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

Mike Bolden — Thu, 12 Feb 2009 17:56:24 +0000

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.

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Mike Bolden » Expensing

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