This case study examines Stryker Corporation's capital budgeting process and why modifications made in 2005 slowed down internal capital project requests. Stryker is a leading medical technology company that saw capital expenditures double from 2000-2005 but then drop 20% in 2006 after changes to its Capital Expense Request (CER) process. The new process increased documentation requirements and review layers, but did not facilitate discussions. As a result, only 30 projects were approved compared to 300 previously. The changes hurt employee morale and motivation. Recommendations include simplifying templates, designating a project team, and better educating stakeholders on the need for changes.

1. Harvard Case Study -
Stryker Corporation: Capital Budgeting
Term Paper
Laini Tsang
Golden Gate University
MS Finance, FI 312
Summer 2013

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

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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.

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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 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 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 complexity of CER
submission forms and the added level of details requested in the submission process, two
weeks being given to requesters to finalize their proposal and analysis was not considered
sufficient. Moreover, the Capital Committee is described being “virtual” and did not facilitate
project feasibility and vitality discussions. The transition to the modified process unfortunately
slowed down the capital request submissions, resulting only 30 requests, compared to 300
requests in the previous years. This was unfortunate because if it was not due to the process
modifications, Stryker would have approved more capital projects, further enhancing the value
of the company. These projects could have been some highly strategic M&A propositions,
trying to capture the industrial dynamics of the second wave of bullish M&As environment in
2006. And Stryker’s growth, more or less, could have been positively impacted by the potential
acquisitions.

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Proposals
Capital budgeting involving millions to billions of dollars of investments. The necessity of
submitting complete, detailed analyses to justify investments is understandable as this
indicates that upper management cares about maintaining the highest quality and integrity of
financial operational processes that are pertinent to the company’s internal controls and
financial reporting purposes. From investors’ point of views, the modified CES process should
be given some credits.
However, from employees’ perspective, the new process seems to decelerate the overall
operational efficiency. The expected synergy between the sponsors and the divisions did not
work out very well. Therefore, divisions were reluctant to submit requests due to obstacles
they encountered during the documentation and consultation processes. In my opinions
however, this disconnect could be avoidable.
To compensate employees’ faith lost, a simple solution for the company to do is to continue to
make the CER templates simpler in formatting and wiser in terms of the ways of gathering
information. The company should also consider hiring a designated project management team
to kick off the capital budgeting process and ask them to manage from pre-start to finish. Let
the project team help facilitate the stakeholders and the sponsors. If necessary, hire a group of
change management consultants to educate the stakeholders why the changes are necessary.
Have the project team facilitate all related discussions, negotiations and streamline the vetting
process so that top down alignment is ensured and expected results are to be delivered within
the timeframe.
As capital budgeting process is a top down approach where upper management needs to set
corporate goals to align with their strategic planning and all other related investment
opportunities, it is divisions’ responsibilities to plan and sort out the analyses of the related
capital and strategic alliance projects to facilitate the financial appraisals and project

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evaluations by the company. All final decisions made are closely tied to their documentation
support and analyses so it is required that all work papers must be as concise as possible.
More importantly, once these projects have been approved, the planning documentations are
to guide the direction to facilitation, controls, monitoring, and the overall execution of the
projects, leading to successful implementation of these capital projects, which is equally
critical. Therefore, having concise, detailed capital project proposals is crucial to the success of
a company.
Conclusions
We can argue that during the time after CER process’s being modified, it is possible that
Stryker might have lost an opportunity to acquire any strategic partner(s) due to the reduced
enthusiasm of their employees. Employees should also be responsible for adapting the
changes and attempt to master the modifications. However, it could be the time given to the
stakeholders being too short or the transition taking too long for people to adapt while M&A
market was starting to die down; that means the timing was bad. Therefore, time is critical -
once stakeholders have adapted the process, it is advisable that the company should not make
any further changes again in the near future. Once everything is rolling and refined, and the
process should not be considered “painful” again.
This case study focuses on the operational aspects of capital budgeting process, which by
itself, is not only a number-crunching process but also requires strategic planning, deep level
of research, thorough documentations, human resources coordination, time and financial
investments by a company. More importantly, it is the people who are submitting the capital
budgeting requests; therefore, they need to feel comfortable with the process in the first
place. In addition, numerous dynamics such as corporate’s politics, divisional competitions and
company’s cultures also play a part. The success of a capital budgeting process is to ensure
good projects being selected to help maximize the company’s value. Therefore, whoever is

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running the logistics for the process requires be highly trained and experienced, and someone
who is neutral, separating from any divisions, and being unbiased.
Stryker’s CER modification was intended to support the growth of the company and allow
employees focus more on research and analysis rather than administrative tasks; however, the
modification turned out to make the process “painful” which could have been avoided if a
group of well-trained finance project management team to liaise and fulfill the gap that
sponsors and the divisional heads overlook. For Stryker to continuously grow with remarkable
records, a smooth CER process is essential!
Provided below is a sample capital program process suggested by a confirming firm
specializing consultations for companies’ capital budgeting process.
Source: Decision Lens

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Reference
Barton, Rhonda W., When the Rubber Misses the Road – or Late Starts. The University of
Tennessee Medical Center. August 2010
Brokerage Research Digest. Zack.com. May, 14, 2013
Capital Planning, Resource Allocation and Budgeting. Decision Lens. 2009-11
Hornke, Matthias and Mandewirth, Sven. Commentary: Merger and Acquisitions (M&A) in the
pharmaceutical industry: the wheel keeps on turning. Journal of Business Chemistry. May 2010
Maris, David, What’s Really Driving the Pharma M&A Frenzy. Forbes. April 27, 2012
Mergers and Acquisitions in the Healthcare Industry, a collection of A.T. Kearney case studies.
A.T. Kearney, Inc. 2010-7
Luehrman, Timothy A., Stryker’s Capital Budgeting Harvard Case Study. Harvard Business
School. January 2009