An Emerging Strategy for Growth - library.corporate …library.corporate-ir.net/library/80/805/80574/items/195605/Buckley...An Emerging Strategy for Growth. ... Defining 3M’s Core

3M Investor Meeting 2006 © 3M 2006 All Rights Reserved

George W. Buckley

Chairman, President and Chief Executive Officer

An Emerging Strategy for Growth


Topics We Will Address Today

Demystifying 3M and understanding the workings of the “3M Lattice”

1

Describing 3M’s strategy for growth while maintaining premium margins

Explaining the origins of further incremental margin growth at 3M

Strategic Management of 3M’s Portfolio

2

3

4


3M’s Summary Strategy

Technology lattice protects the downsides and ensures upsidesInvestment through the economic cyclesDriving growth as a way of doing business

Organic Sales Growth

Earnings Growth

Investment Returns

8%+ and growing

12 -15%

20%+Drill into the core. Move towards scale where markets are large

Move towards higher relative share in smaller markets

Heavy up on globalization

Technology remains part of who we are

Careful tradeoffs of share and growth to maintain value creation momentum

Building on brands, technology, people, service & distribution


Portfolio Priorities

Growing the core; filling white spacesBecoming vital to customersBuilding broad platforms for our technologiesTaking careful and logical adjacency steps

By Technology

Foundation Principles

18%+

Growing the Core

International Growth

Adjacencies

8%+ and growing

13%+

11

2

13%+ 15%+

Track & Trace

Nano-technologies

Electronics & Software

15%+

1 1 2

Portfolio

Health Care

IndustrialHi-Tech

8%+

15%+

Safety

10%+ By Activity


ScaleShareNiche Non Core

What 3M Businesses ShouldLook Like in 5 Years

In every market we will maintain strong technological superiority

Businesses with relative share

Businesses getting relative share

Smaller Markets

Invent & experiment

Grow, close or sell

Experimental And Niche

Large Markets

Businesses with scale

Businesses getting scale


Building Scale And Relative Share In Our Core

Scotch® branded Industrial and Office Tapes

Abrasives

Automotive after-market

Optical Films

Face masks & respirators

Medical tapes and drapes

Post-It® Notes

Traffic Signage

Pharmaceuticals

Touch systems

Precision Optics

Visual displays

Lighting

Electrical Connectors

RFID

Dentistry

Orthodontics

Office supplies

Roofing granules

Commercial Graphics

Adhesives

Scale or Getting ScaleRelative Share or

Targeting Relative Share Sub-Scale


Understanding 3M’s History and Culture

3M’s history is rooted in an “invent and experiment” approach called “make a little, sell a little” where markets were built by bootstrapping. This produced the following outcomes for 3M:– World class materials science and surface chemistry capability was built

over many years– Markets were often entered only after privileged IP positions were built– Scale was not considered important– Demand and capacity were often underestimated – 3M focused on making “risk free” capital investments by using highly

flexible machine tools capable of making many products in plants that served multiple businesses.

– Cross business use of central technologies was encouraged that led to 3M’s participation in many high-margin niche areas


Understanding 3M’s History and Culture

A high degree of conservatism became the norm

The “make a little sell a little” approach led to an incremental approach to capacity and strategic planning– Complex supply chains evolved quite naturally, with extrusion

processes at one plant, coating in another plant and final conversion at yet another

– Individual plants were run with superb efficiency, but interconnecting logistics were often complicated and costly

– Higher inventory and WIP compensated for the complex supply chains

– Chronic underinvestment in core capacity led to many upside sales growth opportunities being missed

3M’s inward focus brought margin benefits but often hindered growth and good long-range planning


What Emerged From Our History

A highly capable scientific, engineering and manufacturing company with deeply conservative values, participating in many successful niche markets

Underinvestment in core markets that made readily available growth hard to capture

Incredible inter-segment technology sharing, where new markets were continually built via a virtual “adjacency machine”

Hugely capable (and generally unknown) world-class manufacturing

Modest and unassuming management

Underdeveloped strategic planning capability


Understand our competenciesIdentify the Basis of DifferentiationResultant Economic advantage

Get Scale Gain relative shareRelative low costCustomer importanceAlways maintain technological advantage

Pose a view of the future Play in near adjacencies onlySequencing adjacency movesWatch for discontinuities

Decision criteriaSystematic processesDistance from the coreOrganizational links

We Can Address Growth By Being More Systematic

Identify Truly Adjacent

Markets

Create A Long Term Addition

Path

Achieve Full Potential In The Core

Define The Core

Business


Defining 3M’s Core

3M’s fundamental core competency is applying coatings to backings– Both the coatings and the backings are traditionally developed inside 3M

– Backings may be woven or non-woven fabrics, paper, cloth, plastics or metal

– Coatings are adhesives, abrasives, medicines, nano particles or imprinted optical patterns

It does this in a highly precise manufacturing approach that involves the large scale unwinding, winding and splitting of tapes

Incredible manufacturing capability and know how is the hidden and unsung hero of 3M and a significant barrier to entry



3M sometimes sells its coatings and backings separately, configured as other products, such as face masks, Thinsulate thermal and acoustic insulation and roofing granules

This same precision machining and materials science capabilities have also been applied in market adjacencies such as dentistry

Cubitron™Ceramic Grain

Respirator Roofing Granules



In applying coatings, 3M developed world class competencies in modifying the shapes and patterns of surface coatings (called micro-replication) that alters the fundamental behavior of a product

This micro-manufacturing competency, leveraged across many markets into nanotechnology makes 3M so hard to beat

Reinvention of the materials science space over the next few years with nanotechnology is one source of the next wave of growth

Trizact AbrasiveFuel Cell MEACubitronVIKUITI™ BEF


In developing the previous “backings and coatings” competencies, broad know-how in adjacent technologies was built, viz – Micro-replication of surface patterns– Optics and light management– Nanotechnology – Ceramics and adhesives

And 3M extended this adjacent knowledge across multiple markets in less obvious applications such as – Post-it® notes (the adhesive is “micro-replicated’)– Adhesives (on which 3M’s dentistry competency is based)

So 3M is, at its heart, an invention and manufacturing companyIts major strength is in solving and delivering unique solutions for OEM and mass channel customers

Defining 3M’s Core: Other Core Competencies


3M’s Technologies Extend Into Multiple Markets

Adhesives

Abrasives

Ceramics

Electronic packaging

Micro replication

Optics

Specialty materials

Non-woven Materials

Polymer melting

3M Technology Platforms

Architecture & Const.

Auto. & Aerospace

Electronics Manuf.

Graphic arts

Health care

Home and Leisure

Industrial OEM

Consumer & Office

Safety & Security

Telecoms and Utilities

Markets


AdAdhesives

DdDrug

Delivery

DmDisplay

Materials

AcAcoustics

CpChemical

PowerSources

VpVacuum

Processing

PpPrecision

Processing

MeMetalMatrix

Composites

SuSurface

Modification

FsFiltration,

Separation,Purification

DoDental &

OrthodonticMaterials

RfReclosableFasteners

AbAbrasives

MrMicro-

replication

PePredictive

Engineering& Modeling

RpRadiationProcessing

NmNonwovenMaterials

PmPolymer

MeltProcessing

SmSpecialtyMaterials

AsApplicationSoftware

FiFilms

MdMedicalDataMgmt

MiMicrobialDetection& Control

PoPorous

Materials &Membrane

s

PcPrecisionCoating

CeCeramics

EpElectronicPackaging

FlFluoro-

materials

ImImaging

IsIntegratedSystemsDesign

MoMolding

PdParticle &DispersionProcessing

PrProcess

Design &Control

WoWoundMgmt

FcFlexible

Converting& Packaging

FoFiberOptics

IpInks &

Pigments

LmLightMgmt

AmAdvancedMaterials

BiBiotech

NtNano

Technology

But Here’s What The Lattice Really Covers; 3M’s Other 32 Technology Platforms…


Demystifying 3M: It is not a Conglomerate

In understanding 3M, it is important to realize the company is not a conglomerate with siloed independent business units

3M is a unique model of a technology and manufacturing “adjacency lattice” that shares basic technologies and manufacturing processes across multiple businesses, markets & product lines – Almost all of 3M’s basic businesses are connected to each other in

this way, from water filtration to Scotch brand tape

In network theory, the power of a network (or lattice) is proportional to the square of the number of users.* It is this lattice that makes 3M so powerful and enduring as an industrial competitor

But ….the lattice can also make 3M difficult to organize for optimal growth

* Robert Metcalfe, Inventor of the Ethernet


How The 3M Invention Machine Goes To Market

Roll to Roll Tapeand Cut Out Manf.

Final Product Configuration

OEM Channel

Mass Channel

Backings

Materials Science

ExtrusionsWovenNon wovenPlasticsMetals

Coatings

Surface Chemistry

AbrasivesAdhesivesOxidesMedicinesPetri BrothOptical Patterns


BrightnessEnhancement

Film

LCDFilm

LED Light Mixing

Light ControlFLG

X-rayScan

NotchedFiber

Large-DiameterOptical Fiber

FILM

Product And Technology Migration At 3M; Microreplication Technology

1964 1970 1980 1990 2000

OpticalLighting

Film

Glare-freeOverheadProjector

Lens

LensFilm

TrafficSignal

LinearSolar

Concen-trator Day

lighting

TotalInternal

Reflection

Ov erheadProjector

LensRadialSolar

Concentrator

Multi focalInterocular

Lens

Low-profileOverheadProjector

Micro lenses

1983Optical

TechnologyCenter Formed

StructuredSurface

AbrasivesShaped Particles

TrizactAbrasives

Scotchlite DGS

InternallyLit Signs

LightPole

LightedGuidance

Tube

LightedLane

Marker

Lane MarkersFluorescent

DGSConspicuity

DG3

Stem WebTape

ControlTAC

SmartAdhesives Micro Comply

Electrical Connectors

StructuredSurface

Filter ISOporous

StructuredSurface Sensor

Micro-channelcooling

FluidTransport

High flowFilter

ProgrammedOptics for Signs

Griplets

LENSES

ILLUMINATION

REFLECTIVEMATERIALS

ABRASIVES

ADHESIVES

MATERIALS

ELECTRONICS

PrismReflectivity

ReclosableFasteners

Wide AngleDGS

Cube cornerDiamond

GradeSheeting


As well as our history, it is the engine of our future growth We believe that one of the keys to sustainable success is unfettered and well-directed innovation– But it’s not only about monetary volume, it’s also about direction– Shared technology model essentially unique– The 15% rule is alive and well

We’ll be searching for disruptive technologies as well as logical developments and extensions to invent new futures for our productsWe’ll increasingly prospect for “just out of the garage” technology developments key to building our coreThe heart and soul of 3M’s approach will remain technological differentiation and application across multiple lines of businessWe’ll add “digital” oriented competencies over time

The Role Of Technology and Innovation at 3M


The World’s Most Innovative Companies 2005

Source: “The World’s Most innovative Companies”, Business Week, April 24, 2006

15. IDEO15. Southwest15. Porsche15. Intel

14. Dell14. Samsung14. Intel14. Sony

13. Sony12. Target12. Sony12. Dell

12. Samsung12. IDEO12. RyanAir12. P&G

11. Virgin11. Wal-Mart11. IKEA11. Virgin

10. IBM10. Dell10. eBay10. Infosys

9. Starbucks9. IBM9. GE9. Nokia

8. Nokia8. Microsoft8. BMW8. Toyota

7. Proctor & Gamble7. Starbucks7. Virgin7. GE

6. General Electric6. GE6. Toyota6. IBM

5. Microsoft5. Toyota5. 3M5. Microsoft

4. Toyota4. 3M4. Microsoft4. Samsung

3. 3M3. P & G3. Nokia3. 3M2. Google2. Google2. Google2. Google

1. Apple1. Apple1. Apple1. Apple

GlobalNorth AmericaEuropeAsia


Innovation Is Not Just About Process, It’s Also About Imagination and People

3M GDP

→ 10%

≈3-4%

Aspirational Long Term Organic Growth

CommercialExcellenceCustomers

Imagination

Inspired GrowthMinded Leaders

Globalization

Technology

Growth

Growth MindedInventors

X

Great Products

X

Clear Goal of > 2X GDP


Some Breakthrough 3M Products

Advanced Composite Conductor

Dual Brightness Enhancing Films

Littmann® Electronic Stethoscope with A mbient

Noise Reduction Flexible Circuit

3M Trizact Abrasives

Post-it Picture Paper

3M Confirm Laminate with Floating Image


3M Patent Portfolio

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2000

2001 2002

2003

2004 2005

2006

2007 2008

2009

2010

2011

Pend

ing

& Is

sued

Pat

ents

US Pending & Issued OUS Pending & Issued

11.2 % CAGR

13.5% CAGRApproaching 100,000


3M BRICP Patent Filings

0

100

200

300

400

500

600

700

800

900

2002 2003 2004 2005 2006 Projected

China Brazil India Russia Poland

Approaching 1000 in 2006


3M Will Lead The 21st Century Materials Science Revolution

Rapid Expansion of

Manufacturing

1950s - 60s

Material Substitution (i.e., Metal to Plastics)

1970s – 80s

Nanotechnology

2000 ->

Adper™

Adhesive Named Top Ten

Nanotech Product


3M, Becoming the World’s Nanotechnology Giant

What is it?; The application of micro-manufacturing and micro-assembly of products in sizes less than 1000 nanometers

3M has more than $1 Billion in sales from nano products– And the broadest patent portfolio in the world

The next wave of the breakthroughs will come from nanotechnology

3M has applications in many fields;– Self assembling molecules in medical applications

– Optical applications

– Adhesives and abrasives

– Fuel cells

– 3M Surface Modified Ceramic Nanoparticles for LCD TV screens

New applications are being discovered every day


New Applications of Nanotechnology; Fuel CellsWhat is a Fuel Cell?

The ultimate potential is generation of off-grid electricity from hydrogen produced from completely renewable, widely dispersed energy sources.

HydrogenOxygen from the air

Stored HydrogenFuel Cell

Heat

Water

Electricity


Nanostructured Thin Film Catalysts for Fuel Cells

50 square km field of new wheat, 4" tall, 2" apart12,355 Acres

Shrink it down by factor of 100,000

50 cm2 MEA

1 NanostructuredWhisker for EachBlade of Wheat

=~ 4 billion whiskers/cm2


3M Fuel Cell Membrane Manufacturing Lines

Alpha Line

• Input material from CCM line & GDL process

• Robotic assembly process• Precision cut• Sequenced assembly• Bonded under heat & pressure• Automated gasket dispensing• Curing

Pi Line

Menomonie, Wisconsin


Another Nanotechnology SuccessBEF (Brightness Enhancing film) Optical Film Solutions

Main LCD for Mobile Phone

Sub-LCD for Mobile Phone

Digital Still CameraPDA

Thin BEFThin BEFLight guide plateESR

LCD Panel

Structure of Backlight


New Functionalities Enabled byMultilayer Optical Films

Mirrors without

metal

Polarization without absorption

Color without colorants

Light without heat

Reflective polarizer for LCD brightness enhancement

98.5 - 99.5% reflectiveHighest efficiency mirror known Multiple bounce for light transport and redirection

99.5%


Advancing 3M’s GrowthAdvancing 3M’s Growth


Adjacency Mega Trends Seeded by small M&AElectronics and softwareFacilitated by grouping

RFID/Wireless/GPSMinerals extractionOil & GasFood safetyBorder crossing & securityConsumer Electronics

The Four Principal Elements Of Growth We’ll Use

Grow the Current Core Business

Build New Business via EBOs

StrategicThrust

Complementary Acquisitions


Defend and extend the coreBuild scaleBuild relative shareEmphasize localizationDisruptive technologiesBuild long term competency

Follows core strategySupports adjacenciesMostly tuck-insBaby bear strategy

BRICPEastern EuropeWestern EuropeJapanAustralasiaGrowth everywhere


Growing The Current Core Business

Imagine, dream and inventBeat competitors to the futurePlan for cannibalizationLicensing as a routeAvoid NIH syndrome

Invent a New Future

Build Broad LongTerm Competencies

Develop broad based long-term capabilitiesAcquire supporting core technology with quality brandsBuild volume and scale

Build key customer partnershipsCustomization as toolConstant reinvention; drill downLocalization and differentiation

Grow the Current Core

Extend The Core

Build first where we’re strongGet scale & build relative shareFill in the product “white spaces”Become important to customersUse dual brandingInternational product localizationLocal acquisitionsPrivate labeling


Core StrategyGrow the Current Core

Build first where we are strong

Constant reinvention in the Current Core (Light Pipes → BEF → DBEF→ APF)

Build even stronger key customer partnerships

Customize for customers

– Solving their needs as well as ours

– Drilling into the niche and capturing new product segments

Localization of production

– Factories, businesses, product converting

Becoming more intimate with our customers

Invent a New FutureGrow the

Current Core

3M Inve stor Meeti ng 20 06 © 3M 20 06 All Righ ts Re served


Extend The Core


Build key customer pa rtnershipsCustomization as toolConsta nt reinvention; drill downLocalization and differenti ati on

Imagine, dream and inventBeat competitors to the futurePlan for cannibal izati onLi ce nsi ng as a routeAvoid NIH syndrome

Develop broad based l ong-term capabi lit iesAcquire supporting core technology w ith quality bran dsBuild volume and scale

Invent a New Future


Build f irst where we’ re strongGet scal e & build relati ve shareF ill in the product “white spaces”Become important to customersUse dual brandingInte rnational product local izati onLocal acquisit ionsPrivate label ing


Core StrategyExtend the Core – Build Scale and Relative Share

Extend the core to build scale and grow relative share

Fill in the product “white spaces” and become more important to our customers

Defend created markets against new entrants

Use dual branding in the upper middle market

Emphasize product localization; use a mixture of brands & local acquisitions

Thoughtfully extend private labeling

Accurate capacity planning

Significant new volume exists in the core. Lack of product breadth often weakens our customer influence

Invent a New Future

Extend The Core

3M Investor Meeti ng 2 006 © 3M 2006 All Rights Res erv ed


Extend The Core


Bu ild key custome r partnershipsCusto mization as toolConstant reinvention; drill downLocalization and differe nti ati on

Imagine, dream an d i nventBea t competi tors to the futurePlan for cannibal izati onLicensing as a rou teAvoid NIH syndrome

Develo p broad based lon g-term capabili ti esAcquire supporti ng co re technolog y with quality b ran dsBuild volume and scale

Invent a New Future


Bui ld first wh ere we’ re stro ngGet scale & b uild relative sh areFill i n the product “white spaces”Become importa nt to customersU se dua l b ra ndingInternational product l ocalizationL ocal acquisit ionsPrivate labeli ng


Core StrategyUsing Differentiated Brands and Technology to Grow Our Market

Selective privatelabeling or

manufacturing JVs to support partnership

customers

Use principal brands and

differentiated technology or features

Use Secondary Brands /

Technologies

Industrial Consumer

Diamond Grade™

High Intensity Grade

Engineering Grade


Core StrategyVigorously Focus On Inventing A New Future

While developing and growing the existing market, plan for cannibalization by inventing a new futureUse our technological prowess to invent the natural substitute technologyTo aid speed we’ll:

– Strategic licensing of technology– Investment in small technology companies– Greater University support and liaison– Use imagination and invention extensively

Avoid the NIH SyndromeBeat our competitors to our future

All markets wax and wane; we want to be there when it waxes and reinvent it before it wanes

Invent a New Future

Invent a New Future

3M Inve stor Meeti ng 20 06 © 3M 20 06 All Righ ts Re served


Extend The Core


Build key customer pa rtnershipsCustomization as toolConsta nt reinvention; drill downLocalization and differenti ati on

Imagine, dream and inventBeat competitors to the futurePlan for cannibal izati onLi ce nsi ng as a routeAvoid NIH syndrome

Develop broad based l ong-term capabi lit iesAcquire supporting core technology w ith quality bran dsBuild volume and scale

Invent a New Future


Build f irst where we’ re strongGet scal e & build relati ve shareF ill in the product “white spaces”Become important to customersUse dual brandingInte rnational product local izati onLocal acquisit ionsPrivate label ing


Core StrategyBuild Broad Long Term Basic Competencies

Build deep, broad and consumer-friendly competitive advantage in our core marketsQuality acquisitions and internal development Any acquisitions will be premium brands that deepen our technology bench, provide new applications and channel access for 3M Filling in the logical complementary core extensions, & providing new platforms for growth

Long term market power can be enhanced by long term strengthening of the core and near adjacencies

Build Broad Long Term

Competencies

3M Investo r Meeting 2006 © 3M 20 06 All Righ ts Re ser ved


Extend The Core


Bui ld key customer partnershipsCustomizati on as toolConstant rei nvention; dril l downLocalization and dif ferentiat ion

Imagine, dream and inventBeat competitors to the futurePlan for cannibalizationLi censing as a routeAvoid NIH syndrome

Develop broad based long-term capabil iti esAcqui re supporti ng core technology wi th quality brandsBui ld vol ume and scale

Invent a New Future


Build first where we’re strongGet scale & buil d relat ive shareFi ll in the product “white spaces”Become important to customersUse dua l brandingInternational product localizati onLocal acquisiti onsPri vate labeling


Acquisitions and Divestitures

Over time we’ll divest or close those businesses where;– We cannot, over time, build scale or good relative share, or– We cannot differentiate through technology, or– The base technology is at “end of life” and cannot be refreshed, or– The risk profile suggests another owner could extract more

value than 3M

The majority of acquisitions will be EPS accretive or neutral inyear 1 and EVA accretive by the end of year 3They will closely reflect and support our strategic planWe’re prepared to sacrifice some % margin for additional growth provided net shareholder value creation is positive. We expect returns to remain high



StrategicThrust




Growth Acquisitions - Screening Criteria

InorganicGrowthOpportunities

High Growth Market Screen

Select Healthcare segmentsSafety & ProtectionTrack & TraceEnergyDisplay & GraphicsConsumer

Operating Metrics & Fit

Screen

Double digit growth Potential for margin improvementAbility to leverage across current customers Integration with current 3M innovation processes

ValuationandSize

ValuationandSize

Mostly Mid-size rather than transformationalEarly EPS accretion

Mostly Mid-size rather than transformationalEarly EPS accretion

PotentialTargets



StrategicThrust




EBO Adjacencies

Concept– Enhanced focus on emerging business opportunities with high growth

– Concept used where capability exists with ready adjacencies but no current focus

“EBOs” are Emerging Business Opportunities used to drive faster growth

AttributesCollect all related activities into a single entity“Housed” in a SegmentLeader reports directly to the EVPAcquisitions and additional resources provide supportGrowth and speed are the focus

Initial EBO CandidatesFiltration

Track & Trace

Energy & minerals extraction

Food Safety

Initial EBO CandidatesFiltration

Track & Trace

Energy & minerals extraction

Food Safety

1

2

3

4



StrategicThrust




EBO Adjacencies: Filtration

What products do we have?Membrane cartridges, antimicrobial media

What business are we in?Fluid Processing - cleaner, safer fluids: reduce operating costsHealthcare Market - depth filtration mediaWater Filtration - bacteria reduction

2,324Total

137Patents

12Business Development

What is the scale of the opportunity?CAGR2009E2006E($MM)

10%$7,300$5,500MarketWhat are our assets?

Manufacturing Capability

400Marketing & Sales

Membrane materials & processing

1700Manufacturing / Other

212TechnicalPeople

CUNO is a strong player with industrial fluid processing customers


Filtration EBO: A Critical Capability for 21st Century Healthcare & Industrial Production

Filtration

Water

Appliance

Appliance manufacturers Direct

marketersOEMs

Residential

Plumbing wholesalers

RetailersWater

Specialists

Kitchen & Bath

Food Service

RestaurantsPost mix

drinkCoffee service

Fluid Processing

General Industrial

Paints / Coatings

Electronics

Chemicals

Oil & GasWafer

Handling

Packaging

Components

Health Care

Depth Filtration

MembraneTFF /

SystemsChromato-graphy

Food & Beverage

Filter Aids

TFF / Systems

Filter

Sheets

PharmaBioprocess

Biologics


What products do we have?Library

-3M™ One-Tag RFID SystemOffice/Legal

-3M™ RFID Tracking Solutions: File LocationCommunications / Utilities

-3M Dynatel™ Location and Marking Products-Telecom Access Control – CMD Germany

Supply Chain Execution-HighJump™ Software

What business are we in?Automated tracking of critical assets and productsBenefits include: Asset utilization, cycle time reduction, working capital reduction & product security

EBO Adjacencies: Track & Trace

176Total

80Patents




What other assets do we need?

56Marketing & Sales

GPS, wireless, other electronics and software capability

12Manufacturing / Other

94TechnicalPeople

Specific applications for high value asset management solutions


Track And Trace Has Broad Based Opportunities

Existing and Potential Solution Spaces

How Am I?

Where Am I? Sensor Networks • Sensors• Temp• Vibration• Humidity• Light• Contaminants

Who Am I?• RFID Tag• Bar Code • Database

• Tracking Software • RFID Network• Wireless Location• RTLS• GPS• Road Tolling

Improve and Advantage Me!

• Location-based serv ices• Supply chain optimization• Competitive “superiority”

in Order Fulfillment– Supply chain– Distribution


Example Opportunities in the RFID and GPS Space

RFID+

GPS 1

2

3

4

5

6

Container Monitoring

Food Supply Chain

Medical Specimen Tracking

Yard and Warehouse Management

Oil, Gas and Minerals Extraction

Ground Vehicle Asset Tracking

Innovation 41

Tr ack and Trace Needs RFID and GPS Capability

RFID +GPS Track and Trace

RFID +GPS Track and Trace


Perhaps the Largest Single Growth Opportunity

GPS RFID

UHFID

Consumer

Medical

Information

Security

Military Agriculture

Transport

Industrial

Children

Border Crossing Passports

ID cards

Criminals

Pets

Navigation

Target IDBattlefield Mngmt

Asset Mngmt

Automotive

Railway Signals

Road Toll

AssetTrackRunway

Mgmt

Vehicle Security

Animals Fish Farms

Vehicle Security

Navigation OutdoorSki

Hike

Fish

Personal

Patients

PathologyRecords

Transplants

Assets

Library

Government

Surveying

Records

AssetTrack

Warehouse

Containers

Packages


Adjacency EBOs: Power Transmission

What products do we have?Family of high performance high temperature ACCR conductors that can replace any of the overhead line conductors in use today

What business are we in?High performance overhead cables to increase transmission capacity by 2-3X using existing towers and infrastructureCost competitive, quick solution, no visual change to line, no permitting because it use existing rights of way

26Patents




2Marketing & Sales

11Total

8TechnicalPeople

Multiple test lines with utilities; lower manufacturing costs is the key


The Opportunity of International Growth

International growth rates 2X – 3X US

61% of 3M sales are outside the United States today, ≈ 70% in 2011

Focus is on BRICP; double investments there

China growing ≈ 35% CAGR, expecting circa $1Bn sales in 2006

India growing at 40%+

Double digit growth rates in E. Europe and LA

W. Europe grows faster on localization strategies

Acquire local brands and manufacturing as well as organic expansion



StrategicThrust




Capital Expenditure in BRICP Countries

Increased Capital Expenditures to BRICP drives OUS growth

$34 $34$64

$98

$166

$217$240

$280

$0

$50

$100

$150

$200

$250

$300

2002 2003 2004 2005 2006 2007 2008 2009

BRICP Capital Investment


Building Emerging Country Capacity; End 2006

INDIA

● 722 Employees

● 2 Plants

POLAND

● 652 employees

● 2 Plants

RUSSIA

● 237 Employees

● 1 Plant

BRAZIL

● 2,943 Employees

● 3 Plants

CHINA

● 2,070 Employees

● 6 Plants


International Growth Investing in Higher GDP - Growth Economies

*GDP is weighted average of 3M sales by region

2003 2006E 2011E

APAC25%

US46%

LAC7%

EM EA22%

APAC29%US

38%

LAC8%

EMEA25% EMEA

26%

LAC9%

US30% APAC

35%


Operational Excellence


Our Foundational Beliefs on Competitiveness

We compete on six competitive platforms

Low cost is the ultimate competitive deadly weapon

Scale and relative share are vital for efficiency and competitiveness

Follow the customer value chain

Pristine service and brands can overcome price in some markets

We can compete best in the core, but the core evolves dynamically

People

Cost

Brands

Service

Technology

Distribution

6σ & LeanGlobal sourcingFactory costsTaxes

Secure the bestSecure the broadest

NanotechnologyElectronics & Software

Speed to marketOTIFQuality

Inspire and guideDevelop leadershipContinuing education

Protect the PrimarySecondary for local


Keeping Our Commitment To Operational Excellence

Our commitment to operational excellence and Six Sigma remains strong

Put process in where it belongs… and ignore it where it doesn’t

Six Sigma is evolving to also include “Lean” methods, beginning first in manufacturing

Operational excellence focus will be expanded to cover procurement and logistics– Offers large opportunities for margin expansion & sales growth

Initiatives will be driven into the fabric of 3M’s culture


Moving The Supply Chain Closer to The Customer Is A Priority

Master Production Schedule

FG Inventory

Time10 Days

220 Days

Reducing Cycle Times

Finished Goods

Plant 1

Plant 2

Plant 3

Plant 4

Plant 5Plant 6

Raw Materials

Shortening Supply Chains


History Of Flags - Manufacturing

2006WIP/RM’s: <20 daysCycle time: <15 days

Lolita, TXBOPP Jumbo

Hutchinson, MN•Jumbo Coating & Printing •Slitting•All Assembly

MNCustom Printing

Greenville, SC*Polyester Jumbo

Hartford City, IN*Matte Coating

Nevada, MO*LAB, Adh, Color*Slitting*1” Assembly*2” Assembly

Milwaukee, WI*2” Prtg (Index)*Leaderstrips

Amery, WI*Split Flag Asmby*2” Prtd Asmby*Hldy Tags AsmbyMinneapolis, MN*1”, 2” Printed*Holiday Tags*Quality Flags

U.S./O.U.S. Distribution

U.S./O.U.S. Distribution

1988-1996WIP/RM’s: 100 daysCycle time: 95+ days

CMA

Jumbo Production

12” Master Roll converting into Lefts and Rights

Gannicott Master Pad Converting

Automated Assembly and Pack-out


And Here’s What Happens To Cost When You Do It

6 8 3 - 4 /6 8 3 - 4 A B U n i t C o st B r e a k d o w n

$ 0 .0 0

$ 0 .1 0

$ 0 .2 0

$ 0 .3 0

$ 0 .4 0

$ 0 .5 0

$ 0 .6 0

$ 0 .7 0

$ 0 .8 0

$ 0 .9 020

00

2 001

2002

2003

200 4

2 005

-YTD

Long

card

2 Pa

ck

O th e r P a c k a g in g

In d ire c t

H o ld D o w n L a b e l

L o g o L a b e l

D i s p e n s e r

P a d

M a c h in e

L a b o r

100%

50%

25%

75%

0%

Non-Material Unit CostFlags

Cost element 1Cost element 2Cost element 3Cost element 4Cost element 5Cost element 6Cost element 7Cost element 8


ECB Service Improvements Drive Growth

► Approximately 1/3 of business recovery due to improved service► Improved fill rate 2000 bps from a low of 75% in Dec ’03 to a high of 95% in Aug ’05► Consistently achieving 90% or better► Customers are recognizing better service with loyalty

Critical business differentiator that powers growth

70%

75%

80%

85%

90%

95%

(20%)

(15%)

(10%)

(5%)

0%

5%

10%

15%

20%

25%

ECB Service ECB Sales Growth

% O

n-Ti

me

& In

-Ful

l YOY Sales G

rowth

Jan ’03 Mar ’06

Step-Change Improvement in Service and

Sales


Manufacturing Footprint

We’re going where the customers are going

Where we have scale, or can get scale, manufacturing will be done in single focus plants in high volumes close to the customer base– Shorten supply chains, improve order on-time-in-full (OTIF) and drive out

WIP and FG

– Over time, more supply chains will be designed for Make To Order supply

“X-Factors” are increasingly with us and, while unpredictable in detail and nature, are probably a feature of life going forward

Plants will be highly automated and designed with a small amountof surge capacity


Sourcing: Price vs Inflation

Pricing initially difficult in 2004

Added value made positive pricing power better in ’05

Negative price still expected to be a factor in ‘06

Asian sourcing up 30 % over 2004

Local sourcing developed before local manufacturing

Operating sourcing offices in Eastern Europe, China and Latin America

Global business process driving down back office costs

Reverse auctions for commodities showing great promise

Legal entity and tax structures important

Net Impact ($MM)

264 209 110316

68

-300-100100300500

'02 '03 '04 '05 '06Net Cost Savings Pricing

Great Progress, More To Do


So There’s Still More On the Table In Operations

3M purchases $8Bn plus of materials and services each year.A 1% improvement in this cost improves OP margin by 30 bps

Logistics; stretched by the complex nature of 3M’s manufacturing footprint, logistics will be eased by:-– Release of capital for new capacity in the core

– Close to market manufacturing

OTIF performance will be improved with selected capacity increases. Sales growth is a non-linear positive function of OTIF

Shortened supply chains will release working capital that can beput to work on growth

Scale in more businesses will continue to reduce factory costs


Relative Value Of Growth For Different Companies

MMM 5.2GE 11.4

IBM 3.5DHR 5.1

PG 7.2XOM 2.1GM 2.4

WMT 1.6#REF! #REF!#REF! #REF!#REF! #REF!

0.0

2.0

4.0

6.0

8.0

10.0

12.0

MMM GE IBM DHR PG XOM GM WMT

Company Ticker

Rel

ativ

e V

alue

of G

row

th

Chart shows ratio of value creation from 100 bps of growth to 100 bps of margin

Depending on capital structure and margin, growth generates more incremental shareholder value for than margin improvement alone

Acquisitions add value by blending the value lost from margin dilution and the value added from incremental growth and mass

Value Of Growth Vastly Exceeds Value Of Margin Expansion

Source:HBR April 2005


Summary Target Growth Picture

3% - 5% sales growth in market adjacencies, acquisitions and EBOs, 20% incremental margin; using new or primary brands

2% - 4% sales growth in subsidiary markets, at or above peer margins; using secondary brands

International expansion occurs in all three dimensions.

Traction and momentum will occur at different rates.

5% - 8% sales growth in traditional 3M core; 40% incremental leverage using primary brands


What’s Our Plan Timetable? The Big Picture

5-8% growth in 2006, 10-12% EPS growth

8%+ 2008, 12-15% EPS growth

10%+ 2011, 15%+ EPS growth

Growth Rate

Time

Not every contributory growth element will begin at the same time or accelerate at the same rate


Coordinated Value Creation Strategy

Strategy ► Review business units by key metr ics inc luding growth and capital effic iency

► Work in high growth spaces with reasonable EPS targets . Value creation orientation. Less margin obsessive

Strategy ► Increase leverage on the balance sheet. Be willing, if necessary, to dip below AA rating to A

Near TermTactics

► Put ongoing review metr ics in place► Divestiture of Pharmaceuticals► Examine others for divestiture

► Use cash flow for investment, acquis itions and share buybacks

Near TermTactics

Near TermTactics

► Safety & Protection► Medical, Dental & Orthodontics► Display & Graphics (Optics & Films)► Track & Trace (RFID/Wireless/GPS)► Wider Consumer Offer ings

Near TermTactics

► Focus on adjacent segments with higher growth, cost and revenue synergies

Strategy ► Focus on mega trends, scale and relative share in core business

Strategy

Selected DivestitureSelected

DivestitureOrganic Growth

Capital StrategyCapital

StrategyAcquisitionsAcquisitions


10.0%8%+Safety, Security and Protection Services

7.1%5-8%Electro and Communications5.6%5-8%3M

5.7%5-8%Consumer and Office6.7%8%+Display and Graphics4.0%6-8%Health Care Business (ex. Pharma)

4.2%5-8%Industrial and Transportation Business

Last 4 Qtr. Avg.LC* Target

Near-Term Organic Local Currency Growth Target

*Local Currency Sales Growth = Volume + Price

Strong Contributions Across the Portfolio

Organic


32.0%

16.1%17.8%

28.8%

23.5%

30.5%32.9%

13.2%14.0%13.3%

0%

5%

10%

15%

20%

25%

30%

35%

2001 2002 2003 2004 2005

3M Peers Median (1)

25.9%

10.9%13.0%

22.3%

19.3%22.6%

22.2%

9.1%10.5%11.0%

0%

5%

10%

15%

20%

25%

30%

2001 2002 2003 2004 2005

3M Peers Median (1)Note: ROE represents Net Income/Shareholder Equity; ROIC represents tax-affected EBIT/(Debt + Shareholder Equity + Minority Interest).(1) Peer group includes Danaher, Emerson, Eaton, General Electric, Honeywell, Ingersoll-Rand, ITT Industries, Illinois Tool Works, Textron, Tyco, and United Technologies.

Return on Equity Return on Invested Capital

Return on Equity and Return on Invested Capital


3M vs. Peers ……. DuPont Analysis

Source: FactSetSee Appendix page 44 for details. Data for 2005.Note: GE removed for comparison purposes because of its financing business. GE NI margin = 12.3%, Asset Turn = 0.22x, Leverage = 6.15x, and ROE = 16.7%

3MITWDanaherIREmersonTycoUTXEatonHONTextronITT

Net Income x Sales x Assets = ROE %Sales Assets Equity

Net IncomeMargin % x Asset Turn x Leverage = ROE

15.3% 1.03x 2.03x 32.0%11.6% 1.13 1.52 19.8%11.4% 0.87 1.80 17.8%10.0% 0.90 2.04 18.3%8.8% 1.04 2.18 20.0%8.3% 0.64 1.92 10.1%7.4% 0.93 2.70 18.6%7.2% 1.09 2.70 21.3%5.7% 0.86 2.87 14.0%5.1% 0.61 5.04 15.8%4.2% 1.05 2.59 11.5%


So ….. In Summary


Moving Forward

A broad base of support for growth exists across 3M.

– Employees are ready for growth after years of internal focus on cost reduction

Accelerated growth is available while maintaining superior margins

Barriers to growth have been mainly internal and even self generated, not external

The unique nature of 3M’s business model lends power unseen elsewhere in American Industry

Technological differentiation will remain hallmarks of 3M’s competitive strategy for the future

We’ll “weed and feed” on divestitures and acquisitions to optimize focus, opportunity and value


Moving Forward

Our Number 1 growth priority is to build scale and relative share in 3M’s traditional core markets

– Solve the chronic capacity underinvestment in the core

– We’ll build scale and relative market share everywhere

– The need for speed dictates a blended solution of capacity investment and bolt on acquisitions, themselves dictated by reasonable price and availability

Our Number 2 growth priority is international expansion with a focus in BRICP countries

Our Number 3 growth priority is adjacency expansion in high growth EBOs

Supported by attitudinal change to secondary markets– Standing firm in markets 3M has traditionally vacated when IPR wanes

– Keeping costs down and margins well above our competition, while driving for growth


Moving Forward

Focus our technical resources on supporting the strategic plan

Build shorter and more nimble supply chains to drive cost savings and OTIF improvements– Relentless focus on productivity and efficiency

– Will require some increased Capital Expenditure

Improved technological platforms in software and electronics– Needed to support Track and Trace initiatives and Software Services

More effective use of branding, particularly secondary brands in international markets

Greater product and brand localization

Growth is not magic, but it’s a different and often harder, but ultimately more rewarding kind of work

Documents

An Emerging Strategy for Growth - library.corporate …library.corporate-ir.net/library/80/805/80574/items/195605/Buckley...An Emerging Strategy for Growth. ... Defining 3M’s Core