Selection of the Financial Initiative from Management Message to Shareholders - Essay Example

Financial Outcomes Paper Selection of the financial initiative from Management Message to shareholders: In the context of Home Depot, it is proposed to take up the “Aprons on the floor” initiative that envisages earmarking and deployment of $200Million annualized savings for the benefit of servicing of customers on the floor of the stores. Comparing and contrasting three potential financial outcomes that your Learning Team envisions for the proposed initiative: The aspect of this initiative needs to be viewed in the context of Home Depot’s position in the home construction industry. It is observed that it is the largest corporate of its kind in the world, dealing in home renovation products and services. Its sales during 2008 has been to the tune of $ 71.3B, which is lower than that for fiscal year 2007, totaling $77.3B, a fall of nearly 8% when compared to 2007 fiscals. (The home depot, n.d.). The main cause for reduction in sales could be deduced as arising out of a general fall in demand for products of construction industry, due to unemployment and tight money market conditions which offered lowered scope for loans to meet housing repairs, etc. Moreover, the present economic crisis has also dampened investment in house improvement programs which are a critical element for this company’s future growth prospects. It could also be seen in terms of the fact that, in the US, the fragmented construction industry is not very concentrated, and is broken down to a large number of SME’s, who indulge in construction activities, making it very competitive and price sensitive. Again, the present economic scenario and low spending proclivities displayed by consumers in US markets have not really encouraged home repair and renovation industry substantially. Restructuring Support services: Thus, it has become necessary for Home Depot to cut down jobs. In the process they are forced to do away with sinecure positions and concentrate on the core business of generating revenues and business profits. Thus, the company has restructured its HRD, to begin with, in order to slash operating costs. Accordingly they have dispensed with both the Human Resource Managers and supervisors in all its stores. The company has announced that around 2200 employees would be affected by this change and there would be around 1000 job losses. (Can you improve service by firing HR people?, 2008). This has become necessary since profits of the company have slumped in recent years. The Gross Profit has come down from $25,997 M in 2007 to $ 23,990 during 2008, a fall of 7.72% when compared to the previous year. (Appendix 1) However, this is in contrast with a sharp increase in operating costs during 2008, which has risen from $18,755M during 2007 to $19,631M in 2008, a rise of nearly 4.67%. (Appendix 1) It is further seen net profits declined from $4395M during 2007 to $2260M in 2008, a dramatic and significant reduction of nearly 50%, or almost halved the profits during the year 2008 under review. (Appendix 1) Under such circumstances it is imperative that cost saving programs be launched and implemented immediately to arrest further losses and address the issue promptly. Coming to the HR aspects, it could be seen that the main impacts or implications of job cuts or reallocation of the workforce into the core areas of business, the check outs and stores would be as follows: 1. The main functions of HR are in terms of addressing labor related issues, interalia, discrimination, harassments, or wage related problems. Now, with virtual nonexistence of HR department, the incidence of lawsuits and employment related infringement issues would increase, and possibly Home Depot would have to pay out large sums to avoid or settle lawsuits and employee disputes. This may impact their cash flows dramatically. 2. It is seen that customer interactions and personalized selling are important aspects of retail business and underpins the growth of such businesses, but, apparently, in the case of Home Depot, often, customers have to search and find their buying needs by themselves- the Do-It- Yourself (DIY) has also extended to searching and even loading merchandise by customers themselves, with the help of sign boards and without the assistance of busy sales staff. In the long run, this perhaps may not augur well for competitive retail business, as may be seen in the Home Depot context. Signboards do not substitute for personalized selling. 3. Job cuts and redundancies at Home Depot may indirectly help its major rival, Lowe. It may not be untrue to say that Lowe has made large strides in its business, offering strong competition to HD, and if unchecked may even grab HD’s market. (Cover story, 2004, p.40). Evaluate your findings to determine the most likely outcome: From the financial point of view, it is seen that considering the losses that HD has accrued, it is necessary to concentrate and invest in its core business. Perhaps this may have been the compelling reason for opting for a scheme of “Aprons on the floor.” strategy which drastically reduced head count cost by nearly $200M. (The home depot, n.d.). However, it is also seen that dramatic job cuts could result in lowering of employee morale, additional work pressure and stress on existing staff and general workforce, and most importantly, conspicuous drop in customer servicing. This could be seen in having to queue for endless hours for payment and receiving cleared goods, and crowding in check in and check out points at the stores. Often, it is seen that strategic decisions taking by management may have adverse effects on customer servicing since building and preservation of goodwill and customer service are significant criteria in retail business, especially in direct dealings with customers and clients. According to the Company’s Annual Report, “in fiscal 2008, despite the continuing difficult economic environment, we continue to focus on our core retail business, investing in our associates and stores and improving our customer service.” (The home depot, n.d., p.2). “We have exited non-core business, restructured support staff and have stopped applying significant capital to building new square footage. We remain committed to the long-term health of our business through our strategy of investing in our retail business through five priorities.” Loss of competitive advantages through self servicing: The most likely outcome is that the competitors of Home Depot, namely Lowe, Sherwin Williams, Imperial Chemicals and others, who are in the home improvement industry, may have a competitive edge over HD, and may be able to get a better market share than what they presently have. At present, it is seen that in the largely unorganized home improvement industry in the US, HD has a market share of about 17% and the rest is shared by business rivals, big and small. It is quite possible that market share of Home Depot may be reduced in future due to erosion of goodwill and reputation caused by lawsuits, compensation claims and other litigative constituents. Even as it stands today, HD is facing legal proceedings from a number of quarters, including governmental and private action claims, tort etc. This has to be viewed in the context that taking or not taking action against such lawsuits could, to a large extent impact upon business, costly verdicts and future risks to business prospects. (The home depot, n.d.). Need to match business with customer contentment: It is seen that the Company needs to strike a harmonious balance between the strategic aspects of running a successful and profitable business, on the one hand, and the needs and aspirations of present and potential customers, on the other. While these may frequently be inconsistent, there exists need to bring about reconciliation between the two, in order to be beneficial both for the business and the customers. Aspects of customer servicing and providing prompt service may be compromised due to paucity of staff to serve them, and Self Service, which seems to be the determining policy of HD at the moment, may be at the cost of their potential sales and profits. In an era where consumer goods patrons, especially in the retail sector, needs to be coaxed and pampered to buy goods, services and utilities, ( a competing firm is just around the corner) retaining customers is an even more difficult proposition than gaining and servicing them. In the context of HD, it is also seen that mushrooming store openings to gain competitive advantages, in terms of augmented sales and market access has led to cannibalization, which had a negative impact upon overall sales and profit figures. Analysis of various financial outcomes: It is observed in this case study that Selling, General and Administrative expenses during 2008, form 25% of costs, which is quite substantial. Besides, it has increased over 2007 figures by nearly 5%. Perhaps the present lowering of head count would reduce these figures during the next fiscals, 2009. Again, impact of lowered profits has been seen in lowering of Earnings per share (EPS) from $2/38/share to $1.34/share between 2007/8 figures. To combat rising costs and eroding revenues, the company has set forth with rationalization plan which envisions the following areas of company’s business: Reduce its plans for increases in total space areas of shops Abandon plans of adding another 50 US stores to existing ones. Closure of 25 loss rendering stores Exit from EXPO and other external businesses to focus on core HD business only Rationalize and restructure current support systems which may affect work status of 2000 personnel. (The home depot, n.d.). Impact on the position of Home Depot: It is believed that this could lead to a cost savings of around $343 M as depicted above. This substantial savings, if implemented could bring HD back on the rails, and contribute to future profits, especially for the core business. It could also be seen in terms of adding value to existing business and trade practices and combined with ongoing campaign of “New Lower Price “could provide greater worth and exhilarating goods in the stores for the benefit of all customers. Finally, it needs to be said that the present economic meltdown is just another signpost in the 30 year old history of HM. As a matter of fact, the store was established during 1979, when America was going through a period of major recession. Yet, the company flourished and prospered over its useful existence, not only in the US, but also at a global level. It is believed that this economic crisis would end, sooner or later, and like other global corporates, HD would be able to swiftly recover lost ground and provide illustrious service in terms of catering to the needs of millions of customers situated all over the globe. Appendix 1 References Can you improve service by firing HR people? Home depot slashes field hr staff. (2008). The HR Capitalist: Get to the Table Stay at the Table. Retrieved June 4, 2009, from http://www.hrcapitalist.com/2008/04/can-you-improve.html Cover story: retail IT. (2004, August 1). CIO, 17(20), 40. Retrieved June 4, 2009, http://books.google.com/books?id=NwsAAAAAMBAJ&pg=PA35&dq=Aprons+on+the+floor+-+The+Home+Depot+experience&ei=D1wmSqC-DYbgkQSbnfDnBg#PPA40,M1 The home depot. (n.d). Retrieved June 4, 2009, from http://www.homedepotar.com/html/downloads/HD_Annual_Report_2008.pdf The home depot: Our business: Operating strategy. (n.d). Retrieved June 4, 2009, from http://www.homedepotar.com/html/downloads/HD_Annual_Report_2008.pdf Read More