Danaher Corporation

9-708-445 REV: APRIL 15, 2011

BHARAT ANAND

DAVID J. COLLIS

S O P H I E H O OD

Danaher Corporation

In early April 2010, Danaher Corporation’s Chief Executive Officer Larry Culp and his senior executive team were getting ready for another round of performance reviews of the firm’s diverse operating businesses. As usual at Danaher, this process was likely to involve not only conference room presentations but visits to the factory floor and conversations with customers. Culp had joined Washington D.C.-based Danaher after graduating from Harvard Business School in 1990, and was appointed CEO in 2001 at the age of 38. He had taken over a company that had generated compound annual stock returns of over 25% since its founding in 1985. Under Culp’s leadership so far, Danaher’s performance continued unabated. Between 2001 and 2006, Danaher’s revenues and net income more than doubled, the firm consummated over 50 acquisitions, and its stock price continued to outperform its peers by impressive margins1 (see Exhibit 1). And, while the “great recession” of 2008-09 impacted its businesses like any other industrial conglomerate, the company emerged relatively unscathed. Indeed, Culp was about to announce higher than expected earnings for yet another quarter.

Culp was wary of the term “conglomerate,” instead referring to Danaher as a family of strategic growth platforms. Management defined a strategic growth platform as “a multi-billion-dollar market in which Danaher can generate $1 billion or more in revenue while being No. 1 or No. 2 in the market.”2 In 2010, Danaher’s portfolio comprised five such platforms, representing over 80% of its total revenue. In addition, the firm operated in seven focused niche businesses—a “business operating in a fragmented or small market in which Danaher has sufficient market share and acceptable margins and returns.”3

The company’s portfolio had evolved over the years. Once a cyclical industrial company, Danaher had in recent years become a scientific and technical instrumentation company that competed in less cyclical markets.4 This evolution was most apparent when considering the build-out of the Dental and Life Sciences & Diagnostics platforms.5 (The firm’s other platforms were Environmental, Test & Measurement, and Industrial Technologies, see Exhibit 2). Danaher boasted leading market positions in a number of their business areas (see Exhibit 3). Many of these companies were the result of successful acquisitions executed in the past dozen years.

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Professors Bharat Anand and David J. Collis and Research Associate Sophie Hood prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2008, 2011 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 708-445 Danaher Corporation

Culp had earned widespread praise for being a “hands-on” CEO. Culp believed that “the role of the CEO is to ensure the company has a clear and well-articulated strategy coupled with the right people to execute that strategy.”6 For Danaher, a central pillar of that strategy was the Danaher Business System, or DBS (Exhibit 4 illustrates the system’s core tenets). As one analyst described, “the DBS process system is the soul of Danaher. The system guides planning, deployment and execution.”7 Culp affirmed the significance of the company’s philosophy of kaizen, or continuous improvement, in his first letter to shareholders in the 2001 annual report: “The bedrock of our company is the Danaher Business System (DBS). 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.”

Danaher’s successful implementation of DBS across its acquisitions had resulted in rapid growth. Indeed, Danaher’s management team had an impressive track record of expanding the operating margins of acquired companies (see Exhibit 5). One equity research firm also noted that they “were pretty amazed at the number of new product introductions across the portfolio.”8

However, despite its tremendous success, Danaher still faced a number of challenges. First, as the company grew to over $13 billion in revenues with strong cash flow, could it continue to identify and execute attractive, value-added acquisitions, as well as drive organic growth within its current businesses? Second, what challenges might arise as it applied DBS to some of the higher technology, science-based industries that Danaher had expanded into in recent years? Last, some observers wondered how long “continuous improvement” could continue.

During Culp’s 20-year tenure with Danaher, he had seen the company rise to numerous challenges before. He was quietly confident that the firm would do so again.

Corporate History

Origins

Steven and Mitchell Rales were two of four brothers who grew up in Bethesda, Maryland. In 1980 they formed their initial investment vehicle, Equity Group Holdings, with an objective to acquire businesses with the following characteristics: (i) understandable operations in a reasonably defined niche, (ii) predictable earnings that generate cash profits, and (iii) experienced management with an entrepreneurial orientation. In 1981, they acquired Master Shield, Inc., a Texas-based vinyl siding manufacturer. Then, they acquired Mohawk Rubber Company of Hudson, Ohio, using $2 million of their own money, and borrowing $90 million.

Soon after, a real estate investment trust (REIT) called DMG, Inc. came to the attention of several investor groups, including the Rales. DMG had not posted a profit since 1975, but it had more than $130 million in tax-loss carry forwards.9 In 1983, the brothers gained control of publicly traded DMG, and sold the company’s real estate holdings the following year. They then folded both Master Shield and Mohawk Rubber Company into the REIT, sheltering the manufacturing earnings under the tax credits.10 They also changed the company’s name to Danaher, after a favorite fly-fishing locale in western Montana. The Danaher River traced its name to the Celtic root “Dana,” or “swift flowing.”11

From then on, the brothers used the newly tailored Danaher as an acquisition vehicle. Using a considerable amount of debt, Danaher launched a series of both friendly and hostile takeovers. They focused on low-profile industrial firms, and purchased 12 additional companies within two years of Danaher’s debut. Early acquisitions included various manufacturers of tools, controls, precision

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components, and plastics. In such mergers, Danaher’s focus was on cutting costs and paying down debt through the divestiture of underperforming assets. By 1986, Danaher was listed as a Fortune 500 company with revenues of $456 million. The 14 subsidiaries were at that time organized into four business units: automotive/transportation, instrumentation, precision components, and extruded products.

Despite their rate of growth, Danaher’s acquisition strategy was far from indiscriminate. As outlined in the 1986 annual report: “As we pursue our objective of becoming the most-innovative and lowest-cost manufacturer of the products we offer, we are seeking a market position with each product line that is either first, second or within a very distinctive market niche.”12 At least 12 of their 14 subsidiaries were market leaders. Danaher considered its strategy distinct among the numerous serial acquirers of the mid-1980s: “If there’s one thing that distinguishes us from the other players in the M&A field, it’s that we stay in touch with the companies,” commented Steven Rales in 1986. After all, he added, “we’re reasonably young fellows with long time horizons.”13

Continuous Improvement Around 1988, the Rales brothers shifted tack in three noteworthy areas. First, they turned an eye inward—both to the subsidiaries’ operations, and the operations of the overall corporate entity. The managers of Jacobs Vehicle Systems, one of Danaher’s divisions, had studied Toyota Motor Corp.’s lean manufacturing with great success. Before long, the brothers implemented the system companywide. The move bespoke what certain Danaher managers later described as their “near-instinctive affinity for lean manufacturing.”14 This penchant for lean manufacturing was the first aspect of a broader philosophy of kaizen—an approach that would ultimately become known as DBS, one of Danaher’s hallmarks.

Second, the Rales brothers noticed early warning signs in the junk-bond market, prompting them to reduce their debt. As a result, they were able to successfully weather the recession of the early 1990s.15 Finally, Steven and Mitchell chose to retire their positions as chief executive and president. Although the brothers stayed on as chairman of the board and chairman of the executive committee, they looked to someone else to take the day-to-day helm.

The Sherman Years

In February 1990, Danaher appointed George M. Sherman as president and chief executive officer. Sherman was 48 at the time of his appointment, an engineer by training who also had an M.B.A. He joined Danaher from the Black & Decker Corporation, where he had been a corporate executive vice president and president of the Power Tools and Home Improvement Group. Sherman was known as a highly effective leader; one analyst commented that he was “the highest-energy CEO I’ve met. He is exhausting to be around.”16 At Black & Decker, he was widely credited with the turnaround of the Power Tools businesses, which grew twice as fast as the market during his tenure. Prior to that, Sherman had been at General Electric and Emerson Electric.

Sherman commented upon joining Danaher that he hoped “to add strategic planning with a market-driven emphasis to enhance the admirable position of Danaher’s companies.”17 In addition, he looked to reposition the portfolio towards more attractive, less cyclical businesses. The company began to “look at international opportunities for expansion both in terms of selling our products overseas and selective acquisitions.”18 It also began divesting those companies making tires, tools, and components for the auto industry, as Danaher had neither the brand identity nor the sufficient scale to withstand pricing pressures affecting the industry. Beyond this, Danaher invested in new “platforms,” re-focusing the firm’s acquisition approach and generating economies of scale not only in production but in distribution. Initial platforms included environmental controls, electronic test

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instrumentation, and precision motors. Last, Sherman concentrated on “making fewer but larger acquisitions, many of them family-owned firms with good products and respectable market shares that were under-performing financially.”19

In 1986, Danaher had 16 operating companies. By 1995, it had 24 operating companies and by 2000 it had 51 operating companies.20 As Danaher moved into electronic test instruments, water quality instruments, temperature and pressure sensors for food and pharmaceutical manufacturing, and “hardware for utility companies and other businesses,”21 their management team “proved to be adept at integrating these companies into their existing operations.”22 The acquisitions also solidified the shift in the company’s business mix that Sherman had jumpstarted in 1990. In 1985, 86% of revenue came from tires and rubber goods; in 1991, 78% of sales came instead from tools and automotive equipment. By 2001, over half of all revenues came from the Environmental, Electronic Test and Motion Control platforms23 (see Exhibit 6 for percentages of revenue and profit by segment and geographic area from 2004–2010).

During Sherman’s tenure, Danaher’s sales increased from $750 million to $3.8 billion.24 The last five years of Sherman’s leadership saw Danaher achieve a compound annual growth rate in earnings of over 20% and revenue growth of about 15% per year.25 Danaher also worked to expand and ingrain the continuous quality improvement techniques the founders had introduced. DBS came to be understood as the keystone of the firm’s continual success. The investment community praised Sherman’s leadership, opining that between 1990 and 2001, Danaher had emerged “from midcap company status to become the premier large-cap industrial company.”26

Danaher, 2001–present

Portfolio

During its early years, Danaher pursued a financial orientation towards its choice of businesses, making resource allocation decisions on the basis of return on invested capital (ROIC). Starting in the mid-nineties, Culp noted, the company’s portfolio evolved towards “fewer, better businesses”27 by creating “platforms” based on a lead company with a strong position in an attractive market around which add-on acquisitions could be made. Danaher’s purchase of Fluke in 1998 was the first substantial acquisition that demonstrated the value in this approach.

Business selection was driven by a belief that “the market comes first, the company second.” In this, the firm adhered to Warren Buffet’s famous epithet that “when an industry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the industry that keeps its reputation intact.” Rather than identify potential targets and then assess their market potential, Danaher conducted a top-down analysis that progressed from market analysis to company evaluation to diligence, valuation, negotiation, and finally, integration.28

Industries were screened according to certain desirable criteria. “First, the market size should exceed $1 billion. Second, core market growth should be at least 5%–7% and without undue cyclicality or volatility. This excludes Rust Belt and Silicon Valley businesses for us. Third, we look for fragmented industries with a long tail of participants that have $25–$100 million in sales, and that can be acquired for their products without necessarily needing their overheads. Fourth, we try to avoid outstanding competitors such as Toyota or Microsoft. Fifth, the target arena should present a good opportunity for applying the DBS so that we can leverage our Danaher skill sets. Last, we look for tangible product-centric businesses. This rules out, for example, financial services. Broadly, this set of criteria is rooted in a simple premise: we look for markets of size and where we can win.”

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Acquisitions that followed these criteria fell into three categories based upon the target’s relation to existing businesses:

 New Platforms As the classification suggested, a new platform acquisition represented a significant expansion of Danaher’s portfolio into new markets and products. Such an entry point could be a division of a larger corporation, a stand-alone public firm, or a private company. “Platform-establishing acquisitions,” explained the 2001 annual report, “bring in ‘Danaher-like’ businesses where our skills and abilities can create value.”29 Summarizing their importance, Culp remarked that “it was tough to build a string of pearls from later add- on acquisitions without a center of gravity on which to build.” Targets tended to be large and in sectors of strategic importance. Danaher’s recent expansion into the medical sector was one instance of platform entry into an attractive market where, by 2006, the firm had “invested over $2.6 billion in acquisitions with a focus on building our Medical Technologies platform.”30

 Bolt-Ons Bolt-ons were smaller transactions that sought synergies between existing Danaher businesses and new targets. Acquired companies were comprehensively integrated into the core business in terms of management, organization, and distribution. In 2004, for example, Danaher acquired various product lines from Harris Corporation for $50 million, bolting them on to the Electronic Test Platform.

 Adjacencies Unlike bolt-ons, adjacencies tended to function as predominantly stand-alone businesses after acquisition, despite their connection to a particular platform. For instance, Danaher acquired Trojan Technologies in 2004 for $191 million. While Trojan operated within the Environmental platform, their water treatment products occupied a particular niche and the business continued to function post-acquisition as a more or less distinct organization.

Although Danaher was on a pace of one acquisition per month by 2007, platform acquisitions were rare. A list of target industries was maintained by a corporate group that included the CEO, CFO, head of Strategy Development, and head of M&A, and this list was reviewed regularly by the board. Often, Danaher would already know something about a business that it became interested in. For example, Culp noted that “American Sigma (acquired in 1995) was familiar to us as we had used its waste water sampling products at Veeder Root. Similarly, Gilbarco (acquired in 2002) had been my first customer back in 1990.” But the firm also searched broadly to find the right business opportunity. The idea of entering the dental market, for example, was identified as early as 2002.

In identifying appropriate targets, Danaher was “willing to accept that an entry-point firm might not have a great leadership team, a key facility, or a terrific infrastructure in place. The only deal killer is when we cannot identify management to fill any anticipated gaps.” If a suitable company was not available, Danaher was prepared to wait. Yet, Culp believed that “because of our preparation, we are tactically advantaged when it comes to entering a new platform business. For example, we were decisive in the bid for KaVo in 2004 since the dental market had already been investigated by us and approved as a target by our board in 2002–2003.”

Smaller bolt-on acquisitions to existing platform businesses were more common than entering new business areas. Bolt-on acquisitions were the responsibility of the operating companies with legal, pricing, and deal expertise contributed by the corporate M&A group. Implementation of such acquisitions would typically involve folding the target’s structure and operations into the existing platform. Such deal opportunities were reviewed monthly with each business although the company walked away from far more deals than it ultimately consummated.

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Distinguishing between various types of acquisitions informed the merger process from start to finish. Indeed, even post-acquisition benchmarks were determined by the type of add-on, as explained in the 2001 annual report: “[W]e scrutinize return on invested capital (ROIC) on all acquisitions. Our minimum hurdle rate is 10% after-tax ROIC within three years on average, with bolt-ons frequently reaching this threshold more quickly and platform-establishing transactions taking a little longer, but not exceeding five years.”31

Reshaping the portfolio since the mid-nineties had occurred without any large divestitures. Instead, trimming had mainly occurred around the edges.

Danaher’s acquisition strategy had not gone unnoticed. As one strategy consultant favorably commented in BusinessWeek, “those guys have a very well-defined model of how to do M&A.”32 Over the prior decade Danaher had expanded into Western and Eastern Europe, Asia, Latin America, and the Middle East. Initial expansion was fueled by adding small European companies to an existing U.S. operation in order to access international markets. More recently, as the firm’s international experience grew, it used certain European acquisitions (such as Radiometer in Denmark or Leica in Germany) as its core entry points into desirable sectors. Indeed, Culp viewed the German “Mittelstand”—medium-sized, often family-owned, German-engineering companies—as ideal territory in which Danaher might make acquisitions since they included companies that had a broad geographic footprint but were typically “capable of more.” Culp believed that the Danaher operating model had been shown to effectively transfer overseas: “It might take a bit longer to change things, but if you accommodate the system to the new context and are always respectful of stakeholders’ needs and requirements, it can be done.” To date, Danaher had pursued fewer acquisitions in Asia, seeing companies there as too small to be valuable additions, and instead emphasized building businesses organically through their growth platforms. However, by the end of 2010, Danaher’s sales in China exceeded $1 billion, which included four separate operating companies all achieving more than $100 million each.

By 2010, Danaher comprised five strategic business segments: Dental, Life Sciences & Diagnostics, Environmental, Test & Measurement and Industrial Technologies. (see Exhibit 7 for detailed descriptions of the platforms, and see Exhibit 8 for acquisitions within various platforms over the years). Culp broadly sketched future possibilities: “We don’t believe that Danaher’s operating model itself imposes any constraints on the size of the company. While our current platforms are primarily in B2B industries, we believe that we can potentially compete in a wide range of industries.”

Organization

Danaher was headquartered in Washington D.C. in an unassuming office building six blocks north of the White House. The company’s name was not on the front of the building, nor was it even listed inside. Offices for the 75 or so corporate employees featured plain décor. Corporate functions represented in Washington included finance, accounting, legal, tax, treasury, HR, and M&A deal making.

By 2010, Danaher was active in dozens of different businesses, and had grown to over $13 billion in sales. It operated with 45–55 separate business P&Ls, but only three segment EVPs reported to the CEO. Danaher liked fewer reporting units and, unlike other conglomerates such as Dover and Illinois Tool Works that split units when they got large, Danaher invariably looked to combine smaller units into one operating entity.

Culp himself spent about half a day a week on external affairs (investor relations), between one and a half and two days a week on strategic or M&A issues, and the remaining time—more than half

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the week—on operational and HR matters. Although he and other corporate executives had run a number of Danaher businesses effectively in the past, he noted that “today, I don’t make many operating decisions directly. Everything I do is really organization and people related. It’s all about influencing people and helping frame the conversation in a developmental way.”

The other important corporate function at Danaher was the DBS Office (DBSO) that comprised 15–20 executives who were physically located in the businesses rather than at headquarters. Individuals worked in the DBSO for a limited time as it was seen as a developmental role, but the basic requirement for the position was to have been a senior operating executive. The current head of the DBSO, for example, was the former President of a Danaher company. The DBSO’s role was to train managers, both in acquired companies and existing Danaher operations, in the Danaher Business System (DBS). The DBSO was involved with the initial training and kaizen sessions for all new acquisitions. For existing businesses, its services were in most cases invited by the business itself although, on occasion, it was told to assist a particular business. The DBSO was intentionally kept small because it was not intended to supersede the authority of line managers who were expected to ultimately implement DBS themselves.

Corporate HR was run by a former company president. Individual businesses were responsible for managing their own people, but there was also a talent funnel from which to fill senior positions. Procedurally, however, corporate HR was intimately involved in executive careers. Any new job opportunity was run through an approximately 2,000-person corporate talent funnel, and all important moves were reviewed by the CEO and head of HR. A talent review was a key part of every operating company review. While Danaher believed in developing an expertise in a function within a single business, the bias was to promote and retain executives within Danaher. As a result, approximately three out of every four senior promotions were filled internally and roughly one-fifth of the senior managers were promoted to a new position every year. Opportunities included both promotions within a business as well as opportunities in another Danaher business. An assignment did not have a predetermined length, and further promotions would be considered and planned as part of the talent review process when an employee mastered required competencies within the assignment and performed at or above expectations. Senior managers were expected to continuously develop, performance manage, and upgrade their team members. However, no bottom performer reduction targets were set. Rather, individuals were assessed based on their performance and fit with DBS values.

Hiring into the firm included a psychological assessment as well as more typical interview procedures. Candidates were expected to “want to win with a team and demonstrate personal humility, while having a passion and energy for creative change.” Executives hired from outside were put through a rigorous 8–12 week immersion program to learn about and engage in DBS, the tools and culture. During this period, new executives focused exclusively on immersion and did not perform the job for which they were hired. A pipeline program for hiring engineering and technical undergraduates focused primarily on schools like the University of Illinois and Virginia Tech. At the MBA level, Danaher recruited at top-tier schools like Darden, Harvard Business School, Kellogg, Stanford, IMD, and Insead, with a focus on long-term leadership potential. New hires were given job rotations, but were expected to run parts of a Danaher operation at an early stage, whether as shift leader for a manufacturing cell or as a regional sales manager. It was essential in the first few years that new hires demonstrate an understanding of commercial leadership, an ability to put wins on the board & deliver results, and the ability to lead within a DBS environment.

Corporate M&A consisted of a small team of dealmakers. The team worked extensively with Business Development in each of the platforms as well as with Strategy Development on all

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transactions. The businesses were encouraged to identify and cultivate potential targets within their industry as well as adjacencies whereas Strategy Development focused most of their energy on potential new platforms. During each of the last four years, Danaher had acquired 8–12 companies.

Compensation for senior managers included base salary, a bonus, and equity participation. Base pay was set to be competitive within function and industry, and was not standardized across Danaher, although at the very senior levels (president’s and their reports) base pay levels did converge. The bonus was equal to one quarter to half of base pay, with the mix shifting to the bonus as seniority increased. Bonuses were paid according to performance of the business and the individual’s own goals for the year. The latter were set to specific objectives, such as revenue growth in China, or the number and success of new product launches, or how many potential president candidates had been developed. Long-term equity compensation was intended for long-term wealth creation of executives. Given Danaher’s stock performance, wealth creation for executives at Danaher had outpaced compensation for executives at peer companies.

Danaher Business System (DBS)

At the core of Danaher’s operating model and acquisition strategy was the Danaher Business System (DBS). The firm’s investor presentations described DBS as “defining our high-performance culture. DBS is who we are and how we do what we do.” Outsiders noted that DBS “is a set of management tools borrowed liberally from the famed Toyota Production System. In essence it requires every employee, from the janitor to the president, to find ways every day to improve the way works get done.”33 While such programs were “de rigeur for manufacturers for years, the difference at Danaher (was) the company started lean in 1987, one of the earliest U.S. companies to do so, and it has maintained a cultish devotion to making it pay off.”34 The lean approach replaced a traditional “batch-and-queue” manufacturing system with a “single-piece flow” that minimized in- process time and so reduced inventory and other overhead costs. “In a typical Danaher factory, floors are covered with strips of tape indicating where everything should be, from the biggest machine to the humblest trash can. Managers determine the most efficient place for everything, so a worker won’t have to walk an extra few yards to pick up a tool, for instance.”35

Over time, DBS came to represent a broader approach than simply lean manufacturing, and had taken these same principles to transactional processes. More recently, Danaher had been expanding DBS to focus on innovation and growth, with tools and processes around new product development, marketing, and sales. New tools like Accelerated Product Development, Strategic Pricing, and Intellectual Property Management were created to ensure the challenge of accelerating growth was being met with the same continuous improvement mindset that had been used for cost and efficiency challenges historically.

The DBS approach embodied “four P’s—people, plan, process, and performance.” These four elements were applied rigorously and unemotionally both to current businesses and new acquisitions, with an emphasis in three areas: Growth, Lean and Leadership.

PEOPLE Talent assessment was a major component of acquisition due diligence as well as of ongoing reviews of existing businesses. Managerial retention rates differed across acquisitions, but Danaher typically transitioned out between zero and 50% of senior management within a couple of years of ownership. For an acquisition like Videojet, replacing the management team might have been seen as part of the value-creation opportunity. In other deals, like Radiometer, no one was asked to leave. Personnel decisions were made not only on the basis of interviews during the due-diligence process but after observing managers in operation, and were made as quickly as possible to sort

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among executives who were either unlikely to succeed or unlikely to fit in the Danaher culture. As Culp noted, “you get a different view of someone when you spend a week or a month working with them, than in a three- or four-hour interview.” If, before completing the deal, it was known that certain key personnel would leave, a plan to replace them, either with a pre-identified internal candidate or an outsider (preferably a Danaher proven manager) would have been developed.

PLAN The second element of DBS was creating a strategic plan for every business (existing or acquired) that would address two questions: “What game are we playing” and “how do we win?” Although Danaher executives obtained some idea of a preferred strategy for an acquisition target during the due-diligence process, Culp noted that “it was only after the deal was completed, and the bankers and lawyers are out of the room, that we can have an honest strategic conversation with management. At that point, we throw out the 180-page strategy manuals and create a plan for the new acquisition that is due within 100 days of purchase that is intended to produce a shared long- term vision. No sacred cows are left unchallenged, and our due-diligence findings are shared with the company. This entire conversation is usually very important.” The Danaher team involved in this process included the CEO, EVP of the segment, head of HR, CFO and two members of the M&A deal team. The intent was to encourage managers to realize that substantial improvement in performance was possible, and to challenge them to identify the gaps that were preventing them from reaching such a stretch target.

PROCESS A key element of the integration process was introducing DBS to new managers. This first occurred through “one week of a training session for executives followed by a one-week kaizen event.” Danaher’s CEO himself taught a full day in the training program, with the DBSO teaching the remainder. The week-long kaizen event usually took place in one of the target’s manufacturing facilities and was designed to improve the process flow of a single piece, as in the Toyota Production System. The goal for such an exercise would be set high, such as halving the floor space required, but managers found they typically exceeded even that aggressive goal. Culp noted that “we really don’t care if it’s manufacturing focused or not, the goal is to get newcomers to appreciate elements like single piece flow, visual maps, and so on. It is action learning. Furthermore, having the president of the company put on jeans and work boots and get involved with a broom on the shop floor can be powerful in setting expectations. It is an opportunity to touch a lot of people quickly.”

Since the Leica acquisition in 2005, Danaher had added an additional step in the training process that took roughly 12 mid-level managers away from their jobs on a three-month Danaher world tour to immerse them in DBS and drive cultural integration. This immersion exercise involved several kaizen events and managers were expected to “get the mindset” if not yet become experts in certain Danaher tools, like accelerated product development.

After the initial training period, the process shifted into a “maniacal focus on DBS which seeks to drive sustainable improvement over an indefinite time period.” This involved both an operating philosophy and ongoing management development. The intent was to create a culture where every executive was continually looking for opportunities to improve any and every aspect of the business. While specific tools (such as value-stream mapping, and kaizen events, where a team dedicated a week to developing and implementing a solution to an identified problem) were the most visible manifestations of DBS, Danaher believed that building a managerial mindset of continuous improvement was ultimately the most important result of the process.

PERFORMANCE Once the strategy for a business was agreed upon, a policy deployment (PD) tool was used to drive and monitor its implementation (see Exhibit 9 for a Top-Level Policy

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Deployment Chart). The core of this system was the Policy Deployment Review (PD), “a literal but perhaps awkward translation of the Japanese term “Hoshin Kanri” which really means guiding light.”36 PD reviews took place once a month for every business and PD objectives were directly linked to the strategic plan. First, were a series of three to five year objectives that would dramatically improve firm performance. Next were annual objectives that had to be met in order to keep the strategy on path, particularly those objectives that tracked the breakthrough initiatives essential to achieving a step change in performance. In turn, these objectives triggered a series of process improvements that were needed, and whose performance was tracked against specific output measures. HR, for example, would end up with targets for items such as “time to fill a vacant position” or “internal fill rate of positions”, rather than input measures, such as completing the design of a talent development plan. Culp offered additional detail on the nature of the monthly reviews:

First, there are the financial variables we focus on: profit/loss, balance sheet, and cash, with particular emphasis placed on achieving a target ROIC in the case of a new acquisition. In addition, there are key performance indicators for each business—on-time delivery, yield, etc.—which number around 15 for each business and are derived from the plan. Then there are the elements driving breakthroughs. Last, there are the intangibles we examine by walking through the shop floor, or having skip-level lunches. These meetings are hands-on. They are designed to ensure that the numbers are real, as well as to build process and organization for the longer term.

PDs don’t just involve senior managers but are cascaded through the organization. For example, if a business level objective were the doubling of R&D productivity, one PD goal might be to improve the product development process. In turn, that objective would trigger a series of objectives for other parts of the R&D organization (see Exhibit 10 for an Improvement Priorities Cascade Slide).

We capture the PD review objectives on a single piece of paper. Progress against goals is color coded: red if off-track, green if on-track, yellow if questionable. Red numbers receive the most attention naturally, but we don’t always start with these—we may talk through the greens first . . . to ensure that they are really greens. For the red indicators, we do a root cause analysis of the failure, asking the “five why’s” in order to understand what needs to be corrected and to propose a series of countermeasures. The number of red metrics in a business is not by itself important, but neither is it acceptable for a red metric to continue for long.

Analysts noted how DBS arose from a firm belief at Danaher that “everything is measurable.” At the same time, Culp noted that:

PD reviews are not simply “managing by the numbers,” as some people think. We iteratively start with the numbers, then talk through process, then cycle back to the numbers. Performance is not just painting by numbers, it’s understanding how those numbers were achieved that is important. We may be as focused on the numbers as any company but we combine this with a Toyota-like drive around operational improvements. Indeed, what is critical about PD reviews is that tools and processes are being deployed to address the metrics. As a result, red metrics can be good since it is through these that we build processes for the longer term. Conversely, there would be as much concern if all the metrics are green because it would indicate that there was no further potential for improvement.

Over time, Danaher had internally developed a series of over 50 tools (see Exhibit 11 for a sample) that covered processes including general management, personal development, sales force

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management, product development, lean thinking, transactional process improvements, and problem solving. This set of tools had evolved over time with a conscious effort to develop processes that were applicable beyond manufacturing as well. Use of the particular tool was left up to managers who were expected to choose the tool that helped solve their problem, rather than just to check the boxes (“I’ve done six sigma”).

Culp concluded by summarizing the role of PD reviews in DBS more broadly:

Our objective is a blameless culture: we try to attack the problem, not the person. At the same time, these conversations can be intense. But that is how we build muscle and culture in the organization. Indeed, if there were only one DBS tool to use, it would be PD. This is at the root of sustained performance improvement since it does not accept a low bar as sufficient. We set very high expectations and have a bias for action while maintaining a competitive sense of winning. It demands that management have experience and commitment to DBS to lead from the front, as well as the confidence and the thick skin required to truly stretch the organization.

DBS in Action: The Radiometer Acquisition

In January 2005 Danaher acquired Radiometer, a Danish firm that had been family controlled since its founding in 1935 and publicly traded since 1984. Radiometer made instruments for testing and measuring blood gases (oxygen and carbon dioxide) for acute care patients, and was the world leader in a $1 billion global niche market. During the previous five years, sales had grown at 6.5% per year, and return on sales had grown to almost 20%. Peter Kurstein, CEO of Radiometer, also recalled that “the management team had an average tenure of 16 years in the company. We loved the company, but also thought we were pretty good and were skeptical that anybody, without detailed knowledge about our niche, could make us any better. There were many bidders for our company, including private equity. They all worked through the ‘data room’ as did Danaher’s M&A team. The only real difference between the buyers was that two Danaher executives asked for a three-hour walk through one of our plants in order to understand its potential for ‘lean manufacturing.’”37 Kurstein continued:

The first key event, that took place four weeks after the acquisition, was the Executive Champion Orientation (or ECO). That was a positive, team-building eye-opener. Having the top 40 managers at Radiometer split into six groups to do a value-stream mapping and seeing the absolutely obvious improvement opportunities from simple changes was very powerful. In our group, we discovered that a little plastic part which took 18 days to move from raw material to shipping, actually took only 1,447 seconds of operating time to produce. We came up with improvements that reduced that in-process time to less than two days by creating a one-piece work flow and eliminating the planning department and IT infrastructure that had previously managed work scheduling. Similarly, the head of R&D came to me a couple of days after the ECO and said “We can use the same way of thinking in R&D. I suggest that we set the goal of reducing development time by 33%.” What more can you ask for—a commitment from the person who is in charge, and the tools readily available to get started. The experience has been the same since.

The next major event was the “strat plan”—two months after the acquisition. It was really not a new strat plan, it was our existing information, analysis, and strategy. But what came through for us was that Danaher really wanted to understand our market and why we have succeeded. Danaher was not going to tell us what to do differently, rather they were going to challenge us on whether we are getting enough out of our opportunities. For example, in some segments Radiometer has more than 40% market share, which we thought was pretty good.

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But Danaher management challenged us and asked: why do 60% prefer other products? We gave them our standard answer which is that the remaining 60% are really not attractive customers. They buy at low prices, don’t care about quality, and are not really competent. Well, they weren’t really happy with our answer, and asked when was the last time we had systematically asked these 60% why they buy something different. Well, the answer was pretty weak, for certain segments we might have done something 3–4 years ago, for most we were pretty blank. Through the strat plan discussions, it became clear to us that we probably knew our own existing customers very well, but we did not know our competitors’ customers. And once you realize this, you also see that you don’t have a growth strategy because converting the competitors’ accounts is where the growth is. So rather than protecting the leading segment share and profitability, the strat plan discussion got us thinking about how we can further win in the market.

With the strategic plan in place, an organizational review allowed Danaher to identify necessary organizational and personnel changes. At Radiometer, two executives were brought in from Danaher—the head of U.S. sales and the vice president of marketing—otherwise it received the equivalent of 3–4 FTEs of time from Danaher personnel in the transition, including a week that several senior team members spent with Peter Kurstein working to kaizen the shop floor of a Michigan plant. In return, Kurstein was obliged to spend one week a year involved in a kaizen project at another Danaher company.

Kurstein believed that Policy Deployment was perhaps the biggest and most important change at Radiometer after the acquisition. Indeed, he had previously been looking “to employ some way to improve execution of strategy through the application of a systematic process, like the Balanced Scorecard.” He went on to note that:

Radiometer used to make three-year strategic plans every year. Lots of work went into it and they were always strictly confidential documents which ended up well protected in some closets, secret also from our own employees. Frankly, those plans were not bad but it is awfully difficult to execute a secret plan. Policy deployment is pure logic, pushing consistent execution of the breakthrough priorities from the overall strategic level to the factory floor. I did not see it at first, and it took me a while to understand the finer mechanics of this tool.

We started by cascading the five to seven strategic priorities needed to radically move the needle on the company’s performance (such as entering a new segment) into a series of one- year goals. The next step was to identify the processes that needed change, such as accelerating product development or introducing value selling into the sales force. For each process change required, one or two metrics were defined that would effectively monitor progress towards those goals and monthly targets identified for each. These targets were posted on a single piece of paper outside the CEO’s office and other locations, such as the lunchroom, and tracked monthly for all to see progress. Level one goals for the organization as a whole were then translated into level two goals for each department, and then into individual action plans, each of which had its own sheet attached to individual’s doors.

Policy deployment does not happen automatically. It takes a lot of hard work in the beginning to set it up, it takes several iterations and a lot of discipline to establish throughout level one, two and three and most importantly to get the right action plans developed. If you do it half way, it does not work well. If sloppily done, it just becomes a paper game with no improvement. For me the monthly PD meetings became the key. If these monthly meetings become inquisitions where we try to find somebody to blame for the misses, PD will start working against you. You have to be intent to use the meetings to direct the relevant resources

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to where they matter the most. Catch the misses early and hit them hard. And when misses are discussed, it is imperative that root causes and countermeasures are defined by those who really know what is going on. . . . Today, I am not in doubt: PD is the most powerful execution tool around and you get it for free—except for the initial investment in setting it up and keeping the discipline.

Not every PD initiative succeeded: for example, dividing the manufacturing floor into 47 cells had been undertaken too quickly and had disrupted purchasing to the extent that production halted on several occasions. But three years after the acquisition, Kurstein noted the results: “Danaher has been able to help us improve not by a little, but by a lot. You can look at almost any aspect of the business, strategy, execution, growth, market share, working capital, inventory—improvements have been accelerated in all areas. Most importantly we have been able to improve our growth from low single digits to high single digits and our operating margin by another 4%, while at the same time increasing our R&D spending for further growth by 2%.” Despite these successes, Kurstein felt that “only half the potential improvement has actually been achieved. We have not used at least half of the tools available through the Tool Box since we only use them when they are relevant.”

Building on the success of Radiometer, Danaher expanded into Dental and Life Sciences. In 2007, revenues from Medical Technology were $3 billion or 25% of the total, growing at high single digits.

Performance

Between 1986 and 2010, Danaher’s revenues grew from $296 million to $13.2 billion, an annual percentage growth rate of nearly 30% (see Exhibit 12). In 2010, Danaher’s trailing twelve month gross margin was 45%, approximately 10% higher than the average for its peer group (see Exhibit 13 for Annual Ratio Report). One business journalist dubbed Danaher “probably the best-run conglomerate in America,” pointing out that over the previous 20 years the firm had returned a “remarkable 25% to shareholders annually, far better than GE (16%), Berkshire Hathaway (21%), or the Standard & Poor’s 500-stock index.”38 Another analyst simply noted that Danaher had “made process improvement an art.”39

During the last decade, Danaher had undergone various changes to its portfolio (see Exhibit 14). More of its revenues now came from markets outside the U.S. Danaher had seen a significant expansion in its leadership positions in Water, Test, and Measurement, and Product Identification and was a recent entrant into Medical Technologies as well. (Indeed, Forbes now grouped Danaher in its Instrumentation and Medical category.) And, the Danaher Business System continued to evolve and extend, from the manufacturing floor and the back office to innovation, marketing, R&D, and sales. Cumulative returns on Danaher’s stock from 2001–2010 exceeded 150%, in comparison with S&P 500 returns of about 25%. Indeed, when managers of other large broadly diversified firms were asked “‘Which company do you emulate?’ the consistent reply was, ‘Danaher.’”40

Challenges Going Forward

Despite this success, Danaher faced a number of challenges.

Growth

Danaher’s historical revenue growth had been largely driven by acquisition (see Exhibit 15). From 1992 to 2010, the compound annual organic growth rate was approximately 5%, versus total growth of 18%. Maintaining its high growth rates required that Danaher confront certain challenges. First, it

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would have to continue to put its strong cash flow to work with attractive value-added acquisitions. Second, a slowing U.S. economy, together with some signs of a weakening world economy, placed natural limits on organic revenue growth. Third, while cyclicality had been reduced, parts of Danaher’s portfolio were still exposed to swings in end-markets.

Some of Danaher’s platforms were poised for organic expansion in 2010: for example, analysts predicted that the environmental and medical platforms would benefit from expanding end-user markets. However, other Danaher businesses served more mature markets with historically lower growth rates.

Growth in acquisitions presented other challenges. As Danaher continued to be active in its search for new targets, it faced the prospect of going head-to-head with a different type of competitor: private equity firms. In October 2006, the Wall Street Journal characterized private equity firms as “on a tear,” noting that 15 of the top 20 buyouts on record had been announced in the previous year and a half by players such as Kohlberg, Kravis, and Roberts, Bain Capital, and the Blackstone Group.41 As recently as 2005, the largest fund was worth $6 billion, but by 2007 Blackstone's fund was worth some $20 billion,42 and its initial public offering was widely covered even in non-financial media outlets.43 Large buy-out firms were increasingly being referred to as the “new conglomerates,” and observers began to question the role of the old ones. The Financial Times summarized this view: “The conglomerate business model, which looked so visionary in the deal fever of the 1980s, appears more and more endangered. . . . Many [conglomerates] are either disappearing or struggling to justify their existence. Their predicament is made all the more serious by the rise of nimbler predators—private- equity groups.”44

In the second-quarter 2007 earnings results conference call, Culp fielded a specific question regarding private equity, replying that:

. . . obviously there is a lot of private equity money out there with some smart people looking to put it to work. They tend, I think . . . to focus on properties that aren't necessarily high on our list. When we take the long view—because we're building businesses and we're not buying to sell -- when we look at our synergies and the other things that we would bring to a transaction, we tend to see, frankly, other strategics as really the relevant competitive set, much more so than private equity. Not that they won't be there, but we find they, more often than not, are going to set a floor in a process as opposed to be a finalist in a sale process with a company like Danaher, particularly around properties that we covet.45

In addition to the challenges posed by a more heated market for acquisitions was the risk of acquiring bigger targets. A recent BusinessWeek article cautioned that “as M&A gets more expensive, Danaher must either increase the pace of its deals or swallow bigger fish. And it may be more difficult to convert bigger companies with established traditions, entrenched cultures, and larger workforces to its fervent brand of lean manufacturing.”46 Some analysts noted the potential to bolster Danaher’s acquisition prospects through the infusion of cash that could come through divestment. Yet Danaher’s divestments had been infrequent: between January 1984 and July 2007, Danaher consummated 79 acquisitions, with only 12 divestitures (see Exhibit 16 for a chart of Danaher’s acquisitions over time). Despite this, Danaher management maintained in 2007 that the conglomerate had plenty of free cash flow to sustain forthcoming deals, and that the acquisition pipeline remained full.

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Sustaining the Culture

The success of DBS, and Danaher, had been built on the mantra of “continuous improvement.” More than two decades after the firm’s founding, it was natural to ask for how long this platform could sustain itself. Was it feasible for a firm like Danaher to continue to add value on an ongoing basis? Indeed, could “continuous improvement” continue indefinitely?

In addition, despite all its success, Danaher had remained remarkably unfamiliar to the public eye. Twenty years after its founding, Danaher did not have its own public relations staff, and senior managers granted only the occasional interview.47 As one analyst put it, “[Danaher] is kind of a . . . below-the-radar company. . . . They don’t look for publicity. They just do a great job.”48 But, as Danaher’s market capitalization grew, so did its coverage. In 1992, 10 analysts had covered the firm; by 2007, 23 analysts followed it. Indeed, BusinessWeek noted that “a continued ascent into the rarefied air of large conglomerates carries one big risk: It makes [Danaher] all the more conspicuous for their success.”49 With coverage came attempts at emulation.

Danaher’s senior management team recognized that evolving and sustaining the culture of DBS was necessary to ensure continued high value add across all businesses. But, they remained quietly confident that the core value of kaizen would continue to provide strong performance. Indeed, Culp believed that the biggest threat to sustained performance at Danaher lay not in external factors, but in the firm’s ability to create a large enough pool of managerial talent internally:

DBS is basically just applied common sense, but it will succeed only if we are staffed by leaders who live and breathe it. DBS is a differentiator that those who have worked with it really grasp. Bringing outsiders into the system is hard since they have to learn a new culture and approach. Therefore, practice, making mistakes, and learning how to use DBS are critical to their success. For this reason, we believe that the real value of Danaher lies in the accumulated experience of operating with DBS that enables leaders to understand the interrelationships between the hard and soft elements of our system. Time is hard to buy . . . no one else has had 20 years of experience with our system.

Recent Events

In September 2008 the global financial markets experienced an unprecedented crisis, triggered first by the burst of the housing bubble in the U.S., and subsequently by the bankruptcy, collapse, and takeovers of major financial institutions like Lehman Brothers, Merrill Lynch, and AIG. From May 2008 through March 2009, the S&P 500 index dropped over 40% and many companies faced severe liquidity concerns as the banking industry fell into severe disarray. Danaher, like virtually every other major U.S. corporation, had to confront both near-term decisions on how to best navigate the recession, and longer-term decisions regarding growth and strategic objectives. A few weeks after the Lehman news broke, the Danaher senior executive team decided on three key objectives: 1) a broad- based effort to reduce structural costs throughout the organization; 2) a strong bias to preserve the investments in growth and innovation; and 3) to take advantage of the liquidity crisis to accelerate acquisition activity and the portfolio evolution.

Over the next six quarters, Danaher eliminated over 5,000 positions and more than 30 facilities, resulting in annual savings of over $300 million. However, on the investment side, Culp remembered the negative impact of reducing R&D (from 3.7% of revenues in 2000 to 3.1% in 2001) during the last downturn. Both through increased investments and the types of new companies that were coming into Danaher, R&D as a percentage of sales was now approaching 6%. Through the downturn,

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Danaher maintained its R&D-to-sales ratio (see Exhibit 17), in contrast to other firms who cut more broadly at the same time across all functions. As a result, as one Business Week article in August 2010 noted, “in spite of the economy, Danaher introduced a large number of key new products in 2009 and has recovered more quickly than it would have otherwise.”

In addition, the company worked to preserve its investments in sales and marketing, particularly in emerging markets. Then, with private equity and many corporations on the sidelines due to the banking crisis, Danaher acquired 18 new companies in 2009, deploying $2 billion of capital. Finally, in early 2010, the company announced that it would contribute its slower growth hand tool business to a new joint venture, allowing the business to pursue new cost and other synergies within a larger entity while not impacting Danaher’s core growth rate.

In April 2010 Danaher announced better than expected first quarter earnings and core growth and raised its growth outlook for the year. During the earnings call, Culp noted a number of the company’s businesses that were growing faster than their competitors, in part a result of the investment strategy during the economic crisis. As Culp once again prepared for the internal performance review cycle, he reflected on both the evolution of DBS and the current portfolio. Many of the businesses had successfully adopted the growth culture; others were still works in progress. Culp was pleased with the progress across Danaher and continued to advocate the multi-industry model. However, Culp still wondered about how the managers across Danaher’s diverse businesses would respond to the opportunities and challenges going forward.

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Appendix

Strategic Platforms1

Life Sciences & Diagnostics

The life sciences and diagnostics segment was Danaher’s newest strategic platform comprising businesses with leading positions in life sciences, and acute care diagnostics. It was also created with a series of platform-establishing transactions, beginning in 2004 with the acquisitions of Radiometer. While two subsequent acquisitions expanded their involvement in the market, most products were still marketed under the Radiometer brand. The business primarily produced critical care applications for blood gas analysis and related services in hospitals and point-of-care locations.

Entry into life sciences instrumentation came in 2005 with the addition of Leica Microsystems to the platform’s portfolio, and was expanded the next year with the acquisition of Vision Systems Limited (which was combined with a division of Leica Microsystems to create Leica Biosystems). These businesses made high precision optimal instruments, solutions and related consumables for life sciences and medical applications, pathology diagnostics products, laboratory and surgical microscopes, and workflow solutions for clinical histopathology laboratories. Then in 2010, Danaher acquired AB Sciex, a leading provider of mass spectrometry equipment and consumables, as well as Molecular Devices, a market leader in cellular plate readers and molecular diagnostic instrumentation.

The investment community responded favorably to Danaher’s expansion into the medical technologies industry, and to their concerted growth of the business. While rising healthcare costs became a much discussed issue throughout 2006 and 2007, most agreed that the healthcare market would continue to balloon as the United Stated underwent demographic shifts and saw an increase in the application of innovative medical technology. 50

Dental

The foundation of Danaher’s dental platform was established in 2004 when it acquired the Gendex business of Dentsply International Inc., and Kaltenbach & Voigt GmbH & Co KG (KaVo), a leader in the manufacturing of dental equipment and cabinetry. Then in 2006, Danaher acquired Sybron Dental Specialties, a leading manufacturer of a broad range of consumables and small equipment for the dental professional, including the specialty markets of orthodontics, endodontics and implantology. Danaher was a global leader in dental technologies and consumables including treatment units, hand pieces, dental imaging and diagnostic systems, dental materials, orthodontic systems, and infection control products. These products were marketed primarily under the KaVo, Gendex, Dexis, Pelton & Crane, Kerr, Ormco, and iCat brands.

Test & Measurement

In 2007, Danaher acquired Tektronix, a global leader in Test & Measurement (T&M), doubling the size of one of its strongest platforms. They entered the T&M market with the acquisition of Fluke Corporation in 1998. Additional acquisitions bolstered the business, which produced and serviced compact professional test tools and calibration equipment for electrical, industrial, and electronic

1 Source: Danaher’s 2006 Annual Report and “Danaher Company Profile,” Datamonitor Research Report, February 2007.

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applications. Test products measured voltage, current, resistance, power quality, frequency, temperature, pressure, and air quality. Additionally, the Fluke Networks business provided both software and hardware for the testing, analysis, and monitoring of local and wide area networks. This business area expanded in 2006 with the acquisition of Visual Networks.

Environmental

The environmental businesses operated primarily in water quality analytical, disinfection, and treatment systems/solutions and petroleum. Danaher entered the water quality market via a series of acquisitions, starting with American Sigma in 1996 and recently with ChemTreat in 2007. Operations in these businesses provided a range of instruments, consumables and services that detected, measured, and treated various water characteristics. Users generally included municipal drinking water and water treatment plants, industrial plants, environmental monitoring and regulatory agencies, and third-party testing laboratories. The company had numerous established water quality brands, including Hach-Lange, Hach Ultra Analytics, Trojan UV, ChemTreat, Buhler Montec, and McCrometer.

Danaher’s retail and commercial petroleum business, by contrast, had been in operation since the mid 1980s, and consisted of a smaller collection of businesses and brands. The Gilbarco Veeder-Root business products included monitoring and lead detection systems, vapor recovery equipment, fuel dispensers, point-of-sale and merchandising systems, and submersible turbine pumps. Service offerings included outsourced fuel management, compliance, fuel system maintenance, and inventory planning and supply chain support. Users of such products and services included independent and company-owned retail petroleum stations, high-volume retailers, convenience stores, supermarkets, and commercial vehicle fleets.

Industrial Technologies

Product Identification Danaher acquired Videojet (previously Marconi Data Systems) in 2002, thus entering the product identification business. Subsequent acquisitions rapidly expanded the platform, which produced a variety of equipment used to print and read bar, date, and lot codes, as well as other information on primary and secondary packaging. Customers typically included food and beverage manufacturers, pharmaceutical manufacturers, retailers, commercial printing and mailing operations, and package and parcel delivery companies, including The United States Postal Service. Danaher’s Videojet, Linx, Accu-Sort, and Alltec were all well-known brands within the industry.

Motion Danaher entered the motion control industry in 1998 with the acquisition of Pacific Scientific Company. Subsequent acquisitions further expanded the business’s footprint and product lines, which grew to include controls, drives, motors, and mechanical components. Such products were sold in various precision motion markets such as packaging, medical, or circuit board assembly equipment; robotics; elevators; and electric vehicles (such as lift trucks). Key brands included Kollmorgen, Thomson, Dover, Portescap, and Pacific Scientific.

Source: Casewriters.

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Exhibit 1 Danaher Share Price versus S&P and Competitors, 1984–2010 (indexed to 100)

35,000 Danaher 30,000 S&P 500 25,000 3M 20,000 Ingersoll-Rand

15,000 Illinois Tool Works

10,000 General Electric

5,000 Honeywell International

0

Source: Created by casewriters using data from Thomson ONE Banker, accessed April 2011.

Exhibit 2 Portfolio Segmentation

Source: Company materials.

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Exhibit 3 Leading Brands in the Danaher Portfolio

Platform Key Brands Position Global Share

Electronic Test Fluke, Fluke Networks #1 25%

Environmental Water Quality Hach, Lange, Trojan #1 2% Retail Petroleum Solutions Gilbarco Veeder-Root #1 30%

Medical Technology Dental Equipment KaVo, Gendex, Pelton & Crane #1 20% Critical Care Diagnostics Radiometer #1 35% Life Sciences Leica Microsystems #2 35%

Motion Kollmorgen, Portescap, Dover #2 8% Product Identification Videojet, Accusort #1 15% Mechanics Hand Tools Craftsman, Matco #1 30%

Source: Adapted by casewriters from company Investor Presentation, December 2005.

Exhibit 4 The Danaher Business System Image

Source: Company materials.

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Exhibit 5 Operating Margin Expansion of Acquired Companies

Source: Company Investor Presentation, December 2005.

Exhibit 6 Breakdown of Total Revenue and Operating Income/Loss by Segment

2004 2005 2006 2007 2008 2009 2010

Revenue by Business Segment Professional Instrumentation 33.2% 32.6% 30.7% 32.1% 38.3% 38.7% NA Medical Technologies 9.8% 14.8% 23.5% 27.2% 25.8% 28.1% NA Industrial Technologies 38.0% 36.4% 31.6% 28.6% 27.3% 25.0% 24.2% Tools and Components 19.0% 16.2% 14.3% 12.1% 10.2% 9.4% NA

Revenue by Geographic Segment United States 64.8% 57.5% 54.0% 53.8% 52.3% 52.9% 49.6% Germany 11.2% 14.5% 15.4% 11.7% 14.2% 13.2% 12.7% United Kingdom 3.6% 4.2% 3.8% 4.7% 3.8% 3.4% 3.5% China NA NA 3.4% 3.6% 6.1% 6.3% 7.1% All Other 16.6% 23.7% 23.4% 26.2% 23.6% 24.2% 27.1%

Operating Income/Loss by Business Segment Professional Instrumentation 43.3% 42.6% 41.7% 40.8% 48.5% 47.2% NA Medical Technologies 6.9% 11.0% 17.4% 22.6% 19.8% 25.6% NA Industrial Technologies 34.7% 33.7% 31.2% 30.6% 29.5% 25.9% 29.1% Tools and Components 17.9% 15.8% 12.9% 10.1% 8.4% 8.1% NA Other -2.8% -3.0% -3.3% -4.0% -4.7% -5.8% -3.4%

Source: Compiled by casewriters using data provided by OneSource® Business BrowserSM, accessed April 2011.

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Exhibit 7 Danaher Strategic Platform Overview

Market Operating Geographic Market Size Growth Sales Margins Mix Key Customers Growth Drivers Key Brands Medical Technologies Dental $16 billion 5-7% $1.6 billion Mid teens NA 45%, EU General Practitioners, Endodontists, Favorable demographic trends, patient demand for KaVo, Gendex, Dexis, 40%, ROW 15% Orthodontists, Lab technicians aesthetics, improved care in emerging markets, Pelton & Crane, Imaging productivity enhancing branded products at Sciences International, premium price points, further consolidation Ormco, Kerr opportunities Life Sciences $4 billion 5-7% $900 million >10% NA 30%, EU Life science research labs, hospitals, Public & private funding of life science research Leica Microsystems 35%, ROW 35% universities, histopathology labs (e.g., live cell/stem cell), industrial markets micro/nano technologies, healthcare expenditures in emerging markets, drive towards more advanced cancer diagnostics, digital imaging & quantitative analysis Radiometer $1.2 billion 4-6% $400 million ~25% NA 20%, EU Critical Care departments in hospitals; Point-of-care (POC) segments, emerging markets Radiometer 55%, ROW 25% central labs, operating rooms, emergency (China, India, Brazil, Russia and Middle East), departments New clinical guidelines in cardiology, laboratory and emergency medicine

Environmental Retail Petroleum, Environmental $2.5 billion 3-5% $1 billion High teens NA 45%, EU Global major and national oil companies, Environmental regulations (air, water), Point-of- Gilbarco, Veeder-Root and Automation Technology 33%, ROW 22% big box and supermarkets, convenience sale & payment system upgrades, geographic stores expansion, NA/Europe retrofit opportunities

Water Quality $6.5 billion 4-6% $1.1 billion 20%+ NA 65%, EU Municipal water facilities, Ultra Pure Water/waste water infrastructure opportunities in Hach, Lange, ChemTreat, 20%, ROW 15% industrial: beverage, electronics, biopharm, emerging markets, increasing regulatory Trojan power, Environmental agencies, industrial requirements, water treatment process boiler cooler facilities optimization Test & Measurement Fluke $4.5 billion 5-7% $1.3 billion 20%+ NA 50%, EU Industrial/Electrical, Calibration/Metrology, Emerging market opportunities, High Fluke, Fluke Networks 30%, ROW 20% Hospitals/Field Service, Vitality/Innovation, Leverage strong brand Communications/Datacomm Tektronix $12 billion 5-7% $1.1 billion >10% NA 38%, EU Computer, Communications; Consumer, Proliferation of wireless, higher performance Tektronix 27%, Education, Gov. and Semiconductor requirements, growth of Next Gen networks, Asia/Pacific emerging market opportunities 20%, Japan 15%

Motion $14 billion 5-7% $1 billion Mid teens NA 50%, Europe 90% OEMs (original equipment Targeted vertical markets, continued conversion Kollmorgen, Dover, 40%, ROW 10% manufacturers) opportunities, Asia expansion led by strength in Thomson, Portescap China, developing clean energy market

Product Identification $5.1 billion ~5% $900 million High teens NA 40%, EU Consumer packaged goods, Emerging markets, New regulations (e.g., Videojet, Accu-Sort 35%, ROW 25% Pharmaceuticals, electronics, automotive; traceability, environmental), new applications (e.g. Systems, Linx Printing letter and parcel distribution product decoration), new verticals (e.g. textile Technologies printing, graphics) Mechanics' Hand Tools US: ~$4.5 2-3% $900 million Mid teens NA 90%, EU 5%, Retail, Industrial, Professional Innovative New Products: ergonomics, electronic Craftsman, Matco Tools, billion globally, ROW 5% torque measurement, industrial ratcheting Sata, GearWrench Global: ~$9 China growth wrenches; Emerging markets billion low double digit

In addition to the six strategic platforms, Danaher has seven focused niche businesses: Aerospace & Defense, Danaher Industrial Controls Group, Delta Consolidated Industries, Hennessy Industries, Jacobs Chuck Manufacturing, Jacobs Vehicle Systems and Power Quality.

Source: Compiled by casewriters from company materials.

Danaher Corporation 708-445

Exhibit 8 Historical Acquisitions and Divestitures by Platform

Strategic Platforms

4 3 2 Medical 1 Technologies 0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

5 4 Test and 3 Measurement 2 1 0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

3

2

1 Product Identification 0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

5 4 3 2 Environmental 1 0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

3 2 1 Motion 0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

3

2

1 Mechanical Hand Tools* 0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -1

Focused Niche Businesses

2

1 Sensors and 0 Controls 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -1 2

1 0 Power Quality -1 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 3

2

1 Aerospace and Defense 0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: Created by casewriters from Thomson data and company information. Note: Rubber and Related Automotive Products and Vinyl/Plastic Consumer Good and Real Estate were segments in Danaher's early years. *Mechanics’ Hand Tools was the Strategic Platform designation as of summer 2007; it also includes subsidiaries once mapped to the "Tools and Components" segment.

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Exhibit 9 Top-Level Policy Deployment Chart

Top Level Policy Deployment

Improvement Priorities

Annual Target to Breakthrough Improve Objectives

3-5 Year Breakthrough Objectives Resources

Primary Responsibility Secondary Responsibility

Source: Recreated by casewriters from company materials.

Exhibit 10 Improvement Priorities Cascade Slide Improvement Priorities Cascade to the Point of Impact TOP LEVEL – Company Point of Impact

Top Level Policy Deployment - Action Plan – POINT OF Many Action Plans Annual Objectives

3-5 Year Breakthrough Target to Objectives Improve IMPACT draw on DBS Benefits Resources resources to Primary Responsibility Secondary Responsibility SECOND LEVEL – implement Plant improvements

POINT OF IMPACT – ROOT CAUSE LEVEL – ACTION PLAN Sub Plant Engineer

Point of Action Plan John Smith

Cascade as many times as necessary to the = Root Cause Level

DBS ACTION

Source: Recreated by casewriters from company materials, as cited by Janney Montgomery Scott.

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Exhibit 11 DBS Training Modules

I2E & Associate Leadership Lean, Supply Chain, Variation Reduction Business Process Growth Tools Development Development Tools

(VOC) Voice of the 5S Visual Mgmt. (DMP) Danaher Materials Introduction to DBS DBS Immersion Strategic Planning Process Customer

Materials Assessment Policy Deployment Value Stream Mapping Value Selling DBS Tool Certification Tool MBB Process ECO

(PSI) Product Sales Daily Management Standard Work DBS Leadership Training Inventory Customer Segmentation DBSL Boot Camp

Accelerated Product Kaizen Event Basics Model Cell Lean Supply Chain Training & Facilitation Crucial Conversations Development Techniques

(SMED) Set-up Reduction Sourcing Workshop Root Cause/Counter Interview & Selection Acquisition Integration Product Life Cycle Mgmt. Measure training (3P) Production Prep. Supply Base Project Management JIT Accounting Process Management Change Management Danaher Leadership Program Accounts Receivable (TPM) Total Productive Ideation DBSL Continuing DBS Zealotry Boot Camp Benchmarking Mfg Commodity Management Education Workshop

Flow /5S/Standard Work (VRK) Variation Financial Acumen Reduction Kaizen TG-2 Kaizen

(IPP) Intellectual Lean Conversion Boot (MSA) Measurement Property Process Camp System Analysis Open Innovation

(TPI) Transactional (FMEA) Failure Mode & Pricing Margin Process Improvement Effective Analysis Management

Sales Force Initiative Heijunka Six Sigma

Lean Conversion Supply Chain & Logistics Breakthrough Ideation Roadmap Best Practices

Lean Software Design Source: Company materials.

708-445 -26-

Exhibit 12 Danaher Annual Income Statement, 1985–2010 (numbers in USD millions)

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2006 2007 2008 2009 2010 Sales (Net) 295.9 616.1 749.1 836.3 1,073.6 1,486.8 2,051.0 3,197.2 3,782.4 5,293.9 7,984.7 9,596.4 11,025.9 12,697.5 11,184.9 13,202.6 Cost of Goods Sold 240.2 406.4 499.1 611.9 758.0 981.1 1,306.4 1,834.4 2,159.6 3,021.4 4,362.7 5,135.8 5,716.5 6,418.0 5,441.3 6,088.7 SG&A 31.6 110.6 136.9 161.6 180.2 266.9 401.6 778.4 872.7 1,316.5 2,160.3 2,730.8 3,246.5 4,070.7 3,706.2 4,483.2 Operating Income Before Depreciation 24.1 99.0 113.1 62.8 135.4 238.8 343.0 584.4 750.1 956.1 1,446.2 1,788.4 1,740.7 1,869.5 1,542.5 2,143.6 Depreciation and Amortization 6.3 13.5 19.1 23.1 35.8 58.5 76.1 126.4 178.4 133.4 177.0 217.2 268.5 339.3 341.6 397.1 Interest Expense 15.9 48.1 27.9 14.5 10.3 7.2 13.1 16.7 25.7 59.0 44.9 79.8 109.7 130.2 122.7 120.8 Interest Income 3.2 5.1 5.7 0.0 0.0 0.0 10.1 14.7 8.0 6.1 10.0 5.0 6.1 Pretax Income 14.0 43.4 79.1 26.3 91.1 173.1 253.8 429.6 476.3 797.0 1,234.4 1,446.2 1,637.1 1,749.3 1,424.9 2,342.7 Net Income (Loss) 13.5 19.0 61.1 13.3 17.7 108.3 154.8 261.6 297.7 536.8 897.8 1,122.0 1,369.9 1,317.6 1,151.7 1,793.0

Source: Standard & Poor’s Compustat® data and Company SEC filings.

708-445 -27-

Exhibit 13 Danaher Annual Ratio Report, 2002–2010

2010 2009 2008 2007 2006 2005 2004 2003 2002 Financial Strength Current Ratio 1.7 1.9 1.5 1.4 1.4 1.3 1.3 2.1 1.9 Quick Ratio 1.2 1.3 0.8 0.8 0.8 0.8 0.8 1.5 1.2 Working Capital (USD millions) 2,424.8 2,459.7 1,442.0 1,149.9 977.0 676.4 716.4 1,562.1 1,122.0

Operating Ratios Asset Turnover 0.63 0.60 0.73 0.73 0.86 0.90 0.90 0.80 0.80 Inventory Turnover 5.93 5.53 5.79 5.49 5.81 5.90 6.40 6.20 6.20 Receivables Turnover 6.38 5.87 6.55 6.06 6.18 6.10 6.60 6.50 6.80

Profitability Gross Margin 50.2% 47.2% 46.8% 45.7% 44.3% 43.1% 42.0% 40.4% 39.0% Operating Margin 16.4% 13.8% 14.7% 15.8% 15.9% 15.9% 16.0% 16.0% 15.3% EBITDA Margin 19.4% 16.8% 17.4% 18.2% 18.1% 18.1% 18.3% 18.7% 18.4% EBIT Margin 16.4% 13.8% 14.7% 15.8% 15.9% 15.9% 16.0% 16.2% 15.5% Pretax Margin 17.7% 12.7% 13.8% 14.9% 15.1% 11.2% 10.8% 10.1% 6.3% Profit Margin 13.6% 10.3% 10.4% 11.0% 11.7% 11.2% 10.8% 10.1% 9.5% Return on Equity 14.2% 10.7% 14.0% 15.4% 18.9% 18.5% 18.0% 16.1% 11.1% Return on Assets 8.6% 6.2% 7.5% 8.0% 10.1% 10.2% 9.7% 8.3% 5.4% SG&A Expense/Sales 27.8% 27.5% 26.0% 24.6% 24.0% 27.2% 26.1% 24.9% 24.0%

Leverage Ratios Long Term Debt/Equity 0.2 0.3 0.3 0.4 0.4 0.2 0.2 0.4 0.4 Total Debt/Equity 0.2 0.3 0.3 0.4 0.4 0.2 0.2 0.4 0.4 Long-Term Debt/Total Capitalization 0.2 0.2 0.2 0.3 0.3 0.2 0.3 0.4 0.4 Total Debt/Total Capitalization 0.2 0.2 0.2 0.3 0.3 0.1 0.2 0.3 0.3 Tax Rate 23.5% 19.2% 24.7% 25.8% 22.4% 27.3% 29.5% 32.6% 34.0% Total Capital (USD millions) 16,535.7 14,563.4 12,427.9 12,811.9 9,078.4 6,122.1 5,970.0 4,945.6 4,319.6

Valuation Ratios Free Cash Flow/Share $2.84 $2.50 $2.62 $2.33 $2.29 $3.54 $2.97 $2.54 $2.11 Operating Cash Flow/Share $3.18 $2.79 $2.92 $2.59 $2.51 $3.94 $3.34 $2.80 $2.33

Source: Data provided by OneSource® Business BrowserSM, accessed April 2011.

708-445 Danaher Corporation

Exhibit 14 Portfolio Evolution

Source: Company materials.

Exhibit 15 Organic (core) versus Inorganic (acquisition) Growth, 2003–2007

30%

25%

20%

15%

10%

5%

0% 2003 vs. 2004 2004 vs. 2005 2005 vs. 2006 2006 vs. 2007

Organic Inorganic

Source: Created by casewriters from company materials.

28 708-445 -29-

Exhibit 16 Danaher Acquisitions, 1985–2007

Acquisitions Year over Year*

5000 9

4500 8

4000 7

3500 6 3000 5 2500 4

USD (millions)USD 2000

# # of Acquisitions 3 1500

2 1000

500 1

0 0

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Total Value # of Acquisitions Average Value Projected Total Value

Source: Created by casewriters from Thomson data, August 2007.

*Undisclosed data excluded from acquisition value, both total and average.

708-445 Danaher Corporation

Exhibit 17 R&D/Sales, 2001-2009

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Compiled using data from Thomson One Banker, accessed April 2011.

30 Danaher Corporation 708-445

Endnotes

1 George Anders, “The Best Acquisitions Start With a CEO Who Charms Sellers,” The Wall Street Journal, August 21, 2006, p. B1.

2 Ned Armstrong and Ian Fleischer, “Danaher Corporation: Outperform,” Friedman, Billings, Ramsey & Co., Inc. Equity Research Report, September 14, 2006.

3 Ibid.

4 Nicole M. Parent, Andrew Noorigian, and Russell W. Lane, “Danaher Corporation: Company Update,” Credit Suisse Equity Research, December 14, 2006.

5 Ibid.

6 James C. Lucas, “Danaher Corporation: Kaizen and the Art of Value Creation,” Janney Montgomery Scott Equity Research Report, February 22, 2006.

7 Richard C. Eastman, Robert W. Mason, “Danaher Corporation: Analyst Meeting Update, CY-07 Outlook Favorable, Maintain Outperform Rating,” Baird Equity Research Report, December 14, 2006.

8 Parent, Noorigian and Lane.

9 Wendy Cooper and Erik Ipsen, “The new generation of corporate raiders,” Institutional Investor, January 1986.

10 Ibid.

11 Danaher Corporate website accessed online July 13, 2007.

12 Danaher Annual Report, 1986.

13 Cooper and Ipsen.

14 Ibid.

15 Pearlstein.

16 Cliff Ransom of NatWest Securities, as quoted by Angela Paik, “Danaher master of takeover,” The News & Observer Raleigh, NC,” August 3, 1997.

17 “Sherman Appointed President and CEO of Danaher,” PR Newswire, February 8, 1990.

18 “Danaher President Looks to Overseas Market,” Reuters News, February 8, 1990.

19 Ibid.

20 Danaher’s 2006 10-K S.E.C. filing and Bob Drummond, “Rales Brothers Eclipse Buffet as Danaher Shares Soar,” bloomberg.com, March 31, 2004.

21 Drummond.

22 Mead, as quoted by Paik.

23 Drummond, and Danaher’s 2001 10-K S.E.C. filing.

24 Tim Lemke, “Danaher seen ‘weathering’ economic slump; Analysts cite restructuring, strategy,” The Washington Times, June 24, 2002.

25 Moye.

26 Thomas D’Amore of First Union Securities, as quoted by Moye.

31 708-445 Danaher Corporation

27 Interview with Larry Culp, April 2007. Except where otherwise noted, quotes are likewise from this interview.

28 Discussion of acquisition categorization and processes draws heavily from James C. Lucas’s Report, “Danaher Corporation: Buy; Kaizen and the Art of Value Creation,” Janney Montgomery Scott, February 22, 2006.

29 Danaher, 2001 Annual Report (Washington, DC: Danaher, 2001). p. 4, http://www.danaher.com/ investors/annualreports.htm, accessed September 2007.

30 Danaher, 2006 Annual Report Washington, DC: Danaher, 2006). p. 14, http://www.danaher.com/ investors/annualreports.htm.

31 Danaher, 2001 Annual Report Washington, DC: Danaher, 2001). p. 5, http://www.danaher.com/ investors/annualreports.htm.

32 Jim McTaggart, founder of strategy consulting firm Marakon Associates, as quoted by Hindo.

33 Hindo, p. 58.

34 Ibid.

35 Ibid, p. 59.

36 Interview with Larry Culp, April 2007.

37 Interview with Peter Kurstein, April 2007.

38 Hindo 39 Wendy B. Caplan, Julie Russo, Allison Poliniak and Kelly P. McClintock, “Danaher Corporation: DHR: Anywhere, USA = Shanghai, China; Postcard from the Chinese Road,” Wachovia Equity Research Report, August 27, 2007. 40 Caplan, Russo, Poliniak and McClintock.

41 Jason Singer and Henny Sender, “Growing Funds Fuel Buyout Boom—Already Biggest, Blackstone Pool Will Raise Additional $4.4 Billion As Firms Seek Larger Targets,” The Wall Street Journal, October 26, 2006, accessed via http://global.factiva.com, September 2007.

42 “The uneasy crown: Private Equity,” The Economist (London), vol. 382, iss. 8515, February 10, 2007, p. 82.

43 Andrew Ross Sorkin (editor), “How Low Can Blackstone Go?” nytimes.com Dealbook, September 7, 2007, accessed online at http://dealbook.blogs.nytimes.com/2007/09/07/how-low-can-blackstone-go/

44 Francesco Guerrera, “Less than the sum of its parts? Decline sets in at the conglomerate industry: After half a century in vogue, diversified business groups are increasingly seen as redundant but some may still have a role,” Financial Times (London Edition), February 5, 2007, p. 15.

45 “Q2 2007 Danaher Earnings Conference Call – Final,” Voxant FD Wire, July 19, 2007, accessed online via http://global.factiva.com, September 2007.

46 Hindo.

47 Drummond.

48 Robert Mitchell of Northern Trust, as quoted by Drummond.

49 Hindo.

50 Jim Lucas, “Danaher Corporation (DHR-$78.61), Consistency is not a Fluke; NEUTRAL but Warming Up,” Janney Montgomery Scott Research Report, July 20, 2007, p. 4.

32