Not too
many years ago, the temple of management was General Electric (GE ). Former CEO Jack Welch was
the high priest, and his disciples spread the word to executive suites
throughout the land. One of his most highly regarded followers, James McNerney,
was quickly snatched up by 3M after falling short in the closely watched race to
succeed Welch. 3M's board considered McNerney a huge prize, and the company's
stock jumped nearly 20% in the days after Dec. 5, 2000, when his selection as
CEO was announced. The mere mention of his name made everyone
richer.
McNerney was the first outsider to lead the insular
St. Paul (Minn.) company in its 100-year history. He had barely stepped off the
plane before he announced he would change the DNA of the place. His playbook was
vintage GE. McNerney axed 8,000 workers (about 11% of the workforce),
intensified the performance-review process, and tightened the purse strings at a
company that had become a profligate spender. He also imported GE's vaunted Six
Sigma program�a series of management techniques designed to decrease production
defects and increase efficiency. Thousands of staffers became trained as Six
Sigma "black belts." The plan appeared to work: McNerney jolted 3M's moribund
stock back to life and won accolades for bringing discipline to an organization
that had become unwieldy, erratic, and sluggish.
Then, four and a half
years after arriving, McNerney abruptly left for a bigger opportunity, the top
job at Boeing (BA ). Now his
successors face a challenging question: whether the relentless emphasis on
efficiency had made 3M a less creative company. That's a vitally important issue
for a company whose very identity is built on innovation. After all, 3M is the
birthplace of masking tape, Thinsulate, and the Post-it note. It is the
invention machine whose methods were consecrated in the influential 1994
best-seller Built to Last by Jim Collins and Jerry I. Porras. But those
old hits have become distant memories. It has been a long time since the debut
of 3M's last game-changing technology: the multilayered optical films that coat
liquid-crystal display screens. At the company that has always prided itself on
drawing at least one-third of sales from products released in the past five
years, today that fraction has slipped to only one-quarter.
Those results
are not coincidental. Efficiency programs such as Six Sigma are designed to
identify problems in work processes�and then use rigorous measurement to reduce
variation and eliminate defects. When these types of initiatives become
ingrained in a company's culture, as they did at 3M, creativity can easily get
squelched. After all, a breakthrough innovation is something that challenges
existing procedures and norms. "Invention is by its very nature a disorderly
process," says current CEO George Buckley, who has dialed back many of
McNerney's initiatives. "You can't put a Six Sigma process into that area and
say, well, I'm getting behind on invention, so I'm going to schedule myself for
three good ideas on Wednesday and two on Friday. That's not how creativity
works." McNerney declined to comment for this story.
PROUD
CREATIVE CULTURE The tension that Buckley is trying to
manage�between innovation and efficiency�is one that's bedeviling CEOs
everywhere. There is no doubt that the application of lean and mean work
processes at thousands of companies, often through programs with
obscure-sounding names such as ISO 9000 and Total Quality Management, has been
one of the most important business trends of past decades. But as once-bloated
U.S. manufacturers have shaped up and become profitable global competitors, the
onus shifts to growth and innovation, especially in today's idea-based,
design-obsessed economy. While process excellence demands precision,
consistency, and repetition, innovation calls for variation, failure, and
serendipity.
Indeed, the very factors that make Six Sigma effective in
one context can make it ineffective in another. Traditionally, it uses rigorous
statistical analysis to produce unambiguous data that help produce better
quality, lower costs, and more efficiency. That all sounds great when you know
what outcomes you'd like to control. But what about when there are few facts to
go on�or you don't even know the nature of the problem you're trying to define?
"New things look very bad on this scale," says MITSloan School of Management
professor Eric von Hippel, who has worked with 3M on innovation projects that he
says "took a backseat" once Six Sigma settled in. "The more you hardwire a
company on total quality management, [the more] it is going to hurt breakthrough
innovation," adds Vijay Govindarajan, a management professor at Dartmouth's Tuck
School of Business. "The mindset that is needed, the capabilities that are
needed, the metrics that are needed, the whole culture that is needed for
discontinuous innovation, are fundamentally different."
The exigencies of
Wall Street are another matter. Investors liked McNerney's approach to boosting
earnings, which may have sacrificed creativity but made up for it in
consistency. Profits grew, on average, 22% a year. In Buckley's first year,
sales approached $23 billion and profits totaled $1.4 billion, but two quarterly
earnings misses and a languishing stock made it a rocky ride. In 2007, Buckley
seems to have satisfied many skeptics on the Street, convincing them he can
ignite top-line growth without killing the McNerney-led productivity
improvements. Shares are up 12% since January.
Buckley's Street cred was
hard-won. He's nowhere near the management rock star his predecessor was.
McNerney could play the President on TV. He's tall and athletic, with charisma
to spare. Buckley is of average height, with a slight middle-age paunch, an
informal demeanor, and a scientist's natural curiosity. In the office he prefers
checked shirts and khakis to suits and ties. He's bookish and puckish, in the
way of a tenured professor.
Buckley, in short, is just the kind of guy
who has traditionally thrived at 3M. It was one of the pillars of the "3M Way"
that workers could seek out funding from a number of company sources to get
their pet projects off the ground. Official company policy allowed employees to
use 15% of their time to pursue independent projects. The company explicitly
encouraged risk and tolerated failure. 3M's creative culture foreshadowed the
one that is currently celebrated unanimously at Google (GOOG ).
Perhaps all of
that made it particularly painful for 3M's proud workforce to deal with the hard
reality the company faced by the late '90s. Profit and sales growth were wildly
erratic. It bungled operations in Asia amid the 1998 financial crisis there. The
stock sat out the entire late '90s boom, budging less than 1% from September,
1997, to September, 2000. The flexibility and lack of structure, which had
enabled the company's success, had also by then produced a bloated staff and
inefficient workflow. So McNerney had plenty of cause to whip things into
shape.
GREEN-BELT TRAINING REGIMEN One of his main
tools was Six Sigma, which originated at Motorola (MOT ) in 1986 and became a
staple of corporate life in the '90s after it was embraced by GE. The term is
now so widely and divergently applied that it's hard to pin down what it
actually means. At some companies, Six Sigma is plainly a euphemism for
cost-cutting. Others explain it as a tool for analyzing a problem (high shipping
costs, for instance) and then using data to solve each component of it. But on a
basic level, Six Sigma seeks to remove variability from a process. In that way
you avoid errors, or defects, and increase predictability (technically speaking,
Six Sigma quality has come to be accepted as no more than 3.4 defects per
million).
At 3M, McNerney introduced the two main Six Sigma tools. The
first and more traditional version is an acronym known as DMAIC (pronounced
"dee-may-ic"), which stands for: define, measure, analyze, improve, control.
These five steps are the essence of the Six Sigma approach to problem solving.
The other flavor is called Design for Six Sigma, or DFSS, which purports to
systematize a new product development process so that something can be made to
Six Sigma quality from the start.
Thousands of 3Mers were trained as
black belts, an honorific awarded to experts who often act as internal
consultants for their companies. Nearly every employee participated in a
several-day "green-belt" training regimen, which explained DMAIC and DFSS,
familiarized workers with statistics, and showed them how to track data and
create charts and tables on a computer program called Minitab. The black belts
fanned out and led bigger-scale "black-belt projects," such as increasing
production speed 40% by reducing variations and removing wasted steps from
manufacturing. They also often oversaw smaller "green-belt projects," such as
improving the order fulfillment process. This Six Sigma drive undoubtedly
contributed to 3M's astronomical profitability improvements under McNerney;
operating margins went from 17% in 2001 to 23% in 2005.
While Six Sigma
was invented as a way to improve quality, its main value to corporations now
clearly is its ability to save time and money. McNerney arrived at a company
that had been criticized for throwing cash at problems. In his first full year,
he slashed capital expenditures 22%, from $980 million to $763 million, and 11%
more to a trough of $677 million in 2003. As a percentage of sales, capital
expenditures dropped from 6.1% in 2001 to just 3.7% in 2003. McNerney also held
research and development funding constant from 2001 to 2005, hovering over $1
billion a year. "If you take over a company that's been living on innovation,
clearly you can squeeze costs out," says Charles O'Reilly, a Stanford Graduate
School of Business management professor. "The question is, what's the long-term
damage to the company?"
Under McNerney, the R&D function at 3M was
systematized in ways that were unheard of and downright heretical in St. Paul,
even though the guidelines would have looked familiar at many other
conglomerates. Some employees found the constant analysis stifling. Steven Boyd,
a PhD who had worked as a researcher at 3M for 32 years before his job was
eliminated in 2004, was one of them. After a couple of months on a research
project, he would have to fill in a "red book" with scores of pages worth of
charts and tables, analyzing everything from the potential commercial
application, to the size of the market, to possible manufacturing
concerns.
Traditionally, 3M had been a place where researchers had been
given wide latitude to pursue research down whatever alleys they wished. After
the arrival of the new boss, the DMAIC process was laid over a phase-review
process for innovations�a novelty at 3M. The goal was to speed up and
systematize the progress of inventions into the new-product pipeline. The DMAIC
questions "are all wonderful considerations, but are they appropriate for
somebody who's just trying to...develop some ideas?" asks Boyd. The impact of
the Six Sigma regime, according to Boyd and other former 3Mers, was that more
predictable, incremental work took precedence over blue-sky research. "You're
supposed to be having something that was going to be producing a profit, if not
next quarter, it better be the quarter after that," Boyd says.
For a long
time, 3M had allowed researchers to spend years testing products. Consider, for
example, the Post-it note. Its inventor, Art Fry, a 3M scientist who's now
retired, and others fiddled with the idea for several years before the product
went into full production in 1980. Early during the Six Sigma effort, after a
meeting at which technical employees were briefed on the new process, "we all
came to the conclusion that there was no way in the world that anything like a
Post-it note would ever emerge from this new system," says Michael Mucci, who
worked at 3M for 27 years before his dismissal in 2004. (Mucci has alleged in a
class action that 3M engaged in age discrimination; the company says the claims
are without merit.)
There has been little formal research on whether the
tension between Six Sigma and innovation is inevitable. But the most notable
attempt yet, by Wharton School professor Mary Benner and Harvard Business School
professor Michael L. Tushman, suggests that Six Sigma will lead to more
incremental innovation at the expense of more blue-sky work. The two professors
analyzed the types of patents granted to paint and photography companies over a
20-year period, before and after a quality improvement drive. Their work shows
that, after the quality push, patents issued based primarily on prior work made
up a dramatically larger share of the total, while those not based on prior work
dwindled.
Defenders of Six Sigma at 3M claim that a more systematic
new-product introduction process allows innovations to get to market faster. But
Fry, the Post-it note inventor, disagrees. In fact, he places the blame for 3M's
recent lack of innovative sizzle squarely on Six Sigma's application in 3M's
research labs. Innovation, he says, is "a numbers game. You have to go through
5,000 to 6,000 raw ideas to find one successful business." Six Sigma would ask,
why not eliminate all that waste and just come up with the right idea the first
time? That way of thinking, says Fry, can have serious side effects. "What's
remarkable is how fast a culture can be torn apart," says Fry, who lives in
Maplewood, Minn., just a few minutes south of the corporate campus and pops into
the office regularly to help with colleagues' projects. "[McNerney] didn't kill
it, because he wasn't here long enough. But if he had been here much longer, I
think he could have."
REINVIGORATED
WORKFORCE Buckley, a PhD chemical engineer by training, seems to
recognize the cultural ramifications of a process-focused program on an
organization whose fate and history is so bound up in inventing new stuff. "You
cannot create in that atmosphere of confinement or sameness," Buckley says.
"Perhaps one of the mistakes that we made as a company�it's one of the dangers
of Six Sigma�is that when you value sameness more than you value creativity, I
think you potentially undermine the heart and soul of a company like
3M."
In recent years, the company's reputation as an innovator has been
sliding. In 2004, 3M was ranked No. 1 on Boston Consulting Group's Most
Innovative Companies list (now the BusinessWeek/BCG list). It dropped
to No. 2 in 2005, to No. 3 in 2006, and down to No. 7 this year. "People have
kind of forgotten about these guys," says Dev Patnaik, managing associate of
innovation consultancy Jump Associates. "When was the last time you saw
something innovative or experimental coming out of there?"
Buckley has
loosened the reins a bit by removing 3M research scientists' obligation to hew
to Six Sigma objectives. There was perhaps a one-size-fits-all approach to the
application of Six Sigma as the initial implementation got under way, says Dr.
Larry Wendling, a vice-president who directs the "R" in 3M's R&D operation.
"Since [McNerney] was driving it to the organization, you know, there were
metrics established across the organization and quite frankly, some of them did
not make as much sense for the lab as they did other parts of the organization,"
Wendling says. What sort of metrics? Keeping track of how many black-belt and
green-belt projects were completed, for one.
In fact, it's not uncommon
for Six Sigma to become an end unto itself. That may be appropriate in an
operations context�at the end of the year, it's easy enough for a line manager
to count up all the money he's saved by doing green-belt projects. But what
3Mers came to realize is that these financially definitive outcomes were much
more elusive in the context of a research lab. "In some cases in the lab it made
sense, but in other cases, people were going around dreaming up green-belt
programs to fill their quota of green-belt programs for that time period," says
Wendling. "We were letting, I think, the process get in the way of doing the
actual invention."
To help get the creative juices flowing, Buckley is
opening the money spigot�hiking spending on R&D, acquisitions, and capital
expenditures. The overall R&D budget will grow 20% this year, to $1.5
billion. Even more significant than the increase in money is Buckley's
reallocation of those funds. He's funneling cash into what he calls "core" areas
of 3M technology, 45 in all, from abrasives to nanotechnology to flexible
electronics. That is another departure from McNerney's priorities; he told
BusinessWeek in 2004 that the 3M product with the most promise was
skin-care cream Aldara, the centerpiece to a burgeoning pharmaceuticals
business. In January, Buckley sold the pharma business for $2
billion.
Quietly, the McNerney legacy is being revised at 3M. While there
is no doubt the former CEO brought some positive change to the company, many
workers say they are reinvigorated now that the corporate emphasis has shifted
from profitability and process discipline to growth and innovation. Timm
Hammond, the director of strategic business development, says "[Buckley] has
brought back a spark around creativity." Adds Bob Anderson, a business director
in 3M's radio frequency identification division: "We feel like we can dream
again."