BA 117

Case 5 – HOME DEPOT “Home Depot's Total Rehab” (see below)

Compare and contrast the MCS during Nardelli and Blake’s tenures as CEOs of Home Depot. Discuss
how the strategies and management styles of each CEO influenced the MCS in HD during his tenure.

Based on Blake’s priorities as CEO as identified in the article, develop a strategy map and a balanced
score card for two key strategic initiatives Blake, as CEO, will need to pursue immediately.

Case 6 – PELICAN INC. (in Anthony & Govindarajan – see GDrive)

See guide questions in case.

Home Depot's total rehab

First the customers revolted. Then housing went into a free fall. Time to slash and burn - unless you're
CEO Frank Blake, who thinks an army of orange aprons will save the day.

By Jennifer Reingold, senior writer

SEPTEMBER 19, 2008: 8:31 AM EDT

Home Depot CEO Frank Blake

(Fortune magazine) -- The Home Depot's Francis S. (Frank) Blake has one of the biggest jobs in
corporate America but one of its least famous faces. Which is what the CEO is counting on one weekday
morning when he goes on an undercover mission in Riverside, N.J.: a secret walkthrough at one of his
company's 1,970 U.S. stores. He's been taking the walks an average of four times a week, all around the
U.S., since January 2007, when he took over as CEO after Bob Nardelli's abrupt and painful departure.
Blake wants to see for himself the way regular folks are treated when they shop at the big orange box.
And he's not sure what to expect. "This is going to be like a Cracker Jack box," he says, a bit nervously.
"You don't know what you'll get."

Things get off to a promising start: Barely are we in the door when an orange-aproned associate asks
brightly, "Can I help you find something?" A small smile plays across Blake's poker face. "That's always
good," he says, stooping to pick up some pink flower petals that have fallen to the ground. As he makes
his way to the carpet section, which has been redesigned so that women customers can actually reach the
rugs, the level of service begins to border on obsessive. "You need help with anything?" "How you doing
today?" "Folks, you sure you don't need any help?"

A shopping experience where employees trip over themselves to help customers is the ultimate fantasy
for anyone heading a retail company. But at Home Depot - the second-largest retailer in the U.S., after
Wal-Mart (WMT, Fortune 500) - that fantasy has been a long way from reality for a long time. Over the
past several years a trip to the big orange box has so often ended in frustration that the company once
famous for its helpful employees became fodder for late-night TV jokes and home to hundreds of blog
rants about bad experiences with disengaged or scarce employees. (Type "I hate Home Depot" into
Google and see what happens.) On the University of Michigan's American Customer Satisfaction Index,
Home Depot fell eight points in seven years, to 67 at the end of 2007. It was the largest drop for any
retailer in the index, while rival Lowe's (LOW, Fortune 500) remained steady at 75.

That kind of deterioration would be a challenge for any newly minted chief executive. (Blake, 59, is a
lawyer by training.) But trying to recast the company's image in the middle of the worst housing
downturn in decades multiplies the challenge. Does service even matter when recession-spooked
customers are avoiding shopping altogether? (In this third year of decline, Home Depot's same-store sales
dropped 7.9% in 2008's second fiscal quarter; rival Lowe's posted a 5.3% drop.) Blake, however, is not
managing for the here and now, slashing jobs and expenses with quarterly earnings in mind. Instead, he's
doing something counterintuitive: He's spending money on the folks in the orange aprons to prime Home
Depot for life after hard times. Blake is quietly but aggressively presiding over radical change at the
company, starting with a complete reversal of his former boss Nardelli's strategy of dominating the
wholesale housing-supply business.

Since Blake took over, he has sold off the supply unit, HD Supply, and slowed store growth to focus on
quality over quantity, trying most of all to rebuild the sense of pride that employees once had in what they
do. "It was a religion at Home Depot that customers had to be happy," says Bernie Marcus, one of the
company's three founders. "Over a very short period [Blake] began to realize the malaise that was taking
place in the stores." Wall Street analysts have been surprisingly supportive, despite the company's
abysmal numbers and lousy reputation. "A lot of what he's doing is very textbook," says Citigroup (C,
Fortune 500) analyst Deborah Weinswig. "Invest in a down market when you've got time. That makes
sense to me."

Whatever the economy does, Home Depot won't fully recover until customers trust it again. And that's
why, back in Riverside, Blake is doing his best to inspire the troops. Rather than mentioning the flower
petals on the floor or a few other infractions, Blake is supportive and encouraging. "Take us around," he
says to Pleskach, a 15-year Home Depot veteran. "Show us what you're proud of." Pleskach heads over to
the garden area to show off his fleet of lawn tractors and then to the home-services tent, where Bob, an
associate who has personalized his orange apron by writing a big smiley face inside the "O" in his name,
tells Blake about his success generating leads for expensive jobs like roof installation and house painting.
Suddenly a "pro," a customer who's a professional contractor, comes over to put in his two cents. "These
guys are great," the contractor says. "I'm trying to get a whole bunch of pallets of tiles, and they're
working their butts off trying to get it done. The problem is, I hope they can get it done." "They'll get it
done," says Blake, with the air of a doting dad. "I have total confidence."

Just 18 months ago, confidence in any form was hard to come by at Home Depot. Nardelli, the GE
(GE, Fortune 500) executive who had been chosen by co-founders Marcus and Arthur Blank (who now
owns the NFL's Atlanta Falcons) to help bring scale and organization to a company that had outgrown its
loose, entrepreneurial culture, had done that - and much more. Believing the home-improvement market
would soon become saturated in the U.S. as rivals Lowe's and Menards went on their own expansion
drives, Nardelli concluded that Home Depot's future lay in moving further up the chain to contracting and
building supply. In just over six years he spent more than $8 billion to acquire 30 companies and create
HD Supply, nearly doubling revenues. He also used his experience at GE, with its systems- and data-
driven culture, to help centralize purchasing and merchandising, which had never been done. When
Nardelli arrived, store managers didn't even have the ability to send e-mail to one another.

For several years Nardelli's strategy seemed to work. Earnings per share more than doubled, driven by
cost savings from centralizing operations and by a blistering real estate market. But all that attention to
growth and efficiency came at a price. Store managers were suddenly measured on a bewildering array of
metrics, such as the average hourly labor rate; none related to customer service. By centralizing, Home
Depot saved money - but robbed managers of the power they'd had to make decisions based on
neighborhood quirks (more vacation rental units, say) or the regional popularity of small iridescent tiles.
"There were beach chairs in Kansas City when it was snowing outside," says a regional manager during a
visit to a store in Southlake, Texas. "The focus was on the metrics below the sales line, but not sales
itself." Stores became dirty; employees, surly or scarce. The result: a company that looked better on paper
but felt much unhappier in person. And in the retail business, where the customer experience is what
matters most, that unhappiness eventually showed up at the cash register.

The data-driven Nardelli, who loved to say, "Facts are friendly," didn't really grasp what was going on,
says Ken Langone, a co-founder of HD who had helped recruit Nardelli. Belatedly, in 2006, Nardelli
agreed to increase slightly the percentage of employee hours devoted to the stores - but Langone says the
CEO grudgingly predicted, "The company will get nothing for it." Says Langone: "I think Bob didn't
appreciate the importance of a kid on the floor with an apron on. You just can't measure productivity in a
retail store." Nardelli declined to comment for this story.

Nardelli made matters worse with a tendency to squelch dissent and dismiss criticism of his pay, which
reached $30 million in 2005 as the company began to struggle. In January 2007, after the board asked to
renegotiate his pay package, he instead stepped down and famously collected a severance payout worth -
including comp from his original contract - $210 million. One of his favorite hires, vice chairman Blake,
succeeded him. (In August 2007, Nardelli became CEO of Chrysler; the two haven't spoken since he left.)

Blake was not an obvious choice. He had spent most of his career as a lawyer, working as a clerk to
Supreme Court Justice John Paul Stevens, then moving to GE and also serving as a deputy counsel to
George H.W. Bush when he was Vice President. Blake says he never aspired to be a CEO and in his
previous job had spent more of his time thinking about retail locations than the products sold inside them.
Nor is he a rally-the-troops type: Blake is soft-spoken, relatively free of platitudes, and refreshingly
unscripted. He shares, without prodding, what his wife said when she saw a videotape of him speaking in
front of Home Depot's store managers in March: "'That's appalling.' And actually looking at that, you say,
'Yeah, that's right. I do need to communicate better.'"
Blake may have lacked experience, but you wouldn't know that from his first move as CEO, which
carried symbolic weight: He placed a call to company founders Marcus and Blank, asking for their help
and advice. Marcus, still among Home Depot's largest shareholders, had become estranged from Nardelli;
he hadn't set foot in a store in three-and-a-half years. "I couldn't take it emotionally," he says. But when
Blake reached out to him, he responded immediately, agreeing to speak at the company's March 2007
store managers' meeting and taking Blake on store walks to teach him the ropes. "My advice was to get
into the stores," Marcus says. "Get the associates to talk to you, to trust you. Get them to understand that
if you see something wrong in the store, you're not going to have them fired." Blake, whose son Frank Jr.
is a store manager in North Carolina, did so - and rapidly decided that the company was involved in so
many initiatives that it wasn't succeeding at any of them. At the first meeting of his management team in
early 2007, he got his point across. "You know that sign in the lobby that says improve everything we
touch [HD's internal slogan under Nardelli]?" Blake asked. "Please don't."

Blake has boiled his strategy down to a few priorities, all of which revolve around stores (engaging
employees, making products readily available and exciting to customers, improving the store
environment, and dominating the professional contracting business, an area in which Home Depot's
closest rivals trail far behind). "To me, it just makes more sense to have one integrated business," he says
by way of explaining why he sold off the wholesale business. (The sale price, originally agreed upon at
$10.3 billion, was renegotiated down to $8.5 billion in August 2007 as the M&A market collapsed - an
embarrassment at the time that today actually looks good.)

To spruce up the stores, Blake restriped the parking lots and improved lighting. He bulked up his
merchandising team, headed by Craig Menear, which has, in turn, empowered the field merchants, whose
job it is to understand local markets. Menear wants to make sure that the focus is on the customer's
project rather than the product being sold. "Our whole job is to help customers solve their problems," he
says. "You need to make sure you think about that from a project standpoint. If not, you can fall into the
trap of selling commodities."

But the people who work inside those orange boxes have seen the biggest changes. Instead of assessing
store managers on 30 metrics, the company today uses only eight, including each store's improvement in
customer surveys. Blake now gives assistant managers restricted stock, has boosted the number of
associates eligible for annual bonuses, and has reinstituted merit awards, which make associates who go
beyond the norm eligible for a spot bonus. He also returned some of the decision-making to the stores:
About 75% of the end caps (promotions at the end of an aisle) are now the choice of local and regional
managers, who can use their experience to promote locally popular items., like pool salt in the Southlake,
Texas, store. (Saltwater pools are popular in the Sunbelt.)

For Blake, it's obvious that employee morale is a more sensitive issue in retail than in some other
industries. "Whoever was in the factory manufacturing the Styrofoam cup," he says, "if this person had a
good or bad day, it's not going to impact my enjoyment of the cup. But part of your experience of our
company is determined by whether an associate feels valued. So investing in our associates is the right
thing to do." Probably the most significant demonstration of Blake's store focus is the company's "aprons
on the floor" program. The goal has been to boost in-store employee hours without increasing overall
costs. So when Blake decided to cut the corporate staff by 10% and shuttered a call center, the savings
was earmarked for putting more employees on the floor. Blake also abolished the pay ceilings that existed
under Nardelli to hire 3,000 specialized in-store experts, called master trade specialists, whose job it is to
provide professional-quality advice to customers. David Schick, managing director and retail analyst at
Stifel Nicolaus, applauds the move: "You can either say the housing market's the worst it's been in 30
years, and we're gonna fire everyone, or the housing market's the worst in 30 years, so I'm gonna go out
and hire every plumber I could never have hired." Finally, Blake has tackled the company's shockingly
low-tech supply chain, which - even today - has stores receiving 80% of their own merchandise directly.
So far, the company has opened three regional distribution centers, and the plan is to reach 20 within the
next two years, with 75% of goods coming through the centers.

Marcus, meanwhile, thinks he's seeing a difference. "As I go into stores," he says, "I see old faces who
have become rejuvenated. I've watched the tempo go from a slow walk to a tango." But Blake knows
better than most that it takes two to tango - customers included.