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The Home Depot

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Tai
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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
_________________________________
1
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.aspx
2”
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
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4 Home Depot 2006 Annual Report and Form 10K. Retrieved 4/19/2007. from http://ir.homedepot.com/downloads/HD_2006_AR.pdf

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
_________________________________
5
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:

Perform
Home Depo
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

_________________________________
7
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.aspx
8
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.

Perfor
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.
Home De
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
$ 3 .0 0
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
$ 2 .5 0
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
$ 2 .0 0
business of their customers. Home Depot must focus on maintaining customer relationships,
providing solid product/price leadership and mandating operational excellence in order to
$ 1 .5 6
differentiate themselves from the offerings of their competitors.
____________________________________________________
9 $ 1 .5 0
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

$ 1 .0 0
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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
Home De
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 (Includes H
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

Suppliers
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 HDEXPO
AndStrategic
_______________________
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 -

Partnerships HomeDepot
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Home Depot
Custom
Core Values
Consum
Home Depot’s Core Values revolve around the tenets of providing excellent customer service. Profess
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 Install
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-

Competition/ Substitutor
blooded” entrepreneurial spirit are distinctive hallmarks of our culture.” 11

(Lowes, OSH , True Value)

HOME DEPO
_______________________________
Suppli
11
Manufact
Home Depot 2006 Annual Report and Form 10K. Retrieved 4/19/2007. from http://ir.homedepot.com/downloads/HD_2006_AR.pdf

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

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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Five Fo
Pote
Bargaining
Power
Of Suppliers
Complementors Force

The complementor’s force is the net effect of companies helping each other out for mutual
Suppliers have week bargaining power
benefit. This force is sometimes induced by a production technology that exhibits economies of
Multiple substitutions
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
Non -Differentiated products
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
Multitude of suppliers
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.

Rivalry
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.
Fi
The price points a company established for its products and services is essential in terms of
Lo
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
OSH,
rs S
p
u
lie

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.

Threat of Substitute
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
Products or Services
The financial resources which Home Depot possesses are in having a strong cash flow position
Threats are high as there are
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
several available substitutes
 Page 12 of 21

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 the
home 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

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
 Page 13 of 21

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.
15
Home Depot 2006 Annual Report and Form 10K. Retrieved 4/19/2007. from http://ir.homedepot.com/downloads/HD_2006_AR.pdf

Core Competencies

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.
 Page 14 of 21

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

16
Home Depot 2006 Annual Report and Form 10K. Retrieved 4/19/2007. from http://ir.homedepot.com/downloads/HD_2006_AR.pdf

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
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 and
sell, how much, and at what price and there will be competitive interactions around these
decisions.

Innovation and Research and Development

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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.

17
Home Depot 2006 Annual Report and Form 10K. Retrieved 4/19/2007. from http://ir.homedepot.com/downloads/HD_2006_AR.pdf

S.W.O.T. Analysis

Home
Positive
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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

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

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• 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.

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.
18
Home Depot 2006 Annual Report and Form 10K. Retrieved 4/19/2007. from http://ir.homedepot.com/downloads/HD_2006_AR.pdf

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
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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.

Recom
• Improve Customer Service
retention and indoctrination
create a culture which valu
hard work.
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Rec
Conclusion:
• Continue to seek innov
Home Depot should continue to seek innovative ways to enhance and distribute products here in

which magnifies value

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
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

• Implement complex cu
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

capabilities which will e

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
future customer intent.
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.aspx
20
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

• Create Interior Design

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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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