What Would You Do? Case Assignment

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, healthcare, 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 5 percent of their time, roughly a half-day per week, doing whatever they wanted as long as it was related to innovation and new product development.

And it 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?

When your 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 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 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 times, 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, sustainable advantage over competitors, and 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 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, 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, 10 percent, or 5 percent of its new products through acquisitions? What makes the most sense and why?

If you were in charge at 3M, what would you do?