In the case a budget constraint is discussed What is this constraint Do you think it is important or should be reviewed Stryker Corporation Capital Budgeting At the end of January 2007 Stryker Corporation, headquartered in Kalamazoo, Michigan, released operating and financial data for the fourth quarter of 2006, completing the picture of 2006 as a whole The company's performance was strong indeed, it was the latest in a string of strong performances going back many quarters Sales of $5 4 billion for all of 2006 reflected an increase of 11 0 EBIT grew by 15 6 to $1 1 billion Net income was $778 million compared to $644 million in 2005, reflecting growth of 20 8 It was Stryker's seventh straight year of double digit growth in net income Exhibit 1 presents summary operating and financial data for Stryker for the ten year period 1997 2006 Exhibit 2 presents financial statements for the years 2005 and 2006 The performance of Stryker's stock mirrored its strong operating results Earnings per share grew 20 from 2005 to 2006 Even more impressive, the compound average growth in earnings per share over the preceding 30 years exceeded 20 per year Not surprisingly, the company's stock price surged during this period At the end of January 2007 Stryker's shares closed above $60 per share, posting a gain for the year of more than 24 Gains recorded by the stock over the preceding ten years were similar A $10,000 investment in Stryker stock in January 1997 was worth almost $90,000 in January 2007, a compounded return of nearly 25 per year, not including dividends At current prices, the company's market capitalization exceeded $25 billion Exhibit 3 shows Stryker's stock price performance during 1997 2006, adjusted for two 2 for 1 stock splits At December 31, 2006 Stryker's balance sheet showed long term debt of $14 8 million against total assets of $5 9 billion, of which $1 4 billion was cash and marketable securities These figures reflected a striking long term trend of declining leverage Nearly ten years previously, in 1998, Stryker had doubled its size by acquiring Howmedica, a major producer of orthopaedic implants, from Pfizer, Inc for $1 65 billion By comparison, at the end of the prior year, Stryker's total assets had been less than $1 0 billion and its long term debt less than $80 million Stryker borrowed heavily to finance the acquisition of Howmedica and consequently its debt ballooned to $1 5 billion in 1998 Net income fell in 1998 and again in 1999 before turning around in 2000 Since then earnings had resumed their steady 20 per year growth rate, and Stryker's debt was steadily reduced until it reached $26 million at the end of 2003 In the same year, the company's cash balance began growing rapidly, as shown in Exhibit 1 Given its track record, one of the toughest challenges facing Stryker in the decade ahead was how to keep it up Sustaining the performance would require continuous investment in both new and 4 The Approval Process The approval process for large CERs had been modified in recent years to increase the spending authority thresholds at the Division and Group levels, institute more formal, standardized procedures, and require more rigorous analysis and documentation The standard CER forms were also redesigned and came into usage along with the modified procedures in 2005 Partly as a result of the changes, the number of CERs requiring centralized approval fell from about 300 per year to about 30 per year As part of the change, a Capital Committee was constituted and formally charged with reviewing and approving large CERs Members of the Capital Committee included Stryker's CEO, CFO, Treasurer, Controller, General Counsel, VPs for Tax and Business Development, and the Director of IT To receive spending authorization, a large project had to be approved by both the CEO and a majority of the other Capital Committee members Each CER had a desi grated sponsor who served as liaison between the proposing division and the Capital Committee Operational CERs were sponsored by the Controller M A CERs were sponsored by the VP for Business Development CERs for IT systems were sponsored by the Director of IT The sponsor had several tasks to perform The first part of the job was to assist the division in preparation of the CER and supporting documentation to ensure that it met Stryker standards for quality and completeness Second, the sponsor coordinated the submission of the completed CER to ensure that Committee members all received complete information Third, the sponsor served as an interface between Committee members and the division regarding requests for additional information and condi tions to be met for approval Internal guidelines specified a timetable for submission, review, and disposition of CERs These were intended to ensure that adequate time was allowed to review spending requests and to minimize the need for emergency approvals In general, the guidelines provided for a minimum of two weeks between the time a division notified the appropriate sponsor of it intent to submit a CER and the formal consideration by the Capital Committee of the CER About a week was devoted to a review process between the division and the sponsor, and another week set aside for review of the submission by individual Committee members, who could request additional information 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 This document is asthorized lor use orly by John Aichards (jphn ichands sas Agmal com) Capying or posting is an intingenert of copyright Please cortact customenevicelianardousiness org or 8009880895 lor addions copies Stryker Corporation Capital Budgeting At the end of January 2007 Stryker Corporation, headquartered in Kalamazoo, Michigan, released operating and financial data for the fourth quarter of 2006, completing the picture of 2006 as a whole The company's performance was strong indeed, it was the latest in a string of strong performances going back many quarters Sales of $5 4 billion for all of 2006 reflected an increase of 11 0 EBIT grew by 15 6 to $1 1 billion Net income was $778 million compared to $644 million in 2005, reflecting growth of 20 8 It was Stryker's seventh straight year of double digit growth in net income Exhibit 1 presents summary operating and financial data for Stryker for the ten year period 1997 2006 Exhibit 2 presents financial statements for the years 2005 and 2006 The performance of Stryker's stock mirrored its strong operating results Earnings per share grew 20 from 2005 to 2006 Even more impressive, the compound average growth in earnings per share over the preceding 30 years exceeded 20 per year Not surprisingly, the company's stock price surged during this period At the end of January 2007 Stryker's shares closed above $60 per share, posting a gain for the year of more than 24 Gains recorded by the stock over the preceding ten years were similar A $10,000 investment in Stryker stock in January 1997 was worth almost $90,000 in January 2007, a compounded return of nearly 25 per year, not including dividends At current prices, the company's market capitalization exceeded $25 billion Exhibit 3 shows Stryker's stock price performance during 1997 2006, adjusted for two 2 for 1 stock splits At December 31, 2006 Stryker's balance sheet showed long term debt of $14 8 million against total assets of $5 9 billion, of which $1 4 billion was cash and marketable securities These figures reflected a striking long term trend of declining leverage Nearly ten years previously, in 1998, Stryker had doubled its size by acquiring Howmedica, a major producer of orthopaedic implants, from Pfizer, Inc for $1 65 billion By comparison, at the end of the prior year, Stryker's total assets had been less than $1 0 billion and its long term debt less than $80 million Stryker borrowed heavily to finance the acquisition of Howmedica and consequently its debt ballooned to $1 5 billion in 1998 Net income fell in 1998 and again in 1999 before turning around in 2000 Since then earnings had resumed their steady 20 per year growth rate, and Stryker's debt was steadily reduced until it reached $26 million at the end of 2003 In the same year, the company's cash balance began growing rapidly, as shown in Exhibit 1 Given its track record, one of the toughest challenges facing Stryker in the decade ahead was how to keep it up Sustaining the performance would require continuous investment in both new and 4 The Approval Process The approval process for large CERs had been modified in recent years to increase the spending authority thresholds at the Division and Group levels, institute more formal, standardized procedures, and require more rigorous analysis and documentation The standard CER forms were also redesigned and came into usage along with the modified procedures in 2005 Partly as a result of the changes, the number of CERs requiring centralized approval fell from about 300 per year to about 30 per year As part of the change, a Capital Committee was constituted and formally charged with reviewing and approving large CERs Members of the Capital Committee included Stryker's CEO, CFO, Treasurer, Controller, General Counsel, VPs for Tax and Business Development, and the Director of IT To receive spending authorization, a large project had to be approved by both the CEO and a majority of the other Capital Committee members Each CER had a desi grated sponsor who served as liaison between the proposing division and the Capital Committee Operational CERs were sponsored by the Controller M A CERs were sponsored by the VP for Business Development CERs for IT systems were sponsored by the Director of IT The sponsor had several tasks to perform The first part of the job was to assist the division in preparation of the CER and supporting documentation to ensure that it met Stryker standards for quality and completeness Second, the sponsor coordinated the submission of the completed CER to ensure that Committee members all received complete information Third, the sponsor served as an interface between Committee members and the division regarding requests for additional information and condi tions to be met for approval Internal guidelines specified a timetable for submission, review, and disposition of CERs These were intended to ensure that adequate time was allowed to review spending requests and to minimize the need for emergency approvals In general, the guidelines provided for a minimum of two weeks between the time a division notified the appropriate sponsor of it intent to submit a CER and the formal consideration by the Capital Committee of the CER About a week was devoted to a review process between the division and the sponsor, and another week set aside for review of the submission by individual Committee members, who could request additional information 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 This document is asthorized lor use orly by John Aichards (jphn ichands sas Agmal com) Capying or posting is an intingenert of copyright Please cortact customenevicelianardousiness org or 8009880895 lor addions copies

Question

In the case a budget constraint is discussed  What is this constraint  Do you think it is important or should be reviewed  Stryker Corporation  Capital Budgeting At the end of January 2007 Stryker Corporation, headquartered in Kalamazoo, Michigan, released operating and financial data for the fourth quarter of 2006, completing the picture of 2006 as a whole  The company's performance was strong  indeed, it was the latest in a string of strong performances going back many quarters  Sales of $5 4 billion for all of 2006 reflected an increase of 11 0   EBIT grew by 15 6  to $1 1 billion  Net income was $778 million compared to $644 million in 2005, reflecting growth of 20 8   It was Stryker's seventh straight year of double digit growth in net income  Exhibit 1 presents summary operating and financial data for Stryker for the ten year period 1997 2006  Exhibit 2 presents financial statements for the years 2005 and 2006  The performance of Stryker's stock mirrored its strong operating results  Earnings per share grew 20  from 2005 to 2006   Even more impressive, the compound average growth in earnings per share over the preceding 30 years exceeded 20  per year  Not surprisingly, the company's stock price surged during this period  At the end of January 2007 Stryker's shares closed above $60 per share, posting a gain for the year of more than 24   Gains recorded by the stock over the preceding ten years were similar  A $10,000 investment in Stryker stock in January 1997 was worth almost $90,000 in January 2007, a compounded return of nearly 25  per year, not including dividends  At current prices, the company's market capitalization exceeded $25 billion  Exhibit 3 shows Stryker's stock price performance during 1997 2006, adjusted for two 2 for 1 stock splits  At December 31, 2006 Stryker's balance sheet showed long term debt of $14 8 million against total assets of $5 9 billion, of which $1 4 billion was cash and marketable securities  These figures reflected a striking long term trend of declining leverage  Nearly ten years previously, in 1998, Stryker had doubled its size by acquiring Howmedica, a major producer of orthopaedic implants, from Pfizer, Inc  for $1 65 billion  By comparison, at the end of the prior year, Stryker's total assets had been less than $1 0 billion and its long term debt less than $80 million  Stryker borrowed heavily to finance the acquisition of Howmedica and consequently its debt ballooned to $1 5 billion in 1998   Net income fell in 1998 and again in 1999 before turning around in 2000  Since then earnings had resumed their steady 20  per year growth rate, and Stryker's debt was steadily reduced until it reached $26 million at the end of 2003  In the same year, the company's cash balance began growing rapidly, as shown in Exhibit 1  Given its track record, one of the toughest challenges facing Stryker in the decade ahead was how to keep it up  Sustaining the performance would require continuous investment in both new and 4 The Approval Process The approval process for large CERs had been modified in recent years to increase the spending authority thresholds at the Division and Group levels, institute more formal, standardized procedures, and require more rigorous analysis and documentation  The standard CER forms were also redesigned and came into usage along with the modified procedures in 2005  Partly as a result of the changes, the number of CERs requiring centralized approval fell from about 300 per year to about 30 per year  As part of the change, a Capital Committee was constituted and formally charged with reviewing and approving large CERs  Members of the Capital Committee included Stryker's CEO, CFO, Treasurer, Controller, General Counsel, VPs for Tax and Business Development, and the Director of IT  To receive spending authorization, a large project had to be approved by both the CEO and a majority of the other Capital Committee members  Each CER had a desi grated sponsor who served as liaison between the proposing division and the Capital Committee  Operational CERs were sponsored by the Controller  M  A CERs were sponsored by the VP for Business Development  CERs for IT systems were sponsored by the Director of IT  The sponsor had several tasks to perform  The first part of the job was to assist the division in preparation of the CER and supporting documentation to ensure that it met Stryker standards for quality and completeness  Second, the sponsor coordinated the submission of the completed CER to ensure that Committee members all received complete information  Third, the sponsor served as an interface between Committee members and the division regarding requests for additional information and condi tions to be met for approval  Internal guidelines specified a timetable for submission, review, and disposition of CERs  These were intended to ensure that adequate time was allowed to review spending requests and to minimize the need for  emergency  approvals  In general, the guidelines provided for a minimum of two weeks between the time a division notified the appropriate sponsor of it intent to submit a CER and the formal consideration by the Capital Committee of the CER  About a week was devoted to a review process between the division and the sponsor, and another week set aside for review of the submission by individual Committee members, who could request additional information  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   This document is asthorized lor use orly by John Aichards (jphn ichands sas Agmal com)  Capying or posting is an intingenert of copyright  Please cortact customenevicelianardousiness org or 8009880895 lor addions copies  Stryker Corporation  Capital Budgeting At the end of January 2007 Stryker Corporation, headquartered in Kalamazoo, Michigan, released operating and financial data for the fourth quarter of 2006, completing the picture of 2006 as a whole  The company's performance was strong  indeed, it was the latest in a string of strong performances going back many quarters  Sales of $5 4 billion for all of 2006 reflected an increase of 11 0   EBIT grew by 15 6  to $1 1 billion  Net income was $778 million compared to $644 million in 2005, reflecting growth of 20 8   It was Stryker's seventh straight year of double digit growth in net income  Exhibit 1 presents summary operating and financial data for Stryker for the ten year period 1997 2006  Exhibit 2 presents financial statements for the years 2005 and 2006  The performance of Stryker's stock mirrored its strong operating results  Earnings per share grew 20  from 2005 to 2006   Even more impressive, the compound average growth in earnings per share over the preceding 30 years exceeded 20  per year  Not surprisingly, the company's stock price surged during this period  At the end of January 2007 Stryker's shares closed above $60 per share, posting a gain for the year of more than 24   Gains recorded by the stock over the preceding ten years were similar  A $10,000 investment in Stryker stock in January 1997 was worth almost $90,000 in January 2007, a compounded return of nearly 25  per year, not including dividends  At current prices, the company's market capitalization exceeded $25 billion  Exhibit 3 shows Stryker's stock price performance during 1997 2006, adjusted for two 2 for 1 stock splits  At December 31, 2006 Stryker's balance sheet showed long term debt of $14 8 million against total assets of $5 9 billion, of which $1 4 billion was cash and marketable securities  These figures reflected a striking long term trend of declining leverage  Nearly ten years previously, in 1998, Stryker had doubled its size by acquiring Howmedica, a major producer of orthopaedic implants, from Pfizer, Inc  for $1 65 billion  By comparison, at the end of the prior year, Stryker's total assets had been less than $1 0 billion and its long term debt less than $80 million  Stryker borrowed heavily to finance the acquisition of Howmedica and consequently its debt ballooned to $1 5 billion in 1998   Net income fell in 1998 and again in 1999 before turning around in 2000  Since then earnings had resumed their steady 20  per year growth rate, and Stryker's debt was steadily reduced until it reached $26 million at the end of 2003  In the same year, the company's cash balance began growing rapidly, as shown in Exhibit 1  Given its track record, one of the toughest challenges facing Stryker in the decade ahead was how to keep it up  Sustaining the performance would require continuous investment in both new and 4 The Approval Process The approval process for large CERs had been modified in recent years to increase the spending authority thresholds at the Division and Group levels, institute more formal, standardized procedures, and require more rigorous analysis and documentation  The standard CER forms were also redesigned and came into usage along with the modified procedures in 2005  Partly as a result of the changes, the number of CERs requiring centralized approval fell from about 300 per year to about 30 per year  As part of the change, a Capital Committee was constituted and formally charged with reviewing and approving large CERs  Members of the Capital Committee included Stryker's CEO, CFO, Treasurer, Controller, General Counsel, VPs for Tax and Business Development, and the Director of IT  To receive spending authorization, a large project had to be approved by both the CEO and a majority of the other Capital Committee members  Each CER had a desi grated sponsor who served as liaison between the proposing division and the Capital Committee  Operational CERs were sponsored by the Controller  M  A CERs were sponsored by the VP for Business Development  CERs for IT systems were sponsored by the Director of IT  The sponsor had several tasks to perform  The first part of the job was to assist the division in preparation of the CER and supporting documentation to ensure that it met Stryker standards for quality and completeness  Second, the sponsor coordinated the submission of the completed CER to ensure that Committee members all received complete information  Third, the sponsor served as an interface between Committee members and the division regarding requests for additional information and condi tions to be met for approval  Internal guidelines specified a timetable for submission, review, and disposition of CERs  These were intended to ensure that adequate time was allowed to review spending requests and to minimize the need for  emergency  approvals  In general, the guidelines provided for a minimum of two weeks between the time a division notified the appropriate sponsor of it intent to submit a CER and the formal consideration by the Capital Committee of the CER  About a week was devoted to a review process between the division and the sponsor, and another week set aside for review of the submission by individual Committee members, who could request additional information  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   This document is asthorized lor use orly by John Aichards (jphn ichands sas Agmal com)  Capying or posting is an intingenert of copyright  Please cortact customenevicelianardousiness org or 8009880895 lor addions copies

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In the case a budget constraint is discussed. What is this constraint? Do you think it is important or should be reviewed? Stryker Corporation: Capital

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