(1)Judging the system: could it be improved?

(2)Where did this system come from historicaily? \Vhat are its roots?

Capital Expenditure Requests: CERS Part of Stryker's capital allocation process was structured around formal requests for authority to spend funds referred to as Capital Expenditure Requests ("CERs"). Nominally, CERs were forum that had to be lled out before authority to spend could be obtained. More broadly, they embodied a proposal and approval process that was utilized throughout the entire corporation. Internal guidelines split proposals into two broad categories: Operational and M&A. The former included proposals involving buildings, equipment, IT systems, and so forth for Stryker' s existing businesses. The latter included not only mergers and acquisitions, but also licensing and distribution agreements, joint ventures, equity investments, and development agreements negotiated with outside parties. For both types of CER a \"project" was defined to include all parts of multi-phase undertakings and all later-phase expenditures had to be included in descriptive materials and analyses. All CERs, whether Operational or M&A, were comprised of two main sections: one setting forth the business proposition and another summarizing pertinent financial analyses. In addition, submissions often included extensive background and supporting documentation. For a large acquisition, for example, the CER and its accompanying support would be voluminous. For Operational CERs, the first section addressed the following prescribed topics: 0 Project background, try facts and descriptions, and strategic rationale. This part would also review, for example, key industry or competitive trends, salient market facts, the role of the project in the division's annual and strategic plans, and so forth. 0 Economic justg'fr'oation and key risk factors. This part of the CER showed that the project's returns on a discounted cash flow basis would exceed Stryker's normal 15% hurdle rate (which could be higher for riskier projects). In many CERs NPV calculations were performed on the basis of ve to seven years of cash ows and without a terminal value. Calculations of IR and payback period also were required; these likewise were often computed without a terminal value. Finally, this part of the CER set forth the project's anticipated ongoing cash ow and earnings effects on Stryker as a whole, and described specific risks that could affect the project's ability to deliver the projected economic results. 0 HR implemmtation plan and try milestones. This part set forth the human resource requirements of the project and described the plan for meeting these needs. Descriptions included the identification of key team members and the time each would devote to implementation. This section also diSCuSSed rrlilestones, such as revenue, operating profit, capacity utilization, costs savings targets, and dates by which such milestones would be met. The second section of an Operational CER presented the nancial plans and analyses that supported the economic justification presented in the first section. It also included sensitivity analyses of the key risk factors set forth in the first section. M&A CERs contained the same two sections, business and financial, but generally had a broader scope. Section I covered the business proposition and included: 0 Situation analysis. This consisted of a review of the macroeconomic context, the market situation, and background information on the target. 0 Strategic rationale for the proposed transaction. This linked the transaction to specific Stryker goals and the corporate strategic plan, and articulated the justication for the deal. 0 Transaction as proposed. This was essentially a term sheet - a comprehensive summary of key terms of the transaction. It set forth, among other details, all parties to the deal, ownership interests, the legal form of the deal, the types and amounts of consideration to be paid / received by all parties, representations and warranties, fees and expenses, etc. 0 Overview of Base Case operating plans. The operating plan for the target business or assets was a set of ve-year (longer if necessary) operating forecasts based on explicitly-identified value drivers. The plan enumerated and supported all key market and operating assumptions. It projected the financial performance of the business under the Base Case plan and summarized key financial performance measures: NPV, payback period, and IRR. Finally, the Base Case plan also included a management plan: key people and their qualifications and key management structures and timelines. - Risk factors. This consisted of a summary and description of key risks that could affect performance. CERs were to consider risks in twelve specific areas (such as pricing risk, competitive reactions, regulatory approvals, technological obsolescence, overruns, currency and exchange risks, etc.). 0 Project timetine. This set forth key project milestones and expected completion dates. It covered all steps in accomplishing the transaction from negotiations through closing and management transition. Section II of an M&A CER covered the same financial analyses as for an Operational CER and some additional topics as well. In addition to a detailed financial model of the Base Case operating projections, the CER had to present financial analyses of \" Best Case\" and \"Worst Case\" scenarios for the proposed transaction. These scenarios were to reflect salient combinations of the key risk factors identified in Section I of the CER. It was expected that these alternative scenarios would be materially different from the Base Case. Section II also prepared a summary table of key operating and financial performance indicators for years 0-5 for all scenarios. Exhibit 5 summarizes essential elements of both types of CER. The System in Practice: 2007 In early 2007 participants in the new process were still getting used to it. Some of the goals for the revised system were being met: more data, more depth, more analyses, more standardization and rigor. But there were complaints as well. The stipulated timetable for CER submission and review was not always met. Committee members complained about CERs not being submitted on time. Divisions complained about the Committee not being available as such when needed. Indeed, the Committee did not hold regular meetings as a group, but operated more as a \"virtual" committee with members contacting one another as needed. The requirements for standardization and extensive documentation struck some managers as unnecessarily bureaucratic for proposals that were "no-brainers\" and clearly assured of approval. Indeed, "The vast majority gets approved," controller Jim Praeger observed, \"but recently a few CERs have not been approved.\" Finally, the heavy corporate involvement in the process clashed somewhat with Stryker's decentralized organization and entrepreneurial culture. One division executive said simply, \"It's painful" The greatest strengths of the CERs system all relate back to accountability and consistency. For example, with the new capital budgeting process management is able to better control what projects are and are not approved for funding. This eliminated potential losses that might have occurred if an unsound project was given the green light. The CERs also provide a more detailed look at the financials of each proposed project, including the NPV, IRR, and payback period. This, along with an examination of the risks, leads to educated decision making on the part of the management. Finally, the proposal process has now been standardized, such that every proposed project from every department now follows the same layout. This allows for better inter department communication, a smoother workflow, and the comparison between projects. The weaknesses of the CERs system have more to do with bureaucracy and a negative effect on the corporate culture of Stryker. Firstly, now that the proposal process was more