Stryker Corporation: Capital Budgeting Harvard Case Solution & Analysis

Missions of CERs and the Capital Budgeting Process

The mission of CERs and capital budgeting is Standardization and formalization of the processes and activities of the capital budgeting. The CERs and capital budgeting process are implemented in order to implement or approve the formal and standard process of requesting capital expenditure and capital budgeting processes.

It is expected that it would support the cash flow targets and will help Stryker to maintain 20% growth forever. Attaining 20% growth in the past was the routine of Stryker and it has become a habit to attain this percentage of growth each year, therefore this slogan to attain 20% growth is not difficult to fulfill.

The Extent of Shape by Elements of Corporate Finance Theory

The CERs and Capital budgeting processes are significantly characterized by the elements of corporate finance theory. All CERs must provide the discounted cash flows and present value of inflows and outflows, payback and discounted payback period and internal rate of return before approval. Therefore calculating NPV, IRR and payback period is necessary before the submission of the CERs.

 It is expected that these values will highlight the project’s anticipated and expected outgoing cash flows and earnings. It will also represent the effects of these cash inflows and outflows on the company and will explain the specific risks that could affect the ability of the project or capital expenditure request to deliver economic results.

In addition to this, it is necessary to incorporate or anticipate the financial analyses of “Best Case” and “Worst Case” scenarios for the mergers and acquisitions of CERs which would include income and cash flow figures. This shows the commitment of the Stryker to incorporate the element of the corporate finance theory regarding the approval of requests of capital expenditure.

The Extent they shaped by Stryker’s Particular Industry, History, and Culture

There are different factors, which are playing a major role in the formation of the capital expenditure requests and capital budgeting.First of all, the growth in the industry of medical and increase in the population of the aging baby gives Stryker a natural growth and is expected to attain further growth in future.

However, in order to continue to attain this growth on steady rate or increase in the percentage of rate, they would require designing a method to make the best financial decisions and with the help of these decisions, they would maintaing the company’s growth as they would be growing currently in case of CERs and capital budgeting.

The second factor to influence CERs and capital budgeting is History. Stryker’s business history shows that in the 1970s the newly appointed CEO of Stryker Company named John Brown took charge of the company and set ambitious and high growth targets that were expected to meet the innovative behavior and characteristic of  John Brown and were expected to sustain their 20% forever growth’s slogan.

 The trend of 20% growth is expected to continue over the following decades. In order to maintain 20% growth in the future, Stryker will need to review its strategies and plans of investment and capital expenditure regularly.

The third factor influencing the capital expenditure request and capital budgeting is culture. Stryker Company is very specific to propose many investment projects and getting them approved. They have been making these processes for decades and it has embedded in the culture of the Stryker to submit about 3000 requests regarding capital expenditure before approval.

 By applying more specific and standardized processes, Strykeris able to cut down its number of requests to about 30 per year and expected to analyze each project or request under the same view as each project or request is now submitted under the same requirements.

Primary Strengths and Weaknesses of the Current System

Stryker is currently using such system for the approval of capital expenditure, which takes about 2 weeks for the revision of the activities and processes between the sponsor and responsible division. It is expected that it will take further one week from the individual of committee members for the purpose of revision before submission.

In addition to this, the committee members can demand or request additional information whenever they thought that additional information is also required. There are many advantages and disadvantage of such system.Stryker Corporation Capital Budgeting Case Solution

Advantages of Current System

There are different advantages of this system such asit gives better and efficient control. There is a greater number of management in bureaucratic structure with and strong boundary of each person of management. It is expected that orders, instructions and commands will be very clear and will communicate to all members of the management in an efficient way..................................

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