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.