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Team Case Study Report: Home Depot vs. Lowe’s

Lonnie Morrison Scott Reid Karen Reyes Donald Sigwalt Jeffrey Snyder

IST 614: Management Principles for Information Professionals

Prof. Robert Brenner May 5th, 2005

2 Table of Contents

We’ll edit this part once all the sections are completed. Introduction

Whether you own your home or rent, chances are that at some point you will find yourself looking for something that will lead you to one of these two retail giants. The home improvement industry has evolved from small regional and locally owned hardware stores to these superstores. The top two in the industry are Home Depot and Lowe’s. Each has their eye on moving into international markets, each has superstores in all 50 states and each has evolved along different paths to reach their current positions.

According to Fortune 500 Home Depot, Inc. is ranked at #25 and the second largest retailer in the US after Wal-Mart. Home Depot Inc. has its corporate headquarters in Atlanta

Georgia. What began in 1979 as two 60,000-foot stores that resembled warehouses has grown to about 2,200 stores across North America, Puerto Rico, and China. Home Depot Inc. is publicly traded on the New York Stock Exchange as NYSE:HD. At the end of 2008 Home Depot Inc. employed 331,000 people. Home Depot sales recorded and posted in 2009 are $71,288.0 mil.

Home Depot Inc. is the number one home improvement retailer with Lowe’s coming in second place with sales posted in 2009 at $48, 230.0 mil..

Founded in 1946 Lowe’s went from a small hardware store to the ninth largest retailer in the US. Lowe’s went public in 1961 and began trading on the New York Stock Exchange as

NYSE:LOW in 1979. According to Fortune 500 Lowe’s Companies, Inc. is ranked at #47.

Lowe’s Companies, Inc. are headquartered in Mooresville North Carolina. Lowe’s competes with Home Depot, Inc. (home improvement) and Sears (appliances) they are second to both.

Lowe’s currently has 1640 superstores in the U.S. and another dozen stores in Canada. Lowe’s also plans to open stores in Mexico in 2009. Lowe’s has not moved as aggressively in foreign markets as Home Depot. At the end of 2008 Lowe’s employed 216,000 people.

1 As the economy tightens Home Depot, Inc. and Lowe’s Companies, Inc. are both vying for the business of the do-it-yourself, weekend warrior of home improvement as well as professional contractors. While Home Depot carries appliances, Lowe’s has chosen to focus on appliances as a major portion of their business positioning. Both companies carry an inventory of about 40,000 items in their superstores that encompass lumber, flooring, plumbing, gardening supplies, tools, paint, and appliances as well as carpeting, cabinetry, and other installation services. Lowe’s places its focus on lowest prices and superior customer service. Home Depot rewards superior customer service through awards and compensation. As both of these giants compete for business customers are enjoying “low price guarantees”(Home Depot, Inc.) and

“lowe’st prices guaranteed plus 10%” (Lowe’s Companies, Inc.) as each moves to increase customer shares of the marketplace.

Home Depot, Inc. and Lowe’s Companies, Inc. have different employee benefit structures. Home Depot, Inc. has less full time employees that the 75% that make up Lowe’s workforce. Home Depot, Inc. prides itself on offering the most competitive pay and benefits for its full and part time employees these include some non-traditional benefits as well as savings plans and employee stock purchase plans. Lowe’s offers benefits for its full and part time employees but describes these as comprehensive and these are less publicized and much less detailed that those benefits offered by Home Depot. Both companies are looking for associates to work in the stores that have experience and knowledge; each company has cross over employees that have worked for the competitor.

2 Perception Management

Both Home Depot and Lowe’s cater to the Do-it-Yourself (DIY) home improvement market and construction professionals and want to be seen as a one-stop, customer-friendly shopping establishment. For example, Lowe’s vision is to “provide customer-valued solutions, with the best prices, products and services to make Lowe’s the first choice for home improvement.” (http://investor.shareholder.com/lowes/).

Both markets are considered to be areas for potential growth given the current status of the housing industry, and the fact that more homeowners are reinvesting in their homes, and the economic environment. Although both companies operate more than 1,500 retail stores, Home

Depot is the larger of the two, with stores in all 50 states, the District of Columbia, Puerto Rico,

U.S. Virgin Islands, Canada Mexico and China. At the present time, Lowe’s stores are only located in the U.S. and Canada. Home Depot and Lowe’s are ranked # 25 and #47 respectively in 2009 on the Fortune 500 U.S. list.

Both companies want to be perceived as consumer and environmental friendly, and community oriented. This is evident in an on-line article on the history of The Home Depot, in which the author stated the following about Home Depot “What they find is a "feel good" store: a place where they feel good about walking in our doors, feel good about consulting our knowledgeable associates, feel good about paying a low price and feel good about returning time after time.” (http://www.fundinguniverse.com/company-histories/The-Home-Depot-Inc-

Company-History.html.)

Deming, Drucker, and Williams are all in agreement that consumer needs should be paramount for an organization’s success, most notably in their discussion regarding consumer

3 loyalty. Although, I would argue that Deming tends to place more emphasis on product quality than Drucker and Williams.

With regards to being environmental friendly, both companies appear to have been winners of the ENERGY STAR partner of the Year Award for leadership in recognition of their efforts in reducing greenhouse gas emissions. In addition, the Home Depot Foundation and their suppliers have committed more than $11 million to support recovery and rebuilding efforts in regions impacted by Hurricanes Katrina, Rita and Wilma, and have been active with local welfare organizations, Habitat for Humanity, and the Boys and Girls Clubs.

Home Depot is considered to be the innovator of the warehouse store, versions of which have been adopted by Wal-Mart, Kmart, etc. It is interesting to note that Lowe’s was initially reluctant to build warehouse stores, but realized that it would not be able to compete with Home

Depot if it did not do so.

Home Depot stores average 105,000 square feet, whereas, Lowe’s average 75,000.

Although, as I have indicated, in order to be competitive with Home Depot, Lowe’s stores that are opening in larger markets tend to average around 114,000 square feet.

Both stores cater to DIY and professional contractors, and stock building materials, wall and floor covering, paint, plumbing supplies, hardware, tools, electrical supplies, and supplies for landscaping and gardening. However, Lowe’s also has a home fashions and interior design center; and an appliance and home electronics dealer. Hence, Lowe’s is not only competing with

Home Depot, but with stores that specialize in home appliances and electronics.

Given the real estate slump, Home Depot and Lowe’s have refocused on their core retail business, closing some underperforming U.S. locations and halting plans for building new stores.

4 Both companies recognize that customers’ needs are an important element in fostering a company’s growth. For example, although do-it-yourselfers made up 60% of the building supply industries sales, the majority had little knowledge or expertise in home repair and improvement projects. Hence, to meet customer needs, management increased the stock of items for sale and educated its sales force. The expectation was that staff would help customers gain confidence in doing home projects and come back to purchase the items needed and/or get additional advice.

Although Home Depot originated the concept of hiring professionals to provide the customer with "expert advice" Lowe’s has now copied this practice. It is interesting to note that since small retail stores could not compete in the area of sales items and price, customer service was the one area that smaller stores had the advantage over Home Depot and Lowe’s.

Conclusion

We would argue that Home Depot had a more focused business strategy than Lowe’s.

For example, Home Depot was the first to establish the warehouse retailing concept, warehouse pricing and professional sales support. It has been suggested that their dominance in the industry is in part due to being first in their focus on technical support and customer service.

The founders of Home Depot, Bernie Marcus and Arthur Blank, used a three legged stool to describe their core business strategy – assortment, price, and service. Lowe’s core strategy is similar and recognizable via the acronym RSVP – retail sales, volume, and profit. Darrow,

Smith, and Fabricant (1994) argue that there have been imitators, but none have been able to achieve the success of Home Depot. In his article Innovation and Entrepreneurship, Drucker

(Pierce and Newstrom, 1993), discusses the concept of “Fustest with the Mostest,” the aim of which is to achieve permanent leadership. Although Drucker argues that of all the entrepreneurial strategies, it comes with the greatest risk, but success offers the greatest reward.

5 We would argue that this is indeed what Home Depot has been able to accomplish and although

Lowe’s has attempted to diversify its sales items it has not have much success in gaining significant market share.

Another way in which both stores are comparable, yet different is in their pricing policy.

Home Depot carries the broadest range of merchandise, priced below competition in every market where they compete. Hence, both are committed to competitive pricing; although, Home

Depot has a single price policy and Lowe’s a two-tier pricing policy.

Customer service is an area where both companies have tried to establish a competitive advantage. Darrow, Smith and Frabricant note that Home Depot’s hiring strategy is to hire individuals who are customer-friendly as well as individuals with experience in the building trades. We would argue that this employment model has been copied by Lowe’s. However, it is not clear if such approach is a viable one as stores expand into metropolitan urban areas.

We think that Home Depot and Lowe’s have been able to successfully portray themselves as consumer-friendly companies through their emphasis on pricing, service and product choice.

However, behind the scene there is intense competition to attract customers and establish consumer loyalty. We would argue that Home Depot’s business strategy, along with its innovative approach to customer service, has been instrumental in helping it to achieve market dominance and should continue to do so in the future.

6 Organizational Design

Don and Lonnie,

Copy and paste the completed Organizational Design section here.

1 Human Resources

Human resource management can best be described as the function of the organization that focuses on recruitment, hiring, management, benefits, safety, motivation, training, communication, and ultimately organizational development. A strong and healthy management of human resources can be the difference between success and failure, being first in the industry and always taking second place. In terms of the value of human resources and their management

Home Depot, Inc. currently seems to be providing the industry standard. That has not always been the case.

The Wall Street Journal reported in April of 2008 the restructuring of Home Depot’s human-resources department. The change eliminated about 1,000 jobs and affected over 2,200 people. The shift from having HR supervisors in each store allowed the retailer to put additional workers in stores. The HR supervisors were replaced by a centralized service center near the company headquarters. This was the latest in a series of HR issues that has plagued Home Depot since the hiring of CEO Robert L. Nardelli in 2001. Nardelli was driven by data, the HR decisions made during his time as CEO were driven by data, Nardelli believed that efficiency could be aligned with a human-centered management creating a formula for success. This success was short-lived Nardelli resigned January 2006; the current CEO, Frank Blake replaced

Nardelli. Blake has spent the past 2+ years working to repair the HR cultural upheaval that occurred seven years ago when Nardelli initiated his first sweeping changes to the company. The same HR executives that were hired under CEO Nardelli to go into the stores and develop partnerships at the store level shared in the ultimate decision to streamline their organization. By streamlining and shifting resources this would allow for a greater number of associates to be available in each store. Under current CEO Blake there is a clear message being sent to the

1 workforce, it is aimed at improving morale, and increasing both the numbers and quality of the associate at the stores. Despite the current economy Home Depot, Inc. included this message to their shareholders:

Our associates carry our service culture to our customers everyday. For 2008, we issued success-sharing checks in excess of $88 million to our hourly associates. This is a Company record, and it is a source of pride that we can take care of associates in economically difficult times like these. Furthermore, associates under the officer level will receive performance based merit increases and our 401 (k) matching program remains intact. Taking care of our associates is an important part of taking care of our customers. Annual Report 2008

Home Depot, Inc. was founded with the philosophy that customers and the associates that serve those customers is key to success. There was support for entrepreneurial spirit and creativity among the employees, recognition for sales performance included financial rewards and stock benefits. Nardelli shifted the focus, imposing rigorous standards, reducing benefits to associates while developing a bureaucratic control. Blake is working to return to the philosophy that made

Home Depot number one.

Current hiring practices require that HR managers have at least three years of experience in HR as well as experience in a retailing area similar to Home Depot’s. The focus is back on human resources as Home Depot puts its restructuring plans in place. Home Depot is keeping their HR call center while other retailers are outsourcing this function.

In comparison, Lowe’s continues to keep a full time HR presence at the store level. In contrast Lowe’s has had very little published about its HR. While Home Depot has had company layoffs, Lowe’s is hoping that by using a different strategy it will be able to maintain its workforce or at least minimize layoffs. Lowe’s is choosing to freeze the salaries of all vice presidents and above for 2009 and reduce raise levels for all other employees. The company has also chosen not to fill about 400 positions at the corporate offices that have been vacated through

2 attrition. Lowe’s has also decided to cut the number of new stores that will open this year from

80 to 60 and that number is subject to change again according to CEO Robert A. Niblock.

Lowe’s limits its information regarding employee benefits and perks in contrast to the explicit outlines of benefits that Home Depot creates. For anyone seeking employment based on benefits and bonuses as well as knowing the culture and climate of the employer it is clear that you can readily find all that information about Home Depot but would have to interview and get hired to find out what to expect from Lowe’s. Lowe’s has about 75% of their associates that are employed full time, while Home Depot maintains about 50% of their associates as full time employees. One thing is clear, Home Depot and Lowe’s each have a different view of their human resources.

3 Innovation

The home improvement industry is a continuously changing market; Home Depot and

Lowe’s are constantly making incremental improvements to their processes, procedures and technologies. In their never-ending battle for market dominance, managers must constantly analyze their business environment, down to the tiniest detail, to be able to innovate for an advantage. Lowe’s first started selling shares in 1961, almost twenty years before Home Depot; however, it was Home Depot that was able to revolutionize the home improvement industry by introducing “big-box” warehouse stores to provide better selection, better prices and better service than its competitors (Upbin, 2003).

Home Depot was able to become the largest home improvement retailer in the U.S. by

“being fustest with the mostest.” This is an innovation and entrepreneurial strategy, described by

Peter Drucker, in which an entrepreneur aims at leadership, if not dominance of a new market or a new industry (162). Arthur Blank and Bernie Marcus founded the Home Depot in 1978

(Johnson, 1998). They built radical “big box” stores, averaging 108,000 square feet, loaded with every imaginable home product. Besides building bigger stores than their competition, the true innovation was in their founders’ mantra: this is a service business, not a discount hardware store. They hired plumbers, carpenters, contractors, and other industry professionals to provide the highest level of customer service possible. Their famously loyal and knowledgeable store employees are widely credited with creating the modern home improvement marketplace and propelling the chain to dominance in its market niche. In 1989, Home Depot officially surpassed

Lowe’s in revenue to become the largest home improvement retailer in the U.S. (Upbin, 2003).

“Then, after the innovation has become a successful business, the work really begins,” writes Drucker (164). He adds, “then the strategy of ‘being fustest with the mostest,’ demands

4 substantial and continuing efforts to retain a leadership position; otherwise, all one has done is create a market for a competitor.” To ensure Home Depot is constantly innovating and able to stay ahead of their competitors on price, displays and product assortment, they constructed an

88,000 square foot Innovation Center in 2004 (Grow, 2004). In a secret, discrete looking brick building, somewhere in Atlanta, HD associates are able to test everything from riding lawn mowers to displays for patio furniture sets before they hit the stores. Tom Taylor, EVP of merchandising and marketing, and his team use this facility to experiment and explore new product segments. Drucker believes, “new uses have to be found; new customers must be identified, and persuaded to try the new materials”; this is exactly the impetus behind the innovation center and a sign that Home Depot doesn’t not plan on relinquishing its leadership position.

During the 1980’s, Lowe’s was the industry leader, but intense competition from Home

Depot caused the chain to suffer (Upbin, 2003). Although Lowe’s resisted, management knew it would need to adopt the “big box” format in order to survive. Lowe’s abandoned its 52 year heritage as a ‘small-box,’ small-market retailer to follow the blueprint created by Home Depot

(Johnson, 1998). The average size of a Lowe’s store increased from 20,000 sq. ft. in 1989, to

86,000 in 1998, to over 100,000 today. In this sense, Drucker would consider Lowe’s a ‘creative imitator.’ “What the entrepreneur does is something that somebody has already done. But it is creative because the entrepreneur applying the strategy of ‘creative imitation’ understands what the innovation represents better than the people who made it and who innovated,” writes Drucker

(165-166). Like ‘being fustest with the mostest,’ ‘creative imitation’ is aimed at market or industry leadership.

5 Robert Tillman, Lowe’s former CEO, says, “If you've ever been No. 1, it's no fun being the No. 2 sled dog and looking at the lead dog's you-know-what” (Johnson, 1998). According to

Tillman, “our objective is in every market we serve to be the first choice store for home improvement products.” In order for a creative imitator to be successful, they must serve the markets the pioneers have created but do not adequately service. “Other companies mindlessly copied Home Depot but didn’t focus on the customer,” says Tillman, “if the customer doesn’t think we’re doing what we need to do, then we do it.”

The management team at Lowe’s developed two innovative strategies to better service this market. Tillman seized research that showed women initiate 80% of home improvement projects (“Robert Tillman: Lowes,” 2003). Stores were redesigned to be given a brighter appearance, they began stocking more appliances, and they’ve focused on higher end goods – everything from Laura Ashley paints to high end bathroom fixtures. While not completely pulling back on male-dominant categories like tools, they’ve expanded their décor related segments and have added other subtle feminine improvements. The second driver in differentiating themselves is their lean distribution network. Since they used to operate mainly in smaller markets, they’ve learned how to distribute merchandise more efficiently than Home

Depot. Their distribution networks, located around the country, permit Lowe’s to buy larger quantities of products from vendors, resulting in volume discounts and lower prices and they can get those products into its stores quicker (Johnson, 1998).

This strategy has appeared to work so far as Lowe’s has been able to close the gap on

Home Depot. Current CEO, Robert Niblock says, “our core strategy is really based on winning customers’ business and loyalty by offering them something different and hopefully better”

(Howell, 2005). The innovation is ongoing for Lowe’s; to keep stores fresh and relevant, they

6 spent more than $500 million in 2005 on existing stores, ranging from routine projects to major merchandising projects. Although still in second, they’ve been able to carve out a niche for themselves in home improvement retailing with a compelling, differentiated offering, especially amongst female buyers.

7 Social Responsibility

Don,

Could you please combine your’s and Scott’s sections for this chapter?

8 Finance

According to information in their 2008 annual reports, Home Depot is the larger of the two corporations by almost any measure. The Home Depot has 2,233 stores to 1,649 for Lowe's.

The Home Depot has 322,000 employees while Lowe's has 228,000. The Home Depot has assets, liabilities and equity of $41.1 billion, $23.4 billion and $17.8 billion dollars respectively.

The corresponding figures for Lowe's are $32.7 billion, $14.6 billion and $18.1 billion. The equity figures are intriguing as they show the two companies to have a fairly equal residual value for shareholders even though The Home Depot has almost half again as many stores as Lowe's.

The most recent annual net income from operations for the two companies was also practically identical: $2.3 billion for The Home Depot versus $2.2 billion for Lowe's. This metric has declined two years in a row for both companies with The Home Depot experiencing the sharper reductions. The Home Depot's operating income for the fiscal year ending February 2008 was

$4.4 billion and the year before it was $5.8 billion. The figures for Lowe's are $2.8 billion and

$3.1 billion. Over the same three year period The Home Depot's earning per share dropped from about $2.80 to about $1.35 while Lowe's went from about $2.00 to about $1.50 (The Home

Depot, Inc., pp. 16-29; and Lowe's, 2009a, pp. 5, 13 & 28-29).

Investors seem to favor The Home Depot despite these bottom line similarities. The

Home Depot has 1.71 billion shares of common stock outstanding (The Home Depot, Inc., p.

30). Its stock closed at $25.77 a share on May 1, 2009 (Google, 2009a) giving a current total market value of about $44.07 billion. Lowe's has 1.47 (Lowe's, 2009a, p. 30) billion shares outstanding with a total market value of roughly $30.65 billion given the stock's close of $20.85 on May 1, 2009 (Google, 2009b). The Home Depot stock is valued at 19 times 2008 earnings whereas Lowe's is selling at only 14 times last year's earnings. Investors apparently have higher

1 expectations of Home Depot's future potential. This disparity is puzzling given Lowe's higher earnings per share and the roughly equal shareholder's equity and recent net operating income of the two companies. The Home Depot does have a much higher dividend at $0.90 per share for a yield of 3.49% (The Home Depot, Inc., p. 30) than Lowe's at $0.335 per share for a 1.60% yield

(Lowe's, 2009a, p. 28). Having a yield above certificate of deposit interest rates does explain at least part of investor's preference for The Home Depot stock, though this assumes investors have confidence that The Home Depot can sustain this dividend rate.

The Home Depot's liabilities are 57% of its assets compared to a ratio of 45% for Lowe's.

The Home Depot's total debt is $11.4 billion with $5.0 billion due in five years. Lowe's debt is

$6.1 billion with only $0.6 billion due in five years. Home Depot pays over $600 million a year in interest on its long term debt while Lowe's pays over $300 million interest on its long term debt (Value Line, pp. 881-2). It is also interesting to compare assets and liabilities per store for the two companies. Home Depot has $18.4 million in assets per store but the smaller Lowe's has

$19.8 of assets per store. Home Depot has ten and a half million dollars in liabilities per store but Lowe's has only $8.9 million. Lowe's financial position seems to be stronger that that of

Home Depot. The most likely explanation is that Home Depot has been more aggressive in opening new stores and has borrowed considerably to fund its growth. A book written in 1999 mentions that “Home Depot expects to be operating over 1,600 stores by 2002” (Sagawa &

Segal, p. 34). Since Home Depot has over 2,200 stores in 2009 the company opened or acquired at least 600 stores in the last ten years. The growth was actually much greater since Home Depot had 761 stores in 1998. That's 1472 new stores in 11 years, an average of two and a half new stores per week. During the same period Lowe's grew from 484 stores to 1649, averaging just over two additional stores per week (Marcus, Blank & Andelman, p. 162)

2 Lowe's was “founded in 1946 ... [and] went public in 1961, and began trading on the

New York Stock Exchange in 1979” (Lowe's, 2009b). In four years the stock price had quadrupled and by the mid-1990s it had increased twenty fold over it's 1979 value. It doubled again around the turn of the century and then tripled again before losing a third of its value in the current depressed market (Google, 2009b).

The Home Depot was founded in 1978 and its start up capital was two million dollars from a group of forty investors who took a mix of preferred and common stock. The men who created the Home Depot business plan, and who would run the business, received common stock for “pennies a share” (Marcus, Blank & Andelman, p. 53) Bernie Marcus became CEO with

18% of the original common stock, Arthur Blank was the main financial officer with 15% and

Pat Farrah, the lumber yard merchandiser got almost 15% (Marcus, Blank & Andelman, p. 65).

The Home Depot went public in 1981 and the original preferred sock was converted to common stock (Marcus, Blank & Andelman, p. 94). In a couple years the stock's value had increased twenty fold (Google, 2009a).

When Marcus stepped down as CEO in 1997 and Blank took his position (Roush, p. 227) the stock had increased in value another twenty fold (Google, 2009a) making it four hundred times its original value. Three years later Blank retired as CEO in favor of Robert Nardelli who remained in charge until 2006 (Kavilanz). Under Blank the stock's value quadrupled but a slide was in store. “In his five years as CEO, he [Nardelli] has made more than $245 million, while the company's stock declined 12 percent during the same period” (Marquez). The bear market of

2008 further eroded the stock's value which now under performs versus the Dow Jones industrial average and currently trades at about twice the value if did when Marcus retired as CEO

(Google, 2009a).

3 This look at the historical stock values of the two companies shows that investors have greatly favored stock in The Home Depot over that of Lowe's The current market price of the former is over 800 times its late 1970s value while the former trades at a mere 80 times its value from the same era. By comparison the Dow Jones Industrial Average is currently only ten times it's 1978-79 levels. A close look at the most recent annual reports of the two companies leads one to question whether the historical investor bias in favor of The Home Depot stock relative to

Lowe's will continue. The per share book value (total equity divided by outstanding shares) of

Lowe's stock is $12.31 versus $10.41 for The Home Depot, yet the latter stock trades for five dollars a share more with only a higher dividend to recommend it.

4 The Role of IT

Home Depot and Lowe’s are continuously battling for market share in the home improvement industry. To create and maintain competitive advantages in this market, these companies need to have accurate, complete, relevant and timely information concerning all aspects of their operations. Managers must consistently assess and upgrade their information systems and technology to support the company’s growth, control costs and improve decision making. Since these companies are so alike, it is no surprise they have very similar technical needs; their technology must provide real-time inventory information, support administrative and decision making functions, and enhance the experience of the customer.

In July of 2001, Lowe’s CIO, Steve Stone revamped the company’s approach to IT planning by investing in an enterprise portfolio management (EMP) system (Waxer, 2005). In the hopes of aligning IT initiatives with corporate strategy, Stone and his team sought to carefully document commitments, time lines and resource demands of every IT project in the works, from routine hardware upgrades to enterprise wide rollouts. Stone assembled an IT steering committee, consisting of Lowe’s CEO Robert Niblock, and six other executives from cross functional departments to review detailed project proposals. With a proper IT governance framework in place, management at Lowe’s is able to take on strategic projects and ensure they remain on budget, on schedule and align with corporate goals.

In 2005, Lowe’s implemented the ‘Rapid Response Replenishment’ (R3) program to improve supply chain efficiency and better leverage inventory (Biederman, 2007). Lowe’s collaborated with vendors using CaseStack, a 3rd party logistics company that specializes in retail vendor consolidation, to ensure full, on-time shipments to its eleven distribution centers.

When the R3 initiative was first implemented, about 50% of stock moved through these

5 distribution centers; by the end of 2006, over 75% of stock moved through the distribution center network. This gives managers real-time perpetual inventory information and allows business intelligence technology to track over 50 million items in its 1,400 stores to plan inventory levels and analyze the effectiveness of the 4,000 to 6,000 quantity-discount programs Lowe’s has in place at any one time (Havenstein, 2007).

In 2001, when then-executive VP and CIO, Bob DeRodes joined Home Depot, he joked that the most advanced technology in some HD stores was a No. 2 pencil (Whiting, 2005). His mission was clear: to transform Home Depot into a “more information-based company.”

DeRodes felt Home Depot lacked merchandising, inventory, and supply chain management capabilities, as well as visibility into its supply chain operations. Karen Etzkorn, VP of IT marketing and merchandising systems, also emphasized that they needed to be electronically connected to its suppliers. Under DeRodes leadership, Home Depot spent $1 billion, from 2001 to 2005, to overhaul both its front- and back-end IT infrastructure (“Most Powerful CIO’s,”

2005). Home Depot chose to implement SAP for its retail merchandising and supply chain applications because it is a scalable system that could stretch across its consumer and contractor businesses and expand as the company grows. The addition of a new point-of-sale (POS) system, cordless scan guns, and self-checkout technology has allowed Home Depot to automate its inventory control systems so employees can spend less time restocking and replenishing, and more time on the sales floor (Dutton, 2007).

Another important function of IT for both companies is to improve customer satisfaction.

Shoppers are becoming more familiar with emerging technologies and demanding the option of using them in stores and online. In response, Home Depot and Lowe’s have identified e- commerce as a growth area of its business and are hoping to replicate that in-store experience

6 online (Pallavi, 2006). Allurent Research found that found that for every $1 spent online, the internet influences consumers to spend another $6 in stores (Murphy, 2007). In addition, 67% of consumers who visited an online store intending to make a purchase left because the retailer did not provide enough information. To that end, both companies have invested heavily in online retailing; proving detailed, up-to-date product descriptions and prices, product comparisons and reviews, and special online promotions.

These companies are also bringing the web into stores with internet kiosks. Both companies are using technology created by EdgeNet to allow customers to design their own window treatments, counter tops and entire rooms with an easy to use, point and click design program (Desjardins, 2005). Customers can visualize how they want to transform their space, and then have the option to have it delivered directly to their homes and even installed. Besides creating convenience and a visual aid for customers, this technology is increasing sales by adding an average increase of 30% in ticket size.

These stores are also enhancing customer satisfaction and convenience by improving

POS systems. In 2006, Home Depot redesigned its POS system to allow for greater flexibility and creativity (“This Old POS,” 2006). This new system is now capable of improving inventory control, measuring employee performance, and provides an online price and receipt lookup feature. The introduction of this system as well as wireless handheld scanners has reduced employee compensation claims and reduced transaction times by nearly 10%.

Lowe’s followed Home Depot’s success by making major improvements to their returns system. CIO Steve Stone says, “if we can make this process as painless as possible, its yet another reason for them [customers] to choose Lowe’s” (Weier, 2007). Lowe’s was successful implementing this system because it considered business processes first and technology second.

7 The system was designed to specifically handle the complexity of returning items from several different shopping trips that may have used different payment methods. Lowe’s has been able to reduce the average time of a return by 90 seconds and reduce labor time at the return desk by an average of 30 hours per week, per store.

Both companies have also been pioneers in the fastest growing technology in retail: the self-checkout lane. Home Depot was able to reallocate between 5% and 12% of its cashier to other jobs on the sales floor, recapturing between 50 and 80 employee hours per week (“This Old

POS,” 2006). Senior manager of front end operations at HD, Paul Burel says, “all other things being equal, between 9% and 12% will shop with you over a competitor if you’ve got self- checkout.”

Both Home Depot and Lowe’s have been able to leverage information technology to improve their operations in merchandising and supply chains, allowing them to make better business decisions and create competitive advantages. These companies have been able to align

IT with business objectives to create value and gain market share.

8 Strategic Plan

Strategic Plans are both the cornerstone and keystone document for most organizations.

Essentially, they are high-level plans developed by either executive level management or the corporate board and serve many different purposes (FML, 2009). As the cornerstone, they provide the foundation for defining where the company wants to head in the future, setting both the long term strategy and creating focus on the goals they want to accomplish. As the keystone, they serve to tie all of the subordinate divisions of the organization together by providing them a cohesive vision for the future and setting the expectations of their employees and stakeholders

(FML, 2009).

Strategic plans typically contain both a mission and vision statement, each possessing their own purpose (Williams, 2008). The basis of the mission statement is to define and describe the purpose of the organization’s existence (FML, 2009). There are certain fundamentals that must be considered when developing the mission statement: statement developers should

“consider the organization's products, services, markets, values, and concern for public image, and maybe priorities of activities for survival” (McNamara, 2008). With respect to the vision statement, they are more focused on the long range goals of the enterprise. They typically encompass a longer time window and better define where the organization wants to be as opposed to where they are today.

Due to today’s economic environment, both Lowe’s and Home Depot must contend with how to maintain sales as well as maintaining or gaining market share. The world economic situation, especially regarding the downturn in the housing market and tightening of the credit market, is putting stress on both organizations for the fact that consumers are more likely to curb discretionary spending on home improvements as the cost of food, fuel, and family necessities

1 increases (Lowe’s, 2007). For this reason, both will have to develop new strategies and methods for creating demand for their products and services.

Home Depot Strategic Plan The Home Depot is the largest home improvement do-it-yourself retailer in the world

(Home Depot, 2007). However, even though they are considerable in size, they too are feeling the pain of a downtrodden economy. They’ve seen their retail sales decline by an average of

2.1% over the past couple of years and their average earnings per share fell over 11% last year

(Home Depot, 2007). In an effort to weather this economic storm, Home Depot’s long term goal is to emphasize improving the customer experience in their stores. Within that primary goal, they have five top priorities: associate engagement (e.g. recognition, training, and compensation), product excitement (e.g. new innovative products and revamped product lines), product availability (e.g. improved distribution networks and supply chains), shopping environment (e.g. improved store maintenance), and “own the pro” (e.g. deploy new commercial customer programs) (Home Depot, 2007).

Lowe’s Strategic Plan Lowe’s, as you might surmise, is the second largest home improvement do-it-yourself retailer in the world (Lowe’s, 2007). And, as stated previously, have felt the pinch of the shrinking economy as well. In their 2007 annual report, Lowe’s is very forthcoming regarding the issues they’ve faced during this economic downturn.

Their overall plan for the future is to gain strategic advantages and continue to expand into additional markets to gain a larger market share. In the nearer term, one of their main objectives is to continue researching and analyzing external factors to find out how best to cope with these external pressures. Current day strategies include: improved service to the customer

2 (e.g. better customer service experience, merchandising, and specialty sales), new experiences in more places (e.g. new stores, new markets, and new formats), and improved execution through greater efficiency (e.g. distribution, expense management, technology, and training) (Lowe’s,

2007). As demonstrated by Lowe’s vision statement, customer service is the primary goal they believe will enable them to achieve improved performance in the years to come.

“Lowe's Vision - We will provide customer-valued solutions with the best prices, products and services to make Lowe's the first choice for home improvement.” (Lowe’s, 2005)

Strategic Plans Comparison Both Home Depot and Lowe’s are obviously impacted by the state of the world and U.S. economies. And as such, both are painfully aware that it is impacting their ability to maintain revenue and market share. However, when evaluating both of their strategic, long term plans, both are surprisingly similar. Both companies are employing Drucker’s strategy of creating customer utility. Especially in today’s tough economic times, both are striving to: create utility, improve pricing, adapt to the customer’s social and economic reality, and deliver what represents true value to the customer (Drucker, 2001). Employing these tactics as part of their overall strategy are likely to win over customers who are looking for value in the products they buy and helping to stretch the buying power of each dollar they spend.

Also, today’s consumers are also much more ecologically and socially conscious. Again, both companies realize this fact. They have developed programs that help to improve the communities they operate in and also the world at large. They support: educational programs, volunteer programs, ecology improvement programs, as well as community improvement programs such as Habitat for Humanity (Home Depot, 2007). In supporting these types of efforts, their strategy is to gain customer loyalty through the demonstration of these company’s desire and ability to improve their local communities.

3 Conclusion

All,

This section is incomplete. We should all contribute a paragraph or so to this section on the Wiki page covering our respective topics.

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