Danaher: The Best Team Wins Part 2

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In Part 1, we explored Danaher’s (DHR) origins. We learned about its founding, and how acquisitive the business model was. In fact, we saw a disciplined and purposeful approach to acquisitions. We learned about a company that had acquired 400+ companies and thrived whilst making those acquisitions.

Consider that for a second. That’s an amazing feat considering how 70-90% of acquisitions fail! We can’t know the exact data on failure rates, but I think it’s safe to say that most have failed. 

If we looked back at most large acquisitions read about in our lifetime, most would’ve failed. Yet, that means 10-30% of acquisitions are successful. Furthermore, what happens when one company makes 12 acquisitions a year? I’m sure DHR has had some failed acquisitions out of the 450+. But if they had a 70% failure rate, the business wouldn’t exist today!

Not only does the business exist today, it’s thriving. DHR has proven its ability to make successful acquisitions over 30 years. Not only do they make good acquisitions, they are able to build businesses to put the success rate in their favour. At the core of this process is the Danaher Business System (DBS).

Though DBS started out with the intention of creating lean systems within manufacturing ecosystems, it evolved over the years. I’m not just talking about an evolution in application to different divisions of a business. It evolved to shift the priority from the process to those implementing the process.

The people at DHR became the building blocks to DBS. DHR realized that was their competitive advantage. They needed to bring on people who didn’t blindly implement systems as if they were instruction manuals. Instead, they needed to bring on people who could be taught principles that they could learn to apply in every situation by integrating themselves into it.

DBS Today: Do, Learn, Iterate, Repeat

The foundation of DBS is continuous improvement. This principle is applied at every operating level with key performance indicators (KPIs) that are measured on an hourly, daily, weekly, monthly, and yearly basis. Does that sound excessive?

In 2006, they reached ~150 KPIs and even the leadership at DHR thought it was excessive. They had gone down the path of Robert McNamara into mistakenly thinking more data and measuring everything was good. But, true to the name of continuous improvement, they learned from a not-so-lean KPI structure and iterated. 

The leadership narrowed DHR’s core metrics to eight that could be used to answer the question: Are we winning?

• Four Financial Metrics

  • Core Growth

  • Operating Margin Expansion

  • Working Capital Returns

  • Returns on Invested Capital (ROIC)

• Two Customer Metrics

  • On-time delivery based on expected dates

  • External quality based on customer experience

• Two People Metrics

  • Fill rate of managerial positions with internal candidates

  • Retention

This is how DBS evolved since the start when it was just Jake Brake’s finding ways to move machinery around to find efficiency gains. Part of that evolution required making mistakes, learning, and iterating over and over again. One mistake was when they adopted Lean Six Sigma (LSS). 

LSS was a popular tool used in GE under Jack Welch and was one more organizational principle that developed a cult following. The result was people forgetting to see it as a tool and adopting it as the sole way of life.

LSS was intended to be one of many tools incorporated into DBS but in its early years, LSS aficionados deflected and took the “everything looks like a nail to the man with the hammer” view. 

Per Mark De Luzio, the principal architect of DBS, it took years to pluck that mindset out of DHR. LSS was just one of such mistakes that moved DBS to a more principle-based approach. DHR was also learning how to be a long-term organization that prioritized slow and steady over adopting fads for quick fixes. 

"We just roll up our sleeves and do it. We know we will fail a hundred times before we get it right. But with businesses that have demonstrated this discipline around core processes and tenets, slow and steady wins the race. That has helped Danaher focus on long-term growth, long-term margin expansion, and maintaining a great cash flow record over many years.” - Chris McMahon, ex-VP of Finance at Danaher

Despite being a company founded in the 80s, more than 50% of Danaher’s 2020 revenues came from acquisitions made in the last seven years. Knowing its history of acquiring hundreds of companies over the decades, we can get a sense of how fluid the business is and it makes sense its systems need to be as well. 

"Danaher has a fact-based culture. As long as you have the facts or are willing to get them, you’re safe. If you’re touting pabulum, that’s an unsafe place to be.” Steve Simms, ex-EVP of Danaher

Its need to evolve requires everyone from HQ to the operating businesses to be nimble. That requires creating an environment where leaders have the autonomy to operate their individual businesses. But it doesn’t stop there.