Background
The Home Depot was founded in 1978 by Bernie Marcus and Arthur Blank in Atlanta, Georgia after they were fired from their executive post at the Handy Dan Home Improvement Centers in California. The founders began the home improvement company around their vision of “one-stop shopping for the do it yourselfer” opening their first two stores in 1979 in Atlanta, Georgia in a cavernous warehouses that dwarfed the competition stocking 25,000 stock keeping units (SKUs), much more than the average hardware store at that time, and staffing the stores with knowledgeable experts in home improvement and customer service.
From the beginning, Home Depot was able to offer not only the best customer service in the industry by hiring employees knowledgeable and experienced in the business and by motivating the sales associates to develop relationships with the customers instead of seeing sales as a transaction, but by popularizing the concept of “do it yourself” (DIY) offering to homeowners and other individuals trainings workshops and clinics so customers could learn how to do it themselves. The Home Depot revolutionized the home improvement industry by bringing the know-how and the tools to the consumer and by saving them money.
In 1980, Home Depot opened two more stores achieving annual sales of $22 million from all its four stores. By 1990, the company had opened 145 stores, employing 21,500 people, generating annual sales of $3.8 billion, and becoming the number one U.S. retailer in the home improvement industry. As supported by Ton & Ross, Home Depot was the youngest retailer ever to reach $30 billion in revenues, a feat that would be repeated as it attained $40 billion, $50 billion, $60 billion and $70 billion in sales faster than any other retail company worldwide (p. 4).
During its first 20 years, the company was known for its entrepreneurial spirit, concentration in excellent customer service, and decentralized retailer’s operations, including merchandising and store management. Decentralized purchasing meant that “the retailer was acting as if it were $5 billion companies rather than a single $45 billion company, thus squandering the chance to drive down costs and boost gross margins,” wrote one industry observer. But, despite Home Depot’s success, the owners Marcus and Blank decided that the company needed to improve the operations approach for further growth. To bring more operational discipline to the company and to lead the changes, in year 2000, Home Depot hired Bob Nardelli, a senior GE executive, as chairman and CEO.

Although the company was growing and innovating in a fast way, Nardelli found that Home Depot had lost its competitive edge. From the very beginning he revolutionized the way how management was driving the business in Home Depot. As chairman and CEO, Mr. Nardelli improved the existing operations making major changes to the fundamental retail functions, for example, centralizing the functions of merchandising and purchasing, bringing discipline to store operations, improving quality trough the use of Six Sigma approach, standardizing and simplifying the store productivity process, introducing a new era of technology, and making emphasis on part time staff. All these operational strategies contributed to successfully double the revenues, slash the costs, and improve Home Depot’s financial management, but during Nardelli’s administration certain aspects of customer services suffered and he unfortunately did little for the share price.
On January 03, 2007, after Nardellis resignation, Frank Blake, was hired as a chairman and CEO of the company. Blake was facing significant challenges, as stated by Ton & Ross (2009), the stock price was low, the company was facing a downturn in the housing market, a principal driver of the home improvement retail industry, and Home Depot’s chief competitor, Lowe’s, was adding stores and directly challenging Home Depot in its previously uncontested turf of urban markets (p. 2). As a result, the new chairman and CEO has to decide which of the Narnellis operational strategies to consolidate, which to alter, and how strengthening a culture of customer service at Home Depot.
Problem Statement
The Home Depot, Inc., the world’s largest home improvement store chain, was transformed under Robert Nardelli’s administration into a much more profitable and more streamlined company, but some aspects of its culture of customer service suffered and the share price went down. Home Depot needs to decide which aspects of operating process discipline and customer service must be changed to gain customers and investor confidence and to continue being the number one retailer in the industry.

Case Analysis
Home Depot case is focused in deciding not only which of Nardelli’s strategies maintain, modify, and dismantle, but finding new strategies to increase the stock price and to recover the customer service’s areas that suffered during Nardelli’s administration. To better proceed with the decision, the case was deeply analyzed in the area related with the major changes made to fundamental retail functions.
By December 2000, Home Depot was stepping the beginning of Century 21, but the company was years behind other retailers in technology and had lost its competitive edge. Despite its accelerated annual profits and its rapid growth and innovative format, there was not possible way to communicate an e-mail to all its stores at once; the company employed 227,000 associates without a Human resources head officer. There was no general counsel, no chief marketing function, neither CFO. Its inventory system was mediocre, and the company had a decentralized purchasing and merchandising system. New chairman and CEO radically changed that all.
Robert Nardelli’s administration introduced a new era of information system at all levels in Home Depot. Labor productivity was increased through the Front End Accuracy and Service Transformation (FAST) initiative, equipping all stores with new point of sales terminals with touch screens. Nardelli centralized Home depot’s merchandizing and purchasing to achieve economies of scale. The centralization was aimed at realizing gains in purchasing power and addressing inefficiencies in operations. To support centralized merchandising, Home Depot spent over $1 billion to modernize the retailer’s technological infrastructure and IT systems, including a new system for inventory management. By 2004, Home Depot implemented assortment planning, markdown management, and store space planning software. By 2005, 11% of sales were replenished automatically (Ton & Ross, 2009, p.6). The Six Sigma approach was implemented to achieve improved quality and therefore made the company more competitive. To improve productivity, Nardelli not only simplified store associate’s job functions per store, but standardized in-store logistics activities. To improve labor scheduling and to reduce cost, the company increased the number of part time employees, from 15% of personnel to 50%, being them less experienced and less knowledgeable in customer service undoing part of the Marcus and Blank legacy. The new chairman and CEO also expanded Home Depot geographically to countries such as Mexico, Canada, and China.
Robert Nardelli revolutionized Home Depot. It is true that Nardelli’s changes lead Home Depot to double revenues and to increase gross margin from 30% in year 2000 to 33.8% in year 2005, but it is also true that between year 2000 and 2006, during Nardellis administration, Home Depot’s stock price remained nearly unchanged and certain aspects of customer services suffered significantly.
Nardelli’s operations strategies were necessary at the moment he was hired as Chairman and CEO of Home Depot in year 2000. Then, why customer services suffered? Because since that point in time, he gave a vast importance to the operational strategic discipline, but the company’s philosophy of opening stores with associated knowledgeable in customer services was left behind. As a result, Home Depot’s customer service culture started suffering because their new store associates did not excel in customer services. The new administration forgot that customers provide significant inputs into the production and services business process. The Nardelli’s management was unable to remember “that the presence of customer inputs is a necessary and sufficient condition to define a production process as a service process” (Sampson, S 2008). The new chairman and CEO did not rationalize that the costumer is more than merely the consumer of outputs. That it is not so much what a company does for the customer that makes it a service, but what the customer does for the company. It is indubitable that the Nardelli’s strategies made the company much more profitable and more streamlined, but while implementing those strategies, he forgot that all managerial concerns to service operations are founded in this customer-input distinction. Nardelli did not take into consideration that the customer provides essential input to the production and business services process. Do customer inputs make a difference in the way a business should be appropriately run? Yes. It turns out; the involvement of customer inputs makes all the difference in the world. Nardelli’s customer services strategy was likely related with the Home Depot’s declining stock price.
And, why Home Depot’s stock price remained almost unchanged while revenues were doubling? Although the CEO improved the retailer’s numbers, the company had delivered high revenues and earnings per share growth in excess of 20% for four consecutive years, and the company's stock had almost doubled in price since the beginning of 2003, the market did not believe Nardelli could deliver sustained profits after years of neglect; as result, the stock price lagged. Believe it or not, stock trading is driven by psychology just as much as it is by business fundamentals.
The stock price sank roughly 12% during Nardelli’s administration. Total return, which includes dividends, was negative 7%. But, isn’t earnings growth supposed to drive stock prices? Maybe not, using the methodology call “economic value added” which is found calculating a company’s return on capital less the cost of the return. It comes closer than any other method to measuring the true economic profit of a company. So, we are measuring the earnings per share, but we are also measuring the return on capital. And the return on capital is what matters. “The biggest impact on stock price is the rate of change of return on capital, or the slope of the line”. Under Nardelli’s administration, Home Depot’s return on capital remained high, but it bounced around from 14.2 % in 2001 to 17.4% in 2002 to a high of 18.6% in 2005 and back down to 16.7% in 2006, according Money.cnn.com. Over time, Home Depot's return on capital didn't improve much. And neither did the stock price.
Investors always need and want more. Even though Nardelli increased revenues and profits enormously, investors didn’t believe he could invest increasing amounts at an attractive return in the future, and the future is what investors buy.
In response to Nardelli’s strategy toward customer service and management of capital, Home Depot’s customers and investors sent a clear message to Nardelli and to the market: customers and investors are a very important part of the distribution of the cake. All indicates that Nardelli do not paid attention to the message.
Just ending this analysis, the recommendation to Home Depot’s administration is to regain customers and investors confidence. The recommendation suggests going back and applying again the premise under which Home Depot was founded: “Do it by yourselfer (DIY)” giving the customer the confidence that prepared staff is available to help and serve. It is also recommended to be focused on improving its in-stock position. The remaining business functions and processes implemented by Mr. Nardelli should be consolidated since they are reflecting a proven increase in Home Depot’s gross margin.

Conclusions and Recommendations

The Home Depot, Inc, case is focused in deciding which strategies implemented by Mr. Robert Nardelli should be maintained since his administration led the company to double revenues, but the stock price remained nearly unchanged and certain aspects of customer service suffered significantly.
Based in the result of the analysis and taking into consideration that Nardelli’s administration lead Home Depot to double revenues and was successful in pushing gross margin from 30% in year 2000 to 33.8% in year 2005, the recommendation to the company is: a) Modify the customer service strategy implemented by Nardelli creating a more knowledgeable and helpful staff for its stores so the know-how and service become its competitive edge; b) Be focused on improving its in-stock position.
It is also recommended that the remaining strategies implemented by Nardelli during his administration be consolidated since they are producing satisfactory results.