Abdulaziz Mohammad GhaniBusiness Strategy Report: Home Depot

March,6 2014

Table of Contents

1

Introduction...................................................................................................................................4

Current Performance.....................................................................................................................4

Strategic Posture........................................................................................................................... 4

Mission Statement.....................................................................................................................4

Vision Statement........................................................................................................................4

Objective....................................................................................................................................5

Current Strategy............................................................................................................................ 5

Corporate Governance.................................................................................................................. 6

External Environment: PESTLE.......................................................................................................7

Porters’ five forces.........................................................................................................................9

Customers....................................................................................................................................10

Competitors.................................................................................................................................10

Internal Environment...................................................................................................................11

Corporate Structure.................................................................................................................11

Corporate resources....................................................................................................................12

Marketing.................................................................................................................................12

Financial................................................................................................................................... 13

Research & Development.........................................................................................................13

Operation & Logistics...............................................................................................................14

Human Resources.................................................................................................................... 14

Information technology........................................................................................................... 14

Alternatives and Strategic recommendations..............................................................................14

Alternatives..............................................................................................................................14

Recommended Strategy.............................................................................................................. 18

Implementation...........................................................................................................................18

Contingency plan.........................................................................................................................19

Reference.....................................................................................................................................20

2

IntroductionArthur Blank and Bernie Marcus founded Home Depot in Atlanta, Georgia, US in 1978. Since its

initial opening, Home Depot has managed to grow into the country’s largest retailer in home

improvements. As of 2012, there were a total of 2,256 stores located throughout the US, Canada,

Mexico, Puerto Rico, Virgin Islands, China and Guam. Each store is approximately 104,000

square feet with an additional 24000 square feet of the outside garden area. With over 600,000

SKU’s each store provides a one stop shop for all building materials, home improvement and

garden products. Since its founding years Home Depot has been able to innovate products to

make life of home owners become tranquil with working around the house. (Home Depot, 2013)

Current Performance Since its opening, Home Depot has expanded into 7 countries, mainly in the Americas. The

company currently has 1,976 locations in the US, 180 in Canada and 100 in Mexico, during 2012

Home Depot closed 7 of its stores in China this leaving them with 1 paint specialty store in the

region. The company reported employing approximately 340,000 employees in its stores,

warehouses and the head office. Total sales recorded by all Home Depot stores increase from

$70.4 billion in FY 2011 to $ $74.8 billion in FY 2012, indicating the beginning of a healing

progression in the US housing market. (Home Depot, 2013)

Strategic Posture

Mission Statement

Home Depot’s mission is to excel customer satisfaction through consistent high quality products,

customer service and competitive pricing. The company strives for the customer to get the best

possible service by training skilled employees and nurturing long lasting relationships with

customers. (Blake, 2013)

Vision Statement

Home Depot’s vision is driven by a set of core values supporting it in developing a high standard

of product, the highest level of service, the most competitive prices and the broadest selection of

products. The eight core values are:

3

Excellent customer service

Taking care of our people

Giving back

Doing the "right" thing

Creating shareholder value

Respect for all people

Entrepreneurial spirit

Objective

Home Depot’s onward objective prospects are based on a number of elements in its

operation. Home Depot anticipates maintaining its position in the industry and expects to

prevail amongst competitors. Its objectives reflect current and future goals Home Depot

aspires to achieve, the following is the list of these objectives:

To offer excellent customer service

Delivering innovation, assortment and value in its product offering.

Disciplined Capital Allocation, efficiency and productivity.

Current StrategyHome Depot’s current strategy allowed it to become one of the major players in the retailing of

home improvement products. Since the company’s founding it has had to shift between different

strategies to help achieve what it is recognized for today. Home Depot’s strategic factors

augmenting it in the industry are the following:

Customer service- Home Depot endeavors in creating an emotional connection with its

customers, recently the company has opened new customer call centers to support it in

achieving greater customer service, the previous year it implemented a new scheduling

system for store associates and a centralized process for returning products to vendor to

increase customer satisfaction. Home Depot estimates that currently 57% of its store labor

hours are committed to customer-facing activity and the company anticipates increasing it

60% in fiscal 2013(Blake, 2013) .

4

Product Authority- Home Depot continuously aims at providing product value, innovation

and assortment. During 2012 it broadened the number of brands it offers in its appliance

showroom by including Whirlpool, Frigidaire and Electrolux, additionally it also introduced

innovative new products to its D-I-Y and professional customers most of its departments

(Blake,2013).

Productivity and Efficiency- Home Depot strives to continuously optimize the efficiency and

productivity of its operation, the company achieves this by building best-in-class supply chain

network and through advanced information technology systems. This allows the company to

lower its operating cost and increase shareholder wealth (Blake, 2013).

Interconnected Retail- Home Depot aims to sell through different channels to meet the needs of

customers wanting to purchase through online, phone or store. The company recently upgraded

its online shopping website with a new interface to make the shopping experience seamless, it

also implemented programs to offer customers numerous ways of receiving their purchase such

as buy online, ship to store and buy online, return in store (Blake, 2013).

Corporate Governance

FRANCIS S. BLAKE, Chairman and Chief Executive Officer

MATTHEW A. CAREY, Executive Vice President and Chief Information Officer

TIMOTHY M. CROW, Executive Vice President – Human Resources

MARVIN R. ELLISON, Executive Vice President – U.S. Stores

CRAIG A. MENEAR, Executive Vice President – Merchandising

CAROL B. TOMÉ, Chief Financial Officer

TERESA WYNN ROSEBOROUGH, Executive Vice President, General Counsel

Board of directorF. Duane Ackerman

Former President and

Chief Executive Officer,

BellSouth Corporation

Francis S. Blake

Chairman and Chief Executive

Officer, The Home Depot, Inc.

5

Ari Bousbib

Chairman and Chief Executive

Officer, IMS Health Inc

Gregory D. Brenneman

Chairman, CCMP Capital

Advisors, LLC

J. Frank Brown

Managing Director and

Chief Operating Officer,

General Atlantic LLC

Albert P. Carey

Chief Executive Officer,

PepsiCo Americas Beverages

Armando Codina

Chairman and Chief Executive

Officer, Codina Partners, LLC

Bonnie G. Hill, Ed.D

President, B. Hill Enterprises,

LLC

Karen L. Katen

Senior Advisor, Essex

Woodlands Health Ventures

Mark Vadon

Chairman, Blue Nile, Inc.

and zulily, Inc.

Source http://ir.homedepot.com/phoenix.zhtml?c=63646&p=irol-govhighlights

External Environment: PESTLE

Political factors

Home Depot gets its products from third party suppliers, most of these products are

manufactured in third-world countries with unstable political environment. Home Depot is

exposed to trade embargos and increase in tariff rates. Home Depot operates in countries with

different tax regulations, exposing it to double taxation if the countries do not have respective

treaties in place to avoid double taxation. Yet the governments of these countries may have

incentive programs applicable for Home Depot as an employer of local labor (Home Depot,

2013).

Economic factors

Home Depot operates in different economies, some of which are declining, increasing or are in a

stagnation stage, but no one can foresee the future of a market. Home Depot purchases and sells

its merchandise in different currencies affecting the cost of importing and sales, which may serve

as an advantage and disadvantage for Home Depot. The company is also exposed to inflation that

can have an adverse effect if operating cost increases while the selling price remains the same.

6

Social factors

Home Depot promotes an environmentally friendly atmosphere with protecting its employees’

health and safety requirements. It has also created a supplier social responsibility program

intended to ensure that suppliers observe a high standard of social responsibility (Home Depot,

2013).

Technological factors

Home Depot is operating in an era where 2.4 billion people surf the Internet causing the spread

of globalization. This allows Home Depot to have access to different manufacturers to support it

in locating suppliers. The Internet also allows customers to shop more confidently as they can

compare competing products of different producers. Retailers can take advantage of selling

through e-commerce due to low operating cost. Statistics have shown the amount spent on online

shopping was $763 billion dollars in 2011. The Internet has enabled advertising to be done

through social media, via mobile means and search engine marketing, making it one of the

cheapest and efficient ways to market a product (Brain,2012).

Legal factors

Home Depot gets involved in legal matters with its customers, employees, competitors and

suppliers due to disagreements and damages caused while doing business, but the resolution of

such matters does not have any adverse effect on the operation of the company.

Environmental factors

Home Depot is dedicated to conducting business in an environmentally responsible manner. This

commitment is implemented in all areas of Home Depot’s operation, including its energy

consumption, supply chain network, store maintenance and construction, furthermore it offers

many products that participate in the "Energy Saving Program,"

7

Porters’ five forces

Threat of new entrants – Low The threat of new entrants is low. Home depot currently dominates the markets, it is competing

in, for an entrant to enter the market; it will need to have the same influence over its suppliers

and distributors as Home Depot. Furthermore the company has the ability to offer competitive

prices on products and have exclusive rights to brands which is impossible for a new entrant to

offer to its customer (Blake, 2013).

Bargaining power of buyers – LowThe Bargaining power of buyers is low due to Home Depots’ efficient supply chain network, The

company offers everything a customer would need from a home improvement retailer, this puts

the buyer in a weak position to demand more products and lower price. Customers will always

have the option of choosing amongst other home improvement retailers, however Home Depot

has retained a large share of the market due to its convenient store locations, product assortment

and competitive prices (Blake, 2013).

Bargaining power of suppliers – LowThe bargaining power of suppliers is low due to Home Depot not having a long term contract

with its suppliers, Home Depot has eliminated third party distributors due to establishing their

own distributing centers to have more control over its merchandise inventory. Furthermore

Home Depots’ purchases would outweigh purchases made by other retailers due to its large

purchase orders. As well a supplier's product gets greater exposure through Home Depot stores

versus smaller home improvement retailers this is due to their large retail presence in the market

(Blake, 2013).

Threat of substitute products – Low

The threat of substitute products is relatively low as the variety offered by Home Depot is vast.

The trend within the retail industry is not to specialize in one good or service, but instead offer

an array of products and services and Home Depot is currently in that direction (Blake, 2013).

Rivalry among existing competitors – Medium

8

The rivalry among competitors in the retail industry is medium. Home Depots main competitors

are Lowe’s, Home Hardware, Ace Hardware and local improvement retailers. Some of these

competitors have access to a great amount of resources and can expand into markets Home

Depot is situated in. However Home Depot has the resources to allow it to compete on price,

service and product variety (Blake, 2013).

Customers Home Depot’s customers are mainly home owners, general contractors, tradesmen, repairmen

and small business owners. However Home Depot has categorized its customers into 3 groups,

Do-It-Yourself, Do-It-For-Me and Professional customers (Home Depot, 2013).

The Do-It-Yourself customers are the typical home owners who purchase the required

products to complete their project and repairs by themselves.

The Do-If-For-Me customers are the typical home owners who purchase their products

and hire a third party to complete their repair and projects. To these customers Home

Depot is able to offer its installation program, the company offers installation programs

on carpeting, countertops, water heaters, roofing and many others.

The professional customers are mainly general contractors, repairmen and small business

owners. Home Depot offers numerous services to these customers to make their shopping

experience content, such as dedicated staff, designated parking and bulk pricing.

CompetitorsHome Depot operates in markets which are highly competitive. Competition is mainly on

customer service, store location, price and quality. The markets Home Depot serves in, there are

major home improvement stores that have large market share. The company's top competitors are

lowest, Ace Hardware, Amazon, Rona and local home improvement retailers. Although Home

Depot is competing amongst many retailers, its market share and resources are greater than its

competitors.

9

Direct Competitor Comparison

HD LOW PVT1 PVT2 IndustryMarket Cap: 113.37B 51.53B N/A N/A 52.34BEmployees: N/A N/A 40,5001 N/A N/AQtrly Rev Growth (yoy): -0.03 0.06 N/A N/A 0.03Revenue (ttm): 78.81B 53.42B 7.60B1 N/A 53.42BGross Margin (ttm): 0.35 0.35 N/A N/A 0.35EBITDA (ttm): 10.92B 5.71B N/A N/A 5.71BOperating Margin (ttm): 0.12 0.08 N/A N/A 0.05Net Income (ttm): 5.38B 2.29B N/A N/A N/AEPS (ttm): 3.76 2.14 N/A N/A 2.14P/E (ttm): 21.82 23.38 N/A N/A 23.75PEG (5 yr expected): 1.08 1.16 N/A N/A 1.16P/S (ttm): 1.44 0.98 N/A N/A 0.98

HD= Home DepotLOW = Lowe's Companies, Inc.Pvt1 = Menard, Inc. (privately held)Pvt2 = True Value Company (privately held)Industry = Home Improvement Stores

Source http://ca.finance.yahoo.com/q/co?s=HD

Internal Environment

Corporate StructureHome Depot is structured in a way that information travels from top to bottom. The CEO passes

information to company executives in which at this point, information flow to the different

organizations. These organizations have their own management team headed by middle

management that connects top level management to regional managers. There are many regions,

each of which consists of districts. These districts, each has its own district manager that reports

to the regional manager. There are over 5 stores headed by General Manager in each district.

Each store’s department is overseen by a supervisor who answers to the General Manager. Home

Depot has a good structure that allows communication from top to bottom through company

designed communication channels, such as Employee News Feed and email system. The

company develops a list of objectives, goals and duties, which employees must accomplish. The

table below show the organizational chart of Home Depot.

10

Source http://www.theofficialboard.com/org-chart/home-depot

Corporate resources

MarketingHome Depot needs to market and advertise due to the competitiveness in the industry. The

company reported spending a total of $831 million dollars on advertising and promotions. The

current marketing objectives are in line with the company’s mission, strategy and policy.The

company’s channel of advertising is through TV, flyers, radio, internet and other media (Blake,

2013).

Financial In 2012, Home Depot had a consolidated net profit of  $7.8 billion, which represented about

$3.00 earnings per share. Its total assets were valued at over $41 billion dollars of which almost

11

half were considered current assets. Cash and cash equivalents increased by approximately $500

million between 2011 and 2012 to an amount of $2.5 billion. Current liabilities increased by a

little over $500 million during the same period to an amount of $5.3 billion. Overall, Home

Depot has substantial financial resources and was in a better financial position than the previous

year (Blake, 2013).

Efficiency Ratios 2009-06 2010-06 2011-06 2012-06 2013-06 TTMDays Sales Outstanding 1.25 0.99 1.07 1..11 2.02 3.69Days Inventory 99.81 112.14 142.000 137.44 113.68 156.20Payables Period — — — 3.78 7.92 10.99Cash Conversion Cycle — — — 134.77 107.78 148.90Receivables Turnover 293.14 367.38 339.70 328.65 180.86 98.82Inventory Turnover 3.66 3.25 2.57 2.66 3.21 2.34Fixed Assets Turnover 7.98 9.20 10.04 9.86 9.98 8.79Asset Turnover 2.28 2.29 2.09 1.91 2.10 1.85

Profitability 2009-06 2010-06 2011-06 2012-06 2013-06 TTMTax Rate % — 34.06 29.57 27.57 28.77 —Net Margin % -1.42 4.40 4.85 2.70 0.91 -0.15Asset Turnover (Average) 2.28 2.29 2.09 1.91 2.10 1.85Return on Assets % -3.25 10.08 10.14 5.16 1.91 -0.28Financial Leverage (Average) 1.22 1.35 1.22 1.20 1.24 1.36Return on Equity % -3.95 12.95 13.00 6.25 2.32 -0.39Return on Invested Capital % -3.92 12.95 13.00 6.19 2.26 0.46Interest Coverage — — — 109.37 39.84 -7.20

Source http://quotes.morningstar.com/stock/hd/s?t=hd

Research & DevelopmentThe Home improvement industry experiences continuous innovation. Home Depot must be up-

to-date with new products to allow it in adapting to the change in equipment and consumer

preferences. Home Depot seeks to collaborate with new and existing manufacturers to sell their

products to enable it to be a one-stop-shop for home improvement products. The stores are

continuously changing their design to allow customers to interact more with products and to

allow the stocking of products efficiently. Research is done in customer service as well to make

sure their experience is at the best possible level. Home Depot also continuously researches

competitor’s pricing, to enable them in pricing competitively (Home Depot, 2013).

12

Operation & LogisticsThe company manages a distribution network for its stores in the US, Canada and Mexico. Home

Depot currently operates 18 remote distribution centers in the US, and 33 bulk distribution

centers within the US, Canada and Mexico. Home Depot continuously innovates the distribution

centers, build new logistic competences and improve its inventory management systems. Home

Depot over the past years has centralized its inventory planning and implemented new

forecasting technology, currently 91% of its US store products are ordered through a central

replenishment and it hopes to increase the number in the coming years (Blake, 2013).

Human Resources Home Depot reported having 340,000 associates as of the last reporting fiscal. The employees

are expected to share the same vision as Home Depot. Employees are provided with many in-

house workshops such as customers first training program and company sponsored programs to

give associates a better understanding of their product. Home Depot believers their employees

are satisfied with the compensation they receive for their employment and has offered them

many means to keep their relationship excellent with the employees. One is to offer them an

option to purchase a limited amount of stocks in the company at a discount rate from fair market

value and medical insurance (Home Depot, 2013).

Information technology Home Depot is highly dependent on its information system to operate its business. The system it

employs assists them to process transactions, inventory management, sales, purchases and

overall support a cost efficient operation. Home Depot is promoting the sale of products through

its website, an advantage of selling through its website is that it allows customers to purchase at

any time, wide exposure, low overhead and helps in entering new markets. Alternatives and

Strategic recommendations

AlternativesAlternative 1

Make space available for more than one chain of popular fast food restaurant in all stores.

Building lease will be partially offset plus Home Depot will be receiving a small percentage of

the fast food chain’s revenue. The restaurant must operate during regular business hours of

Home Depot. Currently Home Depot stores only have a Subway, Harvey’s or a Tim Hortons.

13

Pros

This will help to partially offset building lease costs.

The restaurant will attract more customers to walk into the store and will keep them in the

store longer.

A low-cost strategy to implement, it will be at the cost of the fast-food to set the restaurant

and the operation.

Cons

All stores will have to change the layout to fit the restaurant.

The restaurants, food quality and service is controlled by a third party, and any bad publicity

can have a negative impact on Home Depot.

This move may lose more business to Home Depot due to store layout change, than bring

new business in. Unfortunately, this may be known once the restaurant is established.

Alternative 2

Home Depot increases its product offering in private labels, particularly in kitchen and

household appliances.

Pros

Higher profit margins when compared to branded products.

Reduced dependence on branded products.

Exclusivity of the product, competitors will not have the same product.

Control over price, and marketing plans.

Cons

The setup of the private label has to go through intensive research, logo, brand name, and

design.

Home Depot must audit the quality of the manufacturers that will be used to manufacture for

their private label.

14

The quality of the product will impact Home Depot and not the manufacturer that produces

it.

Home Depot is trusting a third party to manufacture a product that will be sold under their

name.

There is no support from manufacturers in marketing and selling the product.

If the product does not sell, Home Depot will be responsible for liquidating the unsold

merchandise.

Warranty of the product will be Home Depot’s responsibility.

Alternative 3

To Continue with its current strategy and driving the organization more towards it. ( Status Quo)

Pros

The current strategy has enabled them to be profitable and increase shareholder wealth.

The organization will not be experiencing any changes in its operation.

Home Depot will continue doing what they are good at, and no new risks will be taken.

The company will not require extra cash to implement this strategy.

Management will not be required to go through a board approval.

The company will not need to go through any changes, managing change without planning

every step of it, the strategy could fail at any stage of the implementation, and possibly even

bring the company down.

 

Cons

Home Depot can be at a risk of losing market share.

Not responding to changes to the market and consumer demand can possibly make the

company less profitable.

The company might not remain as up-to-date with technology and other effective operation

methods.  

15

Not implementing a new strategy can make Home Depot lose an opportunity to better

compete with its rivals and in developing new skills or products that can bring in higher

profits.

New strategies give investors confidence that the company is experiencing growth and is not

in a stagnation stage.

Alternative 4

Home Depot hiring qualified employees to provide installation services to its Do-It-For-Me

customers instead of contracting it to a third party installer.

Pros

Higher profit margin due to backward integration.

Reduce dependence on third-party contractors, and instead take control of the installation.

Have a competitive advantage over competitors who provide installation of third party to its

customer.

Have more control over the quality and service of the installation job.

Home Depot will be providing a service it currently offers, this allows the company to

efficiently forecast and hire the required labor.

Consistency in the quality of the work due to having a set of requirements when hiring

employees.

Cons

Investment is required due to appointing a new HR team to hire, and employees will be paid

hourly or salary, rather than piece work.

Dependence on installation from own employee. In case of employees not being available,

Home Depot will not be able to provide the installation on time.

Permitting and licensing of employees can change, which may require the employee to

educate itself and go through exams.

16

Recommended StrategyHome Depot should establish its own team of skilled employees to install material customers

purchase from the company’s store. The company currently outsources its installation services to

a third party company. Home Depot acts as the general contractor in providing the installation

services to its Do-It-For-Me customers, this places the company in a position where it does not

have full control over the quality of work the installers would provide. All though it is through a

third party, Home Depot is still liable for the installation, regulatory requirements and customer

satisfaction. If the installation process is not effective, the company could suffer lost sales,

lawsuits and fines. By implementing this strategy, Home Depot would have maximum control

over the installation process and reduce the risks that come with contracting to a third party.

This strategy would enable Home Depot to increase profit margin in its installation segment due

to not sharing its installation revenue with a third party installer, Home Depot reported a total

amount of $3.2 billion in service revenue for the year 2012, this is an increase of $300 million

dollars when compared to 2011. The Indirect benefits of implementing this strategy is that

material sales can rise if installation charges are reduced to customers that purchase at the store,

this will also allow Home Depot to be more flexible with charges and can easily provide

competitive prices to customers that purchase material with installation packages.

Implementation.For Home Depot to implement the proposed strategy, they will need to hire the required

employees to carry forward the jobs. Home Depot will first implement this strategy in major

cities. In Canada Home Depot will concentrate in Toronto, Montreal, Vancouver and Alberta.

Home Depot will hire approximately 50-80 skilled employees in each metropolitan area. The

company must first concentrate on installation services that are most frequently purchased and

are not seasonal e.g. flooring, cabinets and countertops. Employees hired must go through a

month of training, and once the training is over, Home Depot will be able to use its own

employees to offer installation services. Although Home Depot will have employees to offer

installation services, it will keep its relationship with the third party contractors the case of

employees hired not being enough to do all the services Home Depot sells.

17

Time LineTask Estimated time Estimated Cost

Phase 1

Finalize proposed strategy with

relevant strategy

1 month $4000

Seek board of directors

approval

1 week $0

Seek a team to lead the project 1 month $5000

Finalize the project 1 week $5000

Lease or purchase property to

hold employee training

3 months $1,000,000

Purchase equipment 2 weeks $100,000

Recruit certified technicians 1 month $50,000

Phase 2

Orientation 2 weeks $25,000

Train employees 2 weeks $100,000

Phase 3

Dedicate employees to certain

stores

1 week $0

Phase 4

Evaluate the employees and

their completed jobs

1 month $10,000

Hire more employees if needed 3 month $10,000

Total Cost $1,309,000

Contingency planIf the proposed strategy is not as successful as anticipated, Home Depot must continue with what

they are currently doing, with its current strategy Home Depot has been experiencing growth and

an increase in its net income compared to the previous year. In 2012 the company’s comparable

store sales were up by 4.6%, total sales grew by 6.2% and earnings per share were up by 21.5%.

The company achieved 10% operating profit and 15% return on investment capital. This was

18

achieved due to Home Depot’s current strategy of further improving customer service, increase

product selection and continuously allocating capital effectively.

Reference

E-Commerce / Online Sales Statistics | Statistic Brain. (n.d.). Retrieved from

http://www.statisticbrain.com/total-online-sales/

Form 10-K. (n.d.). Retrieved from

http://www.sec.gov/Archives/edgar/data/354950/000119312511076501/d10k.htm

HD Competitors | Home Depot, Inc. (The) Common S Stock - Yahoo! Canada Finance. (n.d.).

Retrieved from http://ca.finance.yahoo.com/q/co?s=HD

HD Home Depot, Inc. XNYS:HD Stock Quote Price News. (n.d.). Retrieved from

http://quotes.morningstar.com/stock/hd/s?t=hd

The Home Depot, Inc. - Corporate Governance Overview. (n.d.). Retrieved from

http://ir.homedepot.com/phoenix.zhtml?c=63646&p=irol-govhighlights

Org Chart Home Depot - TheOfficialBoard. (n.d.). Retrieved from

http://www.theofficialboard.com/org-chart/home-depot

19