Wall Street has caught on with the labs

There was a question on R&D productivity from a Wall Street analyst this morning. They have caught on that R&D is faltering, and they are right.

The basic problem is this:

3M has fully misplaced its R&D resources on the wrong type of investments. The investments 3M has made for at least the last 10 years are all in the wrong scope. It all sort of comes down to 3M R&D classes and the balance between them. (see below for explanation of R&D classes)

3M has starved everything class 1-4 since McNerney's time. To the point that class 3 has become a bad word among executives. This has prevented 3M from keeping up with the rest of the world and getting reliable $5-$10M NPIs that pay the bills and provide for steady base business growth. (Also occasionally these class 3 and 4 projects over-perform and become $100M wins.)

Instead 3M has tried to bet the entire farm, metaphorically, on a few class 5 projects that might hit a $100M win, but only have a 1% to 5% chance of success. All the division presidents want to make their next promotion on winning one of these bets. I've even seen one division spend a good part of a year's R&D budget on a single class 5 NPI that launched(!) and resulted in quite literally zero sales.

A smarter approach was, and still is, to spread the R&D investment across the classes. Use class 3 and 4 NPI to pay the bills, leaving some money left over for the best class 5 projects to bet on.

Thank you for coming to my TEDxLayoff talk.

R&D Classes at 3M (for those who don't know):

Class 1 and 2 - Expansion of existing products into new geographies or very minor changes like a new color or new package size.

Class 3 - Basic new product development - This is a new product, but not that far removed from existing products and it goes into existing markets/sales channels. This is a new grade of disposable respirator or a new and improved grade of masking tape.

Class 4 - Either really new technology or entering an adjacent market, but not both. Examples would be a new way to make a respirator for much cheaper or building a new tape specifically for spaceship use.

Class 5 - New products entering into new markets for 3M. One great way to identify these is that 3M usually does not have an existing sales force to sell the new thing.

Class 6 - Fundamental scientific research - Not much of this happens anymore.

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10 replies (most recent on top)

@1jby+1mjVlixX

From what I saw, McNerney told himself he wanted to go big into Pharma, then he realized what Pharma really costs and he chickened out. No backbone to risk $1B on a dr-g that can be stopped overnight.

To make money in Pharma you need to risk $20B on 20 dr-gs hoping one or two of them make up for the others.

@1hjq+1mjVlixX

Your story is as old as the company. New products are just that, new. They rarely run well in the factories when first launched. It takes lots of hard work by the lab, mfg. technology, and the plants to get them running well.

@1qfw+1mjVlixX

The best lab people I know spend several days (and nights) every month in their factories. Be it continuous improvement events, or new product runs, or the rare bail-out.

@1syq+1mjVlixX

Exactly right! I don't think I've ever seen anyone who could reliably predict business success with new products at 3M. Especially predicting success with class 4 and 5 new products.

Former 3M engineer I know spent 47 years at 3M and was on so many huge success products it was amazing. He said the wild successes were never predicted to be huge successes. Of 10 products launched 6 would be failures, one would be out of this world success, and the other 2 would scrape by as a reasonable success. He said the money was made on just 3 out of 10 product launches and the predictions of which ones would succeed were always wrong. Committees of managers and marketers never predicted the successful products.

Varys,

Didn't McNerney bet the farm on pharma and wart creams and sorts, only to have Buckley realize that 3M pharma could never compete with Pfizer and Merck. George dumped it for a loss based on how much jimmy starved the labs of money needed for the many small wins that happened under Desi and earlier.

I'm going to need a punching bag with the GE logo to wear off stress from another stinking layoff.

From outside HQ, it looked like any real Class 5's were shelved. Class 3's were re-labelled as Class 4's. Class 2's were labelled as Class 3's, with a much lower replacement sales cannibalization number used.

In the end, it was all about short term focus and all the long term opportunities in new or adjacent markets were ignored. The excuse was "focused prioritization". Now they are reaping the rewards.

@1hjq+1mjVlixX Yes...and as someone who has walked on both sides of that fence, there are a lot of things that the opposite side doesn't fully understand about the others' job. Elitism or a comparable mindset can cut both ways.

Pushing labbies out into the plant (gasp, maybe even making them do something like a 12 month stint in a plant) and holding them accountable for failures after scale-up would be great places to start.

Equally important would be pulling manufacturing people into the labs to see firsthand how hard and frustrating developing a new product or technology can be...or trying to decipher what the customer *actually * wants and translating that into product specs or process settings.

Both roles are hard to do well, both roles are critical. To be profitable over the longterm, the partnership needs to be equal and mutually respectful.

Lab makes single sourced unsustainable products and then "bails out" the plants that have to do all the work to actually make it. Classic lab elitism that shows why the innovation is dead. Plants overwork themselves trying to figure out how to make these products cost effective since the lab has no thoughts on economics or manufacturability...

It’s 4’s coded as 5’s and a sh-t ton of 2’s (factory support). Labs spending way too much time bailing the factories out.

Varys, I've worked in both R&D and manufacturing roles. I agree completely. The metrics and objectives of each organization are wildly different, to the point that you begin to wonder if people are actually part of the same company. I love how executives preach the virtues of "organic growth", while simultaneously ignoring how organic growth happens in nature - often slowly, sometimes fast, sometimes in surprising circumstances, and never a guarantee. The key is diversity across the classes of development, adequate depth in both the lab and business benches, and enough experience to understand how to have continuity from idea to factory to profit.

Would love to discuss more in-person!

Yeah. And good luck with the new surgical prep. Waaaayyyy too late.

I would argue that most divisions are actually doing more of 1 to 3 and less of 4, and almost no 5.

There is very little appetite for risk taking these days and hence more of the same continues. Legacy products and technologies becoming commodity stuff sooner.

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Wall Street has caught on with the labs

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