Expert answer:Home Depot
Solved by verified expert:What is your reaction to the sale of Home Depot Supply by Frank Blake? Do you see the divestiture as a good or bad decision for Home Depot as of 2007? Why?Discuss the competitive challenges confronting Home Depot. How does its business-level strategy stand up against the rivalry in the industry?What recommendations can you make to the top management team regarding the organizational structure and strategic leadership to support its business-level strategy?
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Case 12
The Home Depot
Dan Phillips, Bo Young Hwang, Sarah Sheets, Tristan Longstreth
Arizona State University
Introduction
The succession of CEOs, presidents, and board of directors provides a challenge for businesses as they reform,
reposition, and restructure. Although these successions
may provide a company with beneficial results, many experience 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., resigned 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 centralized organizational structure affected the performance of
employees resulting in excessive layoffs; and the expansion 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 affected Home Depot’s employee morale, stockholders, and
customers. CEO successor Frank Blake has much to address in order to reposition Home Depot as the industry
giant it has been for 20 years.
© Don Hammond/Design Pics/Corbis
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
prices” along with superior customer service provided by
a knowledgeable staff.1 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 professional 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 addition, 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.2 The 2,100 stores located throughout the United States, Canada, China, and Mexico employ roughly 335,000 people. Home Depot also operates
34 EXPO design centers, 11 landscape supply stores, and
two floor stores.3 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.4
Marcus and Blank implemented a decentralized
structure with an entrepreneurial style of management,
which consisted of a laid-back organization known for
The authors 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
either effective or ineffective handling of a managerial situation. The case solely provides material for class discussion. This case was developed with contributions
from Kevin Holmberg.
153
Case 12 • The Home Depot
154
the independence of its store managers.5 Over time the
changes in leadership, structure, and management style
diverged from what the originators intended.
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 engineer 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 retail experience. From GE he brought a new management strategy 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 operations, such as the computerized automated inventory
system, and centralized supply orders at the Atlanta headquarters. 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.6 Under Nardelli, Home Depot’s
sales over a five-year period went from $45.7 in 2000 to
$81.5 billion in 2005,7 and stock prices stagnated during
Nardelli’s six-year reign at just over $40 per share.8 The
weak financial profits and his results-driven management style, which allegedly affected the cherished culture
of the company, led to a backlash and push for his resignation in January 2007.
Frank Blake succeeded Nardelli as chair and CEO of
Home Depot in January of 2007. He earned his bachelor’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.9
His responsibilities included real estate, store construction 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 executive. 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.10 As Home Depot’s new leader, Blake faces significant challenges, especially when it comes to rising
above competition.
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 forefront 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.11 Only a select few pose a true threat to
Home Depot.
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 second 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 success to a philosophy similar to Home Depot’s: “Providing
customers with the lowest priced and the highest quality home improvement products.”12 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 expanding 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.14
Although most competitors construct their stores in a
compact fashion in order to adhere to real estate constraints, 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 escalators 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 merchandise, specialty departments, wider aisles, and lower,
more convenient merchandise shelves.15
Home Depot’s competitive position is not only affected by the strategies used by the top two competitors,
but also by the relationships it maintains with suppliers.
155
Home Depot relies on 10,000 to 12,000 suppliers to keep
its shelves stocked, creating a tremendous challenge in
regard to the process and coordination of the logistics.16
During the reign of CEO Robert Nardelli, Home Depot
expanded at a rapid rate and failed to take the additional
supply requirements into consideration,17and thus found
its brand image in jeopardy when suppliers were unable
to keep up with the increased production demands.
When Robert Nardelli became CEO, he inherited a
disorganized system of suppliers that relied on archaic
accounting practices, including individual product order
forms and fax-only lines of communication.18 Nardelli
placed increased emphasis on renovating the Home
Depot supplier networks. The first thing he did was to
gradually implement the Home Depot Online Supplier
Center and the Cognos 8 Scorecarding software. The
Center “features continuously updated information on
how to do business with Home Depot, including the
corporate performance policy, updates, news, information on events and training and scorecards.”19 The
Cognos 8 system gathers data from warehouse management sources, purchase orders, and contract terms, and
condenses it. The data is then analyzed and each supplier
is rated on various aspects of the transaction. All the information is available online via the supplier center, allowing suppliers to see what areas they should improve
to become more efficient.20
Nardelli also held workshops for specific groups of
Home Depot suppliers. For instance, Nardelli hosted
meetings with Home Depot’s top 15 strategic suppliers
four times a year to discuss plans for new products and
store promotions. The suppliers toured a Home Depot
Store and gave Nardelli input on product placement.21
Because Home Depot has such a wide variety of suppliers, including suppliers from many different countries,
it offers overseas workshops to educate prospective suppliers. The latest workshop took place in Shanghai and
was conducted by native speakers in an effort to educate
vendors on “how to do business with Home Depot, and
be a better supplier overall.”22
Another area of innovation is Home Depot’s inventory and warehousing procedure. Home Depot prefers to receive products directly from their suppliers,
eliminating the need for distribution centers, which are
popular with many other retail organizations.23 This system has serious benefits and drawbacks. First, it allows
Home Depot to leverage the space it has and display a
multitude of products in a warehouse setting. This capability is beneficial because customers are able to see
the products available and purchase them in the same
visit. The major drawback to this system is that each
store must have an extremely efficient and organized
Customers
Although Home Depot was originally designed as a
home improvement superstore that would cater to both
individual consumers and building contractors, throughout its tumultuous history, Home Depot has changed its
focus a number of times. During Nardelli’s reign, cost cutting was a key focus and the individual customer was neglected in lieu of professional contractors who purchased
materials in bulk amounts. Many long-time Home Depot
customers have switched to competitors, mainly Lowe’s,
because of constant inefficiencies at Home Depot. One
customer explained that he had to wait three months
to get his kitchen remodeled due to errors on Home
Depot’s behalf and he will now “go out of [his] way to go
to Lowe’s.”26 This customer’s experience is not unique and
new CEO Frank Blake has acknowledged the magnitude
of this issue. Home Depot has sold its contractors supply division, which will allow them to resume the focus
on the individual customer.27 Due to the wide range of
customers it caters to, Home Depot will likely face significant competition from other firms selling substitute
services that match the information provided by Home
Depot in the do-it-yourself segment.
Substitute Information Services
for Do-It-Yourself Customers
Most companies focus on differentiating their products
and services in order to combat rivalry, but also obtain
enough loyalty to dissuade customers from switching to
a substitute product. Not many substitutes can realistically threaten the success of Home Depot’s product sales
because they offer such a wide variety of products and
people will always need to build houses and desire to improve existing homes. However, Home Depot’s services,
Case 12 • The Home Depot
Suppliers
warehouse supply chain operation. If a store runs out
of a particular item, the customer will have to wait until the supplier can produce more of that item, which
can take more time than transporting an out-of-stock
item from a distribution center to a local store.24 Finally,
Home Depot has utilized a system of “less than truck
load” store deliveries, which allows its trucking partners
to carry inventories to Home Depot stores along with
products destined for other customers to save on transportation costs. But as Home Depot expands, it may
switch to a dedicated trucking system with full truck
loads servicing multiple stores in a specific region.25
Home Depot has developed many innovations to help
make transactions with suppliers more efficient. One of
Home Depot’s biggest challenges is ensuring good interactions with its customer base.
Case 12 • The Home Depot
156
such as installation, may be hampered by substitutes.
Today numerous Internet sites offer “How to” information as well as structured plans for various types of home
improvement projects. HGTV and other home improvement shows may also deter customers away from Home
Depot’s services. One way to fend off threats from rivalry
and possible substitutes is for Home Depot to expand its
operations internationally.
International Operations
Home Depot is the largest home improvement retailer
in the world and employs 335,000 people. In light of
the industry trends that are occurring, Home Depot is
reaching out to new markets, which may give them additional sources of revenue as well international business
experience. Stores are opening in Canada and Mexico.
In Canada, Home Depot acquired Canadian hardware
store Aikenhead Hardware, and has ambitions to take
over its biggest Canadian competitor Rona Hardware.28
The most recent stage of expansion includes 12 stores in
China, called “The Home Way.”29 This foothold in Asia
will allow them access to markets that were previously
inaccessible.
The Chinese home improvement industry is a refreshing niche market with a lot of potential for new
sales for Home Depot. In China, when a consumer
purchases a home from a contractor, they purchase an
unfinished shell. The house itself is little more than
four walls and floor.30 In order to make the house livable, Chinese consumers must pay contractors, including
electricians, plumbers, and drywall experts, to renovate the house. Home Depot plans to provide Chinese
consumers with the hardware and skills to do much of
the renovation work themselves. In order to meet this
goal Home Depot will need to train an army of knowledgeable salespeople who can provide assistance and
workshops for consumers.31 Home Depot will face a
number of challenges as they expand into China. It must
contend with the bureaucratic communist government
that rules China. There are relatively few safeguards
against nationalization, if the government decides to
appropriate Home Depot assets or property. In addition the Chinese consumers may not have the desire
to renovate their homes by themselves. Upper management must decide which method of entry would be
most appropriate, and the most effective way to appeal
to the average Chinese consumer. In addition, given
the recent domestic housing recession, upper management must decide whether expansion into China is the
most effective use of the firm’s money. Because of the
diverse ventures Home Depot is involved in, Nardelli
and more recently Frank Blake adopted some basic
strategies that can be applied in order to maintain the
company’s viability.
Strategies Used
As previously mentioned Home Depot historically used a
decentralized organizational structure with an entrepreneurial management style, focusing on the retail stores.
Store managers were given immense autonomy, and its
stores were staffed with well-trained and knowledgeable
employees who could offer advice and help customers
find items they wanted quickly.32 Home Depot used to
place a huge emphasis on creating a customer-friendly
atmosphere with clean aisles, organized shelves, and
well-stocked inventory.
However, profit from the retail stores began to decrease as the home improvement retail industry matured
and became saturated. Home Depot needed to find its
next great idea that would sustain growth. Nardelli believed that the key to Home Depot’s success was the
acquisition and incorporation of existing business into
Home Depot Supply, while simultaneously squeezing efficiencies out of its retail stores.33
Home Depot Retail
A critical part of Nardelli’s strategy was to reshape Home
Depot into a more centralized organization.34 The centralization effort was evident in the management system that one journalist referred to as a “Command and
Control Management system,” with a goal to replace the
old, sometimes random, management style with a strict
one.35 Management in corporate headquarters started
to rank every employee on the basis of four performance
metrics: financial, operational, customer, and people skills.
Nardelli created an equation to measure effective performance. The equation is VA Q A E: the valueadded (VA) of an employee equals the quality (Q) of
what the employee does, multiplied by its acceptance (A)
in the company, times how well the employee executes
(E) the task.36
Influenced by his military background, Nardelli often hired employees who had military experience. Of
the 1,142 people who were hired into Home Depot’s
store leadership program, which consisted of a twoyear training program for future store managers, 528
were junior military officers.37 He also brought many
militaristic ideas into managing Home Depot, which
required his employees to carry out his “command.”
Home Depot began to measure everything from gross
margin per labor-hour to the number of greets at its
front doors to maintain better information, allowing the
CEOs to improve control of the Home Depot operation.
157
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 during off-work week days. To my surprise, no matter wh …
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