Home Depot - Research Paper Example

Home Depot: Case Analysis Executive Summary Home Depot, Inc. was a Georgia based home improvement chain that operated with 364,400 employees. The firm was the US’ largest specialty retailer and the second largest American retailer after Wal-Mart. Although the company had improved revenues and profits, its share price value considerably declined at the beginning of the 21st century. This situation caused the unexpected resignation of the then CEO Robert Nardelli; on the following day, Frank Blake took over as chairman and CEO of the Home Depot. This paper critically analyzes various elements that caused the decline in the firm’s share prices despite the all favorable business conditions. Background The Home Depot was founded by Bernie Marcus and Arthur Blank in 1978 in Atlanta, Georgia (The Home Depot). The company could deal with 25,000 stock keeping units (SKUs) just one year after its launching. As McAlexader and Hansen (n.d.) point out, the company’s concept of “do-it-yourself” has well publicized the Home Depot across the US retail industry. This concept assisted the customers to purchase products and build and improve homes on their own. In addition, the firm offered attractive training workshops for its customers in order to make them aware of product maintenance. The sales associates were provided additional training to get deep knowledge in product use so that they could effectively treat customers. As Ton and Ross (2009) state, the company’s growth was supersonic and its store numbers rose from 4 to 145 during the period from 1980 to 1990. This outstanding performance aided the company to earn sales revenue of $3.8 billion by the end of 1990. The major competitor of Home Depot was Lowe’s, and it mainly dealt with selling materials to contractors (Home Depot). However, the housing decline in 1980 and the subsequent fall in profit rates persuaded the Lowe’s to restore its business strategies in a manner that would meet the interests of the DIY consumers. The in introduction of luxurious product lines, home appliances, and other installation services greatly assisted the Lowe’s to maintain a growing customer base. For its first few decades, the Home Depot gave great emphasis on customer service and sales growth. At that time, store managers had the complete freedom to determine their stores’ operations, merchandising practices and vendor management. According to Ton and Ross (2009), the management believed that local autonomy would encourage innovations that best suit the preferences and specifications of the local market. The firm adopted a decentralized purchasing approach so that each nine regional purchasing office separately negotiated with suppliers. It has been identified that the Home Depot gives first priority to full time personnel who are knowledgeable about home improvement. Although the company has adopted all necessary approaches that would add to customer satisfaction, its strategic failure in other organizational management sectors caused ineffective future planning. We also described that the Lowe’s had got a favorable market environment to grow and it became a growing threat to the Home Depot. Anyhow, increased application of customer satisfaction tactics aided the Home Depot to keep its profitability rate stable. Analysis of the issues We saw that the Home Depot’s share prices have been gradually falling for the last four to five years even though the company maintains improved sales revenues and profit. So, to explore the hidden reasons behind this issue, it is necessary to understand various factors that affect share prices. According to Reddy and Saraswathi (2007, p.235), an investor always looks on possible economic growth rate that a company would achieve in future in addition to the current profitability rate of the firm. It is obvious that the future economic growth rate of a firm would clearly depend on the effectiveness of its current business strategies. It seems that the implemented strategies of the Home Depot are thoughtless so that it would not produce far reaching benefits for the company. We have seen that the company provided increased autonomy to stores managers so that they have got the opportunity to deal with vendor management and store’s operations. This practice may allow the stores managers to take some unfair advantages such as purchasing low quality materials, falsification of stores accounts, and late payment to vendors. Although, the company commenced its operations in 1978, it could not develop effective inter-communication strategies even after two decades. Similarly, the former CEO Nardelli’s strategies and policies have also greatly contributed to the decline in company’s share prices. First of all, though Nardelli did not lack operational experience in the retail industry, from the case study, it is observed that Nardelli planned product lines as well as geographical expansion to respond to falling sales, rising costs, and cut-throat competition. In my opinion, Nardelli’s strategy was ineffective since it is not suggestible to plan business expansion policies when the firm is in the midst of severe difficulties. He also implemented Six Sigma management methodology which was intended to improve quality. Although this methodology was able to promote operational efficiency to some extent, it included a sequence of processes such as measurement, analysis, improvement, and control. It is impractical to measure anything and everything accurately. So, this management strategy seems weaker. Likewise, Nardelli did not give adequate care to employee welfare and improved workplace environment while he gave excessive attention to functional changes in the stores. It is essential to not that employee satisfaction is a crucial element that plays an inevitable role in determining firms’ success. The case study reflects that Nardelli preferred to employ more part time workers than full time workers and he tried to increase the number of part time workers from 15% to 50%. I strongly argue that this practice would destroy the potentiality of the Home Depot’s business operations since the majority of part time workers’ interests would be on other external matters. Moreover, the personal management decisions taken by Nardelli were not adequate to add shareholder values. The case study indicates that the share price rose the very next day after the announced change in leadership. Scholars suggest that pitfalls in company’s customer service have greatly caused its share price decline. The deteriorating housing market in 2006 has also badly affected the home improvement retail market. In addition, the challenging business innovations from the global retail giant Wal-Mart also persuaded the shareholders to go back. Recommendations Firstly, it is recommendable for the Home Depot to establish effective communication channels that connect all the stores of the company. This practice would be beneficial for the company to pass merchandise and other information instantaneously between the stores. Likewise, the Home Depot must formulate fruitful employee welfare programs that would contribute to increased productivity and employee retention. It is also advisable for the company management to trim down the part time workers ratio in order to improve operational efficiency. Moreover, the Home Depot management must offer potential investment packages to shareholders, and these techniques must best fit the wealth maximization objectives of the shareholders. We have seen that shareholders always look on business future since they are paid at the end of the financial year. Therefore, it is strongly recommendable for the Home Depot to design some innovative strategies that bear potential to produce fruitful economic outcomes in the future. Conclusion From the discussion, it is obvious that strategic failure of the Home Depot under the leadership of Nardelli largely contributed to the gradual decline in share price despite improved sales revenues and profits. Although his strategies produce fruitful outcomes at the present, it does not have enough potential to boost the business growth in future. However, the new CEO can resolve this issue if he effectively restructures the business policies. References The Home Depot. Official website. Retrieved from http://corporate.homedepot.com/wps/portal/!ut/p/c0/04_SB8K8xLLM9MSSzPy8xBz9CP0os3gDdwNHH0sfE3M3AzMPJ8MAN0sDKNAvyHZUBAA_E14g/ Home Depot: Strategic Management and entrepreneurship. Retrieved from http://oak.cats.ohiou.edu/~ac393497/esp/case.htm McAlexander, J & Hansen, E. (n.d.). “J Sainsbury plc and Home Depot: Retailers’ impact on sustainability”. Sustainable Forests Partnership. Retrieved from http://sfp.cas.psu.edu/homedepot.htm Reddy, M. K & Saraswathi, S. (2007). Managerial economics and financial accounting. New Delhi: Prentice Hall of India Pvt. ltd. Ton, Z & Ross, C. (2009). The Home Depot, Inc. Harvard Business School. Read More