The primary reason for The Home Depot to use a pause/proceed with caution strategy is due to the recent increase in interest rates and the recent decline in the sales within the housing market. Analysis of recent economic data suggests that there is a threat of inflation which will result in lower disposable income for its customers. Coupled with the significant growth in the industry and by its major competitor Lowe’s, The Home Depot should use a pause/proceed with caution strategy for its short-term strategy.
This will help The Home Depot to focus on providing better customer service, competitive pricing, and higher quality of products and services at its current locations. The growth over the past several years has given The Home Depot a competitive advantage and a large market lead. With this, it would be sensible for them to focus on its current stores, increasing sales at those locations before expanding into new areas. A decline in home sales and home improvement markets will have a major impact on the services that The Home Depot can provide and the prices that it can offer.
The demand for installation and other services may suffer if there is a major decline in the housing market or if interest rates increase. It is recommended that The Home Depot implement the pause/proceed with caution strategy for a short-term duration period, to help protect against potential economic problems, which could decrease shareholders value. Strategic Audit Case Analysis Introduction The Home Depot was founded in Atlanta, Georgia in 1978. The company was started by three men who were fired from the same company.
The same weekend that they were fired, they formed what would eventually become The Home Depot. Bernard Marcus, Arthur Blank, and Kenneth G. Langone were the three men that started The Home Depot. The company began in Atlanta and started with just three stores. Industry experts gave Home Depot 10-to-1 odds that it would fail (Wheelen and Hunger, 20-4). However, by 1982, it was voted the “retailer of the year” (Wheelen and Hunger, 20-4). By 1990, its stock price had increased by 7019% and had split eight times. It had gone from Start-up Company to mega-store in just over a decade (Wheelen and Hunger, 20-4).
The original founders were known for their “nonconformity” (Wheelen and Hunger, 20-8). Board meetings would have spit balls flying through the air and were not a typical business meeting of a major corporation. However, that was part of the corporate culture that the original founders had laid. Over the years, as the business grew, The Home Depot would expand into Canada, Mexico, and Central and South America. The amount of growth through the 1990’s was impressive and Home Depot was named one of “America’s most admired companies” in 1995 (Wheelen and Hunger, 20-5).
In 2001, the original founders of the company relinquished themselves to new management. Arthur Blank retired as president and CEO and joined Bernard Marcus as Co-Chairman of the board. Robert L. Nardelli was named the new CEO of Home Depot in January of 2001. It would usher in a new period of growth for the company. Blank and Marcus would both leave the company shortly later. Blank went on to buy the Atlanta Falcons, of the National Football League and Marcus would retire to pursue other ventures. Kenneth Langone would remain on the board of directors as the only founder in a position of control.
Nardelli, who came from General Electric, was given control of the company and would head the new management team that would lead the company into the future (Wheelen and Hunger, 20-5 & 20-6). Today, The Home Depot is the largest Do-it-yourself retailer, and the second largest retailer in the United States, next to Wal-Mart (Wheelen and Hunger, 20-2). In 2005, annual sales were over $81 billion. By August of 2006, it operated 1832 Home Depot stores and had a presence in all 50 states of the United States (Wheelen and Hunger, 20-3). It is the current market leader in the Do-it-yourself industry. Past Corporate Performance
Financial Analysis – Ratios A close analysis of the financial statements (see Figures 1 & 2) and ratios (see Figure 3) of The Home Depot reveal that the company has distinct strengths and weaknesses. The Home Depot’s current ratio has decreased in fiscal 2006; its current assets decreased by $2,033 million due to the decline in short-term investments. The quick ratio reveals that the company has 31% of current assets available to meet its short term obligations, without relying upon the sale of its inventory. This ratio has decreased by $12 million primarily because of the decline in short-term investments.
This indicates that the company is using its assets to its best advantage possible and careful planning its cash flows to effectively increase overall profit. The debt to assets ratio has slightly increased over the past two years primarily because of $4,510 million increase to current liabilities, long-term debt, and other long-term liabilities. The debt to equity ratio has increased to 65% in fiscal 2006. This is an 11% increase, which means that the company receives less than half of its financing from creditors and receives more than half from its owners.
The long-term debt to equity ratio has increased by 7% from fiscal 2004. This ratio indicates that the company has room to expand through possible borrowing of additional long term funds. The inventory ratio has decreased by . 10 times in fiscal 2006 and indicates that the company is holding its excessive inventory stock a slightly longer than in the past. The Home Depot’s fixed asset turnover ratio shows that the utilization of sales productivity, property, and equipment efficiency has declined. This decline can be contributed to the slow housing market and the economy.
The total assets turnover ratio indicates that the company is generating sufficient volume of business for the size of its asset investments. The Home Depot’s gross profit margin has increased over the past two years to 34%, which indicates that the company can readily cover operating expenses and still yields a profit. Operating profit margin, net profit margin, and return on total assets ratios have remained consistent over the past two years. It indicates that the company is reinvesting in an efficient manner. However, to improve the company, it needs to increase all three of these ratios.
Through the use of technology and marketing the company has increased sales and if it continues on this trend, all three ratios should increase. The return on stockholder’s equity ratio reveals that the company earned 0. 22 cents for every dollar invested by its owners. Overall The Home Depot shows stability in an uncertain economic market and as the economy recovers it will remain the leader of the industry. Financial Analysis – Financial Statements Analysis of The Home Depot’s financial statements (see Figures 1 & 2) shows crucial information about the firm’s financial position.
The cash position of the company is growing, even though the balance sheet (see Figure 1) reveals a decrease in cash and equivalents in 2005 and slight increase in 2006. Short-term investments have decreased and net receivables, inventories, and other current assets increased in 2006. In the liabilities and stockholder’s section of the balance sheet, current liabilities increased due to short-term debt of $900 million in 2006 and zero short-term debt in 2005 and 2004 (Wheelen and Hunger, 20-30 & 20-31). At the end of the second quarter of fiscal 2006, The Home Depot’s long-term debt to equity ratio was 24. %, reflecting senior notes issued to purchase Hughes Supply (Wheelen and Hunger, 20-28).
Stockholder’s equity shows an increase for 2006; due to increase in retained earnings. During the second quarter, the company repurchased 58 million shares for a total of 350 million shares repurchased since 2002—approximately 17% of outstanding share (Wheelen and Hunger, 20-29). The Home Depot had an increase in net sales for the year of 2006 of 11. 5%. Sales at Home Depot Supply (formerly known as Hughes Supply, Inc. ) accounted for approximately 10 percent of the company’s total sales (Wheelen and Hunger, 20-6).
Reported net earnings of $5. 8 million and diluted earnings per share of $2. 75 are reported in 2006 and compared to net earnings of $5. 0 million and diluted earnings per share of $2. 29 in 2005. Comparable sales increased 3. 8% and The Home Depot had a gross profit margin of 33. 5% and a record operating margin of 11. 5%. These results are achieved through the continued execution of our strategy to enhance the core, extend the business, and expand the market (2005 Annual Report, p 38). Financial Analysis – Industry/Competitor Comparison
The Home Depot competes in a very large and competitive retail building and supply industry dominated by regional and national chains of vast superstores. In 2006, this market was worth $700 billion, comprising of $550 billion of product demand and $150 billion product installation (Wheelen and Hunger, 20-24). Evaluating the ratios of The Home Depot against industry averages reveals some strength and weakness (“Industry Averages”). The Home Depot needs to improve the return on equity, debt to equity, and earnings per share ratios.
All of these were affected by rising interest rates and a decline in home sales starting in 2006. Debt to equity was the most deficient at 0. 65 compared to the industry average of 112. 4 (“Industry Averages”). This is more likely caused by a low asset turnover. The earnings per share ratio for The Home Depot is a strength, in that it’s at 2. 75 and the industry average is 0. 71 (“Industry Averages”). This is likely because retained earnings have increased for the last three years. Lowes, Menards, and 84 Lumber are The Home Depot’s primary competitors in the retail building and supply industry (Wheelen and Hunger, 20-25).
Lowe’s is the major competitor and very similar to The Home Depot as a leader. Lowe’s has very high profitability indicating this is a strong company in this industry with sales. Lowe’s net sales have been steadily increasing every year and in fiscal year 2006 reached $43,243 million (Wheelen and Hunger, 20-25). Menards, the third largest competitor, has estimated annual sales of $5. 5 million (Wheelen and Hunger, 20-25). The Home Depot was still in lead in 2006 with sales of $81. 5 million.
The Home Depot is currently improving its debt structure which will bring it closer to the industry verage and increase its lead in the industry. Strategic Posture Current Mission The main focus of Home Depot’s mission statement is to offer high quality, competitively priced, products and service to its customers. The Home Depot’s mission statement “is to form mutually beneficial partnerships with diverse businesses that allow us to deliver superior products and services and superb customer service, which ultimately increases shareholder value. We are committed to creating effective competition utilizing all possible sources.
We will actively seek targeted diverse businesses and provide them the opportunity to partner with The Home Depot to provide competitively priced, high quality goods and services to our customers” (“Our Mission and Outreach Efforts”). Current Objectives The Home Depot, Inc. objectives arise out of its mission statement. The main objectives from the mission statement of the company are to deliver exceptional customer service, superior products and services, competitive pricing through partnerships with suppliers and distributors, and increase shareholder’s value.
The company’s 2010 targets included: annual sales growth of 9-12 percent, earnings per share growth of 10-14 percent, add 400-500 new store openings with 40-55 million new square feet, and cumulative capital expenditures of $17-20 billion” (Wheelen and Hunger, 20-7). The Home Depot also expects to expand its do-it-yourself market by $200 billion in the United States and more than $250 billion in the international market (Wheelen and Hunger, 20-7). “According to CEO Nardelli, ‘Over the next five years, The Home Depot expects to maintain and grow its leadership position in home improvement retail worldwide.
At the same time, [it] expect[s] to become the nation’s largest diversifies wholesale distributor, become number one in services and will dramatically increase [its] direct-to-consumer channels’” (Wheelen and Hunger, 20-7). Current Strategies The Home Depot’s current strategies are helping it reach its current goals and objectives outlined from the mission statement. The Home Depot’s “overall strategy was composed of what Nardelli called the 3E’s: Enhancing the Core, Extending the Business, and Expanding the Market” (Wheelen and Hunger, 20-6).
Enhancing the Core means that The Home Depot stores and product lines are always being updated “to increase sales of current products to current customers” (Wheelen and Hunger, 20-6). Determining success of this strategy was evaluated “on the basis of an increasing average ticket paid by store customers and by improving store productivity” (Wheelen and Hunger, 20-6). The second current strategy is, Extending the Business. The goal of this strategy is to expand “the primary retail business of the company” into multiple channels (i. e. atalogs, selling new products or services) (Wheelen and Hunger, 20-6 & 20-7).
The Home Depot continues to look for new ways to expand and grow its business. The last current strategy is, Expanding the Market. Expanding the Market’s goal is for the corporation to constantly grow with new products in new markets to help serve current and future customers (Wheelen and Hunger, 20-7). This strategy is being met by opening new store locations in other countries and “by offering new building supply services to professional customers, such as home building contractors” (Wheelen and Hunger, 20-7).
Numerous new products and services offered at Home Depot, “were being obtained through acquisitions of existing companies” (Wheelen and Hunger, 20-7). Current Policies The Home Depot’s current policies are reflected in the company’s Statement of Outreach, and Business Code of Conduct. The Statement of Outreach says: “In our efforts to actively reach out to diverse businesses, we have chosen several different vehicles to enhance our outreach efforts in order to build upon our program. First, we are national members of the Women’s Business Enterprise National Council (WBENC) and the National Minority Suppliers Development Council (NMSDC).
We also sponsor and attend national and regional diverse supplier and small business trade shows as well as chamber events. We also advertise in publications that are geared toward diverse business owners. We believe these vehicles, in conjunction with our web site, will assist us in effectively identifying prospective suppliers who will partner with us as we continue to grow our business” (“Our Mission and Outreach Efforts”). The Statement of Outreach is a commitment to creating equal employment opportunities within the Home Depot Corporation.
Giving equal rights and opportunities to women, and all minorities, is at the forefront of Home Depot’s Outreach Statement. “Home Depot’s Business Code of Conduct and Ethics state[s]: Acting with integrity and doing the right thing are the driving forces behind The Home Depot’s extraordinary success. From the very beginning, The Home Depot, inclusive of its subsidiaries and affiliates, has been committed to conducting its business in an ethical manner-doing right by our Associates, our customers, our vendors, our suppliers, our communities and our stockholders….
All that we do at The Home Depot must be consistent with the values of the Company. We believe in Doing the Right Thing, having Respect for all People, building Strong Relationships, Taking Care of Our People, Giving Back, providing Excellent Customer Service, and Encouraging Entrepreneurial Spirit and providing strong Shareholder Returns” (Wheelen and Hunger, 20-11). The eight values defined in The Home Depot’s Business Code of Conduct and Ethics are expected of every employee and member of its team everyday within The Home Depot. The “values are the fabric of the Company’s unique culture and are central to our success” (“Values”).
Corporate Governance Board of Directors The Board of Directors for Home Depot is currently made-up of eleven people. Of the eleven members of the board of directors, nine are listed as independent according to the standards of the New York Stock Exchange (Wheelen and Hunger, 20-12). The purpose of the Board of Directors is to focus on the mission of the company, establish the strategic vision, and to ensure that the goals and objectives of Home Depots and its stakeholders are being met. Each board member serves on at least one committee within the organization.
These committees included the Executive Committee, the Audit Committee, the Nominating and Corporate Governance Committee, the Leadership Development and Compensation Committee, and the Information Technology Advisory Council (Wheelen and Hunger, 20-13). The key board members are the CEO, Robert L. Nardelli, and the Lead Director of the Board, Kenneth Langone (Wheelen and Hunger, 20-12). Robert Nardelli joined Home Depot in December of 2000. He was previously the CEO of General Electric (GE) Power Systems. He was never in the military, but always wanted to be. Thus, he brought a significant change to the company and its culture.
The “informal style of the founders was being replaced by the more military style of Nardelli” (Wheelen and Hunger, 20-9). Nardelli brought a wealth of knowledge, skills, and abilities to Home Depot when he arrived. He is currently the chair of the Executive Committee and owns 5,332,266 shares of stock within the company (Wheelen and Hunger, 20-13). Kenneth Langone has been with Home Depot since 1978 and has been a director since then. He was one of the original founders of the company. Being one of the founders, his vision has helped to guide Home Depot throughout the years, to where it is now.
Langone is the last remaining founder to be on the Board of Directors. He currently is the chairman of the board’s Nominating and Corporate Governance Committee, as well as being a member of the board’s Executive Committee and Audit Committee. He owns the most amount of stock of any of the board members with 16,519,117 shares of stock (Wheelen and Hunger, 20-13). The other board members of Home Depot include Gregory Brenneman, John Clendenin, Claudio Gonzalez, Milledge Hart, Bonnie Hill, Laban Johnson, Lawrence Johnson, Angelo Mozilo, and Thomas Ridge. Each of these members brings many years of experience and knowledge to the board.
Most of the directors were CEO’s or leaders of the industry in other roles. Gregory Brenneman was previously CEO of Continental Airline and PWC Consulting. Bonnie Hill has been a director since 1999 and was founder and CEO of Icon Blue, Inc. Thomas Ridge was previously the governor of Pennsylvania and the Secretary of Homeland Security for the United States. Their combined leadership and vision has helped Home Depot nearly double in growth since 2000 (Wheelen and Hunger, 20-1). The Executive Committee for Home Depot consists of Nardelli, Clendenin, Hart, and Langone.
The Audit Committee is made up of Clendenin (Chair), Brenneman, Gonzalez, Jackson, and Langone. The Nominating and Corporate Governance Committee included Langone (Chair), Brenneman, Jackson, and Ridge. The Leadership Development and Compensation Committee is made up of Hill (Chair), Brown, Clendenin, Gonzalez, and Johnstonn. The Information Technology Advisory Council consists of Hart (Chair), Brown, Hill, Johnston, and Ridge. By assigning different directors to different committees, Home Depot is trying to diversify its leadership assets and allow each director to focus on their area of expertise. Leadership Team
Home Depot’s top management team, also known internally as its Leadership Team, is made up of thirteen executives. These executives are the highest ranking officers of the company and focus on individual areas and departments. Robert Nardelli (CEO and Chairman) is the highest ranking member of the Leadership Team. Francis Blake is the Executive Vice President of Business Development and Corporate Operations since March of 2002. He was previously a Senior Vice President at General Electric. Joseph Deangelo is the Executive Vice President of Home Depot Supply and has been with the company since August of 2005.
He, like Blake and Nardelli, had previous employment at General Electric. The Executive Vice President of Information technology and Chief Information Officer is Robert DeRodes. He has been with Home Depot since 2002. Dennis Donovan is the Executive Vice President of Human Resources since 2001. He had previously worked with General Electric as well as Raytheon Company. The Executive Vice President Corporate Secretary and General Counsel of Home Depot is Frank Fernandez. He was a partner in a law firm prior to working for Home Depot. The Executive Vice President of Home Depot Stores is Carl Liebert III.
He has had that position since 2005 but had been with Home Depot since 2003 (Wheelen and Hunger, 20-15). Thomas Taylor was the Executive Vice President of Merchandising and Marketing since 2005; however, Taylor resigned in June of 2006. This was viewed as a major blow to the company from industry analysts. It “considered Taylor to be Home Depot’s only remaining retail expert and viewed his departure as a serious blow to the company” (Wheelen and Hunger, 20-15). Carol Tome is the Executive Vice President and Chief Financial Officer for Home Depot.
She has been in the position since 2001 and has many years experience in the financial services field. Annette Verschuren is the President of the Home Depot Canada and has been in the position since 1996. She has the longest tenure of any of the members of the Leadership Team. The following are Presidents of the different regions: Marvin Ellison (Northern), Bruce Merino (West), and Julian Paul Raines (Southern) (Wheelen and Hunger, 20-13). Most of the current Leadership Team has been in their respective positions since after Robert Nardelli became CEO of The Home Depot.
It is also important to note that many of those on the Leadership Team worked previously with Nardelli at GE and followed him to Home Depot. The most experienced member of the Leadership Team has only been in her position with Home Depot for ten years. The rest have less than six years in their current positions. (Wheelen and Hunger, 20-14 and 20-15). External Environment Societal Environment “Environmental scanning consists of monitoring, evaluating, and dissemination of information from the external and internal environments to key people within the corporation” (Wheelen and Hunger, 73).
The four major components of environmental scanning are economic factors, technical factors, political-legal factors, and sociocultural factors. Home Depot must recognize each of these factors and the many sub-factors in its own external environment. The first factor that The Home Depot has to look at is the economic factors in its external environment. Between 2001 and 2006, the US Economy was growing and stable. “On balance, the U. S. economy compares favorably with its peer group in terms of real GDP growth, real investment in fixed assets, industrial production, employment, labor productivity, and price stability” (Saxton, 2007).
In short, the Economic outlook for this time period was favorable for Home Depot. During this time, GDP was slightly expanding; unemployment was growing, and productivity in the United States grew by 9. 8 percent (Saxton, 2007). This means that customers would not be prompted to buy less, or to save more. The market, as a whole, was stable from 2001-2006. Due to these factors, as well as others, the general state of the economy during this time-frame was good for The Home Depot, as well as most retailers. As far as economic factors, things seem good on the surface.
However, a closer look reveals that there is greater threat of inflation (Wheelen and Hunger, 20-24). With the recent decline in home sales, and rising interest rates, it appears that Home Depot may see a decrease in retail spending by consumers. This is a major threat to The Home Depot’s store growth and sales growth. Home Depot would be wise to watch the increase in interest rates for home sales, as well as the housing market to determine if Home Depot will need to slow its growth in the near future as the market may be in decline.
Technological trends from 2001-2006 were plentiful. The biggest factor that affects Home Depot is the increase of information systems within its retail stores. The increase in the use of information systems has allowed for faster communication and better automation within its stores. The Home Depot has focused on these areas and each store is equipped with a computerized point-of-sale system, electronic bar code scanning system, and UNIX server (Wheelen and Hunger, 20-20). This has increased checkout times, improved inventory management, and increased labor projections.
As technology increase, Home Depot must remain at the forefront of technological changes and advancements. A major technological factor is the availability and use of the internet. From 2001-2006 the internet grew from roughly 361 million users at the end of 2000 to just over 1 billion worldwide users at the end of 2006 (“Internet growth statistics,” 2010). That is an increase of just over 300%. The internet allows consumers to have instant access to products, detailed information about the product, reviews of the product by other users, and ability to make their purchase whenever they want to.
Home Depot must identify the internet as a valuable and important tool and use it to increase sales, market its products, and provide company information online. Judging by current activity, it is doing just that: “Home Depot online sales increased 100% in 2005 from the previous year” (Wheelen and Hunger, 20-18). Other technological factors that affect The Home Depot are Telecommunication infrastructure, productivity improvements through automation, and focus on technological efforts. All of these played an important role for Home Depot.
Telecommunications increased significantly during this timeframe with the increase in cell phone and instant communications through the internet. In Home Depot stores, the use of automation has made it more efficient and allowed productivity to increase while decreasing labor costs. The total focus on technological efforts throughout the industry has seen an increased focus. Most retailers are working to make it easier and more user-friendly to find products in the stores, to checkout, and even to acquire credit- “charge card approval process time had been reduced to less than 30 seconds” (Wheelen and Hunger, 20-20).
As with many retailers, Home Depot must follow and abide by laws and restrictions that affect its customers, employees, competitors, the environment, and its shareholders. The Home Depot must abide by Anti-trust laws, which ensure that market competitors can stay competitive and no one firm gains an unfair advantage. This means that it cannot use tactics such as predatory pricing, price gouging, or refusing to deal with specific individuals or other firms. Home Depot must also be sure that it follows environmental protection laws.
Due to the industry that they are in, it is critical that Home Depot disposes of hazardous materials it uses in an environmentally friendly way. Being a retailer that carries goods from other producers, Home Depot may not have direct liability for the products; however, it does have the responsibility of ensuring customer safety and handling of specific products that could cause harm to others. Finally, Home Depot must be sure to follow the laws on hiring, promotion, and discrimination of employees. Home Depot tends to focus on hiring older, more experienced workers.
This could be a good thing for The Home Depot as this ensures that it is not in violation of the Age Discrimination Act of 1967. Other laws such as the Civil Rights Act, the Americans with Disabilities Act, and other Equal Opportunity laws must be in place and enforced. The final external factor that The Home Depot must understand is the socio-cultural factors. Socio-cultural factors affect who to sell to, when to sell to them, what to sell, and how to sell it. In different parts of the United States, as well as the world, there are many different cultural differences.
Home Depot must identify these differences and be sure to have the right product(s) available at its stores. For instance, in the north it would be wise to sell snow removal equipment in the winter. In the south, gardening products should be available throughout most of the year. Changes in lifestyle, careers, and other factors must also be taken into account. Higher end products and services should be available in areas where economic growth and stability are prevalent. Everyday products and more economic services should be available in areas that have a lower economic impact and outlook.
Typical customers for The Home Depot fall into three categories. These include Do-it-yourself customers, Do-it-for-me customers, and Professional customers (Wheelen and Hunger, 20-17). Do-it-yourself customers are typically age 25 to 34 and have some education and a lower income. Do-it-for-me customers are typically homeowners who have more education, more income, and were typically a baby boomer, age 42-60. Professional customers refer to customers who were contractors or professional trades-people.
Home Depot must identify these groups accordingly in each market and offer products and services that appeal to each. Task Environment – Industry Analysis Michael Porter’s approach to industry analysis focuses on five main areas within the industry. These consist of rivalry among existing firms, bargaining power of suppliers, bargaining power of buyers, threat of substitute products or services, and threat of new entrants. For Home Depot, these areas are all relevant to its growth and stability in the market. The industry was a $700 billion industry in 2006 (Wheelen and Hunger, 20-24).
In order for The Home Depot to maintain and increase its market share of the industry, it will need to analyze the industry thoroughly and take action appropriately. For Home Depot, its biggest rival is Lowe’s. Lowe’s has recently enjoyed significant growth and is a significant threat to The Home Depot’s growth plan. Lowe’s is moving to many areas that were previously dominated by Home Depot (Wheelen and Hunger, 20-25). With the two companies commanding almost 20% of the market, there is indeed an intense rivalry between these two companies.
The other major rivals include Menards and 84 Lumber. Ace, True Value, and Buildings Materials Holding Corporation compete with The Home Depot as well, but mostly in the building supplies area. There are many smaller rivals as well and many local and regionally-owned hardware stores. Other major retailers could also be considered rivals for The Home Depot. Sears has an extensive tool and hardware department and also offers services such as siding, windows, and installations. Wal-Mart is also a rival and competes at a smaller level with a tool and garden center in most of its locations.
In order for The Home Depot to maintain its market share, and to see steady growth in the future, it will need to monitor the activity of its rivals to identify threats, areas of opportunity, and potential new services. The Home Depot’s bargaining power of suppliers is not considered a high threat. According to its 10-K report, “We buy our store merchandise from suppliers located throughout the world and are not dependent on any single supplier. Most of our merchandise is purchased directly from manufacturers, which eliminates ‘middleman’ costs” (Home Depot Inc, 2006).
This suggests that due to the diverse supply chain and many suppliers, there is no threat of bargaining. Home Depot also “formed strategic alliances and exclusive relationships with selected suppliers to market products under a variety of well-recognized brand names” (Home Depot Inc, 2006). This suggests that Home Depot has established the necessary supply chain partners to sustain its growth and product selection. If one supplier failed to meet the pricing needs of Home Depot, it would have the benefit of going to another supplier to meet its needs. It seems as if this is one area that The Home Depot has a olid foundation in.
The real threat in the future will be sustainability. If sales volume and supply volume decrease, suppliers may not be as willing to compromise to lower prices for Home Depot. The Home Depot will need to watch the current economic situation carefully and could potentially need to change its current method of procurement to adjust to market conditions. The bargaining power of buyers is always a significant threat in the retail business. With the internet now a viable search tool for customers, consumers have the ability to research products, pricing, and availability.
This gives customers the ability to compare products and make better decisions when making a purchase. Home Depot will need to continue to have an online presence. It must monitor other competitors and the market to ensure that its prices are comparable or it may lose customers. The bargaining power of buyers also impacts the services that The Home Depot offers. Due to carpenters, contractors, and other handymen that offer lower installation services, Home Depot may have a difficult time meeting customer demands for prices. This is probably the biggest threat to The Home Depot.
Home Depot must ensure that its prices are comparable, that its services are of high quality, and that they perform it as specified. As with many retailers, threat of substitution is high for Home Depot. The biggest threat for Home Depot comes from regional and small businesses and from other “big box” retailers. Retailers that carry the same products, or products that are similar, make it easier for customers to choose a substitute retailer. The threat for substitution for home improvement needs comes mainly from Home Depot’s biggest competitors, Lowes and Menards.
But, it also comes from other home improvement stores such as Ace Hardware and True Value. For building supplies, the Home Depot has to compete with 84 Lumber and again, Lowes. Also, for smaller and immediate needs, customers may choose to buy smaller products at a more convenient local hardware store, such as Value Home Centers. Thus, The Home Depot faces a large threat for substitutes on many different levels. There are virtually no switching costs for choosing a different retailer for the same product and this makes the threat of substitution for Home Depot very high. Threat of new entrants into the industry is low for The Home Depot.
Because it takes a tremendous amount of capital to run a major retail store, it may not be feasible for new entrants to enter the industry. The major obstacles are retail space and facilities, supply chain costs, and transportation/delivery of goods. In order to compete with Home Depot, a new entrant would need to purchase millions of feet of retail floor space. In some areas, it may not be available to purchase, and in others it may be too costly to development. Supply chains are complicated to develop, take time to develop, require information sharing, and require a mutual benefit between the two parties.
It would be very difficult for a new entrant to enter the market because it would be highly unlikely that it could develop a quality supply chain to compete with the major competitors in the market. Finally, shipping and transportation are costly. If a new entrant entered the retail industry, it would have high start-up costs, and have to ship all of the products to its retail stores. This would subside over time, but again the tremendous initial investment that is needed would discourage new entrants from entering the market. Internal Environment Corporate Structure
The Home Depot consists of two segments: Retail and Supply. Retail segments are operated in the United States, Canada, and Mexico. “The U. S. Home Depot stores were organized and managed by geographic region” (Wheelen and Hunger, 20-15). There is a president of the company for each geographic segment and each store has a wide range of managers. Managers typically oversee more than one department (Wheelen and Hunger, 20-15). This helps reduce costs so that it reduces costs for the customers. The Home Depot has made significant changes to the organization of the company since Nardelli took over.
Nardelli has a much different view of how The Home Depot needs to be run than the founders did. It has gone through several different changes that have had considerable impact on the organization. Prior to Nardelli, 90% of employees were full time, currently only 68% of employees are full time (Wheelen and Hunger, 20-24). For it to succeed, everybody needs to be working towards the same goal. The Home Depot currently is off track when it comes to everybody working towards to same things. Corporate Culture The Home Depot’s corporate culture is based off its “orange-blooded” motto.
It emphasizes “individuality, informality, nonconformity, growth, and pride” (Wheelen and Hunger, 20-8). The Home Depot strives to give customers what they need at a low-price. It is all about the customer. The Home Depot employees have to be ready to help customers who want to save money and complete their own projects, as well as offer services to customers who want the job done for them. It is important to leave the customers with a positive attitude so that they will return and remain loyal (Wheelen and Hunger, 20-8). The Home Depot realizes that it is important to address the issues facing a culture in which it is located.
The same issues that occur in Mexico, may not be an issue in the United States. Regardless of the location, it is important to care for customers’ needs and be attentive to the issues surrounding the culture in which the store is located. Economic hardships may not impact the company in one area as much as it will in a different location. Corporate Resources Marketing The Home Depot’s marketing strategy is “to offer a broad assortment of high-quality merchandise and services at low prices using knowledgeable, service-oriented personnel and strong advertising and promotional campaigns” (Wheelen and Hunger, 20-16).
Although it has a good marketing strategy, The Home Depot currently captures a low share of the home-improvement and profession supply market, with only 11% (Wheelen and Hunger, 20-16). It went to great lengths to capture more of the market by sponsoring the Olympic Games and associating itself with Olympic athletes (Wheelen and Hunger, 20-16). The Home Depot markets to three main groups of customers: Do-it-yourself customers, Do-it-for-me customers, and professional customers. The Do-it-yourself customers are customers who want to complete their own projects.
Home Depot has addressed this market in a very unique way. It offers clinics to help teach the Do-it-yourself customers how to complete their projects correctly. Home Depot also focuses on the Do-it-for-me customers. The Home Depot will provide installation through qualified independent contractors (Wheelen and Hunger, 20-17). These customers can afford to pay to have the projects completed for them. The professional customers are “professional remodelers, general contractors, repair-people, and trades-people” (Wheelen and Hunger, 20-17). Finance
The corporation has noticed where it needs to make improvements and has taken action to do so. “Concerned about Home Depot’s recent drop in customer satisfaction, management added 5. 5 million more employee hours to the 2006 Fall/Winter season compared to the same period a year earlier” (Wheelen and Hunger, 20-29). By doing so, it is staying on track with satisfying customer needs. The 11. 5% increase in net sales in 2006 shows that Nardelli made a good move when adding more employee hours (Wheelen and Hunger, 20-28). This action has paid itself off in the long run.
Overall, The Home Depot is performing well. It has had increases in inventories, net receivables, and net earnings. This helps the company perform better overall. It allows The Home Depot to reinvest within itself. By reinvesting this money, it will be able to better meet customer needs and wants, as well as improve its stores and continue to grow. The Home Depot will be extremely efficient in the future if it uses this money to make the necessary changes, rather than investing it in continuing expansion. Operations and Logistics
The Home Depot stocks approximately 35,000 to 45,000 different products in a typical store (Wheelen and Hunger, 20-19). Home Depot imports its products from across the globe; it has developed import centers in the United States and Canada to help process all its merchandise (Wheelen and Hunger, 20-20). The Home Depot has purchased several different companies, and tried several different strategies, failing numerous times. Although today, The Home Depot has its operations under control. Rather than operating several different segments, it offers something for everybody in its main stores.
Home Depot stresses the importance of leaving a customer with a positive experience. It trains employees from the top down, as well as cross trains employees (Wheelen and Hunger, 20-23). Human Resources The Home Depot believes that employees have to be committed to excellence. It strives to have the right people in the right place to best assist its customers. The Home Depot does not believe in paying employees on a commission bases. “Bernard Marcus had said, ‘The day I’m laid out dead with an apple in my mouth is the day we’ll pay commissions.
If you pay commissions, you imply that the small customer isn’t worth anything’” (Wheelen and Hunger, 20-22). Every employee is created equal, from the top to the bottom. The Home Depot is a team, if one person fails, everyone fails. When hiring new employees, The Home Depot looks for team players. When advertising open positions, The Home Depot receives thousands of applications. It conducts interviews on a weekly basis, however, if someone comes along with trade experience, “an on-the-spot interview might be conducted” (Wheelen and Hunger, 20-21).
The ideal employee is one that is outgoing, secure, and a hard worker (Wheelen and Hunger, 20-21). Information Systems Home Depot stays on top of the ever changing technological improvements. It believes that by staying amid the new technology, it will be able to better assist customers and their needs. Also, by staying on top of the new technology, the store will be able to grow and eventually reduce costs. It is important for The Home Depot to stay up to date in order to compete with its competitors. However, the technological advancements do not stop in the stores.
It also focuses on improving its website, as well as other forms of communication to reduce cost and best assist customers. Analysis of Strategic Factors Key Internal and External Factors In analyzing The Home Depot’s internal and external factors listed on the strategic factor analysis summary (SFAS), see Figure 6. We feel that The Home Depot’s top strength is its target markets. It has successfully entered and obtained market shares in three markets: Do-it-for me, Do-it-yourself, and professional customers (Wheelen and Hunger, 20-3). This strength irectly links to the company’s overall strategy “called the 3Es: Enhancing the Core, Extending the Business, and Expanding the Market” (Wheelen and Hunger, 20-6).
The last key strength listed in the SFAS is its employee training. The Home Depot stresses teaching its employees from the top down and cross-training employees to work in different departments (Wheelen and Hunger, 20-23). This gives The Home Depot’s employees knowledge, skills, and abilities (KSA’s) in all the various departments and store operations to both effectively and efficiently provide exceptional customer service skills to its customers.
Examination of the SFAS shows that there are two weaknesses within The Home Depot: management and employee. “Since 2001, 98% of Home Depot’s 170 top executives had left the company. Fifty-six percent of headquarters personnel were hired from outside the company. Home Depot insiders sometimes referred to the firm as ‘Home GEpot’ because of the increasing number of managers being hired from General Electric. Such poor moral was thought by some to lead to less customer satisfaction” (Wheelen and Hunger, 20-9 ;amp; 20-10).
A major weakness for The Home Depot is that it currently are hiring from outside the firm for its executives, instead of promoting people to these positions from within. It decreases The Home Depot to successful implement its Mission Statement, in offering “superb customer service” because its top management are not familiar with every aspect of the company as employees were in the past when they worked their way up the rains (“Our Mission and Outreach Efforts”). The Home Depot’s other main weakness is its change from full-time to part-time employees. “Under Nardelli, The Home Depot went from 70% full-time to 70% part-time.
Unfortunately this led to a less experienced work force and reduced customer service” (Wheelen and Hunger, 20-14). Nardelli soon realized this mistake and returned to the more traditional full-time staffing choice (Wheelen and Hunger, 20-14). “Full-time employees had filled about 90% of the positions under the founders Blank and Marcus, but in 2005 filled only 68% of the positions” (Wheelen and Hunger, 20-21). We believe this is a weakness that The Home Depot should continue to work on correcting to increase its customer service, ultimately leading to an increase its shareholder’s value.
Analysis of the external portion of The Home Depot’s SFAS revealed two main opportunities and threats: online marketing and service businesses for its opportunities, and the housing market and growth of competition for its threats. The Home Depot should increase its markets by expanding into an online service industry (creating an opportunity for customers to shop or order services online). This opportunity could potentially give The Home Depot an increased advantage over its main rival, Lowes.
The last opportunity that we see for The Home Depot is that it must maintain a competitive advantage over its smaller competitors in services offered (i. e. – general builders and contractors). Local small home improvement providers can create a strong competition in potentially offering higher quality services at a cheaper price, which will lead to an increased word-of-mouth advertising from locals. The Home Depot needs to be aware of this and maintain a competitive advantage over local service providers by making sure that it has a strong-positive consumer image, with the hopes of attracting their business.
Lastly, in the external portion mention on the SFAS are the threats: the housing market and growth of competitors. A major threat to The Home Depot is the recent decline in home sales and rising interest rates (Wheelen and Hunger, 20-24). “The home improvement sector is facing significant headwinds as housing turnover slows, and interest rates rise” which ultimately will effect earning growth and future profits (Wheelen and Hunger, 20-24). The threat of the slowing of the housing market and increase of interest rates could potentially have a strong negative effect on the company if the situation is not prepared and analyzed properly.
The last main threat The Home Depot needs to focus on is the growth of its competitors. “Competition between Home Depot and Lowe’s, the two major players in the industry, had intensified recently as Lowe’s had been moving into areas previously dominated by Home Depot” (Wheelen and Hunger, 20-25). The Home Depot needs to constantly stay aware of its competitors to make sure that it maintains a competitive advantage above them to increase its market share.
Review of Mission and Objectives After examining Home Depot’s Mission Statement, we believe that the first art of the statement succeeds in describing the purpose of the corporation’s existence. In explicit detail the first sentence of The Home Depot’s mission statement explains exactly what the corporation strives to do; “to form mutually beneficial partnerships with diverse businesses that allow us to deliver superior products and services and superb customer service, which ultimately increases shareholder value” (“Our Mission and Outreach Efforts”). Forming partnerships with a variety of businesses will allow The Home Depot to offer a wide range of products and services to its customers at a low competitive price.
This will lead to more satisfied customers, increasing sales and profits for the corporation, finally increasing the shareholder’s stock value. The second sentence in The Home Depot’s Mission Statement describes in detail the partnership aspect mentioned in the first sentence of the statement. The second sentence talks about targeting various businesses, giving “them the opportunity to partner with The Home Depot, to provide competitively priced, high quality goods and services to [its] customers” (“Our Mission and Outreach Efforts”).
In analyzing the second part of the mission statement, we concluded that The Home Depot is trying to obtain a competitive advantage over its competitors. With partnering with various businesses, The Home Depot will receive a competitive advantage over numerous companies, by decreasing corporations offering products and services related to The Home Depot’s market. The Home Depot’s objectives are shown within the Mission and Outreach Statement.
The Home Depot’s objectives include some of the following: to deliver exceptional customer service, competitive pricing through partnerships with suppliers and distributors, and increase shareholder’s value. Both the Mission Statement and Statement of Outreach, discuss the efforts the corporation needs to take in order to reach diverse businesses to partner with, growing Home Depot and ultimately the shareholder’s value (“Our Mission and Outreach Efforts”). Alternatives and Recommendations Strategic Alternatives The Home Depot could pursue multiple strategies to result in an expansion and success within the corporation.
One of our strategies we could pursue is the no change strategy, which is a decision to do nothing (Wheelen and Hunger, 176). Continuing to create new stores, enter into new markets, and make strategic acquisitions with various companies could potentially help The Home Depot to continue to grow and expand. However, the problem with the no change strategy is that The Home Depot is currently growing faster in the industry than the positive results can be portrayed. A second strategic alternative is the profit strategy, which consists of acting as if the companies’ problems are only temporary (Wheelen and Hunger, 176).
The benefit of the profit strategy is that it will allow The Home Depot to postpone further growth and expansion with the hopes that the economy will self correct and allow past implementations to become profitable. The problem with this strategy is the assumption that the problems are only temporary and will self correct itself. With no change or implementation to correct the problems there is a huge risk relying on fate. The final strategic analysis is pause/proceed with caution. This strategy allows the company the opportunity to rest before continuing to grow (Wheelen and Hunger, 175).
This will allow The Home Depot to focus on current store operations and increasing sales at current stores. It is our recommendation that The Home Depot pursue the pause/proceed with caution strategy. Recommended Strategy The primary reason for The Home Depot to use a pause/proceed with caution strategy is due to the recent increase in interest rates and the recent decline in home sales (Wheelen and Hunger, 20-24). Recent analysis of economic factors suggests that there is a greater threat of inflation; this in turn will result in lower disposable income for its customers (Wheelen and Hunger, 20-24).
Coupled with the significant growth in the industry and by its major competitor Lowe’s, The Home Depot should use a pause/proceed with caution strategy for its short-term strategy. This will ensure that it can focus on providing better customer service, better pricing, and better quality of products and services at its current store locations. The growth over the past several years has given The Home Depot a competitive advantage and a large market lead. Because of this, it would be prudent for it to focus on its current stores and focus on increasing sales at those locations before expanding into new areas.
The Home Depot should be increasingly cautious with its services business unit. A decline in home sales and home improvement would have a major impact on the services that it can provide and the prices that it can offer. The demand for installation and other services may suffer if there is a major decline in home sales or if interest rates continue to climb. It is recommended that The Home Depot monitor the current economic situation carefully and proceed accordingly. Implementation For The Home Depot to implement this strategy effectively, it will take the combined efforts of all departments and services.
The Leadership Team will need to work as a single unit and agree upon the suitable strategy. Implementation will be important to communicate to all employees and stakeholders in the organization. It will take action from all areas of the company to make this happen and to effectively implement the pause/proceed with caution strategy. From an operations standpoint, The Home Depot will need to focus less on growth, and more on increasing current store sales. This will mean allocating fewer funds for acquiring, building, and stocking new stores and more funds to improve upon current stores.
The finance department must monitor the current economic situation, including the housing market, interest rates, and inflation rate. Marketing will need to focus on increasing same store sales. The marketing team will also need to focus on improving price strategies for its services. Human Resources (HR) will need to hire only what is needed in current stores and try to minimize employment turnover at this time. The Information and Technology (IT) department should focus its efforts on increasing technology software to make inventory management simpler and more cost-effective.
The IT department should also focus on improving automation to increase efficiencies. The goal for this implementation is to limit its exposure to a decline in the economy. By focusing on current operations, it can work to improve its core competencies and decrease its risk to a potential economic downturn. The Home Depot must implement these changes in small doses and avoid tampering with its core competencies as much as possible. HR functions will play a key role here in keeping employees informed, trained, and on board.
With the major growth that the company has been involved with over the past several years, it has been unable to increase its net profits. Net profits have remained the same for three years now. This suggests that the growth is increasing sales, but it is not increasing the profits for the company. This further demonstrates the need for The Home Depot to decrease its growth rate and to focus on its current locations. Evaluation and Control The Home Depot needs to frequently evaluate and monitor this strategy to ensure that it is achieving positive returns and profits.
It should begin by measuring stock price and profitability ratios on a quarterly basis. The Home Depot will also need to monitor the current economic situation and adjust to any changes in the economy. If home sales continue to fall and interest rates continue to increase, then Home Depot must take action to avoid a drop in sales. By monitoring these factors and adjusting accordingly, The Home Depot will make certain that it is meeting its short term goals and increasing its profits. The Home Depot will need to include behavior controls in order to implement the strategy properly.
It will need to communicate its output controls to its employees, stakeholders, and all members of the corporation. Output controls must be attainable and must be met within specific timeframes. By focusing on current store locations, and current employees, The Home Depot will need to focus on input controls to get the most out of its current employees. Input controls are the resources that employees provide to the company such as knowledge, skills, abilities, and motives of employees (Wheelen and Hunger, 265). The more that The Home Depot can get out of its current workforce, the better off it will be.