How a Strategic Mistake Cost Home Depot More Than Money
It was the late 1990s.
General Electric and The Home Depot were going through changes that would unnoticeably form a recipe for disaster.
Jack Welch, the CEO of GE, after an extensive succession planning (in layman terms, finding a replacement), chose Jeff Immelt as his successor. Among the top executives who lost the race was Robert Nardelli.
In a parallel world, The Home Depot was going through a turbulent phase. Arthur Blank, despite being a good Co-founder, was an ineffective CEO, with poor skills in handling managers. Consequently, the company’s supply chain management and logistics were disrupted. They needed a better CEO to take over the helm.
How were these two incidents a recipe for disaster? Read further.
Desperate Talent Acquisition
Ten minutes after losing the race for the CEO’s spot at GE, Nardelli received a call from Home Depot, with an offer — CEO of Home Depot.
This sounds like great things were happening to Nardelli, yes?
For any regular post in a regular company, that could have been great news.
But Nardelli’s post was not regular. Neither was Home Depot’s situation.
Nardelli’s acquisition exposed desperation — Home Depot’s and Nardelli’s. He had just lost a place he had long sought and then in a jiffy, got a huge offer. He neither had the time to think of why he failed nor to introspect about the sudden offer.
The call from Home Depot seemed like a temporary relief for his wounds. A rebound. But the offer was a masquerade, veiling a danger.
Instead of bringing his knowledge and insights into the company, he carried forward the weight of his failures.
Little did anyone know what that decision would bring.
How big the blunder really was
To understand how deep Home Depot’s blunder was, look at the following comparison between GE and Home Depot.
- While GE had an investigative, exhaustive, and surgical succession planning that went for years, Home Depot handed over the CEO’s chair to Nardelli in just minutes.
- GE’s new CEO Jeff Immelt had been with the company for 18 years. On the other hand, Home Depot hired Nardelli who was an outsider with no retail experience.
- After taking over, Jeff Immelt worked with his predecessor Jack Welch for 13 months despite his 18 years of knowing the company. In contrast, Home Depot’s Nardelli was not found in the headquarters for 3 months.
As a bottom line, Home Depot merely recruited (filled a vacancy) a CEO but failed to acquire a top talent as GE did.
Nardelli’s case is a perfect example of the difference between recruitment and talent acquisition.
Talent acquisition is an ongoing strategy to find, attract, and onboard top professionals. The idea is to more effectively fill roles with employees who can meet company needs on day one and well into the future- The University of Alabama at Birmingham
They let someone into the Founder’s shoes — easily
Founders are like fathers.
They understand and safeguard organizational culture better than anyone else. They have the artistic, creative, and emotional attachment to every element of the company.
In contrast, professional managers are process-driven. They are taskmasters with little knowledge of the cultural aspect of the company.
That is the reason why many professional managers contemplate, plan in detail, and usually hesitate to take over founders’ roles. They know the risks involved.
Home Depot’s founders were smart. But not quite smart enough.
After building their own organization fearfully and wonderfully, they just let one of the worst-fit professionals into their shoes.
What was the consequence of such an acquisition? Read further.
Clash of cultures
Those days, managers from GE were seen as the best. GE was the ultimate boot camp.
So while Home Depot’s founders were assuming they had just bought a top talent, they were unaware of oncoming cultural destruction.
Nardelli did not seek the wisdom of Home Depot’s founders, Blank and Marcus to understand the company’s culture. Instead, in his typical aggressive fashion, he decided to force-feed GE’s culture into Home Depot.
When Blank was asked how many times Nardelli arranged lunch with them, he said: “None.”- Tim Irvin
Nardelli paid little respect to the fundamental cultural practices of the company. The cheer and lunches got fewer.
Words such as enemy, war, troops, etc. became regular at work. He loved to be called “The General.”
To understand how the abrupt change of culture affected the company, it is useful to know how different the two cultures were.
GE ran on cut-throat performance.
Intense competition, harsh business environments, barking commands, straight-forward reprimands, and termination were in the breath of the company.
There was little tolerance for poor performance to an extent that the bottom 10% were fired.
Every decision came with military precision after deliberate statistical discussions and measured estimates. There was little room for guesses.
Profit was prioritized, even at the cost of ethical practices.
Home Depot’s culture
The Home Depot, on the other hand, was a gentle park where work was fun and people were friends. Customers came first.
The executives enjoyed weekends, huge awards, and healthy competition through cooperation. The management instilled in employees an entrepreneurial mindset.
Ethical practices were a mandatory part of the company’s operations. Employees were encouraged to give back to the community and were also made shareholders of the company.
Home Depot’s idea of discipline centered around emotional attachment, commitment to work, and best practices.
As a retail business, its frontline employees maintained a happy relationship with customers and managers, which was crucial for its business. Employees were valued by managers and therefore remained cheerful, passionate, and ready-to-serve.
Clash of business models
For starters, GE sold its products to major corporations while Home Depot was into the retail industry.
Therefore, an intense, systemic, performance-based business model worked for GE. On the other hand, as a plain retail company that dealt directly with customers, Home Depot ran on a friendly, entrepreneurship-minded, cheerful culture.
But Nardelli was quick to import GE’s business models that had not been tested in a retail setup.
Applying the Six-Sigma model and Change Acceleration Process(CAP) which worked in GE, he massively transformed Home Depot into a centralized, increasingly uniform, KPI-driven, and process-oriented business model.
Nardelli terminated well-paid hourly workers who had been the driving force of Home Depot’s success for years. He replaced them with relatively lower-paid part-time employees in an effort to save money.
He replaced Home Depot’s “Customer is King” model with GE’s EEE (Enhance, Extend, Expand) model.
Enhance meant enhancing the core business.
Extend meant extending out into new businesses.
Expand meant expanding business outside the core areas. He went on an acquiring spree, buying Supply and Service businesses.
He recruited Dennis Donovan from GE, as the Vice President of the Human Resources department. Through Donovan, Nardelli ensured that there was a steady influx of executives from GE.
Smell the disaster yet?
Consequences of Home Depot’s blunder
- Nardelli’s egomaniacal and military-like GE culture destroyed customer satisfaction and employee happiness.
- With fear and submissiveness everywhere, employees started losing the spirit of entrepreneurship the founders had trained them in.
- The morale and motivation of employees deteriorated by decisions such as installing cameras to monitor staff.
- Within the first three years of Nardelli’s leadership, 24 of the 30 senior officers quit.
- Due to Nardelli’s obsession with measurable traits, he ran the company in GE’s style, sacrificing immeasurable yet indispensable qualities such as morale, motivation, integrity, expertise, and passion.
- Nardelli displeased investors by his massive compensation of $240 million, even in the face of little improvement in stock values.
- Customer service, which had been Home Depot’s USP, became its biggest weakness.
Takeaways from Home Depot
Nardelli’s tenure at Home Depot was almost a perfect layout of corporate failure. Yet, he has given the company and others some valuable lessons:
- The existing culture of companies should be respected.
- Founding fathers should be respected and consulted.
- Employee satisfaction should never, ever be compromised.
- The CEO should know the business at the grass-root level.
- A company that loses spontaneity, openness, integrity, and willingness to take risks is bound to be doomed.
- Business strategies should be tested and tailor-made.
- It isn’t growth when not everyone grows.
- Succession planning is everything.
A company’s success is measured not just by profits.
History is studded with companies that went from stars to the soil because they prioritized money over employee morale, customer satisfaction, collective growth, healthy culture, honest communication, integrity, and wise management.
Home Depot is a strong example of this.
No one speaks of Nardelli’s success in doubling sales and increasing revenue from $45.74 billion in 2000 to $81.51 billion in 2005.
He was, and is, known for destroying a company’s lifeline — culture.
Reference: The Death of the American Corporation: The Psychology of Greed and Destructiveness among CEOs and Bankers by William Czander