Harvard Case Study – Stryker Corporation: Capital Budgeting

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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
2
Table of Content
 Case Background and Summary
 Pharmaceutical Industry’s Landscape
 Stryker’s New CERS and why it is “painful"?
 Propositions
 Conclusions
Stryker’s Capital Budgeting Harvard Case Study
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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, integrity, innovations,
accountability, and customer relationships; it is one of the world’s leading medical
technology
companies with history of successful stories. Stryker’s products focus on implants for joint
replacement, trauma, spinal surgical products, neurologic and endoscopic equipment. The
company has well diversified product portfolios with solid fundamentals. Over the years,
the
company’s accretive mergers and acquisitions brought operational synergies and cost
efficiency, strengthening the pipeline with increasing profitability.
This paper examines Stryker’s capital budgeting process (CER – Capital Expense Request)
and
why this process, after its modifications in 2005, had slowed down the company’s internal
capital project requests. From the company’s financials, we can see their capital
expenditure
from 2000 to 2005 was doubled; however, it was surprisingly to see a drop of 20% in
2006, one
year after the CER process modifications were brought into. Employees did not feel great
on
the changes; their morale was hurt; they concluded that they were not motivated as
previously as they had been due to the modifications.
The framework of this analysis is to first look into pharmaceutical technology industry
landscapes to understand why capital budgeting process is so vital to the growth in the
industry, and what regulatory changes had occurred to put pressure on the industry to
implement more rigorous implementation on capital budgeting process. 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.
Stryker’s Capital Budgeting Harvard Case Study
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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