“You can’t grow long-term if you can’t eat short-term”
There is no doubt that what we are going through is a crisis. For many companies, facing liquidity and profitability challenges, it is easy to tighten up spending and embrace broad-based cost-cutting. However, as the late former GE CEO Jack Welch bluntly put it: “You can’t grow long-term if you can’t eat short-term. Anybody can manage short Anybody can manage long. Balancing those two things is what management is.” Ultimately, the role of management is to balance the two sides of the seesaw. It is perhaps especially important now, as companies go into survival and hibernation mode, the competitive landscape is dramatically changing. Not losing sight of the future is ever more important.
Taking a page from 3M former CEO Sir George Buckley’s playbook, who used transparency, clear corporate communications, and well-defined metrics on R&D to revive a money-losing company on the eve of the financial crisis of ‘08.
When Buckley arrived at 3M, the company had sluggish performance and had just gone through rounds of layoffs and spending cuts. The previous management had failed to make the connection between innovation and growth. Being put in cost-cutting mode, the previous management focused on the immediate results of earnings. Buckley went back into 3M’s history and reinstated a key metric that measures the percentage of revenues that come from products invented in the past 5 years. A metric internally known as the New Product Vitality Index, as the name suggests, that measures the liveliness of the company.
Buckley figured that at least 30% of the revenues should come from new products to maintain even at a modest 4% YoY rate. At the time, 3M’s NPVI was a measly 14%. The gap in the ability to innovate and grow was obvious.
To increase R&D was the obvious answer. But exactly how Buckley managed to increase the spending on R&D while also guiding the company through a financial crisis?
The first thing Buckley did was to find the money elsewhere- i.e., dramatically streamlining the supply chain. In the late 2000s, 3M’s global supply chain worked on a just-in-time system based on the availability and spare capacity of its factories. The complex system resulted in products embarking on multiple global trips before arriving at the distributors. The system created massive delays of fulfillment, and only 73% of the products are delivered on time.
Such delay strained 3M’s working capital and damaged its reputation while creating unnecessary resource constraints. Buckley corrected the issue by mandating the top 30 supply chains could not move plants more than once make it better positioned to serve major distributors in a timely and agile fashion while saving 1.2 billion over the entire revamp.
The money saved went directly to R&D. Even throughout the entire financial crisis, Buckley never once cut the R&D budget. This commitment gave him credibility beyond his words and boosted morale internally through the crisis. Buckley also carefully designed the internally budget allocation model to make sure all businesses have the same access to capital regardless of the size of the business, putting innovation on equal footings internally.
During that time, in the late 2000s, Buckley challenged business heads who saw their business as a mature, low margin, cash management operation to think outside of the construct. In one meeting, Buckley challenged the division head how much it would take to make a mask. When given the answer of over a dollar, Buckley then famously asked- how about five cents. At the time, all the raw materials together were drastically more than five cents. But Buckley didn’t back down and tied executive performance to the innovation produced. With aligned interest and demonstrated commitment from the management, the division managed to cut the production cost of a mask down to ten cents in the early 2010s by streamlining and using new materials. This effort no doubt paid off as the mask itself is synonymous with 3M, as with many of its other inventions over the years such as the Post-It and Scotch tape.
Looking at 3M’s success in investing in the long-term, it is not a tale of risk-taking and the pursuit of the pie in the sky. In fact, it is quite the contrary. Innovations are born out of limitations. In tough times, it is especially important to find ingenious ways to increase productivity and improve quality. Investing in the future is in fact very much aligned with capital discipline. The difference is what behaviors are rewarded and encouraged by the management.
Here at PrivCo, we took this lesson to heart. We are ever more committed to our customers by improving our products at this juncture. We recognize that accurate and high-frequency data is even more important in this distributed work environment.
1, Just last week alone, we have updated 942 company profiles including revenues, fundings, and financials, with 141 M&A deals and 80 funding rounds.
2, We have also revamped our business model to offer a free public view (see example here) for customers to try out our product, a B2C subscription at a fraction of the cost, and a customized solution business lead by our data researchers.
3, We have innovated our marketing strategies to position ourselves to be a thought leader in the industry, focusing on content quality rather than ads spend. We reach 20,000 readers daily with our newsletter. Sign up here.
Just like 3M, we keep our eyes on the future. Innovation is part of who we are and since the beginning of the company, we have made the same commitment to our clients to be the quality provider we set out to be.
Speak soon,
Whitney
