Caso Hope Depot

The Home Depot, Inc.

The year 2007 started with a bang at the Atlanta, Georgia-based do-it-yourself home improvement chain the Home Depot, Inc. (“Home Depot”). With 364,400 employees, Home Depot was the largest specialty retailer in the U.S., and the second largest American retailer after Wal-Mart.1 On January 3, 2007, Frank Blake took over as chairman and CEO, one day after former chairman and CEO Robert Nardelli’s surprise resignation. A January 2 Board of Directors meeting had addressed the board’s simmering discontent with the company’s depressed share price despite improved revenues and profits under Nardelli. During the company’s May 2006 annual meeting, the board had suggested that Nardelli’s generous compensation package be tied to the company’s share price, a proposal Nardelli had flatly rejected.2 On January 2, 2007, Home Depot and Nardelli announced they had “mutually agreed” on Nardelli’s immediate resignation.

Formerly a top executive of General Electric (GE) in charge of its Power Systems Division, Nardelli had arrived at Home Depot to considerable fanfare in December 2000 to take over for retiring founders Bernard Marcus and Arthur Blank. After years of rapid growth, Home Depot in 2000 was a $45.7 billion, 1,134 store home improvement retail chain.3 (See Exhibits 1 and 2 for Home Depot’s financial data.) Nardelli set out to bring greater discipline to the sprawling retailer’s operations, including merchandising and store management. He introduced cost-cutting measures at various levels, including centralizing purchasing and shifting from mostly full-time store staffing to depend on more flexible part-time contracts. By 2006 sales had shot up to $90.8 billion. Profits had more than doubled from 2000 to 2005 to $5.8 billion.4 (See Exhibit 2.) Yet Home Depot’s stagnant share price throughout Nardelli’s tenure compared poorly with close competitor Lowe’s, which saw soaring gains in its share price over the same period.5 Furthermore, Nardelli’s centralization had been criticized by employees, managers and customers as negatively affecting the quality of service and company morale and identity.6

As successor to Nardelli, Blake faced significant challenges. Share price remained low, although it rose 2.3% the day after the announced change in leadership.7 (See Exhibit 3.) In 2007, Home Depot was facing a downturn in the housing market, a principal driver of the home improvement retail industry.8 Home Depot’s chief competitor, Lowe’s, was adding stores and directly challenging Home Depot in its previously uncontested turf of urban markets.

Blake also faced skepticism on Wall Street. Like Nardelli, Blake lacked experience in retail. He was also a former GE man, having served as general counsel and head of business development in Nardelli’s GE Power Systems division.9 A lawyer by training, he had worked for the U.S. government after leaving GE and before following Nardelli to Home Depot in 2002 to become his deputy.10 However, in contrast to the abrasive Nardelli, Blake had a reputation for being a listener and for

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Professor Zeynep Ton and Research Associate Catherine Ross, Global Research Group, prepared this case. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

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This document is authorized for use only in CFMW02CONTRO 2014/4 by GUSTAVO RODRIGUES ORTEGA from October 2014 to December 2014.

608-093 The Home Depot, Inc.

seeking consensus.11 Some analysts expressed surprise that he had not been named merely an interim leader while Home Depot looked for a top retail executive for the post.12 An analyst at Goldman Sachs commented to Business Week: “This is the second-largest retailer in the nation, and [Blake] has never run a company, or one of Home Depot’s major operating businesses.”13 To reassure Wall Street and all of the firm’s stakeholders, Blake would have to decide rapidly which of Nardelli’s strategies to maintain and strengthen, which ones to modify, and which ones to dismantle.

The Home Depot Story

Home Depot was founded in 1978 in Atlanta, Georgia by Bernie Marcus and Arthur Blank. The founders had both been fired from their executive posts at the Handy Dan Home Improvement Centers in California. Rather than seeking employment elsewhere, they sought start-up capital to fund their vision of “one-stop shopping for the do-it-yourselfer”14—vast home improvement stores akin to warehouses that would offer a broad selection of tools and products and would be staffed by knowledgeable experts in home improvement and customer service.15 The new company’s first two 60,000 square-foot stores opened in 1979 in Atlanta with 25,000 stock keeping units (SKUs), far more than offered at that time under any one roof.16

The company popularized the concept of “do-it-yourself” (DIY), in which homeowners and other individuals purchased products and tools and then built, repaired and improved homes on their own. Home Depot facilitated the DIY concept not only by prioritizing customer service, but also by providing customers with training workshops and clinics to teach them how to go about “laying tile, changing a fill valve, or handling a power tool.”17 Sales associates underwent rigorous training in product use before attending to customers. From the outset, Home Depot was characterized by a close focus on the customer: Bernie and Arthur, as Marcus and Blank were known to employees, championed the customer service philosophy of “whatever it takes,” encouraging sales associates to develop relationships with customers rather than seeing sales as a transaction.18

The company grew quickly, achieving $22 million in sales in four stores by 1980, and $3.8 billion with 145 stores by 1990, as it became the top U.S. retailer in the home improvement industry.19 It