Picking on HD Some More
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.