This paper examines Stryker Corporation's capital budgeting process through the lens of its Capital Expenditure Request (CER) system. It explores the mission and design of the CER process, noting how the company's decentralized organizational structure, debt-averse financial strategy, and history of double-digit revenue growth have shaped its capital allocation practices. The paper evaluates the system's performance both quantitatively and qualitatively, drawing on academic literature to identify agency problems and coordination gaps between divisions. It concludes with two targeted recommendations aimed at improving cross-divisional communication and strengthening the Capital Committee's role in early-stage project review.
Stryker has enjoyed a strong run of growth and has taken advantage of this to gradually de-leverage its balance sheet. As a result, the company relies on equity rather than new debt to finance its projects. There are several key missions, therefore, related to Stryker's capital expenditure requests (CERs). These requests are the formal mechanism that forms the basis of the company's capital allocation process. Because the company avoids taking on new debt, the funds available for expansion are somewhat limited, which is why a structured system for allocating available funds is necessary.
Another part of the mission for the capital budgeting process relates to Stryker's strong historical growth, including double-digit revenue growth for seven consecutive years and an average compound annual growth rate (CAGR) of approximately 20% per year. The process is therefore essential to ensuring the company can sustain these growth rates. Once double-digit growth is priced into a company's share price, the market comes to expect it — and failure to deliver will negatively affect the stock price. This creates significant incentive for Stryker's leadership to maintain a robust CER process that supports continued historic growth rates.
The decentralized structure of the company shapes the design of the CER process. Each division is expected to submit plans that have already undergone a rigorous internal vetting process. The company's culture encourages generating ambitious ideas, which in turn creates the need to pare back the total number of proposals moving forward. Proposals are designed around divisional cash flow requirements, consistent with the decentralized structure. Within each division, tradeoffs must also be made between existing business lines and new business initiatives. In recent years, Stryker has also modified its approval process so that larger CERs are subject to increased spending authority thresholds.
The overall approval structure within Stryker requires that proposals accepted at the division level proceed to approval at the group level, and finally to the Capital Committee or Board of Directors. This process is time-consuming, but Stryker has been cautious about moving too quickly on new ideas, preferring to ensure that any initiative will not undermine the company's growth trajectory.
Evaluating the performance of the CER system cannot be done against a theoretical alternative. Quantitatively, it can only be assessed in terms of whether the corporation meets its objectives. The system can also be subjected to qualitative analysis to assess how effectively it supports those objectives.
Quantitatively, the system has delivered success. Stryker has maintained a high level of growth over the past seven years, both in revenue and in profit. Profit is arguably the more relevant measure for a company whose capital budgeting process emphasizes positive cash flow. Most quantitative frameworks also factor in return on investment (ROI) or return on equity (ROE): ROI is generally the more appropriate measure for individual projects, while ROE is useful for evaluating the corporation as a whole. Litzenberger and Joy (1975) argue that ex-post return on investment should exceed a target rate, and that managers often equate risk with the risk of failing to meet prescribed rate-of-return targets.
"Agency conflicts and coordination gaps between divisions"
"Two proposals to strengthen cross-divisional coordination"
Bower, J., & Gilbert, C. (2007). How managers' everyday decisions create or destroy your company's strategy. Harvard Business Review, February 2007.
Litzenberger, R., & Joy, O. (1975). Decentralized capital budgeting decisions and shareholder wealth maximization. The Journal of Finance, 30(4), 993–1002.
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