Stryker Corporation Equity Analysis and Valuation

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Stryker Corporation Equity

Analysis and Valuation

Analysis Group:

Hubbal Coffman

Katy Craig

Jane Holloway

Ryan LeBlanc

Dustin Synatschk

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Executive Summary

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Investment Recommendation: Fairly Valued, Hold 4/1/2008

Stryker - NYSE (April 1, 2008) $65.85

52 Week Range: $58.45 - $76.89 2003 2004 2005 2006 2007 Revenue: $6.21 B 8.0966 11.6312 9.3759 11.7496 10.9295 Market Capitalization: $26.91 B

Shares Outstanding: $411.4 M

Percent Institutional Ownership: 50.90% Actual Price (April 1, 2008) $65.85 Book Value per Share: $14.42

ROE: 19.87%

ROA: 12.55% Trailing P/E: $ 83.61

Forward P/E: $ 57.85

Cost of Capital Estimate: R^2 Beta Ke P.E.G.: $ 27.50

3 - Month 17.87% 1.26 10.17% P/B: $ 65.63

6 - Month 17.93% 1.26 10.32% P/EBITDA: $ 20.78

2 - Year 18.08% 1.26 10.58% P/FCF: $ 39.26

5 - Year 18.10% 1.26 11.31% Enterprise Value/EBITDA $ 22.07

10- Year 18.09% 1.26 12.29%

Published Beta: 1.15 Discount Dividend: $ 21.38 Kd (Before Tax) 5.01 Free Cash Flows: $ 94.37 Kd (After Tax) 3.26 Residual Income: $ 41.99 WACCBT: 10.88% Long Run Return on Equity: $ 67.54 Abnormal Earnings Growth: $ 57.03

Altman's Z - Score

Valuation Estimates

Financial Based Valuations

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Industry Analysis

Stryker is in the medical instruments and devices industry which is part of the healthcare sector. They specialize in two different areas of the industry including orthopedic implants and MedSurg Equipment. While most of the companies in this industry concentrate in many different areas, Stryker’s closest competitors are Zimmer Holdings, Biomet, Smith & Nephew, and Medtronic. Firms in this industry are difficult to evaluate in comparison of each other because they all specialize in different areas of medicine and the fact that there are no two companies that produce identical products. Stryker and its competitors compete on product quality, research and development, innovation, and customer service. Stryker spends $.06 out of every dollar of sales on research and development because this is what the industry demands in order to obtain market share from its competitors. Below is a chart that illustrates the Five Forces Model and how it pertains to the industry.

Medical Instruments and Supplies Industry

Rivalry Among Existing Firms HIGH

Threat of New Entrants LOW

Threat of Substitute Products MODERATE

Bargaining Power of Buyers HIGH

Bargaining Power of Suppliers MODERATE

To enter into the medical instruments and devices industry it requires a large amount of capital which keeps the threat of new entrants low. This allows the different firms to grow within the industry without the chance of a new company stealing their market share. The bargaining power of buyers and suppliers makes this industry unique in that the relationships that are created with the customers (medical staff) and suppliers are what drive the industry. A shortage/surplus in supply can dramatically

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shift the industry as far as price and quantity. With such high rivalry among existing firms, the ability to control the price and quality of the products are essential.

Accounting Analysis

The accounting policies originated by the SEC are known as the GAAP that firms throughout the United States must follow in their business recordings. Accounting numbers are derived from people who are estimating the progress of a company for a certain period of time. When evaluating a company it is vital to address the accuracy of the accounting because the income statement, balance sheet, or statement of cash flows can be easily misconstrued. To determine the accuracy of a firms financial

statements, it is necessary to evaluate the transparency and conservativeness that they present through their accounting.

Stryker’s key accounting policies are recording research and development, capital and operating leases, and defined benefit and pension plans. Their full and untainted disclosure of their research and development expenses is logical compared to the rest of the industry, especially when taking their market position into consideration.

Stryker’s use of operating leases and lack of long-term debt or capital leases is a clear representation of their financial stability and efficiency. And, the planned out amounts of pension plan benefits and returns show that they are utilizing a fair method of projecting future liabilities.

Stryker Corporation does an adequate job disclosing information about all aspects of the company. Their financial reports are very transparent and provide a good understanding of the firm’s recent performance and financial position.

Management clearly describes what is going on within the industry, their competitive position, and plans for the future.

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Financial Analysis, Forecast Financials, and Cost of Capital Estimation

A financial analysis of a company is conducted to determine how a specific firm is performing relative to their competitors. When valuing a firm it is important to look at a series of liquidity, profitability, and capital structure ratios to determine the position of the company. These ratios are evaluated to determine company and industry trends. We then use this knowledge to forecast the financial statements. We then estimated the cost of equity using a regression analysis and the cost of debt by allocating the appropriate weights and rates of the debt for a company. We then plugged these numbers into the weighted average cost of capital formula to get an estimated cost of capital for Stryker.

From the liquidity ratios we determined that Stryker was similar to those in their industry. They led the industry in quick asset ratio and inventory turnover. The quick asset ratio for Stryker revealed that they keep a large amount of cash on hand and have more than enough quick assets to meet short term debt obligations. Their high inventory turnover is a result of high sales and them maintaining relatively low

inventories. The profitability ratios show us that there are structural differences between Stryker and their competitors. Stryker has lower profit margins than their competitors but they are also in different market segments. The capital structure ratios reveal that Stryker and their competitors rely little on debt financing. This makes it easy to meet debt obligations and keeps the firms away from capital structure risk. For the financial forecasts we took the average growth rate from the past 5 years to forecasts out our income statement, balance sheet, and statement of cash flows over the next 10 years. We also forecasted dividends at a growth of 11 cents per year. We chose this number because that is what they have grown the past two years, and if we took an average of the past 5 years growth it would create an outrageous rate.

In estimating the cost of capital for Stryker we took the weighted average of the cost of equity and the cost of debt. We found the cost of equity by running a regression

analysis and the cost of debt by taking a weighted average of the interest rate Stryker owes on short term debt and the interest rate they owe on pension plans. With the

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cost of equity and the cost of debt we were then able to find the cost of capital for the entire firm.

Valuations Analysis

The final step in the equity valuation of a firm is to determine whether or not the firm’s current share price is overvalued, undervalued, or fairly valued. Several ways of determining Stryker’s equity must be implemented to determine an accurate, intrinsic firm price.

We first used the method of comparables as a way to quickly find how Stryker compares to other firms in their industry. We used an observed share price of $65.85 found for the beginning of April 2008 to determine how our different comparable’s prices measured up to Stryker’s actual share pricing. Price to earnings forward, price to book, price earnings growth, and enterprise value to EBITDA all found the firm to be fairly valued at prices of $57.85, $65.63, $27.50, $22.07. The price to earnings trailing and price to free cash flows found the firm to be undervalued with prices of $83.61 and $39.26. The only method that found the firm to be slightly overvalued was the price to EBITDA model with a price of $27.78.

Our final decision as to how accurately Stryker’s current stock price is valued was based on the intrinsic valuation models. Although all five models are highly informative, less emphasis is placed on the findings of discounted dividends and free cash flows model as both are highly sensitive to changes in the growth rate. Discounted dividends found Stryker’s intrinsic price to be $21.38, meaning their current price is overvalued. Free Cash flows found Stryker’s intrinsic price to be $94.37, meaning Stryker’s current price is overvalued. Residual income found Stryker to be slightly overvalued and abnormal earnings growth both found Stryker’s current price to be fairly valued with intrinsic prices of $41.99 and $57.03, respectively. Long run return on equity found the intrinsic price to be $67.54, giving the assessment that Stryker is fairly. Both the

abnormal earnings growth as well as the residual income model can be linked together using the annual change in residual income. As these models are less sensitive to change, more importance is placed on their findings.

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After evaluating the intrinsic model valuations, we found Stryker’s share price as of April 1, 2008 to be fairly valued.

Company and Industry Analysis Company Overview

Stryker was founded in 1941, in Kalamazoo, Michigan, by an orthopedic surgeon named Dr. Homer Stryker. Dr. Stryker felt that certain medical products were not meeting his patients’ needs so he developed new ones. He then started the Stryker Corporation to produce them. His goal was to help patients lead healthier lives through products and services that make surgery and recovery simpler, faster, and more

effective. Today, Stryker Corp. has grown to over 15,000 employees worldwide and is a global leader in medical technology.

Stryker more specifically competes in the medical instruments and supplies industry. They divide their operations into two segments: Orthopedic implants and MedSurg equipment. The Orthopedic Implants segment sells all forms of orthopedic reconstructive, trauma, spinal, and craniomaxillofacial implant systems. The MedSurg Equipment segment offers surgical equipment, surgical navigation systems, and patient handling and emergency medical equipment. Stryker Corp. also provides physical, occupational, and speech therapy services to patients recovering from orthopedic or neurological illness and injury. Stryker primarily competes in this industry against companies such as Biomet, Inc., Smith & Nephew, and Zimmer Holdings Inc.

Stryker Corp. currently has a market capitalization of 27.5 billion dollars which leads the industry. From a financial standpoint, Stryker has done very well both in the United States as well as overseas. Stryker’s sales have substantially increased in all of their segments each year for the past five years. Overall, their total sales have

increased by 79.5% in 5 years as shown in the chart below. Stryker has also managed to increase its total assets as well as shareholders’ equity for each year over the past 5 years. They have almost no long term debt, yet appear to be growing in every

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category. Their stock prices have risen steadily since they started trading stock in February of 1988.

2006 2005 2004 2003 2002

Business Segment Sales:

Orthopedic Implants 3,110.1 2,849.5 2,556.2 2,093.0 1,704.8 MedSurg Equipment 2,037.1 1,759.4 1,461.2 1,309.3 1,105.3 Other 258.4 262.6 244.9 223.0 201.5 Total Sales 5,405.6 4,871.5 4,262.3 3,625.3 3,011.6 Domestic/International Sales Domestic 3,556.8 3165.6 2,753.0 2,333.4 1,973.7 International 1,848.8 1,705.9 1509.3 1,291.9 1,037.9

Total Net Sales 5,405.6 4,871.5 4,262.3 3,625.3 3,011.6

www.finance.yahoo.com

The graph above shows the sales of Stryker Corporations different business segments for the years 2002 to 2006. Below is a chart showing the stock performance of Stryker from Jan. 30, 2003-Jan. 30, 2008.

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Industry Overview

Medical instruments and supplies is a highly competitive industry. Stryker faces three main competitors: Smith & Nephew (SNN), Zimmer Holdings Inc. (ZMH), and Biomet. There are around 12,000 different competitors in this market

(http://www.firstresearch.com/industry-research/Medical-Supplies-and-Devices.html). That being said, the industry is highly competitive. Smaller firms compete based on specialization of certain products whereas larger companies compete on innovation and economies of scale. Large companies in this industry spend vast amounts of money on research and development and then patent those innovative ideas.

The medical supplies and devices industry is one that can be extremely

profitable if approached in the right way. However, there are many factors which have caused problems for all the top firms within the industry. These include but are not limited to: high fixed costs, problems with product differentiation, high economies of scale, and high concentration. However, there is an ongoing increase in demand which is expected to continue well into 2050. This increase will be caused by a large

demographic change in the U.S. By 2050, according to Census, it is estimated that 20.7 percent of U.S. citizens, or approximately 87 million people, will fit into the demographic category of elderly (http://www.ita.doc.gov/td/health/outlook_05_medical.pdf).

The aggressiveness of the industry can be seen by a lawsuit filed on September 27, 2007. The five major competitors in the hip and knee replacement sector, Zimmer, Inc., Depuy Orthopedics, Inc., Biomet, Inc., Smith & Nephew, Inc., and Stryker, were all accused of using “financial inducements” as incentives for surgeons to use their products. The companies were then required to execute all modifications required to the way they conducted their business. This included 18 months of federal monitoring (http://www.usdoj.gov/usao/nj/press/files/pdffiles/hips0927.rel.pdf).

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Five Forces Model

The Five Forces Model is a unique tool designed to evaluate, analyze, and assess the structure and profitability of a company. It provides a way of targeting the most important aspects of competition and bargaining power with its suppliers and

customers. The degree of actual and potential competition can be subdivided into three categories: rivalry among existing firms, threat of new entrants, and threat of substitute products. Another part of differentiating an industry is looking at its bargaining power in input and output markets. This indicates how well an industry maintains their bargaining power with their buyers and suppliers as well as identifies the profitability and potential of a company. These key factors allow any analyst to evaluate a firm and establish how profitable the industry is.

Medical Instruments and Supplies Industry

Rivalry Among Existing Firms HIGH

Threat of New Entrants LOW

Threat of Substitute Products MODERATE

Bargaining Power of Buyers HIGH

Bargaining Power of Suppliers MODERATE

Below the medical instruments and supplies industry will be discussed in detail pertaining to these guidelines mentioned above.

Rivalry Among Existing Firms

The profitability of a company greatly depends on the rivalry among existing firms because it allows investors to see how much activity there is throughout the industry and how it relates to each individual firm. In the medical instruments and supplies industry, companies compete on how they differentiate themselves from their competitors in the terms of patents and research and development. “In the US, the medical instruments and supplies [industry] includes 12,000 companies with combined annual revenue of $50 billion” (www.hoovers.com). The top 50 companies in the

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industry experience high rivalry among existing firms because the industry’s growth is directly related to the inventions and innovations that a company makes to their product lines. There is a direct correlation between the amount of money a company spends on research and development and how high it ranks within the medical

instruments and devices industry. Large companies are able to compete based on economies of scale and ongoing research and development whereas smaller companies compete based on field specialty. For those wishing to join the industry, large fixed costs must first be taken into consideration as well as lack of any reputation among buyers. Also, new entrants must consider the large economies of scale, first mover advantage.

Companies in this industry choose to specialize in one to three areas of the healthcare sector and medical instruments and supplies industry in order to obtain the highest percentage of market share. This industry differentiates companies by their ability to make superior products which in return determines profitability of a company (www.hoovers.com).

Industry Growth

According to the chart below, the medical instruments and supplies industry is forecasted to grow at an annual compounded rate of 6.1 percent between 2007 and 2012 (www.hoovers.com).

(http://www.hoovers.com/stryker/--ID__14815--/free-co-competition.xhtml)

The growth of the industry is going to be related to the number of people needing orthopedic and MedSurg supplies. With an upcoming increase in the number of Americans over the age of 65, the growth of the industry is bound to occur in all

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areas of healthcare. The companies in this industry are preparing for this by increasing their research and development to produce state of the art products for doctors and hospitals to use. The medical instruments and supplies industry is growing at a constant rate from 2003 to 2008 of 50 percent while the healthcare sector’s growth is only 33 percent. The graph below shows how the industry and sector have grown in the last 6 years in reference to the S&P 500 Average.

(http://research.scottrade.com/research/common/pdf.asp?sym=syk&reporttype=SNPRe port)

Industry Concentration

To determine the concentration in an industry, it is necessary to consider the number of firms in the industry and how the market share is distributed. With the fifty largest companies in the industry holding 60 percent of the market share, the medical instruments and supplies is a highly concentrated industry (www.hoovers.com). The ability to specialize in many different areas is a way that small companies can escape

--Medical Instruments and Supplies --Healthcare Sector

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the high pressures that the larger companies pose due to high concentration. Small companies are forced to compete on price which makes it very difficult for them to invest as much money in their research and development department. This gives the larger firms a huge advantage because they are able to devote more money to

improving the quality of their products while inventing new medical instruments and supplies for their buyers. The chart below illustrates the market share of the medical instruments and supplies industry from 2002 to 2006. Stryker has been the larger portion of the market share for the past five years which indicates how the larger companies have control of the industry.

(Sales from 10Ks of each company-SYK, ZMH, BMT, SNN)

The concentration is what determines if the industry competes on differentiation or cost structure based upon the market segment and competition. The medical

instruments and supplies industry allows for innovation through research and development instead of focusing on cost structure.

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Differentiation

For companies to differentiate themselves in this industry, they must compete effectively on innovation, reliability, service and reputation. That is why it is so important for companies to spend money on research and development. With the healthcare industry moving at such a fast pace, companies must keep innovating their products to keep from being left behind in this fast-paced environment. In the medical instruments and supplies industry, a key component of sustaining sales is the

relationships that companies form with their buyers. Doctors and hospitals trust that the company is continuing innovation and providing them with the best possible products at the lowest possible prices. This reliability is necessary in this industry in order to keep producing top of the line products. Service is another aspect that differentiates a company from the industry. In the buyer/producer relationships, service is what is going to make a company thrive and stand out among the others. The ability to create new products in a timely order, incorporate fast shipping, enable great communication, and respond to feedback is what buyers look for in customer service. This is what gives the company a competitive edge. Reputation is the

accumulation of the previous parts, innovation, reliability, and service. This is acquired over many years which makes it harder for smaller and newer companies to increase market share in this industry.

Switching Costs

Switching costs in relation to “Rivalry among Existing Firms” describes a

company’s ability to change the industry that they are currently in to another industry in hopes of generating more revenue and expanding the company. This is a very relevant issue in the healthcare sector because companies change their focus and industry quite a bit depending on their recent innovations and desires to gain market share. In this industry, there are high switching costs associated with changing industries because it is difficult for a firm to do something else with the same resources they have been using for years. With many companies shifting their product lines to different industries, it allows for switching costs to be comparatively low.

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Learning Economies of Scale

Learning economies of scale is prevalent in the medical instruments and supplies industry because there is such an advantage to knowledge in the form of research and development. All firms in technology based industries have a large economies of scale. This is determined by the immense difficulty that new entrants face and the impact that large companies have on the market share. In this industry, market share is dominated by the top 50 companies at 60 percent (www.hoovers.com). Large companies thrive in the medical instruments and supplies industry because of the buying power they have created with doctors and hospitals and the amount of money they are able to devote to research and development. The graph below demonstrates how much the companies in the industry spend on research and development in correlation to their sales.

Stryker Zimmer Biomet Smith & Nephew

2002 4.7 5.9 4.3 5.5

2003 5 5.6 4 5.7

2004 5 5.6 4 5.3

2005 5.7 5.3 4.2 5.3

2006 6 5.4 4.2 4.8

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The graph above demonstrates how the economies of scale for the medical instruments and devices industry focuses on research and development. The larger companies make it hard for smaller companies to increase market share because of the amount that is spent on research. This proves the industry has a large economies of scale.

Fixed-Variable Costs

The cost of an industry is distributed into fixed and variable cost. This is very important in this industry especially when it comes to the ability to save money on fixed cost and spend money on research and development. Fixed costs are what keep

smaller companies from excelling in this industry because it is very difficult for them to compete on the same level as the larger companies. The large economies of scale are also a factor in these cost comparisons because this pertains to smaller companies entering the industry.

Excess Capacity

Excess capacity is a major factor when it comes to price competition in the

industry because it entices companies to sell their remaining inventory by cutting prices. This is an effect of the levels of supply and demand. In the medical instruments and supplies industry, there are fewer large companies, yet they make up most of the market share. This illustrates that the industry is reaching excess capacity and the demand levels are increasing. According to the census, the growth of people over the age of 65 from the baby boomer generation, increases the need for medical supplies at a constant growing rate allowing for all of the companies to experience an increase in sales. In most industries, this would lead to an increase in price because the demand for these products is increasing. Yet, due to FDA regulations this industry is highly monitored to insure that there is a fair price for consumers. Though all firms in this industry will experience an increase in sales, smaller companies will continue to have lower market share due to excess capacity.

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Exit Barriers

Exit barriers are what keep a firm from leaving an industry without a certain level of difficulty. There are very high costs associated with leaving the medical instruments and supplies industry especially with expensive machinery used to develop products and high FDA regulations. To manufacture orthopedic supplies and MedSurg equipment requires very expensive equipment that can require long-term loans to pay off. Most of these machines are only used for certain uses and can’t be transferred to other

industries. FDA regulations including patents are expensive to achieve with the

research and development expenses attached to it. “Since governments spend so much on health care, their policies have an outsize impact on sales of drugs, devices and treatments” (http://online.wsj.com/article/SB119844893032247601.html). The FDA controls how substantial the exit barriers are and what expenses are attached to them. These are the main reason that there are high exit barriers in this industry.

Conclusion

The rivalry among existing firms in this industry is high. There is very strong competition in the top companies in the industry for market share. Even the small companies are in competition with the other smaller companies. Market share can change based on a new invention or patent that was developed by a direct competitor in the industry. Due to a stable industry growth, it is very difficult for new entrants to enter the industry because of the expensive research and development costs. The medical devices and instruments industry experiences a high concentration due to high innovation and differentiation levels. Switching costs are low because an innovation of one part of the medical industry can bleed over to other industries. This would make a company consider expanding into another industry to keep the innovation within the company. Economies of scale are large due to the amount of money spent each year on research and development. With high excess capacity, the demand for the industry is increasing creating more rivalry among firms. High exit barriers keep companies from changing industries often which intensifies rivalry among firms. With all of these

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factors in mind, the medical devices and instruments industry has high rivalry among existing firms which leads to high competition and profitability.

Threat of New Entrants

The healthcare industry is one that has the potential to create excessive amounts of wealth for companies that are able to enter the market. However, potential new firms must first consider the likely barriers to their entrance. These include: large economies of scale, first mover advantages, access to channels of distribution and relationships, and legal barriers. Due to the vast amounts of start-up cost involved in opening a medical supplies company, those who have long since infiltrated the industry have a competitive advantage over those who have yet to enter the market.

Economies of Scale Total Assets 2007 2006 2005 2004 2003 Stryker 7,354,000 5,873,800 4,992,500 4,083,800 3,159,100 Zimmer Holdings 6,367,200 5,974,400 5,721,900 5,695,500 5,156,000 Smith & Nephew 4,276,000 3,231,000 3,438,880 2,984,020 2,552,690 Biomet 2,457,861 1,720,194 1,568,844 1,451,669 1,289,742

* Statistics provided by Google Finance and Biomet’s 10K

The chart emphasizes the size of the assets for Stryker and Stryker’s top three competitors in the medical instruments and supplies industry. Large economies of scale make it very difficult to penetrate this industry. Those who are considering entering the market must take this into consideration. The cost of start-up is high because of

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increased research and development pricing. Aside from the typical start-up cost, building, materials, et cetera, companies in the healthcare field must also be willing to spend huge sums of cash on doctors who can then develop new devices for their consumers which are then patented.

First Mover Advantage

Firms who entered the market early on have a competitive advantage over those who have not been a part of the market for some time. Relationships with suppliers are agreed upon first as well as with the customers who will then market the company’s product. However, firms can create their own competitive advantage by creating and patenting a new product. This gives ample opportunity for any company thinking of entering the market, no matter the size.

Distribution

Finding and creating terms of agreement between their distributors and suppliers within this industry is imperative to company growth. Existing firms have the

competitive advantage over new firms as they have already created and maintained relations with both their distributors and suppliers.

Gaining distributors in this market could prove futile to those who do not already have contracts set up. It was previously mentioned that the top five companies within the medical supplies and devices industry did engage in what can be termed as illegal activity of “paying kickbacks” to their doctors and consultants through financial

“payments” (http://blogs.wsj.com/health/2007/11/27/why-a-device-maker-paid-docs-85-million/). Due to this lawsuit among the top companies in the industry, they are required by law to publicly disclose all information regarding the monies distributed to surgeons and doctors who then endorse their products

(http://online.wsj.com/article/SB119552347946098696.html). This is an example of how competitive this market is when finding and keeping their main distribution sources.

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Relationships

Firms must also have a means of distributing and housing their products.

Adequate warehousing for inventory and excess inventory, labor capital, supply chains, and a means of transportation for their products are all necessary. For example,

Zimmer Holdings has more than 100 manufacturing, distribution and warehousing facilities worldwide (Zimmer Holdings 10-k). Out of Stryker Corporations 16,026

employees worldwide as of December 31, 2007, 6,643 of those were being used in the manufacturing, warehousing and distribution operations (Stryker’s 10-k). Substantial spending is a must for all companies wishing to pierce the market. In order to save on excess spending, sufficient time must be spent on developing a supply chain that is both efficient and realistic to the firms profit goals as well as to what can be spent on expenses. If maximum distribution efficiency is obtained, the company will then have maximum control of their inventory, higher levels of customer satisfaction, and be able to meet and sustain higher quality levels of their products as a whole

(http://www.ibsus.com/industries/medical-supplies-distribution-software/).

In order to cut back on cost, firms in the market must find suppliers who are willing to discount their materials. Cost is a major concern. Those who plan on

maintaining market share must find several suppliers and then maintain good relations with said suppliers.

Legal Barriers

Legal barriers must also be addressed by firms interested in entering the market. Viable companies must address these barriers and be aware of the repercussions they could face if the firm chooses to disregard them. The healthcare sector is regulated by the Department of Justice and U.S. Department of Health and Human Services, the Food and Drug Administration (FDA), Centers for Medicare and Medicaid (CMS), Health Insurance Portability and Accountability Act (HIPAA), Joint Commission on Accreditation of Healthcare Organizations (JCAHO), and the National Committee for Quality

Assurance (NCQA). Those entering the industry must also pay special attentions to the patents of other firms.

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Conclusion

Firms that plan on being introduced into the medical supplies and devices division face many factors which could derail their successful breach of the market. These potential threats include economies of scale, first mover advantages, distribution and relationships, and legal barriers. In order to be flourishing in this market, new firms must find a way to differentiate themselves from their competitors by selling

exceptional products while also finding ways to cut back on cost through good supplier relations.

Threat of Substitute Products Introduction

Within this industry, threat of substitute products is moderate. There is simply no substitute for receiving a prosthetic limb or hip implant. These are specialty items

which, though the material that they are produced with may differ from company to company based on patent restrictions, are virtually the same product. The company must then compete on the pricing and reliability of their products.

Relative Price and Performance

The medical instruments and supplies industry is built on the basis of function and performance first, price second. Often times this idea is misconstrued due to the rising cost of health care. There is a split in the market now between specialty products and commodities.

Specialty products are products or services that either require a certain, special knowledge or resource for its use, or provide a unique service not found commonly. Special products can include implants, methods for surgeries, tools for certain special procedures (such as neurosurgery or arthroscopy), software for analyzing injuries and tracking progress, and imaging systems. Also specialty products bear a higher level of complexity or development, which means these products tend to be more expensive

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because of the expense that went into these products during the research and development stages.

According to Wall Street Journal’s ‘Race Is on for the Next Blood Thinner,’ “Doctors have long wanted an alternative to warfarin. The drug requires patients to have frequent blood-test monitoring, and it can produce serious side effects if it reacts adversely to other drugs a patient takes, a common occurrence, or even to a change in diet.” As a result, there is now a race among big-name companies for the most

innovative new blood thinner, which is almost, if not entirely, research and development oriented. The most successful company will get to partake in the predicted 10-billion dollar market for blood thinners.

Specialty products also tend to be protected by some form of government

regulation, like a trademark or a patent. For example, Baxter has the patented VIAFLEX flexible container systems and AVIVA containers. They offer a special service to their customers and they have kept it from being copied by any possible competitors in the market. All products in the medical instruments and supplies industry must be approved by the FDA before they can be implemented into use. Some products, such as Stryker’s OP-1 bone therapy treatment, can even be given approval for a Humanitarian Device Exemption (HDE) from the FDA. The FDA defines an HDE as a product intended to benefit patients by treating or diagnosing a disease or condition that affects fewer than 4,000 individuals per year in the United States. Both FDA approval and government patents/trademarks serve as protection for the big companies that make these special products. This keeps the court cases you hear about in the news shorter and less expensive for the medical instruments and supplies companies. Because of the nature of specialty products, it is the performance factor that outweighs the price factor in specialty products.

On the other side of the market, commodities are common products used by a majority of either people in the industry or affiliated with it (surgeons, nurses, etc.). The key separation between the commodities and the specialty products in the medical instruments and supplies industry is that much more technology and research is put into specialty products. The uses of specialty products tend to be much more difficult.

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Wikipedia defines a commodity as being anything for which there is demand, but which is supplied without qualitative differentiation across a given market.

Medical technology equipment commodities have a very broad spectrum of products ranging from medical instruments, many are disposable, to dental and veterinary instruments. Commodities can also range from being long-term or short-term. Long-term commodities can be things like office furniture, x-ray machines, surgery tables or even monitors. Short-term commodities can be things such as clothing, disposable surgery kits, drugs and biologicals, dressings, lab equipment, and even cleaning materials.

The commodities market must also be innovative. For example, Vital Signs, Inc. produced a pressure infuser with a clear window in order to read fluid levels better. Things like that, simple innovations that do not cost much, are the qualities that make a commodity product more desirable. However, there are higher levels of competition between companies on the commodity level. Price then becomes the most important deciding factor with buyers. Many commodities are based on this analysis. Does the cost exceed the benefit? That is not to say that there is not room for innovation in commodities, like designing handles better or making the blades a certain shape or the tube longer, skinnier, or more flexible, but not so much room to improve that it drives the price up so high that the cost outweighs the benefit. In the end all that matters is that the product will do the job properly and efficiently and is of low cost to the consumer.

Buyer’s Willingness to Switch

Many companies make products that are used for the same purpose. The key to the retention of medical instruments and supplies customers has a lot to do with the buyer’s willingness to switch.

Many strategies can be used to retain customers, like marketing, customer service, internet relations, quality management, or the expertise in a certain field. One surgeon may prefer a certain brand of products to another simply because he has been with the company for several years and trusts their products and the relationship.

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Unless the price of another product lowers substantially or the benefits of using another product make it more necessary to fulfill a previous need, that customer will not switch.

Also, many products are being made that do not require the customer to use as much of it, or use it as often. This has been an influence for many buyers to reduce their supply of products. Surgeons are required to do their job exactly right every time. Trusting themselves as well as the products they are using to operate on their patients is crucial. For example, Baxter has been around for 75 years. The longevity of the company itself as well as their consistently high quality products has helped propel them to the top of the industry. Another industry leader, Alcon, has been in the eye care market since 1945. They have accumulated large quantities of proprietary knowledge and skill at what they do which makes them a more technologically advanced and trustworthy company.

Buyers will stay with a company for one of two reasons: either they are the only one that makes the product they need or the company makes the buying process easier. Companies make the buying process easier by offering great customer service, giving benefits to long-term or bulk customers, or by helping that buyer personally. An example of this would be helping the buyer to install the x-ray machine they bought, teaching them how to use it if it is different from the last model they purchased, and having a customer service hotline.

How the buyer perceives the benefit is crucial, and going the extra step is a way that many companies retain customers. A hospital can receive benefits such as a

discount on buying scalpels or medical kits in bulk, or by using software on a per-use basis (as opposed to buying the program which can be very expensive), or by receiving a discount for being a returning customer with the company for more than five years. A personal benefit could be the ease of ordering, if they offer online ordering or have automatic inventory systems that re-order when the buyer is out of certain supplies. In the end, buyers will always need their product. If they can get it with a greater benefit, they will switch companies.

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Conclusion

New entrants to the market should consider the aforementioned things before entering into the market. If they cannot provide the service as good if not better than their competitors, they will chance having a failing company. In order to be successful, companies must keep in mind that their financial prosperity is not only determined by how they make their products, but also how they distribute and market their products.

Bargaining Power of Buyers

Whether or not the buyers have bargaining power influences how the various companies conduct their business. If the buyer has large amounts of control over the company, then the company will be forced to keep their prices low. However, if the buyer has little control over the company, the company’s strategy can differ based on their own personal preferences.

The healthcare sector has been on a continual rise for years and it is expected that the market will continue to grow well into 2050. To date, the top 50 firms own 60% of the market share (http://www.hoovers.com/medical-supplies-and-devices/--ID__69--/free-ind-fr-profile-basic.xhtml). With that in mind, it is safe to assume that these leading companies are able to price set based on their large economies of scale. It is also important that companies specializing in or developing unheard of products have what can be termed as a monopoly over their specific products industry.

Price Sensitivity

Price sensitivity gives an indication as to what the individual is willing to pay for a particular product. If a consumer is highly sensitive to changing prices, they will simply refuse to buy the product in consideration. However, if the consumer is insensitive to the price changes, they will continue to buy regardless of an increase in price. As many companies product lines are necessary for the continued well-being of their ultimate consumers and can be assumed to have relatively insensitive demand.

Choice of product within the industry ultimately comes down to how reliable and innovative the product offered truly is. Those that lack good standing within the medical

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community already have problems endorsing and outperforming their predecessors. If companies already established in their field continue to endorse their products with their relatively low prices, as compared to that of their competitors, it can be assumed that their company will continue to flourish, all other factors being equal.

Relative Bargaining Power

The bargaining power of the consumer can be determined by whether or not the consumers outnumber the producers, the volume each consumer will purchase, and the number of products deemed as “alternatives” to products already offered within the industry. As each consumer can decide to endorse only one company’s products, it is imperative to producers that they remain in good standing with the consumer who chose them. The number of products they purchase will ultimately be determined relative to their patient size. If a company’s product underperforms as deemed by the medical community, then their business could then be shunned by the doctor who previously endorsed their products. The market could be deemed to be volatile based on these assumptions. The consumer then has a higher than average bargaining power over the medical instruments and supplies industry.

Conclusion

The bargaining power of the consumers depends upon their size as a whole and how sensitive they are to the fluctuations of prices. If a company truly wishes to gain a fair portion of the market share, they will have to accommodate the aforementioned and create a plan of action around their consumer’s wants and needs. Otherwise, the company could face bankruptcy very early on.

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Bargaining Power of Suppliers

Bargaining power of suppliers is important in all industries because the amount of power suppliers have provides structure and control in the pricing of an industry. Firms in this industry purchase most if not all of their raw materials from multiple

suppliers around the country. Companies choose to outsource their materials to ensure high quality, reliability, and cost effectiveness. They are able to do this by driving up the costs for firms causing them to raise prices. Suppliers have the highest bargaining power when there are few companies for buyers to choose from and few substitutes are available to their customers. In this situation, suppliers are able to make companies pay almost whatever they desire for their products. On the other hand, when there are many firms present and a variety of substitutes available, suppliers have low bargaining power. Firms can force these suppliers to sell certain quantities of product at lower prices or face the risk of losing their business.

Relative Bargaining Power

In the medical instruments and supplies industry the power of suppliers is moderate. Most firms in this industry purchase a very small percentage of finished products from outside suppliers. Firms mainly buy different raw materials from suppliers such as stainless steel, aluminum, cobalt chrome and titanium alloys. They then use them to manufacture different patent specialty products. Although many firms in this industry use single sources for certain materials and services, alternative sources are available if needed. There are no significant difficulties obtaining materials needed to meet production schedules. This describes the relationship firms in this industry have with their suppliers. This relationship must be maintained or else both the supplier and the buyer will suffer. The bargaining power of suppliers is not considered high in this industry because most firms are very substantial, and these firms buy large enough quantities for suppliers to be in need of their business. That said, as there are not a great number of suppliers readily available, the suppliers do have some bargaining power.

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Price Sensitivity

The price sensitivity of the suppliers to the various firms in the medical

instruments and supplies industry determines how buyers react to price increases and decreases in the market. Buyers are more price sensitive when there are few switching costs and the product is undifferentiated (Palepu, Healy, and Bernard). Buyers in this industry are moderately price sensitive. The products they buy are somewhat

undifferentiated because these firms by the same types of raw materials. For instance, firms purchase metals such as stainless steel, aluminum, cobalt chrome and titanium alloys. In the medical instruments industry, buyers are also more likely to expend the resources necessary to shop for lower cost alternatives, because the products these firms are buying represents a large fraction of their cost. If the firm who sells the materials to the company has a sudden increase in price, it is likely that the company will then search for another firm to buy their materials from which offers more

competitive rates.

Quality plays an important role on the price that firms in this industry are willing to pay for the raw materials they buy. Better quality matched with lower prices is becoming the standard set by the market. Buyers require high quality products.

Conclusion

The bargaining power of suppliers is moderate in this industry because, although there are few suppliers, the buyers buy in mass quantities giving them a good

bargaining position with the suppliers. Many firms also use only one supplier and it is imperative that the buyers and their suppliers remain on good terms. In order for this to be accomplished, suppliers must continue to sell high quality products at a

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Strategies for Creating a Value Chain

The medical instruments and supplies industry of the healthcare sector is highly concentrated and extremely competitive. In order for a firm to be viable within the industry, they must develop several different strategies to give them a competitive edge. By achieving a competitive advantage in the market, firms create value within themselves. To achieve superior performance in the healthcare sector, firms must

develop ways to differentiate their products or compete with a cost leadership strategy. Although most firms in this industry create a competitive advantage by differentiating they must also pay attention to product cost.

Differentiation

One of the main ways firms create value within the industry is to differentiate themselves from others in the market. Differentiation, according to the Palepu and Healy, is “supplying a unique product or service at a cost lower than the price premium customers will pay.” It is very important in the medical instruments and supplies

industry that each company differentiates themselves from their competitors. To differentiate themselves most firms strive for better product quality, superior product variety, and innovation.

Superior Product Quality

Creating a product of superior quality is a must for any company wishing to remain a part of the ever-growing healthcare industry. It is imperative for companies to make and distribute products of the highest quality as these products impact the lives of the people who receive them. For example, Stryker was able to excel in the

endoscopy industry because of the superior quality in cameras and intuitive user controls for the Stryker 3-Chip HD Cameras. This allows for surgical teams to improve visibility and effectiveness during endoscopic procedures (Stryker 10-K 2007). Every firm must strive to have almost no error in their manufactured products. Product lines must also meet and ascribe to FDA regulations and patent restrictions placed upon each

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firm individually. The FDA requires extensive clinical testing which focus on the safety and effectiveness of the product.

Superior Customer Service

The medical instruments and supplies industry differs in how they offer customer service compared to other industries. While some industries in other markets offer customer service with the intent of making a sale, companies in the medical field offer customer service that is provided in the form of therapy and making products that best suit customers. Medical instruments and supplies companies are being monitored to hold up to a "corporate integrity agreement" to protect patients from physician

malpractice (http://online.wsj.com/article/SB119510100066994001.html). For example, Zimmer Holdings uses their service expertise to excel in the marketing and sales

department. Their sales team has developed professional relationships with potential and existing customers from their detailed knowledge of their products and instruments (Zimmer Holdings 10-K 2007). Firms in this industry work really hard to provide a variety of products and services that will please consumers.

Innovation

For both the large and small companies in this industry, innovation is of the utmost importance. Spending a substantial amount of overall profits on research and development each year is necessary. Creating an innovative product and then patenting it before your competitors have the chance gives firms a competitive edge necessary to remain in the aggressive market. Innovations and new developments can change the lives of patients forever. For example, new technology from research and development “offers the possibility that an amputee may one day be able to feel with an artificial limb as although it was his own” (

http://blogs.wsj.com/health/2007/11/28/a-prosthetic-arm-with-eeling).

Patents and trademarks are also of great value to firms that possess them. Companies in this industry have an enormous amount of patents to protect their research and development costs. For example, Stryker, Smith and Nephew, and

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Zimmer Holdings have 2,150, 3,200, 4,000 patents respectively on their products (Stryker, Smith and Nephew, and Zimmer Holdings 10-K). Oftentimes, larger firms will purchase smaller companies that have developed and patented “promising” ideas (http://www.hoovers.com/medical-supplies-and-devices/--ID__69--/free-ind-fr-profile-basic.xhtml).

Conclusion

In order for firms to have a competitive advantage within the healthcare sector, they must pay particular attention to ways in which they can differentiate themselves from others in the market. Superior product quality, great customer service, innovation, and an aggressive sales and marketing team can give a firm the upper hand necessary to remain feasible in the industry. To disregard these important factors, a firm can lead to a downturn in their competitive advantage in the industry and overall decrease their value.

Cost Leadership

Although more importance is placed on differentiation within the medical supplies and devices industry, some firms do try to compete using a cost leadership strategy. In the recent years, there has been an increased cost of medical care. Since 1997, overall hospital bills have risen 89 percent and general rehabilitation costs have increased 77 percent (http://online.wsj.com/article/SB119751647063825905.html). These kinds of statistics are challenging some firms in the industry to look to a more cost effective strategy in order to provide medical supplies and devices to all kinds of people with all kinds of income. If a firm is able to achieve a working cost leadership strategy, then that firm can then make a higher profit per unit while still charging the same price as their competitors. However, using a cost leadership strategy as compared to a

differentiations strategy is risky one because there are few opportunities for companies to cut cost or provide products that are cheaply made. Firms can still compete using this strategy by placing the majority of their emphasis on economies or scale and

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making sure they have lower input costs. They also must focus on having an efficient production line.

Economies of Scale

In order to provide a low cost product to their consumers, the company in question must drive down the prices provided to them by their suppliers. Firms in this industry are able to do this because they buy large quantities of raw materials from their suppliers and then manufacture the product themselves. In doing so, they lower their input cost. As previously mentioned, lowering input cost leads to higher profit yields without having to raise the price of the product being offered. Firms must do this as their prices are often regulated by government agencies. Without lowering their input cost, they stand to make little profit.

Efficient Production Line

An efficient production line is vital to the welfare of the company. Inefficient production lines lead to wasted materials and a potentially higher cost for the company. To thwart these higher costs, companies can engage in precision machining, metal fabrications and assembly operations.

Conclusion

A cost leadership strategy is often not what firms in this industry choose to focus on. However, if properly implemented, the firm that chooses to implement this strategy stands to gain profits that their competitors who engage solely in differentiation will not earn.

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Firm Competitive Advantage Analysis

Stryker is one of the world's leading medical technology companies with one of the most widely based range of products in orthopedics. Stryker is also a significant presence in other medical fields. Their products improve medical professionals, as well as patient’s lives in 120 countries worldwide. The company’s unmatchable growth has come from their innovative products, customer service, reliability and great reputation. These factors have had Stryker named one of Americas most admired companies by Fortune.

Historical Innovations

Stryker was first formed when Dr. Homer Stryker, an orthopedic surgeon from Kalamazoo, Michigan, realized that certain medical products were not meeting his patients’ needs. Dr. Stryker then began to make new products that did fit his patients’ needs. These products started to become more and more popular. Therefore he

decided to start the company in 1941. There was a high risk involved with making new products to be placed in the human body. All it would have taken is one faulty product and Dr. Stryker’s reputation and career would have been ruined. Instead the products worked better than other products available on the market. The high risk turned into a high return for Dr. Stryker and gave him a competitive advantage in the industry.

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Current Innovations

Since there is a direct relationship between the amounts of money a company spends on research and development and the rank of medical instruments and devices, there should be no surprise that “Stryker is ranking among the top three medical

products and equipment companies for three years straight” (www.Stryker.com). The company’s current innovations specialize in orthopedic implants and medical surgery equipment. About twenty years ago Stryker joined forces with Curis inc. and started a long term investment in the study of bone growth called OP-1. This product is a natural protein that the human body makes to induce bone formation. Stryker is the first

company to enter OP-1 into clinical studies. Studies have been performed in two clinical sections, fractures of long bones and spine fusions. Stryker has received approval for a Humanitarian Device Exemption (HDE) from the FDA. That is the approval to use the OP-1 implant in the United States as an alternative to auto graft in long bone

nonunions. “As of December 31, 2006, Stryker had more than 800 hospital Institutional Review Board (IRB) approvals for OP-1 Implant in patients in the United States under this HDE” (www.Stryker.com). Most of Stryker’s implants are designed for minimally invasive surgery (MIS) procedures. This is a type of surgery that uses a smaller incision and reduces soft tissue damage and pain.

Future Innovations

Demand for OP-1 Implant and OP-1 Putty continued to increase each quarter. Stryker continues to further the development of OP-1 as an alternative to bone crest graft for patients requiring a spinal fusion. Spinal fusion is used to strengthen the spine for the patients. Stryker is also interested in researching the cartilage regeneration properties of OP-1 and has successfully completed studies showing that OP-1 can stimulate new cartilage formation and increase disc height in animal models. Stryker also continues to research and develop new technology for the surgery process. This technology ranges from saws doctors use to cut during an operation to Computer-assisted technology that does the cutting for the doctors. All products are made with

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the intent of offering customers cost and time savings by reducing the number of steps in the surgical process as well as the accuracy (www.stryker.com).

Differentiation

Stryker’s goal is to gain the largest portion of the market share in this industry is to find ways to separate themselves from their competitors. They focus on

differentiation as opposed to cost leadership as pricings within this industry are already structured. Finding loopholes to agreements already set in place by firms is close to impossible. Instead, they focus their resources on developing superior customer service, spending adequate funding on research and development and then creating a variety of high quality products.

Customer Service

Stryker Corporation began in 1941 with the intent to produce medical products which would meet Dr. Homer Stryker’s patients’ medical needs. The company was started with the customer’s needs in mind and continues to accomplish this goal by helping patients lead healthier and more active lives through their products and innovations. In order for Stryker to continue to compete effectively they must provide quality customer service and maintain a good reputation. Some ways Stryker maintains quality customer service is by keeping close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and development as stated in Stryker’s 2007 10-k report. Stryker also provides physical, occupational and speech therapy services to patients through an outpatient program. This is merely one example of the continual care Stryker provides to the ultimate consumer, or the patients who are recovering from orthopedic or neurological illness.

Stryker has been able to build and maintain a longstanding reputation as the leading provider of medical devices through their good business practices and customer service. Stryker is well known and their good reputation allows them to lead the

industry with the highest market cap, net income, and overall revenue (www.finance.yahoo.com).

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Innovation

The main way Stryker gains a competitive advantage over its competition is through innovation. Their survival will depend on how well they develop new products and make improvements to existing ones. Thus, they spend millions of dollars on research and development each year to make sure they stay on top of the industry. Stryker does a very good job making new, unique, creative products and that enables them to get where they are today. It is also important that Stryker protect their ideas from competition through their patents and trademarks. Although, Stryker doesn’t consider the patent a major factor in its overall competitive success, they do try to obtain them whenever possible. The Company currently owns approximately 820 United States patents and 1,330 international patents which is stated in Stryker’s 2007 10-k report.

Superior Product Quality and Variety

Another way Stryker gains a competitive advantage is by providing a variety of top quality products. Stryker has divided their various product offerings into two main categories: MedSurg Equipment and Orthopedic Implants. These two divisions are divided up in order to gain the greatest share of the market by taking on both the specialty and commodity side of the market.

Stryker’s Orthopedic Implant Division is where Stryker produces their specialty items in the market. Their specialty products compete in a smaller niche within the medical technology market. Among these systems and specialty implants are several differentiated versions of Hip Implant Systems, Knee Replacement Systems, Trauma Implant Systems, Craniomaxillofacial Implant Systems, Spinal Implant Systems, and then there’s OP-1 bone therapy and bone cement.

Stryker’s Medsurg Equipment focuses on the commodity side of Stryker’s sales. This segment creates heavy-duty tools such as saws, drills, cast cutters, and a specialty tool called the bipolar forceps. Though they are classified as commodities, it is

important to note their ease of use for their surgeons, their reliability and their longevity.

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Conclusion

Stryker has not come by their good standing within the medical instruments and supply industry by accident. They have instead spent both time and money developing a plan of action which would set them apart from their competitors. This plan of

differentiation begins with their outstanding customer service and constant emphasis on innovation and then concludes with their high product quality and variety.

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Formal Accounting Analysis

Companies are required to follow the Generally Accepted Accounting Principles, or GAAP, when providing their financial statements. These requirements are the focal point of the business world. Every firm in the United States is required to present their company statistics in the GAAP approved way by a balance sheet, income statement, and statement of cash flows. Within these formats, there are rules as to govern how each item is found and recorded. “GAAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when

analyzing companies for investment purposes. GAAP covers such things as revenue recognition, balance sheet item classification and outstanding share measurements. Companies are expected to follow GAAP rules when reporting their financial data via financial statements” (http://www.investopedia.com/terms/g/gaap.asp). This is relevant to the investor because it makes the company display the most consistent information. When a company uses GAAP it can still try to misrepresent itself, however it makes it more difficult and there is the same data displayed for the public in different ways so that investors can double check and make sure the company is exactly what they say they are.

The formal accounting analysis uses six steps in deciding a company’s

transparency level as well as the accuracy of the firm’s financial statements. The steps are as follows: Identify key accounting principles, assess accounting flexibility as prescribed by GAAP, evaluate the accounting strategies, evaluate the quality of disclosure within the financial statements, identify red flags within the company’s accounting records, and undo the accounting distortions.

When used correctly, an accounting analysis can give a better view of the company using an unbiased source. Though a company can follow the policies set by GAAP, there is still room for accountant’s to manipulate the numbers to make the

company appear to be in a better financial state. An accounting analysis seeks to undue these distortions to give a more accurate view to potential investors.

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Key Accounting Policies

Stryker’s key success factors are important pieces of information used in

determining the critical accounting policies. These will then be used in giving a clearer assessment of the firm’s value. The problem in determining the actual value of a firm is creative accounting, which is taking a subjective accounting method and using it to the firm’s advantage. This causes a clouded view of a company’s actual value and inhibits investors from making informed and accurate financial decisions. Since profits are used as a measure of a manager’s performance, managers are influenced to distort profits with some of these subjective accounting methods. From the 10-K, Stryker’s key success factors that were identified in the Firm’s Competitive Analysis include: product and service differentiation, superior customer service, innovation, and superior product quality and variety. These are vital to the success of the firm. “With over 60 years experience in developing solutions for orthopedic physicians, Stryker understands that our ability to deliver quality results starts with our relationship with you”(Stryker.com). The subjective accounting policies that change the bottom line would be the recording of research and development, the utilization of operating or capital leases, and the disclosure and accounting methods used with pension and defined benefit plans.

One ineffective method required by GAAP is that research and development be expensed, as opposed to capitalizing it. Since research and development is a large cost for Stryker, this gives an inaccurate view of the company. Also, one important

accounting measure that would be important for Stryker, since they manufacture so many products, would be the recording of warranty expenses and reserves. Reading the customer reviews of their products would also be a good way of assessing their image.

Recording Research and Development

Stryker is always trying to be on the cutting edge of technological development with their products and they place a lot of emphasis on developing new products or improving existing ones to expand the scope of their business. This is a huge

Stryker Corporation Equity Analysis and Valuation