Managing Strategic Change: Home Depot - Essay Example

Managing Strategic Change: Home Depot This paper gives a brief background of the events at Home Depot leading up to the resignation of Robert Nardelli, its Chairman and CEO in early 2007. There are two major challenges facing the in-coming CEO would face and they are represented as the problem statement in this paper. The paper identifies the problem of changing the organization’s culture as being the greater challenge due to its implications on the company’s falling customer service. The paper concludes that Home Depot’s current customer service crisis provides the best environment for implementing a successful change effort and recommends two other tactics that should enable the new CEO succeed where his predecessor failed. 1.0. Background In early 2007, Home Depot was the second largest US retailer after Wal-Mart however; its share price was lower and stagnant in comparison to its competitors such as Lowe’s, a customer satisfaction survey rated it at the bottom of the heap of major U.S. retailers in customer service and its staff felt alienated by the new culture introduced by Robert Nardelli during his five-year reign as Chairman and CEO. On the other hand, Robert Nardelli’s had a string of successes that enabled Home Depot increase in profitability and streamline its operations. Nardelli streamlined Home Depot’s operations through cost reduction tactics such as centralizing purchasing and merchandising, increasing the number of part-time employees and increasing organizational efficiency through the adoption of Six Sigma approach and modernizing the retailer’s technological infrastructure and IT systems (Ton & Ross, 2009). The problem though was that all through his tenure, Nardelli had failed to reassure Wall Street to the extent of improving Home Depot’s share price. The board, presumably, acting on behalf of the firm’s shareholders adopted the classical agency theory approach of tying CEO pay to the performance of the company stock. Nardelli who was not happy with this proposition, opted to resign and left Frank Blake the new Chairman and CEO with two major challenges. 2.0. Problem statement The challenges facing the new Chairman and CEO were firstly, and more importantly, Nardelli had changed Home Depot’s service encounter triad from contact-personnel domination to service organization domination. This left employees feeling alienated and customer service fell. Secondly, Nardelli had begun a strategic shift in Home Depot’s target market from its traditional consumer retail to now focusing on selling to professional contractors through HD Supply. 3.0. Analysis From the outset, Home Depot was characterized by a close focus on the customer with the founders: Bernie and Arthur, championing the customer service philosophy of “whatever it takes,” and encouraging sales associates to develop relationships with customers rather than seeing sales as a transaction (Ton & Ross, 2009). Store managers were largely autonomous in their own store operations, and the company invested heavily on training its employees and paying them well to increase store sales and productivity. When looked at in terms of the service encounter triad, Home Depot clearly utilized a contact personnel-dominated encounter to serve its target market (Fitzsimmons & Fitzsimmons, 2010). However, as Nardelli quickly realized, whereas the company’s customer service was exemplary, with the company’s rapid growth the organization’s market-led operations strategy was impeding it from enhancing its operational effectiveness and reaping from the associated benefits. For example the decentralized merchandising was preventing Home Depot from benefitting from the economies of scale that should have resulted from its size and market leadership. It would be difficult to discuss Home Depot’s situation without referring to its operations which according to Barnes (2008) consists of the myriad day-to-day activities that when considered in their totality constitute the company’s long-term strategic direction. Nardelli’s actions were driven by his desire to see Home Depot move from a market-led perspective to an operations-led perspective, where the company’s strategy would be driven by excellence in operations. The latter offers a more sustainable source of competitive advantage given that the organization is better placed to discover, develop and grow in core competencies (Hamel & Prahalad, 1996). From the case, it appears that the greatest challenge for the new CEO would be to see through Nardelli’s companywide change effort of migrating Home Depot from contact-personnel-dominated service encounter to organization-dominated service encounter. According to Kotter (2007) Nardelli committed one of the eight major errors that prevents companies from successfully completing their change efforts. Nardelli failed to create a powerful enough guiding coalition. “Within two years of Nardelli’s arrival, 22 of the company’s top 29 managers left…and 98% of Home Depot’s 170 top executive positions changed hands, and over half of the new hires were from outside the company (Ton & Ross, 2009, p. 8)”. Kotter (2007) argued that in all successful transformation efforts there has to be a leadership coalition that goes beyond the head of the organization. For a company the size of Home Depot, losing more than 75% of the top management does not instill confidence on the other employees over the change effort. An alternate view to explain Nardelli’s failure to have employees embrace the new culture could be that during his reign Home Depot continued to perform well thus there lacked a widely accepted perceived need for change or a significant trigger for change such as crisis or major threat which Johnson (1992) referred to as being critical for creating a climate for change within any organization. This means that even with the removal of the “old guard” and hiring of ex-military personnel among other tactics that Nardelli deployed, rather than contributing to organizational revitalization those actions acted counter-productively and made the bulk of the employees feel alienated and demotivated. Given that the service profit chain clearly shows the importance of employee buy-in and motivation to service value of an organization, it was predictable that Home Depot’s customer service would fall when its employees felt left out. With the US housing market on a decline, the new CEO would have to determine whether to continue with focusing on the new market segment, pursuing both markets or to return to its traditional consumer retail target market. Given that Home Depot has a large market share of the consumer retail market it would be imprudent to ignore this market at the expense of the new market segment. It would be better for the new CEO to sustain the company’s traditional market as a “cash cow” while pursuing the new market as a strategy to remain competitive in future. 4.0. Conclusions and recommendations This paper has focused primarily on the failed organizational culture change effort at Home Depot which, due to its effect on employees and their impact on the service profit chain, is arguably the root cause of the fall in customer service and low Wall Street investor confidence. To effectively tackle this problem the following recommendations are given. First, Home Depot’s new CEO should exploit the current customer service crisis to win over the critical mass of employees necessary to change the organizational culture. Staff will now find it easier to see the need for change. Secondly, the new CEO must find ways to restore employee confidence that was lost during Nardelli’s tenure for example by relooking at the use of increased part-time employment. Thirdly, whereas Nardelli pushed for increased technology-generated service encounters such as that depicted by the introduction of self-checkouts, the new CEO should aim for increased technology facilitated service encounters instead. Customer’s feel abandoned when they use the former whereas the latter helps Home Depot staff to better serve their customers. References Barnes, D. (2008). Operations Management: An International Perspective. London: Cengage Learning. Fitzsimmons, J. A., & Fitzsimmons, M. J. (2010). Service Management: Operations, Strategy, Information Technology (7th ed.). New York: McGraw-Hill. Hamel, G., & Prahalad, C. K. (1996). Competing for the future. Boston, MA: Harvard Business School Press. Johnson, G. (1992). Managing Strategic Change - Strategy, Culture and Action. Long Range Planning, 25(1), 28-36. Kotter, J. P. (2007). Leading Change: Why Transformation Efforts Fail. Harvard Business Review, (January), 92 - 107. Ton, Z., & Ross, C. (2009, March 31). 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