Red Zone News

Home Is Where the Heart Is: Home Depot’s New CEO Is Passionate About Executing New Strategy  (06-24-02)

Glancing through the Red Zone archives, it seems like we’ve been covering the retail sector a lot. Fact is, there are a lot of interesting maneuvers going on there that ably and amply demonstrate key points about leadership and execution in the Red Zone. What’s so innately interesting about retail is that millions are bystanders – and pocketbook judges – of how well an enterprise goes about changing and executing strategy. A good case in point… 

My first trip to Home Deport in many months was necessitated by a plumbing crisis. It took no more than two minutes to notice some significant changes since my last visit: Home Depot was promoting a service to install window coverings and decking; there were registers placed strategically around the store to defuse that horrible bottleneck at the front check-out; the Return Items line was completely depopulated; there was a massive garden center with flowers, plants and accessories…and even a big pastel-colored sign overhead announcing a “décor center.” Had I been transported to an alternate universe? Evidently that bastion of masculine do-it-yourself-ness had been undergoing some fundamental change that bore closer investigation. Here are the half time highlights extracted from a recent story in Fortune[i]…

• In late 2000, Bob Nardelli, known for his phenomenal ability to execute a plan at any operation he headed at GE, was recruited to head Home Depot [HD] by Ken Langone, a GE board member and influential director at HD. Langone is the investment banker who provided start-up capital to HD founders Bernie Marcus and Arthur Blank. Marcus was the visionary and Blank the numbers guy.

• Flash back to 1997. While Nardelli was racking up points toward his career ambition of succeeding Jack Welch, Marcus decides to retire as HD’s CEO and Blank is named as his successor. Both were still co-chairs of HD.

• As HD’s performance and stock price start to plummet, Blank does little to improve the situation and clashes with the board about people, strategy and other issues. Rival Lowe’s is in fast growth mode and its stock is outperforming HD’s. The relationship between Blank and his board hopelessly sours. In November 2002, they ask for his resignation as CEO (and, within three months, as co-chair and an HD director).

• Meanwhile, Nardelli is getting an early and unexpected Christmas present. Jack Welch meets with Nardelli to share the news that he is selecting Jeff Immelt as his successor. Literally minutes after Welch’s official announcement, a despondent Nardelli gets the call from Ken Langone…and the HD board orchestrates the amazing CEO changeover within a week. Recently retired HD director Frank Borman, former CEO of Eastern Airlines, observed: “This is a board of directors who did their jobs well, while most directors sit on their asses.”

• Nardelli’s mission is to transition an entrepreneurial, decentralized do-it-by-ourselves management culture into a more tightly managed, systematic enterprise. An intense and intensive Red Zone maneuver if there ever was one! 

Let’s look at a few of the Red Zone principles and see how Nardelli is calling the plays…

Engaged, passionate leadership. Nardelli is very hands-on, working seven days a week, including weekend meetings with his executives. He meets with his 21 direct reports every Monday to focus on action plans and key performance indicators, such as customer counts and average ticket. He has instilled a coaching environment, in which he not only coaches but also asks for coaching from his board – a fairly rare event in corporate America.

Situational clarity and focus. Many of Nardelli’s changes boil down to dollars and good sense moves to improve costs and synergy…and put better number on the balance sheet. For instance, with centralized buying, HD can more efficiently supply its nationwide store network. In the process, however, small local vendors who used to supply their local HDs, were unable to compete with major national suppliers and long-term relationships were severed. We know that change brings anxiety and potential crises in morale. Change at this cultural level is in a class by itself. By tampering with the do-it-ourselves, entrepreneurial management culture (meaning each store made its own rules), Nardelli has lost 24 of 39 senior officers in the first 19 months through dismissal and voluntary departure. But he is unwavering in his message that things need to change and HD needs a team of managers who can execute when it counts.

Seasoned players. Nardelli recruited a HR executive from his GE days who has helped bring in new blood, not unexpectedly many high performing GE managers. Clearly they are non-retail, which only serves to reinforce his message that the “business has to reach outside of itself.” Additionally, as GE alumni, the concept of recruiting and developing talent is ingrained, and the two are now creating a leadership institute modeled after GE’s Crotonville center with the goal of building leadership throughout the organization.

Eye on the customer. Gone is that cornerstone of HD where consumers could return an item purchased yesterday or 10 years ago to any HD outlet, receipt or no, and get cash back – no questions asked. The new no receipt, credit only policy is forecasted to save HD well over $10 million a year stemming from flagrant abuse of the policy. On the plus side, HD now offers more options intended to delight customers, as discussed next.

Definitive, defendable vision and measurable goals. Nardelli’s growth strategy – to double sales and more than double profits by 2005 – is a direct challenge to HD’s traditional retail model. “We have to change the business model. What got us here may not get us there.” “There” includes…

• Appealing directly to women, stocking HD’s flagship stores with décor products and appliances to compete more effectively with Lowe’s.
• Selling to corporations, supported by the new centralized purchasing system that allows HD to buy any product used to build or operate a facility. His first big account is Disney and a sweet deal it is. HD will supply Disney hotels and theme parks while Disney will supply HD with an exclusive line of paints, children’s furnishing etc. featuring Disney characters and brands.
• Opening Home Depot “Pro” stores for professionals, who outspend individual consumers three to one.
• Moving into home services such as installation, appliance repair and pest control as aging baby boomers shift from “do-it-myself” to “do-it-for-me.” This strategy also leverages relationships with the local professionals HD sells to, although maintaining consistent quality across the network will be an operational challenge. Nardelli’s model: “You approach this like a franchise, as Coke has entrusted its bottlers. You put in the right metrics. You do the same screening, the same drug tests, the same bonding we do with our own associates.”

Rewards and recognition for the right results. The performance evaluation process has been revamped, with just two appraisal forms (rather than 157) on which salaried associates from the CEO down are rated from A “outstanding” to D “improvement required” by co-workers above and below on identical criteria such as “gets results,” “develops people,” “drives change,” and “displays character.” Nardelli participates in performance reviews of each of HD’s 130 officers and scrutinizes every promotion. And he rewards well for performance: that former GE HR exec earned a stunning $21.5 million pay package in 2001. 

Goals on the line: Some sector analysts think Nardelli may be enacting too much change too quickly. He has a nice-size bankroll – $5.2 billion in cash – to finance this vision. From Nardelli’s point of view, “The rate of internal change must be greater than the rate of external change, or we will fall behind.” To us, this sounds like the sentiment of a dedicated Red Zone leader and coach who helps his players move forward and puts big points on the board for shareholders.

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