American Home Products Corp. Case Analysis
Introduction
American Home Product (AHP) was founded in 1926 with the merging of several small home product companies. As the company expanded in the 1930’s, it acquired companies in different businesses. After World War II, the company had four lines of businesses: prescription drugs, packaged (over-the-counter) drugs, food products, and housewares and household products. Although the name “American Home Product” has never appeared on its products, the firm produces many well-known brands in the market, such as Anacin, Woolite and Chef Boyardee.
Starting from the 1960’s, the firm caught a lot of attention with its almost debt-free capital structure. Its chief executive, William F. Laporte, enforced on top-down management system and strict financial policy. His managerial philosophy included the following 4 components:
1. Reticence
According to a poll done by Wall Street, AHP was ranked last in corporate communicability among its competitors in drug industry.
2. Frugality and tight financial control
All expenditure greater than $500 had to be personally approved by the chief executive, Laporte, regardless of the expense was an authorized in the corporate budget.
3. Conservatism and risk-aversion
The company did not develop much new products on its own. They introduced new products by either acquiring or licensing from other firms, or replicating competitors’ products.
4. Centralization of power
Laporte insisted that as the head of the company, he was the top authority. Therefore, he must monitor every aspect of the firm’s operation.
During his tenure, Laporte was able to lead the company into a period of stable, consistent growth and profitability. For 29 consecutive years, AHP had steady increase on its sales, earnings, and dividends. The firm’s price per earnings ratio had fallen, but it had a more than 6 times growth in earnings per share. Due to this huge growth, the value of the stock had triple during Laporte’s era.
As Laporte was coming
American Home Product (AHP) was founded in 1926 with the merging of several small home product companies. As the company expanded in the 1930’s, it acquired companies in different businesses. After World War II, the company had four lines of businesses: prescription drugs, packaged (over-the-counter) drugs, food products, and housewares and household products. Although the name “American Home Product” has never appeared on its products, the firm produces many well-known brands in the market, such as Anacin, Woolite and Chef Boyardee.
Starting from the 1960’s, the firm caught a lot of attention with its almost debt-free capital structure. Its chief executive, William F. Laporte, enforced on top-down management system and strict financial policy. His managerial philosophy included the following 4 components:
1. Reticence
According to a poll done by Wall Street, AHP was ranked last in corporate communicability among its competitors in drug industry.
2. Frugality and tight financial control
All expenditure greater than $500 had to be personally approved by the chief executive, Laporte, regardless of the expense was an authorized in the corporate budget.
3. Conservatism and risk-aversion
The company did not develop much new products on its own. They introduced new products by either acquiring or licensing from other firms, or replicating competitors’ products.
4. Centralization of power
Laporte insisted that as the head of the company, he was the top authority. Therefore, he must monitor every aspect of the firm’s operation.
During his tenure, Laporte was able to lead the company into a period of stable, consistent growth and profitability. For 29 consecutive years, AHP had steady increase on its sales, earnings, and dividends. The firm’s price per earnings ratio had fallen, but it had a more than 6 times growth in earnings per share. Due to this huge growth, the value of the stock had triple during Laporte’s era.
As Laporte was coming