Home Unimprovement: Was Nardelli's Tenure at Home Depot a Blueprint for Failure?91 Knowledge@Wharton, January 10, 20079 With strategic missteps, an outsized compensation contract and a knack for alienating employees and shareholders, Home Depot's Robert Nardelli turned out to be a star-crossed leader. 1 Wharton faculty members and other experts say Nardelli, a talented former executive at General Electric who came within a hair's breadth of replacing Jack Welch as head of the giant conglomerate, brought the wrong toolbox to the job after he was recruited for Home Depot's top spot in December 2000. He did not know the retailing business and mistakenly thought that what had worked at GE could be readily transplanted to Home Depot's more freewheeling, entrepreneurial culture. After years of a declining stock price - and a now- legendary 2006 shareholders meeting where an imperious Nardelli refused to answer questions - Home Depot announced the CEO's resignation on January 3. He walked away with a package worth $210 million. T Nardelli was immediately succeeded as CEO, chairman and president by Frank Blake, who had served as Home Depot's executive vice president since 2002. Before joining the Atlanta-based company, Blake also held senior positions at GE. T "While GE is a great source of management talent, the style of leadership that works at GE doesn't necessarily readily carry over into a company that does not have GE's traditions or GE's riveting focus on performance," says management professor Michael Useem, director of Wharton's Center for Leadership and Change Management. "GE has a deeply held, Focus"While GE is a great source of management talent, the style of leadership that works at GE doesn't necessarily readily carry over into a company that does not have GE's traditions or GE's riveting focus on performance," says management professor Michael Useem, director of Wharton's Center for Leadership and Change Management. "GE has a deeply held, corporate cultural value around the idea of performance. If you don't get results, you just won't hold your position long. An executive leaving GE will attempt to bring what worked in the past, but at Home Depot the way of operating was decentralized. Managers had a lot of discretion and there was a free-flowing, exciting feel to working there. Nardelli tried to streamline some 2,000 stores to get control over them, which might have worked at GE, with its focus on performance. But at Home Depot, that approach to leading did not work well, given the history of the company."f According to Barry Henderson, an equities analyst at T. Rowe Price, the Baltimore, Md.- based mutual fund company, Nardelli made "two big mistakes" at Home Depot: He alienated employees and angered stockholders. Henderson says the alienation of the rank- and-file at the home improvement retailer has been largely overlooked by the business press in analyses of Nardelli's departure. "The Home Depot culture is distinct in retail," Henderson explains, describing it as having been "extremely entrepreneurial and very customer focused" when Nardelli arrived. Tardelli concentrated on overhauling Home Depot's business processes which did need to FocusAccording to Barry Henderson, an equities analyst at T. Rowe Price, the Baltimore, Md.- based mutual fund company, Nardelli made "two big mistakes" at Home Depot: He alienated employees and angered stockholders. Henderson says the alienation of the rank- and-file at the home improvement retailer has been largely overlooked by the business press in analyses of Nardelli's departure. 1 "The Home Depot culture is distinct in retail," Henderson explains, describing it as having been "extremely entrepreneurial and very customer focused" when Nardelli arrived. Nardelli concentrated on overhauling Home Depot's business processes, which did need to be addressed, but he "overfocused" on the processes and swept aside the elements that made Home Depot special. For one thing, Nardelli angered people by firing long-time Home Depot executives and bringing in GE alumni, according to Henderson. He also increased the number of less knowledgeable part-time workers at Home Depot's stores, which left full-time employees fuming and led to a diminishment of customer service, one of the company's strengths. From the very beginning of his tenure, Nardelli, now 58, "damaged morale, and he was seen as a real threat to the Home Depot culture," Henderson says. I As an example of how a high level of commitment to customers made Home Depot a success, Henderson recounts a vignette from the book Built from Scratch: How A Couple of Regular Guys Grew The Home Depot from Nothing to $30 Billion, by company founders Bernie Marcus and Arthur Blank. In the 1990s, a man entered a Home Depot store to return a set of tires and obtain a refund - even though Home Depot did not sell tires. The employee at the service desk called corporate headquarters for guidance. The employee was told to ask the customer how much he had paid for the tires and to give him a cash refund from the register drawer. "The tires," says Henderson, "were hung near the service desk as a reminder that the customer is always right - the 'lifetime value of the customer' is how you would say it in e Depot] didn't care about shrink [the percentage of productsrefund from the register drawer. "The tires," says Henderson, "were hung near the service desk as a reminder that the customer is always right - the 'lifetime value of the customer' is how you would say it in business-school terms. [Home Depot] didn't care about shrink [ the percentage of products lost through theft or error]. Nardelli was exactly the opposite. Shrink was one of the first things he attacked when he got there."I Looking for Growth In fairness to Nardelli, he had his work cut out for him when he joined Home Depot, according to Wharton management professor Lawrence Urebinjak. "Nardelli came into a very tough situation. The original entrepreneurs had built an amazing business" that had shown tremendous growth. Nardelli was under intense pressure "to continue that growth."f In addition to cutting costs, Nardelli decided to begin selling supplies to the professional construction trades along with the usual do-it-yourself crowd. "He wanted to do something different; the problem was he didn't do good strategic analysis," says Urebiniak. "The building-supplies area is a difficult business. You have a different type of relationship with contractors because it's a wholesale operation. [Nardelli] went into a low-margin business FocusLooking for Growth 1 In fairness to Nardelli, he had his work cut out for him when he joined Home Depot, according to Wharton management professor Lawrence Urebinjak. "Nardelli came into a very tough situation. The original entrepreneurs had built an amazing business" that had shown tremendous growth. Nardelli was under intense pressure "to continue that growth."f In addition to cutting costs, Nardelli decided to begin selling supplies to the professional construction trades along with the usual do-it-yourself crowd. "He wanted to do something different; the problem was he didn't do good strategic analysis," says Urebiniak. "The building-supplies area is a difficult business. You have a different type of relationship with contractors because it's a wholesale operation. [Nardelli] went into a low-margin business looking for growth," but he didn't find it. 1 Hrebiniak also suggests that Nardelli "took his eyes off" his chief competitor, Lowe's, which was investing a ton of money in new stores that were more attractive than the older stores operated by Home Depot. "Lowe's said, 'We're going to come in and start stealing your business," Hrebiniak says. I As the competitive situation grew more difficult, Nardelli made another mistake: cutting costs in an attempt to shore up the bottom line. Urebiniak agrees with T. Rowe Price's Henderson that Nardelli's cost-cutting moves crippled customer service. Hrebiniak says this misstep occurred because Nardelli reverted to the kind of approach he was accustomed to as the successful head of GE's power-turbine manufacturing business. "He started cutting costs at Home Depot to make his numbers look better," says Urebiniak. "When things get tough, that often makes sense, but not at Home Depot. Cutting costs meant cutting service."9 On top of this, Nardelli alienated shareholders. He was being paid enormous sums of money over a period of years when the performance of Home Depot's stock was lackluster. dropped 20/ while E Focus