, Italy, France, Great Britain, and New Zealand. The company's performance, however, suffered from the inflation that plagued the economy of the 1970s.

With Harold B. Smith's retirement, the first non-Smith, Silas S. Cathcart, became the chairman of ITW. Smith's son, Harold B. Smith, Jr., served as president and chief operating officer from 1972 through 1981, and Smith family members continued to serve on the board of directors. Under this leadership, the 1970s saw some new developments despite the sluggish economy. Most notable was ITW's entry into the adhesives industry with the purchase of Devcon Corporation. Devcon was a leader in specialty chemicals and manufactured adhesives and sealants.

Acquisitions at Center Stage in the 1980s and 1990s

When John D. Nichols took over as CEO in 1982, he was determined to keep ITW growing by investing more cash into the development of new product lines and in acquisitions, while cutting costs elsewhere to maintain profitability. He kept production costs low, for example, by developing what he termed "focus factories," where a single product was produced in a highly automated setting.

Nichols expanded ITW's industrial tools and systems businesses by purchasing Heartland Components, a maker of customized replacement industrial parts, in 1982; Southern Gage, a manufacturer of industrial gages, and N.A. Woodworth, a maker of tool-holding equipment, in 1984; and Magnaflux, a maker of nondestructive testing equipment and supplies, in 1985. Nichols formed a separate operating unit for automotive controls in 1983, and a division for producing equipment for offshore geophysical exploration, Linac, in 1984.

In 1986 Nichols made another significant acquisition when he purchased Signode Industries for $524 million. The Glenview, Illinois, manufacturer of plastic and steel strapping for bundling items, sketch film, and industrial tape fit in well with ITW's own plastics line. Nichols followed company tradition by breaking Signode down into smaller units, and within a year and a half over 20 new products had been developed as a result of the acquisition, which nearly doubled ITW's revenues. Also in 1986, Cathcart retired as chairman, with Nichols replacing him, while retaining the position of CEO.

Under Nichols, ITW acquired 27 companies in related product lines in the 1980s, while only 3 firms had been purchased before Nichols's tenure. These acquisitions meant that company debt reached higher levels than in the past, but these levels were not out of line with other industrial firms. More importantly, revenues surpassed the $2 billion mark for the first time in 1989 and earnings continued to increase steadily, reaching $182.4 million that year.

Acquisitions continued to fuel spectacular growth in the 1990s for ITW, growth that was only partially slowed down by the recession of the early years of the decade. The largest of 15 acquisitions in 1990 was that of the $200 million revenue DeVilbiss spray painting equipment business of Eagle Industries Inc. which built on the prior year's purchase of Ransburg Corporation, also a maker of spray painting equipment. In 1993 ITW added the Miller Group Ltd., a maker of arc welding equipment which had $250 million in revenues. As usual, Miller's operations were soon broken apart, with seven separate units emerging.

The years 1995 and 1996 were transitional ones for ITW, as Nichols handpicked a successor and then stepped aside. W. James Farrell, a 30-year ITW veteran who had served as president, moved into the CEO position in September 1995, replacing the retiring Nichols as chairman in May 1996. During his 14 years as CEO, Nichols oversaw an amazing period of growth--from $450 million in 1981 to $4.18 billion in 1995 when earnings reached $387.6 million. Through Nichols's aggressive acquisition program and his commitment to a decentralized organizational structure, ITW boasted of 365 separate operating units by 1996. During his tenure, Nichols also increased the company's presence outside the United States such that by 1996 about 35 percent of revenues were derived overseas, primarily from European operations.

The Farrell-led ITW essentially picked up where Nichols left off. The company made 19 acquisitions in 1996, including Hobart Brothers Company, a maker of welding products, and the Australian-based Azon Limited, a manufacturer of strapping and other industrial products. The possibility that Farrell would be even more aggressive than Nichols was raised in late 1995 when ITW made its first hostile takeover bid in the company's history, a $134 million offer for fastener maker Elco Industries Inc., a venture that failed after ITW was outbid for Elco by Textron.

Soon after taking over, Farrell hinted that some organizational changes might be needed at ITW as he raised doubts about the wisdom of a nearly $5 billion company being divided into 365 operating units. Nonetheless, with company revenue growing 20 percent per year and profits increasing even faster (40 percent in 1995 and 25 percent in 1996), it was hard to argue with the proven ITW formula. ITW was certainly likely, however, to look more to overseas markets for growth than it had in the past.

Principal Subsidiaries: Azon Limited (Australia); Buell Industries, Inc.; Burseryds Bruk AB (Sweden); Coding Products Inc.; Cumberland Leasing Co.; Elettro GiBi S.p.A. (Italy); Gema Volstatic AG (Switzerland); Gerrard Strapping Systems Ltd. (New Zealand); Gerrard Strapping Systems Pty Ltd. (Australia); Hobart Brothers Company; Hobart Brothers of Canada, Inc.; ITW Austria Vertriebs-Ges.m.b.H. (Austria); ITW Ateco GmbH (Germany); ITW Befestigungssyteme GmbH (Germany); ITW Canada Inc.; ITW de France S.A.; ITW (Deutschland) GmbH (Germany); ITW Espana S.A. (Spain); ITW Fastex Italia S.p.A. (Italy); ITW Gunther (France); ITW Holding S.A. (France); ITW Holdings Proprietary (Australia); ITW Holdings U.K.; ITW International Finance S.A.S. (France); ITW International Holdings Inc.; ITW Ireland; ITW Leasing & Investments Inc.; ITW Limited (U.K.); ITW Meritex Sdn Bhd (Malaysia); ITW Mortgage Investments I, Inc.; ITW Mortgage Investments II, Inc.; ITW Mortgage Investments III, Inc.; ITW Oberflachentechnik GmbH (Germany); ITW Overseas Investments Corp.; ITW Real Estate L.L.C.; ITW Residuals Inc.; ITW Tech Co. Inc.; Illinois Tool Works FSC Inc. (Barbados); IspraControl s.r.l. (Italy); Liljendals Bruk Ab (Finland); The Loveshaw Corporation; Lys Fusion S.p.A. (Italy); Medalist Industries, Inc.; Miller Electric Mfg. Co.; Miller Europe, S.p.A. (Italy); Miller Thermal, Inc.; Mima, Inc.; Minigrip Inc.; N. A. Woodworth Company; Orgapack AG (Switzerland); Orgapack Holding AG (Switzerland); Paslode Corporation; Pro/Mark Corporation; Ransburg Corporation; Ransburg Industrial Finishing KK (Japan); Shippers Paper Products Company; Signode France; Signode Kabushiki Kaisha (Japan); Signode Systems GmbH (Germany); Societe de Prospection et d'Invention Techniques (France); W. A. Deutsher Pty. Ltd. (Australia).

Principal Operating Units: Engineered Components Segment; Industrial Systems and Consumables Segment; Leasing and Investments Segment.

Further Reading:

• Boorstin, Daniel J., The Americans: The National Experience, New York: Vintage Books, 1965.
• Byrne, Harlan S., "Illinois Tool Works: Satisfying Customers ... and Investors," Barron's, November 16, 1992, pp. 51--52.
• ------, "A New Chapter," Barron's, December 11, 1995, p. 18.
• ------, "A Patent Success," Barron's, May 23, 1994, p. 23.
• Dubashi, Jagannath, "Illinois Tool: Buy This Global Niche Meister on Weakness?" Financial World, December 24, 1991, pp. 16--17.
• ------, "Illinois Tool Works, Really!" Financial World, July 26, 1988, pp. 12, 14.
• Friedman, Dorian, and Paul Glastris, "Tougher than Nails: Illinois Tool Works Is a Profit Machine," U.S. News & World Report, June 10, 1991, pp. 49--51.
• Henkoff, Ronald, "The Ultimate Nuts & Bolts Co.," Fortune, July 16, 1990, pp. 70--73.
• Lashinsky, Adam, "Blue Bloods Go for Jugular: Why ITW Has Turned Hostile," Crain's Chicago Business, September 11, 1995, pp. 3, 54.
• Loeffelholz, Suzanne, "Illinois Tool Works: Waiting for Godot," Financial World, April 18, 1989, p. 15.

Source: International Directory of Company Histories, Vol. 22. St. James Press, 1998.