In assessing the competitive position of a home improvement retailer, we would use the five forces analysis of Michael E. Porter. The assessment would compare Home Depot as home improvement retail against its retail competitors.
Strategic Analysis
External Analysis
Industry Analysis: 5 Forces Model
In assessing the competitive position of a home improvement retailer, we would use the five forces analysis of Michael E. Porter. The assessment would compare Home Depot as home improvement retail against its retail competitors.
Potential Entrants
The retail building supply served two distinct clients which are the professional building contractor and the Do-It-Yourself homeowner.
The industry did not have barriers to entry in the form of patents or special technology. But the BIY segment was moving rapidly one characterized by small, independently run establishments to one dominated by regional and national chains of vast superstores. So there are a few regional or national chains in this industry but they operated a lot of stores in their chain. This can make its chains have more competitive advantage comparing to the independent one. The examples of competitive advantage are brand image, lower cost, a lot of stores, a wide range of products and service, and have more skill. If the newcomer enters into this industry, it has to invest much money to compete with the existing retail chains in every aspect. So the beginner should not enter into BIY segment.
Not only focused on the BIY segment, but the superstore warehouses also tried to serve all market segments, but they had become increasingly consumer-oriented. Because of this, smaller competitors were focusing their strategies on the professional constructor segment of the market. So the newcomer can enter into this segment easier than entering to the BIY segment. But the new entrant has to build its brand image which is the important factor to persuade the customer to buy its product. Building brand image is difficult. Moreover, it has to find a lot of vendors to supply product and service. Most vendors have already signed contract with the existing retailer, so it is difficult to seek for the qualified vendors. So the potential entrants both in BIY homeowner and professional buildings contractor were low.
Industry Competitors
According to 2 segments in the retail building supply industry, the competitors in each segment are different.
For the BIY homeowner, the major competitor of Home Depot is Lowe's, which had been replacing its older, smaller stores with new superstores. Lowe's operated 442 stores and had recently moved into large metropolitan areas. Lowe's had developed regional distribution centers to better serve its growing markets. Its sales were estimated about $11,900 million in 1998. Both Lowe's sales and number of stores were far away from Home Depot's who was the number one of number of stores, sales in dollars, and net profit in dollars. Besides Lowe's, there are small independent retailers located elsewhere in the United States.
A lot of retail chains were focused on the professional contractor market segment which is HomeBase, BMC, Hughes Supply and Woloham Lumber. HomeBase who write off $27 million to cover store closings was changing its strategy from defensive to a more aggressive stance such as accelerating store remodel program. BMC had over 50 stores in 10 western states. Hughes Supply, the second biggest competitors of Home Depot, operated 310 stores whereas Woloham Lumber had 58 stores which generated $410 million in sales.
The Home Depot's competitors were far away from Home Depot, the number one in retailer in building supply industry, in every aspects both in number of stores, sales in dollars, market share, and so on. As per Home Depot's aggressive expansion program, it affected lower same store sales in short run, but a strategic advantage was created by raising the barrier of entry to newcomer and the retail chain competitors. Pricing strategy is the factor which every players in the industry try to compete. This is because customers have less brand loyalty. So the customer will purchase the product from the retailer who set lower price. Moreover, service is another issue that retailers attempt to do for differentiate themselves. So we can conclude that industry competition was intense.
Bargaining Power of Buyers
Homeowners are the consumers of this industry. The customers in this segment have high school diploma or some collage. They did not have well education consequence their income did not high. So the purchasing power was quite low. Although the low purchasing power, the BIY consumer had grown in importance over the past few years. Therefore, this market was interesting. Home Depot had to set low price and sell various products and service to persuade its customer to visit its store. So that customers had high bargaining power in this segment.
The professional contractor customers are remodelers, carpenters, plumbers, electricians, building maintenance professionals, and designers. This group of customers is less loyalty and more demanding than the BIY customers. The company has to add the incremental value into its product and service to increase sales and expanding commercial credit programs, delivery services, and incremental dedicated staff. Moreover, the pricing strategy using for this group should be lower price. Hence, the bargaining power of the professional contractor customers is also the same as the BIY customer which is quite high.
Bargaining Power of Suppliers
There are a lot of suppliers in the industry and everyone can enter into the market. This is because of no regulation and barrier to entry. Each supplier has no bargaining power. Moreover, some suppliers had taken over by its customers whereas some had signed contract with the well known one. Thus bargaining power of suppliers was low.
Threats of Substitutes
The substitutes for Home Depot and other competitors are the department store and discount store such as Zear, Wal-mart etc. The strengths of the department stores are located in the country and have various products to sell in the same building. So department store is one-stop-shopping and the customers can visit every time they preferred. Although the department store and discount store are located nearer than warehouse, home improvement retailers have a wider range of home product selection comparing to the department store or discount store. Moreover, the home improvement retailer's price is lower than the shopping store in the country. This is because it sells high volume; hence the company ordered a big lot. So the pricing will low and the retailer can set the lower price. The weakness of the home improvement retailer is the location which far away from the country. So customer can faced a problem about transportation. The retailer can solve this problem by offering delivery service. Therefore threats of substitutes were high.
Conclusion
After analyzing the retail home improvement industry, we can conclude that the degree of competitive intensity was in the moderate level. This is because suppliers have low bargaining power, low threat of substitute product, and low potential entrant. But the customers have high bargaining power and competitors in this industry are always tried to compete with other by using pricing strategy. The company who want to be successful in this industry should have many stores located elsewhere, better customer service, and set the lower price.
Competitors Analysis
In retail building supply industry, there were 2 main segments which is professional business segment, and Do It Yourself (DIY) segment. The sales value of the professional segment was approximately $215 billion and Home Depot's share of this market was less than 4% or about $8 billion, and in DIY segment Home Depot was a leader in this market, it had approximately 24% market share of $100 billion or $24 billion in 1997.
Home Depot's competitors could be divided into 2 groups.
. Direct competitor
Direct competitors were the companies that sold their products to both the professional building contractor and the DIY homeowner. The direct competitors of each segment can be explained as follow:
The Professional Business Segment
The professional business segment consists of contractors, tradesmen, repair and remodeling, maintenance, and heavy industrial. But Home Depot did not focus on heavy industrial sector, which valued $50 billion in 1997. The customers in the professional market shopped in Home Depot stores, but they also made purchases at other retail and wholesale outlet.
Do-It-Yourself (DIY) Segment
The DIY market breaks into six market segments: (1) lumber and building materials, (2) lawn and garden, (3) plumbing and electrical, (4) hardware and tools, (5) paint and supplies, and (6) hard surface flooring. Home Depot was the number one position in the DIY industry, more than twice it nearest competitor, Lowe's Companies from the North Carolina. Other companies in the industry were facing the challenge by reconfiguring their stores and by targeting niche segments, but some were being forced to close stores in the face of increased competition.
Home Depot direct competitors were:
Competitor
Strengths
Present strategy
Lowe's
• Locate in metropolitan area
• Covered stores in US.
• Has effective region distribution centers
• Strong promotions such as gift-card and seasonal discount
• Focus in DIY segment
• Concentrate in services to support Customers' satisfaction
BMC
• Over 50 stores located in 11 states
• Use IT support Technology to searching, finding, and specifying products
• Has relations with many contractors
• Focus in Professional/Contractor market segment
Hughes Supply
• Over 350,000 products are offered 500 stores in 38 states
• Low turn over employees
• Focus in Professional/Contractor market segment
• Growth strategy and expand market
• Emphasize in customer service
Wolohan Lumber
• 23 Stores in 4 states
• Has many packages of products to support customers' need
• Focus in Professional/Contractor market segment
Eagle Hardware& Garden
• Locate in Seattle, Washington
• 24 Hr services
• Large store area
• Has demonstration of home improvement techniques
• Focus in DIY segment
• Growth Strategy
Payless Cashways
• Locate in Iowa Lawrence, Kansas
• Video demonstration
• Multiple customer service centers
• Focus in DIY segment
2.
Indirect competitor
Home Depot, Inc had some indirect competitors, which were companies, maker, workers, contractors, carpenters, and artisans, who made of hand-made and built-in furniture. Most hand-made and built-in furniture were high price and had to take a long time to make them. So they were supported only niche market, which was not high market value and may be served only narrowly rich people.
Customer Analysis
Customer Trends
The home improvement industry benefits from a huge age demographic as the baby boomers begin to retire and generation Y starts purchasing homes. Together these two generations account for 120 million potential customers. Not only does these generation account for so many people, but they are the vast majority of people who own homes.
One of the main drivers behind the home improvement trend is the increasing number of people owning their own homes. The percentage of people owning homes is estimated at 68.6%, the highest rate in history, and has been steadily rising. This means that there are more people now than ever who are prime targets for the home improvement retailers. 2004 is supposed to be a record year for home sales with an estimated 7.28 million sales, and new housing starts are supposed to exceed 2003's record number of 1.85 million.
The market is fueled even more by historically low mortgage rates. People are locking into low interest rates through home refinancing which also put money back in their pockets to spend on fixing up their homes.
Segmentation
Customers in the home improvement industry can be roughly segmented into 2 major segments which are individual customers and professional business customers.
Individual customer:
Individual customers are those who buy the home improvement products for their own homes. They can be both do-it-yourself (DIY) customers, who buy the products and complete them by themselves, and buy-it-yourself (BIY) customers, who choose products, make the purchase, and contracted with others to complete the project or install the furnishings. We can further segment the individual customers into the subgroups by using demographic factors as follows:
Age
? Below 25 years
Most customers in this age group are living with their parents. They haven't had their own homes since they are still studying or just beginning their first jobs and haven't married yet. They don't have enough money and have no reason to be the homeowners. So they are not the target group of the home improvement business.
? Between 25-35 years
Members in this group are working. Most of them are in generation Y. They have their own income ant tend to collect their money and seek for security ...
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Age
? Below 25 years
Most customers in this age group are living with their parents. They haven't had their own homes since they are still studying or just beginning their first jobs and haven't married yet. They don't have enough money and have no reason to be the homeowners. So they are not the target group of the home improvement business.
? Between 25-35 years
Members in this group are working. Most of them are in generation Y. They have their own income ant tend to collect their money and seek for security in their life. Most of their times will be working and less time for relaxing. Most of them will begin to live separately from their parents or have their own family. They tend to purchase their first owned homes so they are the main target group of home improvement business.
? Between 36-55 years
This group of customers will have their own families. Most of them are in the baby boomers and will have their children so they may have a plan to modify or improve their homes or look for new houses to be suitable with the bigger family. Therefore they are another interested group for home improvement business both in do-it-yourself (DIY) and buy-it-yourself (BIY) business.
? Over 55 years
Most customers in this group had retired from their jobs. They spent most of their times at home. Therefore they usually had more times to take care of their homes such as lawn and gardening etc. Also, it is seen by the huge buy-it-yourself (BIY) market, which accommodates to these homeowners who are too busy or too old to do it themselves.
Professional Business Customers:
Professional business customers can be segmented according to nature of business i.e. builder and general contractors, heavy industrial, property maintenance, repair & remodeling, and tradesmen. Each group usually requires different type of home improvement products. Thus the companies that want to sell to these markets have to know the specific needs of each group so they can serve them more effectively.
Target Customers
After customer segmentation, we recommend Home Depot to continuously target on their individual customers especially in do-it-yourself (DIY) and buy-it-yourself (BIY). The main target group is customers in the age range of 25-35 years since they have higher chance than other groups to purchase home improvement products. The customer profile of this target group is as follows:
? Age between 25 to 35
? Male
? Married
? Median Income
? Homeowners
Apart from this group, we recommend Home Depot to target people in the age 36 and over as their secondary target market too since they also have a great potential to buy a lot of home improvement products especially people in the retirement period because they had more free times than other groups and tend to spend their times on taking care of their homes.
For professional business customers, Home depot currently target on heavy industrial market since their current product lines had not covered other professional business groups. Thus we recommend Home Depot to extend its product lines to place their focus more on the professional business customers although these businesses will highly volatile with economic change, but there are the high growth potential in these markets.
Customer Motivation
The important factors that motivate customers to buy home improvement product can be defined after analyzing customer demands and competitive strategies which reveals in the following industry key success factors.
Demand
Competition
KSFs
. One-stop shopping
. Super store concept
. Wide Product Line
2. Low Price
2. Price based
2. Economy of scale /
Cost efficiency
3. Convenient location
3. Fragmented market, many local competitors
3. Ability to expand by acquisition and new store opening
4. Excellent customer service
4. Provide quality customer care
4. Educated and trained sales force
Customer Structure and Future Goals
Revenue Structure
At present, major revenue of Home Depot came from retail business market especially do-it-yourself (DIY) market whereas the proportion of the professional business market is accounted for only 4 percent. It showed that Home Depot was overemphasizing in the retail or individual customer market.
Future Goals
Home Depot had expanded very rapidly in the past decade. It opened a lot of its new stores throughout the United Stated and also expanded its operations in other nearby countries such as Canada etc. Home Depot had a plan to expand into the professional business market which estimated to be $215 billion in 1997 which Home Depot had less than 4 percent of the shares in this sector.
Driving Forces Analysis
Demographic Environment
Population:
In the mid of year 2002, total U.S. population was 287,973,924 people which grew around 1 percent from previous year. The male population was 141,533,390 people and the female population was 146,440,534 people.
Age distribution:
Age distribution structure of U.S. population was the following:
Age Range
Year
2002
2001
2000
Under 5 years
9,575,536
9,363,867
9,212,312
5 to 13 years
36,951,809
37,058,591
37,037,950
4 to 17 years
6,319,429
6,181,094
6,092,356
8 to 24 years
28,460,518
27,918,979
27,311,145
25 to 44 years
84,461,957
84,733,191
84,963,775
45 to 64 years
66,597,134
64,500,373
62,479,071
65 years and over
35,607,541
35,337,718
35,081,145
Total
287,973,924
285,093,813
282,177,754
From above table, people in the age range of 25 to 44 years were the biggest group in U.S. which was 84,461,957 people or around 29 percent of the whole U.S. population. Next were the people in the age range of 45 to 64 years, 5 to 13 years, and 65 years and over, 18 to 24 years, fewer than 5 years, and 14 to 17 years respectively.
The rate of home ownership in the United States continued to grow as first-time buyers entered the housing market at a rapid pace and baby-boomers moved in force to more expensive homes and second homes. In addition, studies showed that the average age of existing homes continued to increase, and people were staying in their homes later in life. All of these trends enhanced businesses in this industry's opportunities to play in this business.
Income:
U.S. Per capita money income was declined by 1.8 percent, to $22,794, for the overall population between 2001 and 2002. This is the first annual decline in overall per capita income since 1991.
The median household money income in the United States was $42,409, representing a 1.1 percent real decline from its 2001 level of $42,900. The mainly declining was experienced by households in metropolitan areas. Both family and non-family households also experienced declines in money income. In contrast, both men and women who were full-time, year-round workers in 2002 experienced increases in their median earnings.
The increasing of median earning in 2002 will have an impact on the home improvement retailers too because people that have residual income will spend some to improve their home. This is a good sign for this industry.
Socio-cultural Environment
Buying Behavior of customers has changed
Since the world has turned to the digital age, people in the world tend to use to the customer-oriented in every business. This trend brings in the superstores that gather all things to all people. At present, there are many kinds of superstore, such as superstores for food, furniture, Athlete shoes, etc., to support the customer needs and convenience. As a result, the growth of superstore force the small retail store out of the market, because customers want to go to the place that can offer them with full lines of product to save their time and resources.
Professional Business Segment is growing
As explained above, people tend to use to the customer-oriented in every business, leads to the growing in 2 market segments; Do-it-Yourself/ Buy-it-Yourself and the professional business segment. The professional business segment has many opportunities to grow its presence in the pro market that fit within the company's core business. This segment may serve the Buy-it-Yourself customers as a unit that help BIY customers to install home improvement stuff at their home and sometimes help them design and give recommendation to the BIY customers.
From these 2 changes in socio-cultural environment, the home improvement retailers is now having a good opportunities to serve customer needs and expand their markets to both Do-it-Yourself/ Buy-it Yourself and the professional Business Segment. However, the businesses in this industry have to compete aggressively and create differentiation in their business to keep customers with the company.
Economic Environment
Gross Domestic Product (GDP):
Gross Domestic Product or GDP of U.S. was 10,487 billions of current dollars which increased by 3.5 percent from the previous year.
Interest Rate:
U.S. Fed Funds rate or the interest rate at which banks lend to each other overnight as such a market interest rate in year 2002 was 1.25 percent which consecutively declined from over the past several years and was the lowest in the past 41 years.
Inflation Rate
Inflation rate of U.S. which measured by the Consumer Price Index has remained below 5% annually since 1991. By which the Producer Price Index (PPI), which measures the change in the average selling prices of goods entering the market for the first time that is not sold directly to consumers and tends to be a leading indicator of inflation, was 3.8 percent.
Whereas the Consumer Price Index (CPI), commonly referred to as the inflation rate, is a measure of the average change in prices paid by consumers for a fixed market basket of goods and services, was 2.4 percent.
Although both price index had increased from the previous year but it had remained low when compared with over the past 20 years.
Unemployment Rate
The U.S. Unemployment Rate was around 6 percent which was the highest since April 1994.
Foreign exchange
U.S. Dollar was depreciated when compared with other major currencies in the world especially in Euro Dollar. The economic situation was not recovered since the world economic crisis in 1997.
Overall of the economic environment for United States is good for the Home Improvement Retailer Industry. Since the GDP is growing, the interest rate is quite low, and inflation rate is not too high. However, the unemployment rate is quite high and may impact to the per capita income in the future. If the unemployment rate is not better but get worst in the future, the sales revenue of the Home Improvement Retailer Business may be impacted.
Political & Legal
The industry did not have barriers to entry in the form of patents or special technology, leads to the low barrier to entry in this market. However, social are now paying more attention to deforestation issue and the impact on the community. These 2 factors may leads to high cost of operation.
Internal Analysis
Value Chain Analysis
Primary Value Chain Activities
• Inbound Logistics
The Home Depot, Inc sold various types of products and the company stocked approximately 40,000 - 50,000 different kinds of building materials, home improvement products, and lawn and garden supplies. Merchandising and inventory were centrally organized, product mix varied slightly from store to store. So store has to manage its inventory. In 1987, the company introduced an advancement inventory management system that allowed it to increase inventory turnover from 4.1 in 1985 to 5.7 in 1994. This led Home Depot, Inc carry $40 million less in inventory, tying up less working capital to finance it. This efficiency allowed a cost structure that was significantly lower than the competition's. Moreover, the company continued to see greater efficiency as a result of its Electronic Data Interchange (EDI) program. Now, there are over 400 of the company's highest volume vendors were participating in the EDI program.
Moreover, the company constructed a new Import Distribution Center (IDC) which had 1.4-million-square-foot and was staffed with about 600 associates. The IDC enable the company to directly import products not currently available to customers or offer products currently sourced domestically from third-party importers.
• Operations
Operational efficiency had been a crucial part of achieving low prices while still offering a high level of customer service. The company was assessing and upgrading its information to support its growth, reduce and control costs, and enable better decision making. Due to Home Depot, Inc attitude of complete customer satisfaction, the company constantly seeks ways to improve customer service. When the company was faced with clogged aisles, endless checkout lines, and too few salespeople, it sought creative ways to improve customer service. Workers were added to the sales floor and installed the computerized checkout systems. By fiscal year 1994, each store was equipped with a computerized point-of-sale system (POS) electronic bar code scanning systems, and a minicomputer. This provided efficient customer checkout with approximately 90% scanable products, store-based inventory management, rapid order replenishment, labor planning support, and item movement information. In addition, customer can pay via charge card which can reduce process time to less than 30 seconds.
The contribution of Home Depot product group was as follow,
1. Plumbing, heating, lighting, and electrical supplies 27.1%
2. Building materials, lumber, floor, and wall coverings 34.2%
3. Hardware and tools 13.5%
4. Season and specialty items 14.8%
5. Paint and others 10.4%
The percentage of product group varied from store to store. However, each supported the Home Depot look: warehouse style shelves, wide concrete-floored aisles, end-displays pushing sales items, and the ever-present orange banners indicating the store's departments. Most stores had banners on each aisle to help customers locate what they are looking for.
• Outbound Logistics
From the year-end 1989 to 1994, The Home Depot increased its store count by an average of 24% per year. At the close of fiscal year 1997, the company operated 624 full-service, warehouse-styled stores by itself. The stores can be divided into 4 types of store which were 555 retail stores in 44 states and 5 EXPO Design Center stores in the United Stated, plus 32 retail stores in four Canadian provinces. Two thirds of the new stores in fiscal 1997 were in existing markets. The company continues to add stores to even its most mature markets to further penetrate and increase its presence in the market.
The company planed to add new stores at a 21 to 22% annual growth rate, which would increase stores from 624 in 1997 to 1,300 stores in 2001. Not only Home Depot focused on the current market, but the company also planned to enter new markets such as Alaska, Ohio, Wisconsin, Chile, Puerto Rico etc.
By nature of the business, customers will walk into its stores. Therefore, retail outlet should located in everywhere that customer could easily visit.
When customers visit Home Depot, some buy products and carry it by themselves. Other has to rent vehicle for carry it. So the location is an important factor where customer selects the place to buy home equipment. This problem disappeared when the company owned Load 'N GoTM, an exclusive rental truck service for its customers.
•
Marketing and Sales
The company maintained an aggressive campaign, using various media for both price and institutional policy. Print advertising, usually emphasizing price, was prepared by an in-house staff to control context, layout, media placement, and cost. Broadcast media advertisements were generally institutional and promoted Home Depot, Inc "the company", not just pricing strategy. The advertisements focused on the "You'll feel right at home" and "Everyday Low Pricing" ad slogans. The company still relied heavily on print media.
By the year-end 1996, the company acquired Maintenance Warehouse/America Corporation, which was the leading direct mail marketer of maintenance, repair, and operating products to the United Stated building and facilities in management market. This acquisition made the company strong in the field of advertisement. For example, all of stores offered hands-on workshops on projects and activities in which customers in a particular locality had expressed interest. Promotion of the workshops was done through direct mail advertising and in-store promotion.
Moreover, Home Depot be a good citizen by sponsoring the 1996 U.S. Summer Olympic Games in Atlanta and planned to remain a sponsor for at least the next six years for the Olympics Games. The company also acted as a sponsored for the 1998 Winter Olympic Games.
• Service
Customer service differentiated Home Depot from its competitors. The highly qualified and helpful employees, professional clinics, and in-store displays had developed into a customer service approach referred to as "customer cultivation". It has DIY customers the support and confidence that no home project was beyond their capabilities with Home Depot personnel close at hand. Home Depot, Inc's employees went beyond simply recommending appropriate products, tools, and materials. Sales personnel cultivated the customers by demonstrating methods and techniques of performing a job safely and efficiently.
As per 10-year compound growth rate, Home Depot's weighted average sales per square foot increased from $1.00 to $4.40. So we can infer that there are a lot of customers visits Home Depot. The company faced a lot of problem about services, therefore management tried to solve the problem starting with introduction of full-service, in-store interior decorating centers staffed by designers and an expanded assortment in its lighting department in 1991.
In fiscal year 1993, the company introduced Depot diners which were an extension of the company's commitment to total customer satisfaction and was designed to provide customers and employees with a convenience place to eat. Next, it introduced phone centers to serve its customers who called to inquire about pricing and availability of merchandise. Home Depot also responded to the demographics of certain markets by expanding its service hours to 24 hours a day in 15 stores location.
Moreover, the company authorized approximately 3,500 installed sales vendors who, as independent licensed contractors, provide services to customers. This program targeted the BIY customer, who would purchase a product but did not have the desire or ability to install it.
Support Activities
• Procurement
Merchandising included all activities involved in the buying and selling of goods for a profit. It involved long-range planning to ensure that the right merchandise was available at the right place, at the right time, in the right quantity, and at the right price. As per a wide variety of Home Depot's product, the company conducted business with approximately 5,700 vendors, the majority of which were manufacturers. There is no single vendor accounted for more than 5% of total purchases.
Not only Home Depot had many vendors, but the company also acquired some of its vendors such as National Blind & Wallpaper Factory and Habitat Wallpaper & Blinds stores. The integration of this company made Home Depot the capability to handle wallpaper and window covering special orders in a more efficient, cost effective, and convenient manner for customers.
In addition, the company also developed innovative merchandising programs that help to grow the business further.
• Technology Development
Refer to 1998 Home Depot's Balance Sheet, the company invested approximately 10% in Furniture, fixtures, and equipment. Home Depot invested a lot of technology to serve its customers. The company spent a lot of money on equipment such as using Universal Product Code (UPC) scanning systems to speed checkout time, developed and test a new store productivity improvement (SPI) program designed to make more effective use of existing and new store space and to allow for rapid replenishment of merchandise on the sales floor. The SPI program involved the renovation of portions of certain existing stores and an improved design for new stores with goal of enhanced customer access, reducing customer shopping tine, and streamlining merchandise stocking and delivery. Moreover, the company introduced a number of merchandising programs during fiscal 1991, and installed sales program targeted the BIY customer in the next year.
After that, the company equipped a computerized point-of-sale system (POS), electronic bar code scanning systems, a minicomputer, and introduced along with new check approval systems and a new receipt format to expedite credit care transactions.
The company applied Electronic Data Interchange (EDI) program. A paperless system, EDI electronically processed orders from stores to vendors, alerted the store when the merchandise was to arrive, and transmitted vendor invoice data. Then, company used Electronic Article Surveillance (EAS) detectors, which triggered an alarm if a person exited the store with merchandise that had been affixed with an EAS label that had not been desensitized at the cash register.
Besides introducing the technology, Home Depot also operated its own television network (HDTV). This device allowed Home Depot's top executives to get instant feedback from local managers and also allowed training and communication programs to be viewed in the stores.
• Human Resource Management
Home Depot emphasized on Human Resource Management because it is an important factor that made the company success in its operations.
The organization was divided into seven divisions:
. Southeast Division
2. Western Division
3. Northeast Division
4. Midwest Division
5. Home Depot Canada Division
6. Southwest Division
7. EXPO Design Centers
Each division was headed by a President, who was supported by Vice Presidents of Merchandising and Store Operations. Under each Vice President in a division was a group of regional managers responsible for a number of stores. At the store level, there are Manager, Assistant Managers, and Department Managers.
Employee population varied greatly among stores, depending on store size, sales volume, and the season of the year. Full-time employees filled approximately 90% of the positions. The company employed approximately 125,000 associates, of whom about 7,900 were salaried, and the remainders of the employees were paid on an hourly basis.
The company attempted to provide excellent wages and benefits, superior training and advancement opportunities, and using Employee Stock Ownership Program (ESOP) while encouraging independent thinking and initiative.
Home Depot's ownership provided Home Depot with greater operational control and flexibility, generally lower occupancy loss, and certain other economic advantages. The company augmented that concept with a corporate culture that valued decentralized management and decision making, entrepreneurial innovation and risk taking, and high levels of employee commitment and enthusiasm. So Managers within individual stores made decisions regarding their employees, such as firing and hiring, but they looked to headquarters in areas such as training.
Organization's culture is called "orange-blooded" culture which emphasized on individuality, informality, nonconformity, growth, and pride. Some analysts talked about Home Depot's culture. For instant, Merrill Lynch stated that its "entrepreneurial culture and heavy dedication toward customer service, combined with its large merchandise selection, has resulted in a retailer that leads its industry by almost every performance measure".
• Firm infrastructure
Home Depot spent much money to invest in the company's infrastructure that allowed the company to operate its operations including inventory management, payment process system, customer service, and delivery service. This fully service can establish customer satisfaction.
From the above Home Depot's activities, we can analyze that Home Depot operated its retail business well. Not the company only supplied from over 5,700 vendors but it also acquired some businesses which related to the home improvement retail. So the company has high power comparing to vendors. The company developed technology to support employee's work such as inventory management, Electronic Data Interchange (EDI), Store Productivity Improvement (SPI) program etc. Moreover, Home Depot also invested in technology to increase customer satisfaction such as Universal Product Code (UPC) scanning system, charge card. All of technology which Home Depot use can help the company in various field such as inbound logistic, operations, service. For the Outbound logistic and Marketing and sales, the company acquired the other company so that Home Depot had the technology which is not wait it time to establish. In addition, the company can use this technology to serve the existing customer and support its home improvement business too.
Financial Analysis
From financial statement of Home Depot, Inc can be calculating to ratio as follow:
Ratio
Feb 04
2 Feb 03
3 Feb 02
Current Ratio
.39
.48
.59
Quick Ratio
0.45
0.45
0.56
Debt Ratio
34.9%
34.2%
31.5%
Debt/ Equity Ratio
53.69%
51.56%
45.97%
Gross Profit Margin
31.8%
31.1%
30.2%
Net Operating Profit Margin
6.6%
6.3%
5.7%
ROE
2.5%
2.2%
1.5%
Account Receivable Turnover (Days)
41.67
6.2
-
Account Payable Turnover (Days)
65
57.66
-
From financial ratio above shows that Home Depot, Inc may have problem in liquidity in the near future. Due to the liquidity ratio; current ratio and quick ratio, that decrease steadily, as the company has to keep a lot of inventory to support customer needs. If the company cannot find the way to decrease amount of inventory they kept, they may have to face with the cash flow problem.
However, its leverage ratio; debt ratio and debt/ equity ratio show good performance. The company has quite low debt compare with its equity. This will support them if they want to borrow money from bank.
Profitability ratio; gross profit margin, net operating profit margin, and ROE show better performance of the company, as these 2 ratio tend to increase steadily.
Moreover, efficiency ratio; account receivable turnover (days) and account payable turnover (days) support the liquidity ratio that they might have some problem in inventory management. The wider lines of product, the more products they have to keep in their warehouse. This leads to the more cost and more time they have to use to sell these products out of their stocks, also the more cost of money they loss.
In conclusion, Home Depot, Inc has a good performance in creating profit and maintaining their level of debt. However, they have to pay more attention to their liquidity, especially their inventory management. At present, the liquidity problem have already show problem through liquidity ratio and efficiency ratio. If they cannot find out the way to solve this problem soon, they may have to face with a big problem in the near future.
SWOT Analysis
Strengths
Corporation
* Home Depot is the world's largest home improvement retailer, operates 624 full-service, warehouse styled stores - 555 stores in 44 states and 5 EXPO Design Center stores in United States plus 32 in 4 Canadian provinces.
* Corporate culture that valued decentralized management and decision making, entrepreneurial innovation and risk taking, high level of employee commitment and enthusiasm.
Operation
* The stores stocked approximately 40,000-50,000 different kinds of building materials, home improvement products, and lawn and garden supplies.
* Owned 2 wholly owned subsidiaries, maintenance warehouse and National Blind & Wallpaper factory.
* Owned Load 'N Gotm, an exclusive rental truck service for their customers.
* Advance inventory management system, using Universal Product Code (UPC), scanning system to speed of checkout time.
* Satellite data communication network improved management communication and training.
* Test a new store productivity improvement (SPI) program to make more effective use of existing and new store space and to allow for more rapid replenishment of merchandise on the sales floor.
* Have full-service, there are
o In-store interior decorating centers staffed by designers and an expanded assortment in its lighting department.
o EXPO Design Centers which was the extensive use of computer-aided design technology that the store's creative coordination used.
o Enlarged garden center prototype
o Depot Diners to create total customer satisfaction and were designed to provide customers and employees with a convenient place to eat.
o Private label product, "Homer"
o 24 Hour Store
* Offered a selecting of major kitchen appliances. The product line offered was the top of the line.
* Acquired Maintenance Warehouse/ America Corporation, which was the leading direct mail marketer of maintenance, repair, and operating products to the United States building and facilities in management market.
* Using Clustering Strategy, opening two other stores in a single market area, raising the barrier of entry to competitors, reduced over crowding in the existing stores, allowed the company to spread its advertising and distribution costs over a larger store base, and lowering selling, general, and administrative costs.
* Home Depot was able to undercut the competition by as much as 25% was a dependable relationship with its suppliers.
* All of the stores were company-owned, not franchised, and most were freestanding, built to Home Depot's standards.
Weaknesses
* Employee turnover varied from store to store.
* Have to keep a lot of inventory to support customer needs
* Have problem in cash flow. Even Home Depot, Inc can create a lot of profit each year, but it has spent a lot of money to invest in technology and service.
* Liquidity of the company tend to decrease steadily
* Slower in E-commerce compared to many new pure e-retailers.
Opportunities
* Growth due to increasing in demand and consumer spending
* Increasing demand in Buy-it-Yourself
* Do-it-yourself/ Buy-it-yourself can grow to $100 billion in 1997
* Opportunity to grow in professional sector
* E-business model could bring additional revenue stream with minimal cost
Threats
* Slow down of the U.S. Economy
* There are many large major competitors in this market, for example, Lowe's, Eagle Hardware & Garden. This is because the industry did not have barriers to entry in the form of patents or special technology.
* Social concern about environment, force the companies to invest a lot of money for green operation.
* Growing of Internet commerce.
Strategic Formulation
Direction Setting
Vision Statement
Bernard Marcus, the founder, chairman of Home Depot, Inc, envisioned Home Depot, Inc as "a place where they feel good about walking in our doors, feel good about consulting our knowledgeable associates, feel good about paying a low price, and feel good about returning time after time".
Therefore, throughout its more than twenty-year history, Home Depot, Inc was constantly expanding the range of products sold in their stores to follow its founder's vision. But Home Depot, Inc has not focusing more on the first brand in customer's mind. Nowadays, there are many competitors in home improvement retailer business, Home Depot, Inc should be the first place that customers would think about when they want to buy home improvement stuff. So we recommended Home Depot to make a little adjustment on its current vision as "the first place in customers' mind where they feel good about walking in our doors, feel good about consulting our knowledgeable associates, feel good about paying a low price, and feel good about returning time after time"
Mission Statement
Home Depot, Inc did not state it own mission so we recommend that Home Depot, Inc should set its mission as "Being the place that offer customers with the most convenient, reliable, and various products with the service-minded home improvement retail stores"
Corporate Strategy Formulation
Concentrate Growth Strategy
After analyzing both external and internal environment of Home Depot, Inc, we think that Home Depot, Inc should use "Concentrate Growth Strategy" for its business. The details of this strategy can be explained by using strategy table below.
Strategy Table
Current Product
New Product
Current Market
Market Penetration
Product Development
New
Market
Market Development
Diversification
From the strategy table above, Home Depot, Inc should pursue the "Market Development" Strategy.
Market Development Strategy
Market development strategy will lead Home Depot, Inc expand to the new market by focusing on its current product. By growing with this strategy, Home Depot, Inc should develop both DIY and the professional business segment. To grow in DIY market, Home Depot, Inc should extend into the remaining states that Home Depot, Inc has not entered yet. Moreover, Home Depot, Inc should focus more on professional business segment and raise it as another major customer group. Because the market size of this market is very big and tend to have high growth rate in the future. If Home Depot, inc. grabs this market and is the first mover, this will help Home Depot, Inc to get customer minds, customer loyalty, and also can reduce the chance of competitors to come in this market.
Pros and Cons of the Concentration Growth Strategy
Pros:
. Utilize Resources and Business Know-how
By focusing on current business, Home Depot, Inc could utilize its resource and technology know-how in its business to easily expand to the new markets. Home Depot, Inc is the player in Home Improvement Retailer business that could serve customers with the more advance technology than other competitors.
2. Low operational risk
Concentration growth strategy would help Home Depot; Inc grew with the lower operation risk than other growth strategies. Since Home Depot, Inc's management and employees would be expertise in their work and they knew the business environment very well, so they could effectively perform their work within the new market or with the new product category.
3. Knowing the customer's needs
Home Depot, Inc had operated in the Home Improvement Retailer business more than 20 years, it would know what customers need and expect from this business. For example, Home Depot, Inc could know that besides price and convenience, a wide range of selection was also a key dimension that defines the customer experience. So Home Depot, Inc keep extending their product categories offered on its stores that customer might want to buy.
Cons:
. High Financial Risk
Due to using concentration strategy, Home Depot, Inc would focus only on the current business. If there were the problems in the home improvement retail business, for example, the number of shopper decrease or the competition is more intensified; Home Depot, Inc revenue and profit will be affected a lot since it focused too much on only one business area.
Business Strategy Formulation
According to Concentration Strategy, Home Depot, Inc would target both groups of its customers which were DIY customers and Professional Business customers. For DIY customers, Home Depot, Inc should target on home owners in the United States that continued to grow as first-time buyers entered the housing market at a rapid pace and baby-boomers moved in force to more expensive homes and second homes. The average age of existing homes continued to increase, and people were staying in their homes later in life.
Home Depot, Inc should use the Concentration Strategy. So the company should seek for the way to growth with this strategy. Details of Business strategy is explained as the table below,
Competitive Advantage
Competitive Scope
Low Cost
Differentiation
Broad
Target
Cost Leadership
Differentiation
Narrow
Target
Cost Focus
Focused Differentiation
Home Depot, inc should use 2 ways to overcome its goals which are "Differentiation Strategy" and "Cost Focus Strategy" to support their growth strategy. There are a lot of competitors in Home Improvement Retailer business. So Home Depot, Inc has to continuously develop themselves from those competitors by expanding their lines of product, provides full service, and offered low price to their customers.
Differentiation Strategy
Traditionally, customers have to spend a lot of time to find out the product they need from each store, such as, if they want to buy furniture, they have to go to the furniture shop that sells only furniture. If they want to find anything else, they have to go to other shops. But Home Depot, Inc creates the new channel to buy goods which are more convenience. So Home Depot, Inc establishes the channel differentiation that can help customer find and buy product easier. In addition to the channel differentiation, Home Depot, Inc should emphasis on research and development (R&D) to offer the wider variety of product lines and full service to cover all customer needs.
Cost Leadership Strategy
At present, Home Depot, Inc is the leader in Home Improvement Retailers business. However, if the market reaches the saturation stage, other competitors in the market can improve their business and have everything like Home Depot, Inc has. Therefore, the way that Home Depot, Inc should do today to create the gap between itself and the competitors is to be the cost leader. As Home Depot's has been in this business for more than 20 years plus the competence in high technology in this business, these 2 strengths could help Home Depot, Inc to reduce their cost of operations that will be reflected in price to customers. Moreover, the price that Home Depot, Inc set after reduction can be lower than competitors also, this could help Home Depot, Inc to be stronger in this market and reduce number of competitors in the same time.
Functional Strategy Formulation
Marketing Strategy
Due to differentiation strategy, Home Depot has to differentiate itself in marketing mix. The details are as follow.
Product
The professional contractor market can divided into 5 submarkets which are builders/general contractors, heavy industrial, property maintenance, repair and remodeling, and tradesmen. The market size was approximately $265 billion but Home Depot's core business was only in heavy industrial account for $50 billion. Home Depot can differentiate itself in each category as the follow text.
> Offering a wider variety of product selection. This made Home Depot have more product items than other brands.
> Creating made to order home improvement equipment. The customers in this group are the professional so that they have the idea to create new products. If any vendors can offer the products which match their needs, they will purchase product with them. This can make the company to find the unmet needs, and company can order it to sell in the BIY market too.
> Set "changeable product" program. When the professionals buy a big lot of product, they did not check every piece of the product. So that the company could offer this program for guarantee that the product which brought from the company will be in a good condition before their customers used it.
For BIY market, Home Depot should continue to offer the extensive range of goods and service which answer the customer's needs.
Price
Home Depot should position itself as a high quality by offering the low price. The company should still use "Everyday Low Price" for DIY and BIY customers and using lower price or negotiable price for professional one.
Moreover, Home Depot should guarantee the lowest prices for example; If customers find a lower price from a legitimate, local competitor on an identical item Home Depot stock, even if it's an "advertised special," Home Depot will not only meet that price, it will beat competitor by 2 times of the difference price to thank customers for bringing it to it attention. By the way, Home Depot should have more special services such as credit program for well-known customers, and discount price if customer orders a big deal. This strategy will help Home Depot compete with the competitors.
Place
Home Depot should use both Push and Pull strategy. For a Push Strategy, Home Depot should expand its retail stores into every state which it did not go through. For professional segment, the company should use direct mail, and catalog to reach customers. Moreover, personal selling is the effective place to make sales.
In addition, Home Depot promotes its stores via print advertisement and media, so this will pull customer to visit the store.
Promotion
> Using amount of money they pay in the same day to change for special gift at the store.
> Using quantity discount for the professional.
> Price reduction for customers who use Home Depot's charge card, the prepaid card, which help the company to mange cash.
> Communicate customer about the various and high quality products and services to be served to customer in the lower price.
> Create gift card to attract the new customers who receive this card to visit the stores.
Professional Business Segment Operation
Product and service Operation
Home Depot must provide products in Pro Service Desk especially for facility maintenance managers and the building trades. The other equipments were shown in ProBookTM and catalog. Nevertheless, Home Depot should use IT and computers to support these customers when they want to search something they can not find and should have dedicated fax and phone lines to ensure customer call or fax gets to the department customers' need without delay.
Direct Sale Operation
Not only the Pro Service Desk, the ProBookTM professional equipment and supply catalog to professional customers, but Home Depot should have direct sale persons to support and coordinate activities with many contactors, who contract for repair job, remodel jobs, and building and design job.
In the practice, the sale persons might go to the bid contractual activities to make relationship with contractors and building companies, who are bidder on the contractual activities. It may be negotiated about the products and material price and may sign contract in the project to make sure each others about the price, amount, and the delivery time. Because in professional market, price of products and materials is an important factor that indicates profit of the contractual companies. So Home Depot must concentrate with competitive price to have an advantage over the competitors.
Distributive Operation
Professional business customers in Home Depot stores were assisted at a Pro Service Desk to find the product and service they need. Professional customers usually buy many items and amount of products and it will be valuable each time. So Home Depot should have delivery in stores' service area. Home Depot may use a pickup and truck to deliver products and can unload the product quickly and safely. The trucks allow customers to get large items without damaging products.
To prevent stock out, Home Depot should expand stores' warehouse for Pro Service Deck part and emphasize on the inventory management of professional product in distribution centre. Home Depot should use some tools to manage the inventory such as linear analysis, queuing analysis, and transportation analysis.
Human Resource Strategy
Recruitment and Selection
According to Home Depot's management team, the company recognized that having the right number of people, in the right jobs, at the right time was critical. So it should improve some policy about recruitment and selection. Moreover, Home Depot, Inc. has already designed a proprietary automated system for identifying the best candidates for store sales associate positions. These are the good policies that Home Depot, Inc should maintain and apply to all position in the company.
At present, the company has no formal program to encourage employee to refer their friends for employment. The company should add this method to their recruitment and selection policies. It would help the company to filter the candidates because these candidates have been qualified by their existing employees, this can reduce the selection time. To apply this method of recruitment, Home Depot, Inc. has to announce the qualification for each position and the impact to the referrer clearly to all employees.
Create Incentive Program
At present, Home Depot, Inc has no incentive or commission policies. Even the company has bonuses and Employee Stock Option Program (ESOP) for their employees, but these are for the full-time employees only. The company should have incentive or commission program for their part-timers to encourage their motivation and persuade them to stay long with the company. This can reduce company turnover rate.
Financial Strategy Formulation
To support the "concentrate growth strategy" of the corporation, Home Depot should increase its stores to cover the area that it has not located yet. Home Depot has 2 choices to expand its stores; increasing its equity or borrows money from creditors. We would like to suggest that Home Depot should expand their stores by using debt because its debt ratio is quite low. The usefulness of using debt to increase stores are lower cost of capital than using equity, and will increase the turnover to the stockholders more.
In addition, we would like to suggest Home Depot should increase its account payable turnover (days). Due to its inventory turnover (days) equal to 71.8 days and the account receivable turnover (days) equal to 41.6 days. So, the cash conversion cycle will equal to 113.4 days, that more than account payable turnover (days) 48.4 days. It means the company can collect money at day 114, whereas, the company has to pay money to the account payable at day 49. So the company may face the liquidity problem during this period.
Strategy Control and Evaluation
In control and measuring the performance of Home Depot, it can use "Balanced Scorecard", which was a new approach to strategic management that developed in the early 1990's by Drs. Robert Kaplan (Harvard Business School) and David Norton. They named this system the "balanced scorecard." Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective.
The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise.
The balanced scorecard suggests that the company should view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives; Finance, Customer, Internal Process, and Learning & Growth.
Key Performance Indicators (KPIs)
Objectives
KPI
. Maximize Profit
• Profit Growth
• Return on Investment (ROI)
2. Increase Sales Revenue
• Sales Growth
• Sales Revenue
3. Increase Service Revenue
• Service Sales Growth
• Service Sales Revenue
4. Reduce Costs
• Profit Margin
• Costs per cup
5. Maintain existing customers
• Numbers of Existing Customers
6. Increase new customers
• Number of New Customers
7. Increase customers' satisfaction
• Customers Satisfaction Index (Survey)
8. Faster Services
• Service Time
• Waiting Time
9. Increase lines of products and service
• Number of product and service lines
0. Good Image
• Customers Satisfaction Index (Survey)
1. Increase Market Coverage
• Number of New Countries
2. Fast, Accurate, and User Friendly operating process
• Service Time
• Number of Failure in each process
• Number of Complaints about Website Appearance and Using the Web
3. Open New Markets (DC + Websites)
• Number of New Markets
• Number of New DC and Websites
4. Improve Research and Development
• Number of New Product and Service
• Number of Process Improvement
5. Supplier Relationship Management
• Supplier Performance
• Total Material Costs
• Number of new suppliers making contract with the company
6. Proficient and Service-Minded Employees
• Performance Evaluation
• Competency Testing
Objectives
KPI
7. Expand Product Lines
• Number of new products
8. Technology Improvement
• Number of technology course employee take
• Amount of money invest in technology
9. Employee Training
• Number of training hours per employee
• Number of training courses
20. Employee Recruitment and Selection
• Turnover rate
21. High morale and satisfaction from employee
• Turnover rate
• Employee Satisfaction
Strategic Management