Danaher and its Business System – A Model of Excellence
While not groundbreaking today, Danaher’s operating model in the 1980’s sought to ensure maximum effectiveness and efficiency. By aligning its operating model and business model since its early days, Danaher today has become a $19B industry superstar.
Danaher has long been recognized as a leading operating company (125 companies worldwide; 19B revenue). By repackaging key pillars of lean and kaizen-based systems, Danaher established the Danaher Business System (DBS) in the mid-to-late-1980s. Over time, Danaher has effectively linked its business model to its operating model. According to former CEO Larry Culp, “The DBS process system is the soul of Danaher; the system guides planning and execution.” (HBS Danaher case)
As a large operating company, Danaher has a track record of improving its portfolio companies’ operations, resulting in improved performance and growth. With a winning business strategy, Danaher has provided 21% annual returns since 1997 to shareholders. (beta.finance.yahoo.com/quote/DHR) Since launching DBS, Danaher’s strategy has been to implement its proven operating system to eliminate inefficiencies. (http://www.leaninterim.com/danaher-business-system-implementing-real-lean-thinking)
Four “P’s:”—people, plan, process, and performance—create the foundation of DBS. Continuous improvement and operational efficiencies are built into the system. Danaher has thrived by creating an environment that encourages employees to seek improvement and find/explore entrepreneurial gaps. Recently, Danaher expanded DBS into new areas that focus on innovation and growth, aiming to drive improvement in product development, marketing, and sales. (Danaher case)
DBS is not unique in today’s context. In fact, it is a copycat—DBS was formed using other operating methodologies (lean/kaizen/TPS) that Danaher implemented ahead of others in industry. While lean and kaizen became commonplace in some manufacturing companies by the mid-to-late 1990’s, Danaher was a decade ahead of its competitors. What is unique is the way in which Danaher linked a relatively new way of operating to its business strategy. By the late 1980’s, DBS became firmly entrenched in firm culture while the company was still in its early stage. (web.archive.org/web/20081010225950/http://www.psekd.com/Company/Danaher_Corp)
While providing a good example of an effective operations model, I also selected Danaher for this blog because it takes a page out of the LEAD textbook. The implementation of DBS is a massive “change management” challenge. With each new acquisition, DBS is implemented almost immediately, system-wide, and from top-down. While we have analyzed other lean/kaizen/TPS-based operating models in TOM, none were implemented inorganically within a relatively short timeline. In other words, an employee at Toyota expects to operate in an environment driven by TPS. However, if I am an employee at a tire manufacturer acquired last Tuesday by Danaher, and suddenly face DBS today, how will I react? How will my company react?
I am sure many of you have read about or experienced instances of a takeover, after which a company is either gutted or faces changes to its way of doing business. How big and what type of disruption does DBS create? The answer: “It depends.” According to HBS’s Danaher case, the implementation of DBS at Radiometer was relatively smooth (but required considerable planning). Danaher surprised Radiometer’s executive team, who believed their operations were as efficient as possible; as it turned out, DBS drove considerable process improvements. On the other hand, one online blog (taken with care/context/partial skepticism) portrays employees at various Danaher operating companies with less optimism. (glassdoor.com/Reviews/Danaher-Reviews) The comments range from: “Danaher doesn’t train us well…” to “Danaher is only worried about ‘reaching their numbers’” and “Danaher will strip [the company down] to achieve higher profits…at the expense of the individuals making [the profits] happen.”
This is likely contextual; the degree of buy-in to DBS and Danaher culture by an operating company’s leadership is a likely driver of implementation. Per the HBS case, Radiometer executives quickly bought into DBS and pushed it throughout Radiometer organically. If I were Danaher, I would ensure a company’s executive team fully supports DBS before going forward with an acquisition. If unachievable at that time, I might wait to complete the acquisition until I have fully convinced the company of DBS’s benefits, particularly since performance is dependent on successful DBS implementation. Secondly, I would ensure each employee receives the requisite training to succeed.
Danaher’s business and operating systems support each other. With a business strategy designed to identify and acquire companies that will benefit from DBS, Danaher has achieved considerable growth in top line, bottom line, and market share for its portfolio of operating companies. Additionally, DBS touches every business competency—ranging from marketing/sales to in-factory production. (Danaher case) So while not superbly unique, DBS stands out as a proven operating system that supports and sustains its parent company’s business model and aims. Throughout the last 20 years, Danaher has shown tremendous growth and returns; by many accounts, the credit belongs to DBS.
It’s a very flowing overview of Danaher’s business system and its implications. I think it is also a great analysis because Danaher is one of the few companies that can keep its business model as a sustainable and profitable one while not operating with the most unique business system (DBS).
Many businesses find the long term and sustainable solution in inorganic growth when their core business / industry growth goes into a stagnant cycle. Inorganic growth is not the simplest art especially in manufacturing / industrials areas. As many services companies face little difficulty in growing their businesses inorganically as it requires talent management and training sessions only. In the industry segment which Danaher operates, acquirers should also be able to smoothly manage the change in business / operating processes. That’s what makes this journey a very difficult one, a very physical one. Apparently, Danaher, as an established and successful company, is a good operator of this process.
My long term concern about this model: Going forward, industrials / manufacturing players will be operating with very tight margins as the global competition is expected to be harsh for every player. I see it very difficult for Danaher to change / implement / adapt its current model when other competitors come up with original, more modern and efficient models. As Danaher’s operating assets in diverse sub-industries will result in harder implementation and adaptation processes, flexibility and quick response abilities to a top-down approach will be the key to successful competition in these industries.
Ercu – Danaher’s operating companies have for years operated in marketplaces with tight margins. Where they have been able to beat out their competitors is through employing more efficient business practices, and when required, drop product lines altogether (if they’re not making money). Danaher has been judicious with what it chooses to manufacture, and is constantly looking at the next frontier of industry and which companies it will acquire (whatever and wherever that might be) to maximize its operational profits.