Where did this system come from historicaily? What are its roots? (CER systems)

Stryker's History and Businesses Dr. Homer Stryker, an orthopaedic surgeon in Kalamazoo, Michigan, was also an inventor of medical tools and devices designed to improve surgical procedures and/ or help patients recover from them more quickly and effectively. Dr. Stryker incorporated the Orthopedic Frame Company following World War II to produce and sell his inventions and to develop new ones. The company changed its name to Stryker Corporation in 1964 and Lee Stryker, the son of the founder, became president in 1969. Following Lee Stryker's death in a 1976 plane crash, John Brown was named president and CEO. The company issued shares to the public in a 1979 IPO. Stryker's total revenues in the year prior to its IPO were only $23 million. The late 1970s, however, marked the beginning of an extended period of remarkable growth. John Brown set simple but ambitious growth targets which were met through a combination of invention, organic growth, and strategic acquisitions. Growth of 20% per year became both a habit and a corporate slogan, articulated by Brown as \"20% growth forever!\" Stryker' s sales hit $100 million in 1985, $500 million in 1993, and were just under $1 billion by 1997. By 2002 Stryker's sales were over $3 billion, the company had moved its listing from the NASDAQ to the New York Stock Exchange, and Stryker was listed in the Fortune 500 for the rst time. In 2003 Stryker hired a new president and COO from outside the company. Stephen MacMillan was an experienced health care executive from Johnson 8: Johnson and, most recently, Pharmacia. At the beginning of 2015, MacMillan succeeded Brown as CEO, while the latter continued to serve as Chairman of the Board. For financial reporting purposes Stryker divided its businesses into two reportable segments: MedSurg Equipment and Orthopaedic Implants, with 2036 revenues of $20 billion and $3.1 billion, respectively.1 Operationally, the businesses were further subdivided by product line and geographies. Orthopaedic Implants produced hip, knee, and shoulder reconstructive systems, as well as trauma, spinal and craniomaxillofacial implant systems, bone cement, and the bone growth factor OP-1. MedSurg Equipment produced and sold surgical equipment; surgical navigation systems; endoscopic, communications, and digital imaging systems; and patient handling and emergency medical equipment. Stryker's International Group was responsible for sales outside North and South America ($115 billion in 2006) and the BSOD Group contained Biotech, Spinal Implants, Osterosynthesis, and Development activities, which together accounted for $1.1 billion in revenue in 2006. Stryker's businesses beneted from favorable demographic trends as the baby boom generation matured and entered the prime age range for many orthopaedic and other medical procedures. At the same time advances in medical science, computers, and other technologies were bringing ever more sophisticated procedures into mainstream medical practice. Both trends enlarged Stryker's key markets. Industry analysts expected current trends to continue for the foreseeable future, resulting in continued healthy growth in the sector. Moreover, Stryker's businesses consistently outgrew the markets in which they participated. Stryker's organization was highly decentralized and characterized by a complementary culture summarized as \"Focus, Freedom, and Accountability.\" Executives who managed Stryker's thirteen defined businesses or \"divisions\" had considerable autonomy and were held accountable by Corporate and by each other for their results. \"Making the numbers\" was an important shared responsibility within each business and for the corporation as a whole. The importance of the company's 20% benchmark for growth was engrained in the corporate culture and, as one executive observed, \"You don't get a year off.\" Exhibit 4 presents an organization chart for Stryker in 2007. Even before the Howmedica acquisition, Stryker had established a pattern of using strategic acquisitions to enter new markets, reach new customers and extend its core businesses. The company acquired Osteonics Corporation in 1979, which brought it into orthopaedic implants. It entered arthroscopy and endoscopy with the acquisition of SynOptics in 1986. Dimso SA (1993) brought a presence in spinal fixation; with Osteo AG (1996) came entry into the trauma market. Significant acquisitions since the blockbuster Howmedica deal included Surgical Dynamics (2002 interbody spinal cages), SpineCore (2004 artificial discs) and Sightline (2006 gastrointestinal scopes). None of the deals, before or after, approached the size of the Howmedica acquisition, however. The price tag for Sightline, the largest of Stryker's 2006 acquisitions, for example, was significantly less than 10% of Howmedica's in 1998. Capital Investment at Stryker The investment process began in Stryker's decentralized divisions, where marketing, production, and technology specialists proposed projects within their own division for the upcoming year, in accordance with multi-year strategic plans. Generally, proposals were discussed, vetted and prioritized within the division as part of the process of developing division operating plans and budgets. Curt Hartman, President of Global Instruments, commented (in early 2007) on the relationship between the operating budget and the capital budgets: \"I already know my 2008 numbers for revenue, operating profit, all the way down to free cash flow. The corporation is going to have a plan to grow adjusted net income by at least 20% and I know what that means for me R&D hits operating prot; capital spending hits free cash flow, and so forth. It all has to t." Generally, the plans presented by divisions to corporate had already been refined by analysis, negotiations, and assessments of tradeoffs within the division. These plans contained goals for revenue, operating prot and cash flow that the divisions felt were both deliverable and consistent with global corporate targets. Total divisional capital spending had to be trimmed to meet cash flow targets. Hartman observed, \"Everyone has a wish list [for spending items]. If we roll up everyone's wish list, it's too big by a factor of three. So I have to push back. And we go back and forth until we figure out what works.\" The capital budget also reflected tradeoffs between spending on existing businesses and new initiatives. The split within Global Instruments, for example, had recently been about 25-35% percent for existing businesses and the remainder for new initiatives. Spending proposals originated with sales and marketing executives, who were listening to customers and watching competitors; with in-house technology experts, mostly engineers; and with business development executives, who studied markets, went to medical conventions and trade shows, and worked with outside experts and consultants. Authority to approve capital spending resided at the division level, the group level, with the Capital Committee, or with the Board of Directors, depending on the purpose and the amount of funds involved. Only the Board could authorize expenditures over $10 million. The Capital Committee had to approve operational projects involving more than $2.5 million, as well as all acquisitions, joint ventures, equity investments, and licensing, development or distribution agreements in excess of $1 million. The Committee likewise reviewed all subsequent changes in cost or scope for projects it had previously approved. Below the Capital Committee, spending authority varied within different groups and across divisions but had to conform to corporate guidelines. 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 forms that had to be filled 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 MA. 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 multiphase undertakings and all later-phase expenditures had to be included in descriptive materials and analyses. All CERs, whether Operational or MM, 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: - Project background, key 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 justication and key riskctors. This part of the CER showed that the project's returns on a discounted cash ow 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 five to seven years of cash ows and without a terminal value. Calculations of [RR 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 implementation plan and key milestones. This part set forth the human resource requirements of the project and described the plan for meeting these needs. Descriptions included the identication of key team members and the time each would devote to implementation. This section also discussed milestones, 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 financial 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: I Situation analysis. This consisted of a review of the macroeconomic context, the market situation, and background information on the target. I Strategic rationale for the proposed transaction. This linked the transaction to specific Stryker goals and the corporate strategic plan, and articulated the justification for the deal. I 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. I Overview of Base Case operating plans. The operating plan for the target business or assets was a set of five-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. II 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.). I 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 I] 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