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CONTROL AND CHANGE

Control and Change: The Success of Home Depot Trident University International Kevin S. Varner Principles of Management BHS 312 Case Study Module Number 5 Coordinator Professor: Dr. Mickey Shachar Core Faculty: Monica Vargas June 21, 2011

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Every organization has some form of controls in place, be they strictly administrative in function or even mechanical style controls. Control is a necessary function of management in any type of business from the extremes of the Military to a more informal version in a “mom and pop” grocery store. Everything from the requirement of a specific size bolt used to be used on a manufacturing line, to a standard format cover sheet on a report, is a control and decided upon by management at some level. These are not in themselves bad things, and are important aspects of business. Allowing personnel to go about their job without some form of guidance as to standardized conduct would in no way help aim the business in the desired direction. The very creation of a Mission and Vision for any organization is the basis for controls in some form. Call it “coordination” if that makes it seem less Machiavellian, but at its base the function of management is to control. Of course there are varying levels of control in organizations and overdoing anything can be bad for the business, even being too controlling – or over controlling too quickly in an organization that had little in the way of standardized controls at the beginning. This eventually could lead to problems with employees, customers and eventually lead to a drop in the bottom line; anathema to any Board of Directors, CEO’s or upper management personnel. In the case of Home Depot at the turn of the century this drastic change in control style can be clearly illustrated. Although the company went through a record growth period, a change in the economic environment and years of complaints eventually led to the end of a CEO’s tenure. Militarization of Home Depot – At the beginning of 2000 Home Depot sales were at $46 Billion with gross margins at 30% (Grow 2006). Founded at the end of the 1970’s by Bernie Marcus and Arthur Blank, Home Depot managed to expand and profit at unbelievable rates,

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hitting over $40 Billion in sales in just 20 years of existence. However, it was perceived as getting to large for the more “laid back style” of its founders. So, in December of 2000 a former GE Executive, Robert Nardelli, was appointed as CEO and immediately implemented drastic changes in the company. Apparently taking a cue from the Military Leadership model he admires, and utilizing a similar style to what he employed at GE Transportation and GE Power Systems, Nardelli began restructuring the entire corporation. Before Nardelli store managers were given the ability to decide on how their store was run, basing decisions on their own experience in that location for what sold and when to stock what supplies. After he took over that changed and he implemented metrics using a combination of sales and profit targets to track how well his stores where doing. Additionally, where once the business was dominated by fulltime employees, it changed with a high influx of part-time employees in an effort to drive down labor costs. Nardelli went further in his approach and implemented hiring programs designed to increase his number of employees with military experience bringing the totals to 13% of the 345,000 personnel by 2005 (Grow 2006). He explained this by pointing to the ability of former military members to follow orders and respond to authority in the manner he was aiming for in all Home Depot employees. He implemented an evaluation system that examined employee performance on the basis of four metrics; financial, operational, customer and people skills. This coupled with a two step interview process that includes role-playing exercises seems to be aimed at changing not only the make up his employees, but also the corporate culture of the entire organization. This is evident when looking at the high turnover of the top executive in the corporation where 98% of the top personnel were new to the job between 2001 and 2005 (Grow 2006).

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In strictly numbers it appeared the new CEO was doing exactly what he set out to accomplish. The March of 2006 cover story for BusinessWeek, written by Brian Grow, Dine Brady and Michael Arendt, goes through all the examples sited above to show the changes in how the company was run, but it also shows an increase in sales from the 2000 numbers to $81.5 Billion by the end of 2005 with a 3.5% increase in gross margins and an average annual growth rate of 12% up to that point. However, that is only one aspect of business and sustainability of growth and profits is more important than fast gains that cannot be held onto. Failures in the Nardelli approach – In January of 2007, after 6 years as CEO, Robert Nardelli resigned and moved on with a huge $210 million severance package that included stock options (Kavilanz 2007). The announcement from the company stated it was a mutual agreement by Nardelli and the board of directors, and they appointed Frank Blake (an Executive VP) as the new CEO. Although put out as strictly a decision based on a successful six years, coupled with Nardelli feeling it was time to move on, other indicators were there to show there could have been larger issues. For years there were complaints about his over-controlling leadership style, which resulted in an overall feeling of risk associated with investing in Home Depot for the longterm (Kavilanz 2007). Even the separation agreement and years of a guaranteed high salary in Nardelli’s contract where brought into question as he left his position. Many believed it was the right time to hire Nardelli when he came in, but with a changing economy, including a slow down in the housing market, other issues needed to be taken into account when heading the company. Consider the choice of replacement for Nardelli; Frank Blake. Known to be “personable” with good administration skills, it was assumed he would be a change from the zero flexibility approach of his predecessor (Kavilanz 2007). Moving from a militaristic style of

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leadership to a more flexible, personable leader indicates a shift in the corporate mind-set and goals. Clearly, although there was a time when that level of aggressiveness and control were profitable, the company and potential investors realized it was not a sustainable environment to continue in. When sales are extremely high and your product is doing very well in multiple marketplaces you can get away with just about any leadership style for the short-term. However, especially when dealing in customer service industries, it does not work when your product could be considered a frivolous expenditure compared to other needs by customers – or when compared to an alternate supplier with a perceived reputation for superior customer service and a more relaxed environment such as Lowe’s, Home Depot’s main competition in the market. Even in the 2005 article that seemed to praise Nardelli’s approach and his ability to ignore his detractors, it was noted how far the Home Depots customer service had slipped under the new CEO, including coming in last among major retailers nationwide in one survey (Grow 2005). This clearly illustrates how the level of control placed over every aspect of the organization by its CEO added pressure and anxiety in the workplace and was a leading contributor to the drop in how “nice and helpful” employees would seem to customers. By replacing Nardelli with someone like Blake the corporation sent a message to consumers and potential investors that the corporate culture was ready to change. This decreased uncertainty about the future sustainability of the organization at that time and could only help mitigate the beginning of a downward trend for Home Depot. Home Depot as a model for Health Care – Utilizing this case as an example of a model for a Health Care organization should show how too many controls in certain areas can lead to problems. Health care is customer service oriented, and should be handled that way at all times.

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Certain administrative controls are more important when people’s health and their lives are at stake, so there has to be a high level of control in some areas. Quality control, employee qualifications and experience, maximum working hours with mandated time off, and various other controls should be paramount in a Health Care organization. This means management must take a strong hand at policy and practices implementation. However, when it comes to some autonomy for mid-level leaders, Nardelli’s style would cause problems. Even in a military hospital, where the type of leadership style Nardelli seemed to admire would be the norm, there is less in the way of controls than what was apparently common at Home Depot. Arbitrarily creating metrics for number of patients seen on specific wards coupled with the amount of supplies utilized and time spent on administrative functions, then using those metrics to determine when personnel needed to be fired (as a parallel to what Nardelli did to measure store’s performance) would lead to changes in the way people treated patients. This is not conducive to a Health Care setting. Most businesses could handle that if they are factory driven, or create a specific product away from the customer. When dealing with people, however, there has to be some flexibility with controls. Nardelli’s style does not lend itself well to a customer service environment overall. Some aspects could be useful, and many controls he implemented including hiring practices and training programs would be very beneficial to any industry, just not everything he implemented at Home Depot. Conclusion Control is necessary for management to ensure the mission and vision of their organization is adhered too. The level of control necessary is the key to long-term success; the more you have to micro-manage your employees the less comfortable the work environment will

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be, which leads to the less employees will want to stay and the worse they will feel on a daily basis. When your employees are constantly unsure of themselves and uncomfortable in their environment it will translate into how they deal with customers, leading to an overall perception that your business has little potential for long-term sustainability. The less control you exert to accomplish the same result toward your goals, the more comfortable people will be working for you. They will feel the company appreciates their point of view more, and has faith in their abilities. This leads to employees enjoying working for an organization, and translates across to their customers and potential investors. Control is necessary – just do not overdo it. .

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References Anonymous (2011) Executive Profile: Robert L. Nardelli. Chief Executive Officer, Freedom Group Inc. Retrieved from: http://investing.businessweek.com/businessweek/research/stocks/people/person.asp?pers onId=601167&ticker=HD:US Grow, Brian; et al (2006). Renovating Home Depot. Business Week March 6, 2006; 3975, 50. Retrieved from ProQuest Kavilanz, Parija (2007) Nardelli out at Home Depot. Retreived from: http://money.cnn.com/2007/01/03/news/companies/home_depot/index.htm McNamara, C. (2007). Management Function of Coordinating / Controlling: Overview of Basic Methods. Retrieved from: http://www.managementhelp.org/cntrllng/cntrllng.htm

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