Innovation Strategies
Finding new ways of doing an old way of business is what the discount home improvement industry has done. No longer are home improvement supplies only available at specialty stores with a narrow selection to choose from. The discount industry has created a warehouse environment with mass volumes of merchandise along with a large selection of products. Upon entering a store in this discount industry it is easy to conclude that the warehouse was in existence before the store; however this is not the case. The construction of a warehouse like building is an innovation strategy of the industry, reinforcing the element of low-prices and great deals.
Growth Strategies
So far Home Depot is the only company in the industry who has expanded globally. On a national level the industry is thriving. As analyzed in Figure 3, the industries store locations have jumped an impressive 90% in the past five years. By the end of 2002 Lowes will have stores in 44 states. Rapid expansion into metropolitan areas is the key Growth strategy in the industry. More stores produce more revenue, almost completely proportionate. Which suggest that the market is nowhere near saturated.
C. Porter Competitive Model
The Porter competitive model depicted in Figure 5 defines five forces that influence the competitive environment of the discount home improvement industry. The industry rivalry lists the main competitors within the industry that compete directly with the SBU of Home Depot. Specialty stores along, with hardware/lumber stores, should not be overlooked; they are still a pivot of great influence over the nature of competition within the industry.
IntraIndustry Rivalry
As previously mentioned the discount industry of home improvement competes with the cost leadership strategy. In order to carry out such strategies, the companies that are able to keep overhead costs at a minimum, on a continuing basis, will maintain success within the industry. Passing along low prices to consumers by keeping profit margins low is counteracted by an increase in sales. Real or contrived value as seen by the customers is what drives the rivalry. Low prices and competitive customer service are key to success.
Porter Competitive Model
Figure 5
The Bargaining Power of Suppliers
The bargaining power of suppliers has declined in recent years because of the growing importance of cost leadership within the industry. Retailers have emphasized cost management at all levels. Many suppliers have had to enter into vendor partnership agreements with retailers or risk losing their customers.
Information technology product and service providers have seen a decline in their bargaining power as well. Even though there is an increasing demand for hardware, software, and telecommunications; retailers have extended their cost leadership strategies to these vendors as well. Retailers have the ability to manage their own information technology, and as a result it forces vendors to compete using the low cost strategy.
The Bargaining Power of Customers
The industry’s customers demand speed, personal service, and competitively lower prices. They usually want to fulfill what they need as quickly as possible upon arrival. Recent trends suggest that consumers no longer shop for the sake of shopping. They are more likely to shop for their desired items on their way to doing something else. The ability to meet the needs of demanding, fickle, price-savvy customers is an essential element retailers must recognize and cater to.
Middle-class consumers have turned to the discount home improvement industry as an alternative to contracting businesses to do the work for them. These customers are often labeled as do-it-yourselfers; because they are looking to save money in the first place, they are the most sensitive to price fluctuation.
Higher income professional customers demand big volumes and a large selection of on hand merchandise to satisfy their customer’s needs. To these customers, price is also important, but not as much as the do-it-yourself consumer.
New Entrance
New entrants are either new competitors entering a geographic market or an existing company making a major shift in its business strategies so that it becomes a direct competitor to the strategic business unit.
Because the industry is already predominantly controlled by two major companies, competitive new entrants to the industry are not very likely. Recognizing that the two dominating companies are expanding at such a rapid rate, it would be almost impossible to enter the market and be a threat to the established industry. Menords is the only specific company that has the potential to nationally compete, but since it is privately held it remains a regional company that lacks the resources of its bigger competitors.
Threat of Substitute Products and Services
A substitute is an alternative to doing business with the specific industry. Consumers might choose to get products directly from manufactures mail order catalogs. Or instead of shopping for garden supplies at a discount home improvement location, a consumer might choose to purchase supplies at a specialized nursery. They might pay a slightly high price but they will receive more attentive service. The same concept holds true for paint stores, hardware/lumber stores, as well as specialized home décor retailers. A consumer might chose to go to one of vendors to receive a more specialized/directed service.
Conclusions Based on the Porter Competitive Model Analysis
The Porter Model analysis leads to the following conclusions. First and foremost, intra-industry rivalry is narrow. There are not a lot, if any, threats of new companies entering the industry. Customers are of two types: middle income do-it-yourself consumers, and high income professional consumers. Alternatives to doing business with the discount home improvement industry include specialized companies such as paint stores, hardware/lumber stores and specialized home décor retailers.
D. Globalization of the Industry
Home Depot is the only competitor in the industry who has thus far expanded globally. Globalization of this market is not an easy task. The United States is one of the only markets who put significant value on consumer home improvement. Home Depot has slowly introduced itself to Argentina, Puerto Rico, and Mexico under the name of TotalHome. Because of the limited market for such an industry, Lowes has not attempted to do so, and Home Depot is approaching it with caution. The strategy of more stores produces more sales is not plausible in the international industry because of economic concerns
E. Importance of Information Technology to the Industry
The discount home improvement industry stores must deal with an incredibly large about of inventory. Without information systems it would be virtually impossible to run such an operation. Transaction Systems also play an essential part in everyday business. With the high volume of merchandise and competitive prices, it is no surprise that daily merchandise transactions and sales are immense. Without point-of-sale transaction systems managing sales, everyday task would be unobtainable
SECTION II: COMPANY PERSPECTIVE: AN ANALYSIS OF HOME DEPOT STORES
A. Home Depot Stores Profile
Background
The Home Depot was confounded in 1978 by Bernie Marcus and Arthur Blank, upon both being fired from Handy Dan, a former California home center retailer. Bernie was the former President of Handy Dan, and Arthur was Vice President for finance. In 1979 they opened there first store in Atlanta, Georgia.
The cofounders had a dream of warehouse stores filled with an enormous amount of inventory and products at the lowest prices with trained associates giving unbeatable customer service. The Home Depot grew to encompass stores in Georgia, Florida, Louisiana, Texas, and Alabama within the first 5 years.
Bernie and Aurthur both come from similar modest and religious backgrounds. Both were given a strong drive towards success by their parents. As founders of Home Depot, they stand on the fact that they are only as good as their people. They believe and implement the following values into The Home Depot Company. Using these values, they hope to instill them in their associates; they are the principals, beliefs, and standards of the Home Depot Company.
-
Excellent customer service. Doing whatever it takes to build customer loyalty.
-
Taking care of our people. The most important reason for The Home Depot’s success.
-
Developing entrepreneurial spirit. We think of our organizational structure as an inverted pyramid: Stores and customers are the top and senior management is on the bottom.
-
Respect for all people. Talent and good people are everywhere, and we can’t afford to overlook any source of good people.
-
Building strong relationships with associates, customers, vendors, and communities.
-
Doing the right thing, not just going things right.
-
Giving back to our communities as an integral part of doing business.
-
Shareholder return. Investors in the Home Depot will benefit from the money they’ve given us to grow out business.
Taken from The Home Depot Built from Scratch, authors Bernie Marcus and Arthur Blank.
The Company
On January 1, 2002 CEO and cofounder, Bernie Marcus, stepped down as CEO of Home Depot to pursue more charitable projects. He also retired from the board in May of this year. Bob Nardelli has taken his place after “shadowing” with Bernie for a year.
Home Depot’s original store opened in 1979 in Atlanta Georgia, and has since established 1,318 others as of the 2001 fiscal year. It occupies 49 states and seven countries. Home Depot has become the number one discount home improvement retailer in North America with $53.6 Billion dollars in sales in 2001. It has extended its operations to consist of not only 1,234 traditional Home Depot Stores, but also 46 EXPO Design Centers, four Villager's Hardware stores, Maintenance Warehouse, Georgia Lighting, Apex Supply Company, Your "other" Warehouse, Home Depot Commercial Direct, and four Total Home locations.
In 1994 Aikenhead's stores were acquired in Canada to create a Canadian Division of Home Depot. In 1998 Home Depot expanded into the South America market by opening a store in Santiago, Chile, and also entered the Puerto Rican market that same year. In 2000 International coverage was extended by opening the first stores in Quebec and Argentina. Home Depot Acquired Mexico's Total Home, a four-store chain of home improvement stores in Mexico, as a wholly-owned subsidiary in 2001.
B. Market and Financial Performance
Within 6 years Home Depot grew from one store to 50. In 1981 the company went public, and by 1986 Home Depot exceeded one Billion in sales while operating 60 stores. Since then expansion has progressed at an astounding pace, at the end of 1999 1,319 locations were in existence spanning 49 states and reporting sales over $38 Billion.
Figure 6
Home Depot continues to be a growing business, with plans to double sales over the next few years. The tactics of doing so are: their growth will be driven by new stores, comparable sales increases in existing stores, and through adjacent businesses.
Figure 7
Home Depot believes that it has the ability to increase its presence in every market in which they already operate. Their growth is not only centered on the number of stores opened, but on the quality of the stores. In the next three months alone 50 new locations nationwide will be opening, continuing a pace of rapid expansion.
Not only will their efforts go towards new stores, but Home Depot will continue to be innovative and more productive in existing stores. After meeting with every store’s new manager and thousands of other associates, CEO, Bob Nardelli, is certain that they have the ingenuity and talent to grow sales and implement best practices from existing stores across the corporation.
Innovative programs to improve store performance are key elements of Home Depot’s growth plans, but a enhanced emphasis on merchandising and store execution is equally critical. New product lines, sharper assortments to enhance the vitality of their inventory, and a dedication to improving inventory speed are central to these efforts. For example, Home Depot's introduction of major appliances in fiscal 2000 added substantial sales and profits, while offering their customers a complete kitchen or laundry project package. With incremental support from product line expansion, advertising and training, Home Depot is expected to double this business during the coming year.
C. The Competitive Strategy
Home Depot’s operating strategy “is to offer a broad assortment of high-quality merchandise and services at competitive prices using highly knowledgeable, service-oriented personnel and aggressive advertising.”
Home Depot’s ability to maintain customer satisfaction is due in part to its associates’ knowledge of products and home improvement techniques and applications. This critical success factor is also the root of Home Depot’s marketing approach. To ensure that their prices are competitive, Home Depot regularly checks competitors’ prices within each market.
A typical Home Depot store stocks approximately 40,000 to 50,000 product items, including variations in color and size. Each store carries a wide selection of high-quality and nationally advertised brand name merchandise. Merchandise is purchased directly from manufactures located throughout the world, which eliminates the middlemen costs. Merchandise is currently purchased from more than 260 manufactures in over 35 countries.
D. Significance of Information Systems
Home Depot has used information systems to a modest extent since its original opening in 1979; however, in 1983 computerized checkout systems were installed following their expansion into the Arizonan and Louisianan markets. Still, checkout codes were entered by hand; it wasn’t until 1987 that a UPC scanning system was adopted. By capturing UPC codes by scanning, it cut down on the time of checkout in all locations, as well as improved accuracy. In 1988 their first Satellite communication system was implemented, linking all the Home Depot stores together and to Home Depot headquarters in Atlanta, Georgia; it equipped the company for an on-demand information approach. The year 2000 marked the beginning of Home Depot’s e-commerce venture, by extending an online store to only Las Vegas customers. It proved to be a success. In 2001 it expanded its online sales nation wide.
Home Depot’s online store is very complex from an IS perspective. Managing in store inventory against online inventory needs instant at-the-cash-register delisting of items available in web site inventory. This requires integration of several systems: store inventory, cash register and the web site catalog. If this integration proved to be unsuccessful in the testing phase in Las Vegas a tremendous amount of customer frustration would come of it. Thankfully it did indeed prove to be a success. Home Depot has been able to link the separate inventory and data bases, plus keep each store’s inventory in real time. By accomplishing such a task Home Depot has jumped a hurdle in local-online retailing
The home improvement industry is somewhat complex. In some U.S states, for example, the purchase of a carpet is taxable or non-taxable depending on whether it will be installed on concrete or wood floor. Home Depot associates need this kind of information at their fingertips. And just because Home Depot associates excel in their respected traded doesn’t mean they are computer savvy. Home Depot’s information Systems has addressed a high level of complexity but has also remained easy to use
Currently several character based systems access a mainframe at Home Depot’s headquarters, and acts as a central storehouse for customer’s information. With a new store opening every 43 hours, The Home Depot has needed an enterprise management system to rapidly and reliably roll out new Windows 2000 workstations, as well as consistently keep them up to date. They have chosen to outsource this task, by doing so Home Depot has been able to eliminate the need for technicians to travel to remote store to install and configure workstations.
E. Strengths and Weaknesses of Home Depot
Strengths
SPI
Home Depot is constantly seeking to drive their performance level upward. The Service Performance Improvement (SPI) initiative launched in 2001, shifts product receiving to the night hours. The resulting efficiencies free up associates to dedicate their time to serving customers. As a result, stores are easier to shop, the shelves are fully stocked and the aisles are cleaner. Now associates are able to give customers a more personal, satisfying shopping experience. Not only does this enable associates to better serve their customers but it also enable them to take opportunities to learn more about products Home Depot carries, resulting in a better equipped product knowledge.
Pro Market
The pro market continues to be a promising opportunity for Home Depot. During 2001 Stores expanded management teams and resources to support a more aggressive pro enterprise. At the end of 2001, 535 were offering pro-specific product assortments, credit programs, and enhanced will-call and delivery services through a pr desk inside Home Depot, staffed by associates who specialize in the pro customer. The pro market is comprised of mostly professional contractors who represent 30% of Home Depot’s business today. Because pro customers shop more frequently and usually purchase larger quantities, catering to their demands and providing excellent service tailored for them is a unique contribution to the industry.
Local Merchandising
Home Depot strives to keep their stores neighborhood friendly. Because all customers are unique and live in a unique community, Home Depot provides catered solutions and merchandise for all needs; it is what has enabled them to expand at such a great speed. Instead of limiting their stores to one kind of architectural lay out, or only a certain kind of merchandise, they have been able to adapt to the environment in the market they want to break into.
Cost Management
Home Depot is the low-cost leader within the discount home improvement industry mainly because of their high priority on cost management. The attitude of, “If you can find it some place cheaper, we will beat it” is a driving force behind their continuing low price strategy.
Weaknesses
Competition
Recently there has been speculation that Lowes could perhaps be closing in on Home Depot, based on the evidence that Home Depot posted a 17 percent increase in revenue—down from the 25 percent posted in recent years. Still, Lowes is trailing Home Depot in sales by Billions. Lowes presence on the Western part of the United States is slim; they are hoping to remedy that problem in the next 2 years by breaking into new markets.
Company Image
The image of Home Depot stores as a corporate home improvement giant out to push all “mom and pop” hardware stores out of business is beginning to fade. However, coming to the surface are environmental activist protesting Home Depot’s purchase of “old” trees in ancient rooted forest of the United States. Not only is the purchasing of the trees being protested but also the complete rooting of Home Depot stores in towns because of this and other practices. A campaign has been started with the slogan “Home towns, not Home Depot.” Although it has not been reported that this has effected Home Depot’s growth in any significant way, it most certainly has not helped the company’s image in trying to become a part of the community.
SECTION III. A FINAL ANALYSIS: THE SUCCESS OF HOME DEPOT
A. The Success of Business Strategy and IT Use to Date
The growth through expansion strategy has made Home Depot the #1 discount home improvement retailer in the world. Information Systems have played a significant part in this expansion, especially now with Home Depot’s new e-commerce store front. The IT organization is dedicated to developing and managing systems across the enterprise, and has approximately 1200 employees—half of which are developers. Curtis Chambers, Senior Manager of Information Services is always evaluating alternatives for Home Depot’s Information Systems.
Their latest project is connecting all workstations/in-store PCs to a remote management system. They are looking to gain control of Windows 2000-based inventory management and retail-floor terminals that are being installed to replace DOS systems in its 1,300 plus stores. To do that, Home Depot will start deploying remote management software so IT workers will be able to remotely install and update the operating system and the applications used be the machines. Home Depot hopes to have 90,000 PCs plugged into the remote management system by the end of 2004. Currently service and updates needed on in-store PCs are done by sending technicians into the field or shipping disk drives back and forth. When the project is completed in-store PCs will be updates from centralized UNIX servers, help desk workers will also be able to remotely take control of systems to perform troubleshooting or provide support to end users.
B. Effectively Positioning the Company for the Future
Home Depot will continue to expand in the North American borders and has no expectations of slowing down for a while. With the new development of 46 EXPO Design centers Home Depot hopes to expand and become a one-stop design and decorating source through EXPO. Efforts are also being focused on building business-to-business relationships through Home Depot Supply. Home Depot has begun to aggregate and coordinate their ability to serve other business customers; they hope to gain growth through neighboring while utilizing its asset base ad leveraging its merchandise and service offerings.
The international market is also a huge opportunity for potential growth in the future. This year alone six stores are scheduled to open in Mexico, increasing the count to a total of 11 stores. Home Depot hopes to break into more international markets and expand already existing ones, but also realizes that it is a much slower process than the markets it has conquered in the US.
It remains to be seen whether or not Lowes posses a threat on the Western market, despite speculations. Home Depot has positioned itself with many opportunities to tap into all aspect of the home improvement market. By not only growing at a phenomenal rate, but also specializing in home improvement unique areas, and without forgetting the importance of low prices and exceptional service, Home Depot will remain a leading competitor.
Bibliography
Mulligan, Megan E. “Home Suppliers Hitting Home Runs.”
http://abcnews.go.com/sections/business/DailyNews/forbes_homeretailers_020524.html
“HomeTowns, Not home Depot” http://www.sprawl-busters.com/hometown.html
“Home Depot chooses IBM for e-business infrastructure” http://www.ibm.com/news/us/2002/03/18.html
“The Home Depot's Latest Project: XML, Web Services” http://industry.java.sun.com/javanews/stories/print/0,1797,42081,00.html
“Analysis Summary” http://profiles.wisi.com/profiles/scripts/page2.asp?cusip=437076102. April 17, 2002
“Center of Home Depot” http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/2000/diy.html. April 17, 2002
“Companies within the Retail (Home Improvement) Industry”
http://cnnfn.multexinvestor.com/MGI/industry.asp?target=stocks%2Fcompanyinformation%2Fsnap&Ticker=HD&ind=rthome&rt=analystresearch&rn= . April 17, 2002.
