Danaher Corporation, one of the least known companies to the general public, produces products that we touch, see, and interact with every day. They make everything from gas pumps to dentist’s chairs, from microscopes to water purifiers. And they are able to do it all with incredible success, thanks largely in part to how closely aligned their business and their operations are. You might expect results like those see in the graph below, or their $3 Billion of free cash flow over the last four quarters, from someone like Apple or GE. But Danaher is doing it with tractor-trailer brakes!
Danaher’s business model is pretty simple, despite its continued success. It basically acquires and operates manufacturing companies. And not just one or two acquisitions each year. Over the last 30 years, Danaher has completed over 400 acquisitions. Not necessarily shiny brand-name companies, rapidly growing companies, or companies that need turning around. Simply companies in growing markets, without large competitors, where they can use their operating model to provide a competitive advantage. Because of their specific brand of value investing, they typically stay away from flashy markets and well known companies, basically because they don’t want pay a premium for a name.
Danaher’s operating model is where the real magic happens, and is the core of their value proposition to its customers and investors. Created after seeing and experiencing the success of bits and pieces of the Toyota Production System in the 1980’s, the Danaher Business System has become one of the most effective operating systems around. It continually drives the companies businesses through a never-ending cycle of continuous improvement and change, always looking to be better than yesterday. Starting with lean manufacturing, and spreading to improving growth and even leadership, the Danaher Business System is an attempt to research, document, and replicate how to do almost anything, from locating printers in your office, to managing inventory in your warehouse, and filtering leads in a sales funnel. You must be thinking, “With all of these acquisitions, how many businesses have they sold?” The answer is one! It is simply more profitable for them to continue operating, and continue improving their businesses rather than sell them.
Tying It All Together
These two models not only work incredibly well together, they often rely on each other for success. The business model continually feeds the operation new business, ripe for DBS implementation. This not only allows the operation to capitalize on synergies between often times similar businesses, but also gives the manufacturing teams fresh meat to begin improving.
These improvements, in all operating metrics, especially free cash flows, provide the model will billions of dollars each year to acquire more business. Not only does the operation side provide cash, but they often times provide an edge which allows Danaher to outbid other interested parties in new business. The Danaher acquisitions team is able to analyze targets not as they are now, but what they will become after DBS implementation. Simply put, some businesses are simply worth more in the hands of Danaher than anyone else.
The long and the short of it, is that Danaher is never satisfied with how well its companies are running, or the stable of businesses it has acquired. They are always looking for more. More value to be created and captured. Their former CEO, and HBS Alum Lawrence Culp was once quoted saying, “There are a lot of companies where if you win 10-9, nobody want to talk about the nine runs they just gave up. We’ll celebrate the win, but we’ll talk about ‘How did we give up nine runs? Why didn’t we score 12?'”