Software

Why Software Giants Like Adobe Are Slaughtering Manufacturers Like 3M

For more than a century, 3M has helped companies build better products and work smarter. But lately, the Minnesota Post-it® maker has been showing its age.

In April, the maker of industrial adhesives, abrasives, coatings and other real-world, value-added goods reported dismal financial results. Demand slackened at four out of its five divisions.

Signage stands outside the 3M Co. Cottage Grove Center in Cottage Grove, Minnesota, U.S., on Thursday, Oct. 18, 2018. 3M's Cottage Grove factory had been churning out some varieties of Per-and polyfluoroalkyl substances (PFAS) since the 1950s for the water- and stain-repellant Scotchgard. Recent studies have linked widely used PFAS to reduced immune response and cancer. As awareness spreads, 3M has been named in dozens of lawsuits, several this year alone. The company said the chemicals aren't a danger to public health. Photographer: Daniel Acker/Bloomberg

Signage stands outside the 3M Co. Cottage Grove Center in Cottage Grove, Minnesota, U.S., on Thursday, Oct. 18, 2018. 3M’s Cottage Grove factory had been churning out some varieties of Per-and polyfluoroalkyl substances (PFAS) since the 1950s for the water- and stain-repellant Scotchgard. Recent studies have linked widely used PFAS to reduced immune response and cancer. As awareness spreads, 3M has been named in dozens of lawsuits, several this year alone. The company said the chemicals aren’t a danger to public health. Photographer: Daniel Acker/Bloomberg

© 2018 BLOOMBERG FINANCE LP

Companies are doing more with less. They are reimagining their businesses with software.

And 3M can’t hold it together in the face of formidable competitors that have already mastered the new cloud-services-based world we are in.

In the official corporate press release, 3M managers noted weak demand in its Electronics and Energy, Safety and Graphics, and Industrial divisions resulted in a 5% decline in quarterly sales, to $7.9 billion. And the weakness extended across all geographies.

3M is a long way from its humble Midwestern roots. The company began in 1892 when a butcher, a doctor, a lawyer and two railroad executives started a mining and manufacturing company in Two Harbors, Minn. Back then, they hoped to make grinding wheels from minerals mined at a nearby quarry.

Today, the old Minnesota Mining and Manufacturing Company is officially 3M. Its 97,000 employees are strewn out over 200 countries. A rich history of engineering research and development is responsible for 100,000 patents. The company is adding about 3,000 new patents each year.

You would think that would be enough to maintain heady growth, but sales peaked in 2014.

It was about the same time corporate culture began to change. Companies started doing more with less actual stuff. Workflows migrated to the cloud. Data analytics and digital strategies moved from slick presentation decks to reality.

Satya Nadella became CEO at Microsoft in spring 2014. It was a rebirth for the Redmond, Wash., software giant. Nadella, a fast-rising star at Azure, the company’s cloud computing division, was intent on changing focus at the Windows company.

His first order of business, according to a CNBC story, was to elevate the cloud business.

Amazon Web Services pioneered pay-as-you-go cloud computing. Its versatility quickly attracted large enterprises. Netflix, for example, transformed itself from a mail-order DVD-rental business into a global streaming media empire.

Every line of code is built atop AWS.

Nadella knew Microsoft could compete. He saw a new business hiding in plain sight.

Last week, on the very day 3M managers were grousing about weak demand, Nadella boasted near-insatiable demand at Azure …

Sales, including its cloud-based Office productivity suite, hit $38.5 billion, an increase of 73% year-over-year.

Companies of every size are moving their workflows to Azure, and then building new business models around data analytics.

For many, the migration is existential. They know they can’t survive by simply making their existing products shinier or brighter. They need to embrace digital strategies before their competitors. They need to keep customers and find new ones.

Volkswagen, for example, extended its relationship with Azure in February. The German automaker is working with Microsoft on a connected-car platform so future vehicles can relay information about weather, traffic and route closures.

The network will also allow Volkswagen to create value-added services like personalization, streaming media, automated parking and charge capabilities for electric vehicles.

These new businesses are all made possible by collecting, processing and analyzing digital information in the Azure cloud.

Investors need to be aware this process is underway. They also need to understand the benefits will reach far beyond public cloud providers like Azure.

A vibrant new ecosystem of cloud-based services is budding. Empires are flowering. In contrast, the 3Ms of the world are hollowing out.

Most investors still think of Adobe Systems as a simple software publisher. Its Photoshop and Acrobat applications dominate creative and online publishing.

However, the San Jose, Calif., company has another important business in digital marketing …

Its Adobe Experience platform helps businesses collect, build and analyze digital marketing campaigns. It is a reliable source of revenue, contributing to overall sales of $9 billion in fiscal 2018, a 23.5% increase year-over-year.

In March, Adobe and Microsoft announced plans to share data across the Experience Cloud of Marketo Engage, a marketing automation company acquired by Adobe in September 2018, Microsoft Dynamics for Sales, and LinkedIn, the business social media platform.

The combination creates a formidable rival to Salesforce, the industry leader in customer relationship management software.

Customer relationship management software is considered the tip of the digital spear for large enterprises. It allows them to manage and service existing customers, and identify new sales leads, all in one suite.

Data analytics, with a dollop of artificial intelligence, show what’s working and what’s not, and why.

Adobe shares trade at 24.7x forward earnings. While this is certainly not cheap, enterprises are only in the early middle innings of the shift away from physical value-added strategies toward digital campaigns.

Adobe’s stock price could reach $414 during the next three years, up from their current price at $286.50. This projection is based solely on middle-20% growth rates for sales and income. That would be a nice 44.5% gain from here. Not bad for three years’ time with a stock that’s already trading in the triple-digits.

[“source=forbes”]