History of Project Management

Henry Gantt (1861-1919), the father of planning and control techniques.

As a discipline, Project Management developed from different fields of application including

construction, engineering and defense. In the United States, the two forefathers of project
management are Henry Gantt, called the father of planning and control techniques, who is
famously known for his use of the Gantt chart as a project management tool, and Henri Fayol
for his creation of the 5 management functions, which form the basis for the body of
knowledge associated with project and program management.

Henri Fayol (1841–1925), both Gantt and Fayol were known as being students of Frederick
Winslow Taylor's theories of scientific management. His work is the forerunner to modern
project management tools including work breakdown structure (WBS) and resource allocation.

The 1950s marked the beginning of the modern Project Management era. Project management
was formally recognized as a distinct discipline arising from the management discipline. [1] Again,
in the United States, prior to the 1950s, projects were managed on an ad hoc basis using mostly
Gantt Charts, and informal techniques and tools. At that time, two mathematical project
scheduling models were developed. The "Critical Path Method" (CPM) developed in a joint
venture by both DuPont Corporation and Remington Rand Corporation for managing plant
maintenance projects. And the "Program Evaluation and Review Technique" or PERT,
developed by Booz-Allen & Hamilton as part of the United States Navy's (in conjunction with
the Lockheed Corporation) Polaris missile submarine program;[9] These mathematical
techniques quickly spread into many private enterprises.

At the same time, technology for project cost estimating, cost management, and engineering
economics was evolving, with pioneering work by Hans Lang and others. In 1956, the American
Association of Cost Engineers (now AACE International; the Association for the Advancement of
Cost Engineering) was formed by early practitioners of project management and the associated
specialties of planning and scheduling, cost estimating, and cost/schedule control (project
control). AACE has continued its pioneering work and in 2006 released the first ever integrated
process for portfolio, program and project management (Total Cost Management Framework).

In 1969, the Project Management Institute (PMI) was formed to serve the interests of the
project management industry.[10] The premise of PMI is that the tools and techniques of project
management are common even among the widespread application of projects from the
software industry to the construction industry. In 1981, the PMI Board of Directors authorized
the development of what has become A Guide to the Project Management Body of Knowledge
(PMBOK Guide), containing the standards and guidelines of practice that are widely used
throughout the profession.

The International Project Management Association (IPMA), founded in Europe in 1967, has
undergone a similar development and instituted the IPMA Competence Baseline (ICB). The
focus of the ICB also begins with knowledge as a foundation, and adds considerations about
relevant experience, interpersonal skills, and competence. Both organizations are now
participating in the development of an ISO project management standard.

Risk Management
It’s the identification, assessment, and prioritization of risks followed by
coordinated and economical application of resources to minimize, monitor, and
control the probability and/or impact of unfortunate events..[1] Risks can come
from uncertainty in financial markets, project failures, legal liabilities, credit risk,
accidents, natural causes and disasters as well as deliberate attacks from an
adversary. Several risk management standards have been developed including the
Project Management Institute, the National Institute of Science & Technology,
actuarial societies, and ISO standards.[2][3] Methods, definitions and goals vary
widely according to whether the risk management method is in the context of
project management, security, engineering, industrial processes, financial
portfolios, actuarial assessments, or public health and safety.

For the most part, these methodologies consist of the following elements,
performed, more or less, in the following order.

1. identify, characterize, and assess threats

2. assess the vulnerability of critical assets to specific threats
3. determine the risk (i.e. the expected consequences of specific types of
attacks on specific assets)
4. identify ways to reduce those risks
5. prioritize risk reduction measures based on a strategy

The strategies to manage risk include transferring the risk to another party,
avoiding the risk, reducing the negative effect of the risk, and accepting some or
all of the consequences of a particular risk.
Contents

 1 Introduction
 2 Principles of risk management
 3 Process
o 3.1 Establishing the context
o 3.2 Identification
o 3.3 Assessment
o 3.4 Potential risk treatments
 3.4.1 Risk avoidance
 3.4.2 Risk reduction
 3.4.3 Risk retention
 3.4.4 Risk transfer
o 3.5 Create a risk-management plan
o 3.6 Implementation
o 3.7 Review and evaluation of the plan
 4 Limitations
 5 Areas of risk management
o 5.1 Enterprise risk management
o 5.2 Risk-management activities as applied to project management
 6 Risk management and business continuity
 7 Risk Communication
 8 Benefits and Barriers of Risk Communication
 9 Seven cardinal rules for the practice of risk communication
 10 See also
 11 References
 12 Further reading
 13 External links
Introduction

This section provides an introduction to the principles of risk management. The

vocabulary of risk management is defined in ISO Guide 73, "Risk management.
Vocabulary".

In ideal risk management, a prioritization process is followed whereby the risks

with the greatest loss and the greatest probability of occurring are handled first,
and risks with lower probability of occurrence and lower loss are handled in
descending order. In practice the process can be very difficult, and balancing
between risks with a high probability of occurrence but lower loss versus a risk
with high loss but lower probability of occurrence can often be mishandled.

Intangible risk management identifies a new type of a risk that has a 100%
probability of occurring but is ignored by the organization due to a lack of
identification ability. For example, when deficient knowledge is applied to a
situation, a knowledge risk materialises. Relationship risk appears when
ineffective collaboration occurs. Process-engagement risk may be an issue when
ineffective operational procedures are applied. These risks directly reduce the
productivity of knowledge workers, decrease cost effectiveness, profitability,
service, quality, reputation, brand value, and earnings quality. Intangible risk
management allows risk management to create immediate value from the
identification and reduction of risks that reduce productivity.

Risk management also faces difficulties allocating resources. This is the idea of
opportunity cost. Resources spent on risk management could have been spent on
more profitable activities. Again, ideal risk management minimizes spending while
maximizing the reduction of the negative effects of risks.
Principles of risk management

The International Organization for Standardization identifies the following

principles of risk management: [4]

 Risk management should create value.

 Risk management should be an integral part of organizational processes.
 Risk management should be part of decision making.
 Risk management should explicitly address uncertainty.
 Risk management should be systematic and structured.
 Risk management should be based on the best available information.
 Risk management should be tailored.
 Risk management should take into account human factors.
 Risk management should be transparent and inclusive.
 Risk management should be dynamic, iterative and responsive to change.
 Risk management should be capable of continual improvement and
enhancement.

Process

According to the standard ISO/DIS 31000 "Risk management -- Principles and

guidelines on implementation" [3], the process of risk management consists of
several steps as follows:

Establishing the context

Establishing the context involves

1. Identification of risk in a selected domain of interest

2. Planning the remainder of the process.
3. Mapping out the following:
o the social scope of risk management
o the identity and objectives of stakeholders
o the basis upon which risks will be evaluated, constraints.
4. Defining a framework for the activity and an agenda for identification.
5. Developing an analysis of risks involved in the process.
6. Mitigation of risks using available technological, human and organizational
resources.
Identification

After establishing the context, the next step in the process of managing risk is to
identify potential risks. Risks are about events that, when triggered, cause
problems. Hence, risk identification can start with the source of problems, or with
the problem itself.

 Source analysis Risk sources may be internal or external to the system that
is the target of risk management.

Examples of risk sources are: stakeholders of a project, employees of a company

or the weather over an airport.

 Problem analysis Risks are related to identified threats. For example: the
threat of losing money, the threat of abuse of privacy information or the
threat of accidents and casualties. The threats may exist with various
entities, most important with shareholders, customers and legislative
bodies such as the government.

When either source or problem is known, the events that a source may trigger or
the events that can lead to a problem can be investigated. For example:
stakeholders withdrawing during a project may endanger funding of the project;
privacy information may be stolen by employees even within a closed network;
lightning striking a Boeing 747 during takeoff may make all people onboard
immediate casualties.

The chosen method of identifying risks may depend on culture, industry practice
and compliance. The identification methods are formed by templates or the
development of templates for identifying source, problem or event. Common risk
identification methods are:

 Objectives-based risk identification Organizations and project teams have

objectives. Any event that may endanger achieving an objective partly or
completely is identified as risk.
 Scenario-based risk identification In scenario analysis different scenarios
are created. The scenarios may be the alternative ways to achieve an
objective, or an analysis of the interaction of forces in, for example, a
 market or battle. Any event that triggers an undesired scenario alternative
is identified as risk - see Futures Studies for methodology used by Futurists.
 Taxonomy-based risk identification The taxonomy in taxonomy-based risk
identification is a breakdown of possible risk sources. Based on the
taxonomy and knowledge of best practices, a questionnaire is compiled.
The answers to the questions reveal risks. Taxonomy-based risk
identification in software industry can be found in CMU/SEI-93-TR-6.
 Common-risk checking In several industries lists with known risks are
available. Each risk in the list can be checked for application to a particular
situation. An example of known risks in the software industry is the
Common Vulnerability and Exposures list found at http://cve.mitre.org.
 Risk charting (risk mapping) This method combines the above approaches
by listing Resources at risk, Threats to those resources Modifying Factors
which may increase or decrease the risk and Consequences it is wished to
avoid. Creating a matrix under these headings enables a variety of
approaches. One can begin with resources and consider the threats they
are exposed to and the consequences of each. Alternatively one can start
with the threats and examine which resources they would affect, or one
can begin with the consequences and determine which combination of
threats and resources would be involved to bring them about.

Assessment

Once risks have been identified, they must then be assessed as to their potential
severity of loss and to the probability of occurrence. These quantities can be
either simple to measure, in the case of the value of a lost building, or impossible
to know for sure in the case of the probability of an unlikely event occurring.
Therefore, in the assessment process it is critical to make the best educated
guesses possible in order to properly prioritize the implementation of the risk
management plan.

The fundamental difficulty in risk assessment is determining the rate of

occurrence since statistical information is not available on all kinds of past
incidents. Furthermore, evaluating the severity of the consequences (impact) is
often quite difficult for immaterial assets. Asset valuation is another question that
needs to be addressed. Thus, best educated opinions and available statistics are
the primary sources of information. Nevertheless, risk assessment should produce
such information for the management of the organization that the primary risks
are easy to understand and that the risk management decisions may be
prioritized. Thus, there have been several theories and attempts to quantify risks.
Numerous different risk formulae exist, but perhaps the most widely accepted
formula for risk quantification is:

Rate of occurrence multiplied by the impact of the event equals risk

Later research has shown that the financial benefits of risk management are less
dependent on the formula used but are more dependent on the frequency and
how risk assessment is performed.

In business it is imperative to be able to present the findings of risk assessments

in financial terms. Robert Courtney Jr. (IBM, 1970) proposed a formula for
presenting risks in financial terms [5]. The Courtney formula was accepted as the
official risk analysis method for the US governmental agencies. The formula
proposes calculation of ALE (annualised loss expectancy) and compares the
expected loss value to the security control implementation costs (cost-benefit
analysis).

Potential risk treatments

Once risks have been identified and assessed, all techniques to manage the risk
fall into one or more of these four major categories: [6]

 Avoidance (eliminate)
 Reduction (mitigate)
 Transfer (outsource or insure)
 Retention (accept and budget)

Ideal use of these strategies may not be possible. Some of them may involve
trade-offs that are not acceptable to the organization or person making the risk
management decisions. Another source, from the US Department of Defense,
Defense Acquisition University, calls these categories ACAT, for Avoid, Control,
Accept, or Transfer. This use of the ACAT acronym is reminiscent of another ACAT
(for Acquisition Category) used in US Defense industry procurements, in which
Risk Management figures prominently in decision making and planning.
Risk avoidance

Includes not performing an activity that could carry risk. An example would be not
buying a property or business in order to not take on the liability that comes with
it. Another would be not flying in order to not take the risk that the airplane were
to be hijacked. Avoidance may seem the answer to all risks, but avoiding risks also
means losing out on the potential gain that accepting (retaining) the risk may
have allowed. Not entering a business to avoid the risk of loss also avoids the
possibility of earning profits.

Risk reduction

Involves methods that reduce the severity of the loss or the likelihood of the loss
from occurring. For example, sprinklers are designed to put out a fire to reduce
the risk of loss by fire. This method may cause a greater loss by water damage and
therefore may not be suitable. Halon fire suppression systems may mitigate that
risk, but the cost may be prohibitive as a strategy. Risk management may also
take the form of a set policy, such as only allow the use of secured IM platforms
(like Brosix) and not allowing personal IM platforms (like AIM) to be used in order
to reduce the risk of data leaks.

Modern software development methodologies reduce risk by developing and

delivering software incrementally. Early methodologies suffered from the fact
that they only delivered software in the final phase of development; any problems
encountered in earlier phases meant costly rework and often jeopardized the
whole project. By developing in iterations, software projects can limit effort
wasted to a single iteration.

Outsourcing could be an example of risk reduction if the outsourcer can

demonstrate higher capability at managing or reducing risks. [7] In this case
companies outsource only some of their departmental needs. For example, a
company may outsource only its software development, the manufacturing of
hard goods, or customer support needs to another company, while handling the
business management itself. This way, the company can concentrate more on
business development without having to worry as much about the manufacturing
process, managing the development team, or finding a physical location for a call
center.
Risk retention

Involves accepting the loss when it occurs. True self insurance falls in this
category. Risk retention is a viable strategy for small risks where the cost of
insuring against the risk would be greater over time than the total losses
sustained. All risks that are not avoided or transferred are retained by default.
This includes risks that are so large or catastrophic that they either cannot be
insured against or the premiums would be infeasible. War is an example since
most property and risks are not insured against war, so the loss attributed by war
is retained by the insured. Also any amounts of potential loss (risk) over the
amount insured is retained risk. This may also be acceptable if the chance of a
very large loss is small or if the cost to insure for greater coverage amounts is so
great it would hinder the goals of the organization too much.

Risk transfer

In the terminology of practitioners and scholars alike, the purchase of an

insurance contract is often described as a "transfer of risk." However, technically
speaking, the buyer of the contract generally retains legal responsibility for the
losses "transferred", meaning that insurance may be described more accurately
as a post-event compensatory mechanism. For example, a personal injuries
insurance policy does not transfer the risk of a car accident to the insurance
company. The risk still lies with the policy holder namely the person who has been
in the accident. The insurance policy simply provides that if an accident (the
event) occurs involving the policy holder then some compensation may be
payable to the policy holder that is commensurate to the suffering/damage.

Some ways of managing risk fall into multiple categories. Risk retention pools are
technically retaining the risk for the group, but spreading it over the whole group
involves transfer among individual members of the group. This is different from
traditional insurance, in that no premium is exchanged between members of the
group up front, but instead losses are assessed to all members of the group.
Create a risk-management plan

Select appropriate controls or countermeasures to measure each risk. Risk

mitigation needs to be approved by the appropriate level of management. For
example, a risk concerning the image of the organization should have top
management decision behind it whereas IT management would have the
authority to decide on computer virus risks.

The risk management plan should propose applicable and effective security
controls for managing the risks. For example, an observed high risk of computer
viruses could be mitigated by acquiring and implementing antivirus software. A
good risk management plan should contain a schedule for control implementation
and responsible persons for those actions.

According to ISO/IEC 27001, the stage immediately after completion of the Risk
Assessment phase consists of preparing a Risk Treatment Plan, which should
document the decisions about how each of the identified risks should be handled.
Mitigation of risks often means selection of security controls, which should be
documented in a Statement of Applicability, which identifies which particular
control objectives and controls from the standard have been selected, and why.

Implementation

Follow all of the planned methods for mitigating the effect of the risks. Purchase
insurance policies for the risks that have been decided to be transferred to an
insurer, avoid all risks that can be avoided without sacrificing the entity's goals,
reduce others, and retain the rest.

Review and evaluation of the plan

Initial risk management plans will never be perfect. Practice, experience, and
actual loss results will necessitate changes in the plan and contribute information
to allow possible different decisions to be made in dealing with the risks being
faced.

Risk analysis results and management plans should be updated periodically. There
are two primary reasons for this:
 1. to evaluate whether the previously selected security controls are still
applicable and effective, and
2. to evaluate the possible risk level changes in the business environment. For
example, information risks are a good example of rapidly changing business
environment.

Limitations

If risks are improperly assessed and prioritized, time can be wasted in dealing with
risk of losses that are not likely to occur. Spending too much time assessing and
managing unlikely risks can divert resources that could be used more profitably.
Unlikely events do occur but if the risk is unlikely enough to occur it may be better
to simply retain the risk and deal with the result if the loss does in fact occur.
Qualitative risk assessment is subjective and lack consistancy. The primary
justification for a formal risk assessment process is legal and bureaucratic.

Prioritizing too highly the risk management processes could keep an organization
from ever completing a project or even getting started. This is especially true if
other work is suspended until the risk management process is considered
complete.

It is also important to keep in mind the distinction between risk and uncertainty.
Risk can be measured by impacts x probability.

Areas of risk management

As applied to corporate finance, risk management is the technique for measuring,

monitoring and controlling the financial or operational risk on a firm's balance
sheet. See value at risk.

The Basel II framework breaks risks into market risk (price risk), credit risk and
operational risk and also specifies methods for calculating capital requirements
for each of these components.

Enterprise risk management

Main article: Enterprise Risk Management

In enterprise risk management, a risk is defined as a possible event or

circumstance that can have negative influences on the enterprise in question. Its
impact can be on the very existence, the resources (human and capital), the
products and services, or the customers of the enterprise, as well as external
impacts on society, markets, or the environment. In a financial institution,
enterprise risk management is normally thought of as the combination of credit
risk, interest rate risk or asset liability management, market risk, and operational
risk.

In the more general case, every probable risk can have a pre-formulated plan to
deal with its possible consequences (to ensure contingency if the risk becomes a
liability).

From the information above and the average cost per employee over time, or cost
accrual ratio, a project manager can estimate:

 the cost associated with the risk if it arises, estimated by multiplying

employee costs per unit time by the estimated time lost (cost impact, C
where C = cost accrual ratio * S).
 the probable increase in time associated with a risk (schedule variance due
to risk, Rs where Rs = P * S):
o Sorting on this value puts the highest risks to the schedule first. This
is intended to cause the greatest risks to the project to be attempted
first so that risk is minimized as quickly as possible.
o This is slightly misleading as schedule variances with a large P and
small S and vice versa are not equivalent. (The risk of the RMS Titanic
sinking vs. the passengers' meals being served at slightly the wrong
time).
 the probable increase in cost associated with a risk (cost variance due to
risk, Rc where Rc = P*C = P*CAR*S = P*S*CAR)
o sorting on this value puts the highest risks to the budget first.
o see concerns about schedule variance as this is a function of it, as
illustrated in the equation above.

Risk in a project or process can be due either to Special Cause Variation or

Common Cause Variation and requires appropriate treatment. That is to re-iterate
the concern about extremal cases not being equivalent in the list immediately
above.
Risk-management activities as applied to project management

In project management, risk management includes the following activities:

 Planning how risk will be managed in the particular project. Plan should
include risk management tasks, responsibilities, activities and budget.
 Assigning a risk officer - a team member other than a project manager who
is responsible for foreseeing potential project problems. Typical
characteristic of risk officer is a healthy skepticism.
 Maintaining live project risk database. Each risk should have the following
attributes: opening date, title, short description, probability and
importance. Optionally a risk may have an assigned person responsible for
its resolution and a date by which the risk must be resolved.
 Creating anonymous risk reporting channel. Each team member should
have possibility to report risk that he foresees in the project.
 Preparing mitigation plans for risks that are chosen to be mitigated. The
purpose of the mitigation plan is to describe how this particular risk will be
handled – what, when, by who and how will it be done to avoid it or
minimize consequences if it becomes a liability.
 Summarizing planned and faced risks, effectiveness of mitigation activities,
and effort spent for the risk management.

Risk management and business continuity

Risk management is simply a practice of systematically selecting cost effective

approaches for minimizing the effect of threat realization to the organization. All
risks can never be fully avoided or mitigated simply because of financial and
practical limitations. Therefore all organizations have to accept some level of
residual risks.

Whereas risk management tends to be preemptive, business continuity planning

(BCP) was invented to deal with the consequences of realized residual risks. The
necessity to have BCP in place arises because even very unlikely events will occur
if given enough time. Risk management and BCP are often mistakenly seen as
rivals or overlapping practices. In fact these processes are so tightly tied together
that such separation seems artificial. For example, the risk management process
creates important inputs for the BCP (assets, impact assessments, cost estimates
etc). Risk management also proposes applicable controls for the observed risks.
Therefore, risk management covers several areas that are vital for the BCP
process. However, the BCP process goes beyond risk management's preemptive
approach and moves on from the assumption that the disaster will realize at
some point.

Risk Communication

Risk communication refers to the idea that people are uncomfortable talking
about risk. People tend to put off admitting that risk is involved, as well as
communicating about risks and crises. Risk Communication can also be linked to
Crisis communication.

Benefits and Barriers of Risk Communication

"Some of the Benefits of risk communication include, improved collective and

individual decision making. Both the purpose of the exchange, and the nature of
the information have an impact on the benefits. Depending on the situation,
personal and community anxieties about environmental health risks can be
reduced or increased. For example, a goal might be raising concern about radon
and prompting action."

Seven cardinal rules for the practice of risk communication

(as first expressed by the U.S. Environmental Protection Agency and several of the
field's founders)

Accept and involve the public as a legitimate partner.

Plan carefully and evaluate your efforts.
Listen to the public's specific concerns.
Be honest, frank, and open.
Coordinate and collaborate with other credible sources.
Meet the needs of the media.
Speak clearly and with compassion.
Case Studies

Minnesota Mining and Manufacturing Company

Introduction: 3M is considered as one of the most leading multinational companies in the

world and is ranked among the top ten U.S. Companies in patents granted. In the array of
thousands of products, 3M products are considered to be the most innovative. 3M
produces more than 200
innovative products each year. With a ticker symbol of MMM, It is listed on the New
York, Pacific, Chicago and Swiss stock Exchange. 3M, established in 1902, now operates
in more than 60 countries and is engaged in producing more than 75,000 products
including adhesives, sand paper, post-it products, abrasives, pharmaceuticals,
fluorochemicals, optics, coatings, ceramics, LCDs, cables and other industrial and office
equipments. It is said that a quarter of the world’s population uses one or more 3M
products daily and its demand for the products is increasing day by day leading the
company to make solid sales growth and make further prosperity in future.
With referring to the organizational growth and success over the past few years, the
company continues to invest in growth programs and brand building throughout the
portfolio. Its capital budgeting decisions regarding research and development and other
capital expenditures are hoped to increase in every coming year which requires the
challenges of meeting
growing needs for finances, efficient allocation of resources, making good investment
decisions and most importantly maintaining a balance between the objective of profit and
shareholder’s wealth maximization. It has to have a competitive edge and maintain itself
financially sound and stable in accordance with the growing global demand of its
products and increasing innovation in the world.

WHY CAPITAL BUDGETING DECISIONS ARE IMPORTANT?

Capital Budgeting decisions are the most important and critical decisions that directly
influence the company’s performance in terms of profitability and liquidity. These
decisions can lead the company to reach the heights of success and can even lead the
company to face disaster. So effective capital budgeting decisions are key to the
organizations’ success because they involve risk and understanding of uncertainty about
each investment and project, which is usually difficult to analyze.

OVERVIEW / ANALYSIS
Since 3M makes almost 60% of its revenue from international markets that’s why its
primary growth strategy is based on continuing international expansion and producing
more innovative products into new or existing markets. Currently 3M manages its
business operations in six business segments i.e. Health care, Industrial and
Transportation, Display and Graphics, Consumer and Office, Electro and communication,
Safety security and protection services.

3M’s FINANCIAL MANAGEMENT

STRUCTURE IN TERMS OF
CAPITAL BUDGETING DECISIONS
3M’s capital budgeting decisions are mostly related to its R&D, acquisitions, strategic
alliances,
mergers, investments in plant, property, equipment and usually in available for sale
securities.3M invests more than $1 billion per year in research and development and
related activities, and is awarded nearly 600 U.S. patents each year.
3M’s capital expenditures totaled $943 million in 2005 and are expected to increase up to
$1.1 billion in the year 2006. 1A brief overview about the company’s capital budgeting
activities over the past few years is given below:
In 2005, 3M spent about $26 million for capital projects related to protecting the
environment which are further expected to increase to $35 million for new programs to
build pollution control devices, modern facilities and modify manufacturing processes to
minimize waste and reduce emissions.
In 2005, 3M announced to build an LCD optical film manufacturing facility in 1 Only
few of the material investments have been mentioned in the analysis to give the readers
idea about the company’s capital budgeting activities.

Poland in order to cater to the LCD-TV market in Europe and to better serve its
customers.
In 2005, 3M (industrial business segment) acquired a CUNO filtration plant for
purification of fluid and gases for $1.36 billion ($1.27) billion paid in cash and $80
million of debt out of which mostly has been paid) along with the intangible assets of
$268 million.
In the years 2003, 2004 and 2005, 3M business segments continued to buy 100% of
outstanding shares from various companies, manufacturing lines and subsidiaries for the
purpose of expansion and other activities.
In 2006, company combined its industrial and transportation business segment to
increase efficiency and lower down its operational costs.
In 2005, approximately $3.6 billion of cash was used to repurchase 3M common stock
under its repurchase authorization and for the payment of dividends and contributed $788
million to its pension and postretirement plans.

3M paid its first dividend of 6 cents per share in 1916 and since from then, it believes in
delivering sustainable and higher returns to the company’s shareholder. Its dividend
expenditures totaled $1.268 billion in 2005 ($1.68 per share), $1.125 billion in 2004
($1.44 per share) and $1.034 billion in 2004 ($1.32 per share)2. 3M invests large amount
of expenditures in Research and product development. Its total expenditures regarding
R&D totaled $1.242 billion in 2005, $1.194 billion in 2004 and $1.147 billion in 2003
including 2 Dividend per share over the years have been shown in graph given at
appendix 2 the expenditures regarding the development of new and improved products of
$798 million in 2005, $759 million in 2004 and $749 million in 2003. Regarding product
development, 3M uses six sigma3 to increase the productivity and operational
efficiencies by reducing defects to deliver high performance, reliable products to its
customers. The company strongly believes that its ongoing cash flows provide great
source of its funding for expected investments and capital expenditures. It has sufficient
access to the capital markets to meet its investment funding needs. The company
allocates its funding needs from debt as well as from equity. It obtains finances from
operations as well as from long-term debt and short-term borrowings i.e. by issuing and
trading commercial papers, medium term notes, floating rate note, convertible notes, and
marketable securities. The company has entered into various indentures with the banks
(including Citi Bank) with 3 Six sigma is explained in
detail in appendix 3 respect to short term and long term senior debt securities. The table
1.1 (given in the appendix 1) comprises information about its short-term and long-term
debts along with the interest rates and their maturity dates. Its overall longterm debt has
increased from $ 727 million to $1,309 million in 2005 but its short-term debt has
decreased from $2,094 million to $1,072 million in 2005.
3M has contingently convertible 30-year zero-coupon senior notes which are redeemable
into 9.4602 shares of 3M common stock after some conditions have been met. In 2005,
the
conversion price for the fourth quarter was $120 per share. In November 2005, 22,506
out of the 639,000 outstanding bonds were redeemed which resulted 3M to payout
approximately $20
million. 3M has various pension and post retirement plans for its employees. 3M’s goal
of this investment strategy is to meet the obligations and earn the highest rate of return on
actuarial basis. The company determines discount rate for measuring plan liabilities for
these plans and determines the rate of return by analyzing the returns on fixed income
investment having similar duration liabilities (determined by

CORPORATE STRATEGY
Innovation is the basic corporate strategy that 3M is using for driving its organization. It
invests a large sum in its R&D and believes its innovation and patents to be the great
sources of its competitive advantage. 3M's corporate strategy is based on a paradigm shift
towards 21st century competitiveness that requires movement towards long term
“sustainable growth” without
compromise of financial success. It has pursued this goal, in part, through its technical
corporate culture with a workforce that is empowered to innovate. In their annual report
for the year 2005 it is stated:
“Every day, people at 3M find ways to make life better and easier for people around the
world. We increase and efficiency by sharing technologies, manufacturing operations,
brands and other resources across our businesses and geographies. Our businesses
produce innovative products, hold leading market positions and generate solid returns
on investment.” At 3M innovation is a dynamic process. All employees are encouraged to
innovate and according to the 15% rule (their most famous management principle),
employees are allowed to spend 15% of their working time on their own innovative ideas.
The company is more than hundred years old and has been through various
circumstances. Shift towards an innovative organization has been gradual. It had to face
many challenges and adapt to them by changing its
organizational structure.

CHALLENGES AND ORGANIZATIONAL CHANGES WITH REFERENCE TO

STRATEGIC DEVELOPMENT
Some of the challenges faced by the organization in the transformation into an innovative
organization are mentioned in the table 1.3 in Appendix 1. At 3M, Managers are now
engaging the staff for maximum innovation. This transformation required the leaders to
take responsibility for articulating the direction, for creating an environment that
empowers the members of the organization, to have a deep understanding of the changing
needs of the environment and enabled the individuals to be creative and to be driven by
their own will by communicating a clear vision of the future.

COMPETITORS
3M is the member of conglomerate industry. No organization competes with 3M on all
product platforms; it has encountered strong competition in specific business lines. In
particular, Avery Dennison Corporation AVY), Johnson and Johnson (JNJ) and DuPont
(DD) compete with 3M.

FINANCIAL PERFORMANCE
3M’s corporate strategy has great impact on its financial performance. Due to the
increasing demand for its innovative products and effective decision making to reach
operational excellence enabled the company to generate the highest sales revenue8 of
$21.2 billion in 2005 with an increase of 5.4% over the previous year. It reported a net
income of $3.2 billion with an increase of 7.0%.
Operating income grew up to $5 billion with an increase of 9.4%. Earnings per share
reported $4.12, 9.9% higher as compared to the year 2004. Dividends per share with an
increase of 16.7% reported to $1.68. However because of heavy investments and
payment
of some long term debts in 2005, the company reported a net decrease in cash & cash
equivalents of $1,685 million as compared to the year 2004. But these outflows were
because of
heavy investments which would benefit the company on the long-term basis.
 RISK MANAGEMENT
“To understand uncertainty and risk is to understand the key business problem –
and the key business opportunity”— David B. Hertz, 1972.
Risk is the most important factor incorporated in the capital budgeting decisions
that directly influences the credibility of an investment. When a company invests
in a project, it always has some degree of uncertainty involved in it. Financial
managers look for the projects whose expected rate of return is higher with less
amount of risk involved in it to ensure shareholder’s wealth maximization and
company’s profitability.

RISK FACTORS
3M deals with different types of market and company risks. Briefly, they are as
follows:

· The effects of, and changes in, worldwide economic conditions e.g. recession,
social, political, labor conditions or government policies in which company
operates etc. can have an impact on its results.
· Change in consumer preferences, introduction and timings of competitive
products, changing customer order patterns can affect the demand for 3M
products and hence can
affect the company’s revenue and profit margins.
· As company makes almost 60% of its revenue from international markets
therefore its receivables, and expected returns for the investments, sales and
earnings can be affected by exchange rate fluctuations.
· Developments of new products may subject to many risks and is largely
dependent on the timings of their launch and acceptance of that product in the
market. There is no guarantee that all these products will be commercially
successful.
· Price fluctuations, interruption in supply, shortages of raw material, changing
demand, natural disasters and other factors can have a material effect on the
company’s results. e.g. In 2005, the company had to face many problems
regarding costs and supply of oil-derived raw materials because of hurricanes hit
in Katrina and Rita.
· Its capital budgeting decisions regarding acquisitions, strategic alliances,
divestitures and other events resulting from portfolio management actions,
possible organizational restructuring and any other change in its business strategy
can affect the future results.
· The company’s future results can be affected if company generates less
productivity improvements than estimated.
· The Company and some of its subsidiaries are facing many claims, lawsuits, legal
and regulatory proceedings and litigation including those involving product
liability, property and other matters can result in the outcomes other than those
of estimated which can affect the future results.

RISK MANAGEMENT STRATEGY BEING FOLLOWED BY 3M TO OFFSET

RISKS

3M has a financial risk management committee, comprising senior management,

to deal with the company’s financial risk policies and provides guidelines and
procedures for risk management and derivative instrument utilization for control
and valuation.
Regarding the risk factors mentioned above, the company is using various
techniques and strategies to minimize these risks. The activities undertaken by
the management to offset these risks are:
· Hedging is the most important activity which 3M uses to counter risk. The
company has various contractual derivative arrangements to manage risks
associated with foreign
exchange rate, interest rate and commodity price risks. The company uses
interest rate swaps, forward and option contracts to manage risk. It uses a mix of
floating and fixed interest rate debt and uses interest rate swaps to help
managing the borrowing costs. In 2005, half of the currency impacts were
reduced by hedging.
· The company is engaged in supply contracts, price protection agreements and
forward physical contracts to ensure uninterrupted supply throughout the year
and to manage commodity price risks.
· The company is doing global sourcing for coping with the commodity price
inflation which would help in reducing the cost of raw material.
· The company uses tools like six sigma to improve its operational efficiency and
productivity to reduce its operational costs in order to avoid risk regarding new
product development.
· 3M uses variance/co-variance statistical model named “third-party bank
dataset9” to assess interest rates, currency fluctuations and the risks associated
with the loss in after-tax earnings in financial instruments and derivatives.
CONCLUSION
3M is a multinational giant with well-diversified portfolio of products. Its
significant growth along with a steady flow of new and innovative products and
the expense on research, development and related expenses are expected to
increase in the coming years which require the company to face new challenges
regarding its capital budgeting decisions that would directly impact the
organization’s structure and company’s financial performance. In this rapidly
changing global environment of uncertainty, proper risk management is necessary
to acquire required efficiency in order to have a good financial management
structure.