The Home Depot, Inc. (2006) Home Depot, Inc. was founded in Atlanta, Georgia, in 1978.

It was the worlds largest home improvement retailer and the second largest retailer in the United States based on net sales for the 2005 fiscal year ended January 29, 2006. In December 2005, Home Depot opened its 2000th store. Home Dept had been selected by Fortune magazine as the Most Admired Specialty Retailer for 2005. I. Problems Despite been able to deliver sustainable, predictable and profitable growth, Home Depot faced several problems as describe below here: Internal Problems: Excessive compensation of CEO Nardelli has received a disturbingly large amount of compensation despite the stocks poor performance. He changed the measure of his performance to be based on the firms earnings rather than the stock price. Demoralized employees Nardelli applied military culture in Home Depot to make it more centralized and efficient. This culture change caused demoralized staff and created culture of fear. Furthermore, many top executives left the company and many employees were replaced. External Problems: The fallen stock price Home Depots common stock had fallen 30% since Nardelli had taken charge of the company. Increasing competition Home Depot main competitor, Lowes, had been moving into areas previously dominated by Home Depot. Decreasing customer satisfaction The high quality customer service was Home Depots competitive advantage and differentiated it from its competitors. Even so, Home Depots score in The University of Michigans American Customer Satisfaction Index had dropped from 73 in 2004 to 67 in 2005. This drop was thought to be caused by the culture of fear applied by Nardelli. Stagnant growth The decentralized and informal culture of the founders had become partialy responsible for the firms stagnation in sales growth. Nardelli was supposed to get the company back on the fast track. II. Analysis II.1 Internal Environment Analysis Resources a. Man (Human Resources) Home Depot employed 345,000 employees in 2006, almost 68% are full-time employees. Home Depot emphasized the importance of the individual to the success of the companys operations that applied in its human resources policies. - Recruitment / Selection In recruiting process, Home Depot looked for people who shared commitment to excellence, tended to look for older people who brought a high level of knowledge and maturity to position, stable work history, positive attitude and excited, outgoing and hard workers. - Retention Under Nardellis tenure, people were evaluated based on 4 performance metrics: financial, operational, customer and people skills. - Compensation Management-level employees were eligible for bonuses based on stores return on assets and sales versus budget. Executive compensation based on salary, annual bonus and long-term incentives. - Training Home Depot believed that knowledgeable salespeople were one of the keys to the companys

success and spent great deal of time to train employees to bleed orange. They rain their employees to grow the culture. b. Material (Products, Logistics) During fiscal 2005, Home Depot opened 140 new stores, including four relocations in US and also opened 21 new stores in Canada and 10 in Mexico. Home Depot had established 16 import distribution centers in United States and Canada. Home Depot store stocked approximately 35,000 to 45,000 products. Its product group consists of: - Building materials, lumber and millwork - Plumbing, electrical and kitchen - Hardware and seasonal - Paint, flooring and wall covering

c. Money (Financial) Consolidated Statements of Earnings Home Depot Inc, (in million US$, except per share data).

Common-Size Income Statement of Home Depot Inc, to evaluate relations between profitability to sales. Based on common size income statement, Home Depot had relatively stable profitability to sales. Its cost of sales and operating expense decreased, showed that there were efficiency in operational. Below here is the Balance Sheets of Home Depot, Inc. for 2005 2006.

Consolidated of Balance Sheets Home Depot, Inc., (in million US$, except per share data) Ratio Analysis of Home Depot Inc,.

Profitability ratio showed a stagnant growth. Eventhough number of stores was increased to more than 2,000 stores in 2005, but weighted average weekly sales per operating store decreased to US$763,000 (the lowest weighted average weekly sales per operating storesince 1996). This was the effect of company strategy to raising the barrier of entry to competitors.

Common size Balance Sheet of Home Depot, Inc,. Based on exhibit 1 and 2, we analyze that, increasing in net earnings by 17% from 2005 to 2006 did not showed increasing in company performance because net earnings per sales was same between 2005 and 2006 (7%). Operating margin also resulted in stagnant figure, 11%. Accounts receivable turnover was decrease from 48.76 times in 2005 to 34.02 times in 2006. From liquidity ratio, we noted current ratio in 2006 was 1.19 (2005: 1.37) while quick ratio was 0.31 (2005: 0.4). Eventhough it is a common thing for a company such as Home Depot or Lowe to have lower quick ratio than current ratio, but it can disturb company ability to pay its current liabilities because usually inventory was sold on credit, which means that it becomes accounts receivable before converted into cash. d. Method (Marketing) To run its business, Home Depots marketing strategy was to offer a broad assortment of highquality merchandise and services at low prices using knowledgeable, service-oriented personnel and strong advertising and promoting campaigns. Home Depot customer services are what it makes different from its competitors. Highly qualified and helpful employees, professional clinics and in-store displays had developed into a customer service approach referred to as customer cultivation. The merchandising strategy are: 1) excellent customer services, 2) everyday low pricing, 3) wide breadth of products. The company maintained an aggressive campaign, using various media for both price and institutional policy. Home Depot stores served three primary customer groups: Do-It-Yourself (D-I-Y) Customers. Homeowners who purchased products and completed their own projects and installations. Do-It-For-Me (D-I-F-M) Customers. Homeowners who purchased material themselves and preferred someone else to complete the project and/or installation. Professional Customers. Professional remodelers, general contractors, repair people and trades people. e. Information and Technology (IT System) Each Home Depot stores equipped with a computerized point-of-sale system, bar code scanning system and UNIX server. Company also implemented new financial systems for its Mexican retail operations, upgraded call centers, improved Web sites and launched several new direct-toconsumer brands. Culture Home Depot culture was emphasized on individuality, informality, nonconformity, growth and pride that called as orange-blooded culture or decentralized entrepreneurial culture. This culture is nurtured by the founders of Home Depot. However, since Bob Nardelli signed as CEO in 2000, the culture was change into a more centralized and efficient organization. It emphasize on building discipline manager corps, following orders, operating in high-pressure environments and executing with high standards. This culture change was facing some stiff resistance that causing a demoralized staff and culture of fear that causing customer service to decline. Structure Home Depot, Inc. has divisional structure (SBU), consist of a set of companies, such as Home

Depot, EXPO Design Center, etc. For the purposes of financial reporting, operating decisions, allocation of resources, and performance evaluation, Home Depot was composed of two business segments, Retail and Supply. II.2 External Environment Analysis Societal Environment: PEST Analysis Political-Legal Politic and law environment in China Economic Economic booming in China (growth 7% at the present) Economic prosperity in America Home improvement industry as recession proof product Sociocultural Broader internet user at the recent time Rise of aging population in America and China There are women that more aware of home improvement Technological Use of social media (facebook, twitter, etc) for marketing use Task Environment: Six Forces Ed Freeman 1. Threat of New Entrants - low The threat of new entrants is low because they will find it hard and costly to compete head to head with big companies like Home Depot, Lowes, and Menards. They would need to create niche market. 2. Bargaining Power of Buyers - high Because the products offered by Home Depot are very standardized and its competitors such as Lowe's and Menard can provide customers with the same products, the bargaining power of buyers is quite high. Furthermore, Home Depots customer service was decreasing. 3. Threat of Substitute Product very low Home Depot offered a wide variety of home improvement products, so the threat of substitute product is low. 4. Bargaining Power of Suppliers - low Home Depot was not dependent on any single supplier and purchased from suppliers directly from all around the world. It also bought a large volume from the supplier, therefore the firm can ask for some concessions. 5. Rivalry of Existing Firms - high Home Depot main competitor, Lowes, had been moving into areas previously dominated by Home Depot and aggresively expanding. Home Depot also had to compete with Menard, 84 Lumber, building supply competitor, and niche competitors. 6. Relative Power of Stakeholders high Home Depot was committed to act with integrity and do right by its stakeholders such as associates, customers, vendors, suppliers, communities, and shareholders.

III. Root Cause Based on our financial analysis, it seems that companys growth was stagnant. The increase of net earnings by 17% from 2005 to 2006 did not imply increase in company performance because net earnings per sales stayed the same in 2005 and 2006 (7%). Operating margin also showed a stagnant figure, 11%. These was caused by the increase of cost of sales and operating expenses by 1%. Therefore, as inferred from the analysis above, Home Depot needs to increase its operation efficiency and minimize cost to gain more profit. This result also show that CEO Nardellis compensation was indeed excessive and not based on the company actual performance. The stagnant growth may also caused the fallen stock price, added by the CEO pay problem and shareholderss disagreement with Nardelli in annual meetings.The stalled growth may be caused by the increasing competition, along with the decreasing customer satisfaction in Home Depot. As shown in the case, the decreasing customer satisfaction was caused by demoralized employee and

the culture of fear. Nardelli was failed to keep the orange blooded culture and entrepreneurial spirit in Home Depot. Below here is a description of problems and its connection in Home Depot, Inc. IV Strategic Formulation IV.1 SWOT Analysis Based on the internal and external assessment, we conclude the SWOT analysis as describe below.

IV.2 IFAS and EFAS After we conclude SWOT analysis for Home Depot, Inc., we use IFAS and EFAS as tools to formulate company position in Directional Strategy Matrix to define its Corporate Strategy. We use average rating of our group members (5 persons) times attribute weights to calculate the value of each factor. IFAS of Home Depot, Inc. No Internal Factors Weight Average Rating Value S1 Strong relationship with suppliers 0,10 4,2 0,420 S2 Strong information technology infrastructure 0,12 3,8 0,456 S3 High quality of customer services 0,18 4,8 0,864 S4 Good Corporate Social Responsibility 0,10 3,4 0,340 S5 Wide store network 0,12 4,2 0,504 S6 Recession proof 0,09 3,6 0,324 W1 Conflict between shareholders and top management 0,10 4,2 0,420 W2 Demoralized employees 0,07 3,6 0,252 W3 Increase number of part time employees 0,04 2,8 0,112 W4 Financial performance was lower compare with competitors. 0,08 3,4 0,272 Total 1,00 1,852 Legend: 1 = very weak 2 = weak 3 = moderate 4 = strong 5 = very strong Using Pearce and Robinson method to calculate IFAS score, the total value for IFAS Home Depot, Inc. is 1.852, which means that Home Depot strengths more than its weaknesses. Using the same way as IFAS, we calculate EFAS as shown in the table below:

EFAS of Home Depot Inc. No External Factors Weight Average Rating O1 O2 O3 O4 T1 T2 T3 T4 T5

Value

Broader internet user 0,17 3,2 0,544 Large baby boomer generation with prime income 0,14 3,8 0,532 Bright future prospect for Millenia generation 0,13 3,2 0,416 Economic growth in some country in Asia such as China 0,09 2,8 0,252 Lowe and Menards grab Home's areas 0,16 3,6 0,576 Decrease in purchasing power due to increase in interest rate 0,08 2,8 0,224 Low barriers to entry 0,06 2,4 0,144 Environmental issues 0,08 2 0,160 Seasonal demand (high demand in summer, low demand during winter) 0,09 3,2

0,288

Total 1

0,352

Legend: 1 = very weak 2 = weak 3 = moderate 4 = strong 5 = very strong Total value for EFAS Analysis Home Depot Inc, is 0,352, means that Home Depot has more opportunities than its threats. IV.3 SFAS SFAS Matrix summarizes an organizations strategic factors by combining the external factors from EFAS with internal factors from IFAS. The SFAS Matrix includes only the most important factors gathered from environmental scanning (the highest-weighted EFAS and IFAS factors) SFAS of Home Depot Inc. Strategic Factors Weight Rating Weighted Duration Score Short Intermediate Long S3 High quality of customer services 0.2 5 1 X S5 Wide store network 0.18 5 0.9 X W1 Conflict between shareholders and top management 0.13 4 0.52 X O1 Broader internet user 0.16 4 0.64 X O2 Large baby boomer generation with prime income 0.15 3 0.45 X T1 Lowe and Menards grab Home's areas 0.18 4 0.72 X Total Weighted Score 1 4.23 Legend: 1 = very weak 2 = weak 3 = moderate 4 = strong 5 = very strong The SFAS matrix could show us about the important level relativity between key factor in internal and external environment. This matrix also showed us about timing for each key factor. This matrix would help us to prioritize what key factor should we concerned first. IV.4 Corporate Strategy We generate corporate strategy by using Directional Strategy matrix tools, with IFAS and EFAS score as its input. The Directional Strategy Matrix for Home Depot, Inc. is described below here. Directional Strategy Matrix We got growth/differentiation from the directional strategy matrix. As this quadrant consists of four strategies, then we should use QSPM to choose the best corporate strategy. The QSPM shown in the table below: Result from QSPM is that the best strategy for Home Depot, Inc. is horizontal growth. By applying horizontal growth Home Depot, Inc. can take many opportunities that will happen in the future. IV.5 Business Strategy According to Porters Generic Competitive Strategies, there are four Business Strategies. Current business strategy of Home Depot is in the middle between Cost Leadership, because Home Depot offer everyday low pricing strategy and diversified products that targeted broad market with high quality of customer services as its differentiation. Using QSPM analysis, we try to calculate the best solution for Home Depot business strategy. QSPM (Quantitative Strategic Planning Matrix) Analysis of Home Depot, Inc. Factors Weight Cost Leadership Differentiation AS TAS Comment AS TAS Comment Strengths

Good Customer Services 0,15 3 0,45 Cost minimization can be done by reducing services. 4 0,60 Quality services needed to differentiate. Recession proof product 0,05 4 0,20 Purchasing power for low cost product will be bigger. 3 0,15 Purchasing power for premium product will be lower Wide store network 0,10 4 0,40 Product can be distributed in many stores. 4 0,40 Product can be distributed in many stores. Weaknesses Brand erosion 0,10 2 0,20 May cause brand erosion. 4 0,40 Increase brand image Huge Financing 0,10 4 0,40 Lowering financing. 2 0,20 Need huge financing Opportunities New Market 0,10 4 0,40 Gain new market share through low cost products. 4 0,40 Gain new market share through new products. Developing existing market 0,10 3 0,30 Defend existing market share. 3 0,30 Defend existing market share. Online market 0,15 3 0,45 Low cost product will attract online shopper. 3 0,45 Unique product will attract online shopper. Threats Competitor 0,10 3 0,30 Barrier to new entrants and existing competitor. 3 0,30 Hard to imitate. Seasonal Demands 0,05 4 0,20 Low cost product may attract customer in any seasons. 3 0,15 Demand may seasonal. Total 1,00 3,30 3,35 Based on the QSPM analysis, the best solution for Home Depot, Inc. business strategy is to do Differentiation. By differentiation, Home Depot can increase its market while maintain the existing market by increase the quality of its customer services and make products that will attract new customers, specially in online market because the prospect of online shopping is bigger in future. IV.6 Functional Strategy Based on SWOT Analysis of Home Depot, Inc., we formulate the TOWS Matrix to define the Functional Strategy. Based on the matrix, we can define function strategy using company SO, WO, ST, and WT strategies. The strategies are: Marketing 1. Develop online marketing (S2, O1). 2. Penetration on D-I-F-M market (S3, O2). 3. Develop unique customer services (S3, T1). 4. Retain company wide variety of daily products, so it can face seasonal demands (S6, T5). 5. Use strong IT infrastructure to enter Asias markets by online marketing (S2, O4). 6. Use wide store network to grab Millenia market (S5, 03). Operation 1. Develop and maintain IT infrastructure (S2, O1). 2. Maintain good relationship with supplier to have best price (S1, T2) Organization and HRM 1. Give motivation training to employees to increase moral (W2, O2). 2. Synchronize between shareholders objective with top management strategies, in order to synergize the company to face the competition (W1, T1). 3. Build knowledge management center, so the transfer knowledge can be more efficient (W3, T1). 4. Develop company corporate social responsibility in environmental issues (S4, T4). Financial 1. Good relationship with supplier can make company have low purchase price for its inventories. Low price sales with lower cost of good sold can increase gross margin (S1, T2). 2. Develop customer database so that company can identify fast selling products in certain season. Then they can store only related products so the storage cost can be decreased and

operating margin can be increased (W4, T5). V. Solution Based on analysis, we conclude the best solution for Home Depot Inc, is: Corporate Strategy Home Depot should applied horizontal growth strategy. Horizontal growth can be achieved by expanding operation into other geographic location and/or by increasing the range of products and services offer to current market. This strategy could generate huge profit as there are many signs of opportunities in the market, such as increasing market in Asia, increasing millennia generation, and baby boomers generation that are in the prime income Business Strategy Home Depot should make differentiation in its business in order to compete with other competitor, gain new market share, maintain existing market and overcome other threats such as seasonal demand. Functional Strategy Each functional strategy has been described on TOWS Matrix. Home Depot just need to optimize its functions and synergize the whole strategies so that it can be apply in its functions.