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
Net Sales Cost Of Sales Gross Profit 81,511 54,191 27,320

2006
90,837 61,054 29,783

(+/-) %
10.4 12.7 9.0

Selling, Gen & Admin Exp Dep& Amortization Expenses

Total Operating Exp Operating Income Interest (net) Prov For tax Net Earnings

16,485 1,472
17,957 9,363 (81) 3,444 5,838

18,348 1,762
20,110 9,673 (365) 3,547 5,761

11.3 19.7
12.0 3.3 350.0 3.0 (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
Assets Cash & Equiv Receivables Net Inventory 15,269 807 2,396 11,401

2006
18,000 614 3,223 12,822

Change +/-

Other Current Assets Total Currnt Assets Property, Plant &Eq Goodwill Other Assets TOTAL ASSETS

665 15269 24,901 3,286 949 44,405

1,341 18,000 26,605 6314 1,344 52,263

By Azhar

FINANCIAL ANALYSIS 2005-2006

Capital structure
2005
Current Liabilities Long Term Liabilities 12,706 4,790

2006
12,931 14,302

Common Equity
TOTAL LIABILITIES & S/HOLDER EQUITY

26,909
44,405

25,030
52,263

By Azhar

FINANCIAL ANALYSIS 2005-2006

SALES GROWTH (%)
2000 Home Depot Lowes Industry 17.09 15.63 6.35 2001 8.77 20.25 7.51 2002 11.28 18.1 10.22 2003 12.77 18.24 12.62 2004 11.52 18.59 7.93 2005 11.44 8.52 8.89 Annual Growth 12.12 16.49 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 Home Depot Lowes 17.94 24.71 2001 20.37 46.44 2002 17.47 22.18 2003 16.19 19.92 2004 16.74 27.6 2005 11.44 12.3 Annual Growth 14.32 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 Home Depot Lowes Industry 9.2 7.5 8.8 2001 9.2 8.2 7.7 2002 10.0 9.8 8.6 2003 10.6 10 9.1 2004 10.8 10.1 9.2 2005 11.5 10.8 8.8 2006 10.6 11 8.8 2007 9.3 10.3 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 Home Depot Lowes Industry 5.6 4.3 8.8 2001 5.7 4.7 7.7 2002 6.3 5.7 8.6 2003 6.6 5.9 9.1 2004 6.8 5.9 9.2 2005 7.2 6.4 8.8 2006 6.3 6.6 8.8 2007 5.5 6.2 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

FINANCIAL ANALYSIS
RETURN ON EQUITY(%)
2000 Home Depot 18.9 2001 18.4 2002 19.3 2003 20.4 2004 21.5 2005 22.9 2006 22.2 2007 21.6

Lowes Indust ry

15.9 20.3

16.6 16.7

19.8 21.1

19.5 23.6

20 27.8

21.4 27.4

20.7 24.7

19.4 27.4

Consistently better than competitor and the industry average

13
By Azhar

FINANCIAL ANALYSIS
RETURN ON ASSETS(%)
2000 Home Depot Lowes Industry 13.4 8.0 9.8 2001 12.7 8.0 8.2 2002 13 9.9 9.4 2003 13.4 10.4 9.7 2004 13.6 10.9 10.2 2005 14.0 12.1 10.2 2006 11.9 11.8 9.8 2007 9.9 10.5 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 Home Depot Lowes Industry 1.8 1.4 1.6 2001 1.6 1.6 1.7 2002 1.5 1.6 1.8 2003 1.4 1.6 1.8 2004 1.4 1.2 1.8 2005 1.2 1.3 1.7 2006 1.4 1.3 1.7 2007 1.1 1.2 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 Home Depot Lowes Industry 0.3 0.3 0.5 2001 0.6 0.4 0.7 2002 0.4 0.4 0.8 2003 0.4 0.5 0.9 2004 0.4 0.2 0.8 2005 0.4 0.2 0.7 2006 0.3 0.2 0.7 2007 0.2 0.1 0.7

By Azhar

FINANCIAL ANALYSIS 2005-2006

DEBT TO EQUITY RATIO
2000 Home Depot Lowes Industry 9.3 32.9 24.1 2001 6.5 35.9 23.4 2002 6.3 31 26.5 2003 3.7 26.5 25 2004 8.2 21 24.6 2005 9.0 19.7 23.4 2006 31.7 21.6 23.1 2007 39.4 25.8 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 Home Depot Lowes Industry 1.4 2.1 2.3 1.5 2.1 2.3 2002 1.5 1.9 2.4 2003 1.5 1.8 2.5 2004 1.6 1.8 2.8 2005 1.7 1.7 2.6 2006 2.1 1.8 2.6 2007 2.6 1.9 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 Home Depot Lowes Industry Total 2001 2002 2003 64,816 30,838 2004 73,094 36,464 2005 81,511 43,243 2006 90,837 46,927 2007 59,690 37,904 45,738 53,553 58,247 18,779 21,714 26,112 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 62.35 27.95 9.7 2003 61.36 29.2 9.44 2004 60.13 30.00 9.87 2005 58.53 31.05 10.42 2006 59.2 30.59 10.21 2007 54.82 34.81 10.37

Home Depot 63.97 65.09 Lowes 26.26 26.39 Others 9.77 8.52

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 environments 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 (contd)

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 ones 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, Lowes companies structured their target business to appeal to more women.

By Sunita

Social environment (contd)

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 countrys 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 Porters 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 Depots 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 Depots 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 Nardellis 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 Depots 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 Depots second largest competitor would be Lowes 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 Lowes Companies is Home Depots 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

Competitive pricing Convenient locations Excellent management Stay focus Retail store business

Exceptional customer service

Well trained employee

Warehousing capabilities

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 Competencies
Tangile
Stores
Pleasant and customer friendly environment

Product range
Wide range of product and brand Variety in design and colors Sell proprietary items Sell own brand product

Information Technologies
Online supplier center for warehouse management, purchase and supplier rating

Rapid Expansion
Become the worlds largest retailer in home improvement industry

Buying power Quality assurance program Environment, health and safety

Safe environment for customer and employees Committed to protect the environment

Financial Pricing
Low price than competitor

Fuel center
Additional service to customer

By Hon

Core Competencies
Intangible
Customer service Customer perception
Easy to reach Can find all the product they need Cheapest and unique

Innovation in inventory & warehousing procedure Human resource policy

Structure way for new recruiting Continues training program No commission on sale

Intellectual property
Trade mark the name Home Depot Applies for copy right

Organization structure
multidivisional

Succession planning
Promote from within the company

Supplier relationship

By Hon

Value Chain
Primary Activities
Inbound logistics
Computerized and integrated warehousing, inventory control and purchase order.

Marketing & Sales

Online sales: web site and ecommerce. Recognize brand

Operation
Integrated information exchange. Convenient store location to reach more customer Pleasant shopping environment

Service
Professional advice in selecting and using the product Installation service Email newsletter containing advice and announcement of events at their local stores

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

By Hon

Value Chain
Supporting Activities
Firm Infrastructure
Web based infrastructure Online supplier center

Technology Development
Quality assurance program Supplier assessment Improve store environment to increase customer comfort New product development

Human Resource Management

Structure way of recruiting Continuous training program Succession planning

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
Competitive Advantage Cost Broad target Competitive Scope Narrow target Cost Leadership Uniqueness Differentiation Customers require special household products with Low cost & unique products serve as the vertebra or the brand for Home Depot.

Integrated!
Focused Cost Leadership Focused Differentiation

low cost.
Specific buyers needs push Home Depot to create different product line segments.

Integrated strategy is recommended

By Mooi

Strategy Recommendation
Business Level
Competitive Advantage Something which gives the organization some advantages over its rivals. Variety of products with lower cost. Famous brand. Clear positioning through its differentiation. Focus on the core competencies. Market Dominance Could be achieved through internal growth or acquisitions.

De-layering Flattening the management structure, removing bureaucracy to speed up decision making.

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.

Getting back customers trust? YES!

By Hon

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

One-Stop shopping store : - Child-care - Snacks and beverages shop - Home improvement consultation services
Expand product line : - Renewable energy products - Insects / pests prevention products

By Mooi

Strategy Recommendation
International Strategy
Geographical expansion to seek for new opportunities for sustainability.

Sustainability :
(A) Increased market size Largest home improvement retailer in the targeted countries.

Multi-domestic strategy : - Canada, Mexico, China, South America Europe, UK, Vietnam, Australia.

- Customized products to meet local

customers specific needs and preferences.

(B)

Economies of scale & learning

Expanding market size helps to achieve economies of scale in marketing and distribution. Target for those developing countries where constructions are mushrooming. Target for those developed countries where home improvement DIY concept is very strong.

(C)

Location advantages

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 !