New World Leader

Dec. 21, 2004
3M Co.'s James McNerney, CEO of the Year, is committed to operating excellence and organic growth through innovation, international strength, leadership development and Six Sigma.

There is one notable thing that W. James McNerney Jr. is not. He is no longer one of two former General Electric Co. executives who did not get Jack Welch's job when the legendary leader chose his successor in November 2000. In his non-flamboyant yet focused way, McNerney has impressively established his own identity as chairman and CEO of $16.3 billion 3M Co., the St. Paul, Minn.-based, technology-intense manufacturer he joined officially on Jan. 1, 2001. Arguably McNerney, the first outsider to head 3M, has so far written a better business record than Robert L. Nardelli, the other runner-up for Welch's job and now chairman and CEO at Home Depot Inc., and Jeffrey R. Immelt, who did get Welch's job as GE chairman and CEO. "Of the three of them, if you looked over the past three years, [McNerney's] probably had the biggest positive impact," judges Ken Taormina, senior vice president at BearingPoint Inc., a McLean, Va.-based consulting firm. "He's driven [3M] to a more process-oriented model [and] high quality, using Six Sigma. Yet he hasn't hurt the culture of [coming up with] the new ideas."

W. James McNerney Jr. Chairman and CEO, 3M Co., St. Paul, Minn.
Born: Aug. 22, 1949, in Providence, R.I. Education: B.A., Yale University; M.B.A., Harvard University Experience:
  • President & CEO, GE Aircraft Engines 1997-2000
  • President & CEO, GE Lighting 1995-1997
  • President, GE Asia-Pacific 1993-1995
  • President & CEO, GE Electrical Distribution & Control 1991-1992
  • Executive Vice President, GE Financial Services and GE Capital 1989-1991
  • President, GE Information Services 1988-1989
  • General Manager, GE Mobile Communications 1982-1986
  • Prior to joining General Electric Co. in 1982, McNerney worked for Procter & Gamble Co. and McKinsey & Co.
  • Neither has McNerney hurt 3M's financials. Including the third quarter of 2003 -- fourth-quarter and full-year 2003 results are slated to be released on Jan. 20, 2004 -- 3M has posted seven consecutive quarters of record year-over-year earnings. Third-quarter 2003 worldwide sales, including such strategic brands as Post-It and Scotch-Brite, totaled US$4.616 billion, the third consecutive quarter of record sales and an increase of 11.4% from third-quarter 2002. The company's net income for third-quarter 2003 was $633 million, or $0.83 per share, compared with $545 million, or $0.69 a share, in the third quarter of 2002. Both net income and earnings-per-share increased more than 20% year-to-year, rising 21.6% and 20.3%, respectively. And as it reported third-quarter results on Oct. 20, 2003, 3M raised its projection for full-year 2003 earnings to between $2.98 and $3.00 per share on a reported basis -- and to between $3.05 and $3.07 per share excluding special items. These numbers reflect the success McNerney has had already in getting operating excellence and organic growth at 3M. But they don't capture the complexity of the current business world and, in particular, the demands McNerney faced as he arrived at 3M. McNerney was rising to corporate CEO as the U.S. and much of the rest of the world were falling into recession. "I showed up in December of 2000, actually, with a business plan that was already irrelevant because the global markets had tanked," McNerney recalls. Recession wouldn't be his only challenge. The business environment for 3M was changing dramatically in other ways. Global overcapacity existed in a number of industries. Manufacturers and other producers lacked pricing power. The prospect was for slower rates of economic growth around much of the globe than had been the case just a few years before. It was, in McNerney's words, a "new world." Indeed, that new world continues to exist, and, says McNerney, it does not permit him to pursue a single-focus survival strategy. "In the old world -- the '70s, '80s [and] '90s -- you could get away with either running the place very productively . . . or growing [the business]," he says. "In today's world, our overall business objectives are to be simultaneously strong in operating excellence and unusually strong in organic growth," he stresses. "In the slow-growth environment, particularly that [which] the manufacturing world faces, you got to do both well." To assure that 3M both operates efficiently and grows well from within, McNerney is counting on innovation, international strength, leadership development and Six Sigma. In 2002, 3M celebrated its centennial year and what the company called "a century of innovation." McNerney is building on it, most notably in 2003 with the creation of a corporate research laboratory focusing on advanced materials, processes and systems and the transfer of 400 technical employees into the R&D operations of 3M's seven diverse business groups: consumer and office; display and graphics; electro and communications; health care; industrial; safety, security and protection services; and transportation. "Retaining our culture of innovation -- and, in fact, nurturing it -- is a big part of what I am trying to get done with my team here [at 3M]," says McNerney. "And that directly supports the organic growth [of the company]." Also supporting organic growth, a term that refers to increasing revenues from within rather than by acquiring other companies, is leveraging 3M's global presence. The company has operations in more than 60 countries and does business in more than 200. "We're very fortunate to have one of the strongest international organizations out there. We have been overseas for 50, 60, 70 years in some cases. Organizations have grown up [and] are run by locals, not run by U.S. people," emphasizes McNerney. "We can get innovation out there from any country to all other countries faster than most," he claims. That's a critical distinction to Lester Thurow, the Lemelson professor of management and economics at the Massachusetts Institute of Technology in Cambridge, Mass. Thurow says he sees many companies doing the things McNerney is doing at 3M, but contends that the real challenge is doing better "or getting ahead of the wave a little bit." McNerney, however, is working the world with what seems to be a structural anachronism. At a time when other manufacturers have relocated global market responsibilities to their operating businesses, 3M still has a corporate executive vice president for international operations. McNerney confesses that when he first came into the company he saw the job as an anachronism. "But I have come to realize that we really need it," he says. "We have the legitimate need for a global matrix" and "knowing how to manage it is critically important," says McNerney. "We're approaching [being] a $20 billion company. [But] we have 45 divisions, which is a lot of divisions for a company that size, and many of them really aren't big enough to carry their own global operations, so they have to share," he says. "It's the way we capture scale the best way we know how." Leadership development, a long-time hallmark of GE and something that McNerney benefited from during his 18 years with that company, is a very high priority with him. "Leadership development is about helping people grow, and if I can get people as individuals growing, then I've got a company that grows," says McNerney. He's turned a former R&D training center at 3M Center in St. Paul into the Leadership Development Institute, a place where, among other things, about 40 "high-potential people" at a time participate in the 17-day Accelerated Leadership Development Program. They spend all 17 days working on 3M problems selected by McNerney, and, as their training ends, share the solutions with him in a two-hour session. One team created a market-focused tool now used in 3M's strategic planning process. The Institute is one of the places that 3M people are schooled in the methodology of Six Sigma, a statistics-based tool for improving the quality of products and services. At GE, Welch championed it, and McNerney practiced it. However, when McNerney arrived at 3M nearly three years ago, the company's process-improvement and quality programs, which included Six Sigma, could be characterized as "a menu approach," he relates. "I just felt very strongly that the entire company [needed to] adopt one [methodology], so that we could develop a common language . . . so that we could leverage our size," he says. "Quite frankly, it didn't have to be Six Sigma. But Six Sigma was something I was familiar with. I believed in it [and] and number of the people in the company [also] did, so that was sort of the one we all decided to go after." 3M figures that Six Sigma, together with four other corporate initiatives, is taking about $300 million in costs out of the company every year. "I could not be more satisfied [with the results so far]. The people and culture at 3M adapted to Six Sigma faster than any place that I know of," he says. "We started in our factories and worked on yield, and scrap, and re-work -- and got tremendous productivity out of it. Then we moved into our backrooms: finance, and HR, and our customer service organizations -- and began to get productivity there. And now we're moving toward our customers. We're linking up with our customers, improving processes that we share and offering our customers to help improve some of their business processes," he explains. Keys to success: "getting the best people as our Six Sigma leaders and setting kind of a 'moon-shot' goal of [getting] the entire salaried population across the globe [trained in Six Sigma] within a couple of years," states McNerney. Two-thirds of 3M's salaried workforce, about 20,000 people, have been trained in Six Sigma. The rest are expected to be by year-end 2004.

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