Stryker Corporation: Capital Budgeting Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Problem Diagnosis

The main focus of this case is the capital budgeting process and the capital investment approval process that is taking place at Stryker Corporation. It sets out all the detailed procedures, rules, policies, authorization limits for different types of capital spending which normally include the working capital requirements for the existing business, machinery, buildings, licensing agreements, joint ventures, acquisitions and mergers. The track record of the company had been impressive and the profitability of the company along with the growth in the share prices of the company had boosted significantly over the past years.

It was in 2007, when significant modifications had been made to the Capital expenditure requests approval system and these modifications were made so that the spending thresholds for the Group and the Division levels could be increased. However, it was in the same year that problems started to arise despite the fact that the modifications that had been made to the system were intended to support the long term sustainability and growth of the company. The stipulated time for the review of the CERs and its submission was not being met.

Furthermore, the Committee was not available whenever the divisions needed them. There was no formal way through which the complaints were being handled by the Committee and no formal meetings were conducted by them. Some of the managers thought that the new modifications were unnecessary and as a result of them recently some of the CERs had been rejected. Overall, everything was clashing with the decentralized structure and culture of the company, which was increasing the issues for everyone.

Situation Analysis

The mission of the capital budgeting process at Stryker Corporation and the main purpose of CERs is that a formalized and a standardized capital budgeting process should be formulated at the organization. This set of procedures and policies had been designed at the company so that a formal process so set up for requesting for the capital budgeting investments and formal approval is required before a capital spending is made. The growth benchmark of Stryker is 20% and the capital budgeting process in place at Stryker was developed to support this growth and also sustain the long term profitability of the company.

A simple capital expenditure approval process is shown in the diagram below:

Use of Corporate Financial Theory

There are many types of submissions for the capital spending at Stryker Corporation and formal approval is required for all of them. The most important capital budgeting requests include the requests for licensing agreements, equipment’s, buildings, mergers and acquisitions etc. All the approval forms and the submissions that are made for the capital budgeting requests contain detailed financial and operating analysis, sensitivity analysis, and what-if analysis to support the request for the particular capital expenditure. In order to perform the detailed financial analysis there are many concepts of corporate financial theory. The following points highlight these facts:

All the submissions that are provided show all the key financial indicators such as the internal rate of returns, modified internal rate of returns, payback period, net present values and sensitivity analysis.
All the outgoing cash flows and the incoming cash flows from the projects are highlighted.
The impact of the project’s inflows and outflows on the net earnings of the company is also evaluated and analyzed.
The specific risks facing the projects are also described and how they can affect the project returns in case those risks materialize.
Economic justification is provided and proved for all the operational CERs.
For all the merger and acquisition CERs, the base case, worst case and the best case computations are incorporated so that the magnitude of the risks inherent in the projects could be evaluated.
All the project completion dates and the milestones are also mentioned so that the project remains on track.

Impact of Industry, History and Culture on CERs

Industry: As the baby boomer population is growing and the medical industry on the other hand is also growing. Therefore, as a result of this Stryker is also going to experience growth in the company’s CERs and capital investments. However, in order to sustain the current and achieve the future growth for the company, its management needs to have strong capital budgeting procedures and CER evaluation methods in place. Through these setups the company would only be able to make the best financing decisions and touch the future growth targets for the company.............

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