Danaher Corporation’s growth strategy has been deeply rooted in the principles of continuous improvement and operational excellence. The company’s transformation from a cyclical industrial entity to a leading scientific and technical instrumentation business was driven by strategic acquisitions and the adoption of the Danaher Business System (DBS).

By 2010, Danaher had become a family of strategic growth platforms. Over 50 acquisitions between 2001 and 2006 allowed Danaher to transition from a cyclical industrial company to a scientific and technical instrumentation company. Danaher acquired five growth platforms and operations in seven focused niche businesses.

The Danaher Business System (DBS) was, and still is, the central pillar of the company’s growth strategy. This system sets the guidelines for planning, deployment, and implementation of the strategy, under the Kaizen continuous improvement principles. Lary Culp, CEO of Danaher Corporation in 2010, wrote in the shareholder annual report:

 “DBS tools give all of our operating executives the means with which to strive for world-class quality, delivery, and cost benchmarks and deliver superior customer satisfaction and profitable growth.”

The successful implementation of the DBS system across acquired businesses led to rapid growth. The operational margins grew at an impressive rate, along with the number of new product introductions to the original portfolio.

Figure 1 – The Danaher Business System (DBS) framework

The Danaher Business System (DBS)

Danaher took its first steps with Kaizen methodologies in 1988, implementing Toyota’s Lean Manufacturing with great success. From 1986 to 2000, Danaher grew from 16 operating companies to 51 operating companies. Where 86% of the revenue from tyres and rubber goods was directed toward environmental, electronic test, and motion control platforms. Along with all the business transformations, what started as a Lean Manufacturing implementation evolved into a Kaizen system encompassing continuous quality improvement tools and principles. The DBS came to be recognised as the keystone of the company’s success.

The DBS applies the Lean approach to replace the traditional “batch-and-queue” manufacturing system with a “one-piece flow” that minimises in-process time and reduces inventory and other overhead costs. These principles were applied to transactional processes as well, expanding the system to focus on innovation, growth, marketing and sales. New tools, such as accelerated product development, strategic pricing, and intellectual property management, guarantee that the challenge of accelerated growth is tackled with the same Kaizen mindset used for cost and efficiency challenges.

The DBS approach is supported by four principles: people, plan, process, and performance. The application of these principles in current or new businesses emphasises growth, Lean, and leadership.

People

Talent assessments are conducted during reviews of the current business or as part of acquisition due diligence to identify those who might not fit the Danaher culture.

Plan

To answer the questions “What game are we playing?” and “How do we win?”, a strategic plan is created for every business. This plan should encourage managers to acknowledge their improvement opportunities and produce a shared long-term success vision.

Process

The immersion of managers into DBS processes starts with a week-long training session and closes with a one-week Kaizen Event. The goal is to deep-dive into Kaizen concepts such as one-piece flow, visual maps, and benefits tracking.

Performance

A policy deployment tool is used to drive and monitor the implementation of the strategy.

Strategy deployment to overcome the execution gap

Danaher used to make three-year strategic plans every year, through the application of a systematic process, like the Balanced Scorecard. This was a heavy process that resulted in a number of complex documents that were kept confidential. This secrecy made it difficult to execute the strategic plan, as teams had little to no knowledge of its purpose and initiatives. Initiatives took a long time and most of them failed to achieve the targets. A countermeasure process was far from being in place and gaps to targets were not being addressed.

Danaher decided to accept the challenge to implement an effective Strategy Deployment System.

Figure 2 – Top-level policy deployment chart

The first key step in implementing a New Strategy Process is the Value Stream Analysis (VSA). It is a team-building, eye-opening exercise in which top managers are split into groups to create a value stream map and identify improvement opportunities in their supply chain. These improvements may help reduce in-process time, increase service levels, or lower defect rates.

The next major event is the Strat Plan. Through the Strat Plan discussions, it became clear that Danaher probably knew its existing customers very well, but did not know its competitors’ customers. Once they realised this, they also saw they didn’t have a growth strategy because their market focus was unclear. The output of the Strat Plan is a list of five to seven strategic priorities to be achieved in the mid-term.

To improve the execution of the Strat Plan, the Policy Deployment, or Hoshin Kanri, comes into play. The strategic priorities are broken down into a series of one-year goals. This is followed by identifying the processes that need to change, along with the metrics to monitor their improvement effectively. The level one goals are translated into level two goals for each department and then into individual action plans. The key to successful execution lies in the policy deployment meetings, where the gap to the target is identified, and root causes and countermeasures are defined.

Figure 3 – Improvement priorities cascade to the point of impact

The results obtained: growth and value creation

Due to the DBS Culture and the Strat to Action Process, Danaher has grown profitably by almost 30% every year. This is also reflected in market valuation: 80.000% growth since the 1980s. The generation of extremely high Free Cash Flows enabled the company to implement a highly successful M&A Strategy, with a substantial impact on TSR (Total Shareholder Return). The evolution of Kaizen from the manufacturing floor and the back office to innovation, marketing, R&D and sales allowed for a cumulative return on Danaher’s stock from 2001–2010 of over 150%, in comparison with S&P 500 returns of about 25%.

Figure 4 – Danaher share price versus S&P and competitors, 1984–2010 (indexed to 100)

Based on Harvard Business School “Danaher Corporation” by Bharat N. Anand, David J. Collis, Sophie Hood.