The US-based conglomerate 3M has been famous for decades for its culture of innovation. Its rule of allowing 15 per cent of its employees’ working hours to be spent on their own projects has been widely cited as the symbol of tolerance for experimentation. However, there is more to the firm’s core competences than this tolerance.
The development of the spirit of innovation
3M was incorporated in 1902, as Minnesota Mining and Manufacturing. In the late 1910s, when its annual sales exceeded US $1 million and it started to earn profits, former President William McKnight decided the time had come to strengthen 3M’s research function and its linkages with manufacturing and engineering activities. In 1921, Richard Carlton, a calculated risk-taker, was hired to lead 3M’s research activities and to integrate research, manufacturing and engineering objectives. At the same time, Dick Drew, a rule-breaker, and Francis Okie, an inventor, joined the 3M lab staff. The shared characteristics of this trio shaped 3M’s climate of innovation. This climate includes an ‘electric atmosphere’, the freedom to pursue any opportunity, the sharing of ideas, the presence of extensive mentoring and patience regarding investment returns. For example:
- In addition to time (the 15 per cent rule), 3M also supplies money for independent research projects. In 1984, for example, 3M launched the Genesis Program to fund research projects unable to go through the regular funding channels. Genesis Grants could be worth up to US $100,000 and were often awarded to develop unconventional projects that would not otherwise receive funding in the outside world. Other grants were also introduced to spark innovation, such as Alpha Grants, the Technical Circle of Excellence and Innovation, the Carlton Society and the Engineering Achievement Award of Excellence.
- Technology and ideas are shared through both informal channels, such as conversations in hallways, and formal channels, such as the ‘R&D Workcentre’ internal networking website and the so-called ‘Tech Forum’ (officially known as the Technical Information Exchange). The Tech Forum has specialty subgroups in each scientific discipline, so that engineers and chemists can share their expertise. By 2001, the Tech Forum had 9,500 members around the world. 3M also facilitates informal and formal networking at the Tech Forum’s annual symposium, where researchers can collaborate and share their work.
- Mentors and sponsors help younger colleagues by listening to their ideas, giving them advice and assistance, and acting as their champions.
- Patents give 3M the power and time to protect the growth potential of its business. For example, in the 1990s, 3M introduced the unique surface material called brightness enhancement film (BEF), which enhances the brightness of liquid crystal displays (LCDs). Its major customers were Japanese LCD manufacturers, which sold LCDs to computer manufacturers in both Japan and the US. However, 3M also provided BEF directly to several US computer manufacturers, for which it had US patents. By using these sales as leverage, 3M convinced two US computer manufacturers not to buy products which broke 3M’s patents.
Together with the development of the spirit of innovation, William McKnight laid out the McKnight principle of management in 1948, which covers the essence of a corporate culture espousing initiatives: “As our business grows, it becomes increasingly necessary to delegate responsibility and to encourage men and women to exercise their initiative. This requires considerable tolerance. Those men and women, to whom we delegate authority and responsibility, if they are good people, are going to want to do their jobs in their own way.”[1] This principle was critical not only to the spirit of innovation inside the firm but would also guide the firm’s international expansion in later years.
Diversification
While keeping the functions of engineering, research and development, finance, and human resources strongly centralized, 3M organized the rest of the company into many small divisions. When a division grew so big that it tended to overlook the development of new businesses, new businesses were removed from the division, which then had to look for new products to meet its growth objectives. For example, Magnetic Recording Materials was a spin-off from the Electrical Products Division, but it later grew to become a division and several new divisions later spun off from it. This was called the ‘divide and grow’ approach.
The direction of the growth was based on innovation. The company’s philosophy was that “[I]nnovation tells us where to go; we don’t tell innovation where to go”.[2] Thus, the company followed the technology into new products and markets. “By the millennium, 3M had world-class expertise in about 30 technologies and excellent grounding in about 100 more.”[3]
For example, its ‘nonwovens’ technology started with ribbon in the 1940s, but developed into such products as tape backings, low-density abrasives, medical products, and insulations and filters.
The fluorochemical technology also evolved a long way from its roots. In 1944, 3M acquired fluorochemical patents from a Penn State University professor, even though “no one knew how to use the compound”.[4] After more than ten years of investment, 3M realized its first profits in fluorine research when it introduced Scotchgard fabric and upholstery protector to the textile industry in 1956.[5] Initially, 3M’s Fluorel fluoroelastomers were used only in the automotive industry, to make “fuel line hoses, O-rings, oil seals for engines, engine valve seals, little rubber molded ‘elbows’ for crank case ventilation and other prosaic pieces and parts”. By the late 1990s, the technology had evolved into a wide range of applications related to diverse products, including non-stick coatings on cookware.
This process of diversifying into numerous and varied applications was accompanied by the discipline of eliminating those businesses that could not sustain annual sales growth of 10 per cent and profit targets of 25 per cent. For these reasons, 3M sold its Duplicating Products business in 1988 and spun off its data storage and imaging systems businesses in 1995.
Internationalization and the global presence
The formative years
3M developed its international activities in stages, starting with exporting to foreign countries, establishing sales subsidiaries, setting up warehouses after learning about the local market, repackaging products shipped from the US, building plants and setting up R&D labs to provide technical support. As business abroad grew, a steady flow of new products from 3M’s research labs created new export possibilities for foreign subsidiaries.
3M started to export sandpaper to Britain in the 1920s, but McKnight had to halt his attempts to set up a manufacturing plant in Britain because 3M’s major rival in the US threatened to follow 3M there by also building its plant in Britain. McKnight believed that Britain’s market could sustain only one American abrasives firm. After the US legal system began to allow US firms to cooperate in foreign trade, nine American firms, including 3M, founded the England-based Durex Corporation in 1929 to grow the abrasives business overseas. When Durex was dissolved in 1951, 3M inherited a group of top managers, three plants in England, France and Brazil, and an office in Germany.
3M expanded its international reach even further in the 1950s, benefiting from its mature research base in the US. The international division was an entrepreneurial venture, and country managers basically did whatever was necessary to help their businesses survive and grow. Maynard Patterson, former vice president of the international division, adopted a hands-off approach to managing the foreign businesses. He delegated major decision-making power to country managers, and also built fences to prevent either well-meaning help or possible ‘red tape’ from headquarters. For example, when Patterson sent Em Monteiro to grow the business in Colombia, Patterson told him to “go start a company .. . and no one from St. Paul is going to visit you unless you ask for them. We’ll stay out of your way and if someone sticks his nose in your business, you call me.”[6] In this way, the early leaders of the international division built an environment for line managers in each country conducive to growth and adaptation to local customers.
By the end of the 1970s, sales from the international division accounted for around 42 per cent of 3M’s total sales, with operations in 51 countries.
Capitalizing on the global network
In the late 1970s, both the 3M CEO and the head of the international division believed that the international division would grow more if it were integrated with US operations. Integration between the two progressed slowly, starting with some exchange of information, people and technical assistance. Although many employees did not initially see the benefit of such integration, the interactions gradually compelled both the US operations and the international division to identify the “advantages of worldwide cooperation in selling and distributing 3M products”.[7]
In the 1980s, group executives in the US and country managers at the international division started to work together to develop worldwide strategic plans and to prioritize 3M’s roughly 40,000 products. Moreover, 3M looked for ways to improve efficiency in its network. For example, until the mid 1970s, each European subsidiary still hired its own truck lines, without any communication among themselves. 3M finally established a distribution centre in Breda, the Netherlands, functioning as a hub to ship products to the 19 European subsidiaries.[8] In the early 1990s, 3M gradually switched from country-by-country management to a regional structure by creating the first European Business Centre (EBC) to manage 3M’s chemical business in Europe in 1991, and several other EBCs a few years later.
In the late 1970s and early 1980s, overseas innovations started to become important. By the late 1970s, most foreign subsidiaries still copied existing products developed in the US, but some started to churn out innovations in marketing, operations and product adaptations. Some innovations had been applied by sister companies, even the US operations. To “encourage new products and new business initiatives born outside the United States”,[9] 3M started its Pathfinder Program in 1978, and by 1983, US $153 million of new sales came out of the winning projects. Awards and grants initially designed for innovations at US operations were extended to international employees. For example, international researchers started to sit on 3M’s Circle of Technical Excellence, and 3M Italy and 3M Canada became the first two international companies to receive Genesis grants to support their new product development. As a result of such encouragement, international operations generated important innovations. For instance, 3M Brazil developed a low-cost adhesive using local raw materials.
Overseas innovations also resulted from international cooperation among 3M’s companies. For example, when a Canadian marketer had a new idea for cleaning ships underwater, a 3M lab in St Paul invited him to collaborate, and together they developed the Scotch-Brite marine cleaning disc.
By the 1980s, international labs at 3M employed around 1,200 technical professionals on product and process development. Some labs had developed technical expertise in specific areas. For example, 3M’s German lab specialized in electrical innovation, the Belgian lab focused on specialty chemicals and the Italian lab studied recording materials. A global effort to improve automation in abrasive manufacturing included 3M Japan, Brazil, Colombia and several European subsidiaries. By the turn of the century, 4,300 scientists were located internationally, compared with 2,200 scientists in the US.
Troubled innovations
Starting in the early 1990s, 3M’s innovations seemed to stagnate, as new products became incremental rather than revolutionary. Profits also started to fall, leading to a restructuring in 1995, the biggest one in 3M’s history. Some people started to question 3M’s success formula, attributing the stagnating innovation to redundancy in R&D. 3M had around 8,300 researchers scattered among central R&D, 11 centres for particular technology platforms, and labs attached to sectors, groups or businesses. Research money was allocated by management, fellow scientists and many other sources.[10]
In 2001, 3M brought in Jim McNerney, a GE executive and Harvard MBA alumnus to rejuvenate the company. First, McNerney asked researchers to talk more to people in marketing and manufacturing, and to use those conversations to guide their lab work from the very beginning. Naturally, some people worried that 3M might lose breakthrough innovations because of such micromanaging.[11] Second, McNerney got rid of the 30 per cent rule – the company’s longstanding goal to produce 30 per cent of its revenues from products less than four years old. McNerney believed that this rule led to dubious innovations introduced by managers solely to meet the target. Third, he implemented the 3M-acceleration programme, to evaluate new products in the pipeline and invest more money in those with a high probability of success while dropping others at the very beginning. Fourth, McNerney implemented Six Sigma management standards that streamlined processes and minimized defects. However, the efficiency payoffs of Six Sigma also had the unintended effect of placing undue pressure on researchers to generate innovations at an unrealistic pace.[12] The former legacy at 3M, that small ideas could become great innovations, seemed to have been given up.[13] Ronald Baukol, previous executive vice president for international operations and a 33-year veteran, argued against McNerney that “the most important thing about 3M – the single most important thing – is you get to do things your own way”, though many others agreed with McNerney, noting that money was not always directed towards the most promising research programmes.[14]
By 2005, only 21 per cent of revenue was being generated from products less than four years old.[15] In the same year, McNerney left to take the top position at Boeing Co., and George Buckley became the new CEO. Buckley, who had a PhD in electrical engineering, restored emphasis on the 3M laboratories and devoted more than US $1 billion to R&D in 2009. Buckley kept Six Sigma in 3M factories but removed it from the labs, and revenues from new products returned to 30 per cent by 2010.[16]
3M gets back on track
Buckley focused mostly on internal growth through product development, improving efficiency and expansion into emerging markets. He allocated US $2 billion to acquisitions in 2010, a sizeable increase from US $69 million the company spent on acquisitions in 2009.[17] During Buckley’s tenure, 3M’s revenue rose 40 per cent to US $29.6 billion between 2005 and 2011.[18] When Buckley announced his retirement in 2012, 3M’s board of directors selected former COO Inge Thulin as his successor. Thulin’s expertise in “orchestrating profitable growth in international markets” was considered a key factor in his appointment.[19]
Like Buckley, Thulin viewed diversity as a cornerstone of 3M’s philosophy: “This is a company that is many, many small companies, and I think that is an advantage for us.”[20] When asked if 3M should be in the business of producing arguably trivial items such as fishing gear, Thulin stated, “if we [3M] can make money on it, we should.” Thulin’s commitment to increase profitability stemmed from his ability to make 3M more efficient, cut back non-vital businesses, and to acquire “big-name safety product companies with a history of fast growth.”[21] Thulin’s competent and innovative leadership has been cited as a critical factor in leading 3M through a global downturn, and reviving both the company’s revenues and stock price.[22] Thulin remained CEO until 2019 and was succeeded by Michael Roman.
Like Thulin, Roman became responsible for leading 3M through another crisis: the global COVID-19 pandemic. Thanks to 3M’s diverse business segments and arguably Roman’s leadership, 3M was able to fare better against the difficulties posed by the pandemic. It is also 3M’s activities in a wide variety of businesses that caused it to achieve a balanced performance, based on the varying impacts on its different business lines. For example, 3M outlined in its 2020 Annual Report that personal safety, home improvement, general cleaning, semiconductors and data were product lines responsible for boosting 3M’s revenues.[23] On the other hand, oral care, advanced materials, automotive and aerospace, commercial solutions, stationery and office, closure and masking, automotive aftermarket, and businesses aligned with general industrial applications, such as abrasives and industrial adhesives and tapes mostly experienced a decline.[24] 3M stated that the prime reasons for these fluctuations were changes on the demand side and the disruption of global supply chains. Challenges and opportunities triggered by COVID-19 aside, it is largely the promotion of efficiency and diversity through innovation that aided 3M in pushing past the uncertainty posed by the pandemic.[25]
QUESTIONS
- Identify 3M’s core competencies, core products and end products. How are these three sources of competitive advantage linked with each other?
- How does 3M mobilize resources at the SBU level?
- How does 3M address the problem of bounded innovation?
- What is the strategic architecture at 3M? How did top management build it?
- How did 3M internationalize? How did it exploit its core competencies developed at home? How did 3M try to diffuse its core competencies to its overseas subsidiaries?
- What did McNerney and Buckley implement to improve 3M’s R&D activities? Do you agree with these approaches? Why or why not?
- Does diversification of business segments serve as a core competency of 3M? How might this conversely threaten 3M’s business model?
- 8. Can you provide an update on 3M’s core competencies, using materials available on the Web?
Notes
[1] 3M company information 2007.
[2] 3M, ‘A Century of Innovation’.
[3] Ibid.
[4] Ibid.
[5] Ibid., 55
[6] Ibid., 143–4.
[7] Ibid., 158.
[8] Robert L. Rose, ‘Success abroad: how 3M, by tiptoeing into foreign markets, became a big exporter’, Wall Street Journal (29 March 1991), 1.
[9] 3M, ‘A Century of Innovation’, 158.
[10] Thomas A. Stewart, ‘3M fights back’, Fortune 133 (5 February 1996), 94–9.
[11] Michael Arndt and Diane Brady, ‘3M’s rising star: Jim McNerney is racking up quite a record at 3M. Now, can he rev up its innovation machine?’, Business Week (12 April 2004), 62.
[12] Marc Gunther, Marilyn Adamo and Betsy Feldman, ‘3M’s innovation revival’, Fortune 162 (5) (27 September 2010), 73–6.
[13] D. Gayatri and T. Phani Madhav, ‘Innovating 3M’s innovations’, ICFAI Business School Case Development Centre (2004), Case No. 304–357–1.
[14] Michael Arndt, ‘3M: A lab for growth? CEO Jim McNerney – the first outsider boss – is overhauling a company long known for innovation’, Business Week (21 January 2002), 50.
[15] Marc Gunther, Marilyn Adamo and Betsy Feldman, ‘3M’s innovation revival’, Fortune 162 (5) (27 September 2010), 73–6.
[16] Ibid.
[17] Bob Tita, ‘3M to ramp up growth’, Wall Street Journal. (Eastern edition) (10 September 2010), pg. B.1.
[18] Thomas Black, ‘3M’s Thulin to keep Buckley focus on research, emerging markets’, Bloomberg (8 February 2012).
[19] Ibid.
[20] James R. Hagerty, Joann S. Lublin, ‘Corporate news: 3M taps 33-year veteran and operating chief as CEO’, Wall Street Journal. (Eastern edition) (9 February 2012), pg. B.3
[21] Dee DePass, ‘Thulin to Retire in June as 3M board chairman,’ Star Tribune, (6 February, 2019).
[22] Ibid.
[23] Ibid, 1.
[24] Ibid, 1.
[25] Jamie Tjornehoj, ‘Five Observtions: First Friday with 3M CEO Mike Roman,’ University of St. Thomas Newsroom, (8 March 2021).