3M: CULTIVATING CORE COMPETENCY

INTRODUCTION

3M Company, formerly Minnesota Mining and Manufacturing Company until 2002[1], is a multinational multi-industry company based in Maplewood, Minnesota, USA. It deals in thousand of different science-based products.[2]

3M was founded in 1902 with the intention of mining a mineral deposit for grinding-wheel abrasives. The company soon started focusing on sandpaper manufacturing, and in the early 1920s they invented the waterproof sandpaper. In 1925 a lab assistant named Richard G. Drew invented masking tape.[3]

When W. James McNerney took the post of CEO in 2001, he immediately set forth an agenda of examining the company’s organizational structure. Because of his being an outsider coming into office, he could see things in perspectives others who had been in the company for a long while could not. He initiated the Six Sigma cost reduction programme, decided upon 3M Accelerate that favored better in development for quicker market penetration and reformed the research and development to become more concentrated. [4]

3M is currently organized into six business units; Consumer and Office, Display and Graphics, Electro and Communications, Health Care, Industrial and Transportation, and Safety, Security and Protection Services. [5] This diversity is somewhat unique in today’s global market.

Peng describes this type of company that as either a far-flung conglomerate, because it pursues both product-unrelated diversification and extensive geographic diversification, or as a multi-national replicator, because products at 3M are related through the R&D departments.[6] The right description is probably found somewhere in between.

The company’s products are sold through numerous distribution channels, including directly to users and through numerous wholesalers, retailers, jobbers, distributors and dealers in a variety of trades in many countries worldwide.[7]

3M is also quite special by having only a small percentage of its workforce not being local nationals. Of the more than 75,000 employees worldwide, fewer than 300 do not reside in their home countries.[8]

 

DEFINING CORE COMPETENCY

The fundamental core competency lay in applying coatings to backings. 3M has since then extended this knowledge across multiple markets.

Its strength lay in solving and delivering solutions for original equipment manufacturers and mass channel customers. Its technology and process capability were at the core of its unique business model. This strength included technologies such as adhesives, materials science, light management, micro replication and nonwoven materials and its ability not only to develop unique products but also to manufacture them efficiently and consistently around the world. By sharing technologies, manufacturing, operations, brands and other resources across its business it increased speed and efficiency. 3M´s breadth of technologies, along with its ability to combine them to create at steady stream of products is what made it unique.

3M´s strength through the years has been their culture of innovation. Their many research facilities and massive research and development budget combined with their ability to manufacture these innovative products efficiently and consistently on a global basis have through the years led to thousands commercial hits such as Post-it Notes, Scotch-Brite and Scotch tape. 3M have really used their size efficiently with an incredible intersegment technology sharing through the different segments and markets. The diversity across industries and regions has also enabled the company to protect itself against demand fluctuations in industry segments and regions.

You could say that 3M through the years has used an entrepreneurial innovation strategy. An innovation strategy is a specialized form of differentiation strategy. It allows a potentially more sustainable basis for competitive advantage. Firms first to introduce new goods are likely to earn monopoly profits. Innovation should be regarded broadly. Not only are technological breakthroughs innovations. A new way of doing business, reproducing existing products but combine them to create some novel product, is also innovations.[9]

 

DEFINING COMPETITIVE ADVANTAGE

During World War II, 3M grew by finding and understanding markets no one else had and made a niche to fill these markets, instead of focusing like many others on making military supply. Today, 3M’s slogan reads: Innovative and practical solutions from a diversified technology company.[10]. This gives an understanding of how the company sees itself.

Today, competitive advantage mainly exists for 3M and its products, and their strength lies as the slogan says, in the solutions. But is it possible to question the advantage, and to discuss if there are areas the company should focus on, and areas where they should overview production?

First of all is it clear that 3M’s strategy to find customer needs and to make both new products for different areas as well as develop existing products into new markets has given an advantage against their competitors. This wide range of product development, markets and risk spreading gives the company a good innovation process that can be explained through Peng.

Peng describes the innovation through three segments. First one is the introduction of the product or the service, where the “monopoly profits” is the most desired. According to the text is it a tradition for 3M only to stick to markets where they can set its own price, or if that not is possible, to back of (FOTNOT p.2) . This combined with 3M’s interest of finding new customer needs and new markets through customer interfaces has given 3M a good understanding of what really is needed and which markets to interact.

Secondly, Peng describes the importance of global spreading of one’s product and sale. Here again are 3M’s customer interfaces of value and also its ability to find solutions for new markets with existing products, something that can be connected to the relation of a high degree of innovation and a superior profitability.

Third, the entrepreneurial side of the company is of advantage for innovation, and the fact that 3M has six major businesses, all in leading global position[11] also tells about the company’s innovation and entrepreneurship. However, one may question how accurate 3M’s market knowledge and the knowledge of what the costumers really needs is, with over 50 000 different products.[12]

This gives us the reason to discuss their situation using a theory devised by Porter[13], who says that there are two ways of achieving competitive advantage. One based on cost and the other on product differentiation.

 If the company chooses the way of cost leader they must seek to attain the lowest cost in an industry and yet achieve a degree of parity whit its competitors in terms of product differentiation, or its advantage – as a reflect in the price/cost margin – may be reduced. Conversely, a company that achieves competitive advantage trough product differentiation, whereby it offers something which is valued by the costumer but is also unique, must achieve something like parity with its competitors in terms of cost or its advantage may be eroded.  

 

IDENTIFYING EXTERNAL ENVIRONMENTAL FACTORS

There are two kinds of environmental factors that influence a company. First, there are the internal factors. Secondly, there are the external factors. The externals are factors that lie outside of the company’s control but could have implications for the company’s profitability and management. Essentially, the company must consider actions by other players in the fields of technology, economy, culture and politics.

Starting of with the technological perspective, what makes 3M unique is that although being a manufacturing company, its main focus is innovation in a wide variety of sectors. Another industry which shares these characteristics is the pharmaceutical industry (which 3M also was competing in, but has since sold the division[14]).

The main difference is that many revenue channels for pharmaceutical companies are government regulated. Governments often subsidize the purchase of drugs for its citizens.[15] For 3M, this is not possible as their products are not perceived that have same public utility.

Staying with the analogy, Piachaud writes that in addition to efficiency, quality and flexibility, pharmaceutical companies are also required to simultaneously cut costs, improve standards of quality, shorten product development times, and introduce innovative products that customers’ value. [16] This also holds true for 3M. Piachaud continues by wondering if companies have the capacity to convince customers to pay premium prices to cover production costs, as well as to provide satisfactory returns for the future development of additional undifferentiated drugs.

A key feature of the pharmaceutical industry is the importance of patents to protect the advances made by R&D departments as this is the main reason for profitability[17]. Maintaining patents can be a costly venture as described by Piachaud, and a judgment has to be made on the where in the product life cycle the particular product is. 3M accelerate also means that the company will not pursue these kinds of products.

The loss of patents means that generic private labels can replicate and outperform 3M. As Peng mentions, patents are not only held to gain economic value but also competitive advantage. Instead of having to pay others to use their patents, i.e. pay for licensing, others may pay 3M instead. The growth in private labels was a key threat when Data-monitor presented a SWOT analysis of 3M in 2006. The other two main threats consisted of higher oil prices and exchange rate fluctuations.[18] These are economic factors.

Many of the products in 3M’s portfolio are petroleum based, and a high oil price increases the cost of manufacturing as well as the cost of transport. The oil price rose from approximately US$25 per barrel around the 2001 terrorist attacks on the United States[19], to a maximum of US$147 in July of 2008. It has since recedes to the 40-50 dollar range.[20] As Steve Austin of oil-price.net explains, the volatility of the price of oil will continue as the current relatively low price only reflects the downturn in world economics.

The high oil price did however not impact the European economy as much as the United States the US dollar experienced a simultaneous slump in value towards the European single currency (euro). On September 11th, 2001, the dollar was traded at €1,11 against the euro, a figure that had dropped to €0,63 or nearly a 50 percent value loss.[21]

Fluctuating exchange rates as well as oil prices create an uncertainty in production costs and price settings when dealing in an international environment. To counter these uncertainties, a company can choose to place manufacturing close to the end customer to reduce the impact of these factors.

As always, dealing in an international environment requires considering cultural impacts of dealing in different markets. As mentioned above, 3M is quite unique in this way by having only a small percentage of its workforce not being local nationals.

To define culture, we refer to a quote by Dutch professor Geert Hofstede, retold by Peng. Culture is “the collective programming of the mind which distinguishes the members of one group or category of people from another.”[22] Hofstede draws up five dimensions of culture; power distance, individualism, masculinity, uncertainty avoidance, and long-term orientation. The challenge facing 3M is adapting its business strategy to all these dimensions no matter the market.

3M is an American company, but works globally. This should give an excellent perspective from company headquarters on different cultural aspects, as long as this doesn’t mean an information overload[23]. But the relatively small percentage of employees who do not work in their country of origin could is a double-edged sword. Having limited interference from foreign cultures can increase the sense of “us”. But it can also mean that cross-cultural knowledge is not given. These 300 employees play a pivotal role in creating a network of understanding between the different 3M branches, and need to be properly educated and have the ability to educate.

 

EVALUATING ACQUISITION STRATEGY

More than two-thirds of merger deals fail to create value for shareholders in the short and medium term as human resources tend to react negatively to being acquired (Ravenscraft & Scherer, 1989)[24], however the dysfunctional effects of such reaction vary between different M&A (Larsson, Brousseau, Driver, & Sweet, 2002)[25] and sometimes it may not be appropriate to consolidate the acquired company completely into the acquirer organization as they may lose important and unique skills.[26]

In other words, in order to create value for shareholders and overcome the barrier of post-merger integration, management should have different training and approach depending to what have been the M&A’s strategic archetypes.

3M’s core strategy focused on developing and growing the existing market by using its technological prowess to invent natural substitute technology and had decided that the majority of acquisitions would closely reflect and support this plan and adjacencies.

However, by determination to quickly add value to 3M’s portfolio 3M went through 16 vertical and horizontal acquisitions using 4 strategic archetypes, first to acquire new skills, second the market roll-up, third consolidating the mature industry and finally the most stretching type transformation acquisition, however in order to overcome post-merger integration problems they decided to purchase small companies, not only because Marcus A.[27] had felt that small buys were more likely to be successful but also as companies would receive more market approval when merge in their own industry or a nearby related industry.[28]

The market approval is an important factor in the success of M&A as revenue synergies is difficult to estimate and the success of merge is not only about that a company can do better after merge in terms of volume and price, but also on how customers and competitors will react. However, as M&A normally change the nature of both acquirers and acquired organization, the formal post-transaction learning is the first step toward better performance and depending to the size of the organization and its archetypes the requirement for post-merger integration process is different.[29]

However, as general rule there is always a need for good communication link between both companies and it should not been only between management team but also it should involve all stakeholders which allow gradually and actively cultural integration, particularly in the case of 3M which has an unusual corporate culture. As it takes time for people to adopt the new culture and understand why they should do things in a new way, it is very important that managers think about various ways to develop an environment which can help both organizations to share their knowledge. If not, the company can lose some of its greatest assets, in particular if they have acquired the new company for its skills.

But as an overall rule it is much easier to control the integration process when the size of M&A is small.[30] As we know that the management of human factor is the most important factor of a successful post-merger integration strategy (Kimberly & Quinn, 1984)[31] consequently culture plays an important role when it comes to organizational and knowledge integration, system and process integration, operations integration, product and market integration, financial integration, people integration and integration of growth plans (Lubatkin & Lane 1996)[32].

As culture refers to a set of values and norms held by institutions which through a process of socialization, members within the institution learn how to act accordingly (Hofstede G. 1997)[33] it would be easier for a small company to adjust itself for the strategic and organizational fit into the 3M’s powerful unusual corporate culture. As it is known that mismatched cultures tends to be the main causes of M&As failure (Evans & Mendenhall, 2004)[34].

WAYS FORWARD FOR 3M

As for any company, the best way forward is to exploit strengths (S) and opportunities (O), counter threats (T) and manage weaknesses (W). For 3M, a SWOT analysis was conducted by Data-monitor in 2006 and presented by Verima in the case upon which this paper builds. It concluded that 3M’s main strengths lay in a strong R&D capability, a diversified business portfolio, and a robust industrial business. Its opportunities consisted of a growing demand for liquid crystal displays (LCD’s), the acquisition of brands, and international expansion.

It’s main weaknesses were considered to be its weak personal care segment, and low margins in the United States. Emerging threats were a growth in private labeling, higher oil prices and exchange rate fluctuations, as previously mentioned.

We have also concluded that the main competitive advantage of 3M is its diverse technological portfolio, but also identified the risks of over-diversification, and we see that 3M’s core competency is the culture of innovation, not only relating to technological advances but also in finding customer needs and adapting to them.

Evaluating these company resources by using the VRIO framework can give us an idea about what steps to take in order to capitalize on them.

Value: Peng argues[35] that diversification can only create value under certain conditions. Even over-diversified firms can do so because this diversification not only spreads risk but gives a competitive advantage. 3M has always been a first mover and its ability to act on different markets simultaneously can throw off any competitors. As stated in the SWOT analysis, international expansion is an opportunity to counter threats in other markets.

Rarity/Imitability: Peng mentions[36] the case of Chinese computer manufacturer Lenovo acquiring IBM’s personal computer business, without really having the competency to manage it better. The solution was bringing in top American executives. For 3M, the core competency of innovation and diversity in its R&D department gives the company a unique feature. 3M’s successful acquisition strategy has allowed it to gain innovative competencies in a wide range of areas. Harvesting these capabilities on a massive scale gives 3M an advantage that is hard to follow for competitors.

Organization: This is the crunch question. In its current organizational structure, it is unclear how transfer of knowledge between different business units is conducted. The key question is whether the board of directors conducts strategic control or merely financial control over the company. Peng argues[37] that the way to organize a conglomerate, like we have established 3M to be, is by reducing it to financial control. This is to prevent an information overload.

But the question that needs to be asked is how 3M’s innovative culture can benefit from the technological adjacencies of their products as well as that of its salespeople. 3M is currently organized into six business units, with research facilities located at St. Paul, Minnesota, USA.[38] It is unclear whether these are an own branch or if the different units have their own stake in these facilities.

Our recommendation is that R&D becomes a separate unit from which all other business units can benefit. Salespeople and other employees working in each business unit will continue to find out customer needs and contribute to a common source of knowledge. In order for this knowledge to be transferable, cultural aspects must be taken into consideration. Therefore, we also recommend that R&D activities become more geographically diverse in order to adapt to local conditions.

The risk that might be seen in taking this kind of measure is losing the innovative culture. We consider this to be a false assertion. We believe that a changed organizational structure will benefit the corporate identity as all units contribute to the well of knowledge.

The need for more geographical diversification is highlighted by the fact that 63 percent of sales now come from outside of the United States, a figure that is expected to increase, with 30 percent of sales coming from emerging markets, a number increasing with 20 percent annually.[39] A continued effort to capitalize on these markets is essential. Efforts of this kind include locating manufacturing capabilities there as well as adaptive R&D measures.

 

Literature

Verma, M., (2006), “3M: Cultivating Core Competency”, ICFAI Business School, p. 1-12

Peng, M.W., (2009),”Global Strategic Management”, International Student Edition,

South-Western CENGAGE Learning.

Piachaud, B. (2002), “Challenges facing the pharmaceutical industry”, Contemporary Review, March 2002

Porter, M.E. (2006), Journal of Strategic Marketing 4, p 163-179

Ravenscraft, D.J. and Scherer, F.M. (1989), “The profitability of mergers”, International Journal of Industrial Organization, Vol. 7

Larsson, R., Brousseau, K.R., Driver, M.J. and Sweet, P.L. (2002), “The secrets of merger and acquisition success: a co-competence and motivational approach to synergy realization”, M&A Summit, Calgary, June.

Early, S. (2004) “Mergers and acquisitions; New Mckinsey research challenges conventional M&A wisdom” Strategy & Leadership Journal. Vol 32 No.2 pp. 4-11

Kimberly, J.R. and Quinn, R.E. (1984), The Challenge of Managing Corporate Transitions, Dow Jones-Irwin, Homewood, IL

Lubatkin, M.H. and Lane, P.J. (1996), “Past . . . the merger mavens still have it wrong!”, Academy of Management Executive, Vol. 10 No.1

Hofstede, G.H. (1991), Culture and Organization: Software of the Mind, McGraw-Hill, London.

Evans, P. and Mendenhall, M. (2004), in Stahl, K.G. and Mendenhall, M. (Eds), Mergers and Acquisitions: Managing Culture and Human Resources, Stanford University Press, Stanford, CA.

3M 2007 Annual Report, http://multimedia.3m.com/mws/mediawebserver?6666660Zjcf6lVs6EVs66Sp9OCOrrrrQ-, retrieved 2009-02-05

 

Internet Sources

3M.com, Who We Are, http://solutions.3m.com/wps/portal/3M/en_US/our/company/information/about-us/, retrieved 2009-02-04

3M, History, http://solutions.3m.com/wps/portal/3M/en_US/our/company/information/history/, retrieved 2009-02-06

MarketResearch.com, http://www.marketresearch.com/product/print/default.asp?g=1&productid=1787616, retrieved 2009-02-03

WTRG Economics, www.wtrg.com, retrieved 2009-02-05

Crude Oil Price Forecast, www.oil-price.net, retrieved 2009-02-05

FXHistory – Historical Currency Exchange Rates, http://www.oanda.com/convert/fxhistory, retrieved 2009-02-05


[1] Verma (2006)

[2] 3M.com (retrieved 2009-02-04)

[3] Ibid

[4] Verma, M. (2006)

[5] 3M.com (retrieved 2009-02-04)

[6] Ibid

[7] MarketResearch.com (retrieved 2009-02-04)

[8] 3M.com (retrieved 2009-02-04)

[9] Peng, M.W. (2009), p. 197

[10]  3M.com (retrieved 2009-02-04)

[11] 3M.com (retrieved 2009-02-04)

[12] Ibid

[13] Porter, M. (1996), p 163-179

[14] Verma, M. (2006)

[15] Peng, M.W. (2009), p 92

[16] Piachaud, B. (2002)

[17] Peng, M.W. (2009)

[18] Datamonitor (2006)

[19] www.wtrg.com

[20] www.oil-price.net

[21] http://www.oanda.com/convert/fxhistory

[22] Peng (2009), p 102

[23] Peng (2009), p 324

[24] Ravenscraft, D.J. and Scherer, F.M. (1989)

[25] Larsson, R., Brousseau, K.R., Driver, M.J. and Sweet, P.L. (2002)

[26] Early, S. (2004)

[27] Verma, M. (2006)

[28] Early, S. (2004) “Mergers and acquisitions; New Mckinsey research challenges conventional M&A wisdom” Strategy & Leadership Journal. Vol 32 No.2

[29] Ibid

[30] Ibid

[31] Kimberly, J.R. and Quinn, R.E. (1984)

[32] Lubatkin, M.H. and Lane, P.J. (1996)

[33] Hofstede, G.H. (1991)

[34] Evans, P. and Mendenhall, M. (2004)

[35] Peng, M.W. (2009), p 323

[36] Peng, M.W. (2009), p 323

[37] Peng, M.W. (2009), p 324

[38] 3M Annual Report 2007, p 9

[39] 3M Annual Report 2007, p 2