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World Could Learn From 3M’s Failings

It began as a failure, a company formed in 1902 to mine an abrasive called corundum to sell to grinding-wheel manufacturers.

But it couldn’t find enough customers, and now the only vestige of mining is a word in the name Minnesota Mining & Manufacturing, or 3M, the company that has brought Scotch tape, videotape, invisible dental braces and tens of thousands of other products to the world.

Along the way, 3M won the admiration of business people and scholars everywhere as a company devoted to encouraging employees to come up with new ideas and new products. For decades, management books have called 3M a model.

Yet the glow of such compliments may have distracted the company. Because, in this decade, 3M allowed old, less-profitable products to drag down its earnings growth and stock price. That’s why earlier this month 3M was forced to announce that it was getting out of videotape and audiotape, spinning off most of its Information, Imaging & Electronic division, writing off $600 million and cutting 5,000 jobs.

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Suddenly 3M was more mortal than model. Yet investors cheered and bought 3M stock, which has leaped about 14% in a week and a half--or two-thirds as much as the stock has risen in the last five years.

“Its stock performance was a disaster,” says analyst B. Alex Henderson of Prudential Securities, who changed his rating on 3M from a discouraging “high-risk, hold” to “low-risk, buy” when the company made the changes.

Which is nice, but begs the question of why it all happened. What does it say to all companies--and their investors--that such an admired firm has been forced to restructure to lift its stock price? Is there rhyme, reason or stability in the new economy?

It says that world markets--and investment managers--are more demanding than ever these days and that the only stability is to stay in motion. 3M offers an object lesson both reassuring and challenging.

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L.D. (for Livio Diego) DeSimone, chairman of 3M, explains that he is dropping the manufacture of videotape, a product 3M practically invented in 1947, because it has become a commodity, a low-profit item sold only on price with no premium for quality.

And he is putting most products of Information & Imaging--such as computer diskettes and tapes and graphic printing processes--in a separate company because the division hasn’t been earning the 25% on invested capital that 3M’s consumer products and medical sciences divisions achieve.

In all 20% of the portfolio of 3M’s business will be discontinued or separated, says DeSimone, 59, a chemical engineer from Montreal’s McGill University who has worked 38 years for 3M.

And just what pushed him to make this decision now?

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The owners did, the institutional investors who own 64% of 3M stock and who visit company headquarters in St. Paul for two-day sessions every other year. “At every meeting in the last four years, we would ask what they were going to do about the lagging division,” says Anthony Maramarco, head of an investment arm of Massachusetts Mutual Life Insurance, which holds 1.5 million 3M shares.

Videotape had become a commodity as so many products do, Maramarco explains, because “factories in Asia open up and produce the stuff cheaper.” 3M was smart to finally get out, he says.

Agreed, but what can it and all U.S. companies do to stay ahead of “factories in Asia” in other products? “Innovate,” says Maramarco, prescribing something for which 3M has been renowned throughout its history.

The company encourages technical people to spend 15% of their time on projects of their own choosing. It gives employees grants of up to $50,000 to pay for prototypes or testing of their ideas. It allows employees to form companies among themselves--in effect, to develop and market a new product.

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That’s the way Post-It notes were developed. That’s the way Scotch tape was born in the 1930s, a brainchild of the same employee who developed masking tape for auto paint shops.

Indeed, the company put so much store in innovation that it has a requirement that 30% of its annual sales come from products introduced in the last four years.

Yet ironically it stayed too long with diskettes and tapes. Why? Probably because 3M still inspires a great deal of enthusiasm and loyalty among its 80,000 employees. It did not leap to the contemporary fad of downsizing.

But it didn’t help employees by neglecting to drop old products, argues James Collins, co-author of “Built to Last,” a book on visionary companies that features 3M. It’s important that every division achieve the profit to grow along with the others, says Collins, who teaches management at the University of Virginia. “Otherwise money and time are wasted on worn-out products and the company loses concentration on what it does best, which in 3M’s case is innovation,” he says.

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That’s a stern view, but one suited to today’s exacting business world, in which companies compete for every sales dollar and investment dollar. Even Scotch tape must battle for shelf space in super stores such as OfficeMax and Staples, which demand that suppliers such as 3M shoulder inventory expenses.

On the other hand, the superstores expand sales of office products, just as the global economy that cheapens the price of videotape also expands the markets for Scotch tape and for such relative luxuries as attractive orthodontic braces. 3M gets 50% of its sales overseas.

Restructuring will reduce annual sales to $13.5 billion. “But we’ll get back to $16 billion in three years, with earnings growth of 10% a year,” DeSimone says.

Indeed, the ultimate challenge to 3M will be to restructure without changing the essentials that built it under William McKnight, a remarkable businessman who led the company from 1914 until 1966 and whose maxims are still followed.

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“Listen to anybody with an idea,” McKnight said. “Encourage experimental doodling,” and, grandest of all, “If you put fences around people you get sheep; give people the room they need.”

Words for all ages--and markets.


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