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1/ Long thread on the fascinating history of $SYK. For more check out http://www.fundinguniverse.com/company-histories, which pulls information from the International Directory of Company Histories.
2/ Stryker was founded in 1941 when Dr. Homer Stryker, an orthopedist, began designing new devices after growing frustrated with the existing products in his field. His original product was a mobile hospital bed that pivoted from side-to-side, and it was used during WWII.
3/ Over the next 15 years, Stryker expanded into other products but beds and stretchers still made up 70% of sales. In 1955, Homer's son, Lee, took over as CEO.
4/ The business continued to grow for several years, but in the mid-1970s, one of Lee's top-down decisions had very negative results.
5/ He tinkered with his salespeople's compensation arrangement, switching them from commission to salary, but this decision caused Stryker to lose nearly its entire sales force. Lesson: incentives matter!
6/ To make matters worse, in the middle of this crisis with the sales force, Lee Stryker was killed in a plane crash in July 1976. Enter John Brown, who took over as CEO in 1977 after running the surgical instruments division of Bristol-Meyers Squibb.
7/ Brown made some smart changes off the bat - he rebuilt the sales force, changed the compensation structure back to commission (sales reps remain 100% commission today), established a formal budget and expanded into hip implants through an acquisition.
8/ Yet here's something interesting. I've always considered Stryker to have a very strong culture. Today, it's known for its decentralized structure that pushes autonomy down to those closest to the customer.
9/ This enables sales reps to form close relationships with physicians and surgeons, which entrenches Stryker within a hospital. But Stryker hasn't always been this way.
10/ And I can't help but think that this next anecdote is not something you would typically see in a business with a strong culture.
11/ In 1979, the Stryker family sold some of its stake and CEO John Brown announced an ambitious goal for the company: 20% annual earnings growth from then on. He chose this goal because he had been told that emerging growth companies had growth rates of no less than 20%.
12/ Brown wasn't making lofty statements without intending to back it up. He referred to his 20% growth goal as "the law" and demanded that each and every employee do his part to achieve it. Stryker did end up hitting this growth target for the next 19 years, but if I went back…
…13/ in time without knowing the result, I would have worried that this "law" would create an atmosphere of fear and incentive to meet this year's target at the expense of long-term value creation.
14/ This kind of pressure to "meet the numbers" has caused a number of companies like $GE and Enron to get into trouble with employees crossing the line trying to meet their targets no matter what.
15/ There are countless examples of this in the fantastic new book Lights Out: Pride, Delusion and the Fall of General Electric as well as The Smartest Guys in the Room.
16/ You could point out that Brown's strategy was supported by the stated values: "do not lie, cheat, or steal to do it." But still, I have to imagine there was a lot of pressure to meet that EPS target, and not all of it was in the employees' control.
17/ Brown's early years at Stryker were not the smoothest. Stryker hit his 20% target, but his style of management clashed with many existing executives. Many of the issues were out of his control though.
18/ In the mid-1980s, many treatments and procedures that previously required hospital admission shifted to outpatient procedures. This was due to new legislation intended to lower healthcare costs. This meant lower demand for hospital beds, Stryker's main source of revenue.
19/ The company responded by branching into new product categories like biotech and endoscopic equipment. As the company's product lineup became more diverse, Brown made a radical departure from Stryker's traditional management style.
20/ He decentralized the company, with each division head responsible for setting the division's goals, establishing its manufacturing operations, and managing its sales and marketing efforts.
21/ Decentralization allowed each division to make quicker decisions and form a closer relationship between sales reps and customers.
22/ Previously, sales reps had been responsible for selling the whole gamut of Stryker's products, but now they could narrow their focus and better understand and respond to their customers' needs.
23/ With closer customer relationships, salespeople began to come up with ideas for new products and ways to improve existing ones. Between 1986 and 1991, the company almost quadrupled its R&D budget, and doubled its product line.
24/ In 1998, Stryker made a transformational acquisition, buying Pfizer's orthopedic division Howmedica for $1.7bn. This was a massive deal, as Stryker's $980 in sales were not much more than Howmedica's $800 million.
25/ It catapulted Stryker from a little-known player to one of the largest in the industry. But it was risky, and it took $SYK from nearly debt-free to quite leveraged. The market reacted by sending Stryker shares down 14% the day of the announcement.
26/ Transformational acquisitions have a low success rate, but this one seemed grounded in the realities of how Stryker's market was changing.
27/ As hospitals consolidated, purchasing power was often centralized and Stryker recognized that scale was becoming more important than physician preference. It had built its sales approach on personal relationships with individual decision-markers, but the market was changing.
28/ Incidentally, I think this remains a risk today as GPOs could exercise greater bargaining power. Stryker wasn't the only company to realize this - that same year, Tyco bought a surgical instruments company for $3.3bn and J&J bought Depuy for $3.5bn.
29/ Fast forward, and John Brown stepped down as CEO at the end of 2004. During his 27 year tenure, Stryker produced an average annual earnings growth of 22%.
30/ Again, I find it thought-provoking that if I were an investor in 1979, seeing 20% annual EPS growth referred to as "the law" might have scared me off and caused me to question Stryker's culture and long-term focus.
31/ If that didn't do it, I might have sold in 1998 by pointing to what base rates say about transformation acquisitions. But I would have been dead wrong, and Stryker ended up crushing it, exceeding its targets while strengthening its competitive advantage.
32/ For piquing my interest, thanks to some of you who have written about $SYK and similar medtech names before, namely @BluegrassCap , @yourMTLbroker , @PythiaR, @talbottzink, @Logos_LP, @IntrinsicInv and @borrowed_ideas
