Home Depot: New Innovation Vector Required
The last Sudnay paper of 2005 ran a nice piece by Renee DeGross of Cox News, “Home Depot Improves Under Nardelli.” Basically, she reports that ex-GE executive Bob Darnelli has successfully applied organizational discipline and six-sigma methods to right a listing ship. No small feat. That said, it’s the subtitle of her article that calls out for attention: Stock price hasn’t shown much growth.
This is basic issue that Dealing with Darwin is intended to address. Major brand names like Home Depot, Intel, Microsoft, Cisco, Southwest, and Dell have persistently resisted increases in market valuation, despite superior competitive performance within their respective categories. What’s going on?
The answer, as we have previously discussed, is that while investors appreciate Home Depot’s exceptional market performance to date, they do not see its competitive advantage increasing much from here on out. That is, the U.S. market is relatively saturated, and while there are clearly tweaks that can generate additional revenues and profits, there is nothing on the horizon that would substantially change the game. In our parlance, Home Depot’s core business is no longer core. It has instead become context.
To be sure the base business is as mission-critical as it ever was—screw it up even mildly, and the stock will tank. But perform brilliantly, and the stock will not soar. As one investor queries, “Where do we go from here? Nardelli has to communicate a vision.” For shareholder value to appreciate, a new innovation vector is required.
Let’s see if we can’t figure out what that vector has to be. Home Depot’s sector is mature, so none of the growth innovation vectors—disruptive, application, product, or platform—are appropriate. On the other hand the sector is not losing its value, so a major focus on category renewal, be home grown or via acquisition, is also not required. That leaves eight innovation types to choose from.
Since the company’s business model is volume operations, it has to take value engineering and process innovation vectors as table stakes (the six-sigma fix-up was necessary but not differentiating). Moreover, Home Depot’s category killer approach to retail rules out micro-niche strategies around line extension or enhancement innovation—they won’t provide enough scale. That leaves four to look into more deeply: marketing, experiential, integration, and value chain migration.
I’d put my money on a combination of the latter two, both of which imply entering new businesses focused on volume operations services to complement its existing market-leading position in volume operations products. These operations would be likely be downstream from the retail purchase decision., and many customers for them are likely to be a service providers themselves. As a result, the company will have to tread carefully not to compete with its own customers. The key will be to identify the low-margin context work these customers have to do and take that work off their plates so they can focus on the high-margin work that really pays the bills. While this boundary is never obvious, it is always present and can be exploited if the company takes enough care to gain the advice and counsel of its most valued customers.