Don’t Compete with Inevitable — Craig Menear, CEO Home Depot
The Industrialist’s Dilemma — January 10, 2019
Craig Menear tries to be on the store floor of a Home Depot almost every week. He’s spent the vast majority of his career dealing with complex logistics, the expectations of builders and home renovation professionals, and the details of running large retail operations. He became EVP of Merchandising in 2007 and ultimately CEO in 2014 — a pretty tumultuous period for the building industry and the defining period for digital disruption. Despite the challenges, the company’s share price has grown 5x.
Not a bad run. So, we were especially happy to find out that Craig was willing to kick off this year’s Industrialist’s Dilemma course at Stanford.
The Home Depot is a company that has thrived in an era of disruption, while many of its competitors floundered. The company continues to push boundaries on digital solutions while continuing to invest in its core product. And it’s one of the lone stories of a retailer that isn’t faltering in the face of Amazon. So the question for us was, “How and why is this the case?”
The conversation with Craig was fascinating, but in particular three concepts stood out about the approach the company has taken over the past decade.
Don’t Compete with Inevitable
In 2008, the world of retail was reeling from the rapid fall from grace of Best Buy. A company that could do no wrong in the world of retail was suddenly on the ropes. The internet was coming and it was real. It was going to provide price transparency, selection, and forcing companies to compete through more than delivering same store growth. Just a decade earlier, The Home Depot was growing by opening a new store every 48 hours in their quest to build a network of stores that was within 10 miles of 90% the United States. By 2008, everyone with an internet connection in the US seemed to have easy access to whatever they wanted to purchase.
Under the leadership of then Chairman and CEO Frank Blake, Home Depot’s executive team understood the value proposition of the internet. Amazon Prime launched in 2005, and it was proving that distribution would only get cheaper and faster for online players. YouTube was becoming a broad phenomenon, and it was clear that content would only become more easily accessible and richer in nature. Physical distribution was important, but it wasn’t the only thing that customers valued.
While other players fought these changes, The Home Depot embraced them. Menear shared that the leadership team understood that there was no use in fighting the inevitable. Instead, they started to look deeply at the trends that were beginning to unfold and evaluated their entire business against the backdrop of these changes. They embraced the changing world, rebuilt their strategy, and started making headway into the market that they were fairly certain would emerge. Fighting these trends would only waste time and give the competition the opportunity to get ahead.
Never Neglect Your Source of Strength
The Home Depot doesn’t intend to be better than YouTube at what YouTube does best. Correspondingly, it knows that YouTube will never be better at retailing goods for home maintenance than The Home Depot: assuming the company doesn’t neglect its obligation to its customers.
Over the course of the conversation in class, we spoke a lot about digital. We talked about advertising and content partnerships. We talked about developing software that would make life easier for home improvement professionals and consumer customers. We talked about eCommerce. At no point in our conversation, however, did we talk about the specifics of the retail experience and about the product being delivered in Home Depot’s stores.
When Craig stepped to the front of the class he reminded us; “We’re in the business of delivering great product. That means we need to care deeply about and invest in innovation in our product.” Among other things, he explained that the reason customers go to a Home Depot is for quality products, great advice, and a delightful in-store experience. The company needed to invest to deliver best-in-class experiences around the things that made it great because those were going to be the things that enabled its move into the digital age.
Craig reminded us that one needs to have great digital capabilities. But if a retail company has a crummy in-store experience or bad product on its shelves then no amount of great digital assets will differentiate the business from a pure-play eCommerce company.
Your Process Has to Change with the Constraints
Throughout the last four years, we’ve always started our course by highlighting what’s changed in industrial markets over the past last 20 years of innovation in connectivity and computing. At the top of the list is the ease and cost of innovation. It’s just easier than it ever has been before to innovate.
The conversation with Craig surfaced multiple examples where Home Depot was introspective about its own processes. As the company saw the innovation that Amazon brought to the table with algorithmic pricing, The Home Depot invested to build a world class team and expose opportunities for improvement. As the company learned how quickly it could build and deliver new products and services to market in a digital age, it realized it needed to change the way that it funded and wound-down projects. As the company saw consumers shopping online and completing purchases in store, it realized that it needed to change the way that it created incentives for regional leaders to drive attention online. The company recognized that as the world was changing it had to identify the things that made it great — and that these alone wouldn’t get the job done by themselves in the future.
All too often, we’ve seen examples of companies reacting to bad outcomes to change their processes. With The Home Depot, that change was proactive. If the constraints change, it doesn’t matter how successful your business has been. You have to determine what must change.
Every year, we get a little crisper in our thesis. The great industrial companies of the 21st century will take the things that made them great and turn them into advantages instead of anchors. The Home Depot was an exemplar of that fact — aggressively using digital tools and processes in combination with its core assets to deliver better customer outcomes.
