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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 slides to 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.
First large-scale consumer product Tripled in size $100 million sales Lost cassette tape market Filling market niches Abandoning markets where it could not set its own prices
Restructuring 6 Business Segments Continued commitment to innovation Strategic Goals 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
Lacking direction
Fewer hits from vaunted research facilities - no major breakthrough in 2 decades Culture becoming more short-term Difficulty acting on 15% Rule
2003
2004 2005
R&D $1.19 billion - 5.9% Strong $3.8 billion performance revenue (10.5% - industrial increase) division Net Profit $3.2 products billion - 7% driven by increase acquisition R&D $1.2 billion - 5.9% sales Performance
Anemic revenue growth (1-5%) while markets expanding Declining personal care segment - price pressures in Europe Decreased demand for some older products Problems
Strengths 2006 50,000 products Buckley with diverse endUpon user segments based Arrival on both hightechnology and lowtechnology 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 commercializa tion reduced from 4 yrs. to 2-1/2 yrs. for faster sales 4
Often entered markets only after intellectual property positions were built
Strategic Goals 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
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 Accurate capacity planning underinvestment in core capacity - lost sales growth opportunities where *Core Product Categories: it was readily Scotch brand industrial/office tapes available 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
US 39%, AsiaPac 27%, EurMidEAfr 25%, AmCan 9% Health care (21% revenue) and Industrial accounting (19% revenue) Inward focus hindered growth and good longrange planning
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 oilderived raw materials
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
STRATEGIC ACTIONS: STRATEGY FORMULATION & IMPLEMENTATION 5. 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 2006 Sales = $22.923 2005 Sales = $21.167 2004 Sales = $20,011 2003 Sales = $18,232 2002 Sales = $16,332 2001 Sales = $16,054 Percentage of Change in Net Sales Over Previous Year 8.3% 5.7% 9.7% 11.6% 1.7% --
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
Invention has been specified as one of 3M's core competencies, yet the company has not increased investments in Research and Development to stimulate sales growth. This is probably due to acquisition investments now being made to secure radical innovations, enter new markets, and realize gains more quickly. Investing in acquisitions (external innovation) rather than R&D (internal development) has strategic implications for 3M over the long run, which is discussed more fully in the section below. Acquisitions. Detailed numbers on acquisition debt and costs are not available in the case text, but acquisitions in 2006 matched the previous four years of acquisition activity at 3M, and interest expense grew to $122 million from $82 million in 2005. Thus, it can be assumed that increased investment in the company's acquisition strategy has been incurred in an effort to quickly impact sales growth through this strategic initiative. It was previously noted that initial sales of acquired businesses and technologies represent less than 2% of total sales. Without investment numbers, it is difficult to assess early return results. As the case does not highlight any acquisition problems, we can assume that early expectations are being met. Investments in Core Competency and Competitive Advantage. Without statistical evidence, Buckley's strategic goals 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, and
6. Evaluate 3M's Acquisition strategy. The single biggest component of Buckley's strategy that requires attention is his Acquisition strategy, primarily because it is a diversion away from the goal of tapping core competencies to achieve growth. 3M's acquisition experience is limited, and the company's competency at successfully acquiring technology is not yet fully developed. The use of acquisitions to satisfy strategic goals is well-chosen. Acquisitions offer 3M a low-risk, cost-effective way to develop new products, build technology, rapidly access markets (particularly untapped local markets) and meet expectations for sustainable growth. However, the success of acquisitions can be tampered by integration difficulties, excessive debt, and the inability to achieve synergy. 3M's use of strategic licensing and investments in small technology companies that readily "tuck in" to their existing businesses can protect the company from common problems that interfere with successful acquisitions. This cautious approach also fits with the company's conservative values. Targeting acquisitions to fill openings in geography and channel capacity is consistent with the company's other strategic efforts and should provide synergy when acquisitions are complementary to the company's core businesses and capabilities. Despite this well-defined and well-selected strategy, research indicates that acquisitions do not consistently produce above-average returns, with clearly-successful acquisition rates estimated at only 20%. 3M must include the potential costs of some acquisition failure into its projections and continue with cautious selection of complementary acquisition targets that are not over-priced. In addition to identifying the correct acquisitions, success will hinge on the company's ability to execute an effective integration process. Not an existing capability, 3M must invest in building this core competency for a long-term acquisition strategy to be viable. Research indicates that firms with sustained and consistent emphasis on R&D and innovation have achieved long-term competitive advantages through successful acquisitions. Although 3M certainly possess this emphasis, an earlier look at Research and Development investments highlights that they have remained flat over the past 5 years.
International markets to maximize margins and capture emerging growth opportunities. Pursuit of technological growth trends and new technological developments. Attentiveness to impact that prices for oil-derived inputs have on margins. Allocation of resources toward industrial segments and cautiously away from personal care markets where retailers can drive down margins and declines have been experienced. High margin niches to continue to drive up margins. Customer involvement in innovative process.
Arriving at an accurate measure of sales growth potential. Improvements to demand and capacity planning capabilities to maximize benefits of scale and fully realize market opportunities. As the problem of oil prices and supply is unlikely to rectify itself in the near-term, consideration should be given to a long-term strategy of avoiding (or replacing) such input items with more affordable or more readily available input materials. Evaluate Research and Development budget as a percentage of sales to determine if it is being adequately financed for a growth strategy, particularly in light of increased acquisition efforts.
Reconsider dual branding in upper middle markets and the extension of private labeling. This does not fit with 3M's strategic goals, and the practice of attempting to extend the life of dying products or segments at lower margins should be discontinued.
Reinstitute or more aggressively pursue strategic actions to abandon markets where desired prices (and therefore, margins) cannot be maintained. Reestablish use of "Percentage of Sales from New Products" as a standard for measuring innovativeness and tracking results.
Acquisition-Related Advice Note that 3M's acquisition strategy is a change in focus for the company and comes with some risk. It is extremely important to build competency and skill sets for a long-term acquisition strategy to be a viable source of competitive success to 3M. In the meanwhile, these protective measures should be taken:
Use realistic estimates to buffer financial expectations, taking into account possible failure (or loss) rates along with potential upside gains. 15 3M: Cultivating Core Competency
In short order, build skills to effectively conduct due diligence and to select healthy target firms to acquire. Continue to emphasize the importance of correct acquisitions based on compatibility, complimentary, and integration considerations. Direct focus onto strategic controls rather than being too focused on financial measures. Pay close attention to integrating new technologies into 3M's unique lattice of technologies and manufacturing adjacencies. Avoid hostile acquisitions. While integrating acquired businesses, be cautious about restructuring used during the 1990's. Although some structural changes may have helped to create networks that now enhance sharing, want to avoid the risk of upsetting delicate shared networks that provide 3M with its sustainable competitive advantage.
Total Current Assets Property, Plant & Equipment, Net Property, Plant & Equipment, Gross Accumulated Depreciation Interest and Advance to Subsidiaries Other Non-Current Assets Deferred Charges
8,946.00 5,907.00
7,115.00 5,593.00
8,720.00 5,711.00
7,720.00 5,609.00
6,059.00 5,621.00
17,017.00 16,127.00 16,290.00 15,841.00 15,058.00 11,110.00 10,534.00 10,579.00 10,232.00 266.00 373.00 253.00 84.00 437.00 138.00 29.00 381.00 2,723.00 33.00 477.00 763.00 9,437.00 48.00 446.00 677.00
4,790.00 759.00
4,016.00 3,158.00
2,932.00 212.00
2,693.00 305.00
2,167.00 311.00
Total Assets
Liabilities Notes Payable Accounts Payable 1,390.00 1,958.00 580.00 1,711.00 757.00 1,818.00 883.00 1,413.00 884.00 1,224.00
Total Current Liabilities Mortgages Deferred Charges/Inc. Convertible Debt Long-Term Debt Non-Curr. Capital Leases Other Long-Term Liab.
Total Liabilities
11,057.00
9,835.00 10,077.00
9,485.00
9,042.00
Shareholder Equity Minority Interest Preferred Stock Common Stock Capital Surplus Retained Earnings Treasury Stock Other Liabilities 278.00 n/a 9.00 2,484.00 311.00 n/a 9.00 2,225.00 253.00 n/a 9.00 287.00 230.00 n/a 9.00 287.00 294.00 n/a 5.00 291.00
17,933.00 15,715.00 15,649.00 14,010.00 12,748.00 8,456.00 -2,011.00 6,965.00 -589.00 5,503.00 4,641.00 4,767.00
7,885.00
5,993.00
Gross Profit R & D Expenditure Selling, General & Admin Expenses Depreciation & Amort. Non-Operating Income Interest Expense
11,210.00 10,759.00 10,053.00 1,352.00 4,162.00 n/a 51.00 122.00 1,274.00 4,631.00 n/a 56.00 82.00 1,143.00 4,332.00 n/a 46.00 69.00
Income Before Taxes Prov. For Inc. Taxes Minority Interest Realized Investment (Gain/Loss) Other Income
Net Income Before Extra Items Extra Items & Disc. Ops.
3,851.00 n/a
3,146.00 -35.00
2,990.00 n/a
2,403.00 n/a
1,974.00 n/a
Net Income
3,851.00
3,111.00
2,990.00
2,403.00
1,974.00