Strategic Analysis of Home Depot

The House Depot (NYSE: HD) is a house improvement, building and construction product or services merchant operating over 2,000 big-box shops in the United States and abroad. The House Depot was founded in 1978 by Bernie Marcus and Arthur Blank with the vision of one-stop shopping for diy (Do It Yourself) customers, setup services for do-it-for-me (DIFM) customers and competitive items for the professional market. Their DIFM setup programs include items such as carpets, floor covering, cabinets, counter tops, and hot water heater.

In addition, the business supplies installation of numerous expert products like generators and A/C systems. The Home Depot established strategic item alliances straight with industry-leading manufacturers to provide the most unique selections to customers. Through a mix of nationwide brands and exclusive items The House Depot solely brings several major brand names, consisting of: BEHR Paint, G. E., Martha Stewart Living and Thomasville, which sets the requirement for the do-it-yourselfer and the professional specialist.

The House Depot reinvented the house enhancement market by bringing the knowledge and the tools to the customer and by saving them money.

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According to the creators, the customer has a bill of rights at The Home Depot, and this entitles the customer to the ideal selection, amounts and cost, in addition to skilled partners on the sales floor who are there to assist clients (The Home Depot, 2011). Their philosophy of client service-- "whatever it takes"-- indicates cultivating a relationship with customers instead of merely finishing a transaction.

The creators initially viewed the structure of the company as an inverted pyramid, with stores and consumers on top and senior management on the bottom.

They demanded that partners take dangers to prosper, saying, "It is your organisation, your department, your market, your store, your aisle and your consumer." According to The Home Depot Annual Report (2010 ), their company method is to deliver sustainable and rewarding growth by improving, extending, and expanding the general company.

The Home Depot wants to enhance the core base of the business by aking their existing stores the “best they can be” while extending their business by adding adjacent businesses where they deem appropriate. The Home Depot also wants to expand their markets by opening new stores, new formats and new markets (The Home Depot, 2011). The Home Depot has remained focused on providing every day values in their stores. They have continually invested in their business by introducing new technologies, updating their supply chain and cultivating their on-line presence to provide a more interconnected retail experience for their customers.

The Home Depot has reduced as well as eliminated tasks to give store associates more time with customers and provided an overall enhanced customer service experience. They are extremely focused on offering every day values in the stores to their customers. The Home Depot stores serve three primary customer groups: 1. Do-It-Yourself (DIY) Customers: These customers are typically home owners who purchase products and complete their own projects and installations. 2. Do-It-For-Me (DIFM) Customers: These customers are typically homeowners who purchase materials themselves and hire third parties to complete the project or installation.

The Home Depot arranges for the installation of a variety of their products through qualified independent contractors. 3. Professional Customers: These customers are primarily professional remodelers, general contractors, repairmen, small business owners, and tradesmen. In many stores, the Home Depot offers a variety of programs to these customers, including delivery and will-call services, dedicated staff and expanded credit programs, all of which increase sales to these customers.

The Home Depot values its service and their stores offer a variety of installation services. These services target all their customer groups especially the DIFM customers, who select and purchase products and installation of those products from them. The installation programs at the Home Depot include products such as carpeting, flooring, cabinets, countertops and water heaters. Home Depot has been expanding their markets by opening new stores and new formats.

They currently operate approximately 2,248 stores in the U.S., including the Commonwealth of Puerto Rico and the territories of the U.S. Virgin Islands and Guam. There are stores in ten Canadian provinces, 85 stores in Mexico, and eight stores in four Chinese cities. The Home Depot has 48 specialty stores-including, 34 Expo Design Centers, five Northern California Yardbirds stores, two stand-alone Design Centers, and seven-unit HD Bath remodeling business (The Home Depot, 2011).

Competitive environment
To analyze the home improvement warehouse store competitive environment, we use the Five Forces model to evaluate five crucial competitive aspects: selling rivalry, supplier resources, buyer power, outside industry substitutes, and the threat of new entrants to the marketplace. Threat of New Entrants – Weak

While it is easily possible for any business entrepreneur to open a home improvement store, it would be difficult to build a warehouse size retailer even closely comparable in size to Home Depot. Building such a huge warehouse size retail store would require a large amount of capital and this puts a stop on most taking that chance. Due to this barrier to entry, most stores are smaller in size and are not able to compete with the large stores. Buyer Power – Moderate/Normal

The cost advantage within Home Depot’s large warehouse retailing allows them to simply sell the same products at cheaper prices than the competition. Therefore the only reason that a rational consumer would shop somewhere other than a warehouse retailer would be for reasons other than price, which is generally service quality. Suppliers-Resources – Moderate/Normal

To get the lowest costs, Home Depot is able to use their buyer power against their suppliers by negotiating in bulk as an entire corporation. Each bulk supplier is selected for every item at each store by the head corporation in order to keep costs as low as possible. Then each store orders their stock from the predetermined suppliers as directed by their regional manager.

Home Depot’s closest rival is Lowe’s. These two companies are the leaders in the home improvement industry, although they only make up 18% of the home improvement market (Home Depot (HD)). Of this, approximately 3% is from the professional sales category while the remaining is from DIY sales. The rest of the competition is made up of small hardware chains, e.g, Ace and True Value, as well as construction firm resellers who cater to the professional trade buyers, and small, single-location businesses in many rural areas who sell to both DIY customers and pro customers.

These local businesses are able to compete because they have long-term credibility in their areas, personalized customer service, and possibly flexible credit terms. Additionally, a current macro-economical trend is to shop locally to support community-owned businesses, which is an overall threat to the nationwide home improvement warehouse industry. Outside Industry Substitutes - Weak

These would be made up of retailers such as Wal-Mart, Sears, Kmart, etc. They sell some of the same items that buyers can find at Home Depot. Online retailers are another source for buyers to find home improvement items at a sometimes reduced cost as well as having original items. The competition within the home improvement warehouse industry includes a couple of major national players and the traditional hardware store chains. Lowe’s is Home Depot’s number one competitor within the home improvement warehouse industry. With fiscal year 2010 sales of $48.8 billion, Lowe's Companies, Inc. is a  50 company that serves approximately 15 million customers a week at more than 1,750 home improvement stores in the United States, Canada and Mexico (Lowe’s Companies, Inc.). Founded in 1946 and based in Mooresville, N.C., Lowe's is the second-largest home improvement retailer in the world behind The Home Depot.

The traditional hardware store category contains national chains Ace Hardware and True Value. Each Ace store is independently owned and operated by local entrepreneurs who are involved with and, many times, reside in the communities where their stores are. Ace stores – 4,400 of them across the U.S.A. – come in all sizes and shapes. Ace stores offer a wide variety of hardware and fix-and-replace type products, as well as services relevant to the community. Ace changed the retail hardware arena by allowing individual stores to purchase merchandise in bulk
and buy at the lowest possible price. This partnership enabled the smaller stores to compete effectively at retail despite larger stores in their market area. True Value Company is one of the world's largest retailer-owned hardware cooperatives with $1.8 billion in revenue in 2010, more than 60,000 products, 12 distribution centers and extensive buying power. True Value's cooperative serves 54 countries with more than 5,000 stores, 12 regional distribution centers and 3,000 associates. Strategic analysis

Focusing the analysis from the industry as a whole to Home Depot specifically, we use the SWOT method to identify company-specific strengths and weaknesses (internal forces), and opportunities and threats (external forces). The goal of the SWOT analysis is to identify strategic areas that need attention and possible leverage points for improvement.

Home Depot’s primary strength is the business model of the home improvement warehouse store. Its well-established supply chain, widespread locations, product mix and category position of above-average but not high-end products establishes Home Depot as the go-to place for the majority of the DIY upper-middle class. Their position as leader of the home improvement warehouse store market is also a strength with $68bn annual sales (The Home Depot, 2011), compared to their closest rival, Lowe’s, that pulls in $48.8bn annually (Lowe’s Companies, Inc.). The Home Depot’s brand equity is another strength, with its ubiquitous orange logo and apron. The brand has become synonymous for DIY and home improvement. Weaknesses

Home Depot’s primary weakness is the low level of knowledge by its associates in general. While there are presumably some knowledgeable associates at every location, the variability of expertise is criticized by many loyal customers and is a liability as the industry competitors search for ways to extract market share. As the service quality credibility suffers, the collateral effect on Home Depot’s Home Services pulls down that category as well (The Home Depot, 2011). Opportunities

The rebounding economy is an opportunity for Home Depot to increase sales across the board, as discretionary income increases DIY activity and home sales increases professional construction. Another opportunity is the ever-advancing technological fields that create more usable, interactive and socially integrated systems that they can leverage to increase customer service and product expertise at the store level. Threats

As the industry searches for ways to remain competitive, one of the few remaining handholds for the smaller hardware stores and specialized professional trade outlets is the personalized customer service. A major threat to the home improvement warehouse stores is the increase of quality customer service by competitors. Aside from customer service, the decision-making component when shopping includes brand recognition and the lowest price. Another major threat to Home Depot is the increase of online retailers as more desirable brands become available through online sources. Identification of primary issue

Based on the SWOT analysis and the competitive assessment, Home Depot suffers from a credibility deficit among its primary markets. While evaluating the entire associate knowledge-base is impractical, the nation-wide giant is infamous for its unhelpfulness and ironic, recently eliminated tagline “You can do it. We can help.” The most critical strategic issue that Home Depot can address is the quality of customer service, which will enhance its competitive position and restore the brand attribute of helpful, knowledgeable associates. Strategic alternatives

Home Depot faces losing market share and an increasing dissatisfaction among its core customer-base (DIY and pros) due to the heavily-criticized lack of expertise and knowledge among its associates. Through the competitive analysis and SWOT method, tactical strategies emerge as opportunities for Home Depot to reinforce its position as industry leader and quell competitive actions aimed at stealing market share. One recommended strategy for Home Depot to implement immediately is for advanced associate training to establish Home Depot as the leader in DIY and Pro home improvement knowledge and project information.

Through hands-on training and trade expertise, associates will be certified through Home Depot to instruct customers on the best ways to complete their projects and the recommended materials needed. We believe that this will give them the competitive edge within the home improvement warehouse industry and lead to higher customer preference, increased project purchases and overall higher sales. Another recommendation is to develop and implement technological devices at the store level to assist customers with associate help requests, project planning, education and instruction, and merchandise location and selection.

These devices would include kiosks throughout the store where customers can indicate the project they're working on and information requested, as well as easy-to-use associate call buttons, printed instructions in a variety of languages, product lists with photos and directions to help them shop, and a variety of other interactive services. Giving customers a way to quickly locate project and product information will establish The Home Depot as the leader of customer-centric services within the home improvement warehouse industry, leading to increased customer preference and overall higher sales. Recommendation

The recommended strategic action is to increase associate knowledge through advanced training and certification. The gains made from associate training will not only increase customer loyalty and usage, but also establish The Home Depot as the source for home improvement instruction and project planning. Over time, associates trained at Home Depot will be viewed as pre-qualified or apprentice level within their various departments and opportunities for additional revenue streams like certification courses, reference books, online memberships, and course sponsorships will emerge. Financial performance

The information presented in Table 1 shows Home Depot’s current financial status. The data shows that they experienced a fall in sales for the year ending Jan 2010. Looking back into the other years of Home Depot’s financials one would see that sales had been dropping for the past four years. Research shows that the current United States Recession started in December of 2007 (Isidore, 2008).

The US economy is currently beginning to pick back up. However, according to Home Depot’s 2008 and 2009 annual report, “The slowdown in the global economy and the weaknesses in the US residential construction and home improvement markets negatively impacted our Net sales for fiscal year(s) 2008 (and) 2009.” This seems to be one of the main reasons for the large decrease in sales. For the year ended January 2010 they only had average customer tickets of 1,272 with an average bill of $55.81 (The Home Depot, 2011). The customer ticket is the average number, for all stores, of customers that actually made a purchase and the bill is the average sale amount. For year ended January 2009 there was an 8.7% decrease from 2008. For 2010 they had a higher average customer ticket at 1,274 but a lower average bill of $51.76, marking a 6.6% decrease.

For the year 2010, the economy began to pick back up and the average customer ticket was 1,306 with the average bill being $51.93, a 2.9% increase. Home Depot during the year of 2008 closed 15 underperforming stores. They had also opened 41 new stores. Home Depot was also dealing with their EXPO, THD Design Center, Yard Birds, and HD Bath businesses. Due to these discontinued activities, they had to record a loss of $52 million, which affected their bottom line for 2008. In 2009, the sale was completed and gave them net earnings from discontinued operations of $41 million (The Home Depot, 2011).

This restructuring strategy that Home Depot is using has actually lowered their expenses. This is a trend that will remain the same even with no strategic change. With the recent small turn upwards in the global economy as well as the increase in the construction industry it can be expected that sales will continue to increase at the current rate. The current percent of change for yearend Jan 2011 is 2.75%. Using this figure, sales are expected to increase as presented in Table 2. With the increase in sales the Operating Margin would increase as well. Projected performance with recommended strategy

By implementing the recommended strategy of increasing the knowledge base there will be both positive and negative affects to the financials of Home Depot. With the increase in customers and loyalty, the projected sales estimates will increase beyond the new expenses. As stated, with an increased knowledge base you will increase customer satisfaction. Higher customer satisfaction is proven to increase sales.

Home Depot has been lowering their expenses by restructuring the company closing underperforming stores and cutting unneeded jobs. Now is a prime time to implement the new strategy. Estimated expenses would include training, materials, and increased salaries. Home Depot’s expenses would be increased by an estimated 8% the first year. For fiscal yearend Jan 2012 the expenses would be $18,862.20 (see table 3). The second year of implementation the expenses will not increase at the same rate. The estimated rate of increase for the second year is 2.75% for expenses of $19,380.91.

Sales for Home Depot have slowly increased during the past year. With the beginning turn in the global economy, future sales are expected to increase. With the implementation of the new strategy the sale are projected to increase at a higher rate of about 3.5% the first year, the second year at a rate of 5% (table 4).

With the new strategy, the company will observe increases in financial categories beyond just sales. Even though expenses will increase due to the new change it will be outweighed by the increase in Gross Profit. Graph 1 compares the estimated and projected financial categoriees.