T 12
changes
Case 12
dhega
The Home Depot
Strat
Dan Phillips, Bo Young Hwang, Sarah Sheets, Tristan Longstreth
Rober
chairp
anual
from
Arizona State University
rom
Electr
ginee
Powe!
AL
Hom
perie
egy b.
princ
the c
execz
erati
syste
quar
Introduction
The succession of CEOs, presidents, and board of direc-
tors provides a challenge for businesses as they reform,
reposition, and restructure. Although these successions
may provide a company with beneficial results, many ex-
perience hardship. Top company officials leave due to a
variety of reasons, but a common reason is conflict with
employees related to executive leadership style and the
culture it creates
Robert Nardelli, former CEO of Home Depot Inc., re-
signed in January 2007. Numerous factors led to Nardelli's
resignation: Shareholders experienced dissatisfaction
with the performance of Home Depot's stagnating stock
prices; Nardelli's militaristic leadership style and central-
ized organizational structure affected the performance of
employees resulting in excessive layoffs; and the expan-
sion of retail stores became unmanageable. The once
successful and highly valued Home Depot culture had
changed, affecting Home Depot's sales and customer
loyalty. Along with the change in Home Depot's business
culture, it faced challenges associated with the dramatic
boom and fall in the housing market. These problems af-
fected Home Depot's employee morale, stockholders, and
customers. CEO successor Frank Blake has much to ad-
dress in order to reposition Home Depot as the industry
giant it has been for 20 years.
beyc
mar
and
sale
$81
Nar
prices” along with superior customer service provided by
a knowledgeable staff. This vision became a reality after
acquiring sufficient capital from a New York investment
banker. They opened two Home Depot stores on June 22,
1979, in the company headquarters, Atlanta, Georgia.
Home Depot grew rapidly in a short period of time and
went public in 1981. In 1986 Home Depot broke the $1
billion mark in sales with 50 stores that expanded into
eight markets.
Home Depot revolutionized the home improvement
industry by offering a wide selection of merchandise, low
prices, and superior customer service to both the pro-
fessional contractor as well as the do-it-yourself patron.
In-store inventory contains premium products imported
from more than 40 countries, including 40,000-50,000
different types of building materials, home improvement
supplies, and lawn and garden products. An additional
250,000 products are available upon special order. In ad-
dition, merchandise is localized throughout each store to
match the area's specific market needs.
Today Home Depot is the largest home improvement
retailer in the world. The 2,100 stores located through-
out the United States, Canada, China, and Mexico em-
ploy roughly 335,000 people. Home Depot also operates
34 EXPO design centers, 11 landscape supply stores, and
two floor stores. In addition, Home Depot has become
one of the leading diversified wholesale distributors in
the United States due to its former HD Supply division.
HD Supply Centers caters to the professional contractor
for home improvement and municipal infrastructures
with nearly 1,000 locations in the United States and
Canada."
Marcus and Blank implemented a decentralized
structure with an entrepreneurial style of management,
which consisted of a laid-back organization known for
Wea
me
oft
nat
Не
lor
de
jo
of
H
ti
d.
History
Bernie Marcus and Arthur Blank cofounded Home
Depot on June 29, 1978, after being fired from Handy
Dan, a small chain of home improvement stores. Their
vision was to offer "warehouse stores filled from floor to
ceiling with a wide assortment of products at the lowest
te
echon would like to thank Professor Robert E. Hoskisson for his support under whose direction the case was developed The authors do not intend to illustrate
er effective or infective handling of a managerial station. The case solely provides material tor ciass discussion. This case was developed with contributions
vin Homberg
4
Case 12: The Home Depot
the independence of its store managers. Over time the
changes in leadership, structure, and management style
diverged from what the originators intended.
Competition
Competition fuels businesses to be efficient in almost
every way. Competition forces companies to control
their costs, develop new products, and stay at the fore-
front of technology. Companies that provide similar
services are required to differentiate from the rest of
the pack. All of these facets of competition exist in the
home improvement industry. Home Depot has more
than 25 direct competitors including Lowe's, Menards,
True Value, Ace Hardware, Do It Best, Sears, Target,
and Wal-Mart." Only a select few pose a true threat to
Home Depot.
retail ex-
Strategic Leaders
Robert L. Nardelli acted as president, CEO, and
chairperson of the board from December 2000 until
January of 2007. Nardelli received his BS in business
from Western Illinois University and earned his MBA
from University of Louisville. Nardelli joined General
Electric in 1971 as an entry-level manufacturing en-
gineer and by 1995 became president and CEO of GE
Power Systems.
After leaving GE he was quickly hired as CEO of
Home Depot despite the fact that he lacked
any
perience. From GE he brought a new management strat-
egy based on Six Sigma to Home Depot. Using Six Sigma
principles he centralized the management structure of
the company by eliminating and consolidating division
executives, he initiated processes and streamlined op-
erations, such as the computerized automated inventory
system, and centralized supply orders at the Atlanta head-
quarters. He took the focus off the retail stores, moving
beyond the core U.S. big-box business to conquer new
markets by building up its Home Depot Supply division,
and expanded into China. Under Nardelli, Home Depot's
sales over a five-year period went from $45.7 in 2000 to
$81.5 billion in 2005, and stock prices stagnated during
Nardelli's six-year reign at just over $40 per share. The
weak financial profits and his results-driven manage-
ment style, which allegedly affected the cherished culture
of the company, led to a backlash and push for his resig-
nation in January 2007.
Frank Blake succeeded Nardelli as chair and CEO of
Home Depot in January of 2007. He earned his bache-
lor's degree from Harvard College and a jurisprudence
degree from Columbia Law School. Blake originally
joined the company in 2002 as executive vice president
of Business Development and Corporate Operations."
His responsibilities included real estate, store construc-
tion and maintenance, credit services, strategic business
development, special orders and service improvement,
call centers, and installation services business. Prior
to this role, Blake was deputy secretary for the U.S.
Department of Energy and also a former GE execu-
tive. Blake also has public sector experience, serving as
general counsel for the U.S. Environmental Protection
Agency, deputy counsel to Vice President George Bush,
and as a law clerk to Justice Stevens of the U.S. Supreme
Court." As Home Depot's new leader, Blake faces sig
nificant challenges, especially when it comes to rising
above competition
Lowe's
Lowe's is Home Depot's largest competitor and holds a
significant market share. Founded in 1946, Lowe's
grew
from a small hardware store in North Carolina to the sec-
ond largest home improvement wholesaler in the world.
It currently operates 1,375 stores in 49 states and ranks
42 on the Fortune 500 list. Lowe's can attribute its suc-
cess to a philosophy similar to Home Depot's: "Providing
customers with the lowest priced and the highest qual-
ity home improvement products." However, Lowe's
distinguished itself from Home Depot by targeting the
individual customer, especially women, as Home Depot
began to focus on contractors. Lowe's will continue to
differentiate from competitors by promoting and ex-
panding through exclusive private labels or select brands.
Premium kitchen cabinets and stone countertops are a
few new product lines that Lowe's is implementing within
their stores. Much like Home Depot, Lowe's is looking to
expand by pursuing interest in installing services, special
orders, and commercial sales.13
Menards
Menards is Home Depot's second biggest competitor."
Although most competitors construct their stores in a
compact fashion in order to adhere to real estate con-
straints, Menard's is moving ahead with an opposing
strategy. The midwestern home center chain has started
to build two-story urban stores. "We might be No. 3 as
far as store counts go, but we are a regional player and
we are innovative," said Menards spokeswoman Dawn
Sands. Customers navigate the two-story stores using es-
calators that accommodate both the customer and their
shopping cart. The stores also brag a unique customer
experience, including a baby grand piano that provides
in-store music, new boutique departments, upscale mer
chandise, specialty departments, wider aisles, and lower,
more convenient merchandise shelves.
Home Depot's competitive position is not only af
fected by the strategies used by the top two competitors,
but also by the relationships it maintains with suppliers.
Case 12: The Home Depot
57
Home Depot Supply
However, this lead to many underperforming execu-
tives being routinely pushed out of their positions.
Since 2001, 56 percent of job changes involved bringing
new managers in from outside the company. ** This hir-
ing trend is quite different from the past, when man-
agers ran Home Depot stores based on the knowledge
built through the years of internal experience in Home
Depot operations.
In an effort to drive down labor costs, many full-
time employees were replaced by part-time employees.
But this approach did more than just cut costs; it dam-
aged employee morale, diminished the knowledgeable
staff available to customers, and led to many com-
plaints about poor customer service and understaff-
ing. As one customer from San Fernando, California,
stated:
The building supply market during the early 1990s was
a growing yet fragmented market segment worth $410
billion per year.“ Nardelli saw an opportunity to enter
this new market because there were few large competi-
tors. To reduce the cannibalization of sales from its exist-
ing retail stores, he announced that Home Depot would
up
The Home Depot at 12960 Foothill Boulevard, San
Fernando, California 91342, has virtually no customer
service. First I thought I couldn't find any employees to
help me because I used to go after work at around 5:00
P.M. Then I tried going during my lunch hour, then dur-
ing off-work week days. To my surprise, no matter what
time I go, there are no present employees out on the floor.
The one or two that I've seen are obtained by hassling the
cashiers. Try getting help from the guy out in the garden
department and he answers with “I don't know, I'm not an
expert. They didn't train me." What kind of answer is this,
what kind of store is this? The commercials on TV make
it almost seem like a mom and pop candy store. You go
in and you're by yourself
. You need a refrigerator? Tough.
There's nobody there to sell it to you. You need a chande-
lier? Tough no one in this department to help you. What
about the next department? Oh, he replies he knows noth-
ing about the department next door. Customers beware:
shop elsewhere."
cut retail store openings by nearly half over a five-year
period." Using the money saved from cutting retail
store construction, Home Depot spent about $6 billion
acquiring more than 25 wholesale suppliers to build
Home Depot Supply (HDS). HDS was a wholesale unit
that sold pipes, custom kitchens, and building materials
to contractors and municipalities.
Because Home Depot had acquired so many whole-
salers, HDS became one of the leaders in the building
supply industry. For example, in 2005 Home Depot pur-
chased National Waterworks and entered the municipal
water pipe market. Home Depot's biggest purchase was
that of the $3.5 billion acquisition of Hughes Supply in
2006, which made Home Depot a leading distributor of
electrical and plumbing supplies. HDS expected to have
1,500 supply houses with revenues of $25 billion annu-
ally by 2010.41
Due to the fragmentation of the building supply
market, many contractors were associated with their re-
gional suppliers based on long-standing relationships.
Those regional suppliers offered a highly trained sales
staff and specialized service, whereas HDS stores worked
much like the standard warehouse format.15 Home
Depot was challenged to satisfy a new range of custom-
ers' needs, which were different from do-it-yourself
tomers. Therefore, HDS encouraged its sales employees
by rewarding them, primarily in commissions, to win
contracts. Furthermore, Home Depot retained most of
the management of acquired suppliers
, realizing the in-
portance of cultural continuity
. Nardelli insisted that top
management, salespeople, and internal cultures of the
cus-
acquired companies maintain their corporate names and
colors on stores and delivery trucks. 15 He believed that
these efforts would help them keep existing long-term
According to the University of Michigan's annual
American Customer Satisfaction Index released on Feb-
ruary 21, 2006, with a score of 67, down from 73 in 2004,
Home Depot scored 11 points behind Lowe's. Claes
Fornell, a professor at University of Michigan, stated
that the drop in satisfaction was one reason why Home
Depot's stock price has declined at the same time Lowe's
has improved."
The general appearance of Home Depot retail
stores was becoming a drawback for customers. They
often complained that Home Depot had become more
like a "warehouse" that was unclean, unorganized, and
far from the enjoyable shopping experience it had been
in the past. This neglect of the Home Depot's retail
stores may have been the result of Nardelli shifting his
focus toward new ventures, including Home Depot
Supply
relationships with contractors. HDS was expected to
earn 20 percent of the company's overall sales.
As mentioned, when Blake took over as CEO he saw
the need to refocus Home Depot's vision and again ca-
ter to the retail market. Therefore, in June 2007 Home
Depot announced the sale of Home Depot Supply for
$10 billion to a group of private equity firms (Brian
Capital Partners, Carlyle Group, and Clayton, Dubilier,
and Rice).47 The proceeds from the sale will be used to
increased capital spending, upgrading merchandise, and
implement necessary changes in Home Depot such as
Purchase answer to see full
attachment