3M Co.’s greatest strength can often also seem like its Achilles heel. Few technology companies have quite as diversified a product portfolio, which means declines in some business segments can be offset by solid growth in other sectors but the opposite can also happen – as it did in 2012 when 3M’s revenue grew a tepid one percent as opposed to a torrid 11 percent in the prior year.
Keeping 3M on an even keel hasn’t been easy but the company appears to have developed a strategy that will see revenue growing through the foreseeable future. Analysts are projecting 2013 sales will rise about 3 percent to $30.9 billion from $29.9 billion in 2012 and then jump to $32.6 billion in 2014, up more than 5 percent from the preceding year. While the sales growth over the next two years are in the low to mid-single digit range it is still considered strong for a manufacturer that has a presence in almost every segment of the economy, including industrial, transportation, health care, consumer, electronics, office equipment, safety, security and protection services.
3M itself expects sales to continue growing steadily over the next years, tracking its performance from 2003 to 2012 when revenue grew at a compound annual growth rate of 6 percent. During the same period earnings per share rose at 11 percent and the company posted average return on investment (ROIC) of approximately 22 percent. The philosophy anchoring the positive performance hasn’t changed much in years and it isn’t expected to change much despite some business reorganization implemented by Inge Thulin, who took over last year as chairman and CEO of the Minneapolis, Minn.-based company. The three pillars of that philosophy are innovation, leading-edge manufacturing and process engineering and, lastly, solid financial strength, according to 3M CFO David Meline.
“We create value by leveraging a number of our fundamental strengths,” Meline said in a presentation to investors at the Morgan Stanley Industrials & Autos Conference Sept. 18. “First thing, innovation around developing new products which will deliver high margins and return on capital. [We support this with] world class manufacturing and process engineering and a strong financial position.”
Over the decades 3M has increased revenue primarily through organic growth but it has also made strategic acquisitions to boost offerings and power its entry into complementary markets. The company rolls out new products each year and similarly retires many in response to market demand. In the electronics sector, 3M products are used in displays for computers, mobile handsets and tablet computers, TVs and automotive. It also supplies electronic components to OEMs in the automotive, medical and military markets and is a player in the packaging and interconnect segment.
With such an extensive range of products 3M cannot afford to sell its products through direct channels alone and, as a result, it uses distributors in various sectors of the economy, including electronics components distributors. In addition to regular parts distributors, though, the company also sells through retail vendors, further complicating the network of partners it must effectively manage globally.
3M has been tightening operations under new CEO Thulin, although the changes instituted have not resulted in a massive strategic shift in the company’s focus. Thulin, a 30-year veteran with 3M who was previously chief operating officer and head of international operations, has been involved in charting the company’s direction for decades and is not expected to implement any dramatic shifts. However, he has reduced the number of reporting divisions at 3M to five from six previously and responded to anticipated weaknesses in the consumer electronics market with tighter cost controls.
Actions taken in the last year have included not just belt-tightening but efforts to expand into what CEO Thulin referred to as “new and promising technology programs.” Speaking during a presentation to analysts in July Thulin said the company sold one business unit that has “has no relevance to become important in the broader 3M portfolio.”
So where will 3M spend any of its planned acquisition budget, which could be up as much as $2 billion annually? A “review team” set up by the company is looking at investments in longer term disruptive technologies, aimed at opportunities with significant growth potential,” Thulin said. “We are investing in disruptive technologies that will have a longer-term outcome. However, in that pipeline, there are some projects that we will be able to commercialize in the middle of next year.”
Don’t expect 3M to spin off businesses or sell units anytime soon, though. The company has always played up the strength of its extensive portfolio and sees its global presence as another advantage. It is expanding operations in developing economies, targeting these regions with initial offerings of established products and then following up with relevant offerings in adjacent markets. Rather than divest businesses or major product lines, 3M is more likely to pour additional resources to increase the offering of innovative products, according to CFO Meline.
“Divestment is hard given our model because ours is a model of leveraging technologies across the enterprise,” Meline said. “Technologies are freely shared across all of the businesses. It's a model where we share even manufacturing assets. So, the process of divestment is generally quite difficult because of that high level of integration. But on the other hand we think it’s appropriate for us to look at the portfolio, to look at our businesses and to challenge ourselves if there is a business where we think there is potentially a better owner than 3M.”