The Home Depot Case Study

2010

PROBLEM STATEMENT-1

• SUSTAINABILITY IN FACE OF

HYPERCOMPETITION

–Lowes

–Menard

–Wal-mart

By Azhar

PROBLEM STATEMENT-2

• ECONOMIC FACTORS– DECLINING HOME SALES– CREDIT CRUNCH– DECLINING MARKET SHARE

By Azhar

PROBLEM STATEMENT -3

• LEADERSHIP STYLE AND CULTURAL CHANGE– BERNARD MARCUS (1978-1997)– ARTHUR BLANK(1997-2002)– BOB NARDELLI (2002-2007)– FRANK BLAKE (2007-PRESENT)

By Azhar

FINANCIAL ANALYSIS 2005-2006 INCOME statement

2005 2006 (+/-) %Net Sales 81,511 90,837 10.4

Cost Of Sales 54,191 61,054 12.7

Gross Profit 27,320 29,783 9.0

Selling, Gen & Admin Exp 16,485 18,348 11.3

Dep& Amortization

Expenses

1,472 1,762 19.7

Total Operating Exp 17,957 20,110 12.0

Operating Income 9,363 9,673 3.3

Interest (net) (81) (365) 350.0

Prov For tax 3,444 3,547 3.0

Net Earnings 5,838 5,761 (1.3)%

By Azhar

FINANCIAL ANALYSIS 2005-2006 INCOME statement

• Revenue increase by 10.2% • Net earnings decrease by 1.3%

– Due to increase in operating expenses by 11.5% due to increase expenditure on the new EXPO CENTER

By Azhar

FINANCIAL ANALYSIS 2005-2006 Assets and capital structure

2005 2006Change +/-

Assets 15,269 18,000

Cash & Equiv 807 614

Receivables Net 2,396 3,223

Inventory 11,401 12,822

Other Current Assets 665 1,341

Total Currnt Assets 15269 18,000

Property, Plant &Eq 24,901 26,605

Goodwill 3,286 6314

Other Assets 949 1,344

TOTAL ASSETS 44,405 52,263

By Azhar

FINANCIAL ANALYSIS 2005-2006 Capital structure

2005 2006

Current Liabilities 12,706 12,931

Long Term Liabilities 4,790 14,302

Common Equity 26,909 25,030

TOTAL LIABILITIES & S/HOLDER

EQUITY44,405 52,263

By Azhar

FINANCIAL ANALYSIS 2005-2006 SALES GROWTH (%)

  2000 2001 2002 2003 2004 2005Annual Growth

Home Depot 17.09 8.77 11.28 12.77 11.52 11.44 12.12

Lowes 15.63 20.25 18.1 18.24 18.59 8.52 16.49

Industry 6.35 7.51 10.22 12.62 7.93 8.89 8.9

strong growth since 2000 above industry average

Lowes growth is a cause for concern outperforming Home Depot

By Azhar

FINANCIAL ANALYSIS 2005-2006 NET INCOME GROWTH (%)

  2000 2001 2002 2003 2004 2005Annual Growth

Home Depot 17.94 20.37 17.47 16.19 16.74 11.44 14.32

Lowes 24.71 46.44 22.18 19.92 27.6 12.3 25.1

Industry n/a 36.67 22.87 16.58 10.58 5.56 14.42

Strong net income growth but outperformed by Lowes

Due to higher operating expenses

Higher cost of goods sold

By Azhar

FINANCIAL ANALYSIS OPERATING PROFIT MARGIN

  2000 2001 2002 2003 2004 2005 2006 2007Home Depot 9.2 9.2 10.0 10.6 10.8 11.5 10.6 9.3

Lowes 7.5 8.2 9.8 10 10.1 10.8 11 10.3

Industry 8.8 7.7 8.6 9.1 9.2 8.8 8.8 8.6

Measures pricing strategy and operating efficiency

Consistently outperformed industry and competitor up to 2005

2006 and 2007 drop due to higher operating cost

By Azhar

FINANCIAL ANALYSIS NET PROFIT MARGIN(%)

  2000 2001 2002 2003 2004 2005 2006 2007Home Depot 5.6 5.7 6.3 6.6 6.8 7.2 6.3 5.5

Lowes 4.3 4.7 5.7 5.9 5.9 6.4 6.6 6.2

Industry 8.8 7.7 8.6 9.1 9.2 8.8 8.8 5.5

Higher across the board till 2005

2006 onwards losing out to competitor due to drop in net sales and increased operating cost

By Azhar

13

FINANCIAL ANALYSIS RETURN ON EQUITY(%)

  2000 2001 2002 2003 2004 2005 2006 2007Home Depot 18.9 18.4 19.3 20.4 21.5 22.9 22.2 21.6

Lowes 15.9 16.6 19.8 19.5 20 21.4 20.7 19.4

Industry 20.3 16.7 21.1 23.6 27.8 27.4 24.7 27.4

Consistently better than competitor and the industry average

By Azhar

FINANCIAL ANALYSIS RETURN ON ASSETS(%)

  2000 2001 2002 2003 2004 2005 2006 2007Home Depot 13.4 12.7 13 13.4 13.6 14.0 11.9 9.9

Lowes 8.0 8.0 9.9 10.4 10.9 12.1 11.8 10.5

Industry 9.8 8.2 9.4 9.7 10.2 10.2 9.8 9.9

Efficient use of assets to generate earnings since 2002-2005

Decline in 2006,2007 due to decline in net income, increase operating exp. Due to re-modelling of stores, and increased in interest expense

By Azhar

FINANCIAL ANALYSIS CURRENT RATIO

  2000 2001 2002 2003 2004 2005 2006 2007Home Depot 1.8 1.6 1.5 1.4 1.4 1.2 1.4 1.1

Lowes 1.4 1.6 1.6 1.6 1.2 1.3 1.3 1.2

Industry 1.6 1.7 1.8 1.8 1.8 1.7 1.7 1.7

Ability to pay short- term debts with its short term assets

Ratio is healthy but shows a marked decline in 2007

Mainly attributable to decrease in net receivables

By Azhar

FINANCIAL ANALYSIS QUICK RATIO

  2000 2001 2002 2003 2004 2005 2006 2007Home Depot 0.3 0.6 0.4 0.4 0.4 0.4 0.3 0.2

Lowes 0.3 0.4 0.4 0.5 0.2 0.2 0.2 0.1

Industry 0.5 0.7 0.8 0.9 0.8 0.7 0.7 0.7

By Azhar

FINANCIAL ANALYSIS 2005-2006 DEBT TO EQUITY RATIO

  2000 2001 2002 2003 2004 2005 2006 2007Home Depot 9.3 6.5 6.3 3.7 8.2 9.0 31.7 39.4

Lowes 32.9 35.9 31 26.5 21 19.7 21.6 25.8

Industry 24.1 23.4 26.5 25 24.6 23.4 23.1 25

low debt to equity ratio 2000-2005 however increased in 2006-2007 when it issued 9 billion in Notes in 2006 to repurchase its common stock and payment of commercial paper due

By Azhar

FINANCIAL LEVERAGE

  2000 2001 2002 2003 2004 2005 2006 2007Home Depot 1.4 1.5 1.5 1.5 1.6 1.7 2.1 2.6

Lowes 2.1 2.1 1.9 1.8 1.8 1.7 1.8 1.9

Industry 2.3 2.3 2.4 2.5 2.8 2.6 2.6 2.9

Increased financial leverage since 2006 due to commercial debt incurred mainly to re-purchased common stock and store expansion

By Azhar

FINANCIAL ANALYSIS MARKET SHARE ($)

  2000 2001 2002 2003 2004 2005 2006 2007Home Depot 45,738 53,553 58,247 64,816 73,094 81,511 90,837 59,690

Lowes 18,779 21,714 26,112 30,838 36,464 43,243 46,927 37,904Industry Total 71,501 82,276 93,415 105,625 121,560 139,263 153,428 108,881

By Azhar

FINANCIAL ANALYSIS MARKET SHARE (%)

  2000 2001 2002 2003 2004 2005 2006 2007Home Depot 63.97 65.09 62.35 61.36 60.13 58.53 59.2 54.82

Lowes 26.26 26.39 27.95 29.2 30.00 31.05 30.59 34.81

Others 9.77 8.52 9.7 9.44 9.87 10.42 10.21 10.37

By Azhar

General / External Environment

• Political/legal; • Socio-cultural; • Technological; • Demographic; • Economic; and • Global

By Sunita

Economic Environment

• One of the favourable external factor for Home Depot is the economy especially of America, Canada and China.

• The economic prosperity over the years at least until 2008 influenced the growth of many sectors in America.

• China is booming in its economy with 7% growth at present • Home is considered one of the asset and protection for an

individual and people invest in property • Home improvement industry as categorized as “recession-

proof” products• In America - Latest report released from Home Depot for

May 2010 is that Home Depot's first quarter net income increased 41.1% to $725 million, up from $514 million a year earlier.

By Sunita

Social Environment

• Social environment’s role is to be able to gauge the demographic and social trends of a place. Normally a market analysis and survey is conducted to understand who are the customers based on culture, age, lifestyle etc.

• Statistics show that both China and America will battle ageing populations with the age group of 65+ accounting for 12.4% of the total population in 2020 in China and 16.2% of the total in the US.

• There are both positive and negative outcomes from the rise of ageing population.

• Ageing group of people are less likely to purchase new

homes. Instead they would renovate their homes

By Sunita

Social Environment (Cont’d)

• Eventually it is most likely that the homes will be owned by the coming baby boomers. Also it is cheaper to get the necessary tools to purchase tools and materials to modify one’s home then to call a professional contractor to do it for them.

• negative effects of the ageing groups of population. As senior citizens increase in the country, it could also result in more will move into assisted-living centers, apartments or relatives' houses. Those with more than one home may sell one and retire to their vacation house. Some houses may also be given to heirs.

• Total population for women between ages 15-49 by the year 2015, for China was projected as number one and America is placed number three. Women at this age range tend to go into more home improvement area. Knowing that there is a market for this gender group, Lowe’s companies structured their target business to appeal to more women.

By Sunita

Social Environment (Cont’d)

• DIY web sites on the net – attitude / culture change• Change of preference from Do it Yourself (DIY) to Do it

For Myself (DIFM) / Buy It Yourself (BIY) and professionals.

• Traffic jam. For instance San Francisco. Local stores losing their sale

By Sunita

Technological Forces

• Home Depot can be found on Facebook, Twitter and Home Page available on its own web site to name a few

• A business normally goes online to change the way customers do business with them and see the benefits of the internet, as a new era in running its business. Not all customers are excited with the concept of online business.

• Home Depot has successfully integrated EDI (Electronic Data Interchange) with vendors to have an excellent maintenance of warehouse and inventory. Home Depot also uses a code called UPC. This tracks the items sold and helps Home Depot to keep up to date inventory numbers. With fast inventory turn over, little capital is tied to the warehouse goods.

By Sunita

Political / Legal Environment

• The philosophy or the political-legal framework of a country affects the business activities and practices

• By going international, a foreign country’s regulations, its geographical location, economy structure, cultural values, and administrative differences from the country of origin are often found to generate costs, risks and barriers

• Home Depot started its operations to Mexico, Canada, Puerto Rico, Guam, Virgin Islands and China.

• Home Depot was a success in Mexico and Canada but not in Chile.• China was found to be:=

- China now has one of the highest homeownership rates in the world. In just 20 years, Chinese Homeownership has gone from zero to about 70

percent.- China's GDP is nearly $1.5 trillion. The country's population is

growing, along with personal wealth.- It is estimated that the Chinese home improvement market today

is at nearly $50 billion and growing at a compounded annual rate of 20 percent.

• However some challenges in China

By Sunita

Global Environment

• Till date America is holding the position of being the largest market for DIY home products. However there are opportunities outside the foreign market because living standards are expected to continue to rise.

• Worldwide demand for home improvement products will grow as housing development activity is in the rise.

• Able to gain stronger sales and higher profits • Home Depot is able to become a leader • The exposure helped the management to adjust, learn

and gain different sets of knowledge, new marketing techniques, and new approaches to penetrate a new country.

• Provides employment to host countries

By Sunita

Industry Analysis

• Threat of New Entrants/• Barriers to Entry; • Power of Suppliers; • Power of Buyers;• Product Substitutes; and• Intensity of Rivalry Among

Competitors

By Sunita

Bargaining Power of Supplier

• Supplier in Porter’s context means sources that provide the products.• If an industry is dominated by a company then that company will

have more bargaining power than the rest• Home Depot maintains a relationship with 12,000 suppliers that supply

its materials for sale • The network improvements introduced by Mr Nardelli to the suppliers

for example the Home Depot Online Supplier Center, the Cognos 8 Scorecarding Software, workshops for strategic suppliers, also shows that the suppliers are willing to follow the new practice of Home Depot.

• 25 competitors for Home Depot • position of Home Depot’s reign in the market, Home Depot will be

able to make price and volume discount concessions that can bring down the cost of Home Depot and increase Home Depot’s margins, which means suppliers may not be able to derive much profit as they hope to.

By Sunita

Bargaining Power of Supplier (Cont)

• It is in control of its merchandise inventory eliminating the need for a third party which is the distribution centers. Again reduces the power of a distribution centre as a supplier

• Labour is also recognized as a supplier

By Sunita

Bargaining Power of Customer

• Buyers are considered as a force simply because they are able to control prices, demand for better quality or improvement in the quality of products with their expectations, keep competition at bay by being loyal to one product or service

• Three ranges of customers and they are Do-It-Yourself (DIY) customers, Buy-It-Yourself (BIY) customers and professional contractors

• Home Depot offers a wide array of products and services. By having everything a customer needs on the shelf, this limits the customer bargaining power in this area to demand for different products or control the price of the product. Therefore, in this area, the bargaining power of customers is low

• Nardelli’s management technique and decision – shifted to professional contractors. Loss of customers which led to successor CEO Frank Blake to shift its focus back to individual customers. Here the bargaining power of customer is high ‘cos it affected the profit and sales.

By Sunita

Threats of New Entrants

• New entrants find it hard to compete with Home Depot, Lowes and Menards

• Home depot gives wide variety of products + it is a leader in Home improvement industry + has cost leadership quality + economies of scale is big.

• New company needs to find its niche, come up with something new or different to appeal to customers.

By Sunita

Threats of Substitutes

• Substitutes are products or services that function similarly with another prodcut or service in a market

• Home Depot does not have many substitutes that closely compete with it because of its low prices and wide variety of products and services offer.

• A substitute in recent times to Home Depot’s in store home improvement classes is the vast resources of the internet especially where DIY or installation procedures are concerned

• Another substitute that could be included is the purchase of new homes

By Sunita

Rivalry Between Existing Competitors

• Rivalry when exist between competitors, will result in each other deploying tactics using price, warranties, better customer service or good advertising

• Home Depot’s second largest competitor would be Lowe’s which portrays a feminine outlook by targeting women and by focusing on cost leadership and offering at an affordable price similar to Home Depot. Its strength lies in promoting and expanding through exclusive private labels or select brands

• Menards and Homebase are close competitors too but their limitations would be that their business is concentrated in certain geographical areas

• Lowe’s Companies is Home Depot’s largest competitor and they both offer similar wide range of products with low price.

• HD is able to outdo with its acquisition • Mergers and acquisition is one way of competing with rivals which is why

Nardelli chose to acquire 25 wholesalers and build Home Depot Supply (HDS), becoming one of the leaders in the building supply industry.

• Home Depot has been able to increase their market share by opening up more stores across the country. 

By Sunita

Threats of Substitutes

• Can conclude - that no competitor thus far has been able to outdo Home Depot simply because of their lower prices, resources and sheer size of the company (retail outlets in 50 states). Home Depot has a diversified range of products. Unless the customer is very loyal to one particular brand loyalty, customers would still find for Home Depot to shop.

By Sunita

Competitive Strategy

Competitive Advantage:• Product range• Price • Services

By Bimel

Environment Trends

Current Trends that affect Home Depot:

• Economic Events• Governments Plans• Recycled Goods

By Bimel

Key Success Factors • Extensive product

selection– 40,000 to 50,000

product available in store

– 250,000 product available upon special order

• Exceptional customer service– Well trained employee

• Warehousing capabilities

• Competitive pricing• Convenient locations• Excellent

management• Stay focus

– Retail store business

By Hon

Business Level Strategy

• Integrated price leadership/ differentiation– Provide low price – Service both professional and do it

yourself customer. – Differentiate the product by quality,

innovation in product design and customer service

By Hon

Corporate Level Strategy

• Expanding products into multiple geographic location

• Stores were open in Canada, Mexico and China.

By Bimel

Core CompetenciesTangile

• Stores– Pleasant and customer

friendly environment• Information

Technologies– Online supplier center

for warehouse management, purchase and supplier rating

• Rapid Expansion– Become the world’s

largest retailer in home improvement industry

• Financial• Pricing

– Low price than competitor

• Product range– Wide range of product and

brand – Variety in design and

colors– Sell proprietary items– Sell own brand product

• Buying power• Quality assurance

program• Environment, health

and safety– Safe environment for

customer and employees– Committed to protect the

environment• Fuel center

– Additional service to customer

By Hon

Core CompetenciesIntangible

• Customer service• Customer perception

– Easy to reach– Can find all the product

they need– Cheapest and unique

• Intellectual property– Trade mark the name

Home Depot– Applies for copy right

• Supplier relationship

• Innovation in inventory & warehousing procedure

• Human resource policy– Structure way for new

recruiting– Continues training

program– No commission on sale

• Organization structure– multidivisional

• Succession planning– Promote from within the

company

By Hon

Value ChainPrimary Activities

• Inbound logistics– Computerized and integrated

warehousing, inventory control and purchase order.

• Operation– Integrated information

exchange. – Convenient store location to

reach more customer– Pleasant shopping

environment• Outbound logistic

– Point of sale bar code scanning, electronic data interchange with vendors, regional buying linked to the corporate communications network, and satellite communications for both data and video transmission

– Transportation service

• Marketing & Sales– Online sales: web site and

e-commerce. – Recognize brand

• Service– Professional advice in

selecting and using the product

– Installation service– Email newsletter

containing advice and announcement of events at their local stores

By Hon

Value ChainSupporting Activities

• Firm Infrastructure– Web based

infrastructure– Online supplier

center

• Human Resource Management– Structure way of

recruiting– Continuous training

program– Succession planning

• Technology Development– Quality assurance program– Supplier assessment– Improve store environment

to increase customer comfort

– New product development• Procurement

– Internet enable demand planning

– Online supplier center

By Hon

Sustainable Competitive Advantages

• Economics– Opening expenses

• Highly motivated, capable and knowledgeable staff

• Solid reputation for excellence in price, quality and service

• Use state of art technology• High number of stores• Wide product range• Recognized brand name

By Hon

SWOT Table

By Bimel

Strategy Recommendation

Business Level

Cost Leadership

Differentiation

Focused Cost Leadership

FocusedDifferentiation

Integrated!

Broadtarget

Narrowtarget

UniquenessCost

Competitive Advantage

Competitive Scope

Low cost & unique products

serve as the vertebra or the

“brand” for Home Depot.

Customers require “special”

household products with

low cost.

Specific buyers’ needs push

Home Depot to create different

product line segments.

Integrated strategy is recommended

By Mooi

Strategy Recommendation

Business LevelMarket DominanceCompetitive Advantage

De-layering

Something which givesthe organization some

advantages over its rivals.

Could be achieved throughinternal growth or acquisitions.

Flattening the management structure, removing bureaucracy

to speed up decision making.

Getting back customers’ trust? YES!

Variety of products with lower cost. Famous “brand”. Clear positioning through it’s differentiation. Focus on the core competencies.

Acquire suppliers. Change management to make clear and sustain corporate culture which serves as the competitive advantage.

Promote and enhance innovations. Deepen passion towards job and improve efficiency and skills level-up.

By Hon

Strategy Recommendation

Competitive StrategyPlans on how a firm compete, formulated after evaluating SWOT compare to its competitors.

Feminine DIY products :- Cater for female customers- Products which are lighter, easily held by smaller palms.

One-Stop shopping store :- Child-care- Snacks and beverages shop- Home improvement consultation services

Reduce contractors expenses :- Hire cheaper contractors working in the Middle East who are not so well-known but experienced.

Expand product line :- Renewable energy products- Insects / pests prevention products

By Mooi

Strategy Recommendation

International StrategyGeographical expansion to seek for new opportunities for sustainability.Sustainability :

(A) Increased market size

Largest home improvement

retailer in the targeted

countries.

(B) Economies of scale & learning

Expanding market size helps

to achieve economies of

scale in marketing and

distribution.

(C) Location advantages

Multi-domestic strategy :

- Canada, Mexico, China, South America

Europe, UK, Vietnam, Australia.

- Customized products to meet local

customers’ specific needs and preferences.

Target for those developing countries whereconstructions are mushrooming.

Target for those developed countries wherehome improvement DIY concept is very strong.

By Mooi

Strategy Recommendation

Corporate Level

Home Depot is not fit for diversification yet.Need to focus more on business, competitive and international strategies

By Mooi

Thank you !