Smiths Group’s business model operates at two levels. The Group manages our portfolio to create value for shareholders, while the five divisions manage their businesses to meet customers’ needs and create value for the Group.
The Group’s role
We have a lean corporate centre, which sets our strategic direction and allocates capital to manage the portfolio and drive returns. It also fosters a culture of responsibility and accountability wherever we work around the world.
The divisional business model
Our diversified portfolio offers a wide range of long-term growth markets with different customers, demand drivers and competitors. It makes our business relatively resilient throughout the economic cycle.
Our businesses also share some common characteristics. These include high-quality brands, a deep understanding of customers and markets, the ability to engineer products to meet customers’ specific needs, and expertise in small-batch, low-cost manufacturing.
Our decentralised structure ensures our businesses are close to their target markets and customers and encourages a culture of entrepreneurship. Our divisions are responsible for actively managing their risks, ensuring that a strong culture of ethics and compliance is embedded across their businesses, and developing and retaining their people, with regular reporting back to the Group centre.
The Group’s role
Strategy
Sets Group strategy and ensures divisional strategies are aligned with Group strategy.
Governance
Provides an effective governance framework and ensures good governance is embedded across the business.
Performance monitoring
Reviews and regularly challenges divisional performance.
Ethics and compliance
Approves policies and provides oversight to ensure a strong culture of ethical behaviour and compliance.
Budgeting and planning
Agrees annual Group and divisional budgets.
Risk management
Sets risk appetite, ensures a strong risk management framework is in place and provides effective oversight.
Systems
Makes sure the right business systems and processes are in place so that decisions are made efficiently based on high-quality data.
EHS, talent and retention
Sets the Group’s environment, health and safety, and people development policies and monitors compliance and performance.
The Group’s role continued
Capital allocation
Allocates capital across the Group through investing in organic growth and acquisitions, managing our legacy liabilities and returning cash to shareholders.
Financing and capital structure
Optimises the Group’s capital structure and secures long-term financing. Seeks to maintain a strong investment-grade credit rating.
Shareholder returns
Our focus on cash generation enables us to reinvest in the business to drive growth and to generate attractive shareholder returns, through both dividend payments and capital returns.
Manage our legacy liabilities
At the same time, we actively manage our portfolio of liabilities, such as our defined benefit pension schemes and legacy product liability issues, so that we minimise their impact on our value creation. These are managed at either Group or divisional level, as appropriate.
Acquisitions and disposals
We buy businesses that add complementary technologies and products, expand our geographical footprint, particularly in emerging markets, or allow us to leverage our existing scale and infrastructure. We are also active in disposing of businesses that offer less attractive returns.
The divisional business model
Customer intimacy and market knowledge
Our businesses consistently refine their knowledge of their markets. This includes knowing the scale of the market and its growth rate, the competitors and their activities, and our potential sources of competitive advantage. This helps us anticipate and respond to developments.
This deep market knowledge enables us to achieve a high degree of customer intimacy, allowing us to anticipate their specific needs. This in turn helps us to keep our customers for the long term.
Invest in new product development
R&D is the key driver of sales growth and margins. It enables us to keep at the forefront of technology and develop products that meet our customers’ evolving needs.
We fund the majority of our R&D and we also seek funding from our customers. Our spend is focused more on product development than pure research. In 2012, we invested £117m in R&D, of which £10m was customer funded.
The divisional business model continued
Customer intimacy and market knowledge
Our businesses consistently refine their knowledge of their markets. This includes knowing the scale of the market and its growth rate, the competitors and their activities, and our potential sources of competitive advantage. This helps us anticipate and respond to developments.
This deep market knowledge enables us to achieve a high degree of customer intimacy, allowing us to anticipate their specific needs. This in turn helps us to keep our customers for the long term.
Operations and supply chain
The majority of the manufacturing process is in small-batch, low cost assembly, much of which is made to meet specific customer orders. This makes us capital-light and flexible.
Where appropriate, we have established production facilities in lower-cost countries, such as Mexico, China, India, the Czech Republic, Costa Rica and Tunisia.
The divisional business model continued
Customer intimacy and market knowledge
Our businesses consistently refine their knowledge of their markets. This includes knowing the scale of the market and its growth rate, the competitors and their activities, and our potential sources of competitive advantage. This helps us anticipate and respond to developments.
This deep market knowledge enables us to achieve a high degree of customer intimacy, allowing us to anticipate their specific needs. This in turn helps us to keep our customers for the long term.
Sales effectiveness
We take our products to market through our own sales and marketing teams and a network of dealers and distributors around the world. Our focus on building long-term customer relationships is fundamental to the success of our sales force.
Aftermarket services
Many of our businesses provide a high level of aftersales service. We also sell significant quantities of single-use consumables. These activities help us to retain customer loyalty, improve our understanding of how our products perform over their lifetime and increase our resilience throughout the economic cycle.
The divisional business model continued
Organic investment in business
Our strong cash-flow enables us to reinvest in the business to drive top-line growth by investing in new product development, optimising our systems and operations and expanding our sales and marketing presence in key growth markets.
This investment enables us to maintain our technology leadership and accelerates sales and margin growth across the business, providing a platform for sustained growth.
Cash generation
By emphasising working capital management, particularly our debtors and inventories, we are able to convert a high proportion of headline operating profit into cash.