Home Depot’s Blueprint for Culture Change

Deep, lasting culture change requires an integrated approach that remodels a company’s social systems. The leadership team of Home Depot employed a remarkable set of tools to do that.

by

Ram Charan

by

Ram Charan

From the Magazine (April 2006)

Summary.

Reprint: R0604C

What could be harder than turning around a seemingly wildly successful company by imposing a centralized framework on a heretofore radically decentralized, anti-establishment, free-spirited organization? That was the challenge GE alumnus Robert Nardelli faced when he abruptly succeeded Home Depot’s popular founders, Bernie Marcus and Arthur Blank, as the top executive in December 2000.

Talk about a shock: No one expected Marcus and Blank, both in their fifties, to leave. And, as Nardelli himself acknowledges, the last thing anyone wanted was an outsider who would “GE-ize their company and culture.”

But despite its glossy high-growth exterior, Home Depot was standing on shaky financial footings. Rapid expansion had stretched cash flow, inventory turns, profits, and store manager ranks thin. Each store’s vaunted independence was making the company as a whole highly inflexible, unable to take advantage of economies of scale. What so effectively got Home Depot from zero to $50 billion in sales wasn’t going to get it to the next $50 billion.

The story of the vision, strategy, and leadership skills Nardelli used to move Home Depot to the next level has been told. But vision, strategy, and leadership alone—while necessary—are not enough. Typically, culture change is unsystematic and, when it works, is based on the charisma of the person leading the change, Charan says. “But Home Depot shows—in perhaps the best example I have seen in my 30-year career—that a cultural transition can be achieved systematically.”

In this article, Charan lays out the panoply of tools that, wielded in a coordinated and systematic fashion, enabled Home Depot to get a grip on its freewheeling culture so that the company could reap—and sustain—the advantages inherent in its size. Many an up-and-coming company would do well to look to this model to gain similar advantage when the time comes to exchange the thrill of entrepreneurial spirit for the strength of established power.

The Idea in Brief

What to do when your company outgrows its business model? In 2000, Bob Nardelli faced this challenge as Home Depot’s new CEO. He knew that what had propelled the company from zero to $50 billion in sales wouldn’t get them to the next $50 billion.

Home Depot looked wildly successful. But low margins, poor inventory turns, meager leadership bench strength, and looming rival Lowe’s threatened to derail its 20-year track record of spectacular growth.

To combat these problems, Nardelli defined a new strategy that included offering new services (such as tool rental) and serving new customer segments (including big construction contractors). The strategy required major changes—such as buttressing cross-functional collaboration and rethinking Home Depot’s traditional “warehouse” store environment. And executing these changes demanded a centralized, disciplined culture—alarming to managers used to behaving like autonomous entrepreneurs.

Nardelli’s solution? Renovate Home Depot’s freewheeling culture through four mechanisms: metrics encouraging desired new behaviors, programs strengthening managers’ support of the new strategy, processes cementing the new culture (including a new companywide performance management approach), and structures eliminating inefficiencies (such as centralized purchasing).

Nardelli’s reward? Revenues and earnings per share virtually doubled from 2000 to 2005. And more employees began recommending Home Depot to friends as a place to work—revealed by surveys of more than 80% of the company’s 300,000-strong workforce.

The Idea in Practice

How to activate Nardelli’s culture-renovation mechanisms in your company? Consider these guidelines:

Metrics

Create new metrics to:

Show employees that things aren’t going as well as they thought. Detailed data quantifying customers’ perceptions of the Home Depot shopping experience suggested the need for better store lighting.

Reinforce desired behaviors. Data presented in companywide formats encouraged Home Depot’s managers to look beyond sales as the only business goal and to understand relationships between revenue, margins, inventory turns, and other metrics.

Provide a platform for collaboration. Companywide performance metrics—including employee turnover and stores’ gross margins—forced Home Depot managers to see the broader financial impact of their decisions. By jointly discussing data arising at the intersection of different business functions, such as merchandising and supply chain, managers began collectively setting priorities instead of blaming each other for problems. They even accepted resource reallocations that might hurt their functions if such reallocations benefited the company overall.

Programs

Design programs to win managers’ buy-in for your company’s new strategy. Example:

Home Depot established five-day “learning forums” for all regional, district, and store managers, plus high-performing assistant store managers—nearly 2,000 individuals. In one session, participants viewed the company from Nardelli’s perspective and generated ideas for seizing new growth opportunities. When they realized their ideas matched the executive team’s current actions, they embraced the changes.

Processes

Establish processes encouraging accountability for change. Example:

Home Depot’s top 20 executives attend a two-hour conference call every Monday morning. They deliver individual reports on the previous week’s activities in their areas of responsibility and identify reasons behind failures to fulfill commitments made for the previous week. Monday afternoon videocasts to all 1,500 stores focus managers on the week ahead—upcoming promotions, new product introductions, and revenues needed to meet bonus-plan targets. The videocasts remind everyone that each store’s activities contribute to the bigger picture.

Structures

Restructure quickly to reinforce cultural changes. Example:

Before Nardelli, Home Depot had a fragmented purchasing function comprising nine divisional offices that often forged different pricing agreements with the same suppliers. The decentralized arrangement prevented the company from negotiating uniform pricing that would lower costs and boost margins. Nardelli gave the executive team one day to decide how to centralize purchasing. The team successfully designed and staffed the nascent organization, and determined how to compensate the new hires—who started a mere week later.

When Robert Nardelli arrived at Home Depot in December 2000, the deck seemed stacked against the new CEO. He had no retailing experience and, in fact, had spent an entire career in industrial, not consumer, businesses. His previous job was running General Electric’s power systems division, whose multimillion-dollar generating plants for industry and governments were a far cry from $10 light switches for do-it-yourselfers.

A version of this article appeared in the April 2006 issue of Harvard Business Review.

Ram Charan serves on seven private and public boards across the globe and is author or coauthor of 36 books and several HBR articles on corporate governance. He is the co-author of Boards That Lead: When to Take Charge, When to Partner, and When to Stay Out of the Way.

Home Depot’s Blueprint for Culture Change

The Idea in Brief

Metrics

Programs

Processes

Structures

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