The Danaher System

Great takes time and compounding.

The concrete heads

In the late 1980s, Danaher invited consultants from Shingijutsu — a firm founded by disciples of Taiichi Ohno, the architect of the Toyota Production System — to assess their factories. The assessment was blunt.

At Jacobs Chuck, Mr. Iwata walked the floor, then wrote two words on the whiteboard: “NO GOOD!” At Jake Brake, when asked what could be improved, another consultant replied: “50 percent. Everything can be cut by 50 percent.”

The Shingijutsu team didn’t want to work with Danaher at first. As Mark DeLuzio, who became the principal architect of the Danaher Business System, recalls: “They basically said, you guys are a bunch of concrete heads and you’re never gonna learn.”

They learned. Danaher has compounded at roughly 21% annually for forty years, turning the Rales brothers’ initial investment into an 1,800x return. The company is now worth over $200 billion across Danaher itself and its spinoffs.

Learning from the source

What made Danaher different from the hundreds of Western companies that tried to copy Toyota? They went to the source — and they stayed humble.

DeLuzio again: “We learned from the guys that wrote it.” The Shingijutsu consultants were Ohno’s direct disciples. They didn’t teach lean from textbooks; they’d spent decades building the system at Toyota.

Ego death was required. American executives in the 1980s weren’t accustomed to being told their operations were “NO GOOD” by Japanese consultants. Most companies would have shown them the door. Danaher brought them back, again and again, for weeks of kaizen events that transformed their factories.

The Jake Brake results tell the story. Over eleven years, the business went from $65 million to $220 million in revenue. Inventory turns went from 2x to 25x. On-time delivery went from under 20% to over 99%. Operating margins went from 4% to over 30%. Productivity went from 3 brakes per man-hour to 35.

That’s what “50 percent” looked like in practice — except the consultants had been conservative.

Codifying the system

Most companies that achieve operational excellence do it once, in one business, with one exceptional leader. Danaher did something harder: they codified it.

The Danaher Business System is a detailed operating system, not a philosophy or a set of values. It comes with specific tools, training programmes, and metrics. When Danaher acquires a company, the integration follows a predictable pattern: a one-week DBS training session in the first week, a one-week kaizen event in the second week, a 100-day strategic plan, then monthly metric tracking for three years.

The system rests on four P’s — People, Plan, Process, Performance — and tracks eight core metrics across every business: organic growth, operating margins, cash flow, ROIC, on-time delivery, quality (defects per million), internal job fill rate, and retention.

Mitch Rales, who co-founded Danaher with his brother Steven: “It all starts with creating a purpose statement, a set of core values, a vision statement of what you stand for and a BHAG or big hairy audacious goal, which is what you really aspire to over a 20- to 30-year period of time.”

The time horizon matters. Danaher doesn’t optimise for quarters; it optimises for decades.

The acquisition machine

Danaher runs roughly 150 due diligences per year and closes 12-14 deals — a 10x rejection rate — far more selective than most serial acquirers.

Criteria are specific: market size over $1 billion, core growth of 5-7%, fragmented competition, and the target must be a top-three player. But the real filter is whether DBS can transform the business. Danaher looks for operations with improvement potential, not already-optimised assets.

Once acquired, roughly two to three of the top ten roles get changed — often including the CFO. The goal is installing operators who know how to run DBS. The system is demanding, and not everyone adapts.

The Rales brothers understood their own limitations early. Mitch Rales: “Steve and I understood what we didn’t know. We were not meant to be great operators… We could create long-term vision and strategy and how to properly allocate capital.”

That self-awareness shaped the model. Find great operators, give them the system, let them run.

The culture beneath the system

Tools without culture don’t transfer. DBS works because Danaher embedded specific beliefs into how the company operates.

“Kaizen is our way of life” — continuous improvement isn’t a programme, it’s an expectation. “Customers talk, we listen” — voice of customer drives product development. “Best team wins” — talent development is a competitive advantage.

Larry Culp, who ran Danaher from 2001 to 2014 and now leads GE Aerospace, describes what this means in practice: “A problem-solving culture is far more effective operationally than a finger-pointing culture.”

The operational intensity can be uncomfortable. One executive describes DBS as creating “relentless dissatisfaction with the status quo.” But that discomfort is the point. Mitch Rales: “We also think institutions of greatness aren’t built quickly. You can’t be great quickly. Great takes time and compounding.”

Evolution, not transformation

Danaher in 1986 was a collection of industrial businesses — tools, automotive parts, specialty products. Today it’s focused on life sciences and diagnostics. The shift happened gradually, through hundreds of small decisions about what to buy, what to improve, and what to divest.

The company spun off Fortive in 2016 (industrial businesses), Envista in 2019 (dental), and Veralto in 2023 (water and environmental). Each spinoff took businesses that no longer fit the portfolio and gave them independence to compound on their own.

This is the centipede strategy applied over decades. Do less of what underperforms. Do more of what outperforms. The destination emerges from the journey, not from a strategic plan written at the start.

DeLuzio on why the system endured through multiple CEO transitions: “Consistency of leadership in the belief… What the Danaher Business System can mean for all stakeholders… was never wavered from CEO to CEO.”

The system survived because it was institutionalised, not dependent on any individual. That’s the difference between a company that’s operationally excellent and a company that’s built operational excellence into its DNA.

What the concrete heads built

Danaher’s track record is hard to argue with. Over 40 years, the company outperformed Berkshire Hathaway over 5, 10, 15, and 30-year periods. EPS grew roughly 10,000% from 1990 to 2023. Including spinoffs, Danaher has created over $250 billion in shareholder value.

But the real achievement is proving that operational excellence can be codified, taught, and transferred across thousands of employees and hundreds of acquisitions.

The consultants who wrote “NO GOOD!” on that whiteboard were right about Danaher’s starting point. They were also right about what was possible. The gap between the two is what forty years of compounding looks like.

Connects to Library: Process Power · Marginal Gains · Tacit Knowledge

See also: The Halma Discipline — A similar story of incremental improvement compounding over decades. The Heico Playbook — A different approach: decentralisation over systems.