There is a common misconception that older companies can’t or won’t innovate and that innovation only occurs in an industry when a new company enters to disrupt the status quo. However, in our research into the Knowledge Effect, we have found that it takes a strong organizational commitment to innovation in order to remain on the cutting edge of one’s industry and has little to do with the age of a company. Innovation doesn’t happen by taking a “seat of your pants” attitude towards knowledge investments in research and development (R&D) and firm specific resources. Rather, it takes a persistent and a consistent commitment to intangible investment to become a Knowledge Leader. A company like 3M Co (NYSE:MMM), which has been around since 1902, exemplifies this long-term strategic commitment to innovation.
Data note: All data is intangible-adjusted
Out of 88 industrial companies in North America, 3M is the fifth largest investor in R&D as a percentage of sales at 5.8% of sales. This ratio of R&D to sales has been fairly consistent over the past 35 years. 3M has invested 6.1% of its sales on R&D on average annually going back to 1980. As regular readers are aware, however, R&D is just one component of the total intangible investments that a company makes. Firm specific resources, which includes codified information, employee education, and brand equity, are also important in creating sustainable competitive advantages for a company. 3M invests another 6% of sales annually on average on firm specific resources for a total intangible investment rate of 12% of sales each year. Given that 3M had over $30.3 billion in sales in 2015, that that is a lot of money going into intangible investments every year! 3M invests nearly 1.7x as much on intangible investments each year as they do on traditional tangible investments.