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
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