3M's Core Competency Strategy

3M: Cultivating Core Competency
CASE ASSIGNMENT
As the end of his first year comes to a close, George Buckley (CEO) is evaluating his
strategic approach and its ability to drive desired results for 3M during the upcoming
year. He has asked you to prepare a report assessing strategic performance during 2006
and to make recommendations for enhancing strategic competitiveness in 2007. You
will have a 10 minute meeting with Buckley to highlight your findings, so you should
prepare 3-5 Power Point slides to provide an overview of your written report and to
summarize the results of your analysis and supporting exhibits.
Your report and overview should address the following key strategic issues:
1. Establish criteria for judging strategic performance by comparing past successes and
strategies. Use a Balanced Scorecard framework to make sure that both financial and
strategic controls are used to assess performance.
2. Define the company's core competency.
3. Determine if the company has a sustainable competitive advantage. If you determine
that a sustainable advantage exists, support your claim. If you find it lacking,
recommend actions that would secure a sustainable competitive advantage.
4. Identify any external environmental forces that have strategic implications in the
future.
5. Evaluate the success of 3M's strategy in 2006 based on the criteria identified for
judging strategic performance.
6. Evaluate 3M's Acquisition strategy.
7. Recommend an integrated and coordinated set of commitments and actions which
will exploit the company's core competencies, strengthen its competitive advantage,
and maximize value.
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STRATEGIC MANAGEMENT INPUTS
1. Establish criteria for judging strategic performance by comparing past

successes and strategies. Use a Balanced Scorecard framework to make sure
that both financial and strategic controls are used to assess performance.
Criteria for assessing strategic success can be determined by looking at the company's
historical strengths, performance, problems (weaknesses), and strategic goals. The
following table is an extensive look at the historical competencies and successes of 3M.
[This table is available on the Instructor's CD in an Excel spreadsheet, which includes a
worksheet with a blank template that can be provided for the student.]
Strengths Performance Problems Strategic Goals

1907 Aggressive, customer- Product discovery
McKnight/ oriented salesmanship
Bush Niche in growing auto
industry
One of first corporate
R&D divisions in US
1923 First large-scale
consumer product
1930's 45% profits into R&D Tripled in size
1940's Understanding Filling market
markets niches
1952 Product research $100 million sales Lost cassette Abandoning
Carlton tape market markets where
Innovations 10,000 employees it could not set
its own prices
1980's Major product Low-tech marvel: Major
innovation Post It Notes competitor
threats on
multiple fronts
2

1991 Product New product turnaround Declining R&D teamed with
DeSimone development time reduced revenues/profits marketers
Invention of customer- Focus shifted Transformation of
driven products from research existing technology into
commercial products
1992 International sales over
50% of total sales
1994 Over $1 billion of $15 Percentage of sales
billion in sales to first- from new products
year products
1997 30% sales from products
within past 4 yrs.
1998 35% revenues from Restructuring
products within past 4 6 Business Segments
yrs. - many high tech.
Workforce reduction of Continued commitment
5000 to innovation

2001 Increased New CEO from outside Balance science of
McNerney efficiency the company management against
innovation
Underperforming Control the use of
resources for product
development without
killing "crazy" ideas
Lacking direction Quality control and
improvement initiative -
cost cutting and reducing
errors/defects
Fewer hits from Channeled product
vaunted research development funds on
facilities - no major most promising ideas
breakthrough in 2
decades
Culture becoming more Dropping weaker ideas
short-term earlier in the process
Getting best ideas to
market faster
Difficulty acting on Retain culture of
15% Rule innovation
3

2002 Underinvestment in Reorganization to
growth platforms and improve access to larger,
overemphasis on higher-growth markets
boosting short-term Acquisitions to generate
profits growth
2003 Increasing R&D $1.14 Realigned R&D to
sales and billion - 6.3% customer-development
operating sales divisions to enhance
margin responsiveness and
growth
2004 R&D $1.19
billion - 5.9%
2005 Strong $3.8 billion Anemic revenue Growth driven by
performance revenue (10.5% growth (1-5%) while acquisition
- industrial increase) markets expanding
division Net Profit $3.2 Declining personal care
products billion - 7% segment - price
driven by increase pressures in Europe
acquisition R&D $1.2 billion Decreased demand for
- 5.9% sales some older products

2006 50,000 products Growth strategy based on
Buckley with diverse end- enhanced core competency and
Upon user segments building long-term competency
Arrival based on both high- Technology and innovation as
technology and the engine to grow and develop
low-technology existing markets through
Founder and leader disruptive (natural substitute)
in many technologies, logical
technologies - more developments and extensions
than 40 technology of existing products, and "out
platforms of the garage" technology
Continual new developments
markets built Grow core business through the
through "technical strength of constant
adjacency machine" reinvention, stronger key
Strong knowledge Cycle time to Often entered customer partnership,
and understanding commercializ markets only customization, solving
of technologies ation reduced after intellectual customer needs, entering niche
yielding innovative from 4 yrs. to property segments, and capturing new
products globally 2-1/2 yrs. for positions were segments
and consistently faster sales built
4

Buckley Brand ownership Emphasize product
Arrival Participation in localization using mix of
Cont. niche markets brands and local
acquisitions
Strong R&D with Speed growth through
an annual budget strategic licensing,
over $1 billion investment in small tech
companies, University
alliances, and extensive
promotion of invention
Innovative culture Maintain innovative culture
- follow 15% rule
Strong capabilities "Invent and Accurately measuring sales
in science, Experiment" growth potential - demand
engineering, and approach - make a and capacity to benefit
manufacturing little, sell a little - from scale in core product
(world class) with leading to complex categories* and to gain
efficient plants supply chains and relative share in targeted
costly logistics markets**
between operations
World class Deeply
materials science conservative values
and surface Incremental
chemistry capacity and
capability planning
Less risky capital Chronic Accurate capacity planning
investments underinvestment in
through flexible core capacity - lost
machining sales growth
opportunities where
Intersegment it was readily *Core Product Categories:
• Scotch brand industrial/office tapes
technology sharing available • Abrasives
across products and • Automotive
• Optical films
markets • Face masks and respirators
Cross-business use • Medical tapes and drapes
of central • Post-It Notes
• Traffic signage
technologies
historically yielded **Markets aiming for relative share:
• Dentistry
participation in • Orthodontics
high-margin niche • Office supplies
markets • Roofing granules
• Commercial graphics and adhesives
5

Buckley 3M Lattice - unique 3M Lattice Competitive Advantage
Arrival model of technologies makes - unique shared
Cont. and manufacturing managing for technology model
"adjacency lattice" with optimal growth
shared basic difficult
technologies and
manufacturing
processes across
businesses, markets
and product lines -
connection between all
basic businesses
making 3M a powerful
and enduring industrial
competitor
Interdepartmental
cooperation
Diversified (and US 39%, AsiaPac
balanced) operation in 27%,
multiple industries and EurMidEAfr
geographic regions 25%, AmCan 9%
6 key businesses Health care (21% Strategically manage
revenue) and portfolio
Industrial
accounting (19%
revenue)
Inward focus brought Inward focus Maintain premium
margin benefits hindered growth margins
and good long-
range planning
6

Buckley Successfully Sales $21.2 billion Waiting to see Revitalize competitive
After reinvigorating growth accelerate at advantages through
First engineering 60% sales outside core businesses technological
Year culture and US, more than 20% differentiation, application
technological in emerging across multiple lines of
foundation markets business, and renewed
focus on innovation, new
Innovation April - record 1st qtr products, international
sparked sales and profits expansion and penetration
(over 10% increase) Display and with greater emphasis on
Morale - EPS increase over Graphics business localization (concentrating
boosted 20% launch of new on BRICP, E&W Europe,
optical film factory Japan, and Australia)
Investments June - missed
focused on targets, driving Misread demand Defend created markets
core stock prices down for LCD TV's against new entrants, using
competencies dual branding in upper
Sept - sales increase Retailers offering middle market -
7.3% (organic sales branded goods Thoughtful extension of
were up 6.5% (private labels) at private labeling
excluding reduced prices to
acquisitions) consumer, lowering Add 'digital' oriented
3M's targeted price competencies over time
points through
launch of secondary Divestiture or closure
brands - reducing where scale or relative
margins from 45% share cannot be built over
to 20% time, differentiation not
Oil - price increase possible through
and supply technology, or base
restraints on oil- technology at "end life" and
derived raw cannot be refreshed
materials
Acquisitions "Tuck in" Acquisition
$350-400 million of strategy that closely reflects
$22.8 billion in and supports strategic plan
sales and adjacencies, offers
16 acquisitions quick value by quickly
(equal to that of adding technology to
past 4 years) - company, and fills
smaller purchases - openings in geography and
at least 2 in each of channel capacity
6 business units
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Buckley is charged with revitalizing the company's competitive advantage and core
competency. This suggests that drawing from 3M's successful past is a critical
component to planning future strategic moves. Based on the detailed strategic analysis
above, the following strategic initiatives and internal capabilities have been instrumental
in securing past successes for 3M:
Developing technology-oriented solutions to satisfy customer needs.

Filling market niches.
Abandoning markets where desired prices (and margins) cannot be maintained.
Generating a high percentage of sales from new products.
Establishing and fostering a culture of Innovation.
In addition to a growth strategy based on enhancing core competency, 3M has more

recently employed an acquisition strategy to take quick advantage of technology
opportunities and to fill openings in geographic markets and channel capacity. While
acquisitions make a logical strategic option for 3M, this new strategy has not been fully
tested for success, with 16 new acquisitions generating only 1.6% of corporate sales
($375 million out of $22.8 billion in sales).
The criteria for evaluating Buckley's 2006 strategic actions should emphasize the
achievement of sustainable growth and the strengthening of core competencies and
competitive advantage.
Although detailed data for many of the following measures is not available in the case
material, suggested criteria for evaluating Buckley's strategy include:
Balanced Scorecard
Performance Measure Control Type
Sustainable Sales Growth Financial
Sustainable Profit Margins Financial
Increased Solutions to Customer Needs Strategic - Customer
Number of New Patents Internal Business Processes
Number of New Products from Customer Collaboration Customer
Sales from New Products Financial
Number of New Market Niches Served and Market Share Strategic - Customer
Markets Abandoned after Margins Prove to be Strategic - Internal Business
Unsustainable Processes
Innovation Measured by: Strategic - Learning & Growth
Achievement of 15% Rule Internal Business Processes
R&D Budget as Percentage of Sales Financial
(See New Product Measures Above)
Sales, Debt, and Related Cost Measures for Acquisitions Financial
Investments in Core Competency and Competitive Strategic - Learning & Growth
Advantage and Financial
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2. Define the company's core competency.
The case provides an extensive definition of 3M's core competency, which is based on its
invention and manufacturing capabilities to solve and deliver unique solutions for
industrial and commercial customers. The company's technology platforms hold together
its diverse business activities.
According to Buckley, 3M's fundamental core competency is in applying coatings to
backings, processes which were both developed internally. He identified six competitive
platforms giving 3M an edge over its competitors: low cost, scale and relative share,
customer value chain, pristine service, and premium brands.
3. Determine if the company has a sustainable competitive advantage. If you

determine that a sustainable advantage exists, support your claim. If you find
it lacking, recommend actions that would secure a sustainable competitive
advantage.
If the company's innovative technology portfolio and superior manufacturing process

capabilities are 3M's core competencies, its competitive advantage derives from the
company's practice of cooperatively sharing technology across operations, brands, market
segments, and regions. Referred to as the 3M Lattice, the unique business model is a
competitive advantage that offers a steady stream of groundbreaking product
opportunities in adjacent businesses where less obvious applications are discovered.
This competitive advantage is a sustainable advantage in that it meets the qualifications
for sustainability - possessing capabilities which are valuable, rare, costly-to-imitate, and
nonsubstitutable.
4. Identify any external environmental forces that have strategic implications in

the future.
The trend for lower margins in the U.S. market (driven by retailers and private labeling)
and price pressures in Europe can be expected to continue, emphasizing the importance
of 3M's international focus to achieve premium margins. In addition, emerging markets
offer untapped growth and niche opportunities, giving pursuits in these regions a fit with
Buckley's strategy of entering niche markets and capturing new segments.
Growth and technology trends in areas such as electronics and software,
RFID/Wireless/GPS, minerals extraction, oil and gas, food safety, border crossing and
security, and consumer electronics offer acquisition opportunities to support 3M's
strategic plan and to take advantage of extensive knowledge in adjacent technologies to
stimulate product development.
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Business opportunities with high growth potential are emerging in the areas of filtration,
track and trace, energy and minerals extraction, and food safety. Combined with 3M's
available adjacent technologies and the company's ability to share across segment lines,
these areas offer strategic opportunities for internal development.
Price increase and supply limitations for oil and oil-derived products will continue to
impact performance of products dependent on these inputs if price increases cannot be
passed on to the end customer.
The general environment is experiencing rapid advancements in technology. 3M's core
competency and strategy are well-aligned to this external condition, and potential
technology developments (such as nanotechnology applications in materials science and
digital technology applications) indicate continued tech-based growth opportunities for
3M in the foreseeable future.
It is also worth noting declines experienced in the personal care segment. This
observation should be taken into consideration when allocating resources and making
strategic decisions. Again, 3M's strength in industrial segments places the company in a
good position to minimize the impact of reduced opportunities and performance in the
commercial segment.
STRATEGIC ACTIONS: STRATEGY FORMULATION &

IMPLEMENTATION
5. Evaluate the success of 3M's strategy in 2006 based on the criteria (Balanced
Scorecard) established above for judging strategic performance.
Sales Growth. Based on financial information provided in the case and 2006 financial
results, annual sales growth rates for the past 6 years are provided in the table below.
The 5-year growth rate for 3M is 7.35%.
In millions Percentage of Change in Net

Sales Over Previous Year
2006 Sales = $22.923 8.3%
2005 Sales = $21.167 5.7%
2004 Sales = $20,011 9.7%
2003 Sales = $18,232 11.6%
2002 Sales = $16,332 1.7%
2001 Sales = $16,054 --
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Concerns that revenue growth has stagnated to between 1% and 5% are not founded in
actual annual growth rates experienced by 3M, and expectations set between 5.5% and
8% were exceeded in 2006. However, Buckley has projected exceeding a 10% annual
growth rate by 2011, which will require an acceleration of the progress made to date. A
watchful eye should remain on sales results, but indications of strategic success are
evident.
Profit Margins.
Operating Income (in millions) Profit Margins

2006 $5.625 24.5%
2005 $4.828 22.8%
2004 $4.555 22.8%
2003 $3.657 20.1%
2002 $3.005 18.4%
Profit margins in the table above are calculated by dividing Income before Taxes into Net
Sales. This measure has steadily increased over the past 5 years, which shows attempts
to maintain profit margins to be successful. Despite a 49% increase in interest expense
(due to debt funding of acquisitions in 2006), Buckley's first year of margin results show
an impressive gain. His focus on high margin niches should continue to have a positive
impact on this measure of financial success.
Buckley's identification of capacity planning issues, and his attempt to improve 3M's
ability to accurately measure sales growth potential should also provide greater benefits
of scale (with greater margin results) in core product categories. This strategic action
offers the added advantage of increasing relative market share in target markets.
However, the company did miss scale opportunities (misreading demand for LCD TV's),
which indicates that additional attention to this capability is still required for success.
Solutions to Customer Needs and Serving Market Niches. For the sake of this case study,
the measurement of developing new product solutions for customer needs, serving market
niches, and innovativeness cannot be performed. Feedback in the case study indicates
that Buckley has been successful reinvigorating an engineering culture with a
technological foundation, sparking innovation, boosting morale, and stimulating
autonomous strategic behavior.
Annexure IV in the case indicates that Pending and Existing Patents are steadily rising,
with strong projections through 2011. The Sales from New Products figure is not
available in the case, but should be employed by Buckley's team using the previous
benchmark of 30-35% of sales from products new to 3M in the past 4 years. This will
provide a good measure of the successful use of technology and innovation to drive
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sustained revenue growth. As of Buckley's arrival, 3M is still putting out both

incremental and radical innovative products.
Divestiture and Closure. Again, without accurate numbers in the case, it is difficult to
determine whether Buckley is successfully abandoning markets when margins prove to
be unsustainable. However, with an expressed divestiture strategy, and his action to sell
the pharmaceutical business in November, 2006, it should be assumed that actions are
being taken to follow through on this strategic goal.
Innovation. The Research and Development budget as a percentage of sales has

remained flat for several years, and is even down since 2002. See the table below for
calculations.
2006 2005 2004 2003 2002

Net Sales 22,923.00 21,167.00 20,011.00 18,232.00 16,332.00
R&D Exp. 1,352.00 1,274.00 1,143.00 1,102.00 1,066.00
R&D as % of Sales 5.9 6.0 5.7 6.0 6.5
Invention has been specified as one of 3M's core competencies, yet the company has not
increased investments in Research and Development to stimulate sales growth. This is
probably due to acquisition investments now being made to secure radical innovations,
enter new markets, and realize gains more quickly. Investing in acquisitions (external
innovation) rather than R&D (internal development) has strategic implications for 3M
over the long run, which is discussed more fully in the section below.
Acquisitions. Detailed numbers on acquisition debt and costs are not available in the
case text, but acquisitions in 2006 matched the previous four years of acquisition activity
at 3M, and interest expense grew to $122 million from $82 million in 2005. Thus, it can
be assumed that increased investment in the company's acquisition strategy has been
incurred in an effort to quickly impact sales growth through this strategic initiative.
It was previously noted that initial sales of acquired businesses and technologies
represent less than 2% of total sales. Without investment numbers, it is difficult to assess
early return results. As the case does not highlight any acquisition problems, we can
assume that early expectations are being met.
Investments in Core Competency and Competitive Advantage. Without statistical

evidence, Buckley's strategic goals to
• grow and develop existing markets through disruptive (natural substitute)

technologies, logical developments and extensions of existing products, and "out
of the garage" technology developments, and
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• grow core business through the strength of constant reinvention, stronger key
customer partnerships, customization, solving customer needs, entering niche
segments, and capturing new segments
indicate that he has likely supported these initiatives with investments in 3M capabilities
to achieve these goals. Were it not the case, the recommendation to Buckley during this
review would be to correct the oversight to increase the likelihood that implementation of
his strategy will meet with success.
6. Evaluate 3M's Acquisition strategy.
The single biggest component of Buckley's strategy that requires attention is his
Acquisition strategy, primarily because it is a diversion away from the goal of tapping
core competencies to achieve growth. 3M's acquisition experience is limited, and the
company's competency at successfully acquiring technology is not yet fully developed.
The use of acquisitions to satisfy strategic goals is well-chosen. Acquisitions offer 3M a
low-risk, cost-effective way to develop new products, build technology, rapidly access
markets (particularly untapped local markets) and meet expectations for sustainable
growth. However, the success of acquisitions can be tampered by integration difficulties,
excessive debt, and the inability to achieve synergy.
3M's use of strategic licensing and investments in small technology companies that
readily "tuck in" to their existing businesses can protect the company from common
problems that interfere with successful acquisitions. This cautious approach also fits with
the company's conservative values. Targeting acquisitions to fill openings in geography
and channel capacity is consistent with the company's other strategic efforts and should
provide synergy when acquisitions are complementary to the company's core businesses
and capabilities.
Despite this well-defined and well-selected strategy, research indicates that acquisitions
do not consistently produce above-average returns, with clearly-successful acquisition
rates estimated at only 20%. 3M must include the potential costs of some acquisition
failure into its projections and continue with cautious selection of complementary
acquisition targets that are not over-priced.
In addition to identifying the correct acquisitions, success will hinge on the company's
ability to execute an effective integration process. Not an existing capability, 3M must
invest in building this core competency for a long-term acquisition strategy to be viable.
Research indicates that firms with sustained and consistent emphasis on R&D and
innovation have achieved long-term competitive advantages through successful
acquisitions. Although 3M certainly possess this emphasis, an earlier look at Research
and Development investments highlights that they have remained flat over the past 5
years.
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Internal innovation is a core competency within 3M. Directing investment funds to

acquisitions rather than R&D has significant strategic implications. A key risk of
acquisitions is that a firm may substitute an ability to buy innovations for an ability to
produce innovations internally. 3M's approach to managing new technology
development that is acquired rather than home-grown will be critical moving forward.
One way to minimize this risk is to keep focus on strategic control, rather than too much
attention on financial control.
Again, effective integration of new technology will determine whether a culture of
innovation is enhanced or dissolves over time. Close attention must be given to building
the ability to effectively integrate new technologies into 3M's unique lattice of
technologies and manufacturing adjacencies. 3M's competitive advantage of sharing
basic technologies signifies a cooperative internal environment with skills to successfully
integrate acquired technologies. It will also be important to avoid hostile acquisitions
that can introduce difficulties and uncooperative behavior.
Given the company's difficulties in accurately measuring sales growth potential (demand)
and the company's chronic underinvestment in core capacity needed to maximize the
benefits of scale and gain attainable market share, it might be assumed that 3M does not
possess the ability to effectively conduct due diligence and to select healthy target firms
for acquisition. Again, developing these skills as a core competency will be critical to
employing a successful acquisition strategy over time.
With that said, extending 3M's innovative prowess by accessing both internal and
external technological innovations opens up additional strategic opportunities consistent
with 3M's goals and capabilities and is an excellent growth strategy.
7. Recommend an integrated and coordinated set of commitments and actions

which will exploit the company's core competencies, strengthen its competitive
advantage, and maximize value.
Buckley's strategy is a well-conceived plan to exploit the company's core competencies,

strengthen its competitive advantage, and maximize value. It is integrates 3M's strengths
and capabilities with environmental conditions and attempts to correct current areas of
weakness. At the end of 2006, sales growth and profit margin results are initial indicators
of a successfully implemented strategy.
This analysis provides Buckley and his management team with the assurance that his
strategy is on track to achieve desired results. It also establishes a standard for measuring
success, both financial and strategically, through the Balanced Scorecard framework.
Based on the analysis, the following points should be highlighted during the overview
presentation to Buckley.
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Recommendations
Continued Focus in the Following Areas:
• International markets to maximize margins and capture emerging growth

opportunities.
• Pursuit of technological growth trends and new technological developments.
• Attentiveness to impact that prices for oil-derived inputs have on margins.
• Allocation of resources toward industrial segments and cautiously away from
personal care markets where retailers can drive down margins and declines have
been experienced.
• High margin niches to continue to drive up margins.
• Customer involvement in innovative process.
Additional Attention Necessary in the Following Areas:
• Arriving at an accurate measure of sales growth potential. Improvements to demand

and capacity planning capabilities to maximize benefits of scale and fully realize
market opportunities.
• As the problem of oil prices and supply is unlikely to rectify itself in the near-term,
consideration should be given to a long-term strategy of avoiding (or replacing)
such input items with more affordable or more readily available input materials.
• Evaluate Research and Development budget as a percentage of sales to determine if it
is being adequately financed for a growth strategy, particularly in light of increased
acquisition efforts.
Retreat or Abandon the Following Efforts:
• Reconsider dual branding in upper middle markets and the extension of private
labeling. This does not fit with 3M's strategic goals, and the practice of attempting
to extend the life of dying products or segments at lower margins should be
discontinued.
Additions to Strategic Plan
• Reinstitute or more aggressively pursue strategic actions to abandon markets where

desired prices (and therefore, margins) cannot be maintained.
• Reestablish use of "Percentage of Sales from New Products" as a standard for
measuring innovativeness and tracking results.
Acquisition-Related Advice
Note that 3M's acquisition strategy is a change in focus for the company and comes with
some risk. It is extremely important to build competency and skill sets for a long-term
acquisition strategy to be a viable source of competitive success to 3M. In the
meanwhile, these protective measures should be taken:
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• Use realistic estimates to buffer financial expectations, taking into account possible
failure (or loss) rates along with potential upside gains.
• In short order, build skills to effectively conduct due diligence and to select healthy
target firms to acquire.
• Continue to emphasize the importance of correct acquisitions based on compatibility,
complimentary, and integration considerations.
• Direct focus onto strategic controls rather than being too focused on financial
measures.
• Pay close attention to integrating new technologies into 3M's unique lattice of
technologies and manufacturing adjacencies.
• Avoid hostile acquisitions.
• While integrating acquired businesses, be cautious about restructuring used during the
1990's. Although some structural changes may have helped to create networks that
now enhance sharing, want to avoid the risk of upsetting delicate shared networks
that provide 3M with its sustainable competitive advantage.
SUPPORTING EXHIBITS AND FINANCIAL ANALYSIS
Current Financial Information

Revenue & Reported Earnings
Revenue ($mil) (2006) 22,923.00
5-Year Annual Revenue Growth Rate (%) 7.35
Income From Continuing Operations ($mil) (2006) 3,851.00
Income From Total Operations ($mil) (2006) 3,851.00
Diluted EPS From Continuing Operations ($)(2006) 5.06
Diluted EPS From Total Operations ($)(2006) 5.06
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Dividends
Fiscal Year 2007
Dividend Rate ($) 1.92
Yield 2.15%
Yield - 5 Year Average (%) 1.96
5-Year Annual Dividend Growth Rate (%) 8.92
Profit Margins
Operating Margin (%) 22.51
Net Profit Margin (%) 16.80
Valuation Ratios
P/E 15.24
Price to Cash Flow Ratio 20.21
Price To Sales (TTM) 2.96
Price To Book 5.78
Per Share Ratios
Dividend Per Share 1.84
Book Value Per Share 13.27
Revenue Per Share 30.12
Financial Strength
Quick Ratio 0.72
Current Ratio 1.22
LT Debt to Equity 11.17
Total Debt to Equity 36.33
Return on Equity (ROE) Per Share 38.51
Return on Assets (ROA) 18.97
Return on Invested Capital (ROIC) 29.18
Efficiency
Asset Turnover 1.09
Inventory Turnover 4.41
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Data Provided by Thomson Financial and available at www.3M.com.
Balance Sheet Highlights
in millions of USD
As of 2006 2005 2004 2003 2002
Assets
Cash 1,447.00 1,072.00 2,757.00 1,836.00 618.00
Marketable Securities 471.00 n/a n/a n/a n/a
Receivables 3,357.00 3,121.00 3,311.00 3,162.00 2,840.00
Total Inventories 2,601.00 2,162.00 1,897.00 1,816.00 1,931.00
Raw Materials 571.00 406.00 336.00 299.00 329.00
Work In Progress 795.00 706.00 614.00 596.00 591.00
Finished Goods 1,235.00 1,050.00 947.00 921.00 1,011.00
Notes Receivable n/a n/a n/a n/a n/a
Other Current Assets 1,070.00 760.00 755.00 906.00 670.00
Total Current Assets 8,946.00 7,115.00 8,720.00 7,720.00 6,059.00
Property, Plant & Equipment, Net 5,907.00 5,593.00 5,711.00 5,609.00 5,621.00
Property, Plant & Equipment, Gross 17,017.00 16,127.00 16,290.00 15,841.00 15,058.00
Accumulated Depreciation 11,110.00 10,534.00 10,579.00 10,232.00 9,437.00
Interest and Advance to Subsidiaries 266.00 84.00 29.00 33.00 48.00
Other Non-Current Assets 373.00 437.00 381.00 477.00 446.00
Deferred Charges 253.00 138.00 2,723.00 763.00 677.00
Intangibles 4,790.00 4,016.00 2,932.00 2,693.00 2,167.00
Deposits & Other Assets 759.00 3,158.00 212.00 305.00 311.00
Total Assets 21,294.00 20,541.00 20,708.00 17,600.00 15,329.00
Liabilities
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Notes Payable 1,390.00 580.00 757.00 883.00 884.00
Accounts Payable 1,958.00 1,711.00 1,818.00 1,413.00 1,224.00
Curr. Long-Term Debt 1,114.00 492.00 1,405.00 386.00 353.00
Curr. Port. Cap Lease 2.00 n/a 4.00 4.00 n/a
Accrued Expense 864.00 830.00 880.00 896.00 925.00
Income Taxes 1,141.00 998.00 885.00 892.00 528.00
Other Current Liabilities 854.00 627.00 322.00 608.00 543.00
Total Current Liabilities 7,323.00 5,238.00 6,071.00 5,082.00 4,457.00
Mortgages n/a n/a n/a n/a n/a
Deferred Charges/Inc. 134.00 1,387.00 1,339.00 498.00 458.00
Convertible Debt 542.00 539.00 556.00 553.00 550.00
Long-Term Debt 507.00 770.00 171.00 1,182.00 1,590.00
Non-Curr. Capital Leases 63.00 n/a 71.00 70.00 2.00
Other Long-Term Liab. 2,488.00 1,901.00 1,869.00 2,100.00 1,985.00
Total Liabilities 11,057.00 9,835.00 10,077.00 9,485.00 9,042.00
Shareholder Equity
Minority Interest 278.00 311.00 253.00 230.00 294.00
Preferred Stock n/a n/a n/a n/a n/a
Common Stock 9.00 9.00 9.00 9.00 5.00
Capital Surplus 2,484.00 2,225.00 287.00 287.00 291.00
Retained Earnings 17,933.00 15,715.00 15,649.00 14,010.00 12,748.00
Treasury Stock 8,456.00 6,965.00 5,503.00 4,641.00 4,767.00
Other Liabilities -2,011.00 -589.00 -64.00 -1,780.00 -2,284.00
Total Shareholders Equity 9,959.00 10,395.00 10,378.00 7,885.00 5,993.00
19
Total Liabilities & Shareholders Equity 21,294.00 20,541.00 20,708.00 17,600.00 15,329.00
Income Statement Highlights
in millions of USD
Period Ended 2006 2005 2004 2003 2002
Net Sales 22,923.00 21,167.00 20,011.00 18,232.00 16,332.00
Cost of Goods Sold 11,713.00 10,408.00 9,958.00 9,285.00 8,496.00
Gross Profit 11,210.00 10,759.00 10,053.00 8,947.00 7,836.00
R & D Expenditure 1,352.00 1,274.00 1,143.00 1,102.00 1,066.00
Selling, General & Admin Expenses 4,162.00 4,631.00 4,332.00 4,132.00 3,724.00
Depreciation & Amort. n/a n/a n/a n/a n/a
Non-Operating Income 51.00 56.00 46.00 28.00 39.00
Interest Expense 122.00 82.00 69.00 84.00 80.00
Income Before Taxes 5,625.00 4,828.00 4,555.00 3,657.00 3,005.00
Prov. For Inc. Taxes 1,723.00 1,627.00 1,503.00 1,202.00 966.00
Minority Interest 51.00 55.00 62.00 52.00 65.00
Realized Investment (Gain/Loss) n/a n/a n/a n/a n/a
Other Income n/a n/a n/a n/a n/a
Net Income Before Extra Items 3,851.00 3,146.00 2,990.00 2,403.00 1,974.00
Extra Items & Disc. Ops. n/a -35.00 n/a n/a n/a
Net Income 3,851.00 3,111.00 2,990.00 2,403.00 1,974.00
20

3M's Core Competency Strategy

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3M's Core Competency Strategy

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3M: Cultivating Core Competency

STRATEGIC MANAGEMENT INPUTS

1. Establish criteria for judging strategic performance by comparing past

Strengths Performance Problems Strategic Goals

Strengths Performance Problems Strategic Goals

Strengths Performance Problems Strategic Goals

Strengths Performance Problems Strategic Goals

Strengths Performance Problems Strategic Goals

Strengths Performance Problems Strategic Goals

Strengths Performance Problems Strategic Goals

Strengths Performance Problems Strategic Goals

Developing technology-oriented solutions to satisfy customer needs.

In addition to a growth strategy based on enhancing core competency, 3M has more

2. Define the company's core competency.

3. Determine if the company has a sustainable competitive advantage. If you

If the company's innovative technology portfolio and superior manufacturing process

4. Identify any external environmental forces that have strategic implications in

STRATEGIC ACTIONS: STRATEGY FORMULATION &

In millions Percentage of Change in Net

Operating Income (in millions) Profit Margins

sustained revenue growth. As of Buckley's arrival, 3M is still putting out both

Innovation. The Research and Development budget as a percentage of sales has

2006 2005 2004 2003 2002

Investments in Core Competency and Competitive Advantage. Without statistical

• grow and develop existing markets through disruptive (natural substitute)

6. Evaluate 3M's Acquisition strategy.

Internal innovation is a core competency within 3M. Directing investment funds to

7. Recommend an integrated and coordinated set of commitments and actions

Buckley's strategy is a well-conceived plan to exploit the company's core competencies,

Continued Focus in the Following Areas:

• International markets to maximize margins and capture emerging growth

Additional Attention Necessary in the Following Areas:

• Arriving at an accurate measure of sales growth potential. Improvements to demand

Retreat or Abandon the Following Efforts:

Additions to Strategic Plan

• Reinstitute or more aggressively pursue strategic actions to abandon markets where

SUPPORTING EXHIBITS AND FINANCIAL ANALYSIS

Current Financial Information

Revenue ($mil) (2006) 22,923.00

5-Year Annual Revenue Growth Rate (%) 7.35

Income From Continuing Operations ($mil) (2006) 3,851.00

Income From Total Operations ($mil) (2006) 3,851.00

Diluted EPS From Continuing Operations ($)(2006) 5.06

Diluted EPS From Total Operations ($)(2006) 5.06

Fiscal Year 2007

Dividend Rate ($) 1.92

Yield - 5 Year Average (%) 1.96

5-Year Annual Dividend Growth Rate (%) 8.92

Operating Margin (%) 22.51

Net Profit Margin (%) 16.80

Price to Cash Flow Ratio 20.21

Price To Sales (TTM) 2.96

Price To Book 5.78

Per Share Ratios

Dividend Per Share 1.84

Book Value Per Share 13.27

Revenue Per Share 30.12

Quick Ratio 0.72

Current Ratio 1.22

LT Debt to Equity 11.17

Total Debt to Equity 36.33

Return on Equity (ROE) Per Share 38.51