Strategic Audit
Lowes Home Improvement
Inc.
Case Number 33
Group #1
Steve Shapiro, Michael Egan, Ketrone Wallace,
Chris Stubbs, Dylan Young
November 10 2010
th
I. Current Situation
A. Current Performance
 Good financials exceeded $10 Billion in sales for the first time in
history, price/earnings ratio positive.
 Company aggressively grew with from 15 stores in 1962 to
over 1000 by 2004.
 In 1989 the company redefined its business and positioned
itself as a “big box” home improvement retailer.
 Company made conscience decision in 2004 to gain market
share domestically across the United States versus introducing
itself internationally.
 Has become the second largest U.S. home improvement retailer
with approximately 9% of the market share.
 From 1999 have increased their actual store locations
approximately by 100 each year through the year 2004.
B. Strategic Posture
 Mission
 Stores incorporated in 1952 and operated 15 stores selling
commodity-type products to home builders by 1962.
 In 1989, redefined its business and positioned itself as a “big
box” home-improvement retailer, selling a wide variety of
higher margin merchandise.
 The Company serves homeowners, renters and commercial
business customers. Homeowners and renters primarily consist
of do-it-yourself (DIY) customers and do-it-for-me (DIFM)
customers who utilize its installed sales programs, as well as
others buying for personal and family use.
 Commercial business customers include those who work in the
construction, repair/remodel, commercial and residential
property management, or business maintenance professions.

Objectives
 "Lowe's has been helping our customers improve the places
they call home for more than 60 years”.
 Driven to be one of the most successful companies in the
world. H
 “We will provide customer-valued solutions with the best
prices, products and service to make Lowe’s the first choice for
home improvement."

In order to make their vision a reality, Lowe's focuses its
employees on these values, Customer Focused, Teamwork,
Ownership, Passion for Execution, Respect, and Integrity
 Strategies
 Multi-domestic growth through targeted geographic locations,
increased leverages with vendors and focus on promoting “doit-yourself home improvement.
 Stores diversified by appealing to more women shoppers with
the merchandise that is offered. These products consisted of
interior home decorating items, including lamps, window
treatments, and designer towels which were non-existent in
their competitors stores.
 Differentiate themselves by offering higher margin
merchandise.
 Policies


Diversity of thought is fundamentally supported throughout the
company. Building from this corporate-wide platform of
inclusion, and going beyond mere words to put the beliefs into
action.
Aggressively seeks programs that involve the community.
II. Strategic Managers
A. Board of Directors
 Mix of Management Directors and Independent Directors
 Management Directors- both present and former employees of
Lowe’s
 Independent Directors- (majority) does not have a material
relationship with Lowe’s
 Size of Board is no less than 3 members (usually 9-12)
 The Governance Committee of the Board recommends individuals for
nomination to the Board
 Must possess:

High professional ethics

Policy-making experience in business, government,
education, or technology

Willingness to allocate time required to carry out duties

Must commit to several years for knowledge development

Represent best interests of shareholders

Board retirement age of 72

Should retirement age be flexible if a member possesses
irreplaceable knowledge?
 Is the ratio of Management and Independent Directors
sufficient?
B. Top Management
 Chairman & CEO- preferred to have vast experience in business financial
and executive responsibilities
 President & COO- responsible for store operations, merchandising,
marketing, logistics, and store support
 Executive Vice Presidents- multiple positions specializing in finance,
business development, operations, merchandising, and logistics
III. External Environment (EFAS Table; see Exhibit 1)
A. Natural Environment.
 Availability of land for development.
 Fees and regulations for the development of land.
B. Societal Environment
 Economic
 Current Housing market is soaring, through which new
homeowners and existing owners are performing upgrades and
renovations. (O)
 Store size will be an important factor in determining what
markets to enter and which store size to choose. (T)
 Technological
 Advances in the effectiveness and affordability of “Green”
building products will drive for wider product selection. (T and
O)
 Advances in manufactured product offerings will dictate the
inventory needs for the coming years. (T)
 Political- Legal
 National minimum wage increases increasing the costs associated
with operating expenses. (T)
 Pending legislation regarding the reduction of emissions and
reducing the carbon footprint. (T)
 1st Time Home-buyer programs making it more affordable for
citizens to purchase their first home. (O)
 Sociocultural
 With the increase of televised and advertised product placement,
the need to maintain a high quality of life and have designer
products in rapidly increasing. (O)
 The current split household rate, due to divorce and career
mobility, causes the need for increased products per family. (O)
 Dual-career couples with limited time resources, causes the need
for more energy and time efficient household products and
materials. (O)
C. Task Environment
 High amount of new homes being built will lead to the increased need
to improve more homes. (O)
 Increased market competition, while relatively small in the “Big
Name” department, is an issue that must always be evaluated. (T)
 Merging with partners that are established in areas of proposed
expansion. (O)
 Opening new stores in heavily populated metropolitan areas increases
visibility and potential profitability. (O)
 1st Time Home-buyer program increasing the amount of homes
manufactured and improved. (O)
 Maintaining a variety in vendor products allows Lowe’s survivability
if one or more vendors were to go under. (O)
 Housing forecast for the next 10 years. (T)
 Increasing government regulation on “Green” building supplies and
the need to reduce carbon emissions. (T)
 Brand Identification. Ensuring that the Company name is associated
with excellence and quality. (O)
IV. Internal Environment
A. Corporate Structure
 In the service sector of the home improvement industry
 Capitalize on the nationwide growth of the housing market and the “do
it yourself’ in the metropolitan populations
 Projected an annual growth rate of 16% to 17% a year over the next
three years
B. Corporate Culture
 A equal balance between employees and shareholders
 Very involved with communities, public education
 Promotes social responsibilities within company
C. Corporate Resources
A. Marketing
 Developed an installed sales programs in the “buy-it-yourself” (BIY,
or “do-it-for-me”) market that was successful.

Lowe’s targeted retail and commercial business customers through
promotional mix that included television, radio, direct mail,
newspaper, event sponsorships, and in-store programs.

Stores with wider aisles, brighter lighting, more signs and its more in
stock of products for home decorating attracted more customers
B. Finance
 Saw significant product/market growth opportunities expanded into
western United States to build 100+ new stores to also increase profit.
 Net earnings, assets, shareholder’s equity and company’s recorded sales
increased significantly from 2002 to 2003.
 Home Depot leads Lowes with an overall market share 18% to 9%.
C. Research and Development (R&D)
 N/A
D. Operations and Logistics
 Operates 10 regional distributions centers (RDC) and nine smaller
support facilities strategically located throughout the US to handle
special merchandise.
 No plans of international expansion, competitive edge goes to
competition.
 Fifty percent of merchandise is shipped through RDC while remaining
through Global Sourcing Division is shipped through vendors.
E. Human Resources

N/A
F. Information Systems

N/A
EXHIBIT 1
EFAS TABLE FOR LOWES
EXTERNAL FACTORS
Opportunities
Expansion to Western States
Focusing on highly populated
metropolitan areas
Buying out established businesses in
new markets
Current Housing Market
Transition from D-I-Y to B-I-Y base
Maintaining an Equal percentage of
vendor based products
WEIGHT
2
0.2
0.2
0.1
0.1
WEIGHTED
RATING
SCORE
COMMENTS
3
4
5
By 2004, 45 states had
4.25
0.85
stores
Concentrating on Metro
areas with 500,000 +
4.00
0.80
population
1999- Bought out Eagle
Hardware an existing West
3.50
0.35
Coast hardware store
Current Housing Market is
rising considerably
2.00
0.20
0.05
3.00
0.15
0.05
4.50
0.23
0.05
1.75
0.09
Expanding Supply Chain vendor
base
This transition adds profit
through installation services
Diversity within vendors
means not too much risk if a
vendor goes under
Identifying new product
lines that may provide
reduced costs to the
company and increase
customer satisfaction.
Threats
Need for higher quality product
lines and product advances
0.05
2.50
0.13
0.05
4.00
0.20
0.1
2.00
0.20
0.1
1
1.50
0.15
3.34
Competition from "Big Name"
home improvement stores
Current and Forecasted Housing
Market over the next 10 years
Increased government regulation on
green building products
TOTAL SCORES
Revitalizing product
offerings and providing
customers with the best
products available on the
market.
One other known "Big
Name" competitor. But must
surpass their growth and
product offering to maintain
market share
Unknown volatility in the
housing market could lead
to increase or decrease in
profitability
US Government is pushing
towards regulations on
building requirements
EXHIBIT 4
Ratio Analysis for
Lowe's Company
Inc.
2002
2003
2002
2003
2004
1.56
0.36
1.55
0.42
1.22
0.14
0.94
0.84
0.84
4.58
4.64
4.05
79.69
78.66
90.12
1.62
1.64
1.72
5.66%
5.94%
6.39%
10.20%
21.10%
11.04%
22.03%
11.55%
21.21%
1. LIQUIDITY RATIOS
Current
Quick
2. LEVERAGE RATIOS
Debt to Total Assets
Debt to Equity
3. ACTIVITY RATIOS
Inventory Turnover-sales
Inventory Turnover-cost of sales
Avg. Collection Period-days
Fixed Asset Turnover
Total Assets Turnover
3. PROFITABILITY RATIOS
Gross Profit Margin
Net Operating Margin
Profit Margin on Sales
Return on Total Assets
Return on Equity
10.70%
22.00%
11.70%
22.60%
EXHIBIT 5
Common Size
Income
Statements for
Lowe's Company
Inc.
2002
2003
2004
Net Sale
Cost of Sales
Gross Profit
Selling, general/admin. Expenses
Reorganization Expenses
Operating Income
Interest Expense
Other-net
Income before accounting changes
Effect of accounting changes for
post-retirement benefits other than
pensions and income taxes
Total Operating Costs and Expenses
Net Income
100.00% 100.00% 100.00%
71
69
69
29
30
31
18
18
18
0
0
0
8
10
10
1
1
1
0
0
0
0
0
0
0
0
5
0
0
6
0
0
6