American Home Products Case Study

Topics: Capital asset pricing model, Weighted average cost of capital, Finance Pages: 4 (1575 words) Published: March 25, 2009
Grant Nauta AHP Case Study Because American Home Products (AHP) currently operates with virtually no debt, their financial risk is very small. This shifts the burden heavily towards business risk. A porter’s five forces analysis is appropriate to determine the exact levels of business risk for American Home Products. First, the threat of substitutes is a risk that AHP cannot afford to ignore. Because they spend very little on Research and Development, and have to rely on their marketing to catch up to competitors, they always seem to be a step behind their competitors. In the industries that AHP operates, switching costs are very low and consumers based on anything from price to overall sentiment. Also, if a competitor markets a product more heavily than they do and creates a perceived level of product differentiation, this could harm demand for their products as well. Based on all of these facts, I would argue that the threat of substitutes is high. Next, the threat of entry of new competitors is something that must be addressed. The industries that AHP operates in happen to be very mature industries. Without some sort of revolutionary technology or change to make these industries more dynamic, it would be difficult for a new company to enter any of the industries that AHP competes in and be competitive. Also, because the industries AHP operates in are so established, it would take a very large capital requirement to even stand a chance of competing. Based on these factors, I would contend that the threat of new competitors is low. Furthermore, the intensity of competitive rivalry is something that can certainly affect AHP. Again, because they spend very little on research and development, a first mover advantage is something they will rarely, if ever possess. However, they do hold a comparative advantage in their levels of advertising and marketing. Though this helps, it does not make up for never having a first mover advantage. Another factor that does...
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