You’re Not Thinking Enough About This Japanese Philosophy

By Joel Litman, chief investment strategist, Altimetry

When business student Larry Culp dialed up the CEO, all he wanted was a job and a paycheck…

Eleven years later, he was running the show.

As a second-year student at Harvard Business School, Culp was fascinated with Japanese and German manufacturing models. He knew he wanted to work for a company with similar values.

Manufacturing conglomerate Danaher (DHR) had just appointed George Sherman as its new CEO in 1990. Culp was inspired by Sherman’s vision to make Danaher into a world-class manufacturer.

So 10 days after Sherman took over, Culp cold-called him… and walked away with a job offer.

After graduating from Harvard, Culp quickly made his way up the ranks at Danaher. He was tapped by Sherman himself to take over as CEO in 2001.

With Culp at the helm, the company took off… Revenue soared from $4 billion to $20 billion by the time he retired in 2014. The stock more than quintupled.

The secret to his success was mergers and acquisitions (M&A)… and a philosophy called Kaizen, the Japanese term for “continuous improvement.”

As I’ll explain, Kaizen is taking a brand-new form these days. Companies are rethinking this philosophy for the modern economy. And investors can find plenty of businesses that implement this approach… whether or not that’s what they call it.

During Culp’s 14-year tenure as CEO, Danaher acquired more than 140 companies…

He followed a playbook called the Danaher Business System (“DBS”).

DBS was created by brothers Steven and Mitchell Rales, who founded Danaher in 1984. It’s based on five core values… the best team wins, innovation is the future, compete for shareholders, listen to the customer, and Kaizen is the way of life.

It’s a simple system. If Danaher can buy a company at a reasonable price, improve its operations based on the five DBS principles, and increase its value as a result, it will make the acquisition.

It’s important that any acquisition is a small company. That way, if it fails to integrate, it has a very small chance of hurting the overall business.

And with each successive purchase, the Danaher executive team got that much better at implementing DBS…

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The greatest part about the DBS strategy is it can snowball. It’s not just that Danaher’s management knows how to improve a company’s operations. Every single subsidiary subscribes to the strategy, too.

Danaher kept expanding into new industries like life sciences, water quality, and industrial manufacturing. And each of those segments started buying even smaller businesses, meaning they could grow even faster.

DBS is perhaps the most famous example of Kaizen in the business world…

That said, it’s far from the only example. Regular readers know we discussed top automaker Toyota Motor’s (TM) standout success story last month…

Toyota’s ascent is firmly rooted in its strong commitment to Kaizen. The philosophy is more than a business strategy at Toyota. It permeates every aspect of company culture.

Toyota was the first carmaker to introduce a mass-produced hybrid model with the Prius in 1997. It could have rested on its laurels and kept to the hybrid market… but now, it’s pioneering in the electric-vehicle (“EV”) market. Its solid-state batteries aim to charge EVs faster and offer longer range.

When it comes to Toyota employees, the company’s use of Kaizen might seem a bit harsh from the outside…

All employees and teams receive regular evaluations in areas like safety, quality, and human development. Grades are on a scale of zero (worst) to 5 (best).

One president of Toyota’s Canadian auto parts unit noted that the highest score he ever saw was a 3.2… barely above average.

That’s not because Toyota’s employees and teams aren’t good. It shows that perfection is something you strive for but never achieve. That’s how you empower employees to continuously improve.

This philosophy has not only propelled Toyota to the forefront of its industry… it has also turned the company into a model of excellence across numerous other sectors.

Take a closer look at many top-performing companies like Toyota, and you’ll start to notice a pattern…

Kaizen is key in today’s business wins.

For a textbook example, look no further than e-commerce giant Amazon (AMZN).

A critical aspect of Kaizen is eliminating waste through three tenets. “Muda” is about reducing waste. “Mura” addresses operational unevenness. And “Muri” aims to alleviate overburden.

Amazon has addressed these by seamlessly integrating AI into its operations. Even though the company doesn’t name Kaizen as its guiding principle, it embodies Muda, Mura, and Muri in all it does.

In terms of Muda – reducing waste – Amazon’s use of AI in packaging is remarkable. Machine learning has allowed it to cut down packaging weight by 36%… and eliminate more than a million tons of packaging.

This isn’t just about being eco-friendly. It’s a smart business move to optimize resources and cut costs​​​​.

Then there’s Mura… Amazon’s AI-driven regionalization strategy ensures products are stored and shipped from the nearest warehouses. More than 76% of U.S. orders are shipped from local centers. That makes delivery times faster and more predictable.

As for improving overburden through Muri… Amazon tackles this by deploying more than 750,000 robots in its facilities.

Equipped with AI, these robots take on the heavy lifting. They’re intended to reduce the strain on employees and increase efficiency – a clear case of technology serving people, not the other way around​​​​​​.

Amazon’s AI and robotics innovations should drive earnings significantly higher…

Uniform earnings are expected to rise from $43.7 billion in 2022 to $59.8 billion by 2024.

So these continuous improvements allow Amazon to keep even more money for itself. It’s a clear indicator that smart, efficient operations powered by AI can lead to substantial financial growth​​.

Amazon’s story isn’t just about a company using AI. It’s about a business that embodies modern Kaizen… showcasing how traditional principles of improvement can evolve with technology.

For investors, it’s a lesson in identifying companies that embrace such forward-thinking strategies. It’s not just about what they’re doing. It’s about how they’re doing it.

Wishing you love, joy, and peace,

Joel
December 22, 2023