Home Depot Strategic Plan
... November 2003 to March 2004 in GDP (6). Interest Natural Industry Environment (8) The National Retail Hardware Association (NRHA) estimates that hardware stores, home centers and lumberyards posted a 5.7 percent increase in sales last year, pushing the industry total to $197.6 billion. Looking into the future, NRHA estimates that industry sales will grow at an average annual rate of 5.2 percent between 2002 and 2007. During this time, DIY sales are expected to grow more than twice as fast as professional / remodeler sales. The Home Improvement Research Institute (HIRI) forecasts consumer sales of home improvement products will jump nearly 7 percent next year. Competitors of Home Depot: (appendix 1.) The major competitors of Home Depot are: Lowes Company Inc. Menard Inc. TruServ Corporation The comparison of the market share, revenue and other financial indices is shown in the appendix No 1. Summary of Opportunities and Threats Opportunities 1. A strong domestic and increasingly internationally recognized brand name. 2. A vast and expanding customer base. 3. High sales volumes and a high level of local market penetration, which increase barriers to entry for competitors. 4. The company purchases merchandise from vendors located throughout the world and it is not dependent on any single vendor. 5. Most of the company's merchandise is purchased directly from manufacturers, which eliminates middleman costs. 6. The company maintains a global sourcing merchandise Programme to source high-quality products directly from overseas manufacturers, which gives customers a broader selection of products while enhancing company gross margin 7. Market to women- While women consumers make 60% of the purchasing decisions in regards to home improvement purchases, HD does not specifically target market this group. More than ever, women today are more independent, have more financial resources and are more familiar with technology. With the recent announcement by competitor Lowe’s to specifically target women, HD may want to consider a strategy to maintain/increase this market share. 8. Expand E-Commerce- As E-Commerce is becoming an ever more popular means of purchasing goods, it seems only smart for retailers to pay attention to this medium as a means of increasing sales. Although HD does currently sell products via the Internet, the company may want to reassess this avenue, especially as more and more people around the world begin to log-on. Threats 1. Lack of product differentiation- Lending to minimal customer retention, as listed under the internal analysis, the lack of product differentiation at HD makes it easier for consumers to shop at competitors stores. HD should consider whether or not a strategy should be employed to counter this threat. 2. Competition- Although HD has had tremendous success in the home improvement industry, it should be sure not to ride on its laurels. Lowes and Menards are fierce competitors and fast paced changes in market trends do not leave much room for error. If HD doesn’t want to end up as another K-Mart, they had better keep pulling good strategies out of their hats in order to stay one step ahead of their competitors. 3. Customer segmentation and methodology applied to US consumers may not so easily transfer internationally. 4. EXPO Design Center stores also compete with specialty design stores or showrooms, some of which are only open to interior design professionals. 5. The company's main competitor, Lowe's, is also developing similar concepts and strategies. 6. INTERNAL ANALYSIS Value Chain Analysis: 1. Inbound Logistics In order to deliver on its promise to customers of offering products at everyday low prices at its stores, The Home Depot effectively utilizes economies of scale in its inbound logistics activities by employing national-level merchandising strategies in sourcing products, with managers negotiating with and developing strategic alliances with vendor partners for products sold in all Home Depot stores. 2. Operations Home Depot operates more than 1300 stores in the US, Canada and Latin America. These stores are set up in similar fashion and most offer over 40,000 different products. Operational efficiency is critical to HD’s overall success as well as superior customer service. By setting stores up in a similar fashion greater control can be sustained at the corporate level however individual stores are allowed and encouraged to make modifications with justification. Recent introductions of new inventory management, receiving and processing systems, "service Performance Improvement- SPI", has helped to improve operating efficiency. Centralized buying has allowed individual stores to focus more on sales and service. Marketing and Sales While The Home Depot employs economies of scale in its overall national-level strategic marketing and advertising campaigns, individual store locations do have a degree of autonomy and financial independence to execute store-level seasonal or tactical sales promotional campaigns. The Home Depot is able to generate cost savings in advertising because of economies of scale and at the same time, create customer value through local adaptation of promotional campaigns. In comparison to competitors within its industry category (e.g. Loews), The Home Depot has significant share-of-voice in national-level television, print and other above-the-line media. Outbound Logistics The nature of the retail business means that The Home Depot store locations do minimal shipping and distribution traffic, mainly, because the customers go to the stores to shop. However, as an option for customers who prefer to have their goods delivered, The Home Depot has carefully built up a distribution network which has the capability to deliver products to customers' homes within 24 hours. In addition, one of The Home Depot's subsidiaries, the Special Order Center of National Blinds and Wallpaper, provides delivery of custom wallpaper and blinds products and services. Service The Home Depot places extra emphasis on its primary business goal: to serve its customers' needs by market, store by store. The company's divisional merchants and managers are expected to spend more time on the store's floors, listening to their customers and employees, thereby enabling them to make decisions that respond quickly to the unique needs of target customers. By taking a decentralized approach to store and merchandising operations, The Home Depot is able to deliver on what it sees is its core value proposition to its customers: superior service. Support Activities The Home Depot takes a centralized approach to corporate company management; support departments for Human Resources, Finance, Planning, Legal and Procurement, providing services to Home Depot store locations, are located in the company’s corporate headquarters in Atlanta, Georgia. Human Resources The Home Depot has a strong commitment to investing in their employees which they feel is their greatest competitive advantage. In 2001 they introduced new HR initiatives designed to attract, motivate and retain "the best employees in the industry". Through the use of learning programs and leadership development training, Home Depot hopes to shift the focus from "operating a box" to "managing a business". Compensation plans such as performance bonuses and employee stock ownership plans help in retention of employees as well as recognition programs and emphasizing an open-door policy with management. Technological From a technological standpoint Home Depot have both internal and external issues to deal with. External issues pertaining to product development and improvement, patenting and general R&D can be looked as mainly a supplier based concern. Even though the majority of that burden is on the suppliers, Home Depot must monitor these market areas to make sure that the suppliers they are utilizing are continuing to improve and expand. If a particular supplier is not keeping up with his/her changing market the Home Depot must consider looking elsewhere? There are many internal technological issues that are directly related to Home Depot control. The exponentially increasing electronic networking field has lead Home Depot to better tracking systems within its total network. Some examples of their utilization of these types of systems include the Point-of-Sale (POS) technology which is used to identify and track trends, inventory management systems to keep total inventory low and turnover high, and customer service centers to remove the burden from the in-store staff. More recent changes in this area implemented at Home depot include the introduction of web-based ordering that allows for delivery within 24 hours. Expansion in this area is definitely an area of growth opportunity and positioning within the overall industry. PORTER’S COMPETITIVE FORCES 1. Potential Entrants (Barriers to Entry/Exit) The barriers for potential entrants into this industry are high. They consist of high capital investment requirements, high inventory costs, poor access to industry distribution channels, heavy competition and likelihood of retaliation from existing industry players and a high customer switching costs. 2. Customers (Bargaining Power) Buyers are the people / organizations that create demand in an industry. The bargaining power of buyers is greater when There are few dominant buyers and many sellers in the industry Products are standardized Buyers threaten to integrate backward into the industry Suppliers do not threaten to integrate forward into the buyer's industry The industry is not a key supplying group for buyers Customers individually have limited bargaining power, but collectively, they drive the market. 3. Suppliers (Bargaining Power) If suppliers have high bargaining power over a company, then in theory the company's industry is less attractive. The bargaining power of suppliers will be high when: There are many buyers and few dominant suppliers There are undifferentiated, highly valued products Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets) Buyers do not threaten to integrate backwards into supply The industry is not a key customer group to the suppliers 4. Substitutes (Threat of Substitute Products or Services) The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on: Buyers' willingness to substitute The relative price and performance of substitutes The costs of switching to substitutes 5. Industry Competitors (Rivalry among Existing Firms) Home Depot and Lowe’s remain the major players in this industry. Competition is high not only between the “big-box” chains but also with firms competing in specific product lines. In year 2001- 2002, Home Depot held 18.7% market share with $58.25 billion in revenues, Lowe’s held 8.5% with $26.49 billion in revenues and the remainder was spread among many smaller competitors. (9) Appendix 3. Current Performance Home Depot is the second-largest retailer in the US, with fiscal 2003 sales of US$63.8 billion and a share of 2.8% of the broad retail market in the US. Net sales increased by 9.5% over 2002, due in large part to new store openings, while the company's broad market share grew from 2.5% in 2001. Financial ratios: (As per Appendix 2) 1. leverage ratios: a. Debt to Assets ratio = (Total Debt) / (Total assets) 12,030,000 / 34,437,000 = 0.3493 b. Long Term Debt to Equity Ratio = (Long term Debt) / (Total Stake holder’s Equity) 856,000 / 22,407,000 = 0.038 c. Quick ratio: (Earnings Before Interest and taxes) / (Total Interests Charges) 6,905,000 / 62,000 = 111.37 2. Liquidity ratios a. Current ratios: (Current Assets) / (Current Liabilities) 13,328,000 / 9,554,000 = 1.395 b. Quick ratio: (Current Assets – Inventories) / Current liabilities (13,328,000 - 9,076,000 ) / 9,554,000 = 0.445 3. Activity ratio: a. Inventory turnover Ratio: (Total Sales) / (Average Inventory) 64,816,000 / 9,076,000 = 7.14 b. Fixed assets Turnover Ratio: (Total sales) / (Fixed Assets) 64,816,000 / 20,063,000 = 3.23 c. Total Assets Turnover Ratio: (Total sales) / (Total Assets) 64,816,000 / 34,437,000 = 1.88 4. Profitability Ratio: a. Gross profitability margin: (Sales Revenues - Cost of Goods Sold ) / Sales Revenue (64,816,000 - 44,236,000 ) / 64,816,000 = 0.3175 b. Net Profit Margin: (Sales Revenue – All Expanses) / Sales Revenue. (64,816,000 - 6,846,000) / 64816000 = 0.89 c. Return On Assets: (Profit After Taxes) / (Total Assets) 4,304,000 / 34,437,000 = 0.12498 d. Return On Equity: (Profit After Taxes) / Total Stake holder’s Equity 4,304,000 / 22,407,000 = 0.192 Summary of Strengths and Weaknesses Strengths 1. A strong domestic and increasingly internationally recognized brand name. 2. A vast and expanding customer base. 3. High sales volumes and a high level of local market penetration, which increase barriers to entry for competitors. 4. The company purchases merchandise from vendors located throughout the world and it is not dependent on any single vendor. 5. Most of the company's merchandise is purchased directly from manufacturers, which eliminates middleman costs. 6. The company maintains a global sourcing merchandise programmed to source high-quality products directly from overseas manufacturers, which gives customers a broader selection of products while enhancin...