Q1. Evaluate Home Depot’s business strategy. Do you think it is a viable strategy in the long run?
Though The Home Depot is the leader in the industry, its market share is negligible(only 0.9% in 1985). However, its sales grew by 62% in 1985 which far above the industry average. The company has been challenges by the existing firms and the competition is heating up.
Home Depot establishes a valuable brand name in Do-It-Yourself warehouse retailing industry. As the concept is new, customers as likely to rely on well known brands to reduce the risk of bad experience. Home Depot·s expansion strategy is sensible because it exploits this valuable resource. Home Depot has been able to acquire expertise in execution of home improvement projects & their applications through special training programs. Home Depot has been able to ...view middle of the document...
A viable strategy or not?
It seems that The Home Depot's business strategy seems successful in the short run. But, the company will not survive in the long run with its present strategy. As the industry is growing rapidly, the company needs more expansion. Since, the operation activities could not succeed to generate cash for its expansion : the company may face obstacles for financing even through debt. So, the company has to have enough cash generating operations as well as net earnings. Moreover, it is not difficult for the rivals to imitate Home Depot core competencies. As a result, The Home Depot has to think of its business strategy for future success.
Q2. Analyze Home Depot’s financial performance during the fiscal years 1983-1985. Compare Home Depot’s performance in this period with Hechinger’s performance.
Both Home Depot and Hechinger's profitability(ROA&ROE) has been declining from the period 1983-85; however, Hechinger's declining trend is less than that of home Depot. Hechinger's has higher ROS and lower AT compared to Home Depot. This difference is attributed due to the business strategy they have. Hechinger's has been pursuing differentiation business strategy while Home Depot is pursuing Cost leadership strategy.
Hechinger's is better than Home Depot in managing operating expenses. While Hechinger has success in reducing SG&A expenses; Home Depot's cost increased substantially during the period 1983-85. This may reason of higher average profitability of Hechinger's than Home Depot.
In contrast with Home Depot's negative cash generation from operation Hechinger has success in generating positive cash. It is clear from the investing activities that Hechinger's is not following rapid eapansion strategy like Home Depot. This is also attributed by the slower growth of inventory and A/R of Hechiger. Since the Hechinger's has positive cash from operation, it does not have to borrow money for paying interest. Morover, Hechinger is continuosly giving dividend th the shareholder, which will help the firm for long time existence.