Innovation at 3M Corp.-(Case Analysis) Submitted to- Dr. Suresh M. R.

Submitted to:
Dr. Suresh M.R. Marketing Research & PM Associate Professor - Marketing, SDMIMD, Mysore

Submitted by: Group B5

Subodh Nath (12051) Himanshu Singh Gurjar (12080) Omkar Rajyaguru Syam Thomas Lalit Rana Mohita Kaushik Tahir Mustaq (12096) (12114) (12146) (12150) (12174) 1|Page

Contents
Introduction & Case Facts............................................................................................................... 3 SWOT ANALYSIS ................................................................................................................................ 4 Financial Data .................................................................................................................................... 4 Profit and Loss Account.......................................................................................................................... 5 Ratio Analysis of 3M .......................................................................................................................... 5 Analysis: ................................................................................................................................................. 6 ISSUES IN THE CASE................................................................................................................................. 7 IDEA GENERATION ............................................................................................................................ 8 LEAD USER GROUP IDEA GENERATION ................................................................................................... 8 Benefits of the Lead User Method .......................................................................................................... 9 Lead User Research Methodology in Detail ........................................................................................... 9 Strategic Portfolio Management ........................................................................................................... 11 Solution on the basis of Portfolio Management .................................................................................... 11 Findings and Recommendations ........................................................................................................... 11 Conclusion ............................................................................................................................................ 11

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Introduction & Case Facts

The Minnesota Mining and Manufacturing Company (3M) has a long history of innovation. Founded on the North Shore of Lake Superior at Two Harbours, Minnesota in 1902.With over 76,000 employees 3M produces over 55,000 products, including: adhesives, abrasives, laminates, passive fire protection, dental products, electrical materials, electronic circuits and optical films. Known for such products as the, Post-it, which revolutionized the way individuals communicate Masking tape, for the automobile industry which sung a new era for 3M Waterproof sandpaper, the world's first waterproof sandpaper, which reduced airborne dusts during automobile manufacturing, was developed in the early 1920s.

A second major milestone occurred in 1925 when Richard G. Drew, a young lab assistant, invented masking tape an innovative step toward diversification and the first of many Scotch PressureSensitive Tapes. Beyond these innovative products, 3M initially branched out into health care in 1961. This unit of 3M has grown substantially since that time, and in more recent years it has seen annual sales reach more than two billion dollars. McKnights philosophy of delegating responsibility, creating a corporate culture that encourages employee initiative and innovation. This philosophy had a profound impact on the way 3M does business-15% of all employees time is allowed to be on their pet projects (the 3M Way). The Health Care Unit is a core component of 3Ms business model. Although, the unit was recording significant and increasing sales, it had failed to introduce a successful product in almost a decade. This did not jibe well with one of the companys key objectives, which aimed to see at least thirty per cent of sales originate from products that did not exist four years earlier. Rita Shor, a senior product specialist, and a hand-picked group of subject matter experts were tackling this challenge using a new and innovative market research method called Lead User Research. Lead user is a term which Eric von Hippel of MIT developed in 1986 and was first described in the July 1986 issue of Management Science.. His definition for lead user: Lead users face needs that will be general in a marketplace but face them months or years before the bulk of that marketplace encounters them, and Lead users are positioned to benefit significantly by obtaining a solution to those needs.

In simpler words, lead users are users of a product or service that currently experience needs still unknown to the public and who also benefit greatly if they obtain a solution to these needs. Because lead users innovate, they are considered to be one example or type of the creative consumers phenomenon. This method addressed some of the shortcomings of the more traditional market research methods implemented by the company. Rita and her team comprised of individuals with a wide breadth of expertise and backgrounds, including antimicrobial pharmacology, chemistry, dermatology, biology, veterinary science, and even Broadway make-up artistry. After many months implementing the new market research technique, landed on four recommendations. Three of the recommendations would see the introduction of new 3|Page

product lines, whereas the fourth recommendation hinged on a complete rewrite of the Health Care Units business strategy. Rita and her team were spending considerable time discussing the best path forward and trying to determine the ultimate recommendations they would make to the senior management team of the unit.

SWOT ANALYSIS
(Strengths) 1. Strong research and development capability 2. Diversified business portfolio Strong financial performances 3. Strong return on average assets and investments (Weaknesses) 1. Poor inventory management 2. Increasing cost of healthcare segment 3. Focus on the Incremental innovation

(Opportunities) 1. Growing demand for LCDs 2. Rising healthcare spending in the US Global expansion 3. Health care was more hygiene conscious

(Threats) 1. Growth in private labels 2. Exchange rate fluctuations 3. Slowing sales of the Organisation

Financial Data

Sales
Amount in Million $ 15500 15000 14500 14000 13500 13000 12500 1995 1996 1997 Series1 Amount in Million $ 2800 2700 2600 2500 2400 2300 2200 2100

Operating Profit

Series1

1995

1996

1997

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Profit and Loss Account

Ratio Analysis of 3M
PROFITABILITY RATIO=PROFIT/SALES Particular PROFIT SALES RATIO 1997 ($ million) 976 13460 7.25% in 1996 ($ million) 1526 14236 10.72% in 1995 ($ million) 2121 15070 14.07% in

GP MARGIN=GP/SALES Particular GP SALES RATIO 1997 ($ million) 6599 13460 49.03% in 1996 ($ million) 7020 14236 49.31% in 1995 ($ million) 7360 15070 48.84% in

Operating profit margin=Operating profit/sales Particular Operating Profit SALES RATIO 1997 ($ million) 2300 13460 17.09% in 1996 ($ million) 2491 14236 17.50% in 1995 ($ million) 2675 15070 17.75% in

Data used: P&L statement from the year 1995 to 1997.

Key financial indicators used: Sales, COGS (Cost Of Goods Sold), Net profit, ROE%.

Methodologies used: Ratio analysis Analysis of P&L statement

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Analysis:
From the data available for 3M Corporations we can analyse some of the financial aspects. First of all, we would make the analysis of major three performance indicating items of P&L statement which is presented in exhibit number 1, 2 and 3. Exhibit 1: It shows amount of sales generated by the company over the three years duration starting from 1995 to 1997. If we compare the sales data of year 1995 with the year 1996, we can see that it is an increase of 5.77%. Further, we can see that the increase is increasing when we make the calculation of 1996 and 1997. The increase in sales over this two years is 5.86%. We can clearly see that the amount invested in R&D which is also increasing in nature is giving fruitful results and the products is well accepted in the market. Exhibit 2: This shows the amount of operating profit. Profit generated through operating activities is the important thing to take into consideration because, it shows the direct relationship between sales and expense related to operating activities of the production. This indicates the amount of operating expenses done. When the sales is increasing, the operating expenses also increases and the same leads to increase in operating profit. Now if we see the data we have in Exhibit 2, we can see that it is increasing which is good sign but the amount of increase in operating profit form the year 1995 to 1996 is 8.30% while in the next year the increase is 7.39%. which means it is increasing at the decreasing rate. May be the new products are consuming more resources and the sales of the products are not able to match the operating profit that effectively. This give an alarm to the company to reduce its operating profit. Exhibit 3: The amount of investment generated form the public requires good amount of return. This will showcase the value of the company in the market. Now again the ROE% is increasing which is very apparent but it has increased for 19% to 24% to directly 36%. Shareholders are getting more returns out of the profit generated. Taking long term existence of the company, we hope that this is the reviewed decision. Form the main points of P&L accounts, we will move to some of the indicative ratio calculations which gives the comparison view and as in this statement sales is the most important and primary thing we will get a chance to compare all the other amount with respect to sales. Profitability ratio: This ratio measures the amount of profit generated out of the amount of sales. Of this ratio is say, 55 that means that out of the sales of 100 Rs. We are getting a profit of 5 Rs. Now in this case, we can see that the ratio is increasing in increasing order which goes form 7.25% to 10.25% to 14.07% which is the good indicator for the company. Now this trend can be explained by the amount of sales increase. Even though the operating profit Is decreasing the net profit is also the element contributing in high profitability ratio. This also may be the reason to increase in market value of company. Gross Profit Margin: When you deduct the cost of goods sold form the sales, we get gross profit. This is also a very important aspect of the evaluation on the part of the company. (may not be that important for the 6|Page

external stakeholders). Now this ratio almost remains same. Even though the percentage, it is indicating that it also is getting decreasing trend. This can be explained by the high level of cost of goods sold. But as this is logical if the products are innovative and newly developed. This trend can be for the short term. Once the company gets the expertise in the production of these products, it is likely to reduce COGS and increase the ratio. Operating Profit Margin: The operating profit margin measures the percentage of each sales rupee remaining after all cost and expense other than interest, tax and preferred stock dividends are deducted. It represents the pure profit earned on each sales rupee. It measures only the profit earned on operations and ignored other listed things. A high operating profit margin is always preferred. This is the same trend that we can see here. The ratios are high and increasing also but very slowly. We can point out the little difference in the increase when we compare the data given above. It is 17.09% in the year 1995 which increased and became 17.50% in the year 1996 and in the next year it increased to 17.75%. This is the good trend and the company is likely to keep it up. Conclusion: From the data available, and the calculation we have made we can infer that the company is definitely doing well. The point of increase in cost of goods sold need to be taken into the consideration. Though the trend shows thumb up. It is good that the EPS is high but again increase in dividend percentage decreases the amount of retained earnings and reserves. For the fast growing company like this always required good amount of both. Now one needs to look at long term goal instead of increasing the value of the company in the market for the short term. From all the available data we have, the calculations made are not sufficient to make any positive or the negative conclusive comment on any financial aspect of the company.

ISSUES IN THE CASE

The Minnesota Mining and Manufacturing Company (3M) had a long and famous history of innovation. They were known for products, which revolutionized the way individuals communicate, masking tape, and waterproof sandpaper. The Health Care Unit was an important component of 3Ms business model, contributing a large percentage to the companys revenue streams. Although, the unit was recording significant sales, it had failed to introduce a successful product in almost a decade. Given that the company had set one of its working objectives to produce thirty per cent of sales from products that did not exist four years earlier. Other problems faced by the Medical Surgical Market Division are as following: Traditional market research methods were marred with shortcomings, and have proved to be ineffective in helping the Health Care Unit understand customer and market needs The Lead user Research yielded four ideas. Three of them where direct extensions of existing product lines and materials to be used were already available at 3M and a fourth recommendation that might potentially result in having the whole business units strategy statement rewritten 7|Page

 No proper understating about the market in developing nations and their healthcare needs Saturating Current Markets The Lead user Research team were not allowed to work freely on the new Research Methodology as they were still expected to do their traditional duties

IDEA GENERATION
3 M moved away from their traditional way of marketing research and their conventional way of Idea generation. Original 3M Idea generation MethodsVarious Idea Sources Nurses Current Customers Sales Personnels Researchers Marketing Research Reports Products Developers Engineers 1. Hiring Marketing research was adding a new interface which dilutes the customer response. 2. Information obtained by not proprietary but very general taken from text books. 3. Focus groups and customer provided no new or future oriented data thus was not very helpful for disruptive innovation. 4. Too few new product idea and only incremental innovations was happening. 5. Customer didnt know their needs and requirements

Doctors (Physicians) Focus Groups Customer Evaluation Scientists Technologists Data for the Diseases

LEAD USER GROUP IDEA GENERATION

There are certain customers who sense and are aware of their needs ahead of others and they innovate on their own. These customers are called lead user. 3M adopted this process of Innovation to boost the innovation in the organization. The Lead user Idea generation and evaluation takes place in various phases.

1. Focus on the needs of leading-edge users, not routine users; 2. Seek not only needs data but innovationsuser developed solutions to leading-edge needsfrom users; 3. Seek needs and solutions in adjacent markets and nonobvious, analogous markets, in addition to target markets; 4. Employ a cross disciplinary team, bringing in perspectives from various parts of the organization.
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Benefits of the Lead User Method

In this era of accelerated innovation cycles, project teams may not have an extended period of time to develop a research project with outcomes that are difficult to predict. Temporary teams especially cross functional teams and part-time teams do not always get appropriate support and air cover from management, which can undermine their effectiveness and rob the project of needed resources. 1. 2. 3. 4. Finding the right people: Reaching the real lead users and lead-use expert Getting the right people to answer the e-mail or phone call. Remaining open-minded about problems and solutions. Allocating enough time for the process

Lead User Research Methodology in Detail

Lead user research methodology is a non-traditional method of finding out what innovative products can be brought into the market by learning various new techniques or requirements of lead users, or users who have their own innovations in their particular field. Lead user research methodology requires a lot of open mindedness, because the result of the research may not be anywhere close to what the initial thought about the research would have been. Lets take the case of 3M and see if they did lead user research methodology the right way. Some of the points the group noted, that did not go along with the principles of lead user research was that, Shor and her team concentrated only on infections and how to contain them, while during the research itself various other opportunities showed up, like requirement of flexible equipment for mobile medical units, or the requirement of better communication and computer devices. Shor and her teammates missed out on a huge gap that 3M could have gone into. Another major problem that the group came upon was that, the team failed to address all of the three essential elements of success, like mentioned above, they clearly missed some of the basic principles of lead user research, and very importantly they did not have a supportive management, the management should have understood the importance and the freedom the research requires and should have given the team time and removed the pressure factor, thus distorting their focus. The change in leadership to Sam Dunlop did not help the team, and clearly violated one of the necessary three elements required for a successful lead user research. However the interdisciplinary team selected was good and they did do their part well, even with external pressure.

Lets take each stage of the lead user research methodology and analyse where could have 3M gone wrong: Stage I Project Planning The initial stage is of extreme importance and the conclusions made here form the basis of the entire research, however the team made a mistake in the initial stage by not defining the level of innovation that they required, the level was definitely pretty high as 3M wanted to enter into more innovative products in the healthcare industry, however the team stuck to infection containment alone. Another mistake done in Stage I was that the meetings were contained to within the team, and informal meetings with industry experts, suppliers, and doctors were missed.
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Stage II Trends/Needs Identification Though the second stage started off well with a workshop and identification of lead users, they missed out on a great amount of detail that MASH units gave them. The MASH units were lead users on their own, but the team failed to realize their potential, as the perspective of the team was limited to infection containment. The MASH unit gave in a lot of gaps that the mobile medical industry requires which 3M could have tapped into, but the team failed to see that. Stage III Preliminary Concept Generation By Stage III, the team is supposed to find the business potential of the product being conceptualized, but the team failed to have a clear idea in mind by this stage, they were also supposed to continue interviewing lead experts to get more technical knowledge, but the 3M team was still searching for lead users at that time, without realizing the opportunities they ran into, they tried to find better opportunities in developed countries and they did find some good options, including the idea of selling cheap equipment to these countries. The economic line that came up in the later stage was good for these countries, but they failed to go into the business potential of the proposed line, or consult with various lead experts to know about the technicalities of such a line.
Stage IV Final Concept Generation This stage went beautifully for the 3M lead user research team, the workshop held worked and three concrete ideas came up. But again their main concentration was on infection control and they failed to see the open opportunities outside of that. However the ideas that came up were good. However no mention of design concepts, or how this product is going to be released into the market is mentioned. The fourth recommendation did identify a major gap and did propose a greater role for 3M, but the group felt that they were narrowing down their options too much, and failed to see a broader perspective to the whole thing. Another thing that we noticed was that if the management were supportive enough the recommendation of such an idea would not have been in such a dilemma.

Overall, the team did do a good job, but they lacked to follow procedure, a time gap was also seen as Stage II was running into Stage III. The team also lacked a broader perspective and failed to see opportunities right in front of them. The major reason behind the confusion behind the whole issue could be the unsupportive approach of the management. Considering that 3M is a company who leads in the innovation front, a new idea or concept should have been gracefully accepted, but the management was not extremely supportive of the whole idea.

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Strategic Portfolio Management Low Market Newness Low Product Newness Medium Product Newness High Product Antimicrobial Armor Line Newness High Market Newness

Economy Line

The Skin Doctor Line

The Economy, Skin Doctor, and the Antimicrobial Armour Line would allow 3M to promote a balanced, risk-free portfolio containing both incremental and breakthrough innovations.

Solution on the basis of Portfolio Management

The three Product Lines mentioned in the diagram above have the potential to increase the sales for 3M and hence 3M can have its market into the emerging countries like Korea and India. Due to the risk, and high failure cost associated with introducing change in the organization, Rita and her team should not put forward the fourth recommendation of infection prevention. More time should be given to the fourth recommendation, and eventually Rita would also be able demonstrate the importance of Lead User Approach to the new division manager, Dunlop.

Findings and Recommendations

Rita and her team have taken a bold move in shifting from Traditional Market Research Methods to a new method Lead User Approach. Though, as a group we feel that they can still continue with the traditional method of research, but at the same time should move on to other approaches also. Other Recommendations from the group are 1. Product Developers should be a part of the team, as they know about the technicalities of the product or service, and they are more familiar with the technologies, trends, and the businesses in the market. 2. Management could be convinced to invest more in the R&D Activities, as more R&D would lead to more innovation, and hence more benefit to the Company. Also, doing the CostBenefit Analysis, the Benefits associated are more as compared to the Cost associated in using Lead User Approach. 3. As far as, the product ideas are concerned, three ideas should be implemented by 3M, but for the fourth one infection prevention, more research and study should be done before launch.

Conclusion
3M, or the Minnesota, Mining and Manufacturing Company is known for Innovation, as it has given to the world products like masking tape, waterproof sandpaper etc.. 3M Corporation entered into HealthCare Sector in the year 1961, which was a core unit of the Company. Though the HealthCare 11 | P a g e

Unit was making Profits, no new product or no new innovation was done for more than a decade in the area, which was a deviation from the Companys Objective of having 30% sales originating from new product areas.

The Company followed a new approach to find new product ideas Lead User Approach. The ultimate goal was to find leading-edge customer needs; develop concepts for breakthrough products and innovation; and implement a customer focused product development process. Lead User Approach has its own benefits as it fosters strong commitment and relationships among cross-functional teams, lead users, and a variety of experts. It also allowed 3M to have intellectual property rights over the processes, which proved to be a core advantage for the company. 3M faced difficulty in changing from Traditional Marketing Research Methods to a new Lead User Approach, but that proved to be fruitful for the Company. As a group, we feel that, at the time being, 3M should not discard the Traditional Approach completely, because Lead User Approach still needs time and more analysis for it to be implemented over a wider scale.

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