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Stryker Corporation Capital Expenditure Requests
According to financial performance, it is very evident that Stryker’s Corporation is successful in its business operations: growth in share price, market capitalization, stock price, sales, and profitability. Financial statements are the best means by which a business financial performance is gauged since it is in financial statements where information about profitability, financial health, ability to pay obligation, and earnings to shareholders can be found (Brian, 2007). Part of what propelled the corporation into this status is in the way it manages its finances. For example, in Capital Expenditure Requests (CERs), the corporation has made great strides. Capital Expenditure Requests (CERs) as used in Stryker’s Corporation were forms that had to be filled out before authority to spend could be obtained; a key requirement of capital allocation process. Generally CERs in Stryker Corporation is a two-part document with one section being more to do with business proposition while the other section being a summary of pertinent financial analyses.
Stryker’s CERs have been furnished over time with the aims narrowed down to areas where impacts are very meaningful. The corporation’s performance history had been impressive and the great challenge was how to maintain the good performance. As a result, the corporation made continuous investment in new and existing products, technologies as well as markets. Studies have shown that the ability to grow in sales volumes at the expense of competitors is dependent also on the ability of a firm to strategically handle market constraints (Alvarez and Fridson, 2002) while mergers and acquisitions have been found to be the most versatile and powerful growth tools employed by both small and big companies. For example a good timing on merger and acquisition can bring huge immediate financial benefits to the company as well as long-term outlook (Sherman & Hart, 2006). It was along this idea that Stryker’s Corporation found it necessary to make mergers, acquisitions and expansion of facilities. Research and development as well as engineering expenses, which had been growing at an average compounded rate of 21% over some years, also formed part of the corporation’s great expenses; indicating that capital expenditure was justified in these key areas such as engineering activities which accounted for 75-80% of RD& E expenses. This appears to have been influenced by corporation’s historical background that believed in innovation and invention. It was the original owner, Dr. Homer Stryker, whose main job was to invent and sell new devices and develop new ones who seemed to have influenced the culture of Stryker Corporation. This idea has been embedded in the company’s operation and way of conducting successful business in a competitive industry. Other missions of CERs in Stryker were targeted at organic growth and acquisitions. Acquisitions were used to reach new markets, extend its core business and reach new customers. For example, between 1979 and 2006, some of the companies the corporation had acquired include Osteonics Corporation, SynOptics, Dimso SA, Osteo AG, Howmedica, Surgical Dynamics, SpineCore, and Sightline.
As the President of Global Instruments Curt Hartman commented on the association between operating budget and capital budget, CERs was structured in a way to positively influence revenues, operating profit, and cash flow with R&D affecting the operating profits while capital spending hitting free cash flow. However, although everyone at divisional level had a long wish list of what and how much should be spent, it was the aim of management to spend only what is just enough to bring profits and not too much expenditure as to result in negative performance. CERs was a mirror of options between new businesses and new initiatives as seen in the splitting within Global Instruments with allocation of smaller budget to existing businesses while the bulk of the budget is taken up by new initiatives. From the way the budget proposals were originating, it is clear what the mission of the Stryker’s CERs were aimed at. Sales and marketing executives appears to have made sure there is both strides in selling more and watching the behavior of competitors while engineers on the other hand focused on improving the current products to come up with the best in the market. Quality is a factor most desired by customers and for high-technology companies; they favor a product development based on performance or state-of-the-art features that are often far from the customer’s needs (Viardot, 2004). CERs touch on allocation to two main areas: Operational and mergers and acquisitions (M&A) with operational category involved with such investments in buildings, IT systems and equipment while M & A dealing with not only M & A but also licensing and distribution agreements, equity investments, joint ventures, and development agreements.
A detailed analysis of the mission of Stryker Corporation shows that it was aimed at various issues affecting the overall performance of the corporation such as demanding the CERs highlights the background, key facts and descriptions as well as strategic rationale of project. This was in addition to focus on beating competition from other industry players by gathering relevant market information. The corporation had also set aside the hurdle rate in which project acceptance was based at. As such, CERs for any project had to meet not only be economically justifiable but also had to be in such a way as to be devoid of any key risk factors that may jeopardize sustainable economic growth. CERs also had to look into issues affecting human resources such as team identification and timelines of implementing various project tasks while keeping in check milestones regarding operating profits, revenue, targets of cost savings, capacity utilization, together with deadlines by which milestones would be attained. Sensitivity analysis and key risk factors formed part and parcel of financial reporting. A review of contextual scenario of macroeconomics, situation of the market and the full background information was required. It was a requirement that any proposal had a strategic rationale linking specific Stryker goals and corporate strategic plan with the proposal including parties to the deal, legal form of the deal, ownership interests, the types and value of consideration payable or receivable by parties, fees and expenses, and representations and warranties among others. The operating plan of the CERs also captured the duration with key assumptions and market operating conditions including financial performance measures such as NPV, IRR and payback period (Parrino and Kidwell, 2009). According to Morden (2007), strategic management of time, knowledge, innovation and technology is a key to any company’s success in a competitive environment. Base case plan for each CER at Stryker Corporation also has management plan incorporating key people and their qualifications, key management structures and their timelines.
CERs were not complete without a summary and description of risk factors which were observed to negatively affect the performance of the corporation. The purpose of the CERs were therefore to highlight risks such as competitive reactions, pricing risk, regulatory approvals, overruns, technological obsolescence, currency and exchange risks. In an attempt to make sure that projects are completed within set time, CERs were supposed to indicate project timelines and milestones. In summary, the CERs served to avoid worst case scenario while aiming for the best case scenario.
Stryker Corporation’s CERs had key attributes reflected in the overall performance. One of the strengths of CERs was in the way they were prepared and reflected a deep strategic awareness among the various units. Stringent standards had to be met and that it comprehensively looked deeply into all issues likely to affect the firm. For example, preparation of CERs was formal, had to follow standardized procedures, require more rigorous analysis and proper documentation. This is obvious from the extensive background and supporting documentation that was required. CERs were also formally structured and avoided any ad hoc expenditure. The system used in coming up with CERs and approval were stages that were independent meaning there were no bias towards particular projects. Since the corporation had multiple departments, there were guidelines specific to each category implying that each segment was given the attention it deserves. The modification of procedures to allow for better devolution of approval powers implies there is greater efficiency and increased speed in decision-making. By creating a link in form of a sponsor between capital expenditure committee ensured that standards for quality and completeness were met and there were going to be no ambiguity or lack of clarity at the approval stage.
However, the CRs were sometimes voluminous meaning its contents may not be easily verified by the approval team. And if they were to be verified, it would take longer time. That the CERs preparation was complex means a lot of time was spend by the team in understanding them. This was evident on the complaints made, for example time for completion and submission on time. The system imposes stringent standards and documentation beyond the capacity of the current staff who later complained of the excess bureaucracy. The heavy involvement of the corporate implies that devolution of decision-making and the business culture was not being implemented as expected. There should be great empowerment of strategic business units heads as part of minimizing top management involvement in certain affairs that can be delegated and allow for proper strategic management of corporation’s affairs (Sekhar, 2010). In order to evaluate the system, there is a need to conduct as survey of the whole organization especially those tasked with preparations of CERs. Each one is given a chance to show what works and what does not work and how systems should be improved to make operations more efficient. Finally, all the CERs should be analyzed based on the content of the documents versus the performance of the business upon implementation of that CER so that a link can be established.
When Stryker’s long-run goals are considered, there is a need to modify procedural approach to its current CER system. Pertinent questions to be asked are for example, “Is there another way to streamline the procedures to improve on efficiency?” How can the preparations of CERs be simplified to afford the understanding of all parties? Findings on how to make the procedure of preparing CERs less bureaucratic implies there will be increase in efficiency in handling of CERs. Certain corporate expenditures need to be done swiftly and bureaucracy may act as a bottle neck. Decisions will be made faster and not only time will be saved but also money while ensuring opportunities are not lost. Given that not everyone is comfortable with the new system, change management should be accomplished in such a way that there is a smooth transition from the old to the new system. This will ensure changes are positively accepted and practiced by all the stakeholders.
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