Stryker Corporation Capital Budgeting
What are the primary strengths and weakness of the current system? How should the performance of such a system be evaluated?
The capital budgeting system at Stryker Corporation made use of formalized CER forms by which individual divisions within Stryker documented the goals for revenue, operating profit and cash flow across in a way that were deliverable and consistent with global corporate targets. The CER system is a rigorous one requiring thorough documentation before the divisions obtain authority to spend.
The strengths of this system are outlined below:
The new system is more standardized than previous methods (page 6 last paragraph) with more rigorous analysis being done and more detailed documentation being captured in the CER form.
Aligned to the corporation strategic growth plan
Segregation of operational and M&A expenditure requests with separate sections to capture specific data
Defined approval process for each CER
Approval of capital expenditure requests divided between Capital Committee and the Board of Directors based on the purpose and amount of the request.
Reduction in number of CERs requiring centralized approval fell from 300 to 30
A central Capital Committee responsible for review and approval of large CERs
Representation of executives from important business functions - CEO, CFO, Treasury, Legal, Business Development, IT - in the central Capital Committee
Use of the designated sponsor / liaison (page 6) to coordinate between the proposing division and the approval committee
Use of different approval levels (combined with 1 and 2 above) structure
Sensitivity analysis used in both Operational and M&A
M&A CERs included financial analysis of "Best Case" and "Worst Case" income and cash flow scenarios in addition to the Base-Case Scenario analysis.
In spite of the strengths of the system, there are some weaknesses in the system. These include:
Does not mention measures that need to be met for Division approval division
The capital budgeting system at Stryker Corporation made use of formalized CER forms by which individual divisions within Stryker documented the goals for revenue, operating profit and cash flow across in a way that were deliverable and consistent with global corporate targets. The CER system is a rigorous one requiring thorough documentation before the divisions obtain authority to spend.
The strengths of this system are outlined below:
The new system is more standardized than previous methods (page 6 last paragraph) with more rigorous analysis being done and more detailed documentation being captured in the CER form.
Aligned to the corporation strategic growth plan
Segregation of operational and M&A expenditure requests with separate sections to capture specific data
Defined approval process for each CER
Approval of capital expenditure requests divided between Capital Committee and the Board of Directors based on the purpose and amount of the request.
Reduction in number of CERs requiring centralized approval fell from 300 to 30
A central Capital Committee responsible for review and approval of large CERs
Representation of executives from important business functions - CEO, CFO, Treasury, Legal, Business Development, IT - in the central Capital Committee
Use of the designated sponsor / liaison (page 6) to coordinate between the proposing division and the approval committee
Use of different approval levels (combined with 1 and 2 above) structure
Sensitivity analysis used in both Operational and M&A
M&A CERs included financial analysis of "Best Case" and "Worst Case" income and cash flow scenarios in addition to the Base-Case Scenario analysis.
In spite of the strengths of the system, there are some weaknesses in the system. These include:
Does not mention measures that need to be met for Division approval division