HBS CASE : Home Depot

Home Depot - Strategic Internal Organization & Financial Analysis
Summary:

Home Depot has many distinctive competencies that it uses to capture the majority of the Do It Yourself market, which represents a $100 billion dollar market. The key Issue is that while Home Depot is satisfying the DIY market they have not yet gained a significant share of a much larger $265 billion dollar, professional market. It has already built a foundation of key competencies that can be used to attract the professional buyers. These competencies include the incorporation of up to date technologies, which aid in its internal and external environment and allows it to gain a competitive edge over its competition. Home Depot’s ability to supply extensive product lines, and provide services and support for those products, also enables it to differentiate itself from many of its competitors.

Internal Organization Analysis

Strategy and Direction

The company started off with plans to cater to the Do-It-Yourself market, and over the years has been successful with it. This is a $100 billion market. Over the years, since Home Depot has expanded over most of the states and areas in United States and neighboring countries, its time they find another target market that they can address. Hence now Home Depot is thinking of concentrating on the Professional business customer market with is a $265 billion dollar market. Even though the profit margin is low in this business, Home Depot can expand and supply this market and still make good amount of Profit instead of having around $150 million per year in cash savings.

Key Managers
The Key Managers for Home Depot are widely experienced in other retail markets. Many of the key managers have been promoted from within. Because of internal promotions employees have an attachment to the company and are motivated to work hard at their jobs. The company has further improved productivity by cross training its employees. It has invested a considerably large amount of money towards training therefore employee turnover is a concern. Currently Home depot has a 30% turnover rate an this issue needs to be addressed.

Bernard Marcus, Arthur Blank and Ronald Brill are a part of the key management team. Marcus and Blank are co-founders and serve on the board of directors. They have also served on many other boards which bring them more experience in management. Marcus’s background before Home Depot was in the retail industry. Brill has been with Home Depot since its inception in 1978 and was the Treasurer and more currently an Executive Vice President and CFO.

Board of directors
The Board of Directors consists of ten really experienced people. Most of the board members are from outside the company. Like the management team, the board of directors needs to have members with more outside experience in similar retail markets. This will allow them to guide the company in with regard to where competitors are moving, and would help Home Depot take a few critical steps forward. Home Depot Values its employees, and pays them decent wages.

Value chain
As mentioned earlier Home Depot’s wide array of products which is coupled with its supporting services, and extremely helpful and knowledgeable staff proves to be a strong source of added value to its products. This makes the Do-It-Yourself task much simpler. Home Depot has also applied its cutting edge technology to reduce the huge customer lines associated with its large customer base. They have incorporated a self-checkout system which makes it a lot faster, and convenient for customers to complete the purchase process; this is another aspect that adds value to purchasing products at home depot.

Financial analysis
Home Depot has been successful financially, and has showed impressive growth since its beginning. The Do-It-Yourself market has proved to be successful with 24.1 billion in sales, which is more than twice their nearest competitor. The growth numbers have been impressive for this company. If one had invested $1,000 in this company on June 30, 1982, their investment would have been worth $152,479 on June 28, 1997. Home depot’s Inventory turnover increased significantly following the application of a new inventory management system. The change was from 4.1 in 1985 to 5.7 in 1994. This rate helped Home Depot carry 40 million less in inventory tying up less working capital to finance it. This allowed for a cost structure that was significantly lower than its competition.Home Depot had a quick ratio of 54% in 1997, and 35% in 1998; even then they have increased their current assets and inventories. The current ratio for Home Depot in 1997 was 2.01 and in 1998 it was 1.81. This is pretty strong, since they have 1.81 assets for each liability. They have taken no risk at all; they actually have an equivalent of almost half their debts on hand. This means that they have a lot of cash that hasn’t been used for anything yet. These available funds can be used towards the implementation of strategies that support expansion in to the professional market.


Resources , capabilities and performance evaluation
Home Depot is expanding pretty rapidly and making more and more profits every year. Their Balance sheet for 1997 and 1998 shows that Home Depot has an equivalent of $146 million and $172 million in cash and in cash equivalents. The company has always been able to translate its resources into capabilities, by trying to expand in new markets by opening more and more new stores every year and continuously incorporating new technology in its processes. The company’s past performance has been really good. They have used their finances efficiently to expand their business. The Company has been successful up till now with their Do-It-Yourself strategy, and hasn’t yet failed in any strategies that they have tried to implement. Home Depot was mainly focusing on the DIY strategy up until now, when they decided to enter in to the professional market. New strategies that utilize their healthy finances will have to be implemented in order to increase market share of this large target market.

Strategy
While Home Depot has been doing very well over the past few years there is still much room for improvement in a couple areas. The more minor area that Home Depot could look at improving is there employee turnover. While the 30% turnover rate is extremely good in the retail business it is costing Home Depot a lot of money. The reason that there is such a high cost involved is that employees go through an extensive training process. Home Depot needs to find a way to cut the cost involved when they lose an employee.

Unlike the first new strategy suggestion, the second more major strategy involves generating more revenue rather then cutting costs. Our suggestion is for Home Depot to enter the large Professional builder market. Currently Home Depot has the largest market share of the DIY market and is making tons of money. If they are able to do the same with the professional market then their profit potential would skyrocket. Also, the DYI market tends to do better during times of recession while the professional market tends to do better during times of economic growth. By capturing both markets not only would Home Depot make more money, but also their cash flows would be more even throughout the years (not as affected by economic trends).


Implementation Plan

Since Home Depot has done so well in the past they should be able to use some of their past experiences to better help them with our new suggestions. For our first suggestion of cutting cost involved with employees leaving the company Home Depot needs to develop some controls that would allow them, when hiring, to determine which individuals are high risks for turnover. When someone is determined to be high risk Home Depot could decide to not give the employee all of the four to six weeks of training at once. For example; only train an employee on the cash register to begin with, once they have stayed employed for a few months give them training in another section. Hopefully this will be able to save Home Depot some costs that are involved with training then loosing help.

The second suggestion has the ability to make Home Depot a lot of money. The suggestion is that Home Depot try to expand into the professional builder market. What is important about this strategy is that they not let it affect their current efforts with the DYI market. In order for Home Deport to tap into the professional market they will need to expand their current stores; making a section of the store that caters to the professional. As well as expanding their stores Home Depot will also need to come up with a very good delivery system so that building materials can be delivered directly to the job site of the professional. The third step in the process would be that Home Depot would need to do a lot of marketing and advertising to people in the professional market. Basically Home Depot would need to change their image in the eyes of the professional while at the same time maintain their image to the DIY market.
Home Depot is in the fortunate position that they have enough resources to pay for such an expansion. Even though Home Depot has a lot of cash and cash flows it is a good idea to try to leverage some of there equity. Basically try to let the banks pay for as much of their expansion as possible.

External Task Environment (Porters five forces plus two)

Supplier bargaining power:
Home depot has approximately 5700 vendors. The large number of vendors enables it to have high bargaining power where as each supplier has very little to no bargaining power. It is able to demand lower prices due to its large volumes of purchases which in effect give it an advantage over its competitors.

Customer bargaining power:
Customer bargaining power is very low because Home Depot is like a one stop shop with almost everything a person would need; in addition it also provides many workshops and demonstrations which add value to any purchase. By having such a wide array of products and services Home Depot is able to minimize customer bargaining power.

Substitutes:
Professionals such as tradesman builders and general contractors serve as Potential substitutes to Home Depot’s current DIY target market. A benefit of capturing the professional market is that it will allow Home Depot to eliminate threat of these substitutes. Once they sell products to these professionals; whether they provide the service on their own, or are given opportunities through Home Depot’s contracting; either way supplies will be primarily purchased from their store.

Complimentors:
Home Depot’s owns TLC Inc, a very popular channel with remodeling and home maintenance repair shows. These shows serve as a complimentor to Home Depot’s products. These shows increase the viewer’s desire to do their own home improvements, which draws them into the store. Professionals, such as interior designers and other home improvement specialist, compliment Home Depot by giving people new ideas and the means to carryout those same ideas.

Rivalry:
Home Depot’s main competition includes Loews, PayLess, and Builder’s Square. Rivalry has been mainly fuelled by low prices, location and product offerings. Home Depot has managed to excel in these areas due to their bargaining power against suppliers,and the up to date technology that allows it to have lower prices, and enough inventory on hand to satisfy demand, which makes Rivalry considerably low for Home Depot.

Barriers to entry:
Home depot continues to cannibalize sales of existing stores by opening two other stores in a single area. While this may lower same store sales it is also able to drive existing stores out of business and keep competition from entering. Home Depot has managed to raise entry barriers themselves. Also, there is a large amount of capital cost involved in starting up a new store which reduces the threat of new entry.

Stake Holders:
Home Depot managed to build strong relationships with all its stakeholders. Its internal “network” structure coupled with higher wages and employee stock ownership plans helped motivate and gain employee loyalty. Home Depot’s customers are satisfied because they have been given support with installation of purchases through work shops, and by their licensed contractors. Environmental awareness and strong social activeness gives back to the community, through programs such as “Habitat for Humanity” which has built thousands of homes and increased brand exposure. Such activities have helped free the company from any stakeholder threats

Product life cycle/Economies of scale:
Even though Home Depot sells DIY products to fix up houses and these are mature products, in effect they are commodities because individuals will always update and fix their houses. These products can also be commodities because homes are always being built regardless if there is a recession or not. So Home Depot ultimately benefits from selling most items that will always be in demand no matter how bad the economic conditions may be. Even in the last recession Home Depot performed well as the DIY customers would upgrade and maintain their households. However, access to the professional building market is also beneficial because in good economic conditions Home Depot will prosper with the abundance of new homes being built. If rough times are expected Home Depot can always rely on its bread and butter; the do it yourselfers to drive the business.

As the number one home improvement retailer in the market Home Depot sets the standard for its competitors. This allows them to have an economy of scale on how they obtain their supplies. Like Wal-Mart, Home Depot provides a huge outlet for all its vendors. With the vast size of their stores, Home Depot can get bulk discounts that come with ordering large amounts of inventory. They have the DIY and BIY market cornered. However, they may have a large learning curve to overcome to their low percentage in the professional builders market.

Technology:
Technology is highly integrated into Home Depots operational structure. Using EDI (Electronic Data Interchange) with its thousands of vendors Home Depot is able to keep a good window of communication open so they know when a store is low on inventory. Usage of UPC codes and tracking each item sold allows Home Depot to keep an accurate inventory of items and see which items are selling better than others. The integration of technology gives Home Depot a distinct advantage in inventory management. Thus they are able to increase their inventory turnover through the use of these inventory management systems. By turning over inventory quicker, their capital isn’t tied up in a warehouse but able to be used for other projects.