Sorry, but copying text is forbidden on this website!
The Home Depot sells a wide assortment of building materials and home-improvement and lawn and garden products, and they provide a number of services such as design and installation. The stores serve three different types of customers: (1) Do-It-Yourself(D-I-Y) customer, (2) Do-It-For-Me (D-I-F-M) customer and (3) the professional customer, such as home improvement contractors, building maintenance professionals, interior designers, and other professionals. The Home Depot has expanded its business by acquisitions in the same and other markets.
Legally, the company consists of a set of companies: Home Depot, EXPO Design Center, Home Depot Floor Store, Home Depot Landscape Supply, Home Depot Supply, Home Depot Mexico, and Home Depot Canada. In December 2000 Bob Nardelli was appointed to be CEO of the Home Depot. The founders were hoping that with the new CEO the company could continue to grow. However he succeeded in doing so, there were also some negative changes within the company. Among the negative changes, since the appointment of Nardelli, was the change of the corporate culture.
The orange-blooded culture made room for a culture of fear. The orange-blooded cultureemphasized individuality, informality, nonconformity, growth, and pride. The new culture under the management of CEO Nardelli emphasized on building a disciplined manager corps, one predisposed to following orders, operating in high-pressure environments, and executing with high standards. This resulted in a decrease in moral among the employees and thus a lower customer service index.
Other negative changes were the Human Resource management, the Agency Problem and the store location. The work staff changed from 90% full-time employees to only 68% and employee turnover was extremely high. Nardelli’s new format at the annual shareholder’s meeting was strongly criticized as well as the drop in the stock price tied with the change in his earnings metrics. The many new stores that were opened sometimes cannibalized sales of other stores owned by the Home Depot.
In this report we will create a thorough internal analysis by looking at the strengths and weaknesses of the Home Depot and with this information we will create an IFAS Table. IFAS Table We as a team discussed our findings in the case on the Home Depot and listed the strengths and weaknesses. Furthermore, we made an IFAS Table to measure its performance. We do this through weighting, rating and scoring each factor. The last column states a description of why this is a strength or weakness. Internal Factors| Weight| Rating| Score| Description|
Strengths| | | | | Price & Supply| 0,25| 5| 1,25| Low price, no middle man cost, great sale results| Acquisitions| 0,15| 5| 0,75| Improve supply chain| CSR| 0,10| 4| 0,40| Environmentally aware and contribute to society| | | | | | Weaknesses| | | | | Agency Problem| 0,10| 2| 0,20| Changed earning metrics, new format meeting| Corporate Culture| 0,20| 2| 0,40| Orange-blooded culture turned into culture of fear| HRM| 0,10| 3| 0,30| Less full-time employees less experience employee turnover much too high|
Store location| 0,10| 3| 0,30| Too suburban, 3 stores in 1 market area, cannibalization| | | | | | Total| 1,00| | 3,60| | As we can conclude from the table the company scores reasonably well with a total score of 3,60. This score is above company average standard, which is between 1 and 5 meaning 3. Even though, the Home Depot has some weaknesses and some negative changes have occurred since 2000, the company is performing reasonably well. Throughout the entire case we can see this in the high financial returns and the goals that are met.
Weakness Agency Problem Earning Metrics Nardelli had changed the metrics of his compensation from according to the change in stock price to being based on the sales results. As we all know, a corporation’s prime goal is to maximize shareholders’ equity not sales, even profits. Nardelli was hired to work in the interests of the shareholders and should get compensations based on how well the share price went. After the change in the metrics, what did Nardelli work for? Who knows? The construction companies that built new Home Depot stores maybe.
Under the new metric of earning, any manager could simply borrow money from the banks and build new stores and make acquisitions to enlarge sales volume which would not be necessarily good for the long-term growth of the company because getting bigger so rapidly leads to not only increasing revenue but also increasing costs in management and control, less centralization, more uncertainty, cannibalization, more complicated organizational structure that could cause problems in internal control and management and other negative effects of being big.
However, under the new metrics, Nardelli didn’t have to think about those effects at all. That being so, who is still surprised about Home Depot’s sales performance going so well resulting in its stock price going down? Corporate Governance In such a big company like The Home Depot, there is usually a committee formed by independent directors to decide how much the CEO should be paid and more importantly how to calculate his bonus. Having 9 independent directors of 11 directors in the board, Home Depot didn’t have such a committee, or had one but didn’t take its responsibilities.
More ridiculously, the CEO could decide how he was paid in this own wishes. At the annual shareholder’s meeting on May 2006, it happened so many strange things including Nardelli being the only director present, the time limit that each shareholder proposal was allow to be spoken and Nardelli’s refusal of answering questions. These were all evidences of poor corporate governance that made Nardelli able to work on his own interests much more than the interests of shareholders. Those non-management directors seemed not doing anything and receiving quite a good amount of compensation.
Some even had been criticized being not independent enough. Corporate Culture The old culture and the new one were like two extremes. The old culture made employees working happily but too relax, which means not enough focus. The new military culture was even worse, making employees working with fear and hence declining their morale of working, eventually resulting in customer satisfactory going down. Lowe’s at the same time had grown a culture being demanding but low-profile, collaborative and collegial, which made their customers and employee very comfortable.
Home Depot could have lost a number of customers to Lowe’s for this reason. Poor morale resulting from the new culture would also lead to more errors and mistakes in working hours. Like a former Home Depot stated which we agree, “Nardelli’s effort to measure customer service, instead of inspiring it, was to blame. ” Store Location From 2000 and 2005, Home Depot opened more than 900 stores. During the fiscal 2005, the company opened 140 new Home Depot stores, including four relocations in the United States. Most of the U. S.
Store opened in existing markets as the management’s clustering strategy. However, the new store locations cased some problems. The management intentionally cannibalized sales of existing stores by opening two other stores in a single market area. According to management, approximately 20% of its stores were cannibalized by new stores in 2005. The older stores were being gradually replaced with new ones to add room for new merchandise, to increase selling space, and more parking areas. Since the company opened so many new stores, the store layout, appearance, and store productivity remains weak.
Moreover, the new stores were located in suburban areas populated by members of the Home Depot target market. In a certain sense, the company will lose some potential customers, due to the location of the stores. Human Resource Management Human Resource Management could also be a weakness for Home Depot. The company’s career development was formally addressed during semiannual performance reviews, with goals and development plans mutually set by employees and managers. Vacancy lists were prepared at the regional level and distributed to the stores.
However, under Nardelli’s tenure, the employees were evaluated on the basis of four performance metrics: financial, operational, customer, and people skills. The employee population varied among stores, depending on size, sales volume, and the season of the year. Full-time employees had filled about 90% of the positions, but in 2005 filled only 68% of the positions. The decrease of full-employee employees lead to an increase of the employee turnover. In the first year of new stores’ operations, turnover could run 60% to 70% which was extremely high.
The major causes of turnover were too many part-time employees who terminated for poor performance, and tradespeople who considered Home Depot an interim position, and students who returned to school. Recommendations Agency Problem For a big company that is included in Dow Jones Index such as The Home Depot, a well functioned compensation committee must not be missed in the system of corporate governance. We strongly recommend Home Depot organizing a compensation committee composed of independent directors that does its job seriously.
As all the independent directors seemed not doing anything useful and some of them even had independence issues, we suggest shareholders propose a shareholders’ meeting and fire some of the independent shareholders that are possibly not sufficiently independent to the top management. The compensation included too much straight pays, too little for each meeting attended. We suggest the straight compensation dropping to $100,000 annually for each of the non-management directors, $50,000 cash and $50,000 stock units, and increasing payments for attending meetings to $5,000 for board meetings and $4,000 for committee meetings.
If the above changes don’t work any reasons we could not foresee by now and the stock price of the company continues bearish, we suggest the shareholders fire Mr. Nardelli and change a CEO who has a record of working for the shareholders’ interests seriously. Corporate Culture Since the old also had obvious drawbacks, we would not recommend the culture going back to where it used to be. It would also be impossible since Nardelli had been such a military fan. Military culture does have its merits, building discipline and leading people working in good order.
The suggestion here would be to hire more people that are military fans, either from schools, the society or from those retired soldiers. Moreover, solving such a number of retired soldiers’ employment, this would result in a good relationship with the government or even some government grants. The salary of the employees could be slightly higher than those who work in Lowe’s and other competitors. Although managing internally in a military way, it is not suggested to show a military atmosphere to customers because few people like to shop in an army.
We cannot assure this would work because we don’t any examples of doing so in such a big firm. However, if it works, the outcomes could be surprisingly good, better customer service, a cool place to work at and good relationship with the government which is valuable in every country. Another piece of advice as an alternative is to combine the discipline of the military culture with the individuality, informality, nonconformity, growth, and pride that were emphasized in the old culture. Store Location
Since Home Depot opened a large number of new stores, the store layout, appearance, and store productivity remains weak. The company should focus on the improvement of the store productivity by positioning well-trained employees and store managers into the new stores. Furthermore, the stores were placed in suburban areas which is not that convenient for a group of customers. We recommend the company to improve the online shopping service. Human Resource Management Since the employees changed from 90% full-time employees to only 68% and the employee turnover was extremely high.
The high employee turnover hurts a company’s bottom line. It will costs upwards of twice an employee’s salary to find and train a replacement, and it will damage morale among remaining employees. The company should embarked on decreasing turnover and increasing retention. We could recommend the following steps: * Hire the right people and concentrated on effective caress development. The company should have an ongoing career development program which is a continuing cycle. Always hiring the people that really fit wit the organization- the company’s value, culture, goals, etc.
Moreover, skill training program is also important, training is a necessary part that will ensuring employee loyalty and retention. * Level the percent of full-time and part-time employees. The company should hire less part-time employees to decrease the turnover. Part-time employees often leave if offered full-time employment by another company, and possibly creating turnover problem. However, full-time employees are more likely to develop company loyalty and improve the performance of the corporation. Conclusion
After analyzing the case, we can see that The Home Depot, Inc. was a company with high net sales and extremely well ranking among the world. After Bob Nardelli appoint to be the CEO of the Home Depot, he has brought the company keep going well, even with some negative changes, as corporation culture modified and the change of human resource management. We believe that it is very necessary to reform the problems of the management. Especially about decrease the governance power of Bob Nardelli and organize a board of independent directors.
Meanwhile, change the structure of employees is also should on the company’s plan list. However, the defects don’t outweigh the merits. We clearly see that the company remains a lot of strengths. Strong brand awareness and conscientious social responsibility help Home Depot to keep its good reputation; meanwhile, wise international strategy and low price make the company to maintain good revenue. We are not doubt the Home Depot will keep maintain its current strengths and with a bright future, but with these necessary changes will definitely make the company better.