Capital Budgeting Mission of Cer Essay

Litzenberger and Joy (1975) note that in a decentralized system, quantitative measures are more common for evaluating projects, but they also note that for larger projects there is some degree of centralization. This is the case with Stryker, where the most substantial projects are approved by the Board of Directors.

Ang (1986) notes, however, that there can be agency problems where the interests of the division are misaligned with the interests of the corporation as a whole. A good system for CER, therefore, will incorporate checks into the system, to ensure that projects are aligned. To some extent, alignment at Stryker is generally the responsibility of the Capital Committee. The problem with this system is that the Capital Committee only sees projects that have already been approved by the divisions. This means that there might be some useful projects that are rejected at the division level but that might have been better for the company as a whole than the ones that were submitted to the Capital Committee. Further, there is the possibility that a project at the division level might be a good fit for a different division. There is no process by which communication exists between the different divisions, either in an interdivisional level or via the corporate level.

The lack of coherence between the different initiatives is a significant problem, arguably the most important one with the Stryker system. The company has achieved success with respect to quantitative measures but in qualitative terms there is the risk that its system has undermined the possibility of even greater success, where managers in the company are unaware of the activities in other areas and therefore may inadvertently undermine those areas (Bower & Gilbert, 2007).

Recommendations

The first proposal is that projects should be brought for a summary assessment by the Capital Committee prior to approval at the division level.The CC knows the spending limits for each division, but it is also in a better position to assess whether or not a given project meets the needs of the organization as a whole. The CC can therefore contribute valuable knowledge in determining which projects among mutually exclusive options would not only meet the objectives of the division but of the organization as a whole.

The second proposal would be to create communication links between the divisions so that ideas that are rejected at the division level might be moved to another division. The current decentralized structure has evolved out of the organizational culture, rather than for pragmatic reasons. There is still a fairly high degree of congruence between the businesses of different divisions. If the company does not for cultural reasons want to recentralize control via the CC, it can at least open up channels by which people in different divisions can communicate with one another about ideas, allowing for a much higher likelihood that good ideas will be accepted somewhere in the organization.

The success thus far for Stryker in the past several years highlights the value of the current system, so it indicates that mostly what the system needs is a few tweaks to improve its returns and minimize the downside risk. With these tweaks, the system is likely to be better.

Works Cited:

Ang, J. (1986). Internal rationing and agency problems in decentralized capital budgeting. Project Appraisal. Vol. 1 (4) 235-245.

Bower, J. & Gilbert, C. (2007). How managers' everyday decisions create or destroy your company's strategy. Harvard Business Review. Feb 2007.

Litzenberger, R. & Joy, O. (1975). Decentralized capital budgeting….....