Question

3M Minneapolis, Minnesota With 40,000 global patents and patent applications, 3M, maker of Post-it 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 percent of its sales each year must come from products no more than five years old. The logic was simple but powerful. Each year, five-year-old products become six years old and would not be counted toward the 30 percent 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 five percent of their time, roughly half a day per week, doing whatever they wanted as long as it was related to innovation and new product development. 3M’s growth lasted only 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? When the company’s predecessor became CEO ten years ago, he found a struggling, inefficient, oversized company in need of change. He cut costs by laying off 8,000 people. Marketing and research and development funds, which had been allocated to divisions independent of performance (all divisions got the same hike each year), were now distributed based on past performance and growth potential. Poor performance would affect the funds negatively. 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 the fast-growing 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 time, and decrease waste and product errors. And it worked incredibly well, in part. Costs and capital spending dropped, while profits surged 35 percent to record levels. But, product innovation, as compared to the 30/5 goal sank dramatically, as only 21 percent of profits were generated by products that were no more than five years old. 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, having sustainable advantage over competitors, and delivering sizable returns for investors. Thanks to the predecessor, 3M had lower costs, was 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 of these will make 3M more competitive in the long run? When people think of innovation, they tend to think of game-changing advances that render current products obsolete, for example, comparing the iPhone to text-based “smartphones.” Innovation, however, also occurs with lots of incremental changes over time. What are the advantages and disadvantages for 3M of each approach (experiential and compression), and when and where would each be more likely to work? Finally, 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. Over time, how much should companies like 3M rely on acquisitions for innovation? Should 3M acquire half, one-third, ten percent, or five percent of its new products through acquisitions? What makes the most sense and why?

Questions to Complete

1. What are the advantages and disadvantages for 3M of each approach (experiential and compression), and when and where would each be more likely to work?
2. How much should companies like 3M rely on acquisitions for innovation?
3. should 3M acquire half, one-third, ten percent, or five percent of its new products through acquisitions?
4. What makes the most sense and why?
5. If you were in charge at 3M, what would you do?

Answer 1

3M

The case implies that both approaches are crucial for 3M.

It depends on the time and the situation. 3M is already a known brand which is able to survive because of the products developed in the past. Undoubtedly those products were the outcomes of innovation which used to be the core competency of 3M. The company could also establish a competitive advantage because of its core competency. To enhance the process outcomes 3M has opted for quality control techniques like six sigma. This helps them get an efficient process and high production output. But in the process, their core competency of innovation is lost.

Advantages and Disadvantages of the Six Sigma Approach (Compressed)

1. The company is optimizing its production process thereby reducing defects and costs and increasing efficiency
2. At the same time, this inhibits the company to innovate as that will require out of the box concepts and skills.
3. Six Sigma has an inverse relationship with product innovation.

Advantages and Disadvantages of the Innovation approach (Experiential)

1. This will help the company get back its core competency (innovation) and reposition itself in the market once again as an innovator.
2. This might call for huge investments and deviations from the already established and proven processes.
3. The optimization of the processes and efficiency will be affected.

When the company is already able to maintain its market share and market leader position, it can continue to adhere to Six Sigma approaches to maintain the efficiency. In this case, when 3M is actually losing its market share and core competency, it is advisable to pay attention towards innovation so as to get back to its previous market leader position.

When the external environment is highly dynamic and uncertain, and the changes are abrupt, the experiential approach works as it helps to administer innovations during that time. This situation arises when there are technology orientated innovations and there is no certainty of them being accepted by the customers. This approach works well when the focus is on introducing a highly innovative product with cutting edge technology and enhanced performance.

The compressed approach is suitable when the innovation is already widely accepted and the focus is now on cost efficiency and improvisation of the existing innovative product.

So 3M should ideally implement a mix of both the approaches. It should focus on innovation but not a very high-end one. Instead, the firm can apply compressed approach by innovating smaller things which call for minor product differentiation but a higher degree of innovation as far as utility is concerned. This will help the company to get back its lost core competency of innovation and it will be able to main it’s cost and process efficiency also.

Ideally, companies like 3M should not rely on acquisitions for new products, because the company is already an innovator and the entire organizational culture has shaped that way. It already has its core competency which has been a competitive advantage for many years. If at all the requirement arises, the company should opt for related diversification so as to add up to its innovative product portfolio and reduce the expected risks.

3M plans to acquire some new firms whose businesses and products are in alignment with that of the existing product range.

If I were in charge of 3M I too would focus on acquiring businesses that add up to 3M’s existing product assortment or complements the same.