COMPANY ANALYSIS

 

                                                The Home Depot Mission Statement

 

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

 

The founders of The Home Depot had a vision, back when they opened the first store in Atlanta,

Georgia in 1976: " a vision of warehouse stores filled with a wide assortment of products at the

lowest prices with trained associates giving absolutely the best customer service in the industry."

 

Today, that vision is still the guiding force driving the Company's philosophy. The Company's

Mission Statement reflect the Company's strong business focus and core corporate values, which

govern everything that the Company does, from its strategies to its key tactics.

 

In addition, Home Depot's 1998 Annual Report states in its Company Overview that " The Home

Depot is the world's largest home improvement retailer. We are credited as being the innovator

of the home improvement industry, as well as offering a level of service unprecedented among

warehouse-style retailers." The Overview goes on to say that "The Home Depot stores cater to

do-it-yourselfers, as well as home improvement, construction and building maintenance

professionals."

 

In critiquing a company's Mission Statement, Philip Kotler advises in his book, Marketing

Management, that it is useful to as the fundamental questions recommended by management

expert Peter Drucker:

        What is our business?

        Who is the customer?

        What is of value to the customer?

 

When juxtaposed against the above questions, The Home Depot Mission Statement demonstrates its

high relevance and clarity for the following reasons:

    Even with the phenomenal growth of the Company,  the addition of new product and

service offerings to customers and the entry of competitors in the home improvement

retailing industry over the past few decades, The Home Depot still reflects its clear sense of

purpose by defining in straightforward terms in its Mission Statement what its business and

its goals are all about.

The Mission Statement explicitly identifies customer service as the number one core value of

the Company. By stating that it offers premium service in the home improvement industry,

the Mission Statement indicates that The Home Depot has a competitive advantage by

identifying how the Company provides value to the customer.

As an addendum to the company's Mission Statement, the Company Overview clearly

identifies The Home Depot stores' primary customers; such focused targeting is a reflection

of the company's strong customer-centric orientation.

The Company also takes its sense of purpose to the next level by stating its plans to

incorporate e-commerce capability into its current company website as well its plans to

expand operations of its current 900 stores in the United States, Canada, Chile, Argentina

and Puerto Rico, to a total of 1,900 stores in the Americas by the year 2003. This statement

of the Company's future plans reflects the Company's sense of direction in maximizing

opportunities for its business outside the domestic U. S. market as well as the huge

potential of the Internet for its business.

 

By clearly stating in the Mission Statement that it is in the home improvement business, The

Home Depot defines the major competitive scope of its business by stating its industry scope.

By outlining its eight core values, The Home Depot is also defining its competence scope, the

range of core competencies that it excels in as a Company.

               

2.2 Company Strengths and Weaknesses

Company Reputation (Major Strength - High Importance)

              Home Depot’s reputation is among the top, if not the top of the home improvement

industry. Everyday low prices combined with good customer service have enabled Home Depot

to reach and maintain a top-of-the mind status among DIY home improvers and contractors

alike. Home Depot’s marketing strategy also includes the highest advertisement spending by any

company in the home improvement industry, sponsorship in a variety of sporting events,

donating building supplies to disaster areas, sponsorship in a variety of charities, and a variety of

environmental initiatives.

            Company reputation is of ‘High’ importance. A good company reputation ensures that

customers trust Home Depot and remain loyal as returning customers.

Market Share (Major Strength – High Importance)

              Home Depot, with 878 stores located in the United States, Canada, and Latin America,

is the world largest home improvement retailer. Its second largest competitor, Lowe’s

Companies Inc, has approximately half the number of stores (484). Home Depot accounts for

roughly 10% to 11% of the DIY home improvement market.

            Market Share is of ‘High’ importance to Home Depot. The sheer size of home depot and

its large market share give Home Depot several advantages over its competitors.

Customer Satisfaction (Minor Strength – High Importance)

              Home Depot provides customer satisfaction through a variety of means. Apart from the

everyday low pricing, each Home Depot outlet stocks approximately 40,000 to 50,000 kinds of

building materials, home improvement supplies, tools, and garden and lawn products.

Additionally, as seen in their mission statement, Home Depot places a very strong emphasis on

customer service. Personnel are trained to not only be knowledgeable in home improvement, but

to attend to customers needs. Home Depot also provides free consultation and free in store DIY

training courses.

            Why then does this ranking only receive a ‘minor strength’ rating? According to a recent

survey by Consumer Reports, Home Depot’s customer service is rated as 4 out of 5 – identical to

Lowes and Sears Hardware. Additionally, customers find Home Depot outlets hard to navigate

giving it a rating of (2 out of 5). There is room for improvement.

            Customer Satisfaction is of ‘High’ importance. DIY home Improver can choose from

several retail outlets. It is important that the customers needs are met in order to ‘retain’ them as

customers.

 

Customer Retention (Major Strength – High Importance)

                Home Depot’s strength in customer retention comes from providing good customer

value through a combination of price, selection, and superior service. This combination has

enabled Home Depot not only to attract many customers away from competing retail outlets, but

to also keep them coming back as loyal customers. Because of Home Depot, a DIY lifestyle has

emerged among home improvers. Shopping at Home Depot is an integral part of their DIY

hobby for many customers. When our group spoke to employees at the Long Island City Home

Depot, several commented that they had 'regulars' who they knew by name.

                 Customer Retention is of ‘High’ importance. There are DIY outlets competing with

Home Depot in many geographical markets. Unless customer retention is strong, they could

easily switch to Home Depots competitors.

 

Product Quality (Minor Strength – High Importance)

              Home Depot offers a variety of national brand and proprietary products at reduced

prices achieved through economies of scale. A variety of products ranging in price and quality

are available to consumers. To this end, the availability of different products varying in quality

and price make this a minor strength. It is not a major strength in so far that; Home Depot is not

perceived to be a provider of the highest quality products (Consumer Reports rating is 4 out of

5). This is primarily due to the fact the Home Depot markets itself as a provider of low prices.

Sears Hardware, with its line of ‘craftsman’ tools is perceived to be the provider of the highest

quality products (5 out of 5).

            Product Quality is of ‘High’ importance. DIY home improvers like to use high quality

products for their homes. The strong sales of Sears Craftsman tools is testament to the

importance of perceived quality.

Service Quality (Minor Strength – High Importance)

              Home Depot provides good quality customer service. All customer service employees

must undergo a two-week training period before becoming sales personnel. Additionally, Home

Depot provides free in-store training seminars for DIY projects, on the spot truck rentals for

customers, and installation services.

               Despite Home Depot’s strong emphasis on customer service, their quality of service,

according to Consumer Reports, is ranked the same as Lowes and Sears Hardware. There is little

perceived difference in the level of service between Home Depot and its main competitors. Thus,

the service quality is only a ‘minor’ strength, with room for improvement.

               Service Quality is of ‘High’ importance. According to Consumer Reports, the quality of

service is the single most important factor to them. More important than price, selection, and

store navigation.

 

Pricing Effectiveness (Major Strength – High Importance)

              As mentioned earlier, Home Depot is the largest home improvement retail outlet and

surpasses its nearest competitor buy nearly double the number of outlets. Sales for Home Depot

in nine months ending 10/31/99 were 29.26 billion compared to $12.12 billion for its nearest

competitor.  This illustrates the size of the economy of scale Home Depot has available to out-

price the competition. The low prices Home Depot offers have been a major strength in attracting

customers to its outlets.

              Pricing Effectiveness is of ‘High’ importance. Low prices are one of the important

customer value factors. Home Depot has seized on this even going so far as incorporating it into

their slogan ‘Where low prices are just the beginning’.

 

Distribution Effectiveness (Neutral – Med Importance)

                Currently, distribution logistics is not a core competency of Home Depot. The

company uses electronic data interchange (EDI) to transfer 900,000 documents a week between

suppliers, carriers, and third party logistical providers. Although the system is functional and

effective, it does not allow for suppliers to see store-by-store information which results in shorter

lead times, the maintaining of leaner inventories, and reduction of administrative costs. Such as

system is already being used by retailers such as Wal-Mart. Home Depot only began to take its

first step toward creating a streamlined business communications network in October of 1999.

            Distribution Effectiveness is of ‘Medium’ importance. The reason for this is that Home

Depot stocks over 47,000 items in their stores. Many of these are similar items such hammers or

nails. If one item runs out, customers can usually choose another similar one to use in its place.

 

Promotion Effectiveness (Major Strength – Med Importance)

               Home Depot’s advertising spending far exceeds that of any other retailer in the home

improvement industry, $89.2 million for the first half of 1997. Home Depot has carefully

targeted their audience – male homeowners, by sponsoring events like the Senior PGA - Home

Depot golf tournament, and Home Depot sponsored Nascar racing.

            Promotion Effectiveness is of ‘Medium’ importance. The reason why this is only medium

for Home Depot is that the name ‘Home Depot’ is already well known and associated with low

prices. As the largest DIY retailer, Home Depot does not have to make itself known to

consumers. Promotions are used to remind consumers that ‘were still here’ and reinforce their

presence in the consumers’ minds.

 

Sales Force Effectiveness (Minor Strength – High Importance)

              Home Depot has a ‘minor strength’ ranking on Sales Force Effectiveness due to their

well-trained and courteous staff. As mentioned earlier, the level of service provided by Home

Depot is relatively high, and is one of their stated core competencies. This not only includes the

Home Depot retail outlet personnel, but also the sales force at Maintenance Warehouse and

National blinds which operate through direct mail catalog and call center operations.

            Although the sales force is effective, the rating is only ‘minor’ because there is little

differentiation between Home Depot and its competitors with regards to customer service. In

order to improve this rating to a ‘major’ strength, the Home Depot sales force would have to be

perceived as better than its competitors.

               Sales Force Effectiveness is of ‘High’ importance. The sales force at Home Depot is the

main provider of customer service. Their effectiveness has a direct impact on the level of service

the customers receive.

 

Innovation Effectiveness (Minor Strength – Medium Importance)

              Home Depot has been innovative regarding the development of its new stores Villager

and Expo. The Villager, aimed and urban areas, targets smaller fix-it-up jobs while the Expo

offers Ikea style DIY home furnishing. Home Depot has also been quick to introduce new

products and services such as appliances, truck rental, in-store seminars, and financing.

               On the other hand Home Depot has also been slow to react to the advent of E-

commerce, and has treated it as a threat rather than opportunity. By banning suppliers not to use

the Internet to sell directly to consumers, Home Depot may have soured some of the

relationships with their partners. Lowe’s and other retailers have no such mandate. The delay in

taking advantage of the Internet has also allowed smaller E-retailers of home improvement

supplies to begin selling directly over the Internet ahead of Home Depots planned online store.   

            Innovation Effectiveness is of ‘Medium’ importance. Although innovation is an

important tool that Home Depot tries to use to differentiate itself from its competitors, the truth is

that there is little perceived differentiation in consumers’ minds. This is because Home Depot

and Lowes constantly imitate each other’s innovations.

 

Geographical Coverage (Major Strength – High Importance)

              With almost twice as many stores as its nearest competitor, Home Depot has an

outstanding geographical coverage. Home Depot is also rapidly expanding into Canada and Latin

America, well ahead of its competitors.

            Geographical Coverage is of ‘High’ importance. Because Home Depot has twice as many

stores as its nearest competitor, it has several key advantages in terms of economies of scale.

This enables Home Depot to have low prices while maintaining profitability.

 

Cost or Availability of Capital (Major Strength – High Importance)

            The total cash and short-term investments on the balance sheet as of the most recent

quarter for Home Depot is $170.0 Million. Additionally Home Depot has the highest Stock Price

/ Book Value ratio within the Retail Home Improvement industry, approximately three times as

high as its nearest competitor Lowes.

            Cost or Availability of Capital is of ‘High’ importance. Home Depots high availability of

capital means that it can take swift action when opportunity presents itself. This includes buying

smaller chains, opening several new stores on short notice, or entering a price war with a nearby

competitor.

 

Cash Flow (Major Strength – High Importance)

              The total cash and short-term investments on the balance sheet as of the most recent

quarter for Home Depot is $ 170.0 million. The ratio of total current Assets for the most recent

quarter divided by total current Liabilities for the same period is 1.70. For the 9 months ending

10/31/99 net sales for Home Depot rose 27% and are widely forecast to rise between 22% - 25%

for the next period.

See ‘Cost or Availability of capital’ for importance explanation.

 

Financial Stability (Major Strength – Medium Importance)

                Financial stability is also a major strength of Home Depot. The most recently available

Debt / Equity ration is a very low .06 compared to .42 of Lowe’s, 1.55 for National Home

Centers, and .95 for Wal-Mart. Home Depot’s debt is also spread out evenly between short and

long term.  Combined with a strong rise in year-to-year sales, these factors make Home Depot

extremely financially stable and widely considered to be a low-risk investment.

Financial Stability is of ‘Medium’ importance. Although Home Depot has high financial

strength and stability, it is not of utmost importance. Its main competitor Lowes operates

competitively with much less financial strength, proving that this is not of ‘high’ importance.

 

Economies of Scale (Major Strength – High Importance)

                Being the largest retailer, Home Depot enjoys large economies of scale that gives it a

competitive advantage in the home improvement industry. Because Home Depot has twice as

many outlets as its nearest competitor, it sells a much larger quantity of goods, and can command

lower prices from suppliers. In fact, many supplies have come to rely on Home Depot for a

major portion of their sales. For this reason, Home Depot has been able to ‘bully’ suppliers into

lowering prices or staying off the Internet for direct sales to customers.

               Economies of scale is of ‘High’ importance. Home Depots economies of scale enable it

to maintain its lowest prices. Economies of scale also offer Home Depot a large degree of power

over its suppliers.

 

Able Dedicated Workforce (Minor Strength – High Importance)

                Originally this rating was considered to be a major strength. Home Depot has a low

employee turnover and offers training and other programs for advancement. Home Depot also

has very knowledgeable employees as mentioned earlier. However a discrimination suit by

employees, the second such suit in two years, keeps this rating, as a minor strength until those

issues can be resolved.

            Having an Able, Dedicated Workforce is of ‘High’ importance. Service quality is the

most important customer value factor. Home Depot’s workforce, who conduct the day to day

interactions with customers, are the providers of that service. Their ability and dedication is

crucial to the level of service provided.

 

Ability to Produce on Time (Minor Strength – Medium Importance)

              Home Depot’s reliance on outside suppliers for goods (like most of its competitors)

would normally make this neutral or a weakness. The fact is that Home Depot is the largest

retailer and commands due influence over suppliers who depend on Home Depot for sales. This

gives Home Depot a certain amount of leverage to get goods delivered to them on time. Home

Depot also offers many proprietary products through joint ventures, which slightly reduces their

dependency on outside suppliers. Home Depot has also began the installation of an advanced

network system that would allow suppliers to track sales of merchandise outlet by outlet. This

will greatly enhance Home Depots ability to produce goods on time, as well as minimize

inventory costs.

               Ability to produce on time is of ‘Medium’ importance. Since Home Depot stocks a very

high number of items, there are usually alternatives available to customers if an item were to run

out.

 

Visionary, Capable Leadership (Major Strength – High Importance)

              Visionary and capable leadership has led Home Depot to generate over $30 billion in its

22nd year existence. Home Depot has steamrolled to the top of the retail home improvement

industry by providing better value to customers through an innovative combination of low price

and superior service. Home Depot has accomplished this while remaining highly profitable and

financially sound. The expansion currently continues into new markets with the Villager and

Expo stores, and new geographical territories like Canada and Latin America. Furthermore,

Home Depot is currently buying suppliers such as National Blinds and Apex, in order to further

solidify its position as the dominant player in the industry. This could not have been

accomplished without strong management.

 

Dedicated Employees (Minor Strength – Medium Importance)

              The overall majority of Home Depot’s employees are dedicated. However, this rating is

only a ‘minor’ strength because there are no commission or incentive schemes for personnel who

provide outstanding customer service.  This means that the majority of the sales force is per/hour

workers who make near minimum wages. Since low income workers by nature are not

particularity loyal, this rating is not a ‘major strength’.

 

Entrepreneurial Orientation (Neutral – Medium Importance)

              The Management of Home Depot decides the structure of the outlets. This includes size,

products, layout, location, number of employees, services, etc. While this management has made

some outstanding innovations in creating what Home Depot is today, the regular sales personnel

on the lowest levels are not empowered to make changes to the way Home Depot conducts its

business.  Their primary focus is making sure customers are attended to in the outlets. All

strategic decisions are made on the management level. Thus this rating remains ‘neutral’.

 

Flexibility or Responsiveness (Neutral – High Importance)

              Home depot has demonstrated flexibility and responsiveness on a variety of occasions.

Once cited for using old-growth forest wood, Home Depot speedily responded to the situation

and transformed into a environmentally friendly company instituting an Executive

Environmental Council. When disaster strikes in areas near an outlet, Home Depot usually

responds immediately by donating materials and assisting in rebuilding. While responsiveness to

image related matters has been fast, internal flexibility or responsiveness has often been slow. The

integration of a backbone messaging system has been undertaken only recently. Home Depot’s response

to the development of E-commerce has also been questionable.

2.3    Home Depot's Value Delivery Network

 

Raw Materials – The selection of raw materials such as wood, plastic and metal is a critical

factor in the production of quality products.  Good quality materials that are used to make a

product can have a great influence on the quality of the product, which then influences customer

opinion of the product.  The select of good quality raw materials begins the process of getting a

good competitive edge.

                            

Manufacturers/Suppliers – These are the companies that take the raw materials and make a

product.  The type of manufacturer plays an important role in the production of a product.   

Some manufacturers may not be interested in producing a very high quality product, while others

may be interested in that.  The manufacturers that Home Depot decides to carry in its stores will

have a great impact on what the customers expect from the stores and its prices.  If a company

decides to carry products from a good manufacturer, this will give the company a competitive

edge.

 

Distribution Centers – This is an extremely critical point in the value delivery network.  The

distribution centers are where the manufacturers send the product to.  Once the distribution

center has the product, it will distribute it to several stores in the area who request it.  It must be

able to process information from manufacturers as well as the stores.  This is very important in

being able to deliver the products to the stores when the customers need them.  If the distribution

center is able to process information very well and transport the products fast, this gives the

company an excellent competitive edge.

 

Retail Stores – This is where all the different products are provided to the customers.  It is very

important for the retail store to provide what the customer needs and wants.  The customers may

want low prices and good customer service.  Being able to provide the things that the customer

wants gives the retail store a good competitive edge.

 

Customers – This is the end of the value-delivery network.  The customers give feedback to the

company as to what they want by either buying a particular product, or not.  They can also signal

to the company whether they like the stores by revisiting the stores.  If the company can respond

efficiently to the reactions of the customers, it will have a great competitive advantage.

 

            Home Depot now has over 901 stores in the U.S., Puerto Rico, Canada, and Chile.  Most

of the stores are in the U.S., with stores in 45 states.  The company has 40 stores in five Canadian

provinces, and also opened stores in Chile and Puerto Rico in 1998.  Home Depot provides retail

customers with 40,000-50,000 kinds of building materials, home improvement supplies and

garden products. For these stores, there is a supply chain starting with the raw materials, which

the manufacturers use to make their products.  Then the manufacturers supply the products to

distribution center, where the products are then sent to the retail stores.  Home Depot has two

large import products distribution centers, one in Savannah, Georgia and the other on the West

Coast.

            There are two things that Home Depot depends on to ensure that the products arrive at

the stores in a timely manner, so that customers are satisfied.  Both of these are an essential part

of the supply chain:

 

        Information transfer from stores to suppliers, about the products that each store needs.

        A reliable transportation system to bring the products to the correct places.

    

            For transportation of merchandise, Home Depot uses New Penn Motor Express, a

subsidiary of Arnold Industries, Inc.   New Penn is its LTL (Less-Than-Truckload) core carrier. 

New Penn Motor Express provides reliable next-day Northeast regional service to make sure the

merchandise is always in stock at Home Depot stores in that region.  Since new Penn is very

reliable, this gives Home Depot a very good competitive edge.  The transportation company

knows where to deliver the products for Home Depot, and they also know that the delivery must

be fast.  The fact that New Penn is able to provide fast and reliable transportation of Home

Depot’s products, gives Home Depot a great competitive advantage.

            Presently, Home Depot has an Electronic Data Interchange (EDI) system.  This system

transfers over 900,000 documents per week to share information with its 7000 suppliers and to

manage the transportation logistics.  However, due to the rapid expansion of the company, it has

decided to increase the efficiency of the EDI system.    In October 1999, the company selected i2

to enhance the system.  Home Depot and i2 have decided on a solution to facilitate the transfer of

information between the stores and the network of the 7000 suppliers.  With the implementation

of i2, communication with its suppliers will be faster and more accurate.  The improved

information processing gives Home Depot a great competitive edge over its competitors in

providing better service to the customers. 

              In addition, Home Depot has acquired Apex Supply, a wholesaler of plumbing, hvac

and other products.  This is a significant move, because the information transfer will now be

much faster with the use of a common EDI system.  Although this acquisition was primarily to

strengthen their reaches in the professional trade, it will make the transport of a product to the

stores extremely efficient, giving the company a competitive advantage over those companies

who have not done the same thing. 

 

2.4 Company Core Business Processes

Home Depot effectively utilizes the following core business processes:

New Product Realization

            Apart from sourcing national brands from manufacturers to sell in its store locations, The

Home Depot develops and manages strategic partnerships with manufacturers to create products

which are sold exclusively at Home Depot stores. For example, the company recently entered

completed agreements with John Deere for the exclusive rights to sell Scotts lawnmowers and

with General Electric (GE) to sell Smart Water heaters. This strategy in new product realization

is an important tool for Home Depot to maintain its competitive advantage in creating and selling

new product offerings for its customers. The end goal of this core business process remains the

same: to offer quality products with the best value to Home Depot customers.

 

Inventory Management

          To further fulfill the promise of offering low prices to its customers, The Home Depot

has also developed superior efficiency in inventory management of its products. The company

employs electronic data interchange (EDI) with its vendors and distributors to better manage

inventory and supply at its store locations. With the most current information available, demand

governs supply of products at Home Depot stores. This helps to keep inventory costs down and

contributes to making the prices of Home Depot products more competitive. Managing this core

business process is considered absolutely crucial to Home Depot's success.  For instance, in order

to ensure the smooth management of business relationships over the transition to the year 2000,

all Home Depot vendors and distributors were forewarned as early as 1996 to adhere to the

company's rigid Year 2000 compliance policies to retain their partnership agreements with Home

Depot.

 

Customer Acquisition and Retention

            The Home Depot has been quick and adept at identifying opportunities for growing its

business and investing in customer acquisition and retention. By recognizing that constant

innovation of product and service offerings attracts new customers while retaining the loyalty of

existing ones, The Home Depot has leveraged changing market conditions and demographics

and implemented a number of corresponding customer acquisition initiatives:

            The Expo Design Centers were initially rolled out as test centers to specifically meet

the needs of customers' extensive home remodeling/home renovation needs.  Beginning with

eight stores in 1998, Home expects to roll out 200 stores within the five to seven years.

 

            For customers who need to do a quick repair job and prefer the quick convenience of

making purchases in smaller, more traditional-like hardware stores, The Home Depot has

established pilot test stores in the New Jersey area, called Villager's Hardware stores. The Home

Depot estimates that this market has a US$ 50 billion dollar potential.

 

            In recognition of the unique needs of its secondary professional business customer

market, The Home Depot has instituted customized services such as an enhanced ordering

program, same-day delivery and individualized attention for clients.

 

            For customers who are too busy or who do not have the time to do home

improvement chores themselves, The Home Depot offers At Home Services, with its own staff

providing materials and labor for activities as diverse as roof and windows replacement

installations and carpet replacements.

 

            Home Depot's Tool Rental Centers provide customers with the option of renting tools

for one-time home improvement projects or for customers who are unsure about making tools

purchases and wish to test the tools first at home. This service offering is estimated by Home

Depot to have a US$20 billion dollar potential.

 

In addition, The Home Depot realizes the importance of customer loyalty and has also

implemented a number of customer retention initiatives:

 

            Home Depot recognizes that customer loyalty can start early and has devised a Kids'

Workshops at its store locations, whereby children can practice using tools with small decorating

projects and can pick up safety tips. Over two million children in the United States have enrolled

since the program was launched in 1997. For adults who are committed to do-it-yourself home

improvement projects, the company rolled out an intensive four-week program entitled Home

Depot University.

 

            The company is also deploying technology to optimize business from its customers.

Home Depot launched House Minder on its Internet website, primarily as a customer relations

and sales retention tool. House Minder is a free Internet-based home improvement reminder

service to Home Depot website subscribers. The service provides customized product and

service offering information to customers as well as house and lawn improvement reminders.

The company has announced its intentions to add e-commerce capability to its existing website

in the year 2000.

 

Order-to-Remittance

            As in inventory management, technology plays an important role in the steady

management of this core business process. The company's EDI system facilitates in the receiving

and approval of orders while serving as the main repository of information for the prompt and

timely payment of vendors. At the same time, The Home Depot's impressive distribution

network, with a 24-hour delivery system, efficiently delivers products to customers' doorsteps.

Customer Service

 

            The Home Depot has adopted the "10- feet policy" popularized by the management of

supermarket retail chains, whereby if a Home Depot associate spots a customer within a 10-feet

radius, the associate is compelled to greet the customer courteously and offer his/her services

accordingly. All Home Depot associates have been trained to provide service which is

unparalleled in the home improvement retailing industry. In addition, the company openly

welcomes customer suggestions and feedback. Customer inquiries that are channeled to its

offices or to its website are promptly answered and handled efficiently.

 

            In summary, The Home Depot has demonstrated that it has clearly identified its core

business processes and has concentrated on improving all of these processes to emerge as the

best service provider in its industry category.  In developing superior capability in managing

these core processes, The Home Depot has leveraged the value chain model in delivering value

to its customers.

 

  2.5 Company Value Chain

 

            According to Michael Porter of Harvard University, the value chain is a tool for firms to

identify ways of creating customer value by examining the costs and performance of each of its

value-creating activities and outlining ways to improve each activity's improvement. By

performing certain activities better and more cost-effectively than its competitors, the firm has

gained a competitive advantage.

 

            n adapting Porter's value chain model to The Home Depot, it is necessary to examine

the company's primary business activities:

            Inbound Logistics - sourcing of materials or products to bring into the business

            Operations - integrating these products as part of the company's product and service

offerings

            Marketing and Sales - marketing these product and service offerings

            Outbound Logistics - shipping these products out

            Service - servicing customers

 

Inbound Logistics

              In order to deliver on its promise to customers of offering products at everyday low

prices at its stores, The Home Depot effectively utilizes economies of scale in its inbound

logistics activities by employing national-level merchandising strategies in sourcing products,

with managers negotiating with and developing strategic alliances with vendor partners for

products sold in all Home Depot stores.

 

Operations

            The Home Depot sources nationally-branded products from outside manufacturers to

sell at a low cost in its stores. In addition to these high value national brands, the company also

offers proprietary brands - products which are developed by and sold exclusively at Home Depot

store locations - and integrates these products by actively marketing and selling these products as

part of Home Depot's product and service offerings. Because of the its sheer size and the volume

of its purchases from suppliers and manufacturers, The Home Depot has the ability to employ

economies of scale in the sourcing and procurement of its products. This ability, in turn, directly

results in The Home Depot’s capacity to deliver customer value through low cost quality

products.

 

Marketing and Sales

            While The Home Depot employs economies of scale in its overall national-level

strategic marketing and advertising campaigns, individual store locations do have a degree of

autonomy and financial independence to execute store-level seasonal or tactical sales

promotional campaigns. The Home Depot is able to generate cost savings in advertising because

of economies of scale and at the same time, create customer value through local adaptation of

promotional campaigns. In comparison to competitors within its industry category (e.g. Loews),

The Home Depot has significant share-of-voice in national-level television, print and other

above-the-line media.

 

Outbound Logistics

              The nature of the retail business means that The Home Depot store locations do

minimal shipping and distribution traffic, mainly, because the customers go to the stores to shop.

However, as an option for customers who prefer to have their goods delivered, The Home Depot

has carefully built up a distribution network which has the capability to deliver products to

customers' homes within 24 hours. In addition, one of The Home Depot's subsidiaries, the

Special Order Center of National Blinds and Wallpaper, provides delivery of  custom wallpaper

and blinds products and services.

Service

              The Home Depot places extra emphasis on its primary business goal: to serve its

customers' needs by market, store by store. The company's divisional merchants and managers

are expected to spend more time on the store's floors, listening to their customers and employees,

thereby enabling them to make decisions that respond quickly to the unique needs of target

customers. By taking a decentralized approach to store and merchandising operations, The Home

Depot is able to deliver on what it sees is its core value proposition to its customers: superior

service.

Support Activities

            The Home Depot takes a centralized approach to corporate company management;

support departments for Human Resources, Finance, Planning, Legal and Procurement,

providing services to Home Depot store locations, are located in the company’s corporate

headquarters in Atlanta, Georgia.

 

 

 

2.6 Value Delivery Process: Strategic and Tactical Marketing

 

            The twenty-two year old Home Depot is today a wealthy company with reported net

sales of $ 30.2 billion for fiscal 1998[1]. For six consecutive years the company has been ranked

by Fortune magazine as America’s Most Admired Specialty Store that gives its customers lowest

prices and highest level of customer service. How did they get so high?

            The Home Depot value delivery process is well thought out and efficiently implemented.

Both strategic and tactical marketing guard the product along the way from the minds of the

planners through manufacturer’s plants and the Home Depot shelves to the customer’s houses.

And even there the product is still watched.

 

Choosing the value: customer segmentation, market selection / focus, value positioning.

 

Within the strategic phase the company segments the market, targets it and develops its

offer’s value positioning. Before activating manufactures and suppliers the research department

recognizes the demand and supply present in the market.

 

 Customer segmentation

 

As the world’s largest home improvement retailer, the Home Depot serves two segments of the

market: the professional business customers as well as individual do-it-yourselfers. With a

watchful eye for comments and suggestions the company responds to their preferences and needs

like larger quantities or same day on-site delivery. On the other hand Expo and Villager’s

Hardware are designed especially for do-it-yourselfers that do small fix-it projects and prefer

convenient store locations with quick in-and-out service. The stores have a design center staffed

by professional designers who offer free in store consultation for projects ranging from

lightening and room designing. The center proves popular especially among non-constructors.

Also, the stores provide training classes in do-it-yourself home improvement projects. It is a one-

stop solution for the completion of the whole project. Presently Villager’s is a small piece of the

Home Depot. But the expectation is that the experience collected in these stores together with the

company’s brand recognition and good reputation will open the door to a market worth $50

billion.

 

Market selection / focus

 

            The company's marketing efforts to reach contractors, remodlers and other professional

customers are still evolving. Also, Home Depot's programs remain focused on retaining the

dominant status among DIY-ers

The company collects data about the customers’ product and service preferences through

their HomeMinder, a free home improvement Web page. It delivers to subscribers customized

information and reminders for home and lawn maintenance and improvement. The collected data

does not end with pure business considerations. The research explores the customs of the

community that the company wants to serve. For instance, in Waterloo, Ontario the Home Depot

had to provide a horse and buggy barn on store property for the Mennonite customers, a religious

group that does not use motor vehicles.

        Value positioning

 

Once the company invests in the research of the market it wants to retain its current

customers. So it positions itself as the cheapest and most convenient place to shop. The Home

Depot is not striving for the highest margin possible. It is a low price but high volume distributor

with the slogan: ‘Low prices are just the beginning’.

 

Provide the value: product development, service development, pricing, sourcing / making,

distributing / servicing.

        Product development

        A tactical phase follows the strategic one. In the first part the company focuses on

providing the value. When a product is being developed many obvious technical specifications

are taken into consideration. Also apart from these, consumer preferences are given weight. A

dominant one is environmental. To be accepted by the consumers the Home Depot developed

many principles. It is committed to conserving the environment by selling products that are

manufactured, packaged and labeled in environment friendly manner. In 1998 the company

formed an Executive Environmental Council which is accountable for integrating the

environmental planning with every aspect of the Home Depot business. Therefore, the council

controls waste management, and explores alternative product and timber sourcing. Since the

Home Depot endorses certification of wood and wood products, it joined the Foundation for the

Certified Forest Products Council. Also, the company uses recycled products. Sheetrock and

particleboard are made from discarded paper. Carpeting is manufactured from recycled plastic

while steel framework is fabricated from castoff appliances and automobiles.

 

Pricing

 

Once the product is developed the company decides on its price. The Home Depot has

earned Fortune’s magazine recognition also for its prices. The company net margin is only 5.8%

so it can take pride in offering its customers best deals. The company buys its products directly

from suppliers and only marks it up enough to cover overall expenses. With operating expenses

of 22% of sales, the Home Depot runs a well streamlined company and customers benefit from

it. Also, companies within the retail home improvement industry make prices competitive. For

the Home Depot price is a powerful weapon to defend itself. The company’s policy compensates

low prices with volume.

Sourcing / Making

 

Once the pricing stage is completed the making and sourcing phase begins.  The Home

Depot has many proprietary brands developed by and sold only at its stores.  The generic

products supplement nationally branded merchandise. During fiscal 1998 the company

introduced three new product lines:

1.       Rigid stationary power tools that appeal mainly to do-it—yourself woodworking

enthusiasts.

2.       Lawn tractors in cooperation with John Deere.

3.       GESmartWater water heaters and softeners.

Distributing / Servicing

           

            New Penn Motor Express, a subsidiary of Arnold Industries Inc. was named the 1998

LTL (less-than-truckload) Core Carrier of the Year by the Home Depot. The Home Depot is

among the largest users of LTL service in the nation with over 4 million LTL shipments per year.

The company chooses LTL Core Carrier of the Year upon basis of a comprehensive quality that

measures 21 attributes of LTL service in areas such as speed of transit, on-time delivery, safety,

EDI, billing accuracy and overall customer service. Home Depot Director of Transportation, Bret

Rudeseal called New Penn 'an important link in our supply chain'.

Presently, licensed firms operate distribution logistics. In the future, due to volume and

requirements of distribution, the company plans to run its own network.

 

Communicate the value: sales force, sales promotion, and advertising.

        Sales force

 

The second stage of tactical marketing consists in communicating the value of a product

to the market. First sales forces are utilized. The Home Depot recruits its sales forces from the

local communities to reflect the local culture. Employees are trained in many skills, all necessary

to serve a customer. The programs include:

1.       Leadership Training for 21-st Century – it teaches how to work together in diverse

communities.

2.       Respect Training for all associates – helps make vendors, employees and customers

respected. Open Door Policy encourages honest communication without fear of retaliation.

3.       Managing Inclusion – shows the managers how to come over gender, race, religious and

physical differences to reach better understanding and thus to strengthen the company.

 

The Home Depot’s customer services representatives (csr) gained a great appreciation.

According to management 86% of all phone calls got answered in 20 seconds and over 95% in

less than one minute. Importantly csr turnover is less than 10% and more than 40% moving up

the career ladder. A good example of excellence comes from an ex-merchant in Villager’s

Hardware division David Cahn. On January 10, 2000 he was appointed Vice-President of

iRenovate, the Internet home improvement destination. His experience and skills are due to the

Home Depot employment and training.

 

Sales promotion

 

Sales promotion is also done through the help in community projects or disaster areas.

The Home Depot takes a holistic approach. It prepares responses and rebuilds. The company

volunteers reach the affected areas with supplies. When a tornado struck Spencer, South Dakota,

a small town four hours from the Home Depot’s nearest store, which at that time had not even

opened yet, the company volunteers came to rescue with donated saws and delivered clean-up

supplies.

 Advertising

 

'Where low prices are just the beginning'. Home Depot's value-focused advertising has

worked for the retailer. The low-price image continues to win consumers, making Home Depot a

household name in every sense. Home Depot's ad spending far exceeds that of any other retailer

in the home improvement industry. Trade magazine Advertising Age includes the chain in its

ranking of the top 'megabrands' just ahead of Kmart and right behind Mazda. According to

Media Reporting, Home Depot spends on advertising about $90million.

Also the company has a philanthropic budget of more than $15 million for 1999 which is

directed back to the communities the Home Depot serves. The major charitable focuses are

affordable housing and at risk youth. The company works on those issues through various

founded organizations.  The housing concentration is supported by more than 50 locally active

organizations e.g. Accessible Housing Service, HomeCorp, or Mid City Redevelopment

Alliance. The youth at risk issue is tackled by another as numerous set of organizations e.g.

DARE, Citizens Committee for New York City, Inc., or Crippled Children Society.

The company wants to be associated with groups whose spirit and philosophy mirror its

dedication to teamwork and excellence. US and Canadian Olympic Team, the Olympic jobs

opportunities program, and NASCAR Tony Steward are a few examples.

Through the well thought and organized strategies the Home Depot makes a successful

value delivery. Careful and well researched steps throughout the way makes the marketing less

of “the process of taking the guesswork out of a hunch.”[2]

 

  2.7 Stock Price / Book Value

All figures reflect the most recent quarter

 

 

Home Depot                                                                                                               12.12

The Largest DIY home improvement retailer in America with 878 Stores.

  D.I.Y. Home Warehouse                                                                                           0.10

Sells kitchen, bath, plumbing, and paints through 14 stores in Ohio.

                                                                                                                                   

Home Base                                                                                                                 0.27

DIY home improvement with 84 Stores in the Western U.S.

                                                                                               

Lowe’s Companies Inc                                                                                               4.55

Second largest DIY Retailer with 484 stores mostly in Eastern U.S.

                                                                                               

National Home Centers                                                                                             0.72

Retail home improvement with 8 stores in Arkansas.

                                                                                               

Payless Cashways, Inc .                                                                                                0.24

Sells building materials through 154 stores located in Western U.S.

 

Sears Hardware Stores                                                                                               1.84

84 Specialty home Improvement stores which fall under the Sears, Roebuck & Co. name.

                                                                                               

Tractor Supply Company                                                                                            1.08

Retail farm store chain with 243 stores.

                                                                                               

Wickes Inc.                                                                                                                   1.66

Sells mostly wood for home improvement through its 101 stores.

                                                                                               

Wolohan Lumber Company                                                                                          0.70

Sells lumber and building materials through its 56 stores.

                                                                                                                                               

            The Stock Price divided by Book Value is often used as an indicator of a company’s

financial strength. The higher the value, the more financially sound the company is considered.

In the case of Home Depot, we can see that this indicator is 2.5 times higher than that of its

nearest competitor Lowe’s, and over 10 times higher than most of the remaining companies. The

reason for this lies in the fact that Home Depot is financially sound. Apart from having well-

structured debt, Home Depot has $170 million available in cash and short-term investments.

Home Depot’s consistent growth and strong profits have also made the stock a favorite among

the S&P 500 listings.

[1] www.Home Depot.com

[2] The Economist: Pocket International Business Terms.

 

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