3M

3M is a diversified technology and research company that works in a number of different business industries, including industrial and transportation, consumer and office, display and graphics, electro and communication, healthcare, and safety and protection services.

Firm Information

3M is a diversified technology company that has a presence in a number of fields, including industrial and transportation, healthcare, display and graphics, consumer and office, safety, security and protection services, and electro and communications.  The company was founded in 1902, in Two Harbors, Minnesota, as the Minnesota Mining and Manufacturing Company.  The original five founders established the company to mine mineral deposits used as grinding-wheel abrasives.  Over time, 3M developed into a heavy research and science based corporation.  Just a few of their innovations include the world’s first water-proof sandpaper, masking tape (which launched the Scotch© brand name), and the now world-famous Post-It Notes ©.  Beyond its more famous brands, 3M makes everything from reflective adhesive for highway signs to optical films for LCD televisions.

Today, 3M is divided into six different business ventures, which are: Consumer & Office, Display & Graphics, Electoro & Communications, Health Care, Industrial & Transportation, and Safety, Security, & Protection Services.  These six businesses combined for over $24.5 billion in sales for 2007.  International Sales accounted for 63% of business, at $15.5 billion, with the other 27% coming from the United States.  Net Income for 2007 was $4.096 billion, coming in at 16.7% of total sales.  The reported diluted EPS for 2007 was $5.60, up from 2006’s reported $5.06.

Competitive Advantage and Strengths

One of 3Ms most immediately apparent strengths is its diversification across so many industries and so many areas worldwide.  3M makes everything from tape to license plates to healthcare information systems.  The six different businesses that 3M diversifies across provide protection against market downturns in any one specific area.  3M’s largest business, Industrial & Transportation, which accounts for around 30% of revenues, grew 9.5% in 2007.  The next biggest division, Health Care, accounts for just over 16% of total sales.  Each of the other four divisions account for an even lower percentage of total revenues.  3M is not slowing down in its diversification either; it acquired 16 different companies in 2007.

3Ms other immediate strength is the number of fantastic brand names it has license too, including such household favorites as Scotch Tape© and Post-It Notes ©.  This brand name recognition gives 3M an advantage in the stores when customers are deciding between competing products of similar quality; individuals will go with what they know.  It also keeps customers from switching to different products.  3M is focusing on continuing to develop these “enduring franchises,” while at the same time focusing on emerging brand names, such as the new Filtrete brand air filters that are part of 3M’s Consumer & Office business.

3M, which has grown revenue, net income, and dividends consistently for the past five years, can do so because it is constantly developing new products and innovations.  3M employs over 7,000 researchers in its 35 different operations that have laborites throughout the world.  In the last five years, 3M spent over $6.5 billion on research and development, with $1.368 in 2007 alone.  This huge investment into developing new products pays off because it keeps 3M at the top of the technological curve.  It can and has lead to the development of hugely successful new products, such as masking tape, that increase revenue for years to come.  Over its century long company history, 3M has successfully filed over 500 patents.

Future Opportunities

The most obvious area for future growth of 3M is in its international operations.  3M does well internationally now, with 63% of 2007 revenue coming from areas outside the US.  Even with these strong international sales, 3M is looking to expand even more outside the US, with 70% international revenue expected by 2010.  3M is focusing specifically on emerging markets, such as Latin America, Eastern Europe, and China, in which sales have been growing at an average of 20% over the last five years.  In fact, nearly 30% of total revenue, or $7 billion, comes from these emerging markets.

Threats & Weaknesses

Although 3M is a very diverse company, both by product and location, a large portion of revenues, 27%, still comes from the US.  This is a dangerously high percentage because any major economic slowdown in the US, such as the one that happened in 2008, could have a substantial negative effect on 3M’s revenue and sales.  It will be interesting to see how 3M’s US revenue and total sales percentages change in the 2008 annual report.

Another major threat for 3M is the pollution costs it faces from litigation and cleanup.  As recently as 2003, 3M was rated on the Political Economy Research Institute’s list of 100 most toxic companies in the US, releasing 4.75 million pounds of air pollutants every year.  In 2002, 3M decided to stop manufacturing products that contained perfluorochemicals (PFCs), which as recently as 2000 was a $300 million business for the company.  3M set aside $147 million in 2006 to deal with environmental liabilities, which includes $50 million to deal with cleanup in the immediate Minnesota area.  3M also faces significant litigation, estimated to be around $300 million, for other pending environmental suits.

One of 3Ms greatest strengths, its large research and development division, also represents a significant weakness for the company.  3M describes itself as a “science” company, and as such, they must have a constant pipeline of new products coming to market to keep them on top of the most recent technological innovations.  As such, this pipeline can represent a significant liability for a corporation such as 3M if it turns out that one of their products that has been in development for a while does not work out.  3M warns in its 2007 annual report that “The Company’s growth objectives are largely dependent on the timing and market acceptance of its new product offerings, including its ability to continually renew its pipeline of new products and to bring those products to market.”

Two other threats include 3Ms susceptibility to international exchange rates.  Since 63% of its revenues come from outside sources, strengthening of the US dollar against other currencies could lead to unexpected decreases in reported sales.  3M is also highly dependent on energy and raw material prices, and any unexpected changes which lead to lower supplies could raise the costs of natural resources such as oil and severely hurt 3Ms future business development.