In 2002, we celebrated our 100th anniversary--a century of innovation. In the years since our successful introduction of the world's first waterproof sandpaper, we've evolved into a diversified technology company with leading positions in a broad range of important markets. Today, we produce thousands of innovative products and have companies in more than 60 countries. In extending our market reach, 3M's formula for success has remained the same: first, identify customer needs, and second, use 3M technology to pioneer innovative solutions to meet these needs. We've achieved consistent, profitable growth by creating innovative products, establishing strong relationships with customers and boosting operational efficiency. At the same time, we've created a culture that promotes employee pride and well-being, fosters integrity, and supports social and environmental responsibility.
The largest manufacturer in Minnesota, the 110th largest U.S. company overall, and a member of the Dow Jones "30," 3M Company (known officially as Minnesota Mining and Manufacturing Company from its founding in 1902 until 2002) is Wall Street's epitome of high-tech/low-tech business and solid blue-chip performance. Its daunting inventory of some 50,000 products runs the gamut from Post-it Notes and Scotch tape to transdermal patches of nitroglycerin and a prescription cream for treating genital warts. Its equally daunting global presence extends to subsidiary companies in more than 60 countries and markets in nearly 200, as well as net sales from international operations of $8.91 billion, or 55 percent of the company's total 2002 revenue. 3M owes its formidable strength to its unusual corporate culture, which comfortably fosters innovation and interdepartmental cooperation, backed by a massive research and development budget, which typically exceeds $1 billion annually. Because of this, 3M ranks as a leader in--and in many cases a founder of--a number of important technologies, including pressure-sensitive tapes, sandpaper, protective chemicals, microflex circuits, reflective materials, and premium graphics. At the beginning of 2003, the company realigned into seven major business units: Consumer and Office; Display and Graphics; Electro and Communications; Health Care; Industrial; Safety, Security, and Protection Services; and Transportation.
Rough Start As Sandpaper Maker: 1900s-10s
Minnesota Mining and Manufacturing Company (soon nicknamed 3M) was formed in 1902 in Two Harbors, Minnesota, a thriving village on the shores of Lake Superior, by five entrepreneurs--a lawyer, a doctor, two railroad executives, and a butcher--in order to mine the rare mineral corundum and market it as an abrasive. The ill-planned venture--sparked by a flurry of other forms of mining operations in northeastern Minnesota--nearly bankrupted the company, for its mineral holdings turned out to be not corundum but low-grade anorthosite, a virtually useless igneous rock. This unsettling discovery (by whom or when is unclear) was never disclosed in the company records and, for whatever reason, did not deter the owners from establishing a sandpaper factory in Duluth, another more or less ill-fated scheme that placed the company further in jeopardy (3M faced a host of abrasives competitors in the East and was soon forced to import a garnet inferior to that owned by domestic manufacturers, which resulted in a lower quality product). Company headquarters were moved to Duluth in 1905.
In May 1905 a principal investor named Edgar B. Ober, determined to save the company, persuaded friend and fellow St. Paul businessman Lucius Pond Ordway to join with him in rescuing 3M from almost certain demise by paying off $13,000 in debt and pumping in an additional $12,000 in capital. Together Ordway and Ober purchased 60 percent of the company; over the next several years, Ordway, a self-made millionaire, spent an additional $250,000 on a company that had yet to produce a profit, and Ober, who proceeded to oversee 3M, went without a salary. Ordway's continued backing, despite a strong desire to cut his losses early on and his decision to move the firm to St. Paul, ensured 3M's eventual health during the boom years following World War I. A new sandpaper factory was built in St. Paul in 1910, and 3M's headquarters were shifted to that city in 1916, the same year that the firm paid its first dividend.
Legacy of Innovation: 1920s-40s
Of greatest significance to both the company's foundation and future were the hirings in 1907 and 1909 of William L. McKnight and A.G. Bush, respectively. Former farmhands trained as bookkeepers, the two worked as a team for well over 50 years and developed the system that helped make 3M a success. McKnight ran 3M between 1914 and 1966, serving as general manager from 1914 to 1929, president from 1929 to 1949, and chairman of the board from 1949 to 1966. He created the general guidelines of diversification, avoiding price cuts, increasing sales by 10 percent a year, high employee morale, and quality control that fueled the company's growth and created its unique corporate culture. In some ways, the sales system overshadowed the guidelines. McKnight and Bush designed an aggressive, customer-oriented brand of salesmanship. Sales representatives, instead of dealing with a company's purchasing agent, were encouraged to proceed directly to the shop where they could talk with the people who used the products. In so doing, 3M salesmen could discover both how products could be improved and what new products might be needed. This resulted in some of 3M's early innovations. For instance, when Henry Ford's newly motorized assembly lines created too much friction for existing sandpapers, which were designed to sand wood and static objects, a 3M salesman went back to St. Paul with the news. 3M devised a tougher sandpaper, and thus captured much of this niche market within the growing auto industry. Another salesman noticed that dust from sandpaper use made the shop environment extremely unhealthy. Around the same time, a Philadelphia ink manufacturer named Francis G. Okie wrote McKnight with a request for mineral grit samples. According to Virginia Huck, "McKnight's handling of Okie's request changed the course of 3M's history. He could have explained to Okie that 3M didn't sell bulk minerals. ... Instead, prompted by his curiosity, McKnight instructed 3M's Eastern Division sales manager, R.H. Skillman, to get in touch with Okie to find out why he wanted the grit samples." The reason soon became clear: Okie had invented a waterproof, and consequently dust-free, sandpaper. In 1921, after purchasing the patent and then solving various defects, 3M came out with Wetordry sandpaper and significantly expanded its business, eventually licensing two other manufacturers, Carborundum and Behr-Manning, to keep up with demand. It also hired the inventor as its first full-time researcher. This marked the creation of one of the nation's first corporate research and development divisions.
Sending salesmen into the shops paid off a few years later in an even more significant way, by giving 3M its first non-abrasives product line. In 1923 a salesman in an auto body painting shop noticed that the process used to paint cars in two tones worked poorly. He promised the painter that 3M could develop an effective way to prevent the paints from running together. It took two years, but the research and development division invented a successful masking tape--the first in a line of pressure-sensitive tapes that now extends to more than 900 varieties. The invention of Scotch tape, as it came to be called and then trademarked, established 3M as a force for innovation in American industry. Taking a page from its sandpaper business, 3M immediately began to develop different applications of its new technology. Its most famous adaptation came in 1930, when some industrious 3M workers found a way to graft cellophane, a Du Pont invention, to adhesive, thus creating a transparent tape.
Transparent Scotch tape, now a generic commodity, provided a major windfall during the Great Depression, helping 3M to grow at a time when most businesses struggled to break even. Another salesman invented a portable tape dispenser, and 3M had its first large-scale consumer product. Consumers used Scotch tape in a variety of ways: to repair torn paper products, strengthen book bindings, mend clothes until they could be sewn, and even remove lint. By 1932 the new product was doing so well that 3M's main client base shifted from furniture and automobile factories to office supply stores. During the 1930s, 3M funneled some 45 percent of its profits into new product research; consequently, the company tripled in size during the worst decade American business had ever endured.
3M continued to grow during World War II by concentrating on understanding its markets and finding a niche to fill, rather than shifting to making military goods, as many U.S. corporations did. Nevertheless, the war left 3M with a need to restructure and modernize, and not enough cash on hand to do so. To meet its building needs, in 1947 3M issued its first bond offerings. Its first public stock offering, coupled with its tremendous growth rate, attracted additional attention to 3M. Among the new products debuting in the immediate postwar period was Scotch magnetic audiotape, which was introduced in 1947. In 1949, when President McKnight became chairman of the board (with A.G. Bush also moving from daily operations to the boardroom), it marked the end of a tremendous era for 3M. Under McKnight, 3M had grown almost 20-fold. By its 50th year, it had surpassed the $100 million mark and was employing some 10,000 people.
Growing Reputation: 1950s
Such growth could not be ignored. Now that 3M was publicly traded (having debuted on the New York Stock Exchange in 1946), investment bankers took to recommending it as a buy, business magazines sent reporters to write about it, and other companies tried to figure out how 3M continued to excel. McKnight's immediate successor as president, Richard Carlton, encapsulated the company's special path to prosperity with the phrase: "We'll make any damn thing we can make money on." Yet the 3M method involved a great deal more than simply making and selling. Its métier had been, and would continue to be, finding uninhabited markets and then filling them relentlessly with high-quality products. Therefore, research and development received money that most companies spent elsewhere--most companies still did not have such departments by the early 1950s--and the pursuit for ideas was intense.
Carlton kept the company focused on product research (today, 3M honors its scientists through the Carlton Society), which led to further innovations in the 1950s: the first dry-printing photocopy process, ThermoFax (1951), Scotchgard fabric and upholstery protector (1956), and Scotch-Brite scouring pads (1958). 3M breezed through the 1950s in impressive fashion, with 1959 marking the company's 20th consecutive year of increased sales. Yet, for all its growth and diversity, 3M continued to produce strong profits from its established products. In a way, this was almost to be expected, given 3M's penchant for being in "uninhabited" markets. As noted by John Pitblado, 3M's president of U.S. Operations, "Almost everything depends on a coated abrasive during some phase of its manufacture. Your eyeglasses, wrist watches, the printed circuit that's in a TV set, knitting needles ... all require sandpaper."
Skyrocketing 1960s to Earthly Ups and Downs in the 1970s and 1980s
In the 1960s 3M embarked on another growth binge, doubling in size between 1963 and 1967 and becoming a billion-dollar company in the process. Existing product lines did well, and 3M's ventures into magnetic media provided excellent returns. One venture, the backdrops used for some of the spectacular scenes from the 1968 movie 2001: A Space Odyssey, earned an Academy Award. During the 1970s a number of obstacles interfered with 3M's seeming odyssey of growth. Among these were the resignations of several of the company's top executives when it was revealed that they had operated an illegal slush fund from company money between 1963 and 1975, which included a contribution of some $30,000 to Richard Nixon's 1972 campaign. Sales growth also slowed during the decade, particularly in the oil crunch of 1974, ending 3M's phenomenal string of averaging a 15 percent growth rate. 3M responded to its cost crunch in characteristic fashion: it turned to its employees, who devised ways for the company to cut costs at each plant.
The company also had difficulties with consumer products. Particularly galling was the loss of the cassette tape market, which two Japanese companies, TDK and Maxell, dominated by engaging in price-cutting. 3M stuck to its tradition of abandoning markets where it could not set its own prices, and backed off. Eventually, the company stopped making much of its own magnetic media, instead buying from an overseas supplier and putting the 3M label on it (3M instead focused attention on data storage media for the computer market). The loss of the cassette market was not overwhelming: revenues doubled between 1975 and 1980, and in 1976 3M was named one of the Dow Jones Industrial 30.
Unfortunately, price-cutting was not the only problem confronting 3M as it entered the 1980s. Major competitors seemed to face the company on all fronts: the niches of decades past seemed extinct. When Lewis Lehr became company president in 1981, he noted, "There isn't a business where we don't have to come up with a new technology." He promptly restructured 3M from six divisions into four sectors: Industrial and Consumer, Electronic and Information Technologies, Graphic Technologies (later renamed Imaging and combined with Information and Electronic), and Life Sciences, containing a total of some 40 divisions. He also established a goal of having 25 percent of each division's earnings come from products that did not exist five years before. Lehr's concern was not to keep the company going, for 3M was still well-respected, with a less than 25 percent debt-to-equity ratio and reasonable levels of growth. Shareholders, too, had little to complain about, for 1986 marked the 18th consecutive year of increased dividends. Rather, Lehr wanted to ensure that 3M would continue to develop new ideas. The major product to come out of the 1980s was the ubiquitous Post-it, a low-tech marvel created by Art Fry.
Challenges of the 1990s
L.D. DeSimone, who joined 3M in 1958 as a manufacturing engineer and moved into management while working in international operations, was named CEO in 1991. He took the helm of a ship being buffeted by economic recession and stiff price competition: sales rose an annual average of just 2 percent from 1991 to 1993. Kevin Kelly wrote in a 1994 Business Week article, "It turned out that the creative juices that had transformed 3M into a paragon of innovation and the inventor of everything from ubiquitous yellow Post-it notes to surgical staples weren't producing new products fast enough."
DeSimone pushed research staff to work more closely with marketers and transform existing technology into commercial products. Connecting with customers' needs took on more urgency. Product turnaround time was slashed; product development rivaled basic research. Customer-driven products gleaned from the new system included the Never Rust Wool Soap Pad made from recycled plastic bottles and a laptop computer screen film that enhanced brightness without heavy battery drain.
On the international front, foreign sales produced more than 50 percent of total 3M sales for the first time in company history in 1992. The Asia-Pacific region yielded nearly 27 percent of the $7 billion foreign sales volume. A major restructuring of European operations was completed in 1993: manufacturing plants were closed and consolidated and the workforce was trimmed in response to declining operating income.
The company achieved record sales, operating income, net income, and earnings per share in 1994. More than $1 billion of the $15 billion in total sales came from first-year products. DeSimone raised the bar: at least 30 percent of future sales were to come from products introduced within the past four years.
On a more somber note, in 1994 3M took a $35 million pretax charge against probable liabilities and associated expenses related to litigation over 3M's silicone breast implant business operated through former subsidiary McGhan Medical Corporation. 3M was named in more than 5,800 lawsuits claiming injuries caused by leakage or rupture of the implants.
In 1996, 3M dismantled the Information, Imaging and Electronics sector, which accounted for a fifth of its business. It was the largest restructuring effort in company history. The divisions making floppy disks and other data-storage media, X-ray film, and specialty imaging equipment were spun off as an independent, public company (Imation Corporation), and the audio- and videotape operations shut down entirely. 3M retained the businesses making electrical tapes, connectors, insulating materials, overhead projects, and transparency films. The company cut about 5,000 jobs.
Since DeSimone took command, 3M had pumped $1.2 billion into the Information, Imaging and Electronics division, yet operating profit margins remained only a third of the Industrial and Consumer Products and Life Sciences divisions. Persistent pricing pressures from competitors such as Kodak plus rising raw material costs prompted DeSimone to pull the plug on the audio and videotape business. A smaller, leaner operation--the new $2 billion Imation--was deemed to have better prospects in the equally fierce data-storage marketplace.
Following restructuring, 3M concentrated product development efforts on about two dozen core technologies. In 1997 the company achieved one of DeSimone's goals: 30 percent of total sales were generated from products introduced within the past four years. But 3M's numbers began slipping again in 1998. Michelle Conlin wrote in an October 1998 Forbes article, "Are these unavoidable downward blips on a rising curve? Or are they signs of deeper trouble? 3M has been glacially slow to respond to the economic meltdown in Asia, where it gets 23% of its business. In the U.S. a flood of cheaper products made by competitors like Korean polyester film outfits SKC and Kolon have cut into 3M's sales." Conlin nevertheless conceded that 3M had promising products, such as bendable fiber-optic cable and a fluid to replace ozone-depleting chlorofluorocarbons, already in the pipeline.
Declines in both revenues and profits in 1998 prompted further restructuring, including a workforce reduction of about 5,000 that was completed by the end of 1999, the closure of about 10 percent of its global factories, and the jettisoning of a number of underperforming product lines. 3M also reorganized into six business segments in 1999: Industrial Markets; Transportation, Graphics, and Safety; Health Care; Consumer and Office Products; Electro and Communications; and Specialty Material. Highlighting the company's continued commitment to innovation, nearly 35 percent of revenues in 2000 came from products that had been introduced within the previous four years. Many of these products fell within higher-technology areas--a point often ignored by Wall Street analysts critical of the company's more recent product development efforts. For example, an important new 3M product line developed in the 1990s consisted of films to enhance the brightness of electronic displays, including those found on laptop computers, cellular phones, LCD televisions, and personal digital assistants. In 2000 the company began marketing these films under the Vikuiti brand.
Early 21st Century: Outsider at the Helm for the First Time
DeSimone's stewardship of 3M ended at the end of 2000 with his retirement. At the beginning of 2001, W. James McNerney, Jr., took over as chairman and CEO, becoming the first outsider at the helm in the company's nearly 100 years of existence. McNerney was a 19-year veteran of General Electric Company (GE)--like 3M a diversified, manufacturing-oriented corporation--having most recently served as head of GE Aircraft Engines. McNerney had lost out in a three-way battle to succeed legendary GE leader John F. (Jack) Welch, Jr. One of McNerney's first initiatives was to launch Six Sigma, a quality control and improvement initiative that had been pioneered by Motorola, Inc. and AlliedSignal Inc. and then adopted by GE in the late 1990s. The aim of the statistics-driven program was to cut costs by reducing errors or defects.
McNerney's cost-cutting focus was shown in other early initiatives, and 3M during his first year saved more than half a billion dollars through various efforts, including the layoff of 6,500 of the company's 75,000 workers and a major streamlining of purchasing functions. Another initiative, dubbed 3M Acceleration, involved expending more product development funds on the most promising ideas, dropping weaker ideas earlier in the process, and in this way getting the best products to market much faster. In implementing this and other initiatives, most of which focused on making the company more efficient, McNerney had to be careful not to drive out 3M's culture of innovation on which both the company's fame and its long history of success rested. Nevertheless, one apparent victim of McNerney's efficiency drive was 3M's revered "15 Percent Rule," which had allowed its employees to spend up to 15 percent of company time on independent projects, a process called "bootlegging" or "scrounging." Although the rule still existed in theory, it was increasingly difficult to act upon it within the evolving culture at 3M, which was seemingly becoming more short-term oriented.
Early in 2002 the company finally adopted its nickname as its formal moniker, officially becoming 3M Company. Acquisitions were coming more to the fore under McNerney, and the most significant deal of the early 2000s--in fact, the most expensive acquisition in 3M history--was the December 2002 purchase of Corning Precision Lens, Inc. for $850 million. The acquired unit, which was renamed 3M Precision Optics, Inc., was the world's leading supplier of optical lenses used in projection televisions. Overall, financial results for 2002 were encouraging, particularly given the difficult economic environment. While revenues increased only marginally, net income increased by about 20 percent after excluding nonrecurring items. That year, 3M paid a dividend for the 87th straight year and increased its dividend for the 45th consecutive year.
At the beginning of 2003, 3M reorganized yet again, this time attempting to gain improved access to larger, higher-growth markets. The company's largest division--Transportation, Graphics, and Safety--was divided into three units: Display and Graphics; Safety, Security and Protection Services; and Transportation. In addition, the Specialty Material segment was split up, with the unit's consumer-related products shifted into the Consumer and Office unit and its industrial products shifted into the Industrial unit. Overall, this increased the number of business units from six to seven; it also made the Health Care unit the company's largest in terms of both revenues (22 percent of the total) and earnings (27 percent).
In October 2003, 3M implemented a major realignment of its research and development operations. Fourteen separate technology centers were closed, with the scientists at these centers shifted either to a newly formed Corporate Research Laboratory or to the company's 40 divisions, where they would be able to work closely on products within those divisions. The main goal of this R&D shakeup was to move more of 3M's R&D resources to the divisions where the products were actually developed and thereby bring the scientists closer to customers. This was the latest initiative in McNerney's attempt to, in the words of Jennifer Bjorhus, writing in the Saint Paul Pioneer Press, "[turn] a slightly ossified manufacturing giant into a nimbler growth machine." It was clear that 3M was changing--and in some very dramatic ways--but only the passage of time would be able to show whether the company's longstanding penchant for innovation would survive in the new environment.
Principal Subsidiaries: Dyneon LLC; 3M Financial Management Company; 3M Innovative Properties Company; 3M Investment Management Corporation; 3M Unitek Corporation; 3M Touch Systems, Inc.; 3M Precision Optics, Inc.; 3M Argentina S.A.C.I.F.I.A.; 3M Australia Pty. Limited; 3M Oesterreich GmbH (Austria); 3M Belgium S.A./N.V.; Seaside Insurance Limited (Bermuda); 3M do Brasil Limitada (Brazil); 3M Canada Company; 3M China Limited; 3M A/S (Denmark); Suomen 3M Oy (Finland); 3M France, S.A.; Dyneon GmbH (Germany); 3M Inter-Unitek GmbH (Germany); Quante AG (Germany; 99%); Quante Holding GmbH (Germany); 3M Deutschland GmbH (Germany); 3M ESPE (Germany); 3M German Holdings GmbH (Germany); 3M Hong Kong Limited; 3M Italia Finanziaria S.p.A. (Italy); Sumitomo 3M Limited (Japan; 75%); 3M Health Care Limited (Japan; 75%); 3M Korea Limited; 3M Mexico, S.A. de C.V.; Corporate Services B.V. (Netherlands); 3M Nederland B.V. (Netherlands); 3M (New Zealand) Limited; 3M Norge A/S (Norway); 3M Puerto Rico, Inc.; 3M Singapore Private Limited; 3M South Africa (Proprietary) Limited; 3M Espana, S.A. (Spain); 3M Svenska AB (Sweden); 3M (East) A.G. (Switzerland); 3M (Schweiz) A.G. (Switzerland); 3M Taiwan Limited; 3M Thailand Limited; 3M Gulf Ltd. (United Arab Emirates); 3M United Kingdom Holdings P.L.C.; 3M Venezuela, S.A.
Principal Operating Units: Consumer and Office Business; Display and Graphics Business; Electro and Communications Business; Health Care Business; Industrial Business; Safety, Security and Protection Services Business; Transportation Business.
Principal Competitors: Johnson & Johnson; Henkel KGaA; Avery Dennison Corporation; S.C. Johnson & Son, Inc.