Home Depot tries to get back to basics

August 31, 2007


Home Depot continues to attract comment for its strategic decisions. Is it retreating to a low-risk low growth position?

Home Depot has had a tough few years. Its management was criticized for its lack of progress under Bob Nardelli. It was criticised for paying Nardelli too much while he was there, and too much when he left. The sale of its contractor supply business to private equity has been renegotiated downwards during difficult financial market conditions.

Now the strategy itself is criticised, according to a Newsweek report. It seems that

The really important question about the sale of Home Depot’s construction supply business isn’t the price, which Home Depot lowered 18% on Aug. 28, to $8.5 billion, after round-the-clock negotiations. The real issue is whether the unit should be sold at all. Some upset investors argue that by selling HD Supply, which serves contractors rather than do-it-yourselfers, Home Depot’s new management is dumping its best hope for future growth simply to finance a stock buyback and exorcise the ghost of ex-Chief Executive Robert Nardelli, who masterminded the purchase

A Strategic Dilemma

This is the sort of strategic dilemma taught through cases at Business Schools. The cases are intended to demonstrate how students should think about complex business issues, rather than to supply best-practice silver-bullet answers.

Home Depot faces a well-known dilemma. It has long passed a growth phase when its stock was rising in sensational fashion. Efforts to maintain the growth led to a decision to bring in new and dynamic management. When the desired growth was not achieved, the leader was deposed. Nardelli’s demise was made easier by his management style and a skill at extracting extremely favourable personal rewards. It should be noted that this might suggest he was a difficult boss, but not a stupid one. He has since found further and gainful employment elsewhere. His strategy for Home Depot was to find growth for the business.

But continued lack of growth made it harder for the company to finance change. Nardelli’s plan for the future included growth from the side of the business selling to contractors. This remains a high-potential but therefore risky option.

Here’s the dilemma. The market is outside the experience range of the company. There will be need for considerable learning. (Remember those old graphs of new markets/new products?). It may well require new management. Ah, there’s the rub. Home Depot is not exactly over-burdened with leadership talent. But it may well flinch from even more bloodletting.

It seems a signal that the company is settling for stability over a more risky growth strategy. Not exciting, but by no means a stupid strategy.