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2005

2005. A Strategic Management Case Study. Overview. Possible alternative strategies Our Recommendation Strategies Long range objectives EPS/EBIT Implementation Issues Proposed annual objectives (goal) and polices Proposed procedures for evaluation Epilogue Current Performance

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2005

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  1. 2005 A Strategic Management Case Study ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  2. Overview • Possible alternative strategies • Our Recommendation • Strategies • Long range objectives • EPS/EBIT • Implementation Issues • Proposed annual objectives (goal) and polices • Proposed procedures for evaluation • Epilogue • Current Performance • Resources Utilized • Questions • A brief history of The Home Depot • EOY 2004 • Mission, Vision, Objectives, Strategies • 2005 • New Vision and Mission • External Analysis • Opportunities & Threats • CPM • EFE • Internal Analysis • Financial Data • Strengths and weaknesses • IFE • Financial ratios • Strategic Analysis • SWOT Matrix • SPACE • BCG • IE matrix • Grand Strategy Matrix • Matrix Analysis • QSPM ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  3. History of the Home Depot • 1978 Founded by Bernie Marcus and Arthur Blank; zero locations; 20 associates • 1979 3 store location; 200 associates; $7 million in sales • 1980 4 stores; 300 associates; $22 million in sales • 1981 Stock goes public on NASDAQ, raising $4.1 million; 8 stores; 700 associates; $51 Million in sales • 1984 Moved to the New York Stock Exchange (NYSE) in • 1986 Sales exceed $1 billion; 60 stores • 1987 Day-in/Day-out pricing policy; UPC scanning system; health program for associates introduced; 75 stores; $1.45 billion sales • 1988 Named retailer of the Year by Building Supply Home centers for second time; named High Performance Retailer for 7th consecutive year by Management Horizons; 96 stores; $2 billion in sales ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  4. History of the Home Depot • 1994 The company arrived in Canada with the acquisition of Aikenhead’s home improvement centers • 1997 624 stores; 124,000 associates; $24.2 billion sales • 1999 The Legend opened in the Atlanta Store Support Center; chronicles the history of The Home Depot and illustrates the values that set us apart • 2001 Began flying its flag proudly in Mexico in 2001 through the acquisition of Total HOME • 2002 1,532 stores; 300,000 associates; $58.3 billion in sales • 2003 $64.8 billion in sales • 2004 Sales reach 73.1 billion; over 1,818 stores and 54 EXPO centers making Home Depot the world’s largest home improvement retailer, 2nd largest retailer in the United States, 3rd largest retailer in the world ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  5. 2004 Mission The Home Depot is in the home improvement business and our goal is to provide the highest level of service, the broadest selection of products and the most competitive prices. We are a values-driven company and our eight core values include the following: • Excellent customer service • Taking care of our people • Giving back • Doing the "right" thing • Creating shareholder value • Respect for all people • Entrepreneurial spirit • Building strong relationships ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  6. Giving Back In 2004 Home Depot committed to its first ever week of service. 260,000 volunteers hours were donated by 34,500 associates. Completing 1,600 service projects. Due to its success we have decided to make it an annual event. ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  7. 2004 Strategies and objectives • Approximately $1 billion is being invested in infrastructure • Self check out computers • Product scanning devices • 175 new stores in North America • Modernize current stores ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  8. 2004 Issues • Strong competition with Lowe’s is driving down prices • Contractor shortages causing a backlog in home remodeling • A class-action lawsuit alleges that Home Depot and rival Lowe's misled customers with interest-deferred credit card promotions in 2003 ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  9. Exclusive Brands • The Home Depot carries several exclusive brands, including: • BEHR Paint • Chem-Dry (carpet cleaning, upholstery cleaning, tile and grout services) • Distinctions Cabinetry • Eco Options (store brand) • Feather River Doors • G.E. (Water Heaters) • Glacier Bay (faucets and bath) • Hampton Bay (lighting, ceiling fans & patio furniture) • Husky (tools) • Millstead • Pegasus (kitchen and bath items) • Ralph Lauren paint • Ryobi (power tools) • Thomasville cabinetry • Vigoro (fertilizer) • Workforce ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  10. Creating a worldwide presence Add the end of 2004 we had 44 stores in Mexico and 117 in Canada ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  11. A New Vision To be the first choice for affordable, diverse, innovative, and modern products in the home improvement industry. ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  12. A New Mission The Home Depot’s mission is to be a superior retailer in the home improvement business by providing an extensive range of products worldwide. (2,3,7) We offer first-rate customer service to all home owners and businesses, from housewives to contractors. (1) The Home Depot values its relationship with it’s employees, shareholders, customers, and the community as well as the environment and maintains a high level of respect for all. (6,8,9) These relationships are maintained through vast community involvement and a dedication to increasing our presence internationally, thereby providing to those in need and increasing profits to our shareholders. (4, 6,5) We utilize technological advancements to assist in our growth and further develop our innovated stores. (4) ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  13. The Home Depot’s mission The new mission answers the following questions • Customers: Who are the firm’s customers? • Products or services: What are the firm’s major products? • Markets: Geographically, where does the firm compete? • Technology: Is the firm technologically current? • Concern for survival, growth, and profitability: Is the firm committed to growth and financial soundness? • Philosophy: What are the basic beliefs, values, aspirations, and ethical priorities of the firm? • Self-concept: What is the firm’s distinctive competence or major competitive advantage? • Concern for public image: Is the firm responsive to social, community, and environmental concerns? • Concern for employees: Are employees a valuable asset of the firm? ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  14. External Audit: Opportunities • International expansion • Consumer interest in one-stop shopping to save time and gas money • Growth in global sourcing • Hardware stores, home centers, and retail-oriented lumberyards, industry expected to grow (from $236.3 billion in 2004 to $281.7 billion by 2008) • Slow housing sales (people are likely to stay home and spend money on remodeling and on improvements to make a home more attractive to purchase) • The growing number of woman who are making home improvement decisions and spending an increasing amount of time on DIY (do-it-yourself) projects ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  15. External Audit: Threats • Competitors (Lowe's, Sears, Wal-Mart) • Reaching market saturation within North America • Contractor shortage causing backlog in home remodeling • Overlap between Home Depot and Lowe's • A class-action lawsuit alleges that Home Depot and rival Lowe's misled customers with interest-deferred credit card promotions in 2003 ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  16. The Home Depot CPM ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  17. The Home Depot EFE ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  18. Consolidated Balance Sheet ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  19. Consolidated Balance Sheet ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  20. Consolidated Statement of cash flows ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  21. Internal Audit: Strengths • #1 home improvement retailer in the world • #2 retailer in the U.S. • Profits climbed 16% and revenues climbed 13% in for the fiscal year 2004 • Innovative methods of differentiating • Dominant in the lumber and building materials industry • Distinctive product range • Efficient business model ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  22. Internal Audit: Weaknesses • Rising expenses • Store layout and appearance • New store productivity remains weak • Revenue growth is slower than industry average and Lowe's • 18% decrease in cash and cash equivalents FY from 2002 and 2003 to 2004 ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  23. The Home Depot IFE ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  24. LIQUIDITY RATIOS Current Ratio 1.3 times 1.4 times Quick Ratio 0.4 times 0.4 times LEVERAGE RATIOS Debt to Total Assets 37.9% 34.9% Times Interest Earned 114.0 times 111.4 times ACTIVITY RATIOS Inventory Turnover 7.3 t imes 14.3 times Ave. Collection Period 7.5 days 3.1 days Fixed Assets Turnover 3.0 times 6.1 times Total Assets Turnover 1.9 times 3.8 times PROFITABILITY RATIOS Profit Margin on Sales 6.8% 6.6% Return on Total Assets 12.9% 25.0% Return o n Net Worth 20.7% 38.4% Financial Ratio Analysis ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  25. LIQUIDITY RATIOS Current Ratio 1.3 times 1.2 times 0.9 times Quick Ratio 0.4 times 0.2 times 0.2 times LEVERAGE RATIOS Debt to Total Assets 37.9% 45.6% 58.4% Times Interest Earned 114.0 times 21.1 times 17.6 times ACTIVITY RATIOS Inventory Turnover 7.3 times 12.2 times 9.6 times Ave. Collection Period 7.5 days 0.0 days 1.8 days Fixed Assets Turnover 3.0 times 5.1 times 3.6 times Total Assets Turnover 1.9 times 3.4 times 2.4 times PROFITABILITY RATIOS Profit Ma rgin on Sales 6.8% 6.0% 3.5% Return on Total Assets 12.9% 20.5% 8.6% Return on Net Worth 20.7% 37.7% 20.8% Financial Ratio Analysis ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  26. Financial Ratio Analysis ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  27. Financial Trends(January 1999-January 2005) Financial data in U.S. dollars Industry: Home Improvement Stores ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  28. The Home depot stock Performance Source: moneycentral.msn.com Dividends ( ) Splits ( ) ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  29. The Home depot Net Worth(January 2005, in Millions of U.S. Dollars Except Per Share items) *Stock price is based on a closing price at 1/28/2005 from finance.yahoo.com ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  30. Strategic Analysis: SWOT Matrix ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  31. Strategic Analysis: Space Matrix ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  32. Strategic Analysis: Space Matrix Home Depot has achieved moderate competitive advantages and financial strength in a growing and stable industry. ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  33. Strategic Analysis: Grand Strategy Matrix ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  34. Strategic Analysis: IE Matrix ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  35. Strategic Analysis: BCG Matrix ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  36. Matrix Analysis ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  37. The Home Depot QSPM ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  38. The Home Depot QSPM Key Internal Factors ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  39. Possible Alternative Strategies • Forward integration: As a retail outlet, Home Depot can acquire major distributors of plumbing equipment, construction equipment, and other Home Depot product related distributors. • Backward Integration: As a retail outlet, Home Depot can acquire its major suppliers of Home Depot supplies such as installation services, steel mills, and logging companies of their own thus creating a supply that suits their quality, and amount that they need. • Horizontal integration: Home Depot can acquire other home improvement companies taking greater control of the industry, and gaining more control in various regions. ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  40. Possible Alternative Strategies • Market Development: Home Depot mainly targets self builder construction companies and baby boomers. Home Depot can develop a market for newly weds, and new home owners who may want to improve their newly purchased home. • Market Penetration: Go after Lowe’s, Ace Hardware and True Value’s market share ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  41. Recommendations • Strategy 1 Domestic Expansion Open up more full service hardware stores throughout the united states thus creating a presence in all areas within a state. Goal would be to have at least 5 Home Depots per state, averaging 10 new stores per quarter. This will make Home Depot a one stop shop for individual customers and businesses alike. Estimated cost of such an expansion: $4 million per store 10 stores = $40 Million ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  42. Recommendations • Strategy 2 International Expansion Acquire European home improvement company Kingfisher plc. By acquiring this company, we will create a presence in Europe. This will also give us presence and possession of companies that are part of the Kingfisher group such as B&G (UK: Ireland: China: Taiwan and Hong Kong), Brico Depot (France and Spain), Castorama (France: Italy: Poland and Russia) Hombach Holding AG (21% Kingfisher stake), KOCTAS (Turkey, and Screwfix Direct Ltd (England). Estimated cost for such an acquisition: $10 Billion ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  43. Recommendations • Strategy 3 Provide fuel services Aside from being a home improvement store, Home Depot will have filling stations at select Home Depot stores. This will create a one stop shop for customers, and businesses providing fuel, food, and other quick stop necessities. Estimated cost: 8 million ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  44. EPS/EBIT ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  45. EPS/EBIT ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  46. Implementation Issues • Importing goods overseas • Dealing with changes in supply chain with distributors • Dealing with new cultures • Customers • Employees • Environmental issues and regulations • Hostile takeover • Hesitancy of KingFisher to sell ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  47. Proposed Annual Objectives (goal) and Policies • Increase sales revenues by 20% annually for the next 3 years • Reduce expenses by 20% annually for the next 3 years • by 10% in selling and store operating costs • by 10% in general and administrative costs • New capital expenditure priorities; not over investing in a maturing business • 90% reduction in a new store development in domestic • 40% increase in remodeling older stores and upgrading IT systems • 50% increase in international expansion ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  48. Proposed Procedures For Evaluation • Track competitors’ price changes • Company ranking • SAP Top 100 retailers • Business Week • Fortune • Quarterly financial reports • Quarterly meetings to evaluate current plan and respond as necessary to changes ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  49. Epilogue • 2005 launches its high-end online home-furnishings store, 10 Crescent Lane, shortly followed by the launch of Paces Trading Company, its high-end online lighting store. • 2005 Former employee Michael Davis filed a whistleblower lawsuit against the Home Depot, alleging that his discharge was in retaliation for refusing to make unwarranted charge backs against vendors. • 2006 the Home Depot acquired Home Decorators Collection which was placed as an additional brand under its Home Depot Direct Division; Salestotaled US$90.8 billion; 10% increase in revenue • 2006 Started testing with fuel centers at some of its stores. The first centers are expected to earn $5-$7 million per year. The fuel centers sell beer, hot food, snacks along with providing diesel at a separate island. This allows contractors with large trucks to be able to fill their vehicles. The fuel centers also offer car washes, which are large enough to accommodate full size pickups. • 2007 Nardelli (CEO) was replaced by Frank Blake; sold its wholesale division HD Supply to a consortium of 3 private equity firms ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

  50. Current Stock Performance ®Danielle Boucher, Takefumi Kawahara, Matthew Bouchard, Darius Parker

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