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Significant Parts of Home Depot's Growth Strategy

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As part of “The Home Depot’s” growth strategy analysis, I have looked at an analysis of the industry, competitive strategy and financial health.

Industry:

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The home improvement industry was large and growing at 14% CAGR over the last 15 years

$80 billion of total sales recorded in 1985 and strong industry growth was expected to continue

As the number of 2-wage-earner households were increasing, the families’ average disposable income was also increasing thereby increasing the frequency and magnitude of home improvement projects

DIY activities had become America’s second most popular leisure time activity after watching television

Competitive Strategy:

The Home Depot Inc. being the leader in the industry had its sales grown by 62% in 1985 which is far above the industry average.

Focused on DIY segment of the market which helps in differentiating from its competitors

Kept costs low through low overhead

Costs were further reduced by emphasizing higher volume and lower margins with high inventory turnover and thereby achieving cost leadership in the market

Attracted customers through aggressive advertising (in store demonstration), competitive pricing, maintaining high quality products and providing high quality service to customers

Giving guarantee for both popular and less popular brands

Excellent sales assistance by its employees with technical know how

The Home Depot would not have much threats from new players in the industry, but it could have possible challenges from the suppliers since the competitors are expected to become stronger, which will give them greater bargaining power.

Financial Health:

Revenue increased 62% from $432,779,000 in fiscal 1984 to $700,729,000 in fiscal 1985

Number of stores increased from 31 to 50

In Fiscal 1985, The Home Depot earned $8.2 million, or $0.33 per share, as compared with $14.1 million or $0.56 per share in fiscal 1984 i.e. 42% decrease in earnings

The stock price decreased by 23.4%

An analysis of the financials shows that Home Depot is highly dependent on debt financing. While this seems alright, since debt is cheaper than equity financing, it increases chances of default in the face of challenges in managing cash and rising operating expenses. Future financing may be difficult.

Conclusion:

The Home Depot Inc. has a cost leadership business strategy in its industry with primary USPs of providing products of high quality, excellent staff and services. It wins customers by sharing savings with them, but the company’s net earnings have been decreasing from last three years and failed to generate cash from its operating activities.

While this strategy seems optimistic for the short run, the company may not survive for long with the current way of things. With the rapid pace of growth in the industry, the firm has to expand. Moreover, other than failure in generating cash flow, it may not be able to get debt financing anymore. Plus, competitors can easily copy their unique selling points. The Home Depot has to ponder seriously and modify their business strategy if they wish to succeed.

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