Strategic management in business

Strategy Management

Current Situation

Home Depot is a "category killer" retailer, selling supplies for home and garden. Home Depot operates with a cost leadership strategy, as it seeks to use its buying power in particular to offer customers a low price. Home Depot also incorporates a service element to its business model, something it hopes will give it a competitive advantage. Home Depot is currently undergoing a change in terms of its structure and culture, and this has caused some disruption. That said, Home Depot is the second-largest retailer in America behind Wal-Mart and has experienced strong sales improvements during the Nardelli years.

The competitive situation is intense. Home Depot is a dominant competitor in the industry, but faces strong competition from Lowe's, which is almost the same size. These two competitors operate as something of a duopoly, although in other businesses there are specialist firms that are strong competitors. Home Depot believes that significant market growth opportunities remain. The competition with Lowe's has an impact on Home Depot's pricing power. The company retains strong bargaining power over suppliers due to its size, but buyers often face a choice of visiting Home Depot or Lowe's. Of the two, HD has the better service, but the two firms do engage in price competition with each other. For a small company, this industry would be an unfavorable one in which to operate, but Home Depot makes the industry more favorable with its strong brand and substantial bargaining power.

Home Depot's in-store culture has often been considered to be one of its major strengths, in particular the service focus of its employees. The sheer size of the company, with its market reach and its bargaining power, is another source of strength. The systems that Home Depot has utilized, especially since Nardelli took over, are a positive for the organization, as they assist in the superior execution of strategy. That said, Home Depot does have some weaknesses that could harm it. There remains some lack of cohesion between the culture Nardelli wanted for the organization and the culture that preceded him. As a result, Home Depot has been described as being in a state of turmoil. Another weakness of Home Depot is that the company is strictly focused on home improvement supplies. While the company has been able to expand into new service areas, Home Depot has demonstrated no ability to move into other product categories.

Home Depot sees opportunity in a couple of key areas. It sees growth in a number of segments within the home improvement business. There is also growth outside of that business, should Home Depot want to attempt to move into other product lines. The Internet is a source of new sales that Home Depot has not fully taken advantage of. Additionally, while Home Depot is in Canada, the company in general has a lot of opportunity deriving from geographic expansion.

There remain threats to the company in the external environment. Home Depot's business is strongly correlated with housing sales (both new housing starts and aftermarket housing sales), so any disruption in these metrics in the U.S. would cripple the company's business. Additionally, Home Depot faces intense competition from Lowe's. Worse, it could face competition from several other major players like Wal-Mart, Target or Costco, in product lines that Home Depot sells. There are several very large and well-run firms that could encroach on different elements of Home Depot's business.

All told, Home Depot is a very strong company, strong enough to take advantage of the opportunities in the marketplace, but it also faces both threats and constraints to growth. The company is currently seeking new ways to grow, as it feels that growth has slowed.

There are a number of options on the table for renewed growth. The first is to continue with the strategies already in place. This option is reasonable, given the demographic situation. The U.S. is facing an aging population, and if Home Depot is well-positioned to meet the needs of older customers, it will find that this market is growing over time. This alone will provide Home Depot with growth opportunities.

The second alternative is to take a defensive strategy. New housing starts have been falling for 18 months at this point. While the economy is not in recession yet, the sluggish housing market would seem to indicate that Home Depot can expect a slowdown in its business. While the company might want to grow, should housing starts continue to fall, Home Depot might have to be satisfied with maintaining current levels of demand. In order to make this happen, the company would need to begin cutting costs and put some underperforming stores on the chopping block. Some added service features -- and the employees that perform them -- may need to be cut. Additionally, the company will want to win the customers that remain away from competition, and this might require driving prices down to minimal margins.

The third alternative is to take an impressive approach to growth. The company under this approach would focus on multiple new markets simultaneously. This will involve not only the initiatives already undertaken, but new geographic markets, and improved online presence and perhaps an acquisition to diversify the product line that Home Depot markets. The latter strategy might also serve the company well in light of the declining housing starts, by giving Home Depot product lines that are less highly correlated to the housing market.

It is recommended that the company adopt the second alternative. As nice as it is to continue to grow the company, the conditions in the external environment are not positive at present. Home Depot may well face strongly declining demand, and as such needs to gird the company by cutting costs proactively. Fixed costs are high, and can be cut if the company can sell off some underperforming stores. Cutting services in-store will diminish HD's competitive advantage, but also helps the company cut its cost of sales.