SUBMITTED BY:

Namita Dahiya
2009H149194P
Supriya Rana2009H149205P
Anandi Gupta 2009H149210P
Anjum Jain 2009H149218P
R.Umang
Doshi2009H149220P
Q1: Evaluate Home Depot’s business
strategy. Do you think it is a viable
strategy in the long run?
BUSINESS STRATEGY ANALYSIS
 Strategy analysis involves Industry analysis, Competitive analysis and
Corporate 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.
 Force 4: Bargaining Power of Customers: Depend on two factors:
 a) Price Sensitivity: As industry provide less scope for differentiation,
customers are price sensitive. Home Depot offers low, competitive
prices to customers.
 b) Relative Bargaining Power: As industry attracted many
competitors, customers’ bargaining power increased.
 Force 5: Bargaining Power of Suppliers:
 Home Depot had little bargaining power over customers, so they had to
offer low prices.
 CORPORATE STRATEGY: The company could create value
through its broad corporate focus for the following reasons:
 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 Depot’s expansion strategy is sensible because it exploits this
valuable resource.
 Home Depot has been able to acquire expertise in execution of home
improvement projects & their applications through special training
programs.
 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.
 COMPETITIVE ANALYSIS: There are two generic competitive
strategies:
 1) Cost Leadership: Enables a firm to supply same product or service
offered by its competitors at a lower cost.
 2) Differentiation: Involves providing a product or service that is
distinct in some important aspect valued by the customer.
 Home Depot followed a combination of both strategies. It offered low,
competitive prices to individual homeowners & small contractors
thereby following COST LEARDERSHIP STRATEGY.
 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 Depot’s financial performance during
years 1983-85. Compare Home Depot’s performance in this
period with Hechinger’s performance.
 Ratio Analysis – Home Depot, Inc.
1982 1983 1984 1985 1986
EPS 0.07 0.24 0.41 0.56 0.33
Book Value per Share 0.23867 0.82553 2.628574 3.170263 3.528815
Market Price 17.125 12.625

Gross Profit Margin 28.59% 28.35% 27.33% 26.42% 25.90%

Net Profit Margin 2.80% 4.52% 4.01% 3.26% 1.17%
Return on Investment 11.61% 29.90% 18.04% 10.53% 3.06%

Debt Equity Ratio 0.744029 0.012858 0.067159 1.470342 2.244231

Asset Turnover 3.04874 3.563488 2.434515 1.735531 1.843088

Current Ratio 3.116401 2.273185

Quick Ratio 1.339605 0.446848
Interest Coverage Ratio 183.5577 7.390587 2.138448
 DE, Asset T/O Ratios
4

3.5

2.5

1.5

0.5

0
83 84 85
Debt Equity Ratio Asset Turnover AssetTurnover Hech
 Ratios
35.00%

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
83 84 85

Gross Profit Margin Net Profit Margin Return on Investment

Gross Profit Hech Net Profit Hech
 EPS, Book value per share
3.5

2.5

1.5

0.5

0
83 84 85

EPS Book Value per Share

 Current & Quick ratio
3.5

2.5

1.5

0.5

0
1

Current Ratio Quick Ratio

Q3. How productive were Home Depot’s
stores in the fiscal years 1983–1985?
 Stores and Markets Square Footage per Store
60 82000

50 80000
50 80000

40 78000 77419
31
30 76000

20 19 73684
74000
15
11
10 7 72000

0 70000
1983 1984 1985 1983 1984 1985

Number of Markets Number of Stores

 Employees per Store Customers per Store
470000
135.00
466000
129.03 465000
130.00
126.32 461290
125.00 460000

120.00 455000

115.00
450000
447368
110.00 108.00
445000
105.00
440000
100.00
435000
95.00 1983 1984 1985
1983 1984 1985
 Sales per Store (million $) Earnings per Store (million $)
14.10 0.60
14.01 0.54
14.00 13.96
0.50
0.45
13.90

13.80 0.40

13.70
0.30
13.60

13.50 13.48 0.20 0.16

13.40
0.10
13.30

13.20 0.00
1983 1984 1985 1983 1984 1985
 Sales per Square Foot ($) Earnings per Square Foot ($)
184.00 8.00
183.00 7.36
182.00 7.00
180.33 5.88
180.00 6.00

5.00
178.00
4.00
176.00 175.18
3.00
174.00 2.05
2.00
172.00
1.00
170.00
0.00
1983 1984 1985
1983 1984 1985
 Sales per Employee ($) Earnings per Employee ($)
5000.00
140000.00
129759.26
4291.67
120000.00
106750.00 108200.00 4000.00
3525.00
100000.00

3000.00
80000.00

60000.00
2000.00
1518.52
40000.00

1000.00
20000.00

0.00
0.00
1983 1984 1985
1983 1984 1985
 Sales per Customer ($) Earnings per Customer ($)
1.40
35.00
1.21
30.14 30.27 30.07 1.20
30.00

0.99
25.00 1.00

20.00 0.80

15.00 0.60

10.00 0.40 0.35

5.00 0.20

0.00 0.00
1983 1984 1985 1983 1984 1985
Q4: Home Depot’s stock price dropped by 23% between January 1985 and February 1986,making it
difficult for the company to rely on equity capital to finance its growth . Covenants on existing debt
restrict the magnitude of the company’s 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
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 own

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
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.