homedepot case study

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The Home Depot

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Table of Contents

Executive Summary

Overview and Brief History

Description of the Business- Products and Services

Market and Financial Performance

Value Proposition

Value Chain

Value Net

Core Values

Business Model and Marketing Strategy

Industry analysis according to Michael Porter

Complementors Force

Competition

Resourced Based Analysis and competitive advantages

Strategic Intent

Core Competency

Value Migration

Business Strategy and Design

Game Theory

Innovation and R & D

Capabilities of management

S.W.O.T. Analysis

Recommendations

Conclusion

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Executive Summary

The purpose of this project paper is to analyze the Home Depot, who was the first to really commercialize the big-box format back in 1979. Home Depot has grown since then to become the largest home improvement retailer in the world. With the exception of Wal-Mart, no other retail chain has the globally expansive net sales growth than the Home Depot. By creating nearly 25,000 new jobs in 2006, and providing employment for over 364,000 sales associates all over the world, The Home Depot is considered one of the largest retail employers today. With the intensely competitive nature of the home improvement retail segment, it becomes vital to not only make the exact product available to the customers at the right price, but having sensitivity to serving what the customer needs will make the difference in who gains competitive advantages. Although Home Depot has delivered superb financial results since its inception, over the last six years they have encountered their share of challenges to include eroding market share to Lowes, and severe organizational discontent from shareholders, employees as well as customers. With a deteriorating housing market which does not promise to end anytime soon, Home Depot’s newly appointed Chief Executive, Frank Blake has “conceded that 2006 was a difficult year marred by a lot of "noise" for Home Depot, but he promised that 2007 "will be a year of focus, simplification and investment”.1

Overview and Brief History

Home Depot was conceived in the late seventies by Bernard Marcus and Arthur M. Blank; two charismatic entrepreneurs with a retail background and an innovative idea to create a no-frills, floor to ceiling warehouse filled with the largest variety of home improvement products available to the public. Because retail had long been considered a largely aesthetic experience, this was regarded as a radical marketing shift in that a high volume, high assortment, low overhead business strategy could successfully lure customers in with drastically reduced prices over their competition. It has been reported that prior to the first store opening in 1979, Bernard Marcus was “so intent on creating a warehouse feel that he raced around on a forklift, throwing on the brakes to create skid marks on the floors”.2 The co-founders envisioned a huge warehouse store where all products would be acquired and delivered almost instantaneously from the manufacturer’s production floor. The hook for the customer was the promise of amazingly low prices, in an environment where the do-it-yourself customer would be assisted by knowledgeable sales people, who through their expertise, would instruct motivate and encourage customers towards what was needed to fix and improve the home environment.

By the end of that first year, Home Depot had three separate locations opened with almost 200 associates (employees) and net sales of just over $7 million dollars. However, some people would be surprised to know that Home Depot reported a loss in the first year of almost one million dollars. By the following year, a profitable Home Depot literally exploded on the retail front, with sales topping one billion dollars annually by 1986.3 Home Depot reached net sales of almost 91 billion dollars in 2006, with net earnings of 5.8 billion dollars. According to Home Depot’s 2006 Annual Report, they opened 125 new sites in 2006 and currently have a total of 2,100 Home Depot stores located throughout the U.S. Canada, Mexico and just recently, China.4

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Waters, Jennifer. “Home Depot to stress store improvements.” Marketwatch.February 28, 2007. Retrieved 4/10/07 from <http://www.marketwatch.com/News/Story/home-depot-cautions-profit-eye/story.aspx2”Bernard Marcus”. Mother Jones Online. March 5, 2001. Retrieved 4/11/07 from http://www.motherjones.com/news/special_reports/mojo_400/88_marcus.html 3 Hattwick, Richard. “Arthur Blank and Bernie Marcus: The Home Depot Story. March 5, 2005. Retrieved 4/22/07. file:///D|/Hall%20of%20Fame%20ANB/pdf/htm_files/blank_marcus.htm 4 Home Depot 2006 Annual Report and Form 10K. Retrieved 4/19/2007. from http://ir.homedepot.com/downloads/HD_2006_AR.pdf

http://www.marketwatch.com/News/Story/home-depot-cautions-profit-eye/story.aspx

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Home Depot’s plans for expansion in 2007, despite relatively flat sales projections, are to open 115 new sites of which at least 25% are expected to be outside the United States. As for the co-founders, in late 2000, Bernard Marcus and Arthur Blank handed over the CEO job to Robert Nardelli, a command and control leader, who had mentored under Jack Welch while he was at General Electric.

After six years of a love-hate relationship with shareholders, employees and customers, Nardelli walked away from Home Depot in January 2007, with a $210 million dollar exit package. Stepping in after Nardelli’s expected departure is Frank Blake who simply wants the company to get back to its roots as a customer-friendly retailer.

Description of the Business

Home Depot specializes in construction materials, home improvement supplies as well as lawn and garden offerings. Home Depot has been endorsed as an innovator in their ability to combine economies of scale with exceptional customer service and know-how The Home Depot divides itself into two different business compartments: Retail and HD Supply. The retail segment caters to the “Do-It-Yourselfers” those who think they know what they are doing, the “Do-It-For-Me” or “Buy-It Yourselfers” who realize they may need a little extra help and finally the professional remodelers and tradesmen, who really know what they are doing.

The retail segment of Home Depot consists of 1,872 stores in the United States as well as 228 stores in Canada, Mexico and China. Home Depot stores are typically large, averaging about 105,000 square feet and provide well over 40,000 different product offerings. Additionally, Home Depot also operates the EXPO Design Center, an all inclusive shop for home layout and renovation ideas for the consumer as well as Home Depot Landscape Supply and other retail formats to include online sales. With the ongoing housing market cool-down, Home Depot believes that less people will be tapping their homes equity, As a result the retail segment is projecting flat sales for 2007, the first time in the company’

Adding onto the value chain is the HD supply segment, which not only offers products to the home builders and certified contractors, but can assist and manage many types of installation projects. Home Depot created this division with the goal of focusing on every phase of a building project. In 2006, the acquisition of Hughes Supply gave Home Depot a $12 billion commercial supply entity that now brings in about 15% of Home Depot's annual revenues. The commercial supply business is what currently differentiates Home Depot from its closest rival, Lowes. According to HD Supply’s website “HD Supply Facilities Maintenance is the largest supplier of commercial maintenance and replacement products throughout the United States” 5 The concept of HD Supply grew out of Robert Nardelli’s belief that the consumer remodeling market was reaching maturity. Home Depot started dabbling in the wholesale business in the late 1990s by opening a handful of Pro Stores and by purchasing Maintenance Warehouse/America Corp. The acquisition of Hughes Supply, a 500-store transaction doubled the size of HD supply with current annual revenues of $12 billion.6

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HD Supply Retrieved 4/18/07 from company website .http://hdsupplysolutions.com/webapp/wcs/stores/servlet/StaticContentDisplayView?

storeId=10051&langId=-1&catalogId=10051&sfileId=customersupport/

6 Van Riper, “Home Depot: Gone Too Commercial?”. Forbes Online February 13, 2007. Retrieved 4/21/07 fromhttp://www.forbes.com/2007/02/12/home-depot-contractors-biz-cx_tvr_0213homedepot.html

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Market and Financial performance

Prior to the housing market stagnation and downtrend which materialized in mid 2006, Home Depot has averaged annual sales growth of over 15%. Given the market decline, Home Depot still ended its 2006 fiscal period with an 11.4% increase in sales growth from 2005 results. The 2007 sales growth have been modified to a more realistically flat growth rate. Analysts, as well as Home Depot itself, do not expect the residential construction and housing market to improve until the end of the year or early in 2008, “an environment that will keep sales flat or allow them to rise 2% at the most.”7

Home Depot’s performance trends for Net Sales over the last five years are as follows:

Although Net Sales for Home Depot grew by 11.4% in 2006, net earnings as a percentage of sales fell 12.5% from 2005. Net Sales for HD Supply increased 162% from 2005, but it is largely believed that this was due to the acquisition of Hughes Supply. Without the location growth, HD Supply increased by about 5.6%. The Home Depot retail services division which caters to the “do-it-for-me” demographic increased their net sales in 2006 by 8.3% over 2005. These increases reflect the growth in installation services possibly due to an increase in the average employee’s work-day over the last ten years. Home owners no longer have the time to take on large-scale projects so they are turning to home Depot to do it for them. 8

Diluted earnings per share increased a modest 2.5 % from 2005 to 2006, increasing to $2.79 per share from 2005 $2.72 per share. Diluted earnings per share for 2005 and 2006 were favorably impacted by Home’s Depot repurchase of common stock shares. Through its buybacks, Home

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Waters, Jennifer. “Home Depot to stress store improvements.” Marketwatch.February 28, 2007. Retrieved 4/10/07 from <http://www.marketwatch.com/News/Story/home-depot-cautions-profit-eye/story.aspx8 Home Depot 2006 Annual Report and Form 10K. Retrieved 4/19/2007. from http://ir.homedepot.com/downloads/HD_2006_AR.pdf


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Depot has reduced its count of outstanding shares over the past 12 months by 3.9% and has had a history of providing-at least 10% annual dividend growth over the past 12 years.

As for market share and competitive analysis, Shares of Home Depot have fallen 1.4 percent this year, while Lowe's, the second-largest home-improvement retailer, gained 4.5 percent. 9 Home Depot has projected conservative sales growth at about 5% with limited expansion in 2007 while Lowe's expects annual sales to rise 10 percent and as much as 2 percent in stores open at least a year. Given that Lowes intends to open up over 160 new stores this year, the organic net sales growth will be much lower.

Value Proposition

Like every company, Home Depots exists to make a profit. Home Depot’s value proposition is to bring unparalleled value to their customers who will most likely make decisions based on value, convenience of store location, the best level of customer assistance and wide assortment product offering. Home Depot aligns its business strategies to deliver ongoing customer value in the eyes

of the customer. By exhibiting differentiated customer service, characterized by engaged and

knowledgeable associates, the Home Depot offers a unique shopping experience concentrated on solving their customer’s home improvement dilemmas. Over the years, Home Depot has competed effectively by learning faster than its competitors. However, they must work towards quickly discovering customer’s needs and filling them at a faster pace. Home Depot will win by delivering a superior value proposition, not just by being superior to the competition. The value proposition answers the question of what Home Depot must do in order to profitably win the business of their customers. Home Depot must focus on maintaining customer relationships, providing solid product/price leadership and mandating operational excellence in order to differentiate themselves from the offerings of their competitors.

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9 Clothier, Mark “Housing slump hurts Home Depot”. Bloomburg News Online. February 28, 2007. Reviewed 4/18/2007 at http://www.chicagotribune.com/business/chi-0702238homedepot-story,1,1281064.story?coll=chi-bizfront-hed

Value Chain

The value chain for Home Depot begins with the inputs, approximately 40,000 different products, which essentially initiate value creation. Emphasis is placed on the importance of outputs, which includes the support activities of Home Depot’s marketing and customer service teams in an effort to solidify brand name loyalty in the eyes of the consumer. Consumers today have the resources to better educate themselves on home improvement projects and more acclimatized the relationship between value and price. Being closest to the customers in the value chain, Home Depot creates and flexible and adaptable force in which to respond to customers always changing viewpoints and ideologies. By working with suppliers and partnerships in the supply chain, Home Depot can quickly react to meaningful issues which are important to the customer and steer new and re-designed product evolution. Home Depot’s value chain addresses how they get the customers, which processes they need to perform as well as how they deliver it to the customer, thus guaranteeing customers outcomes and benefits in a positive way.

Value Net

Home Depot’s value net consists of a wide array of potential customers and a concentrated amount of competitors all battling for the market share of the “do-it-yourself” customer. Almost all of Home Depot’s suppliers will eventually be pushed into making difficult price concessions which in essence helps Home Depot to lower costs and remain competitive. In order to remain true to Home Depot’s value proposition, suppliers are given operational mandates on product specifications and stock replenishment procedures. This helps to ensure a positive customer experience which can create long-term customer loyalty.

With the challenging times ahead for Home Depot, Frank Blake, Home Depot’s current CEO has figured out that Home Depot must rethink the way they do business in order to maximize their relationships and improve on their individual and joint performance in the marketplace. By focusing on the Value Net, Home Depot can determine any strategic opportunities for growth and improvement. 10

_______________________10 Ryst, Sonia “Housing and Home Depot: Unhappy Together”. Businessweek Online. June 17, 2006. Reviewed April 19, 2007 from www.businessweek.com/bwdaily/dnflash/content/nov2006/db20061115_693477.htm?chan=rss_topStories_ssi_5 -

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Core Values

Home Depot’s Core Values revolve around the tenets of providing excellent customer service. Integrity and respect in dealing with customers, employees and business partnerships is vital to Home Depot’s value creation. Building strong relationships is fundamental to Home Depot’s success and evolution,

Home Depot has a strong belief in doing the right thing. This includes social responsibility, environmental accountability and an adherence to a strict code of business ethics which remains consistent in good times as well as bad times. It was in the early 1990s, that Home Depot Depot began a process of creating a resolute parallel between its fundamental policies and their core values which are almost indigenous to Home Depot. The Home Depot website describes their values as “the fabric of the Company’s unique culture and central to our success. In fact, they are our competitive advantage in the marketplace. Associate pride and our “orange-blooded” entrepreneurial spirit are distinctive hallmarks of our culture.” 11

_______________________________11 Home Depot 2006 Annual Report and Form 10K. Retrieved 4/19/2007. from http://ir.homedepot.com/downloads/HD_2006_AR.pdf

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Home Depot understood that providing exceptional customer service was not just a catchphrase to throw out every now and then, but that it was critical to the success of every business and one of the only ways they would achieve competitive advantage. They know that highest value doesn’t mean being just a low-cost provider. It is the combination of having very competitive costs, outstanding services, innovative products and the best responsiveness- the whole package. The responsiveness of their customer service team is what differentiated Home Depot from its early competitors. In order to do this, Home Depot believes that the people are the most important part of the equation in creating value for the customers, suppliers and employees. By employing the best, Home Depot makes it clear that running the business is a team effort and every employee should feel empowered to put the customer’s needs at the forefront of everything they do.

Bernie Marcus and Arthur Blake always believed that if you chiseled away at the management structure at Home Depot that “stores and customers should be positioned at the top, while senior management is at the bottom. This concept was referred to as the inverted pyramid theory that emphasizes the role of lower-ranking managers over the top brass with the customer sitting on the top.12

Business Model

Home Depot’s business model is designed to transform material and human resources at reasonable costs, into outputs which will create profit for the company and value for the customer. The Home Depot clearly defines the kinds of merchandise they offer and then make sure that they are able to dominate sales so that the customer will think of the Home Depot first when they eventually made purchasing decisions. One of the most important ways in which Home Depot attracts and retains their customer base is their strategy to offer unbelievably low prices. In order to do this, Home Depot demanded price concessions from their supplier in exchange for the high volume which Home Depot could offer. Robert Nardelli, Home Depot’s CEO of the early 2000’s believed that “the most important perspective in retailing was to be market-focused and customer-centric.” 13 Home Depot knows how the building blocks of their business model relate to each other. There are then able to rethink and redesign the relationships in innovative ways. Home Depot’s business model articulates how they will build and sustain effective relationships with their customers by being the best at what they do. Home Depot offers the benefit of price, product selection, store location and excellent customer service so that it earns competitive advantage.

Industry Analysis according to Michael Porter

Michael Porter’s five forces model for Home Depot reveals its competitive strengths front the outside in. Home Depot gains industry advantages due to the week bargaining power of its volume suppliers and its relatively difficult barriers of market entry from competitors thinking they can provide the same assortment of products at competitive prices. At any time, the advantages which Home Depot gains can easily be offset by the fickle bargaining power of the buyers, who would face no difficulty or cost in switching firms if the situation arises.

12 “At Home Depot, the Model Has Changed” . Business Week Online. October 25, 2004. Retrieved 4/10/07 from h ttp://www.businessweek.com/magazine/content/04_43/b3905093_mz017.htm

13 Hattwick, Richard. “Arthur Blank and Bernie Marcus: The Home Depot Story. March 5, 2005. Retrieved 4/22/07. file:///D|/Hall%20of%20Fame%20ANB/pdf/htm_files/blank_marcus.htm

http://www.businessweek.com/magazine/content/04_43/b3905093_mz017.htm

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The rivalry amongst the existing players is fiercely competitive in that everything from “Mom and Pop shops” to other large retailers such as Lowes, Sears and Ace Hardware are all trying to secure competitive advantage within their own niche. Each of Home Depot’s competitors has their own blueprint of how to drive profitable growth. Sears concentrates to create customer value for its Craftsman label products which are considered high quality. Lowe’s is considered Home Depot’s head to head competitor. Lowes business model is relatively the same: Take a big-box store, fill it to the rim with a wide array of products, offer competitive prices which are offset by the volume gains over their competitors and most importantly keep the customers coming back.

As mentioned earlier in this paper, most of Home Depot’s suppliers at some time in their relationship with Home Depot will make price concessions in exchange for a consistently high volume arrangement Suppliers are given operational mandates on product specifications and stock replenishment procedures. Home Depot has well over 40,000 different kinds of products supplies by well over 10,000 different suppliers. As these products are largely non-differentiated, the supplier tends to have a rather weak bargaining position.

Home Depot’s buyers, which make up the “do-it yourselfers”, the “do it for me” and the commercial/professional customer segment are extremely informed and cost conscious. They carry the real bargaining power of the model. With the advent of the internet it is relatively easy to compare prices with the competition before visiting a store. The internet also provides a means for home owners to learn more about home improvement thus substituting the need for Home Depot’s retail services. In addition, the general standardization of the products which Home Depot offers creates a low pain threshold for a customer to switch allegiances.

Given the cost disadvantages of not achieving economies of scale, new entrants to the home improvement industry will not be able to compete with Home Depot or Lowes unless they have considerable amounts of investment capital. The barriers to entry include the following difficulties: economies of scale with a vast product selection, knowledgeable and skilled employees, long-term investment capital, and the ability to grab prime real estate, strong brand recognition and unfaltering customer allegiances.

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Complementors Force

The complementor’s force is the net effect of companies helping each other out for mutual benefit. This force is sometimes induced by a production technology that exhibits economies of scale such as the retail home improvement industry. Home Depot’s complementors are those companies where the products and services offered only exist to enhance Home Depot’s core offerings. Several examples would include Home Equity Mortgage Lenders who provide the financial backing for the Home Depot’s customer decision making mechanism. We have recently seen how this force has worked in a negative way. With the cooling of the housing market, fewer homeowners want to tap into their homes equity. Therefore, the home improvement industry has seen a decline in large scale projects or services.

Competition

In the fiercely competitive home improvement retail sector, the keys to achieving competitive advantage relate to price, image, innovation, logistics, financial and operational efficiencies. The player who figures out the best strategy and game theory wins.

The price points a company established for its products and services is essential in terms of repeat patronage and profit value to the company. If a company plays the pricing game where they attempt to be the lowest cost provider, then they must continue to drive cost concessions from their suppliers as well as process improvements within their organization. Brand image and reputation in the retail home improvement industry is critical because customers will switch on a dime if they do not feel that their needs are being taken care of. The fortitude of Home Depot’s logistics network is of vast importance in that getting the products on the shelves and ultimately to the customer when they want it is one of the most important tenets of competitive success. Logistic sourcing though the value chain is a major source of strength for Home Depot. They have figured out how to efficiently move their product while keeping transportation costs and overhead low.14

The financial resources which Home Depot possesses are in having a strong cash flow position which has enabled them to quickly grow to the largest home improvement retailer in the U.S. This gives them an advantage over their competitor in that their financial strength allows them to seek innovative ways to enhance their products and services and then be able invest in potentially profitable undertakings which would grow their business and further anchor their trust in the eyes of the customer.

Resource Based Analysis

The resource based analysis primarily deals with those assets, tangible and intangible, which create the ability to generate cash flows and to sustain a superior competitive position in thehome improvement industry. Home Depot’s skills, knowledge, financial resources and intellectual property are those hard to copy resources which create customer value and loyalty. Home Depot’s strong customer relationships, creates opportunity for its leaders to extend existing product lines and custom solutions to their customers desires. The asset value test asks four questions:

14 Home Depot 2006 Annual Report and Form 10K. Retrieved 4/19/2007. from http://ir.homedepot.com/downloads/HD_2006_AR.pdf

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Is it convertible? Can the asset evolve into something which has customer value? With Home Depot, their employees are their greatest asset and with unlimited resources of intellectual capital an opportunity is created to provide innovative customer solutions over and beyond its competition.

1) Is it Rare? The asset must be unique and incomparable in order to exploit its value. Home Depot has always been the first to the party in initiating new and emerging innovation before its competitors.

2) Is it Inimitable?Intellectual assets are extremely difficult to imitate. Knowledge and the intimacy of relationships with supply channels and customers attained by Home Depot, create an unrivaled competitive advantage which cannot be trumped.

3) Is it difficult to Substitute? If a competitor cannot successfully imitate another companies business model or resource allocation strategy, then the only chance of achieving competitive success would be to develop another channel to the asset through substitution. Home Depot’s ability to offer competitive prices cannot be matched by Lowes die to economies of scale. Lowes has focused its energies on providing a better shopping experience so that price will not always win out.

Strategic Intent

Home Depot’s strategic intent from the very beginning was to distinguish itself by providing exceptional customer service and satisfaction to all stakeholders while never losing sight of their core values of integrity, customer commitment and continuous improvements. Home Depot strategically extended its business reach both in geographic volume and global expansion throughout the world. Home Depot’s simplistic way of achieving these goals have been with following the co-founders guidelines to providing exceptional customer service: the right products at the right time, at the right cost, error-free and one time with the commitment to always listen to the voice of the customer. 15 Every engagement with a customer is an opportunity for Home Depot to learn what their customers expect of them and how they can strive to exceed those expectations in new and innovative ways. This is not simply a gimmick to take advantage of their customers’ inexperience and indecision by persuading them to buy products they might never need. If a Home Depot associate recommended a less expensive way to do a job, there is a greater chance that such an altruistic approach will create unwavering long-term customer loyalty to Home Depot.

Recently, Home Depot has begun to democratize the strategic planning process over to teams of line and staff managers from different segments. Additionally, Home Depot keeps the planning process close to the realities of markets, with interaction to/from key customers and the suppliers in order to figure out what their customers really want. This gives Home Depots an opportunity to transform the company in a way which changes the rules of the retail home improvement industry to their advantage.


Core Competencies

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Home Depot’s core competencies are in using its breadth and far reaching scope to achieve economy of scale dominance in purchasing quality products and offering them to their customers at competitive prices. Home Depot’s competencies in its retail and commercial divisions are largely the same: provide exceptional customer service while using technology to enhance design and distribution. Home Depots core competencies help provide potential access to a wide variety of markets, while making a contribution to the customer benefits of the product. Home Depot’s core competencies shape the products and services offered by asking why their customers pick them over the competition. The answer is price, availability and location.

Value Migration

Value migration for all business focuses on where the value resides today and where it will go tomorrow. Superior business designs focus on how to select customers, differentiate their offerings and capture the resource and assets needed for future competitive advantage. Home Depot operates in largely mature sector where the U.S. market is already saturated. Added to that, the housing industry slump has tempered, at least temporary, Home Depot’s further entrenchment into the commercial home improvements industry. Home Depot’s business model has always been volume operations. By entering into new businesses or new geographical areas, Home Depot could identify the low-margin business these customers have to do and take that work off their plates so they can focus on the high-margin work. Be moving slightly downstream, Home Depot might develop a disruptive innovation which could open up new markets and distribution channels.

In the past, Home Depot has relied on classic product-focused growth strategies for value migration. They realize that increasing the volume of their current portfolio will only increase further market which creates difficulties in finding strategies for driving significant, sustained new growth. Unlike Lowes, Home Depot has shifted their growth strategy to one of a global reach which creates new growth in new markets. This approach is one of the best ways that they can differentiate themselves and discover new channels and ways to expand their market's boundaries. By creating new-growth segments which focus on growing new value by discovering new avenues of opportunity.

Business Strategy and Design

In today’s economy, globalization has lead to increased competition on a playing field which is not always level, This has led to more ways of doing business as there is a larger variety of what companies do, how they do it and for whom they do it. For Home Depot, deciding which long-term paths to commit to and when to change paths is one of the most important strategic decisions they will make as a company. Home Depot’s business design has focused on its culture, value and power structure and how they optimize it to achieve competitive advantage. Home Depot frequently assesses it core capacities and cost structure to make sure they are on target to generate profitable and sustainable revenue streams. Home Depot states that their


Business strategy is to “deliver sustainable and profitable growth by enhancing the core of what they best, extending the business and expanding their markets”. Their motto “You Can Do It. We Can Help.” is a strategy in of itself as it creates a customer intimacy and a collaborative structure

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between its employees and the customer which can provide sustainable long-term competitive advantage. 16

Game Theory

Game theory is best described as the manner in which the decision maker or the player in the game of business strategy makes a decision that takes into account the actions of decisions made by the other players or competitors.. As each unique player is pushing forth their own strategy, a complex chess-like game ensures where the challenge is to outsmart your completion. Home Depot has always been aggressive with offering the best prices in an industry where you must compete on price in order to gain mark share. However, where cutting prices slightly might increase the overall market potential, decreasing the prices beyond a certain limit has a diminishing impact on the market potential and very seldom does anyone ever win in a price war.

The five elements of game theory revolve around the players (who are involved), the tactics (the possible actions), the scope, the roles (the sequence of moves) and the values (how we do it).In using game theory, Home Depot has learned to analyze, adjust, and even change direction when it is necessary. Home Depot’s key business decisions include what to produce/procure andsell, how much, and at what price and there will be competitive interactions around thesedecisions.

Innovation and Research and Development

Home Depot has always embraced innovation with its suppliers, advancing technology in the marketplace as well as creating innovative customer solutions. In light of the trend towards environmentally protective products, Home Depot has escalated the use and availability of environmentally friendly products as a way to positively impact the environment. . The Home Depot declared and demonstrated its commitment to environmental issues with the creation of the Home Depot Foundation. “a leading organization dedicated to creating healthy, livable communities by supporting the development of affordable, healthy homes for working families and by planting trees in parks, in schoolyards and along city streets” 17

In 2007, Home Depot expects to invest over $260 million dollars on product innovation, pricing strategies, sourcing initiatives and merchandising resets/. Over the last few years Home Depot has invested in technology-enabled customer convenience such as self-checkouts and 15,000 new kiosks to give customers access to more products. Home Depot has also completed the implementation of its centralized automated replenishment strategy as well as engaged in a company-wide performance-measurement system where every employee is provided the direction, knowledge, skills, resources and support to succeed in their own career strategies. Where promotions were once based on who you knew, decisions will now be based on talent and overall contribution.


S.W.O.T. Analysis

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Home Depot’s strengths are in providing an easily accessible popular brand name with an extensive assortment of product and service offerings. Their opportunities lie in their strong cash position which allows for further global expansion and market domination. These positive factors stand the chance of being trumped by the fate of the housing market. As fewer people will be using their homes equity for expansive projects, domestic growth could be flat or even stagnant as compared to prior year growth.

Internal Factors:

Home Depot’s competitive strengths and volume impact to economies of scale make them a very difficult company to compete against. Home Depot’s strengths include:

A simplistic yet proven successful Business model A brand name widely recognized throughout most of the world Extensive assortment of product and services offerings Cultivating a strong growth and expansion mentality Strong Cash Flow Innovativeness

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Home Depot’s business model, created a paradigm shift in the manner in which the regular every-day folks could shop in a generic, yet extensive big-box environment and still reap the benefits of lower prices. This concept was considered revolutionary to a retail segment which had mostly believed that specialization was the key to differentiation. Home Depot did not have a sophisticated model for their founders believed that by demonstrating their core values over and over again, Home Depot would become a company which was admired and respected by their customers as well as their competitors as a leader in the industry which their rivals would attempt to emulate

As the industry has rapidly become more competitive and global, Home Depot has attempted to improve their distribution capabilities and achieve further cost reductions objectives while improving quality and service. Home Depots knows that service improvement can only be achieved through the continuous commitment of a well-oiled human resources machine. As stated on Home Depot’s website their “orange aprons, low prices, knowledgeable associates, and warehouse like stores have all contributed to a very strong brand image”.18

Neutralizing Home Depot’s strengths are the following weaknesses of the organization:

Customer Service deterioration Employee Retention Market saturation

Although growth is seen as both an asset and a liability for Home Depot, they have continued to push the boundaries of new market development. This has in effect changed the structure of their profit and loss statements as their operating expenses have expanded right along with their expanding revenues. Additionally, Home Depot has struggled with lagging customer service skills as compared to Lowes. Much of this has been attributed to the dictatorship style of Robert Nardelli who cut thousands of jobs during his reign and further incurred the wrath of long-term employees who eventually left the organization.

External Factors:

Home Depot has an aggressive plan to expand itself further into world markets which currently have little competition. Lowes has remained relatively domestic and in 2007 will start expanding into the Canadian and Mexican markets. Because the Home Depot organization is largely non-union orientated, they may face difficulties in expanding into countries which have significant worker contracts/agreements. Home Depot has expanded into Mexico, Canada and China in 2006 and they will be looking towards new, markets in new geographic areas of the world. This growth could pose potential strategic and development risks due to unforeseen shifts in market demand and the players who compete in this arena.

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Home Depot has an opportunity to greatly expand their cost opportunities through the use of global sourcing. Global sourcing can provide substantial and long-term cost reductions anywhere from fifteen percent all the way up to 50 or 60 percent based on which factors of production you are outsourcing.


If Home Depot can discover price savings across geographic terrain without unhinging quality and performance of their products, then they will be able to gain even further competitive advantage not just in the countries they source from, but in the United States as well.

Additionally, there are opportunities to gain market share through the distribution of green products. Lowes has been behind the eight ball for a while, but Home Depot could emerge with a stronger chokehold on the market.

The retail industry is one of the most competitive industries in the business world. Home Depot knows that its long-term success and growth depend on their ability to remain a low cost, high variety provider. They want to be the first choice which home improvement customers turn to in their purchasing decisions. Because Home Depot and Lowes are viewed as transposable, the only way in which either can differentiate themselves is through complete customer satisfaction. One of Lowes’ competitive strategies is build a store in direct proximity of a Home Depot. Lowes knows that for the first year, they may gain probationary enthusiasm of the market. Their hope is that by the time the honeymoon period is over that they will have captured the customer’s loyalties. This chess game type of strategy will only serve to create possible market saturation for both companies. The only way to counteract this is by diverting off into unchartered markets and creating a discontinuous value stream all on your own.

Recommendations:

Many consumers and business analysts believe that Home Depot needs to get back to basics of providing exceptional customer service. We have all experienced how lack of assistance and know how will impact your future purchasing decisions. Home Depot has considerable market share to Lowes and its stock price has dropped almost 9% since 2001. Home Depot should reconcentrate its focus on being the best at what they do. It starts with the employees and the way they are welcomed and indoctrinated into Home Depot’s culture.

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Conclusion:

Home Depot should continue to seek innovative ways to enhance and distribute products here in the United States and in other geographic dimensions. By exploiting specialized customer niches (such as female marketing) and gaining footholds in areas of the world which are not experimenting market difficulties, Home Depot can achieve the first to the party competitive advantages. Even with Frank Blake’s background in working alongside Jack Welch and Robert

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Nardelli from General Electric, he will still face difficult operational challenges he ingrains his own brand of culture into Home Depot. One of the key tasks will be perking up sagging morale at the company. Home Depot's customer service left much to be desired after a "culture of fear" instilled during Nardelli's reign.19 Given that eighty percent of Home Depot’s workforce is part-time, Blake must assure the permanent employees that unmet performance targets are not always grounds for immediate termination, they are opportunities for improvement. Cost reduction is never immediately welcomed by employees who are desperately trying to financially figure out their own personal paths, but when Robert Nardelli demanded severe job reductions while securing himself “a guaranteed bonus and a huge compensation package of $38.1 million for the year ended Jan. 30, 2006.”, he in effect caused his most valuable asset (his employees) to seriously question their ongoing commitment as well as hurt Home Depot’s reputation for providing exceptional customer service. 20

19 Waters, Jennifer. “Home Depot to stress store improvements.” Marketwatch.February 28, 2007. Retrieved 4/10/07 from <http://www.marketwatch.com/News/Story/home-depot-cautions-profit-eye/story.aspx20 Van Riper, “Home Depot: Gone Too Commercial?”. Forbes Online February 13, 2007. Retrieved 4/21/07 fromhttp://www.forbes.com/2007/02/12/home-depot-contractors-biz-cx_tvr_0213homedepot.html

Although Home Depot’s revenue growth has been sluggish over the last year, financially, Home Depot remains a powerhouse with their strong cash position. This makes Home Depot very attractive to shareholders/investors who will help provide the capital tools for continued growth and expansion into 2007. Additionally, Home Depot is hoping that the investments made their IT infrastructure will pay off in terms of improved operational efficiencies and customer satisfaction.

The answer of exactly when the building industry market will trend back up is largely unknown at this time. Home Depot should consider entering into new businesses or new geographical areas. Home Depot could identify the low-margin business these customers have to do and take that work off their plates so they can focus on the high-margin work. Be moving slightly downstream, Home Depot might develop a disruptive innovation which could open up new markets and distribution channels.

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