World’s Most Innovative Companies: Lessons from 3M

Business Week’s 2007 “Most Innovative Companies” list has been published. The rankings are done annually by Boston Consulting Group, based on a global survey of senior managers. There are several noteworthy surprises. (See below).

* Walt Disney Co. soared from 43rd in 2006 to 8th, partly because of its launch in Russia and its pioneering efforts to stream ads in Internet videos. This is one of the most dramatic rises in the innovation rankings in history. Built on creativity, Disney appears to have gotten back its creativity DNA.
* Despite a bad year, Wal-Mart rose to 11th from 20th, because of its supply-chain innovations, widely-admired globally.
* 3M, once the gold standard of innovation, ranked 3rd in 2006,  ranked only 7th in 2007, falling four places.

What happened to 3M? On the face of it – nothing. In 2006, 3M’s revenues, at $22.9 b., rose 8%, but its profits, totaling $3.9 b., rose fully 20%. Its head-count grew by 9%, to 75,333, and above all, 3M’s famous “margins” (note its widely-cited slogan, will [this innovation] make 3M margins? – a 3M religion) were stellar: 17% net margin (net profit as % of revenues) and 39% return on shareholders’ equity. 

In 2005 3M CEO James McNerney left to become CEO of Boeing (a $61.5 b. company). McNerney came to 3M in 2000, from GE, having failed to succeed Jack Welch. He brought to 3M a relentless drive for greater efficiency. This included Six Sigma. The result was to fatten 3M’s profits – and endanger its future.

In our book Innovation Management, Seshadri and I note that sometimes, value creation (driven by innovation) and cost reduction can be bitter enemies. 3M seems to be a living example. Wall Street loved McNerney’s bottom-line impact. But  MIT Professor thinks innovation projects at 3M “took a backseat” once Six Sigma settled in. “The more you hardwire a company on TQM,” von Hippel notes, “the more it is going to hurt breakthrough innovation.”

Buckley, a Ph.D. chemical engineer, is “opening the money spigot”, according to Business Week (June 11 issue), to get the creative juices flowing again, hiking spending on R&D, acquisitions and capital spending. 3M’s R&D budget will grow 20% this year, to $1.5 b. Moreover Buckley is funneling cash into 3M’s 45 “core” technologies. Buckley is refocusing 3M. McNerney invested in 3M’s innovative skin cream Aldara. Buckley sold the pharma business, including the cream, for $2 b. 

The bottom line? “We feel we can dream again,” says a 3M senior manager. Look for 3M to rise in next year’s global innovation tables.
 

Source: Business Week June 11 issue