Strategic Management for MBA Class: Home Depot - Case Study Example

Add (Add (Add Details) (Add Home Depot: Case Study The Home Depot, Inc is a Georgia based organization which operates under home improvement industry. Porter’s five forces model is used to perform an industry analysis on the Home Depot for the year 2006. This paper also compares the results of the analysis with those of 2011. While analyzing the competency of the rivals of Home Depot for the year 2006, Lowe’s and Wal-Mart, which jointly shared a significant percent of US retail industry, were the two major players (Businessweek). In the home improvement industry, sales were divided among niche players such as big box center stores, hardware, lawn and garden, and paint and wallpaper stores. Switching costs were low in this industry and this situation assisted consumers to change their retailers easily. In addition, the industry faced threat of substitutes because many products had close substitutes available. In 2006, buyers’ bargaining power was high as they had different market options and good understanding of various brand choices. In contrast, supplier power was low as majority of the retail players received suppliers from a large number of distinct vendors. Need of high initial capital investment eliminated the threat of new entrants to some extent at that time. The home improvement industry underwent tremendous changes over the next six years. Degree of rivalry got intensified because the price factor became paramount. As compared to 2006, threat of substitutes became higher in 2011 mainly because of the innovation and development of improved substitute products. By 2011, the industry adapted to a competitive pricing strategy and this situation added further value to buyer bargaining power. Naturally, suppliers were also forced to provide material to retailers at minimum cost; hence, supplier power further declined in 2011. Similarly, threat of new entrants also reduced to a considerable extent because new entrants found it difficult to confront with huge players like Wal-Mart. 2. While analyzing the market environment of the Home Depot for the year 2006, brand awareness seems to be the most competitive strength of the company. The Home Depot was the world’s largest home improvement retailer during that time, and this dominance boosted its brand awareness. Increased utilization of rapid deployment centers also added to the strength of the company as this strategy contributed to the efficient supply chain operations. In addition, the organization’s simple and distinct business model has entirely changed the way consumers shop home improvement products; hence, this well established business model greatly strengthened the market operations of the firm in 2006. Extensive product offerings and high growth potential are also some of the major potencies of the company (U.S. Communities). In contrast, declining store sales figures was the company’s most noticeable weakness in 2006. Similarly, the company was forced to recall some of its products due to quality issues. This event negatively affected the market reputation of the organization. The higher growth rate also caused the company to experience a rise in its operating expenses in direct proportion with its revenue growth; and this situation ultimately resulted in a slow profitability growth. Reorganization initiatives and increased demand for power tools were the two major opportunities for the company in 2006. In addition, the company experienced a growth increase in online purchasing during the same period. This opportunity had the potential to cut down the operating expenses of the firm to some extent. Home Depot had also a potential opportunity in global outsourcing that might provide the company with access to better resource options. Finally, the company had been practicing a set of IT projects in 2006 including Service Performance Improvement that raised potential opportunities for the Home Depot. In 2006, the company identified a rise in customer service complaints as its major threat. In addition, government investigations and litigation and a slumping US economy turned out to be the challenging troubles to the organization. Finally, the company’s overlap with its primary competitor Lowe’s became a potential threat in 2006. Evidently, Home Depot’s financial conditions further worsened by 2011 as a result of the 2008-09 global financial crisis. However, the recent reports indicate that the company is recovering from the shock and regaining the industry dominance. Home Depot IFE matrix 2006 Key Internal Factors Weights Rating Weighted Score 0.0 to 1.0 1,2, 3, or 4 Internal Strengths 3 or 4 # 1 World’s leading home improvement retailer 0.12 4 0.48 #2 Second largest retailer in the United States 0.09 4 0.04 Increased cash flow for the fiscal period 2006 0.07 4 0.32 Innovative business differentiation approaches 0.08 4 0.32 Dominance in lumber and building materials industry 0.08 3 0.24 Distinctive and diversified product lines 0.04 3 0.12 Efficient business model 0.1 4 0.4 Internal weaknesses 1 or 2 Increasing operating expenses 0.1 2 0.2 Store layout and appearance 0.06 2 0.12 Weak productivity of the new store 0.11 1 0.12 Decreased revenue growth as compared to industry average and its primary competitors 0.07 2 0.16 Significant decline in cash and cash equivalents as compared to previous years 0.08 2 0.16 Total 1 3.04 The Internal Factor Evaluation matrix gives a total weighted score of 3.04 point, which is well above the level of 2.5. Hence, this result indicates that the Home Depot had a strong internal position in 2006. Home Depot EFE matrix 2006 Key External Factors Weights Rating Weighted Score 0.0 to 1.0 1,2, 3, or 4 Opportunities Global expansion 0.1 4 0.4 Adverse changes in customer shopping practices 0.1 4 0.4 Growth in global sourcing activities 0.08 4 0.32 Returns from IT investments 0.05 3 0.15 A high rate of predicted growth in home centers, store, lumberyards, and retail oriented industries 0.08 4 0.32 Decreased sales rate in housing sector (people tend to retain their home by making additions to it) 0.07 2 0.14 Increased rate of involvement of women in home improvement decisions DIY projects 0.09 4 0.36 Threats 0 Powerful competitors such as Lowe’s, Wal-Mart, and Sears 0.1 3 0.3 Home improvement industry is reaching market saturation in North America 0.07 4 0.28 Contractor shortages lead to huge backlog of work in home remodeling 0.07 2 0.14 Overlap between Home Depot and Lowe’s 0.07 3 0.21 Lawsuit against the company alleging that it misled customer with unfair credit card promotions 0.06 2 0.12 Slowdown of the home improvement industry 0.06 3 0.18 Total 1 3.32 The External Factor Evaluation reflects that the company has a weighted score of 3.32. This point is significantly above the level 2.5 and therefore it can be stated that the business had potential ability to respond to external factors. 3. While analyzing the operations of Home Depot’s Board of Directors in 2006, it is clear that they just tried to continue the business acquisition processes initiated by the previous directors. The company acquired Hughes Supply, Inc., a leading construction and repair products distributor, for a cost of $3.5 billion. Although the acquisition doubled the size of Home Depot Supply, this process added $4.0 billion to the Home Depot’s long term debt. This acquisition assisted the company to become the “largest diversified wholesale distributor of construction, repair, and maintenance-related products in the United States” (Hunger and Wheelen, p.20-6). Through this acquisition policy, the board of directors could raise nearly 10% of the company’s total sales from Home Depot Supply. However, BOD’s operations in 2006 were not efficient because later on it was proved that the huge debt incurred by this acquisition strategy had been the key reason which caused the company to experience sales declines in subsequent fiscal periods. Since the company was striving to overcome the impacts of 2008 global financial crisis, its BOD’s did not give much emphasis on business expansion in 2011. They amended the Company’s Bye-Laws in 2011 and this change greatly assisted the company to close the 2011 financial year with a notable rise in profitability (Yahoo Finance). 4. An analysis on profitability ratios indicate that Home Depot’s gross profit margin (sales-cost of goods sold/sales) for the year 2005 was 33.62% whereas it was 33.76 in 2006 (Y-Charts). At the same time, the company’s operating profit margin (operating income/revenue) declined from 11.5% in 2005 to 10.6% in 2006. It directly indicates that the company’s market competitiveness has diminished. However, the Home Depot could maintain the return on capital employed (net profit after taxes/total assets) in 2006 (22.2%) as compared to the previous year (22.9%). A critical evaluation on efficiency ratios reflects that the firm’s asset turnover ratio (sales/total assets) decreased to 11.9% in 2006 while it was reported as 14% in 2005 (The Home Depot: Annual report). Likewise, the firm attained an inventory turnover ratio (sales/inventory) of 4.7% in 2005 and it was dropped to 4.5% by the end of the fiscal period 2006. In 2005, Home Depot’s debtors turnover ratio was 43.9% in 2005 and it significantly declined to 30.43% by 2006. More precisely, the company’s average collection period [account receivable/ (sales for the year/365)] declined from11 days in 2005 to 7 days in 2006. While calculating the company’s liquidity ratios to evaluate its capability in meeting its short term obligations, it is identified that the firm’s quick ratio (current assets-inventory/current liabilities) was low in 2005 (0.4%) and it further dropped to 0.3% in 2006 (The Home Depot: Annual report). This decline really threatens the operational efficiency of the company as this situation may cause the organization to experience troubles in responding to unexpected contingencies. It must be noted that the organization’s gearing ratio (total debt/stockholders equity) was increased from 9% in 2005 to 31.7% in 2006. However, the gearing has not crossed the “low geared” limit. Home Depot’s financial leverage was 1.7% in 2005 whereas it was reached 2.1% in 2006. Finally, the organization possesses a market share of $81,511 in 2005 and it was significantly increased to $90,837 in 2006 (The Home Depot: Annual report). While scrutinizing this overall financial ratio, it can be stated that the company’s financial position got worsened in 2006 as compared to the previous year. 5. While analyzing the strategic orientation of Home Depot; excellent management, efficient customer service, competitive prices, and diversified product lines and wider distribution channels are identified to be the key success factors of the company. The firm’s all market operations are centered on the competitive pricing strategy as this policy has played a pivotal role in raising Home Depot to the top of the world’s home improvement industry. Nowadays, the company practices market segmentation and target marketing with intent to respond to the needs of concerned market segments on time. To illustrate, some of the new stores of the Home Depot have been specifically designed for urban markets including Chicago, Brooklyn, and New York. In addition, the company’s Expo Design Centers mainly target women customers. The company has recently planned to establish larger appliance sections in their existing stores as well as in their new stores. Home Depot is seeking multiple demographics so as to promote its business expansion process. Likewise, the company nowadays recruits more Hispanics with intent to attract the Hispanic market, which constitutes a notable portion of the US’ home improvement industry. The organization has changed its slogan from ‘You can do it. We can help’ to ‘More saving. More doing’. Recently, the company has planned to improve its information technology by identifying core IT processes and business practices that are potential enough to use uniformly throughout the world. In addition, Home Depot focuses on simplification, remerchandising, and other global competition strategies. It is recommendable for the company to continue its competitive pricing strategy for the next three years because majority of the modern customers are highly sensitive to prices. In addition, it would be advisable for the company to stop its global business expansion activities for a while since many of the global economies have not completely recovered the shock of the global financial crisis 2008. Finally, it is advisable for the organization to specifically focus on developing markets such as India and China as those economies would dominate the global market over the next 30 years. Similarly, it seems that Home Depot is most likely to succeed in Qatar market as the country’s home improvement industry has undergone tremendous changes over the last decade. In addition, the Qatari government has recently framed special provisions to extend its credit offering to the home improvement sector. Furthermore, in the Qatari market, the company has less number of rivals to compete with. 6. The corporate history of Home Depot clearly reflects that it is a successful company. Currently, the company is the largest player in the United States’ home improvement sector and operates 2,248 big-fox format stores across the country. In the last 33 years since its foundation, the company has travelled a long distance and had become one of the world’s fastest growing retail chains. Although Home Depot was not the first supplier of home improvement products, it became the first company to capitalize on the niche. Unlike other home improvement suppliers, Home Depot management could rapidly realize their strengths and customers. The company could imprint its logo in the minds of millions of people and it added to the brand awareness. Currently, the company name Home Depot is being interchangeably used for the home improvement industry and people looking for home supplies give first priority to the company. The firm could quickly achieve customer loyalty by allotting its considerable amount of time on solving client problems. In addition, the firm offers weekend workshops with intent to provide home improvement techniques and other consultancy services to people absolutely for free. The company’s historical profitability data underline the fact that the firm has the potential to grow further globally. The company closed its 2010 fiscal period with retail sales of $68 billion and earnings from continuing operations of $3.3 billion (The Home Depot). Finally, the company could quickly overcome the impacts of the 2008 global financial crisis while some of its competitors are still striving to get rid of them. Works Cited Businessweek. “Renovating home depot.” Bloomberg Businessweek. (2006). Web. 06 January 2012. Hunger, David J & Wheelen, Thomas L. “Case 20- The home depot, Inc. (2006): Executive leadership.” (2006): 20-1-20-34. The Home Depot. “Annual report 2006: Focused on serving customers.” (207): 1-68. Web. 06 January 2012. The Home Depot. “Building towards success.” (2011). Web. 06 January 2012. U.S. Communities. “Home depot overview.” (n.d). Web. 05 January 2012. Yahoo Finance. “Amendments to articles of Inc. or Bylaws; Change in fiscal year, submission of mat.” Form 8-K for Home Depot Inc. (2011). Web. 06 January 2012. YCharts. “Home Depot Gross Profit Margin: 34.40%.” (n.d). Web. 06 January 2012. Read More