When looking at the market, you need to keep this Japanese principle in mind…
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From the desk of Miles Everson: I hope your week is going well! Every Wednesday, I talk about investing in the hopes of helping boost your investment portfolio as a means of attaining genuine financial freedom. Today, let’s talk about a Japanese philosophy that advocates for continuous improvement. |
Keep reading below to know more about it.
When looking at the market, you need to keep this Japanese principle in mind…
When Larry Culp was a business student at Harvard Business School, he cold-called George Sherman, then-CEO of manufacturing conglomerate Danaher and asked if he could work for the firm.
Eleven years after that happened, Culp ended up running the show at Danaher when he was tapped by Sherman himself to take over as CEO in 2001.
With Culp at the helm, the conglomerate took off as revenue soared from USD 4 billion to USD 20 billion by the time he retired in 2014.
The secret to his success?
Mergers and acquisitions (M&As) and a philosophy called Kaizen, or the Japanese term for “continuous improvement.”
As we’ll explain in this article, Kaizen is taking on a brand new form these days as companies are rethinking this philosophy for the modern economy.
Investors like you can find plenty of businesses that implement this approach, regardless of whether they call it Kaizen or not.
The Danaher Business System (DBS)
During Culp’s 14-year tenure as Danaher’s CEO, the company acquired more than 140 companies. This strategy was based on the principles laid out in DBS.
DBS was created by brothers Steven and Mitchell Rales. The system is based on five score values:
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The beat team wins.
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Innovation is the future.
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Compete for shareholders.
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Listen to the customer.
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Kaizen is the way of life.
DBS is a simple system. If Danaher can buy a small company at a reasonable price, improve its operations based on the system’s five principles, and increase the business’ values as a result, it will make the acquisition.
The system prioritizes the acquisition of a small company because if it fails to integrate, it has a very small chance of hurting Danaher’s overall business.
With each successive acquisition, the Danaher executive team got better at implementing DBS.
The best part about the DBS strategy?
Its potential to snowball.
It’s not just Danaher’s management that implements the system. Every single subsidiary it acquires has to use it too.
Through DBS, Danaher kept expanding into industries like life sciences, water quality, and industrial manufacturing. Once the firm got into those segments, its subsidiaries started buying even smaller businesses, meaning they could grow even faster.
That said, DBS is far from the only example of a company that subscribes to the principles of Kaizen in the business world.
Japanese Excellence
Toyota is another example of a company that adheres to the principles of Kaizen. The philosophy permeates every aspect of its corporate culture.
The car manufacturing giant was the first to introduce a mass-produced hybrid model with the Prius in 1997.
Instead of resting on its laurels in the hybrid market, it continued innovating in the electric vehicle (EV) space and is now one of its pioneers. Toyota’s solid-state batteries also aim to charge EVs faster and offer longer range.
When it comes to its employees, Toyota gives regular evaluations in areas like safety, quality, and human ability. Grades are on a scale of zero (worst) to 5 (best).
With Kaizen serving as the primary guide in evaluating employees, Toyota is able to empower employees to continuously improve.
… and through Kaizen, the car manufacturing giant has turned itself into a model of excellence across numerous other sectors.
Kaizen is Key
When you take a look at many top-performing companies like Toyota, you’ll start to see a pattern: Kaizen is crucial in today’s business wins.
Aside from Toyota and Danaher, a textbook example of this philosophy is e-commerce giant Amazon.
Even though the company doesn’t name Kaizen as its guiding principle, it embodies aspects of the philosophy in everything it does.
An important aspect of Kaizen is eliminating waste through three tenets:
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“Muda” - About reducing waste.
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“Mura” - Addresses operational unevenness.
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“Muri” - aims to alleviate overburden.
Amazon has successfully integrated these tenets to its operations through its use of artificial intelligence (AI).
The company’s use of AI in packaging embodies “Muda” since it uses machine learning to cut down packaging weight by 36% and eliminate more than a million tons of packaging.
Not only is this eco-friendly, but it also optimizes resources and cuts costs.
Meanwhile, Amazon’s AI-driven regionalization strategy embodies “Mura” since it ensures products are stored and shipped from the nearest warehouses.
More than 76% of U.S. orders are shipped from local centers, making delivery times faster and more predictable.
As for “Muri,” Amazon deploys more than 750,000 AI-equipped robots in its facilities.
These robots are intended to reduce strain on employees and increase efficiency—a clear case of technology serving humans, not the other way around.
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The stories of Danaher, Toyota, and Amazon embodies modern Kaizen and showcases how this philosophy of continuous improvement can spur innovation and lead to high company performance.
The bottom line?
Investors like you should always keep an eye on and embrace companies who practice forward-thinking philosophies like Kaizen.
After all, it’s not just about what a company is doing; it’s also about how it does things.
Hope you’ve found this week’s insights interesting and helpful.
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Stay tuned for next Wednesday’s The Independent Investor!
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