THE HOME DEPOT, INC.: EXECUTIVE LEADERSHIP
SOME KEY POINTS
The Home Depot, Inc. was a success story of three men creating a new business that redefined the industry. By
2000, the company had reached $40 billion in revenues faster than had any retailer in U.S. history. The
founders then left the management of the company in the hands of Robert Nardelli, who it was hoped would
continue the company’s success.
Founded in Atlanta, Georgia, in 1978, Home Depot was the world’s largest home improvement retailer and the
second largest retailer (after Wal-Mart) in the United States based on net sales for the 2005 fiscal year ended
January 29, 2006. The Home Depot stores sold a wide assortment of building materials, home improvement and
lawn and garden products, and provided a number of services such as design and installation. In addition to the
Home Depot stores, the company had a store format that sold products and services primarily for home
decorating and remodeling projects called EXPO Design Center and two store formats focused on professional
customers called Home Depot Supply and The Home Depot Landscaping Supply.
The case begins with Robert Nardelli summarizing the company’s performance during the five year period
(2001 – 2005) since he joined Home Depot as its Chief Executive Officer. On most measures, the company was
clearly an outstanding success. The company had expanded its installation services business. Growing through
acquisitions, the company had successfully increased its sales to the professional builder market.
The case then raises two questions that set the stage for the rest of the case:
1. With such positive accomplishments, why had Home Depot’s common stock fallen 30 percent since
Nardelli had taken charge of the company?
2. Why were the shareholders so upset about CEO Nardelli’s compensation?
The case then summarizes information regarding Home Depot’s current strategic posture, including its current
strategy and its proposed performance objectives for 2010. The corporate culture is discussed in terms of the
entrepreneurial and informal culture developed by its founder-managers, Bernard Marcus and Arthur Blank,
contrasted with the more military, command-style culture introduced by Bob Nardelli. The culture change had
some costs, such as a drop in overall morale and the exit of 98% of top management. The new top management
team was clearly a creature of Nardelli and his executive leadership. The decline in morale at the store level led
to the company’s fall to last place among major U.S. retailers in customer satisfaction – an amazing development
given the company’s previous emphasis on pleasing the customer under the management of its inspiring, but
sometimes disorganized founders.
CASE OBJECTIVES
 To examine how executive leadership changes as a corporation matures from being an entrepreneurial
venture.
 What happens to corporate governance?
 To identify the importance of corporate culture in formulating and implementing strategy.
 To illustrate how executive compensation is determined and why the result might not please corporate
stakeholders.
 To illustrate a very successful company engaging in horizontal growth and diversification in order to
maintain its growth strategy.
 To discuss why Home Depot has been successful as a retailer in an extremely competitive industry.
 What are its core and distinctive competencies? Can they be transferred to the professional market?
 To illustrate one way to resolve the apparently contradictory strategies of differentiation though dedicated
customer service and low-cost, everyday low pricing.
 To analyze how a functional strategy like human resources must change when corporate and business
strategy changes.
 To discuss how changes in the environment affect the home improvement industry.
 To illustrate the use of portfolio analysis as Home Depot invests in a new professional business and uses the
old retail business as a cash cow.
 To illustrate how, in entrepreneurial ventures, the values of the founders and current strategic managers
form and dominate the corporate culture and its policies and can be an impediment to further growth.
1
THE HOME DEPOT, INC.: EXECUTIVE LEADERSHIP

To discuss the company’s strategy to become a leader in the professional building supplies segment rather
than expanding horizontally outside North America or into new product categories in retail stores, like doit-yourself auto repair.
THINGS TO THINK ABOUT
 Differentiation and low-cost competitive strategies can be used simultaneously
 Corporate culture is important to proper strategy implementation.
 Why has the price of Home Depot’s been dropping?
o Management can manipulate stock price by buying back stock and using debt to increase EPS
and by acquiring new businesses to boost sales.
 What should Home Depot do next to ensure continued growth?
o Continue acquisitions to become a leader in the professional contractor market.
o Add new product categories in retail stores to attract more customers and get more from
current customers.
o Open stores in other countries outside North America.
 Other strategies?
o Consider buying out competitors
KEY QUESTIONS
 What are the opportunities and threats facing Home Depot?
 What are the strengths and weaknesses of Home Depot?
 What are the strategic factors facing Home Depot?
 Does Home Depot have any core competencies? If 'yes', what are they?
 Does Home Depot have a distinctive competency? If 'yes', what is it?
 What core competencies does Home Depot possess that can be transferred to the professional contractor
market? To going international? Are any distinctive?
 What do you think of Bob Nardelli’s executive leadership? What’s good about it and what’s bad about it?
 If you were on Home Depot’s board of directors, what would you do to improve the company?
 What are Home Depot’s direct and indirect competitors?
 Would you purchase Home Depot stock? Why or why not?
 What competitive strategy(ies) is Home Depot following?
 What corporate strategy (ies) is the company following?
 What is the importance of corporate culture to Home Depot? Is it being lost or just changed to adjust to a
new environment?
 How should Home Depot’s top management be evaluated?
 Would you work for Bob Nardelli? Why or why not?
ADDITIONAL NOTES
Over the years, Home Depot has been a great example of a successful entrepreneurial venture that had been able
to first, change an industry, and second, dominate that industry. Its founders created a strategy and a corporate
culture that made it very difficult for any competitor to gain a competitive advantage. They created core
competencies which were also distinctive until Lowe’s began to imitate Home Depot’s success.
STAGES OF DEVELOPMENT
The key for continued corporate success was for founders to know when to let go and get out of the way.
EXECUTIVE SUCCESSION
On paper, there was every reason to predict that Bob Nardelli would be a success at Home Depot. He had just
turned around GE’s power systems unit, and it had grown from $770 million in operating income to $2.8 billion
in six years.
2
THE HOME DEPOT, INC.: EXECUTIVE LEADERSHIP
EXECUTIVE LEADERSHIP
It’s pretty clear that Bob Nardelli was a real GE “headbanger” who fit the GE mold. He made decisions quickly
and was sometimes forced to change his mind. He introduced a military, top-down style of decision-making
which conflicted with the informal, fun-loving corporate culture established by founders Blank and Marcus. In
his first five years as CEO, he drove away most of Home Depot’s top managers and replaced a number of them
in key positions with ex-GE types like himself. A good argument can be made that he was destroying Home
Depot’s corporate culture and with it the company’s ability to satisfy its retail customers. He seemed to be
taking the success of the retail stores for granted and using them as “cash cows” to find acquisitions in the
builder/contractor area. This could be explained by Nardelli’s lack of retail experience and his better feel for
selling to professional businesses (as his division did at GE) rather than to the public. Lowe’s top management
was all too ready to make up for Home Depot’s lessened interest in its retail stores.
One must admit, however, that Nardelli was willing to admit his mistakes and to take steps to rectify them.
CURRENT SITUATION
Problems were declining stock price and falling comparable-store growth increases. Declining employee morale
and customer satisfaction were symptoms of underlying problems.
Current Mission
Not stated. Implied: Provide highest quality products & services at lowest price to home improvement do-ityourself and do-it-for-me customers, and to professional builders.
Current Objectives (for 2010)
 Compounded annual sales growth of 9-12 percent
 Compounded earnings per share growth of 10-14 percent
 400-500 new store openings – adding 40-55 million new square feet
 Operating margin increases 50-100 basis points
 Cumulative operating cash flow of $50 billion
 Cumulative capital expenditures of $17-20 billion
 Grow Home Depot Supply sales to $23-27 billion
Current Strategies
 Enhance the core, extend the business, expand the market: Horizontal growth into new locations & products
and concentric diversification into professional market
 Home Depot offers excellent customer service, everyday low pricing, and a wide variety of good quality
products as part of its merchandising/competitive strategy.
 Financial strategies of buying back stock to raise EPS and using cash from stores to fund acquisitions.
Policies:
 Buy supplies in large quantities to receive volume discounts.
 Divisional management with all stores having similar layouts and being operated in the same manner.
 All stores are company-owned.
 “Improve everything we touch”
CORPORATE GOVERNANCE
Top Management:
 Bob Nardelli replaced founders as CEO & Chairman. Responsible for firm’s performance since 2001.
 Veteran of GE, Nardelli is competent, but top-down military-style manager.
 High turnover: 98% execs left firm; some replaced by GE veterans.
 Nardelli quick to make & implement decisions – some later reversed. Lacks patience & people skills, but
decisive.
 Rest of top management probably highly motivated “yes men.”
EXTERNAL ENVIRONMENT
Societal:
3
THE HOME DEPOT, INC.: EXECUTIVE LEADERSHIP








Strong U.S. economy in 2006.
Interest rates increasing – slowing home sales.
Disposable income going up.
Record level of home ownership.
Baby boomers aging.
Hispanic home ownership growing 3X national rate.
By 2016, immigration to represent 40% of new households.
Info Technology allows more web-based sales and simpler store operations
Task/Industry:
 Dependable relationships with low-powered suppliers.
 Two distinct market segments: home improvement & building supplies.
 Fragmented industry facing consolidation as small local stores replaced by chain, big-box stores.
 Retail employees typically not unionized.
 Multiple strategic groups: national (Lowe’s & Home Depot) & regional (Menard’s & 84 Lumber) big box
stores, local small stores in home improvement segment; regional (BMHC, Lanoga, & Stock) in building
supply segment. National niche competitors (Ace & True Value & appliance stores) plus national (WalMart, Target, Kmart) and regional discounters (Fleet Farm & Pamida).
 Lowe’s and Menard’s only home improvement direct competitors of Home Depot’s retail stores. Rivalry of
competitors increasing.
 Power of customers increasing slowly.
 Moderate threat of substitutes.
 Low threat of new entrants in home improvement.
INTERNAL ENVIRONMENT
Corporate Structure:
 Home Depot creating a divisional structure with two business units. Retail unit organized into regions.
Corporate Culture:
 Home Depot known for its "orange-blooded culture" which placed a strong emphasis on individuality,
informality, nonconformity, growth, and pride. Culture now collapsing from lack of new top management
support. Morale falling as “Bob’s Army” replaces previous store managers.
Corporate Resources:
1. Marketing:
 Home Depot maintains aggressive advertising campaign emphasizing everyday low prices, name
recognition, and customer service.
 Relies heavily on print media ads.
 Heavy use of sponsorships, e.g., Olympics.
 Increasing emphasis on installation services.
 Strong growth in Internet & catalog channels.
 Customer satisfaction drops to last place among major U.S. retailers.
 New programs instituted to rebuild retail store customer service.
2. Finance:
 Home Depot financially solid, but signals were mixed.
 Long-term debt to equity ratio 24.5% in 2006 - up from 9% in 2005. Debt boosts leverage & EPS.
 Operating margin at 11.5% in 2005 – up from 9.2% in 2000.
 Annual EPS growth of 20%.
 Sales doubled since 2000.
 Stock price declined 30% since 2000.
 Record high net earnings in 2005.
 Same-store sales growth declined from 10% in 1999 to 5.4% in 2004 and 3.8% in 2005.
 Average ticket up, but sales per square foot down since 2000.
3. Research and Development:
 New Innovation Center enables better product quality & store design.
 Alliances with suppliers allows for better product development and new features.
4
THE HOME DEPOT, INC.: EXECUTIVE LEADERSHIP
4. Operations:
 Same-store sales growth declined from 10% in 1999 to 5.4% in 2004 and 3.8% in 2005.
 Reduction in full-time staff hurt morale and customer service.
 Technology has provided faster customer check-out & more efficient inventory system.
 Cannibalization becoming an increasing problem.
 Excellent logistical system.
 Opened second technology center in 2005 in Texas.
5. Human Resources Management:
 Workers must pass pre-employment tests.
 Decision to reduce full-time employees in favor of part-timers hurt customer service and morale, but
eventually reversed.
 Top managers hired from outside – some from GE with little to no retail experience.
 Employees paid a straight salary.
 Military veterans compose half of those chosen for store leadership training program since 2002.
 Employees may participate in an Employee Stock Ownership Plan.
 Formula used to evaluate performance.
 Good executive compensation system, but appears poorly implemented by board of directors.
6. Management Information Systems:
 Stores have computerized check-out systems and implementing self check-out.
 Advanced inventory management systems with back-end scanning.
 Technology has improved Home Depot's ability to identify and adapt to trends quickly.
STRATEGIC ALTERNATIVES
Continue Related Diversification Strategy via Acquisitions:
Pros:
 Builder market has great potential.
 Competition fragmented in building supplies.
 Power over suppliers – competitive advantage.
Cons:
 Lower profit margins may hurt profits.
 Competitors may combine and become stronger.
 Pulls effort away from retail stores.
Expand Retailing Stores in Latin America & Beyond
Pros:
 Good experience with Canada & Mexico.
 Takes advantage of core competencies in retailing.
 Move into new markets with less competition.
Cons:
 Probably more expensive than expanding in North America – Expect lower profit margins.
 May run into foreign culture problems.
Introduce New Products in Current Retail Locations:
Pros:
 Takes advantage of retailing core competencies.
 Uses current locations to attract new customers.
 Allows for internal growth; Costs less money than other alternatives.
Cons:
 Might not have enough space at current locations.
 Must look carefully for new complementary products or services to offer.
 May not be sufficient for desired growth rate.
RECOMMENDATION
 Continue Present Diversification Strategy
5
THE HOME DEPOT, INC.: EXECUTIVE LEADERSHIP

Home Depot should continue with its current concentric/related diversification growth strategy of using
acquisitions to move into the building supply segment of the industry. The company’s reputation in home
improvement and its relationship with suppliers should provide it with a cost advantage in this industry over
the current set of regional competitors. Even though the profit margin is lower in the building supplies
segment than in the retailing segment, the growth potential more than makes up for this downside. Now that
Home Depot is saturating the retail segment in North America, any further expansion in retailing will bring
a greater rate of cannibalization – leading to lower retailing profit margins as well. Internationalization has
its own risks plus higher costs leading to lower profit margins as well. The only real downside to the
recommended strategy is that top management will take the retail segment for granted and allow it to lose
ground amidst growing competition with Lowe’s. If morale continues to slide and the old “orange” culture
is lost, the retailing segment may go into slow decline.
IMPLEMENTATION
 Establish the retailing and builder segments as separately managed strategic business units.
 Hire a top retailing expert to manage and staff the retailing SBU and provide him/her with autonomy to run
it without Nardelli’s interference.
 Nardelli should focus his energy on building the Home Depot Supply SBU.
 Acquisitions in the professional building supply segment should be carefully integrated into the new,
highly-efficient Home Depot Supply unit.
 Re-establish the “orange” culture in the Home Depot retail stores by supporting loyal full-time employees.
Invite back past full-time employees to participate in a “return to the future.”
EVALUATION AND CONTROL
 Use customer satisfaction surveys.
 Monitor industry trends closely.
 Use employee satisfaction surveys and utilize employee suggestions.
 Current emphasis on improving efficiency is hurting the retail unit. Emphasize both effectiveness and
efficiency measures in both business units. Cut back on finding new efficiencies in retailing until customer
and employee satisfaction measures increase substantially.
6