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3M's Rising Star


Jim McNerney was one of those boys: up early in the morning climbing trees while everybody else in the family was in bed, rousing his three younger brothers to play two-on-two hockey in their basement, running his high school's boys club, and pitching on the varsity baseball team. And he grew up to be one of those men: For three decades, Walter James McNerney Jr. has climbed the corporate ladder without a pause, uprooting his family every two to three years since earning his master's degree from Harvard Business School in 1975. He job-hopped from Procter & Gamble (PG) to McKinsey & Co. and then up through General Electric (GE). On Jan. 1, 2001, after losing a three-way race to succeed John F. Welch as chief executive, he moved on yet again to become chairman and CEO of 3M (MMM), the first outsider to head the Saint Paul (Minn.) company in its century-long history.

It has been a remarkably seamless transition. In many ways, 3M is a mini General Electric Co. Both are industrial conglomerates that seek to balance slowdowns in one industry with upturns elsewhere, and both have strong traditions of discipline, quality, and an intense focus on measuring and rewarding performance. While both companies have a few world-famous brand names -- who doesn't know GE light bulbs or 3M's Scotch tape -- at heart they are bound up with producing the nuts and bolts -- as well as the duct tape, turbines, and electronic gear -- that keep the industrial world humming.

But 3M Co. had begun to drift. Its vaunted research facilities were turning out fewer and fewer commercial hits, and quarterly results were underwhelming. While 3M still draws many of the world's best chemical engineers, the company's labs haven't had a hit like Post-it Notes since, well, Post-it Notes first came out almost a quarter-century ago. Managers at 3M seemed to know instinctively what they needed, and they found it in McNerney: a strong outsider who could restore discipline and focus. It helped that he started in the midst of a recession, when making painful decisions was easier. After rounds of cost-cutting, layoffs, and smart repositioning of the company into more-promising fields such as health care, 3M recently announced its best results ever. Profits have climbed 35% since McNerney took over, to $2.4 billion in 2003 on sales of $18.23 billion. 3M's stock price, now worth just over $81 a share, is also up 35% on McNerney's watch, earning it a spot on our most recent BW50 list.

The Next Post-it

That's exactly what you'd expect from a manager schooled in the GE system of rigorous discipline and accountability. But to restore 3M to full health, McNerney needs to do something his GE background didn't prepare him for: He needs to return 3M to its historical role as one of Corporate America's most inventive and innovative companies. Over the decades, scientists and engineers in its seven divisions have come up with sandpaper, magnetic audiotape, molds and glues for orthodontia, lime-yellow traffic signs, respirators, floppy disks, Scotch tape, Scotchgard, even a prescription salve for genital warts. To this day, 3M draws its identity from its research might. It devotes $1.1 billion to research every year and has 1,000 scientists and engineers around the world searching for The Next Big Thing.

Going outside and buying innovative outfits, as McNerney has already done, can help, but for his tenure to truly be a success, he needs to coax more out of the company labs. He's trying to do that by redirecting funds into more-promising health-care and high-tech research and development, as well as by using Six Sigma, the analytical system made famous at GE, to home in on shortcomings. But it is not at all certain that the creative process that brought Scotchguard fabric protector to the world can flourish under such exacting conditions. In his attempt to suss out the commercial potential of ideas early on, McNerney -- who has never worked in a lab -- might just miss the next Post-it Note.

The flip side to this concern about what McNerney is doing to revitalize 3M is the worry that he won't stay around long enough to finish the job. McNerney, 54, recently celebrated his third anniversary with the company, which is about as long as he has held any position in his life. The question is: How many more 3M anniversaries are there in McNerney's future? Given his nomadic past, 3Mers today whisper anxiously about where their boss is headed next. Nowhere, he swears. McNerney says he has more work to do before 3M is firmly on a high-growth path. He has enrolled a third of 3M's 67,100-person workforce in Six Sigma training, but it has not been encoded yet in the company DNA. He also wants to make 3M much bigger, particularly in fast-growing Asia, perhaps through another acquisition or two. And while he has made management training a priority, establishing 3M's own leadership-development institute, McNerney has no successor ready to take over if he were to leave now. As he says about the challenge of developing potential leaders: "I'm still impressed with how much further we have to go."

Then there are personal reasons for staying put. McNerney, who grew up outside Detroit and Chicago, relishes being back in the Midwest after his globe-trotting at GE, say his family and friends. With an extended family around them in the Twin Cities, his three school-age children are feeling at home. He plays ice hockey with one of his brothers, Peter H. McNerney, in a no-checking league on Sunday evenings. And he can scoot down to Chicago to visit his two adult daughters from his first marriage as well as his parents, who still maintain their home in Chicago's North Shore suburbs. "This is a golden period in Jim's life," says Daniel M. McNerney, another brother who is now a Presbyterian minister and missionary and lives in Winnetka, Ill., around the corner from their boyhood home. "He's ambitious, but he's not blindly ambitious. Maybe this is his last job."

Loyalty Test

Or maybe not. During the race to run GE, McNerney became known as one of the best managers at one of the best-managed companies in the world. Although he lost the race, his successes at GE and 3M have put him on recruiters' shortlist of most desirable CEOs. "People come to us and say, 'Go get us a Jim McNerney,"' says Gerard R. Roche, senior chairman of executive recruiters Heidrick & Struggles International Inc. (HSII). Indeed, McNerney's name seems to surface whenever a company has a high-profile opening in the offing, whether it's Coca-Cola (KO), Walt Disney (DIS), or Merck (MRK). As Welch says: "I could see him doing anything."

McNerney's commitment to 3M was severely tested last fall. When Chairman and CEO Philip M. Condit abruptly resigned from Boeing Co. (BA), the board is said to have asked McNerney if he would consider the post. He clearly has the credentials: A Boeing director himself, McNerney's last job at GE was running its aircraft-engine unit, one of the aerospace company's main suppliers. The board elevated retired exec Harry C. Stonecipher to CEO instead. But noting that Stonecipher already is 67, some people close to Boeing's directors say it's only a matter of time before McNerney ends up there.

McNerney's secret to success is elementary. He sets high goals that can be measured, such as business-unit sales or the rate of product introductions, and demands that his managers meet them. Granted, many CEOs do that today. But like a dedicated teacher or coach, McNerney also works with his team day in, day out, to help them make the grade. "Some people think you either have a demanding, command-and-control management style or you have a nurturing, encouraging style," he says. "I believe you can't have one without the other."

Unusual in this age of celebrity CEOs, and especially for somebody who is so far untouched by scandal or intrigue, McNerney is also one of Corporate America's lowest-profile execs. He has largely ducked the outside world since taking over at 3M. He usually dispatches Chief Financial Officer Patrick D. Campbell to speak for the company, and you can count his national TV appearances on one hand.

His shy-guy public persona is at odds with his image inside the company. There, McNerney is praised as an inspirational leader comfortable speaking to big groups or conversing one-on-one. "He's personable," says Charles Reich, executive vice-president of 3M's health-care business. "He really engages people." Yet family and friends say McNerney genuinely thinks it would be unseemly to draw attention to himself. "It's all about me? No, it's all about my people," says Charles S. Lauer, publisher of Modern Healthcare magazine and a neighbor who has known the McNerney family since the 1960s. "That's Jimmy, the captain of the team. He's got his head screwed on straight."

Emphasis on Humility

Sitting at a conference table in his 14th-floor office suite, McNerney seems to be enjoying himself. He wears a sports jacket and a polo shirt, his usual work attire. He is quick to attribute 3M's achievements to the entire organization and praises 3Mers for their work ethic. "My experience is that if people are convinced they're growing as they pursue company goals, that's when you get ignition," he says. He is also disciplined and direct: He makes his points and doesn't utter a word more. When the allotted time for the appointment ends, he stands up and retreats to his inner office. Back to work.

McNerney inherited his character -- and perhaps his wanderlust -- from his dad, say his family and friends. After a stint in hospital management in Providence, R.I., where Jim was born, Walter J. McNerney Sr. was a health-policy professor at three universities, as well as president of the Blue Cross & Blue Shield Assn. in Chicago. Walter and Shirley, a homemaker, pushed their daughter and four sons hard: All of them, except Dan, hold graduate degrees in business. But even as Walter gained national recognition, he always maintained his humility and insisted his children do the same. "If any of us was ever tooting our own horn, Dad would let us have it," recalls Dan. "Pride was a terrible thing."

Although academic achievement was always No. 1 in the McNerney household, sports came a close second. Jim played baseball and hockey -- and lost a few teeth on the ice -- while getting his bachelor's degree in American studies at Yale University, his father's alma mater. "He was certainly never a hot dog," says his brother Pete, managing partner of Thomas, McNerney & Partners, a venture-capital firm in Minneapolis that specializes in health-care startups. "He was a guy you depended on. It's no surprise to me that he's running something big."

At first, though, it was slow going. McNerney's career started anonymously enough in 1975 as a brand manager on the Downy fabric-softener account at Procter & Gamble Co. He was assigned to two other accounts, Coast and Bounce, before he left in 1978 to become a senior manager with consulting firm McKinsey in Chicago.

His ascent quickened after he was hired three years later at GE as a vice-president in its information-services department. In less than a decade, he was promoted four times to reach the ranks of upper management in 1991 as president and CEO of GE's electrical distribution and control unit. He was 42. Welch recalls McNerney catching his attention early on. What made him stand out? His knack for numbers and his poise, Welch says. "He was just able to handle himself perfectly, even though he was very young."

McNerney really impressed the boss, though, when he was dispatched to Hong Kong as president of GE's Asia-Pacific business in 1993. At the time, the Fairfield (Conn.) giant had no operations of its own in China and was desperate to enter what has since become a $3 billion market for the company. McNerney established its first wholly owned unit within two years and then began staffing the operation before leaving in 1995.

In the Running

But the job that gave him a shot at taking over from Welch was yet to come. In 1997, after two years as chief of GE's lighting unit, based in Cleveland, McNerney was yanked back to Cincinnati to head GE Aircraft Engines. Welch admits today that even he had some doubts about how his prot?g? would do. The aircraft industry is notoriously insular, distrustful of anyone who never wore "a scarf and goggles," as Welch puts it. Yet McNerney bested the insiders. When he arrived at GE Aircraft Engines, it was a distant third-place supplier to Boeing for its twin-engine 777 planes. But in 1999, he cinched a deal making the unit the exclusive engine supplier for Boeing's new long-range 777 aircraft. The 20-year contract was valued at more than $25 billion.

McNerney did it by outhustling his rivals. He became a frequent flier to Seattle, then Boeing's headquarters, to find out what would prevent Boeing from doing business solely with GE. Executives there were concerned that airlines that had never serviced GE engines before wouldn't want to take on such a risk. So McNerney called the heads of Singapore Airlines, Cathay Pacific Airways, and others and got them on board by promising that GE would do everything it could to help maintain the engines. He used GE's leverage, too. The company's aircraft-leasing unit pledged to buy the planes from Boeing and then lease them to airlines -- if GE got an exclusive deal. And he enlisted Welch to personally lobby Boeing's Condit.

In the end, of course, that success wasn't enough. On a rainy day in late November, 2000, Welch flew to Cincinnati and met privately with McNerney in an airplane hangar to deliver the news: He had picked Jeffrey R. Immelt, the head of GE Medical Systems and the front-runner all along in the succession race, to be the next CEO. Immelt's edge: He was six years younger than either McNerney or the other finalist, Robert L. Nardelli, now chairman and CEO of Home Depot Inc. (HD). Immelt was also judged to be more at ease in the spotlight. "You chose the wrong guy," a disappointed McNerney told Welch. But he didn't press the point. He didn't need to.

Even as Welch was still mulling his personnel options, McNerney's name had been passed along to 3M directors by headhunter Roche at Heidrick & Struggles. That spring, 3M's directors had decided to go outside for a chairman and CEO to replace Livio "Desi" DeSimone, who had announced his plan to retire by yearend. An engineer and lifelong 3Mer who took over as CEO in 1991, DeSimone had been unable to keep alive the company's storied history of innovation. Growth rates for sales stalled while profits yo-yoed. The company's share price peaked in mid-1997, then drifted lower even as the overall market raced ahead. "We needed to jump-start the company," recalls Edward A. Brennan, a former chairman and CEO of Sears, Roebuck & Co. (S) who chaired 3M's CEO search committee. "We sensed Jim would be a perfect agent for change."

Given the chilly reception that some "change agents" face, McNerney was braced for a tough time -- especially since he was not only the first CEO who hadn't come up through the 3M ranks, he wasn't even an engineer. But he says employees generally encouraged him to shake things up. "I found a company who thought they weren't achieving all they could, and they were willing to team up with somebody to do more," he says. "That was a surprise." It helped that 3M and GE were so similar. It also helped that McNerney was used to contending with different corporate cultures.

Oddly, the deepening manufacturing recession helped, too. In September, 2000, hosting his last biennial conference for analysts and investors, DeSimone forecast an 11% increase in revenue in the year ahead and a 12% rise in operating income. 3M's telecommunications business would do even better, he predicted, with sales and profits surging 25% as customers strung more and more fiber-optic lines. But by 2001's first quarter, operating earnings were crumbling in every business except consumer and office products. The abrupt downturn proved that things had gone awry and gave McNerney latitude to move even faster. All at once, he notes, "we were all in this together." Quickly, and with little dissent, he ordered a cut of 5,000, or 6.6%, in the company's workforce.

Although less apparent, other, more fundamental changes followed. Under McNerney's predecessors, 3M had always been an egalitarian operation. Every year, each business got the same bump in its budget, no matter how it performed. No more. McNerney and his executive team began allocating R&D and marketing funds according to the growth potential at each business. That means more for health care, now 3M's biggest business with $4 billion in sales and $1 billion in operating earnings, and its display and graphics business, which boasted a 66% surge in 2003 operating profits thanks to the ultrathin plastic films it makes for flat-screen TVs and mobile phones. But it also means less for everyone else, particularly 3M's old-line industrial and transportation businesses.

McNerney is also targeting where in the world 3M spends its money, shifting more resources and personnel out of the U.S., where growth is slower and costs are higher, and into China and other red-hot markets in Asia. Because of targeted layoffs and attrition, last year U.S. staff fell by an additional 1,700, to 33,300, helping to reduce 3M's total payroll by 10% since McNerney took over. Meanwhile, 3M's headcount rose 5% in Asia, to 9,900. Capital spending in the U.S. also dropped in 2003, to $425 million, and has been reduced by one-third over the past three years. In Asia, capital expenditures have increased 25%, to $102 million in the past year. The migration, moreover, isn't just in manual labor; 3M is moving R&D and product design to China as well. McNerney admits that the domestic downsizing hurts the U.S. economy but says he must proceed. "I'm responsible for keeping 3M a globally competitive company," he says. "Now, it's very hard to serve Chinese customers in a lot of our businesses unless we're manufacturing there. We don't do this to eviscerate U.S. jobs. We do it to be competitive."

Targeted Innovation

What McNerney hopes will be his true legacy at 3M, though, is to restore the company to its glory days as one of America's preeminent idea factories, a place where cutting-edge research results in groundbreaking new products. So borrowing again from the GE way, McNerney has acquired new products to pump up 3M's growth rate. In late 2002, 3M paid $850 million for Corning Precision Lens Inc., instantly giving it a big presence in the rear-projection TV market and complementing its other TV component businesses.

His real emphasis, however, is on what the company can do for itself. McNerney now has his scientists talking with the marketing and manufacturing folks right from the start to steer lab work to more profitable ends. For example, sales reps polled TV makers to see what they wanted next in flat-screen models. The response: a wider viewing area, so people don't have to sit square in front of the screen, and a deeper black in the background color. Now researchers are tinkering with optic films to achieve those attributes.

The new way carries its own risks, however. In the past, 3M researchers had the leeway to spend 15% of their time on pet projects. This officially sanctioned moonlighting has paid off for 3M big-time. Its Aldara salve -- an immune-response modifier just approved to treat precancerous skin conditions -- was discovered by a scientist who kept experimenting with the drug. Post-it Notes, too, were another brainchild of scientists who tinkered for years, ignoring the naysayers in manufacturing and marketing. Now these researchers are being reined in. Won't they object? Not likely, says James B. Stake, executive vice-president of 3M's display and graphics business. As the inventor of a few gadgets that never amounted to anything, he argues that today's setup will better the odds of success. "We'll find many fewer individuals going down blind alleys," he says. True, but some worry that by micromanaging the labs, 3M could miss breakthrough ideas in unexpected places.

McNerney is also bringing more management rigor to 3M through Six Sigma. Originally a form of statistical analysis used to reduce product error, at GE it morphed into a companywide tool for cost-cutting in the 1990s. Specially trained "black belts" are now doing the same thing at 3M, and then some. They're using Six Sigma for everything from sharpening sales pitches to developing new kinds of duct tape. McNerney says Six Sigma also turns out to be a low-risk way to spot up-and-coming managers because it provides straightforward measurements of their performance. So far, a quarter of the 1,000 3M employees who have completed Six Sigma have been promoted two steps or more.

Today, McNerney figures he spends most of his time on personnel. Every other week, he addresses groups of employees at company headquarters. He begins the two-hour sessions with an update on 3M's numbers and a progress report on Six Sigma and his other initiatives. Then, for the last hour and a half, he takes questions. He does the same thing while visiting 3M's far-flung facilities around the world. McNerney also is a regular instructor at 3M's leadership-development institute, another program he has borrowed from GE. In between, he monitors how members of his operating committee -- 3M's top 15 executives -- are doing, often swinging by their offices for a chat. If a manager isn't measuring up, McNerney probably won't raise his voice. But he will expect a solution, pronto. "I think all of us are working harder than we've ever worked before," says David W. Powell, 3M's senior vice-president of marketing.

Powell should know: Among the top ranks, he is one of the few holdovers from the DeSimone era. Only two of 3M's seven business heads were at their posts under the previous CEO. But there was no purge. Rather, the departing execs left one by one as they neared 3M's mandatory retirement age of 65, only to be replaced by other 3Mers. There are just two outsiders in McNerney's inner circle: CFO Campbell, who came from General Motors Corp. (GM), and General Counsel Richard Ziegler, a former partner at Cleary, Gottlieb, Steen & Hamilton in New York, who had been McNerney's classmate at Yale.

When McNerney isn't overseeing his managers, he is tending to 3M's customers. In January, W.W. Grainger Inc. (GWW), a $4.7 billion industrial-goods wholesaler that carries 1,300 3M products, got the McNerney treatment -- honed, needless to say, at GE. As executives at the Lake Forest (Ill.) company went over sales trends with their top suppliers, McNerney listened in. Then he met separately with the company's chief operating officer. In all, McNerney spent some three hours at Grainger. And while 3M had regularly sent someone to visit the company, that someone had never been the CEO. "It was a significant event," says Michael A. Pulick, vice-president for product management. "3M is truly trying to get to know our business."

Measures of Success

McNerney's efforts are clearly paying off. In 2003, sales rose in every one of 3M's businesses except telecom, while operating income was up in all but industrial. Cash flow swelled by 29%, to $3.79 billion, and the company's operating margin widened by a full percentage point, to 20.9%. His goal is to boost sales by at least 5% a year, excluding acquisitions, and profits by 11% or more annually. 3M will beat both targets in 2004, with sales up 6.5% and profits growing 16.5%, says McNerney. Analyst John G. Inch of Merrill Lynch & Co. (MER) predicts the company will be able to exceed its targets again in 2005, with earnings nearing $3.3 billion.

Success seems to be agreeing with McNerney. Family and friends say that despite the pressure of being boss, McNerney seems more relaxed today than he has been in years. He and his wife, Haity -- they met at a GE gym that she had set up for the company -- both work out and run regularly. McNerney also occasionally skips business dinners to coach his son's ice hockey team. He skis, golfs, and every May sails on Chesapeake Bay with his brothers and business chums. And he and the family like to jet off to Montana, where he owns a home in a mountain resort.

So is this the last stop for McNerney? If it were, he would be going out on top, in charge of one of the nation's most venerable companies. How many other jobs could give him that satisfaction? Certainly McNerney doesn't need the money. He received $4.9 million in salary and bonus in 2003 and options worth $5.8 million, raising the value of his 3M options to $67.7 million. He also holds $15 million in restricted stock. "It feels like home here," he says. "I'm a 3Mer." Still, he won't turn 65 until 2014. And recruiters are tempting him with job offers all the time. "We're professional movers," he acknowledges. "I could pitch a tent anywhere." He is still one of those boys.

By Michael Arndt

With Diane Brady in New York


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