Corporate culture shock is coming to the 10,400 employees of Pall Corp.
Danaher Corp., the new parent of Long Island's fourth-largest company by 2014 revenue, acknowledged in a message sent to Pall employees in May that they may feel "apprehension, uncertainty and mistrust" as the new regime takes charge. Those feelings are natural when a company is taken over.
But Danaher, an industrial conglomerate based in Washington, D.C., said employees also will be immersed -- including Pall leaders in the first 100 days after the deal closes -- in the culture of "kaizen," a business system that focuses on continuous improvement. It is a cornerstone of Danaher's culture and arguably has helped propel its stock on a dizzying climb that has left even Warren Buffett's Berkshire Hathaway in the dust.
Like General Electric, Fidelity Investments, Motorola and much of the Standard & Poor's 500, Pall, a filtration products company based in Port Washington, has used management philosophies such as "Six Sigma" and lean manufacturing aimed at increasing efficiency and reducing waste, its executives have said. But Danaher, with almost $20 billion in 2014 revenue, makes kaizen an article of faith, using its Danaher Business System (DBS) program to inject the DNA of kaizen and the rest of its culture into companies it acquires.
"I've never seen it implemented this holistically and this religiously at any other company," Brandon Couillard, an analyst at investment bank Jefferies LLC, said of the culture.
At its core, kaizen is a management system based on a set of values that is intended to improve employee and company performance. The system encourages individual and group effort to identify and fix problems, with the goal of making constant improvements in the organization and its products.
Core principles of kaizen include: Workers who perform a task know the most about it; employees should seek to identify problems in the work process instead of assigning blame to scapegoats; waste must be eliminated at each stage; standardization lets companies measure performance and prevent recurring errors; teamwork works.
In May, shortly after announcing the $13.8 billion Pall transaction, Danaher issued a welcoming message to the employees of Pall. No. 3 on its list of five "core values": "Kaizen is our way of life."
That lifestyle is designed to be a path to profits.
In an analyst conference call after the deal was announced, Danaher CEO Thomas Joyce said the company expects to squeeze about $300 million in costs -- equal to about 10 percent of current annual revenue -- from Pall over four or five years. Analysts said that at the very least some Pall jobs that duplicate those at its new parent in areas like legal and human resources are likely to be cut. But Joyce named DBS as the primary driver of efficiency and savings.
"Ultimately, we believe this will be a high-impact opportunity where DBS will have a meaningful impact," Joyce said.
The power of kaizen
Kaizen is derived from two Japanese words: "kai," meaning "change," and "zen," meaning "good." Some trace the term back to China of the 1600s, and its philosophical roots to W. Edwards Deming, an American management consultant sent to help rebuild post-World War II Japan. Kaizen was introduced in a corporate context in the 1950s and 1960s with the creation of the Toyota Production System, according to the book "Toyota Kaizen Methods."
By 1981, Toyota had fully installed kaizen in its standard training program and had secured a growing foothold in the U.S. auto market.
Around the same time, Mitchell and Steven Rales, sons of a Washington, D.C., businessman, began using junk bonds to go on a corporate buying spree. In 1984 the collection of businesses they assembled adopted the Danaher corporate name after a trout stream in western Montana.
Two years later a business bestseller, "Kaizen: The Key to Japan's Competitive Success," brought the philosophy to the West. And in the late 1980s, one of the Rales-owned companies, Jacobs Vehicle Systems, began incorporating kaizen principles. Soon the kaizen philosophy spread throughout Danaher.
In the early years, the Rales brothers faced skeptics. In 1985 Forbes called them "callow youths." But they continued scooping up underappreciated industrial companies, adding efficiencies through DBS and watching the conglomerate's stock price -- and their net worth -- soar.
A company on the move
All told, Danaher has made more than 400 acquisitions. While the Standard & Poor's 500 index has climbed 74 percent in the past 10 years, and Berkshire Hathaway A shares have increased about 149 percent, according to Google Finance, Danaher has soared more than 228 percent.
DBS "really is intended to unify the culture across every aspect of the business, which has made Danaher so successful historically integrating acquisitions," Couillard said.
The Rales brothers each own 6 percent of Danaher's outstanding shares now. Steven Rales, chairman of Danaher, was No. 462 in Forbes' 2015 ranking of the world's billionaires ($3.7 billion), while brother Mitchell, chairman of the executive committee on Danaher's board of directors, came in at No. 418 ($4 billion).
The acquisition of Pall Corp., with about 600 employees in Port Washington, is the biggest bet ever for Danaher.
The conglomerate, with a stock market value of more than $60 billion and a workforce of about 47,000, declined through a public relations agency to answer Newsday's questions, and Pall spokesmen did not respond to requests for comment.
On June 23 the Federal Trade Commission said the deal had cleared antitrust scrutiny. It still requires a two-thirds vote for all of Pall's outstanding shares accepting Danaher's $127.20-per-share offer at a stockholders meeting July 28.
What will happen after the expected close of the deal?
Danaher veterans said employees will be pulled away from their jobs and put in DBS training classes.
At these sessions employees may come across common kaizen acronyms like TIM WOOD, an acronym used to remember the seven wastes tackled by the philosophy: Transport waste; Inventory waste; Motion waste; Waiting waste; Overproducing waste; Overprocessing waste, and Defects waste.
In a 2006 interview published by management consultancy Accenture, former Danaher CEO Larry Culp said DBS initially sought to imitate the lean manufacturing system at Toyota, but it eventually became a companywide process for everything from strategic planning to employee training to product development.
The culture of kaizen is so pervasive at Danaher that simply meeting goals isn't enough. To earn full credit, Culp said, managers must not only meet their objectives, but do it the Danaher way.
Planning for transition
3For Pall employees the transition could be jarring even though outgoing CEO Lawrence Kingsley, who took his post in October 2011, began instituting some kaizen-style programs.
"It can be a cultural shock when Danaher does buy somebody," said Richard Eastman, senior research analyst at Robert W. Baird & Co.
Carlos Abisambra is a consultant whose career has included stops at several companies known for applying cultures of efficiency, quality and waste reduction, including Fluke Networks, a Danaher operating company being acquired by NetScout Systems Inc.
Abisambra, who left Fluke in June 2014 to found Vortice Services LLC, a Seattle marketing consultancy, said a hallmark of kaizen culture is "kaizen events," problem-solving sessions that can stretch from one to five days. Executives, middle managers and floor workers brainstorm together. Titles and rank are left at the door in an effort to solve defined problems together.
Problems can range from "How can we make this manufacturing line double its output?" to How can we "improve the safety of our workers?" Abisambra said.
Getting executives, middle managers and floor workers to shed traditional western notions of central command is not easy, said Christopher Leonard, client services director at Kaizen Institute USA in Seattle.
"It's about changing the mindset," he said. "At most organizations, people within the organizations feel that problems are not good news. People don't like to be near them. Kaizen turns that on its head. You find problems and you're empowered to solve them."
Deciphering the mindset
Abisambra warns that the gut feel and political considerations of some traditional corporate environments count for little at a kaizen event.
Pall employees should be prepared that the way decisions are made is going to change, he said. "If somebody has an idea and states it as a fact, you're probably going to be asked what data you have to back it up."
Another feature of the continuous-improvement culture:
Celebrations are short.
"You celebrate very quickly and move on" to the next improvement, Abisambra said.
Couillard said the culture provides Danaher with a "sustainable competitive advantage" that also tends to weed out employees who resist the change. "Those that don't buy into it are not the associates that Danaher wants to keep around," he said.
Still, kaizen is no magic wand that shields companies from missteps. One kaizen practitioner, Japan's Takata Corp., is facing the largest air bag recall in U.S. automotive history.
Abisambra concedes kaizen and DBS "may not be the right culture" for everyone.
Nevertheless, his advice to Pall employees is to "embrace" the new culture.
"You're going to learn a ton," he said. "Two or three years down the road, you can find a company that is a better fit."