3M: Cultivating Core Competency

CASE ASSIGNMENT

As the end of his first year comes to a close, George Buckley (CEO) is evaluating his strategic approach and its ability to drive desired results for 3M during the upcoming year. He has asked you to prepare a report assessing strategic performance during 2006 and to make recommendations for enhancing strategic competitiveness in 2007. You will have a 10 minute meeting with Buckley to highlight your findings, so you should prepare 3-5 Power Point slidesto provide an overview of your written report and to summarize the results of your analysis and supporting exhibits.

Your report and overview should address the following key strategic issues:

  1. Establish criteria for judging strategic performance by comparing past successes and strategies. Use a Balanced Scorecard framework to make sure that both financial and strategic controls are used to assess performance.
  2. Define the company's core competency.
  3. Determine if the company has a sustainable competitive advantage. If you determine that a sustainable advantage exists, support your claim. If you find it lacking, recommend actions that would secure a sustainable competitive advantage.
  4. Identify any external environmental forces that have strategic implications in the future.
  5. Evaluate the success of 3M's strategy in 2006 based on the criteria identified for judging strategic performance.
  6. Evaluate 3M's Acquisition strategy.
  7. Recommend an integrated and coordinated set of commitments and actions which will exploit the company's core competencies, strengthen its competitive advantage, and maximize value.

STRATEGIC MANAGEMENT INPUTS

  1. Establish criteria for judging strategic performance by comparing past successes and strategies. Use a Balanced Scorecard framework to make sure that both financial and strategic controls are used to assess performance.

Criteria for assessing strategic success can be determined by looking at the company's historical strengths, performance, problems (weaknesses), and strategic goals. The following table is an extensive look at the historical competencies and successes of 3M. [This table is available on the Instructor's CD in an Excel spreadsheet, which includes a worksheet with a blank template that can be provided for the student.]

Strengths / Performance / Problems / Strategic Goals
1907
McKnight/
Bush
1923
1930's
1940's
1952
Carlton
1980's / Aggressive, customer-oriented salesmanship
Niche in growing auto industry
One of first corporate R&D divisions in US
45% profits into R&D
Understanding markets
Product research
Innovations
Major product innovation / Product discovery
First large-scale consumer product
Tripled in size
$100 million sales
10,000 employees
Low-tech marvel: Post It Notes / Lost cassette tape market
Major competitor threats on multiple fronts / Filling market niches
Abandoning markets where it could not set its own prices
Strengths / Performance / Problems / Strategic Goals
1991
DeSimone
1992
1994
1997
1998 / Product development / New product turnaround time reduced
Invention of customer-driven products
International sales over 50% of total sales
Over $1 billion of $15 billion in sales to first-year products
30% sales from products within past 4 yrs.
35% revenues from products within past 4 yrs. - many high tech.
Workforce reduction of 5000 / Declining revenues/profits
Focus shifted from research / R&D teamed with marketers
Transformation of existing technology into commercial products
Percentage of sales from new products
Restructuring
6 Business Segments
Continued commitment to innovation
Strengths / Performance / Problems / Strategic Goals
2001
McNerney / Increased efficiency / New CEO from outside the company
Underperforming
Lacking direction
Fewer hits from vaunted research facilities - no major breakthrough in 2 decades
Culture becoming more short-term
Difficulty acting on 15% Rule / Balance science of management against innovation
Control the use of resources for product development without killing "crazy" ideas
Quality control and improvement initiative - cost cutting and reducing errors/defects
Channeled product development funds on most promising ideas
Dropping weaker ideas earlier in the process
Getting best ideas to market faster
Retain culture of innovation
Strengths / Performance / Problems / Strategic Goals
2002
2003
2004
2005 / Increasing sales and operating margin
Strong performance - industrial division products driven by acquisition / R&D $1.14 billion - 6.3% sales
R&D $1.19 billion - 5.9%
$3.8 billion revenue (10.5% increase)
Net Profit $3.2 billion - 7% increase
R&D $1.2 billion - 5.9% sales / Underinvestment in growth platforms and overemphasis on boosting short-term profits
Anemic revenue growth (1-5%) while markets expanding
Declining personal care segment - price pressures in Europe
Decreased demand for some older products / Reorganization to improve access to larger, higher-growth markets
Acquisitions to generate growth
Realigned R&D to customer-development divisions to enhance responsiveness and growth
Growth driven by acquisition
Strengths / Performance / Problems / Strategic Goals
2006
Buckley
Upon Arrival / 50,000 products with diverse end-user segments based on both high- technology and low-technology
Founder and leader in many technologies - more than 40 technology platforms
Continual new markets built through "technical adjacency machine"
Strong knowledge and understanding of technologies yielding innovative products globally and consistently / Cycle time to commercialization reduced from 4 yrs. to 2-1/2 yrs. for faster sales / Often entered markets only after intellectual property positions were built / Growth strategy based on enhanced core competency and building long-term competency
Technology and innovation as the engine to grow and develop existing markets through disruptive (natural substitute) technologies, logical developments and extensions of existing products, and "out of the garage" technology developments
Grow core business through the strength of constant reinvention, stronger key customer partnership, customization, solving customer needs, entering niche segments, and capturing new segments
Strengths / Performance / Problems / Strategic Goals
Buckley Arrival Cont. / Brand ownership
Participation in niche markets
Strong R&D with an annual budget over $1 billion
Innovative culture
Strong capabilities in science, engineering, and manufacturing (world class) with efficient plants
World class materials science and surface chemistry capability
Less risky capital investments through flexible machining
Intersegment technology sharing across products and markets
Cross-business use of central technologies historically yielded participation in high-margin niche markets / "Invent and Experiment" approach - make a little, sell a little - leading to complex supply chains and costly logistics between operations
Deeply conservative values
Incremental capacity and planning
Chronic underinvestment in core capacity - lost sales growth opportunities where it was readily available / Emphasize product localization using mix of brands and local acquisitions
Speed growth through strategic licensing, investment in small tech companies, University alliances, and extensive promotion of invention
Maintain innovative culture - follow 15% rule
Accurately measuring sales growth potential - demand and capacity to benefit from scale in core product categories* and to gain relative share in targeted markets**
Accurate capacity planning
*Core Product Categories:
  • Scotch brand industrial/office tapes
  • Abrasives
  • Automotive
  • Optical films
  • Face masks and respirators
  • Medical tapes and drapes
  • Post-It Notes
  • Traffic signage
**Markets aiming for relative share:
  • Dentistry
  • Orthodontics
  • Office supplies
  • Roofing granules
  • Commercial graphics and adhesives

Strengths / Performance / Problems / Strategic Goals
Buckley Arrival Cont. / 3M Lattice - unique model of technologies and manufacturing "adjacency lattice" with shared basic technologies and manufacturing processes across businesses, markets and product lines - connection between all basic businesses making 3M a powerful and enduring industrial competitor
Interdepartmental cooperation
Diversified (and balanced) operation in multiple industries and geographic regions
6 key businesses
Inward focus brought margin benefits / US 39%, AsiaPac 27%, EurMidEAfr 25%, AmCan 9%
Health care (21% revenue) and Industrial accounting (19% revenue) / 3M Lattice makes managing for optimal growth difficult
Inward focus hindered growth and good long-range planning / Competitive Advantage - unique shared technology model
Strategically manage portfolio
Maintain premium margins
Strengths / Performance / Problems / Strategic Goals
Buckley After First Year / Successfully reinvigorating engineering culture and technological foundation
Innovation sparked
Morale boosted
Investments focused on core competencies / Sales $21.2 billion
60% sales outside US, more than 20% in emerging markets
April - record 1st qtr sales and profits (over 10% increase) - EPS increase over 20%
June - missed targets, driving stock prices down
Sept - sales increase 7.3% (organic sales were up 6.5% excluding acquisitions)
Acquisitions
$350-400 million of $22.8 billion in sales
16 acquisitions (equal to that of past 4 years) - smaller purchases - at least 2 in each of 6 business units / Waiting to see growth accelerate at core businesses
Display and Graphics business launch of new optical film factory
Misread demand for LCD TV's
Retailers offering branded goods (private labels) at reduced prices to consumer, lowering 3M's targeted price points through launch of secondary brands - reducing margins from 45% to 20%
Oil - price increase and supply restraints on oil-derived raw materials / Revitalize competitive advantages through technological differentiation, application across multiple lines of business, and renewed focus on innovation, new products, international expansion and penetration with greater emphasis on localization (concentrating on BRICP, E&W Europe, Japan, and Australia)
Defend created markets against new entrants, using dual branding in upper middle market -
Thoughtful extension of private labeling
Add 'digital' oriented competencies over time
Divestiture or closure where scale or relative share cannot be built over time, differentiation not possible through technology, or base technology at "end life" and cannot be refreshed
"Tuck in" Acquisition strategy that closely reflects and supports strategic plan and adjacencies, offers quick value by quickly adding technology to company, and fills openings in geography and channel capacity

Buckley is charged with revitalizing the company's competitive advantage and core competency. This suggests that drawing from 3M's successful past is a critical component to planning future strategic moves. Based on thedetailed strategic analysis above, the following strategic initiatives and internal capabilities have been instrumental in securing past successes for 3M:

Developing technology-oriented solutions to satisfy customer needs.

Filling market niches.

Abandoning markets where desired prices (and margins) cannot be maintained.

Generating a high percentage of sales from new products.

Establishing and fostering a culture of Innovation.

In addition to a growth strategy based on enhancing core competency, 3M has more recently employed an acquisition strategy to take quick advantage of technology opportunities and to fill openings in geographic markets and channel capacity. While acquisitions make a logical strategic option for 3M, this new strategy has not been fully tested for success, with 16 new acquisitions generating only 1.6% of corporate sales ($375 million out of $22.8 billion in sales).

The criteria for evaluating Buckley's 2006 strategic actions should emphasize the achievement of sustainable growth and the strengthening of core competencies and competitive advantage.

Although detailed data for many of the following measures is not available in the case material, suggested criteria for evaluating Buckley's strategy include:

Balanced Scorecard
Performance Measure / Control Type
Sustainable Sales Growth / Financial
Sustainable Profit Margins / Financial
Increased Solutions to Customer Needs / Strategic - Customer
Number of New Patents / Internal Business Processes
Number of New Products from Customer Collaboration / Customer
Sales from New Products / Financial
Number of New Market Niches Served and Market Share / Strategic - Customer
Markets Abandoned after Margins Prove to be Unsustainable / Strategic - Internal Business Processes
Innovation Measured by: / Strategic - Learning & Growth
Achievement of 15% Rule / Internal Business Processes
R&D Budget as Percentage of Sales / Financial
(See New Product Measures Above)
Sales, Debt, and Related Cost Measures for Acquisitions / Financial
Investments in Core Competency and Competitive Advantage / Strategic - Learning & Growth and Financial
  1. Define the company's core competency.

The case provides an extensive definition of 3M's core competency, which is based on its invention and manufacturing capabilities to solve and deliver unique solutions for industrial and commercial customers. The company's technology platforms hold together its diverse business activities.

According to Buckley, 3M's fundamental core competency is in applying coatings to backings, processes which were both developed internally. He identified six competitive platforms giving 3M an edge over its competitors: low cost, scale and relative share, customer value chain, pristine service, and premium brands.

  1. Determine if the company has a sustainable competitive advantage. If you determine that a sustainable advantage exists, support your claim. If you find it lacking, recommend actions that would secure a sustainable competitive advantage.

If the company's innovative technology portfolio and superior manufacturing process capabilities are 3M's core competencies, its competitive advantage derives from the company's practice of cooperatively sharing technology across operations, brands, market segments, and regions. Referred to as the 3M Lattice, the unique business model is a competitive advantage that offers a steady stream of groundbreaking product opportunities in adjacent businesses where less obvious applications are discovered.

This competitive advantage is a sustainable advantage in that it meets the qualifications for sustainability - possessing capabilities which are valuable, rare, costly-to-imitate, and nonsubstitutable.

  1. Identify any external environmental forces that have strategic implications in the future.

The trend for lower margins in the U.S. market (driven by retailers and private labeling) and price pressures in Europecan be expected to continue, emphasizing the importance of 3M's international focus to achieve premium margins. In addition, emerging markets offer untapped growth and niche opportunities, giving pursuits in these regions a fit with Buckley's strategy of entering niche markets and capturing new segments.

Growth and technology trends in areas such as electronics and software, RFID/Wireless/GPS, minerals extraction, oil and gas, food safety, border crossing and security, and consumer electronics offer acquisition opportunities to support 3M's strategic plan and to take advantage of extensive knowledge in adjacent technologies to stimulate product development.

Business opportunities with high growth potential are emerging in the areas of filtration, track and trace, energy and minerals extraction, and food safety. Combined with 3M's available adjacent technologies and the company's ability to share across segment lines, these areas offer strategic opportunities for internal development.

Price increase and supply limitations for oil and oil-derived products will continue to impact performance of products dependent on these inputs if price increases cannot be passed on to the end customer.

The general environment is experiencing rapid advancements in technology. 3M's core competency and strategy are well-aligned to this external condition, and potential technology developments (such as nanotechnology applications in materials science and digital technology applications) indicate continued tech-based growth opportunities for 3M in the foreseeable future.

It is also worth noting declines experienced in the personal care segment. This observation should be taken into consideration when allocating resources and making strategic decisions. Again, 3M's strength in industrial segments places the company in a good position to minimize the impact of reduced opportunities and performance in the commercial segment.

STRATEGIC ACTIONS: STRATEGY FORMULATION & IMPLEMENTATION

  1. Evaluate the success of 3M's strategy in 2006 based on the criteria (Balanced Scorecard) established above for judging strategic performance.

Sales Growth. Based on financial information provided in the case and 2006 financial results, annual sales growth rates for the past 6 years are provided in the table below. The 5-year growth rate for 3M is 7.35%.

In millions / Percentage of Change in Net Sales Over Previous Year
2006 Sales = $22.923 / 8.3%
2005 Sales = $21.167 / 5.7%
2004 Sales = $20,011 / 9.7%
2003 Sales = $18,232 / 11.6%
2002 Sales = $16,332 / 1.7%
2001 Sales = $16,054 / --

Concerns that revenue growth has stagnated to between 1% and 5% are not founded in actual annual growth rates experienced by 3M, and expectations set between 5.5% and 8% were exceeded in 2006. However, Buckley has projected exceeding a 10% annual growth rate by 2011, which will require an acceleration of the progress made to date. A watchful eye should remain on sales results, but indications of strategic success are evident.

Profit Margins.

Operating Income (in millions) / Profit Margins
2006 $5.625 / 24.5%
2005 $4.828 / 22.8%
2004 $4.555 / 22.8%
2003 $3.657 / 20.1%
2002 $3.005 / 18.4%

Profit margins in the table above are calculated by dividing Income before Taxes into Net Sales. This measure has steadily increased over the past 5 years, which shows attempts to maintain profit margins to be successful. Despite a 49% increase in interest expense (due to debt funding of acquisitions in 2006), Buckley's first year of margin results show an impressive gain. His focus on high margin niches should continue to have a positive impact on this measure of financial success.

Buckley's identification of capacity planning issues, and his attempt to improve 3M's ability to accurately measure sales growth potential should also provide greater benefits of scale (with greater margin results) in core product categories. This strategic action offers the added advantage of increasing relative market share in target markets. However, the company did miss scale opportunities (misreading demand for LCD TV's), which indicates that additional attention to this capability is still required for success.

Solutions to Customer Needs and Serving Market Niches. For the sake of this case study, the measurement of developing new product solutions for customer needs, serving market niches, and innovativeness cannot be performed. Feedback in the case study indicates that Buckley has been successful reinvigorating an engineering culture with a technological foundation, sparking innovation, boosting morale, and stimulating autonomous strategic behavior.

Annexure IV in the case indicates that Pending and Existing Patents are steadily rising, with strong projections through 2011. The Sales from New Products figure is not available in the case, but should be employed by Buckley's team using the previous benchmark of 30-35% of sales from products new to 3M in the past 4 years. This will provide a good measure of the successful use of technology and innovation to drive

sustained revenue growth. As of Buckley's arrival, 3M is still putting out both incremental and radical innovative products.