SUBMITTED BY: Namita Dahiya 2009H149194P Supriya Rana2009H149205P Anandi Gupta 2009H149210P Anjum Jain 2009H149218P R.Umang Doshi2009H149220P

y Q1: Evaluate Home Depots business strategy.

Do you think it is a viable strategy in the long run?

BUSINESS STRATEGY ANALYSISy Strategy analysis involves Industry analysis, Competitive analysis and Corporate y y y y y

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Strategy analysis. INDUSTRY ANALYSIS: Three potential sources of competition in an industry are as follows: Force 1: Rivalry among the existing firms Factors determining the intensity of competition in an industry are: a) Industry growth rate: Industry had grown at a CAGR of 14% over last 15 yrs and is expected to grow at a similar rate. Home Depot market share will increase. b) Concentration & Balance of Competitors: Though industry growth attracted many companies but only major competition to Home Depot was from Hechinger Co. c) Scale/Learning Economies & Ratio of Fixed Cost to Variable Cost: There has to be economies of scale in the industry so company is engaging in

Aggressive competition for market share. Also Ratio of FC to VC is high resulting in

price reductions to utilize installed capacity. Force 2:Threat of New Entrant Factors determining the height of barriers in an industry are as follows: a) Economies of Scale: Industry requires economies of scale both in terms of number of warehouses & products b) First mover Advantage: Industry provided first mover advantage to Home Depot as it brought the warehouse retailing concept to the home center industry. c) Access to Distribution & Relationships: Home Depot had considerable control over channels of distribution & build enduring relationships with customers through excellent sales assistance. Force 3:Threat of Substitute Home Depot is in DO-IT-YOURSELF segment, already existing hardware stores can be potential threat to company.

y Force 4: Bargaining Power of Customers: Depend on two factors:

Price Sensitivity: As industry provide less scope for differentiation, customers are price sensitive. Home Depot offers low, competitive prices to customers. y b) Relative Bargaining Power: As industry attracted many competitors, customers bargaining power increased. y Force 5: Bargaining Power of Suppliers: y Home Depot had little bargaining power over customers, so they had to offer low prices.y a)

y CORPORATE STRATEGY: The company could create value through its

broad corporate focus for the following reasons: y Home Depot establishes a valuable brand name in Do-It-Yourself warehouse retailing industry. As the concept is new, customers as likely to rely on well known brands to reduce the risk of bad experience. Home Depots expansion strategy is sensible because it exploits this valuable resource.y Home Depot has been able to acquire expertise in execution of home

improvement projects & their applications through special training programs. y Home Depot has been able to create a tremendous amount of loyalty among its customers through aggressive marketing and execution. Its strategy exploits this valuable customer base.

y COMPETITIVE ANALYSIS: There are two generic competitive strategies: y 1) Cost Leadership: Enables a firm to supply same product or service offered

by its competitors at a lower cost. y 2) Differentiation: Involves providing a product or service that is distinct in some important aspect valued by the customer. y Home Depot followed a combination of both strategies. It offered low, competitive prices to individual homeowners & small contractors thereby following COST LEARDERSHIP STRATEGY. y It differentiated its services by increasing convenience, minimizing out-of-stock occurrences and providing excellent sales assistance in home improvement projects.

Q 2:Analyze Home Depots financial performance during years 198385. Compare Home Depots performance in this period with Hechingers performance.

Ratio Analysis Home Depot, Inc.1982 EPS Book Value per Share Market Price 0.07 0.23867 1983 0.24 0.82553 1984 0.41 2.628574 1985 0.56 3.170263 17.125 1986 0.33 3.528815 12.625

Gross Profit Margin Net Profit Margin Return on Investment

28.59% 2.80% 11.61%

28.35% 4.52% 29.90%

27.33% 4.01% 18.04%

26.42% 3.26% 10.53%

25.90% 1.17% 3.06%

Debt Equity Ratio Asset Turnover

0.744029 3.04874

0.012858 3.563488

0.067159 2.434515

1.470342 1.735531

2.244231 1.843088

Current Ratio Quick Ratio Interest Coverage Ratio 183.5577

3.116401 1.339605 7.390587

2.273185 0.446848 2.138448

DE, Asset T/O Ratios4 3.5 3 2.5 2 1.5 1 0.5 0 83 Debt Equity Ratio 84 Asset Turnover 85 AssetTurnover Hech

Ratios35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 83 Gross Profit Margin Gross Profit Hech 84 Net Profit Margin Net Profit Hech 85 Return on Investment

EPS, Book value per share3.5 3 2.5 2 1.5 1 0.5 0 83 EPS 84 Book Value per Share 85

Current & Quick ratio3.5 3 2.5 2 1.5 1 0.5 0 1 Current Ratio 2 Quick Ratio 3

Q3. How productive were Home Depots stores in the fiscal years 19831985?

Stores and Markets60 50 50 40 31 30 20 10 0 1983 1984 1985 7 19 15 11 72000 70000 76000 74000 80000 78000 82000

Square Footage per Store

80000

77419

73684

1983

1984

1985

Number of Markets

Number of Stores

Employees per Store135.00 130.00 126.32 125.00 120.00 115.00 450000 110.00 105.00 100.00 95.00 1983 1984 1985 440000 435000 108.00 445000 460000 455000 129.03 470000 465000

Customers per Store466000 461290

447368

1983

1984

1985

Sales per Store (million $)14.10 14.00 13.90 13.80 13.70 0.30 13.60 13.50 13.40 0.10 13.30 13.20 1983 1984 1985 0.00 13.48 0.20 0.40 13.96 0.50 0.60 14.01

Earnings per Store (million $)0.54 0.45

0.16

1983

1984

1985

Sales per Square Foot ($)184.00 182.00 180.33 180.00 178.00 176.00 174.00 2.00 172.00 170.00 1983 1984 1985 1.00 0.00 175.18 3.00 6.00 5.00 4.00 183.00 8.00 7.00

Earnings per Square Foot ($)7.36

5.88

2.05

1983

1984

1985

Sales per Employee ($)140000.00 120000.00 106750.00 100000.00 80000.00 60000.00 40000.00 20000.00 0.00 1983 1984 1985 1000.00 3000.00 5000.00 129759.26 108200.00

Earnings per Employee ($)4291.67 4000.00 3525.00

2000.00 1518.52

0.00 1983 1984 1985

Sales per Customer ($)35.00 30.14 30.00 25.00 20.00 15.00 10.00 5.00 0.00 1983 1984 1985 30.27 30.07 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00

Earnings per Customer ($)1.21

0.99

0.35

1983

1984

1985

Q4: Home Depots stock price dropped by 23% between January 1985 and February 1986,makingit difficult for the company to rely on equity capital to finance its growth . Covenants on existing debt restrict the magnitude of the companys future borrowing. Given these constraints, what specific actions should Home Depot take with respect to its current operating performance? Should the company change its strategy? If so,why?

1985 was a year of rapid expansion and continued growth for The Home Depot which they saw as a time to enhance their share of the do it yourself market strategy by making significant investment in long term future while compromising on the short term profit growth. It had announced plans for expansion with site acquisition and construction costing $ 6.6 million per store and investment in inventory requiring $ 1.8milliion per store. Since discounting cuts in the gross profit margins, they must carefully control buying ,merchandising and inventory costs Actions: The company offers low and competitive prices, it must increase its price and profit margins which were low in the industry, despite the best quality and no time delay in product availability. This was possible due to central warehousing concept with each store functioning as its own warehouse with a capacity of over 25000 different items Due to sales on cash and carry basis, cash flows from existing operations gave the company a significant source of liquidity. Also, a significant portion of inventory is financed under vendor credit terms. So, company should focus more on income from operations for financing its activities. Some of the markets like Houstan where oil related economy was undergoing contractions with fierce industry competition, so they should have a flexible reaction in merchandising and operations They should implement a perpetual inventory tie in with the price look up system, thereby eliminating the pricing of merchandising at store level which will increase labour productivity and hence decrease the operating costs

y

y

y y

y Despite significant investments, they continue to be in a strong financial

position and are pursuing sale and lease back negotiations for $ 50 mn for their 10 stores. The cost of the store expansion plan will also depend on the extent to which company is able to lease second use store space as opposed to acquiring leases or sites and having stores constructed to its owny The opening of stores in the existing markets , while sharing the advertising and

operational expenses helps achieve a faster return. So, the primary focus should be on expanding in existing markets instead of entering new markets which would have had the combined effect of diluting their personnel and negatively affecting earnings y They can also gain leverage on their philosophy of educating the customer on how to do it by yourself by increasing their traditional training clinics for educating the customers in skills like electrical wiring, carpentry etc. for increasing and strengthening their loyal customer base and simultaneously. specification Their do it yourself strategy is no more a differentiating strategy, so the company must not rely solely on this strategy but instead focus on generating more cash while increasing their profit margins by implementing the above measures. Generating more cash from its own operations would be the best way for Home Depot to invest in its growth on a sustainable basis.