3M’s Strategic Elements and Whether to “Invest” or “Expense” Costs

In This Downturn – Expense Core Products And Brands
Companies should lean more toward costs which are expenses to harvest profits and grow revenue in the short term during lean economic times such as the current recession. They should look to do more investing during slowdowns and when better economic times are forecast. Given this paradigm, 3M should look to utilize “expensing” for its core products and brands such as Scotch, Post-It, Scotchlite, and Scotch-Brite. They should leverage out the brand equity, and not put heavy investment types of costs into these brands in the current economic climate. This will help maintain the margins, and the maintained strong equity in 3M will carry over to lesser product lines.

Invest In BRIC Country Businesses
For another one of their strategic elements, it is suggested to invest in the BRIC countries (Brazil, Russia, India, and China) with a slight amount of harvesting due to the global recession and the need to do some profit-taking. This can take the form of acquisitions in these countries as an investment type of cost to increase 3M’s footprint in these regions to leverage future growth. Within the U.S., conversely, 3M should seek to “expense” acquisitions, and buy companies which provide immediate substantial cash flow and/or are highly synergic with core businesses or product lines. For 3M, acquired businesses must have an immediate impact on the bottom line and be a strategic fit. If there is not immediate positive cash flow “as is,” then 3M’s managers must be able to use cost reduction techniques such as Six Sigma to drive costs down until the business is profitable.

Selective “Investment” In EBO’s
It is strongly suggested that 3M “invest” selectively in emerging business opportunities (EBOs). As a consideration of the current economic downturn, EBOs must be synergic with core products lines and businesses. The other key factor for investing in EBOs is that it can be initiated as part of a key mega-trend. In this recession, 3M’s EBOs still need to see significant investment because of the internal fabric of innovation within the 3M culture. Also, it is important to be positioned advantageously emerging from this recession when consumer confidence and spending rebounds.

3M’s Management Must Look at Businesses for ROI and Cash Flow
There are four strategic elements which CEO George W. Buckley must balance properly via optimizing resource allocation. For all of these elements, 3M executives and managers must balance two critical factors: ROI and Cash Flow. 3M must examine its products as elements of a portfolio and understand s the cash flow generated by them and their respective ROIs. For the product lines and businesses kicking off a high amount of cash, look to allocate costs as expenses and favor them along a shorter time horizon. For products which provide a high return on resources allocated to them, concentrate on a longer time horizon and treat their costs as investment.

Navigating Any Kind Of Economic Weather to Keep People in Their Jobs
3M’s innovation is a trademark strength and a major part of their culture. Resource allocation is the backbone of any company, and is the enabler for its strategy. Weighing the short- and long-term expensing and investing of costs is vital to ensuring that a business weathers difficult economic seas, and opens full throttle in calm seas. These past two posts offer guideposts to 3M’s brain trust and the four key elements by which they operate their company. Ultimately, their choices keep people in jobs and protect families – these posts help toward that end.

3M’s Key to Renewed Growth Is Resource Allocation in Midst of Falling Profits

Substantial Drop in Income – To Cut Spending
After posting a 37% drop in quarterly net income, the 3M Company plans to reduce capital spending by 30% in this year. According to the Wall Street Journal, 3M’s net income fell to $536 million from $851 million a year earlier. They have cut expenditures because of the uncertain economic outlook and challenges in their markets. An example of challenges in key markets is 3M’s health-care unit which makes bandages, braces, and drug delivery systems – it saw profits fall 12% on a 2.1% reduction in revenue. When profits decrease dramatically disproportionately relative to the revenue drop, something is wrong. If this occurs to a key unit like health-care, one can only guess that it is emblematic of most of the units of the 3M Company.

Investing Vs. Expensing
This dilemma is symptomatic of the key issue: how to effectively allocate resources to optimize short-term revenue-generating horizons while providing a critical mass for longer-term growth. It really becomes a question of investing or expensing. To fully understand 3M’s situation, let’s examine their core corporate-wide strategy:
1) Grow the current core business
2) Continue complementary acquisitions to support core businesses and expansion into adjacent markets
3) Build new business via Emerging Business Opportunities (EBOs)
4) Significantly increase investment in international opportunities

Decide On Businesses Associated With Strategic Elements
With each of these elements, there are investment decisions to be made about the type of resources to be put into the corresponding business opportunities. For the businesses associated with these elements, they can invest and focus on longer-term growth over a greater time horizon. Or, they expense short-term costs to pull cash out of a business, and seek greater short-term profitability. This type of allocation involves focusing less on building the brand and more on marketing-oriented initiatives and slashing short-time horizon-oriented costs. Investments in a business consist of spending on improving production equipment and facilities, IT initiatives to improve production, and marketing which focuses on increasing overall brand equity.