INTRODUCTION Home Depot enjoyed high growth of revenues and profits in the period 1978-2003. From 7 mio USD of revenues in 1979 to 64,8 bn in 2003. Revenue growth was generated mainly due to external growth coming from mergers and acquisitions. Home Depot has four product categories: Building and Remodeling, Home Decor and Organizing, Outdoor Living and Tool and Hardware. Company went through some structural changes when in 2000 first non funder Bob Nerdelli became the CEO of the company.
Nerdelli previously worked for 27 years at General Electric and was known to be detailed oriented leader concerned with industrial cycles and archiving operational efficiency. After Nerdelli become CEO of Home Depot the company introduced several operational improvements like improved supply chain, self check out kiosk, introduction of advance IT technology, offering more services, etc. Even dough these improvements were well perceived by the customers and analysts the stock price fell to all-time low bottom 22 USD in year 2000.
The operating margin and net profit margin were increasing during the years 2002-04, however, the revenue growth was below the expected revenue growth of 16% in the first quarter 2001 compared to the company 5-year annual average of 25%. The strategies chosen by Home Depot seem to have worked effectively till this day. However, if the company continues to ignore the low profit that it is making and just expands the number of its stores, in the long run, the company might fail to achieve its business goals. SITUATION ALALYSIS
The case does not provide any industry or competitive analysis of margins and revenue growth but I can assume that they performed better than Home Deposit because its stocks were declining in value. For the purpose of this paper I will analyze the industry, Home Depots generic strategies and analysis of the main competitor (Lowe) position. I find it interesting that in 1980 the situation was reversed – Lowe was the largest home improvement retailer and Home Depot overtook the market leader position, which suggests competitive environment in the industry.
The Industry – Home Improvement Retail The case do not say much about other competitors, it only mentions two main players Home Depot and Lowe which are large warehouse-like stores offering numerous home improvement products for the lowest price possible. The industry in the past was not dynamic but since the competition from Lowe is increasing the two competitors are trying to satisfy more customers needs (shift from do-it-yourselfers to full basket of services) and offer extra services which makes the industry more dynamic and innovative. Competition
The largest competitor of Home Depot is Lowe which is the fastest growing retailer in the U. S. market with the annual growth rate of 19%. Lowe chose direct confrontation with Home Depot and their goal is to offer customers better service, more user-friendly stores and competitive pricing. It seems that Lowe understands customer needs better because they make store more appealing to women as their research indicated that women made majority of the purchasing decisions. I do not believe that there is a threat of a new large competitor entering this market.
I rather see an opportunity for small niche players that can satisfy more sophisticated individual needs which cannot be covered by the two large players. Large amount of stores set high entry barrier for other competitors. Since Lowe is gaining its market share and current Home Depot market position is bad I expect that Lowe will try to become the largest player by exploiting Home Depots weaknesses. Unfortunately the case does not provide financial information about Lowe which would allow us to asses financial stability of both players.
Home Depot – The Company I have briefly described the company in the introduction. In this section I will evaluate Home Depots weaknesses and strengths. The strengths of the company are the distribution network which is very important in home improvement industry, numerous stores which created large entry barriers for competitors, business mode which is simple and well established, extensive product offering, well known brand name and ability to grow although this strength is declining.
Among the weaknesses I would emphasize the recent slow growth and the fact that Home Depot cannot satisfy customers needs as good as Lowe can (targeting woman for example). Strategies From a Porters generic strategies model Home Depot persuades cost leadership strategy. In the past industry was very price sensitive and Home Depot gained its market share by exploiting economies of scale and scope and by offering products at a lowest possible price. The second strategy I will point out is the strategy of external expansion.
In the past Home Depot grew mainly due to the openings of new stores. This strategy at first showed to be very successful, however, unplanned and excessive store openings lead to result that stores were open too close to each other and started to cannibalize each other’s revenues. Norelli decided to stop proliferation of the stores and ensure balanced location of the stores. I think that even dough the stores cannibalized each other the fact that Home Depot had a huge store coverage increased the barriers to entry which gives Home Depot a competitive advantage.
The third strategy is focusing on increasing customer service and satisfaction. Home Depot is trying to increase customer’s value with adding new services or improving existing ones. They managed to reduce checkout lines, educating employees who leads to highly qualified and helpful staff, implemented professional clinics and in-store clinics, etc. Home Depot effort of complete customer satisfaction has led the company to improve customers’ service; however, Lowe did the same and therefore I would say that was rather a necessity than gaining a competitive advantage. Identification of Issues
In the past Home Depot did an outstanding job in achieving a good “fit” between their strategy and structure. This is apparent by viewing the amount of market share that they have maintained and the extremely high sales they reported annually. However, nowadays Home Depot is facing a serious threat from Lowe. They have to implement new strategies in order to sustainably protect their dominant market position. The implementation of these changes is also a big issue in the case because analysts argued that the changes did not provide a stable environment for the company.
The main problem here is that Nardelli is too focused on improving operational efficiency and manufacturing effectiveness that he neglects the importance of retail enhancements. Low stock price is always an issue in strategic management because at the end of the day managers’ job is to maximize the firms’ value or maximizes stakeholders’ value. However, in order to do that manager has to properly conduct a business strategy and most importantly he has to implement it. If I can summarize the issues: lack of focus on retail, lack of long term strategy, poor marketing, bad company erformance relative to its competitors (decreasing market share), not efficient resources alignment, threat of losing market leader status. POSSIBLE SOLUTIONS Possibility of even higher operating efficiency Home Depot under Nardellis leadership has made some significant improvements in operational efficiency; however, they could even more examine their cost structure and try to maximize profitability because since Lowe is growing faster than they do it is clear that Lowe is doing things better than Home Depot.
This recommendation is the most obvious one but is very difficult to achieve because it requires trade off in order to create more efficient profitability. If company decides to make tradeoffs it may risk deposing certain resource that will be crucial in the future to sustain competitive advantage Possibility of expansion Home Depot cannot rely on generic growth because it is falling behind the competitors. In order to achieve growth it has to grow externally through opening new stores and mergers and acquisitions of smaller stores and store chains.
I see a big potential in do-it-yourselfer market because these people are the most price sensitive and Home Depot can deliver products at cheapest prices. They should analyze the markets which are close to US market (example Germany and France) where they can achieve further sustainable growth. In this stage of rivalry with Lowe I believe that is crucial that Home Depot defends market leader position and grow through M&A. Stock speculations From a financial point of view I can say that if market does not perceive that management in Home Depot is doing a good job stock price will not increase.
Management can play behavioral finance game and, for example, announce that they will buy their own stock. By signaling theory market should perceive this as a signal that stock price is undervalued so stock price should increase. This is by nature only short term effect but it can help the company to take off from recent drawback. EVALUATION OF SOLUTIONS AND RECCOMENDATIONS I believe that all the above mentioned strategies are not excluding and therefore Home Depot can realize all at the same time.
The hardest to achieve is operational superiority because it requires the change through whole value chain which can be very expensive. However, the rising competitive power from Lowe is forcing Home Depot to higher efficiency so I think that Home Depot really does not have a choice and has to improve its operating efficiency. They could also try to differentiate but this industry has shown to be very price sensitive and differentiation is highly unlikely to be accepted widely.
It seems that market stock price is strongly influenced by company’s growth so in order to push market price to historical high level firm should adopt growth strategies such as entering new markets and adding new products or service lines. As I mentioned above, in the short run firm can also influence stock market price to bounce from its floor stock value. However, they must keep in mind that the price increase will not be sustainable on the long run without new strategy and more importantly strategy implementation.
