Home Depot Essay

It is not common for an enterprise to rise from the level of start-up to market domination in less than 3 decades, but Home Depot has this special distinction. With annual sales in excess of $80 billion from over 2 thousand retail stores (A Portrait of Growth, 2007) this remarkable corporation did not even exist until 1978. This stunning growth, which has an impressive record of profitability as well, has been largely achieved in North America, during the less than dynamic times of the last quadrant of the 20th century. The Home Depot success story is not in mere commercial or financial terms alone, but is also a powerful symbol of the spirit of free enterprise: the company was founded by a team of just 2 entrepreneurs, and has made deep inroads in all the communities it serves (Roush, 1999). This document combines both internal and external views and accounts of the functional histories and accomplishments of Home Depot, and concludes with observations about the possible future prospects of the corporation in the global markets which have begun to unfold. Company Analysis Home Depot has been built on a triad of platforms, which can be used to analyze its performance in qualitative terms (A Portrait of Growth, 2007). The first of these planks has been to build on a core business, which the company has executed with finesse and with impressive results. The corporate brand has become virtually synonymous with all do-it-yourself and do-it-for-me home improvement activities in the United States. The company is present in all 50 States, and has a comprehensive package of products and services for all categories of individual home owners. The company brand is an assurance of quality and value-for-money for an entire generation of U. S. citizens. Easily accessible customer advice (Roush, 1999). and strong cultural roots in the multi-racial values of modern America are inextricably linked with all phases of company operations. A second dimension of Home Depot has been to extend business (A Portrait of Growth, 2007). The management has been relatively conservative in this respect, adding wholesale and electronic business lines, but without the kind of aggressive expansion that was a hall-mark of its early years of store expansion. Indeed, it is also interested to dispose off its wholesale business. It is possible to think of many extensions of the original home improvement business in a retail format, which the company seems to have ignored. However, business extension remains a key stated aim of Home Depot. The third plank of Home Depot is to enter new markets (A Portrait of Growth, 2007). Implementation, being restricted to Canada, Mexico, and China, has been poor. Russia, India, the European Union, Brazil, the Middle East, and South Africa, are some of the potential markets which Home Depot has ignored. There seems to be no systematic effort to exploit the Internet and establish a strong global presence, as many other U. S. based corporations have done. The overall qualitative company analysis of Home Depot shows excellence in and focus on growing the core business, with limited forays in diversification, and weak attempts to extend the business to all available markets. Quantified company analysis leads to the same conclusion: Home Depot yields high short-term cash, but seems to be low on initiatives for new investment. 2005 Gross Profit, at over $27 billion, is more than a third of sales revenue. This is quite extraordinary for a business without proprietary products or technology. It reflects the success of the company’s basic philosophy of achieving economies of scale (Roush, 1999). The 2005 achievement is no ‘flash in the pan’ for the company has an impressive record of 5 years of operating margin expansion. Long term debt is less than 10% of equity, indicating some possible diffidence of company management about future prospects. It does not augur well for investors who look for superior growth opportunities. The 2005 Quick Ration is below 0. indicating efficiency in purchasing and logistics, with due leverage of its commanding market share and brand strength. It is clear that Home Depot is a successful and profitable enterprise, though it is inadequately geared to exploit new opportunities and emergent market trends. The company’s financials and business structure indicate that it may have already crested its best years, especially with respect to the limitations to further growth in North America. Segregated accounts for operations in China are not available in the public domain, but it appears that the company has not matched its historical success in a new continent. The entrepreneurial origins of Home Depot may not be entirely relevant for the professionalism demanded by a global market environment. Economics High volumes at low prices are at the heart of the business model (Roush, 1999). The network of over 2 thousand retail stores, with national spread in the United States, and enviable brand equity, combine to attract a plethora of suppliers with apparent deep discounts for the company’s endorsement. The economics of Home Depot act as an entry barrier, preventing regional competitors from attacking its market share. High cash generation puts Home Depot in a formidable bargaining position, and with the power to sustain predatory pricing offers. The Home Depot economic model has deeper roots in people than in numbers! Decades of intensive training and close interaction between the founders and front-line employees (Roush, 1999) make the company’s stores more than mere warehouses of branded goods. Home Depot emphasizes customer education, which attracts middle-class first time home buyers in sustained and large numbers. The company has carved a large segment in the U.  S. market with such deep footprints that they are almost impossible for newcomers to erase. Accounting Home Depot is listed on the New York Stock Exchange (Home Depot Inc, 2007). It has met all reporting and disclosure requirements without any exceptions on record. Auditor comments on its financial statements show adequate compliance with statutory accounting standards. It is apparent that the company has an adequate accounting system, which is able to capture details of millions of transactions in reliable manner. Though the Management Information Systems of Home Depot are not in the public domain, it is possible to observe that even statutory treasury functions are advantageous for the company. The control of such a large number of sales items spread trans-nationally over such a large number of locations, would itself serve as an entry barrier for a new entrant. The company must excel in systems development, even if some parts are outsourced, to account correctly for such a large number of daily transactions. The Home Depot accounting system is therefore a significant non-financial asset of the corporation. Such systems have large future profit potentials if the company diversifies and enters new markets. Finance Earnings have grown by more than 20% for 4 consecutive years (A Portrait of Growth, 2007). Cash generation exceeds $7 billion. Total assets are about $44 billion. The equity base is stable at just over 2 billion shares, but long term debt is just 9. 9% of equity. The company is amazingly liquid for a business, which on paper should be most vulnerable to the vagaries of customer demand. The Current Ratio is just 1. 7, which is remarkable for so many items on sale across more than 2 thousand depots. Return on Investment in 18. 31, which exceed expected performance for a business without patents and proprietary technologies. Home Depot has a sterling financial performance, and is extremely sound by all financial yardsticks. However, the equity is not adequately leveraged. It appears that the management does not have new ideas about the future, though the business segment in which it operates is full of technological, economic, spatial, and demographic changes. Even the Current and Quick ratios, while admirable from an accountant’s perspective, may be questioned in terms of inventories of scare materials such as wood. Overall, finance has opportunities to excel as a function when a company grows aggressively, makes ambitious expansion plans, and deals in multiple currencies. The financial waters of Home Depot are placid! Marketing The Finance function of Home Depot may be a quiet place, but Marketing is a dynamic function for the company! Excellence in customer service is a founding value of the company (Roush, 1999). Much of this is achieved through intensive training programs, and by innovation in store design. It is hard to match the incomparable product and service combination of Home Depot and it is apparent that the company has a strong understanding of middle-class Americans as a customer segment. All home improvement needs can be met at the company’s stores, and customers have come to rely on the company’s pricing for a wide variety of tools and fixtures. The company brand enjoys top-of-the-mind recall, and has strong associations with the generic product category of retail home improvement. The do-it-yourself product category is very large in most sections of U. S. society, so Home Depot has a durable line of revenue by dominating this market. The business calls for deep understanding of the multi-faceted needs of home owners, and Home Depot has nurtured a special bonding with typical customers ever since its inception. The brand loyalty is extremely strong and has not been broken by any competitor as yet. The company has such a strong hold on the market that new manufacturers of appliances, fittings, and surfaces, are forced to enter the market through Home Depot stores. Customer education is a key consideration at Home Depot (Roush, 1999). This serves to protect the company’s market shares for even the most generic product lines, because no one else matches the information needs of new home owners, or older ones who encounter new problems in their properties. Since the company also offers favorable pricing, customers have little motivation to switch loyalties. Repeat custom is ensured through universal customer satisfaction. There is also plenty of space devoted to do-it-for-me market segments, which combines well with the wholesale business (now on the block for sale) to bring in valuable endorsements from experts in the professional home repair and redecoration businesses. Customers routinely visit Home Depot without any specific product in mind, or even without fully knowing what exactly they need to buy. The friendly advice which is easily and freely available at Home Depot serves to hook customers and has them returning for all home improvement needs. The service also serves to expand the overall market for home improvement, encouraging home owners to take on tasks which they may have left unattended or passed on to service providers, were it not for the guidelines forthcoming from the stores of Home Depot. The encouraging ambience in the stores of Home Depot is reinforced by wise and timely mass media communication. By advertising on a NASCAR theme on television (A Portrait of Growth, 2007) the company shows deep appreciation of its typical customer cluster, and their preferences. Home Depot is also an official NFL sponsor, which is most appropriate considering the profile of the typical customer who shops at Home Depot, and who is responsible for the vast majority of home improvement decisions. Home Depot excels in all aspects of Marketing with sharp focus on a targeted segment. The Marketing Mix is a coordinated mix of product and service elements guaranteed to ensure repeat custom and durable brand loyalties. Though Home Depot has not slackened its intensive marketing efforts to this day, the residual effects of the goodwill it has generated can stand it in good stead for years. It is considered to be one of the best retailers in North America by customers, associates, and peers alike. Management The Chief Executive Officer and senior Legal and Human Resources personnel have left the company in the last 3 months ending February 2007 (A Portrait of Growth, 2007). All the vacancies have been filled by internal promotions. Such moves would indicate strong management resistance to proposed changes of basic direction, and a determination to persist with established business patterns. The implications are even clearer for a company such as Home Depot, with strong traditions for developing and depending on people. The possible power struggle may have left significant sections of the remaining staff in turmoil, and perhaps now actively searching for alternate jobs. The former Chief Executive Officer is bound by a year’s no-compete clause, and cannot solicit employees to leave and join in his other ventures for the next few years: such clauses in separation contracts also suggest that many people in Home Depot may want to search for alternate jobs as soon as they have options. There is no merit in this matter as far as Home Depot’s future prospects are concerned. There is worse conflict with a major share-holder as well, over strategic direction (A Portrait of Growth, 2007). The share-holder entity, which is professionally managed, has merely asked for an independent strategy review, which is not something against the best interests of Home Depot. However, the Board has decided to oppose the constructive resolution. Reviews by outsiders are never binding on clients, so the management’s intransigence in this matter leaves room for doubt about cohesion at the top of the hierarchy. It is apparent that the company is divided between proponents of change, and a powerful group which favors the status-quo-ante. Though Home Depot has a spectacular performance record, it is true that the 21st century global market is quite different from domestic USA towards the end of the last millennium. New demographic segments of the wealthy, and of some immigrants, have emerged even within the strong hold of the home market, so a recasting of strategy seems in order, even if such an exercise were to conclude that the company is already on the right course. Hands on Human Resources Management, with emphasis on training (Roush, 1999) formed the template of the early success of Home Depot. However, a modern corporation cannot survive on breakfast meetings between employees and founders alone! Diversity concerns have certainly altered the composition of the work force, so new ways of managing people and deploying resources are inevitable. The present Home Depot management may have become prisoners of past achievement, preferring to stay with a course which may not be appropriate any longer. While internal promotions are creditable to a certain extent, Boards also need infusion of new perspectives from other successful companies. By filling all the recent vacancies internally, Home Depot may have deprived itself of valuable perspectives from the street. The company’s close association with middle-class America may become a limitation as it is forced to engage with unfamiliar markets and new customer types. Overall, serious discontinuities are evident in the highest echelons of Home Depot.