Home Depot at 30: A Lesson in Corporate Culture

 
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Bernard Marcus, Arthur Blank, and Ronald Brill started Home Depot thirty years ago for the same reason that lots of people start lots of businesses. They got fired.

They had all worked at Handy Dan home center chain when new ownership decided to restructure. They weren't out of work long. They acquired venture funding and incorporated Home Depot thirty years ago.

At the time, do-it-yourselfers (DIY) made up about 60 percent of sales for building supply stores. Marcus, Blank, and Brill thought they could design a business that would make a lot of money by catering to DIY customers. That involved three key decisions.

They decided to make Home Depot's store really big. At the time the average building supply store stocked about 10,000 items. Home Depot stores stocked more than twice that.

They decided that Home Depot would solve the DIY customers' biggest problem: lack of knowledge. DIY customers were often doing projects for the first time. They didn't know what to buy or what to do. Home Depot staffed the sales floor with knowledgeable people who could help DIY customers get their projects done right.

They decided that Home Depot could only offer the best service if each store catered to the people in their community. So they gave Home Depot store managers lots of autonomy.

There were bumps in the road, but Home Depot grew quickly. They went public in 1981 and were listed on the New York Stock Exchange just three years later. By then they had 31 stores and were doing $431 million in sales.

Between 1986 and 1996 Marcus and Blank led Home Depot to forty quarters of successive record results. By the time Marcus stepped down as CEO, Home Depot had 500 stores and $20 billion in sales. During its first twenty years, Home Depot grew faster than any company except Wal-Mart.

Blank without Marcus couldn't keep the growth fires burning, so in 2000, the board brought in Bob Nardelli who had just lost the GE CEO contest. They were optimistic. Outside observers were not.

Nardelli was the first executive without retail experience to take over a publicly traded, non-food retail chain.  He was following a founder. That's tough. And there was that challenge to return to the thrilling days of yesteryear's growth.

There were certainly problems. Home Depot had huge inventories. Internal systems hadn't caught up with growth that had gone from zero to $40 billion in a little more than two decades.

Bludgeoning Bob and the big brains on the board decided that what was needed was a dose of good old business efficiency. So they cut labor costs by cutting those expert part-timers that made Home Depot a great place to shop.

They centralized control of inventory and other things while they made internal systems more efficient. Nobody in charge noticed that they were ripping up the culture so they could have better inventory control.

In the first six months of Nardelli's tenure, 29 of what had been 34 senior Home Depot executives were gone. Within five years he had replaced 98 percent of the top 170 executives. More than half of those positions were filled from outside.

Things went from bad to worse on many fronts. Acquisitions didn't work out. In May of 2006, Nardelli delivered what will probably be all time Most Arrogant Performance by a CEO. That's when he conducted a 37 minute shareholder's meeting where he gave no speech, took no questions and announced the results of voting for the directors before the ballots were handed in.

Six months later, Nardelli was out as CEO, taking a trainload of money with him. During his tenure the stock price declined as did the amount of money for bonuses at the store level, all while his "guaranteed bonus," whatever that is, kept getting bigger.

Home Depot is trying to make things right, but it won't be easy. What made Home Depot successful were the store managers and the part-time experts who were obsessed with making the DIY customer's experience a great one.

Nardelli drove those people out into the wilderness, with the sins of the old Home Depot heaped upon them. They took the old culture with them. It's not likely that many will come back.

Boss's Bottom Lines

Leadership is situational. Bob Nardelli was successful in a number of jobs at GE, but he was the wrong person for Home Depot. The board only made things worse.

Nardelli going to Home Depot was like a jilted suitor immediately taking up with a new love. There was not much due diligence on either side. Hiring a CEO, like all important people decisions, should be made slowly and carefully.

People and relationships are the best source of sustainable competitive advantage. Nobody can copy them. An exodus of good people should be a sign that something is very wrong.

Culture is a slow growing tree. In the beginning it needs protection. But after a couple of decades the culture will be stronger than you are. You need to work with it, not against it.

No amount of efficiency improvement can compensate for the loss of people and their knowledge and relationships.

Wally's Working Supervisor's Support Kit is a collection of information and tools to help working supervisors do a better job. It's based on what Wally's learned in over twenty years of supervisory skills training. Click here to check it out.

 

 

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Comments

  • 6/23/2009 12:22 AM Fred H Schlegel wrote:
    I remember this period. It was the first time I got so fed up with Home Depot I tried out Lowes. Funny how customers new what was happening long before the board figured it out.
    Reply to this
    1. 6/23/2009 7:59 AM Wally Bock wrote:

      I don't know if the board ever got it, Fred. I think they got tired of the stock price not going up and tired of Nardelli's arrogance, but I'm not sure they ever got what was really happening in the stores.

       

      One Home Depot part-timer who was let go told me that HD people used to joke that Lowe's had buttons a customer could push to get help. He said HD people figured you'd never need one of those because there were always helpful people around. After he was let go he went back to see some friends. He noticed that HD now had a "push for help" button. He pushed it. But no one came.


      Reply to this
  • 6/23/2009 11:30 AM Rodney Johnson wrote:
    Wally, I'm interested on your take relative to Nardelli, Immelt and Mulally - the GE executives that were being groomed for Welch's top spot at GE. Immelt was the chosen one, and has struggled to fill Jack's shoes, which may have been totally unrealistic to begin with. Second, my perception is that Nardelli never was a leader. He was an ops person with a leadership title. And lastly, McNerney. Possibly the least understood of the three. Many insiders at 3M think he almost destroyed the innovation culture and were glad to see him leave. Now Boeing is sputtering, leaving me to wonder.

    Was the GE Leadership path everything it was cracked up to be?
    Reply to this
    1. 6/23/2009 1:37 PM Wally Bock wrote:

      Thanks for coming by and adding your comments, Rodney. I'll give your question a shot.

       

      First, I think the way to judge GE's leadership development is not through executives who have gone elsewhere. I think you have to ask whether it's producing good leaders for GE. And, at least from here, the answer appears to be "Yes." In fact, I think that will be Jack Welch's lasting legacy.

       

      I also see Jeff Immelt as doing an excellent job in trying times. In GE CEO terms it's still early in the game, though. Remember they've only had something like 13 CEOs in over 100 years.

       

      For both McNerney and Nardelli, I think the "jilted suitor" concept holds. Both 3M and Home Depot had strong cultures that had helped make them successful. Both McNerney and Nardelli took it on themselves to try to remake the culture in GE's image. For Nardelli there were also issues of lack of fit and the kind of arrogance that leads you to refuse to take questions at a shareholders' meeting.

       

      In both those cases, I'd put my blame stamp on the board. They went after name and pedigree and simply didn't pay attention to cultural fit. The Home Depot board seemed to see all the problems the culture created without seeing its strengths.

       

      An interesting counter-example is Alan Mulally at Ford. I was certain he would be eaten alive by the Ford culture. I was wrong. Instead he's done a kind of masterful cultural aikido, using the parts of the culture where he fits to help him learn about the others and using the strength of the culture to help deal with the weaknesses. It's been masterful so far.


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  • 6/23/2009 1:17 PM Kirk Hunt wrote:
    I am always concerned that the "best and brightest" too frequently appear to be dull and less-than. How can the Board of one of the US+World's largest retailers be so badly out of touch with the front lines of their "reason to exist"? No wonder we're in the middle of an economic meltdown.
    Reply to this
    1. 6/23/2009 1:38 PM Wally Bock wrote:

      It does make you wonder about how we select board members and what we expect them to do, doesn't it?  Thanks for commenting.


      Reply to this
  • 6/23/2009 10:47 PM Nick McCormick wrote:
    I'm not sure how much responsibility Nardelli had for the downfall of Home Depot. It's hard to continue growing at the rate that they were. I believe they tried to get into smaller boutique designer stores to expand their target market, but it didn't work out very well.

    From you post, Wally, it certainly sounds like Nardelli's tactics contributed to the slide, and the bottom line is that under his watch the company did not perform well. Therefore, at the very least, his wallet should have suffered.

    As long as boards are made up of fellow CEOs and "CEO wanna be's" that merely rubber stamp the wishes of the chairman/CEO, the scenario will repeat.
    Reply to this
    1. 6/24/2009 7:03 AM Wally Bock wrote:

      Thanks for adding those comments, Nick. The interesting thing is that Nardelli achieved many of the things he set out to do on a tactical level. Home Depot has better inventory control now. They have better controls and systems. All they lack is the loyal customers and dedicated staff they used to have.

       

      Essentially, Nardelli did what had worked for him at GE. He brought in people like the ones he remembered from his days building locomotives. He adopted the GE tactic of growth by acquisition. Insiders started to call Home Depot, "Home GEpot."

       

      None of the things he did was "bad." But they either weren't a good choice for Home Depot or they were implemented by shoving them down the throats of those people willing to stay. That's rarely an implementation strategy that works.


      Reply to this
  • 6/27/2009 8:07 AM Executive Coaching Guru wrote:
    I like the thought of culture as a slow growing tree, balance this with an entrepreneurial spirit and you can see why when business direction shifts, the human being is often challenged to change at the speed of the business decision.
    Reply to this
    1. 6/27/2009 8:51 AM Wally Bock wrote:

      Thanks for adding that comment. I think you're right that there's a real tension between the slow growing culture and the speed of most entrepreneurial decision-making.


      Reply to this
  • 6/27/2009 8:38 PM Joan Mershon wrote:
    As a long time HD customer, I wondered if it was just our local store that changed. Now I see it was a part of a bigger issue.

    This is a great example of why every company needs to keep (and listen to) at least a few "old timers" that hold the history culture & traditions of a company. Companies should also find a way to capture the information these old timers carry with them. HD lost sight of what made them special - the experienced clerks helping the DIYers. If they had talked to some of the long term employees, it might have worked out different. HD is certainly not the only company to falter on this challenge. Sadly, I don't imagine they will be the last either.
    Reply to this
    1. 6/28/2009 7:12 AM Wally Bock wrote:

      Thanks for sharing those comments. I think you're dead right about the need to keep some old timers around. Nardelli not only didn't understand that, he saw the old timers as the problem.


      Reply to this
  • 12/13/2010 9:18 AM whirlpool parts wrote:
    Bernard Marcus, Arthur Blank, and Ronald Brill have done a great job in the Home Depot industry. It's a shame they weren't appreciated as they deserved to be. Their ways of making business should be taught everywhere.
    Reply to this
  • 10/30/2013 4:11 PM Chris Craft wrote:
    Now I'm really confused about what the truth is...I read an HBR article which, in way greater depth, praises Nardelli's actions at THD. See article at website above. Wally, what am I missing?
    Reply to this
    1. 10/31/2013 11:20 AM Wally Bock wrote:
      Thanks, Chris. I haven't read the HBR article you refer to, but I'm going to respond anyway since I've seen a number of "revisionist" comments about Nardelli's tenure at Home Depot.

      Let me start with a quick review of performance measures. During his six year tenure both revenues and profits increased dramatically while the stock price remained about the same. It's worth noting that he worked on exactly what the board wanted him to work on.

      If you only look at those measures they lead you to the conclusion that Nardelli did some good things. Home Depot definitely needed more efficiency, but it also had a strong sales culture. Making the numbers come out right was what Nardelli was good at. He'd been successful with that approach at GE in manufacturing operations where cost cutting and efficiency improvement are often the way to succeed.

      My take is that opening a new business (since sold off) and adding stores made revenues go up, while efficiencies helped profits go up. But business, especially retail, is not just a game of numbers and efficiency.

      Part of Nardelli's problem at Home Depot was that he seemed to have a "my way or the highway" approach with everyone including investors. When investors wanted to ask questions about why competitor Lowe's stock price had doubled while Home Depots had remained the same, Nardelli simply refused to take questions.

      Style was part of the problem. Having a skill set better suited to a manufacturing environment was another. But mostly I see this as a baby and bathwater situation.

      It's clear that some of the bathwater needed to go. Home Depot needed become more efficient. But Home Depot's success was based on a culture that created enthusiastic customers and workers. That needed to stay, but out it went.

      Thanks for prodding me to take another look.


      Reply to this
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