How Danaher achieved an annual 30 percent growth with an effective acquisition strategy
Discover how the Danaher Business System offers a foolproof roadmap to effective acquisitions
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The story of Danaher’s success
In 2010, science and technology innovator Danaher Corporation had grown into a family of strategic growth platforms, having undergone more than 50 acquisitions between 2001 and 2006. The company successfully transitioned from a cyclical industrial company by pivoting the organizational focus to manufacturing scientific and technical instrumentation. Danaher attained control of five growth platforms and began operations in seven focused niche businesses.
The central pillar of the organization's growth strategy was, and still is, the Danaher Business System (DBS). This system sets strategy guidelines for planning, deployment and implementation under the Kaizen continuous improvement principles.
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In 2010, on the Danaher annual shareholder report, Larry Culp, who was the CEO of Danaher Corporation at the time, noted: "DBS tools give all of our operating executives the means with which to strive for world-class quality, delivery, cost benchmarks and deliver superior customer satisfaction and profitable growth."
Danaher’s rapid growth was fueled in large part by the successful implementation of the DBS across acquired businesses. Operational margins grew at an impressive rate and Danaher bolstered its portfolio with the implementation of a number of new products.
The Danaher Business System - Source: Kaizen Institute
What are the principles supporting the DBS?
In 1988, Danaher had great success with the implementation of Toyota’s Lean manufacturing methodology, marking its first foray into the implementation of Kaizen techniques. Between 1986 and 2000, Danaher expanded its roster of operating companies from 16 to 51, with 86 percent of revenue from tires and rubber goods being transitioned into environmental, electronic test and motion control platforms. The DBS stood as the keystone of the firm's continual success.
In the DBS, traditional ‘batch-and-queue’ manufacturing is replaced with a single-piece, or one-piece flow Lean approach, which minimizes process time, inventory and overhead costs. These Lean principles were also applied to transactional processes, expanding the system to focus on innovation, growth, marketing and sales.
The application of new techniques, such as accelerated product development, strategic pricing and intellectual property management, ensured that the challenge of accelerated growth was overcome with the same Kaizen mindset that is used to tackle cost and efficiency challenges.
There are four principles that support the DBS approach: people, plan, process and performance. When applying these principles for current or new businesses the emphasis should be focused on growth, Lean methodology and leadership.
- People: This principle requires routine talent assessments as part of standard business state reviews or usual acquisition due diligence, to identify individuals who might not fit in the Danaher culture.
- Plan: A strategic plan is created for every business acquisition, to answer the questions "what game are we playing?" and "how do we win?". This plan should encourage managers to acknowledge opportunities for improvement and produce a vision for shared, long-term success.
- Process: Indoctrinating managers into the DBS processes starts with a one-week training session and closes with a one week Kaizen event. The goal of this training is to offer managers the opportunity to take a deep dive into Kaizen methodologies such as single-piece flow, visual maps and benefit tracking.
- Performance: Finally, a policy deployment tool is leveraged to drive and monitor the strategy implementation.
What is the three-stage plan for strategy deployment?
Initially, with any acquisition, Danaher would develop three-year strategic plans supported by systematic processes, such as the balanced scorecard. This was labor intensive and generated a number of complex, confidential documents.
This level of secrecy complicated the execution of strategic plans, as teams had little-to-no visibility over the purpose of initiatives. Implementing new initiatives absorbed an unnecessary amount of time and the majority of these programs would fail to meet organizational targets.
In response to these shortcomings, Danaher decided to revolutionize its strategy deployment system, using three key stages.
The first stage was an operational value stream analysis (VSA). This is a team-building and eye-opening exercise, which requires top managers to split into groups, to conduct a value stream map and acknowledge any improvement opportunities in the supply chain. Managers looked for improvements that could offer reductions in process time and defect rates or increase service levels.
The next major stage was the strategy plan. In strategy planning discussions, it became clear that Danaher had excellent knowledge of its existing customers, but none of its competitors’ customers. Once the company realized this, it also noticed it was lacking a solid growth strategy, due to uncertainty around market focus. The output of the strategy plan was a list of five to seven strategic priorities to be achieved in the mid-term.
The third stage, called policy deployment stage or ‘Hoshin Kanri’, is intended to improve the execution of the strategy plan and involves breaking down strategic priorities into a series of one-year goals. This is followed by the identification of processes that require adjustment or overhauling along with deciding on which metrics to apply to effectively monitor the progress of improvement. The first-level goals are translated into second-level goals for each department and then into individual action plans.
The key to the success of the execution comes in the policy deployment meetings, where target gaps are identified and root causes and countermeasures are defined.
Source: Kaizen Institute
What are the results of the DBS strategy in numbers?
As a result of the DBS culture and the strategy to action process, Danaher has grown profitably by almost 30 percent every year. This is also reflected in market valuation, where Danaher has displayed 80 percent growth since the 1980s and generated extremely high free cash flows.
This expansion has allowed the company to implement a very successful strategy for mergers and acquisitions, with a significant effect on total shareholder returns. The evolution of Kaizen methodologies from the manufacturing floor and back office to innovation, marketing, research and development and sales has allowed for a cumulative return on Danaher’s stock from 2001 to 2010 of more than 150 percent.
Danaher share price versus S&P and competitors, 1984–2010 (indexed to 100) - Source: Kaizen Institute
This article was originally published as Danaher Corporation Story.
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