Management Essays – Home Depot Management
Analyse the organisational culture of Home Depot around the time that Marcus stepped down.
Analyse the organisational culture of Home Depot around the time that Marcus stepped down and Blank became the CEO of Home Depot in 1997, and contrast this with the culture in the company around 2003, when the new CEO, Nardelli was three years into his change strategy in the company using one or more appropriate frameworks from the literature. Within your answer attempt to draw conclusions on whether the prevailing culture contributed to the problems that the company started experiencing in the late 1990’s.
When Bernard Marcus stepped down as CEO in 1997, Home Depot had a distinctive culture, based on personal rapport and involvement he and co-founder Arthur Blank had with employees. Marcus and Blank are opposites in many ways. Marcus is gregarious and outgoing, whilst Blank is a detailed number man (Johnson 1998). The two both emphasised customer service, however, encouraging sales staff to help customers with their hardware problems instead of just trying to sell them a tool (Johnson 1998). To accomplish this, most sales people were plumbers, contractors, carpenters, or others with similar “handy” experience (Johnson 1998). Marcus and Blank believed this expert advice would help empower homeowners to do their own work, and subsequently would grow Home Depot’s potential market, a strategy that proved successful (Johnson 1997).
Culturally Home Depot was described as a “laissez-faire” or “cowboy” culture from its founding through 2000 (Pascual 2001; Sellers 2002). Individual sales people were encouraged to make decisions, even if it meant making a mistake (Johnson 1998). Local managers made many of the decisions for their stores independently of the main office. Buying was similarly left up to individual regional managers, who each negotiated separate supply contracts, resulting in different terms from region to region and in some cases from store to store (Pascual 2001). “The co-founders used to boast that the chapter on merchandising in Home Depot’s policy manual didn’t have a single word in it” (Sellers 2002, 93). Almost all jobs above entry level were filled internally, causing a system of personal networks to dominate communication within the company (Stein 2000). This was further reinforced by senior management, who managed by regularly visiting stores to develop personal relationships with workers and check store operations (Stein 2000). Co-founders Marcus and Blank trained every manager personally (Sellers and Woods 1996). Employees were encouraged to buy stock, and offered it at a discount price, to give them personal investment in Home Depot’s success (Sellers and Woods 1996).
By the time Blank succeeded Marcus as CEO in 1997, Home Depot was becoming too large for its informal culture. Blank tried to rectify this situation by adding an additional level of executives directly below himself and above the six division heads, a move questioned by many (Johnson 1998). He tried to maintain Home Depot’s traditional culture, whilst formalising decision-making and communication systems, a plan that was unsuccessful. In his three years in charge, things went from bad to worse. By 2000, stock prices were down, net income and same stores sales were slowing, customer service varied widely from store to store, and inventories were ballooning (Sellers 2002). Because Home Depot has simply continued to expand without adjusting its internal systems, the main office was not able to either monitor or support the increasing number of stores (Johnson 1998). Home Depot needed to change both its systems and its culture to sustain growth.
Culture is what solidifies a company’s identity as one organization; without it, a company lacks direction, values and purpose (Goffee and Jones 1996). It is the way people relate to each other in a given community. “Like families, villages, schools, and clubs, businesses rest on patterns of social interaction that sustain them over time or are their undoing” (Goffee and Jones 1996, 134). Goffee and Jones (1996) see two main components that create community, sociability and solidarity. Sociability is the communication and sincere friendship relationships between community members, whilst solidarity is how quickly and effectively the community can and will pursue its common objectives. Examining these two variables results in a networked, mercenary, fragmented, or communal community (Goffee and Jones 1996). Importantly, none is necessarily better than the other, but each has been found to be more effective in specific situations.
The culture at Home Depot before Nardelli took over was what Goffee and Jones (1996) would call a networked community. Managers had little accountability, worked things out on their own, and depended on social contacts for getting much of their jobs done (Upbin 2000). There was not enough investment in company-based initiatives; headquarters lacked clout to implement change in many stores (Upbin 2000). Networked communities provide a flexibility that allows employees to cut through or circumvent bureaucracy, something that can be helpful in a rapidly growing company if not taken to extremes. However, “because there is little commitment to shared business objectives, employees in networked organizations often contest performance measures, procedures, rules, and systems,” the very things Home Depot needed by the late 1990s due to its mammoth size (Goffee and Jones 1996, 138). Trying to maintain this networked community whilst introducing its antithesis, systems and structure, was Blank’s undoing. Such actions typically “consolidate workplace friendships but do little for organizational solidarity,” and often cause political cliques to form against the person or persons trying to implement change (Goffee and Jones 1996, 138).
Home Depot’s culture can also be considered through a Force Field analysis, which reveals several components of its culture likely to work against change (Johnson and Scholes 2002). As stated earlier, almost all of Home Depot’s employees above entry level had been promoted from within, leaving the company with managers and executives who not only excelled in its loose environment but most likely preferred it (Stein 2000). Many had worked at Home Depot for years, moving up through the ranks, and were heavily invested in its culture (Stein 2000). Not surprisingly, when Nardelli began making changes in the early 2000s, many employees were unwilling or unable to follow, and the company lost nearly two-thirds of senior managers, who either quit or were fired (Seller 2002). Nardelli then bucked company culture by hiring outside personnel to replace them, allowing him to make needed changes in the company’s culture and systems. Force Field analysis dictates that making personnel changes such as these would greatly reduce the cultural deterrents to change at Home Depot, an analysis that proved true (Johnson and Scholes 2002).
Robert Nardelli began to make changes almost immediately after he took over in late 2000, attempting to both make the company more efficient and economically viable and to move its culture from a networked community to a communal one. A communal community is much like a networked community in that it has high sociability amongst its members, but unlike a networked community it also has high solidarity, which allows community members to focus on common goals and accept changes necessary to reach those goals (Goffee and Jones 1996). Nardelli altered the “cowboy” culture at Home Depot by changing the emphasis to discipline and efficiency, implementing and centralizing systems throughout the company and installing a formal chain of command for handling situations (Pascual 2001; Tsao 2002). He brought quality control measures from his prior experience at General Electric, such as Sigma Six, to Home Depot and demanded a higher level of customer service and job performance (Sellers 2002). Instead of emphasizing his personal relationships with employees, as Marcus did for example through personally training managers, Nardelli developed systems, in the case of training instituting a leadership training institute at the company (Sellers 2002).
(b) What were the specific procedural and control system changes made by Nardelli, which impacted on Home Depot’s culture? Do you think that as an outsider Nardelli was in a better position to bring in cultural reforms at the company? Critically discuss.
Most of Nardelli’s initial changes at Home Depot involved systems and centralisation. Headquarters went from being looked upon as sales support to being a true main office, overseeing and controlling company operations (Pascual 2001). Buying was moved from separate functions at each of the company’s nine regional offices to a central office in its Atlanta headquarters. This improved the company’s margins and reduced the number of suppliers. Gross margins improved an entire percentage point, a significant accomplishment for a retailer (Revell 2003). Personnel evaluations were standardised throughout the company. Before Nardelli, individual stores used over 157 different employee appraisal forms, many that they had designed themselves (Sellers 2002). This was changed to a 360 degree appraisal method which required only two forms and was the same at every store and at headquarters. Employees now receive pay increases based on their overall performance ratings measured on such evaluations (Sellers 2002). Managerial training at each store was replaced by the leadership training institute in Atlanta (Sellers 2002). An additional item of streamlining was removing Blank’s additional layer of management and passing areas of responsibility assigned to them back to the regional managers (Pascual 2001).
He additionally mandated changes in how stores operated. Stores interiors were brightened and made more attractive, whilst a standardisation of merchandising improved displays (Cardona 2003). Advertising and web presence were also revamped, and the company began to court the female customers it was rapidly loosing to competitor Lowe’s, increasing the number of how-to clinics in areas of women’s interests and more clearly marking item locations (Cardona 2003). Stores were required to operate according to company-wide regulations in many areas, such as moving restocking activities to nights to improve safety and customer service (Pascual 2001). Nardelli also changed the company’s cash-return policy, which many saw as an unalterable part of Home Depot culture. However, the looseness of the policy led to widespread abuse; a customer could return any item bought from Home Depot at anytime for a full cash refund with no receipt or proof of purchase was required. Nardelli required a receipt for cash back and placed a time limit on returns. While many of the old guard at Home Depot protested strongly, the new policy is predicted to save Home Depot over ten million dollars annually (Sellers 2002).
Obviously, these changes impacted culture in addition to operations at Home Depot. Store managers and regional division heads were no longer free to “ride the range” as cowboys doing their own things. The informal network culture that comprised much of how things were done at Home Depot was replaced by structured, centralised systems more in line with a communal community (Goffee and Jones 1996). Fortunately Nardelli realised the importance of continuing to solicit, value and use suggestions from all levels of the company, and included in his plan communication systems from the store level to headquarters and vice versa (Pascual 2001). However, the solidarity requirements of the new community structure required decisions and implementation of decisions to come from a top-down position, with individual managers now mandated to work through established, formal channels and face repercussions if they tried to circumvent them (Pascual 2001). Not all Home Depot personnel were supportive of such changes, but eventually everyone either got on board or left (Sellers 2002).
Coming in as an outsider was a tremendous benefit to Nardelli in successfully implementing such drastic company-wide changes, and in such a short time. From a stakeholder standpoint, there were those who were invested in the cultural aspects of Home Depot and those invested in the financial aspects, with some in both camps. Stakeholders are those people who both “depend on the organisation to fulfil their own goals and on whom, in turn the organisation depends” (Johnson and Scholes 2002, 206). In this case there was conflict between the desires of employees to maintain a culture they valued and the desires of shareholders and the board to improve returns and safeguard the long-term financial stability of the organisation. Someone within the company would have a difficult time responded to the needs of both parties, and making the difficult decisions that sometimes favoured one or the other.
From a Force Field analysis, it was also beneficial to Nardelli to be an outsider. As noted earlier, if someone had come up through the ranks at Home Depot, he or she would have undoubtedly both favoured and reinforced the loose culture of its first twenty years. He or she would have also already been a part of the social networks on which the company operated, and would have been less likely to damage such networks or be able to force change through them. Force Field analysis indicates that such barriers as exists in a network community are unlikely to be removed by an insider (Goffee and Jones 1996). Robert Nardelli, coming from a different and highly disciplined culture at General Electric, was in a better position to make such changes.
2. (a) Use elements of the change kaleidoscope to identify which of the contextual features of change were particularly important for Nardelli, to consider when approaching the implementation of his vision for change in 2000.
The change kaleidoscope model “comprises design choices in the centre, surrounded by change contexts” (Bradford 2002, 20). Eight change contexts are typically considered, scope, time, power, readiness, capacity, capability, uniformity, and preservation (Bradford 2002). Change is so complex that it is impossible to create a specific formula for it, but considering each of these factors and the relationships between them can assist in change analysis. Nardelli needed to consider each of these change contexts when he arrived at Home Depot.
The scope of changes he needed to implement was company-wide. Many of the changes required centralisation of company functions and implementation of accountability and specific systems. Changes of this scope requires the support from workers throughout the company and at all levels, something Nardelli could not count on given the tremendous cultural changes these operational changes would cause. He was wise to hold “town-meetings” to discuss upcoming changes and get local store employees on board, to continue visiting stores and soliciting input from floor-level employees, in addition to keeping some visible markers of Home Depot, such as the orange aprons (Sellers 2002). These actions helped bring some on board necessary to implement changes of this scope.
Time was of the essence for several reasons. Rival Lowe’s was gaining market share (Pascual and Berner 2000). Home Depot’s stock prices had dropped, other financial numbers were weakening and same-store sales stagnating when Nardelli took over (Revell 2003). Changes had to happen quickly to turn the company around, otherwise Home Depot risked losing its positioning and market dominance. Moving quickly also improved the chances of support from both major groups of stakeholders. Board members and shareholders would see him doing something, whilst store workers are more likely to accept changes with a leadership change than several years down the road (Johnson and Scholes 2002).
Being in his “honeymoon period” also gave Nardelli increased power. He had something of a board order to make changes, and current employees had a vested interest, particularly coming from a culture that relied on social networks, to get on the good side of the new boss. Nardelli was further able to bring in personnel from outside Home Depot, many from his place of cultural foundation, General Electric, to assist him in solidifying his power base and implementing planned changes (Pascual 2001). As his power increased, this made it easier to implement changes more quickly and of a broader scope.
New personnel also increased the readiness of Home Depot, as did to some extent Nardelli’s communication in town meetings and the like. Most employees from the old administration were neither aware nor committed to widespread changes at Home Depot (Sellers 2002). Employees in this mindset are often likely to sabotage or circumvent changes, as they had done to some extent under Arthur Blank (Bradford 2002). Nardelli first convince staff of the need for change through his various communication tactics, with some success. He additionally brought in new personnel at executive levels who had an awareness of needed changes. He simply required those who were unwilling to commit to the needed changes to come on board or leave (Sellers 2002). Given the external pressures on Home Depot at the time, he had little other choice (Revell 2003).
Capacity, on the other hand, was not a problem at Home Depot. Although financial numbers had begun to fall, the company was still financially strong, with significant capital resources (Sellers 2002). The company owned many of its stores outright, and had developed means of erecting a new store with a relatively small capital expenditure. Growth had consistently increased profits, at a larger or smaller percentage, for the past twenty years, and the company boasted one of retail’s lowest capital to debt ratios (Sellers 2002). The company had a reasonably solid group of workers, with the financial means to replace personnel as needed.
Capability, however, depended largely on people and was therefore more of a question. Capability requires the necessary skills and abilities amongst a company’s staff to manage planned changes (Bradford 2002). Since so many of Home Depot’s managers and executives had come up through the stores, not all of them had the experience of training to implement changes outside how they were used to working (Stein 2000). This was solved by Nardelli through creation of the leadership training institute and by brining in executives from outside Home Depot.
An even bigger problem for Nardelli was the lack of uniformity within the company. Each manger ran his or her store the way he or she wanted; each regional division head ran his or her area as he or she best saw fit. There was almost no systemic uniformity in operations from store to store or region to region. This meant almost everyone at Home Depot somehow had to change the way they did business for the changes to be successfully implemented. Preservation, maintaining the existing elements valued within the organisation, seemed less of a priority for Nardelli than did righting the company, as he considered every aspect of the company as a potential area of change and then made the changes he felt were necessary, regardless of their ties to Home Depot’s past.
(b) What change design choices were indicated (or constrained ) by critical contextual features identified above? Were these indicated design choices reflected in the change strategy actually adopted during the transition to the new organisational arrangements and procedures in Home Depot after 2000? Within your answer indicate whether or not you think the criticisms against Nardelli were justified and evaluate his effectiveness in managing change over the period described in the case.
Change design was influence by scope, time, and power factors, and constrained by readiness, capability and uniformity. Changes other than the widespread centralisations and standardisations implemented by Nardelli would not have addressed the needs of Home Depot, nor would they have been likely to have been followed by staff at the store level. Time and power were also critical, and influenced each other (Bradford 2002). External factors necessitated Nardelli making changes at Home Depot in a short period of time. As Nardelli increased his power within the company, he could implement changes more quickly, and similarly move the company towards a communal community at a greater pace.
However, he was impeded by the low level of readiness and capability within the company. The change target that Nardelli faced, the collection of behaviours that needed to be changed, was significant for many employees (Bradford 2002). Workers at all levels of the company had to be motivated to buy into and follow through with the planned changes. Had Nardelli tried to simply strong-arm the changes into place without any attempt to involve employees or at least acknowledge the social network community under which they operated, he would have likely faced widespread mutiny and lost his job. By insisting on changes but honouring social networking, even though it would eventually need to be adapted, he brought a number of his staff into an awareness of the need for changes and subsequent willingness to commit to those changes (Sellers 2002). Nardelli was able to solidify both his power base and those in positions of implementing change by bringing in executives from his own culture and “social network” at General Electric (Tsao 2002). He additionally mentored and worked individually with key personnel within the company to be sure they were invested and on board with his proposed plans, reassuring their cultural pattern of social network. Eventually, longer-time employees at Home Depot committed to the change plans, displaying an increased readiness and capability. Those unwilling to accept the need for change or commit to it were pushed out or resigned over Nardelli’s first year or two (Seller 2002).
Lack of uniformity at Home Depot required that changes be from the top down, both so they would be implemented and so they would be implemented in the same way from store to store (Pascual 2001). This directive approach also countered initial resistance from workers used to doing things their own way and being rewarded by their superiors for taking entrepreneurial risks (Johnson 1998). Since directives were coming from the top, rather than bubbling up from the bottom or sliding side to side as they had previously, Nardelli’s mentoring of executives and managers with executive potential, in addition to replacing key staff at the executive level, ensured a level of solidarity at the upper management level needed for his change plans (Pascual 2001). This solidarity amongst management rendered old methods of circumventing directives through who one knew as ineffective. Nardelli required stores to use the new systems, if they didn’t they didn’t receive inventory or other needed supplies (Revell 2003). He was therefore able to require compliance for workers to be able to continue working and succeeding at their jobs.
Many criticised Nardelli for what changes he made and how quickly he made them. Pascual (2001) reports one former senior vice-president complained the changes being implemented both damaged worker morale and were counter-cultural to Home Depot. Almost two-thirds of the senior managers, such as this man quoted, were unsupportive enough of the changes to leave the company or be fired (Sellers 2002).However, if one considers the lack of uniformity and deteriorating systems (of what systems there were) at Home Depot, the scope of Nardelli’s changes was necessary. Specific changes were also vital to Home Depot’s ability to sustain growth. The company simply could not keep on adding new stores without some centralisation of systems and standardisation of procedures. To not act meant undermining many of the good things, like customer service, that had traditionally been part of the Home Depot equation but had slipped in recent years (Upbin 2000). Many stakeholders within the company felt he was also trying to make changes too quickly (Nardelli, Sellers and Schlosser 2004). Others believed the changes were being implemented too swiftly; some even accused him of trying to make Home Depot into General Electric overnight (Nardelli, Sellers and Schlosser 2004). Some Wall Street analysts were amongst this group, and their opinions led to a rapid dropt in the company stock, which decreased almost by half in Nardelli’s first year (Revell 2003).
Time has shown the wisdom of Nardelli’s plan, however. Home Depot has weathered both a high level of internal and external change, and has emerged with increased profits, reduced expenses, and one of the lowest rates of employee turnover in the US retail sector (Nardelli, Sellers and Schlosser 2004). Apparently, the employees at Home Depot have embraced these changes on the long-term, allowing the continued success of such measures within the company. Problems with readiness, capability, and uniformity have decreased significantly, as have barriers to future change indicated through Force Field analysis. All these factors both support the changes made by Nardelli and bode well for future changes that may need to be implemented at Home Depot.
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