Scott Davis

"•   Most companies grasp the importance of innovation and growth, but many underestimate risk. •   Success often drives arrogance and/or complacency. Stay focused. •   The severity of most crises is underestimated; crisis management is best done in advance. •   Innovative companies run the risk of favoring engineering over financial viability, but being too financially focused is an easy way to lose sight of other important variables. •   Both the number and the importance of key stakeholder groups always grow over time. •   Overemphasis of one business objective runs the risk of underemphasis of others. •   Some leaders are better equipped to manage certain risks and stakeholders than others. Boards need to act decisively when executives are not equipped to handle a crisis before it spirals further out of control. CHAPTER 4 DANAHER Process-Driven Reinvention BY SCOTT DAVIS Once a company achieves initial success, no matter which path taken, it faces a new challenge. People relax and allow bad habits to creep in. They erect bureaucracy, lose focus, and leak talent. Performance suffers and culture degrades, but by the time leaders or investors notice, it’s often too late. Danaher may be the best example of a company fighting to resist this complacency creep. Cofounders"

"“Now that the deal is closed, please tell us everything that you failed to tell us during diligence.” He believed that things always go wrong in a deal; what distinguishes the good from the bad deals are the speed and permanence of the fixes. He put the people and processes in place to make sure the bad news traveled more quickly. Danaher also tracks the ROIC and other seven key metrics for the transaction each month for three years, and longer for the biggest deals."

"Danaher believes that project management requires some form of visual aid, and that regular (but short) meetings should be held in front of the visual aid."

"We highlight the importance Danaher placed on its talent in the top finance job because it is a key differentiator in the outsized success of the company. In fact, most of our successful case studies had notable talent in the CFO seat."

"For example, every Danaher acquisition has a war room with timelines, maps, and checklists. Responsibilities are clearly noted, and if someone is falling behind, the red ink denotes that as an area of focus. Bad news travels fast, accountability is maximized, and the successful completion of tasks is noted. The feedback loop is nothing that email or Excel could accomplish. Visual management is a simple yet powerful tool."

"Lessons from Danaher •   Lean manufacturing works. It’s the basis for every successful business system we know. •   Small improvements every day add up to massive change over time. •   Create process in everything—literally, everything. •   Business tools are focusing tools, and today focusing employees matters more than ever. •   Humility, transparency, and high expectations are three great cultural traits to develop. •   The CFO job matters more than most appreciate. Financial complexity is the new normal for global companies. •   Compounding is a financial theme, but the best make it an operating theme, too. •   Risk controls matter. A bad deal can unwind a lot of good work and goodwill."

"THE THREE VALUE DRIVERS TransDigm is remarkably consistent in the application of what it calls its three value drivers: (1) value-based pricing, (2) productivity, and (3) profitable new business."

"TransDigm’s 2018 acquisition of Extant, a company that acquires intellectual property rights to “dying” lines of old aircraft parts that companies decide they no longer want. Picture this: A business line manager at a large company looks at the list of products in her business unit and says, “I could grow this operation’s revenues faster if I could get rid of the stuff that’s shrinking.” She finds products that go on older aircraft no longer in production, where inventory turns slowly and innovation is scant. If she gets rid of these parts, her business’s overall growth rate goes up over time, and her inventory goes down. Depending on how she’s being paid, which most often is by sales growth, she’s a hero. There’s only one problem with this picture: these products often have the highest potential profit in the portfolio. They have the best pricing power, and they require little or no ongoing investment. The fact that managers were allowed to sell such product lines to Extant is crazier than anything TransDigm has ever done."

"TransDigm aspires to generate annual growth at a level that it characterizes as “private-equity-like.” This equates to 15 to 20 percent over a number of years. The belief is that if the business can consistently generate that type of growth, sizable stock returns will follow. And at TransDigm, stock awards comprise a large share of overall employee compensation. The company is convinced that in order for the business model to work, those in charge of executing the strategy need to be compensated as owners. If managers effectively execute to the plan, they are compensated with stock that has the potential to appreciate well beyond the initial value of the bonus. I know TransDigm “retirees” who still have younger children and not a single strand of gray hair. They came in early, worked hard, were appropriately rewarded by the company, and then left with their riches."

"Lessons from TransDigm •   Even good businesses can always be better. •   Know your unique advantages and always focus on maximizing them. •   Simple goals create focused outcomes. Complex goals breed confusion. •   Cash and capital structure are often overlooked tools for enhancing value creation. •   M&A strategy should almost never stray from core competencies. •   Employees should think and be compensated like long-term owners. •   Bottom-up management can be far more effective than top-down management."

"Every employee in every role is focused on the company’s value drivers, and in return every employee gets to share in the rewards. The pace is demanding, and it’s not for everyone—if you can’t keep up, the company is quick to show you to the door. Of the top couple of hundred people that make up the company’s leadership team today, nearly 90 percent were homegrown and internally promoted. Many of them are multimillionaires, and a handful are hundred millionaires. All this wealth creation is the result of a compensation plan that reinforces the desired outcomes."

"Jellison wanted a detailed breakeven analysis on every product, an analysis that had a shelf life long past diligence."

"We started this chapter with a comparison to asset-heavy new tech companies like Uber; we want to end it with a suggestion that the lessons herein are applicable to future business models and may even be necessary for them."

"United Rentals knew early on that addressing customer dissatisfaction with deliveries was a major opportunity. Late deliveries also brought excess cost and lost pricing. Rental equipment might be only 2 percent of the cost of building a high-rise, but if the equipment is not there or not working, dozens of other processes stop. High-wage workers stand around waiting, delays back up, and the customer gets angry at the rental company. An outflow of the early kaizen events was a visual fix for late deliveries. Did the order get taken correctly, with the customer specifying exactly what kind of setup was wanted on the 60-foot boom lift? Did the customer know exactly what was needed, or could the customer have benefited from a quick consult with an expert? Did the order include the phone number and backup number of the person who would take delivery on site? Is it a cell phone? Is the delivery address correct? If it is a large jobsite, what gate should the truck deliver to?"