MGT229\t-\tLesson\t6 \tCase\tStudy 3M History and Products With 40,000 global patents and patent applications, 3M, maker of Postit notes, reflective materials (Scotch lite), and 55,000 products in numerous industries (displays and graphics, electronics and communications, health care, safety and security, transportation, manufacturing, office products, and home and leisure), has long been one of the most innovative companies in the world. 3M codified its focus on innovation into a specific goal, \"30/5,\" which meant that 30% of its sales each year must come from products no more than 5 years old. The logic was simple but powerful. Each year, 5yearold products become 6 years old and would not be counted toward the 30% of sales. Thus, the 30/5 goal encouraged everyone at 3M to be on the lookout for and open to new ideas and products. Furthermore, 3M allowed its engineers and scientists to spend 5% of their time, roughly a halfday per week, doing whatever they wanted as long as it was related to innovation and new product development. The 30/5 focus worked, for a while. A decade ago, the Boston Consulting Group, one of the premier consulting companies in the world, ranked 3M as the most innovative company in the world. In subsequent years, it dropped to second, third, and then seventh. Today, 3M doesn't even crack the top 50. Dev Patnaik, of Jump Associates, an innovation consulting firm, says, \"People have kind of forgotten about those guys [3M]. When was the last time you saw something innovative or experimental coming out of there?\" So, what happened? Changes and Restructuring When your predecessor became CEO 10 years ago, he found a struggling, inefficient, oversized company in need of change. He cut costs by laying off 8,000 people. Marketing, research, and development funds, which had been allocated to divisions independent of performance (all divisions got the same increase each year), were now distributed based on past performance and growth potential. Perform poorly, and your funds would shrink the next year. Likewise, with U.S. sales stagnating and Asia sales rising, management decreased headcount, hiring, and capital expenditures in the United States, while significantly increasing all three in fastgrowing Asian markets. Six Sigma processes, popularized at Motorola and GE, were introduced to analyze how things got done, to remove unnecessary steps, and to change procedures which caused defects. Thousands of 3M managers and employees became trained as Six Sigma \"black belts\" and returned to their divisions and departments to root out inefficiencies, reduce production times, and decrease waste and product errors. It worked incredibly well, in part. Costs and capital spending dropped, while profits surged 35% to record levels. But, product innovation, as compared to the 30/5 goal sank dramatically, as only 21% of profits were generated by products that were no more than 5yearsold. What to Do? So, what should 3M do? From inception, 3M has been an innovator, bringing a stream of new products and services to market, creating value for customers, sustaining advantage over competitors, and creating sizable returns for investors. Thanks to your predecessor, 3M has lower costs, is highly efficient, and much more profitable. But it no longer ranks among the most innovative firms in the world. In fact, the use of Six Sigma procedures appears to be inversely related to product innovation. If that's the case, should 3M continue to focus on using Six Sigma procedures to reduce costs and increase efficiencies, or should it strive again to encourage its scientists and managers to focus on innovation? Which will make 3M more competitive in the long run? When people think of innovation, they tend to think of gamechanging advances that render current products obsolete: for example, comparing the iPhone to textbased \"smartphones.\" Innovation, however, also occurs with lots of incremental changes over time. What are the advantages and disadvantages for 3M of each approach, and when and where would each be more likely to work? Two Key Choices One way to grow a company is through internal or organic growth. If your strategy is innovation, like at 3M, that means innovating with new products and services developed from your existing businesses. Another way to grow is through external growth, or buying other companies, in other words acquiring or buying other companies which have developed innovative products and services. This is a difficult choice keeping in mind the following research. When innovation is the core competency of your company, relying too much on acquisitions for innovation is an admission that you're failing to generate enough innovative products and services from your existing businesses. While it's expensive to develop new products and services internally, it's more expensive to acquire them by buying other companies. On the other hand, acquiring other companies is a relatively quick way to fill holes in product and service offerings, or to bring in a critical, already developed technology that can be leveraged throughout existing businesses. However, there's also a risk that acquired companies won't succeed. A metaanalysis based on 103 studies and a sample of 25,205 companies indicates that, on average, acquiring other companies actually hurts the value of the acquiring firm. In other words, there is only a 45% chance that growing a company through external acquisitions will work! Some companies innovate from within by successfully implementing creative ideas in their products or services. Sometimes, though, innovation is acquired by purchasing other companies that have made innovative advances. For example, although Google is generally rated as one of the most innovative companies in the world, most people have forgotten that Google bought YouTube to combine its search expertise with YouTube's online video capabilities. The textbook states that organizations can create competitive advantage for themselves if they have a distinctive competence that allows them to make, do, or perform something better than their competitors. A competitive advantage becomes sustainable if other companies cannot duplicate the benefits obtained from that distinctive competence. Technological innovation, however, can enable competitors to duplicate the benefits obtained from a company's distinctive advantage. In other words, innovation can allow companies that fall behind to catch up. In addition, sometimes innovation can be so disruptive that market leaders become market followers as their competitive advantage turns into a competitive disadvantage. Consequently, companies that want to sustain a competitive advantage must understand and protect themselves from the strategic threats of innovation. Over the long run, the best way for a company to do this is to create a stream of its own innovative ideas and products year after year. When a company does that, it's called an innovation stream, that is, a pattern of innovation over time that creates sustainable competitive advantage. Innovation streams prevent competitors from catching up because new innovations keep market leaders, one, two, or three steps ahead of their competition. Source: Adapted from MGMT 6 Instructor Resources, Chapter 7, Cengage Learning, 2013