bizzXceleration: Performance, Value and Profit

So here's our preliminary shopping list - things to focus on now and things to do to set the table for the future. In other words while emergency repair and recovery needs to be pusued with all due haste and effort those short-term focused efforts need to seque into longer-term and deeper changes or they will be unsupportable.

1. Economic Deterioration - unfortunately HD got a real lift over the last few years from the housing market and judging from the last quater's earnings and the outlook is just beginning to see severe pressures from dropping demand. More unfortunately that would argue for decreased spending just when increased spending is required for repair. Mr. Nardelli truly left some conundrums behind him.
2. Employee Morale - this isn't just doing away with excess pay or special priveleges while Mr. Blake eats in the regular cafeteria. Good jestures and tokens of sincerity and commitment. Any good leader knows that symbolic gestures are essential communication tools - as long as they reflect deeper efforts.
• Fixing morale really means changing staffing patterns - put more people on the floor, give them time to spend with customers and pay them for good service. Ka-ching $$ !
• In case you missed it an earlier post riffed on some of the work on Bob Sutton's blog on morale and company performance and takes a bottom-up approach to translating morale into measurable impacts:People & Performance:Assets or Fungible Commodities ?
3. Customer Satisfaction - investing in better service is the first major step in recovering the faith & trust of the customer base. Now HD still has lots of customers but Lowe's wouldn't be doing as well as it has without a lot of looking for alternatives. So in addition to better staffing and service this means paying attention to store appearance, product mix and quality, pricing and all the other standard 'appurtances' of quality retailing.
• And another post translated the vicious down-cycle created by cost-cutting and the impact on top-down performance and tried to proxy the impact on total market value:Cheap at the Price: Nardelli, Home Depot and Performance
4. Operations - making everybody feel better is a short- and long-term requirement but eventually they have to feel better about something. Which brings us to lost opportunities in re-factoring logistics & distribution. In a prior post we pointed out how HD's ability to adapt on a daily basis to store-level demands was a critical capability lost when increased size and complexity led to exponentially rising costs. Fixing that with a traditional distribution system was sensible only within the boundaries of the warehouse walls but made it more difficult to keep up service. Other areas that need equal attention (read investment, insight and commitment) are info systems, product management & procurement and store operations. Making transformational changes in those areas will lay down a sustainable foundation for the HD who'd like to become.
5. Product Development - this has two aspects. One, where HD has done a wonderful job, is developing suppliers and creating new value in products and product categories. For example the multi-tool kits from Ryobi, Makita, DeWalt, et.al. are real bargains as long as you know your price-quality value tradeoffs. On the other side my neighborhood plumber pointed out that in reducing the cost of fixtures so much plastic was used where a slightly higher cost use of brass would lead to much...much longer lifetimes. So HD needs to keep on doing what it's been doing but consider broadening the categories it covers, thinking much much harder about the value tradeoffs before it looses more customer trust and develop a wider range of selections across that spectrum within categories. That's a major strategic effort which will take time, money, skill and persistence. It also requires, and therefore complements, improvements in morale, customer service and operations. In other words great new products mean nothing if there's nobody to buy it or sell it or it can't be put in the right store at the right time.
6. Business Model & Innovation - in the day HD's great idea was a great idea. Provide good products at a decent price and wrap it with superb & knowledgable customer service so that customers both saw more value in HD than in traditional hardware stores and the market for HD's services was enormously widened beyond the traditional. In other words make Do-It-Yourself (DIY) appealing and workable to a lot more people. That model still holds good with two caveats. The obvious one we've harped on - it depends on nurturing (read investing in) the capabilities to deliver service and the people who deliver it. And the not-so-obvious - as your business grows rapidly you have to re-engineer and transform your operations to make sure you can mainte original value proposition in a greatly changed world. Something HD failed to do. Beyond that however lies the new critical strategic questions facing HD:
• Will the same business model keep on working if it's repaired given market saturation ? Or does it either need refreshing or extension/modification ?
  
• What new strategic innovations are required ? In other words if the old model has approached saturation and exhaustion - then what ?

Posted by dblwyo at 12:32 PM | Permalink | Comments (0)

After some sidetrips to explore performance vs. valuation and the impacts of sacrificing employee morale on long-term performance it's time to revist our friends at Home Depot. Not that we're above just plain old picking on HD, probably the sign of jilted expectations for us as well as the many folks who innundated message boards around the Net and the Blogosphere expressing their deepest disappointments with value and customer service at HD. But it's also more than that - and we hope - much...much more. HD was, perhaps is and certainly can be a great company again but it faces many challenges.

More than that - HD is a poster child (my more erudite friends would say exemplar which is a good word for it) of all the major business-school case study high-performers who appear to have gone aground recently. Just as a sidebar stop and consider the names whoe were making the front-pages of the Journal in the last year or so, and particularly in the last few weeks. Besides HD there's Microsoft, Starbucks, Citigroup, Dell and many others. We should be asking ourselves what's going on here ? Both as investors and participants in the bigger picture of the economy. So picking on HD is not just about them - it's about large-scale performance challenges and what the consequences might be.

Earlier we reviewed HD's history and looked at it's performance, stock price and challenges. They started with an 'exemplary' value proposition based on fair-priced, high-quality products wrapped in attentive and knowledgable service, with skilled, industry-experience staff. However as they grew operational problems with in-store replenishment, saturation of markets and growing competition meant a slowing in relative performance. The Board then brought in a new broom in Bob Nardelli who unfortunately sacrificed HD's two major soft assets (employee morale and customer service satisfaction) at the feet of the idol of short-term performance and controls. It's one thing to instill discipline and a management system. Eventually all rapidly growing entrapaneurial companies need to do that. Fedex for example managed the transition so well in the early 80s with it's extensive management controls that to this day it's maintained superb controls, a record of continous innovation & experimentation (some of which didn't pan out too well of course - who else remembers ZapMail ?) and a superlative reputation for customer service. So we know it's possible - just rare. It is after one thing to have controls and quite another to make sure they're built to serve strategic goals and reflect the exercise of business judgement.

Which would appear to be HD's challenges now. In fact that sets up the critical question - what should they be doing now ? At least in our humble opinion. 

We know that the two immediate priorities are re-building employee moral and restoring customer trust - and judging from the anecdotal evidence new CEO Frank Blake has made some major strides in that direction; at least insofar as can be done in a few months. But even those two efforts are not quick fixes - after all both groups will turn out to be from Missouri. That is, they'll have to be shown the new HD, repeatedly, to believe that a new regime means what it says. But those aren't the only challenges facing Mr. Blake. And judging by the volumes of message board and blog comments both are uphill battles.

So here's our preliminary shopping list - things to focus on now and things to do to set the table for the future. In other words while emergency repair and recovery needs to be pusued with all due haste and effort those short-term focused efforts need to segue into longer-term and deeper changes or they will be unsupportable.

They include Morale, Customer Service, Operations (Logistics, IT, Procurement), Product Management, Business Model Re-Development and Innovation.

Let's leave it there for now and pick up the details of the "Next Six" with the next post.

Posted by dblwyo at 09:55 AM | Permalink | Comments (0)