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Stryker Corporation: Capital Budgeting Essay

1847 words - 8 pages

Harvard Case Study Stryker Corporation: Capital Budgeting

Term Paper Laini Tsang Golden Gate University MS Finance, FI 312 Summer 2013

Stryker’s Capital Budgeting Harvard Case Study

Table of Content

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Case Background and Summary Pharmaceutical Industry’s Landscape Stryker’s New CERS and why it is “painful”? Propositions Conclusions

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Stryker’s Capital Budgeting Harvard Case Study

Case Background and Summary Founded in 1941 in Michigan, Stryker Corporation is a fast-paced company with continuously exceptional growth rates. Over the last 27 years, the company historically increased revenues by 20%. The company’s culture prides itself on service ethics, ...view middle of the document...

Secondly, I will focus on the modifications made in Stryker’s capital budgeting process, and why their employees felt “painful”. Lastly, I will propose to refine the process as recommendations of this paper.

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Stryker’s Capital Budgeting Harvard Case Study

Pharmaceutical Industry Landscape During the late 90s, Stryker heavily financed its acquisitions of Howmedica. Stryker was not alone in the industry engaging in M&As; other major companies such as Pfizer and GlaxoSmithKline were amongst the infamous mega-mergers at that time. According to the Institute of Mergers, Acquisitions and Alliances, M&As in the Pharmaceutical industry peaked from 1998 to 2000. After all, these companies had to reconfigure their acquired transactions and settled for a while. But M&A popularity reappeared in 2006 to 2008 until the collapse of financial market. These trends were the same across Northern America and worldwide during the period.

The main driving forces behind the M&A-centric environment in pharmaceutical industry are mainly due to that fact that: 1. operational synergies which means not only do new market territories enlarge, sales pipeline becomes consolidated after acquisitions. 2. Acquirers also look for cost cutting to help boost the company’s value for market capitals. The merger approach was seen effective for Strykers as the company was doing very well in revenue and constant earnings per shares. 3. Risk diversification that pharmaceutical companies engage in competitive innovations to gain market shares and prevent itself from being taken over.

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Stryker’s Capital Budgeting Harvard Case Study

Stryker’s New CERS and why it is “painful”?

Stryker’s Capital Expense Request (CER) process was built upon a foundation of a formal submission and structured approval process: specific guidelines in terms of levels of approvals in relations to dollar limits are detailed. Generally a project proposal is discussed, vetted and prioritized within a division. Divisional heads receive corporate’s financial metrics to drive capital spending to the level that the corporate expects. In 2005, a modification procedure was implemented. Besides, the spending authority thresholds at the divisional and group levels have been increased as well. There was also a new layer of authority created for large CERs: they are the Capital Committee comprised of the company’s CEO, CFO, Controller, General Counsel, and other upper management. The new CER process also created a liaison for the division heads; the liaison is either the controller for operational capital projects or the VP of Business Developments for M&A projects.

In essence, the new CER refined the documentation process and added opportunities for divisional heads to consult with their sponsor (the controller or the VP of Business Development), and it was supposed to help alignment. The increase in threshold dollars for approval limits was also thoughtful. However, because of the increased...

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