Akkam’s Razor

A couple of semesters ago, I read a Businessweek article on Home Depot then-CEO Bob Nardelli’s plan to turn around Home Depot.  BW glowingly reported on Nardelli’s personnel changes and differing style, with his strong preference for hiring former-military persons in key rolls.  Anecdotally speaking, a masters program classmate who was also a Naval Academy graduate mentioned that Home Depot had indeed made a push for hiring employees who were formerly Officer Grade to run their stores, casting the opportunity as entrepreneurial.  Businessweek gave several hints as to what was coming in their description of Nardelli’s style:

Military analogies are commonplace at Home Depot Inc. (HD ) these days. Five years after his December, 2000, arrival, Chief Executive Robert L. Nardelli is putting his stamp on what was long a decentralized, entrepreneurial business under founders Bernie Marcus and Arthur Blank. And if his company starts to look and feel like an army, that’s the point. Nardelli loves to hire soldiers. In fact, he seems to love almost everything about the armed services. The military, to a large extent, has become the management model for his entire enterprise. Of the 1,142 people hired into Home Depot’s store leadership program, a two-year training regimen for future store managers launched in 2002, almost half — 528 — are junior military officers. More than 100 of them now run Home Depots. Recruits such as Ray “understand the mission,” says Nardelli. “It’s one thing to have faced a tough customer. It’s another to face the enemy shooting at you. So they probably will be pretty calm under fire.”

[…]

The cultural overhaul is taking Home Depot in a markedly different direction from Lowe’s, where managers describe the atmosphere as demanding — but low-profile, collaborative, and collegial. Lowe’s does not have formal military-hiring programs, says a company spokeswoman, nor does it track the number of military veterans in its ranks. Observes Goldman, Sachs & Co. (GS ) analyst Matthew Fassler: “Bob believes in a command-and-control organization.”

In Nardelli’s eyes, it’s a necessary step in Home Depot’s corporate evolution. Even though founders Marcus and Blank were hardly a pair of teddy bears, they allowed store managers immense autonomy. “Whether it was an aisle, department, or store, you were truly in charge of it,” says former store operations manager and Navy mechanic Bryce G. Church, who now oversees 30 Ace Hardware stores. And the two relied more on instincts than analytics to build the youngest company ever to hit $40 billion in revenue, just 20 years after its 1979 founding. In the waning years of their leadership in the late 1990s, however, sales stagnated. The company “grew so fast the wheels were starting to come off,” says Edward E. Lawler III, a professor of business at the University of Southern California. These days every major decision and goal at Home Depot flows down from Nardelli’s office. “There’s no question; Bob’s the general,” says Joe DeAngelo, 44, executive vice-president of Home Depot Supply and a GE veteran.

Although he has yet to win all the hearts and minds of his employees, and probably never will, Nardelli’s feisty spirit is rekindling stellar financial performance. Riding a housing and home-improvement boom, Home Depot sales have soared, from $46 billion in 2000, the year Nardelli took over, to $81.5 billion in 2005, an average annual growth rate of 12%, according to results announced on Feb. 21.

Retrospectively, one can see that Nardelli’s job at Home Depot was quick profitability and plumping up their wholesale units - Home Depot Supply.  Unfortuantely, Nardelli creative destruction of value in those areas came at the cost of destroying Home Depots workforce (in terms of full-times, experience, and wages - check the comments in this Big Picture post from 2006) and obliterating most of the vestiges of their founders’ corporate culture.  HDS was later sold off, but only after a $2 billion price cut.

Before he arrived, managers ran Home Depot’s stores on “tribal knowledge,” based on years of experience about what sold and what didn’t. Now they click nervously through BlackBerrys at the end of each week, hoping they “made plan,” a combination of sales and profit targets. The once-heavy ranks of full-time Home Depot store staff have been replaced with part-timers to drive down labor costs. Underperforming executives are routinely culled from the ranks. Since 2001, 98% of Home Depot’s 170 top executives are new to their positions and, at headquarters in Atlanta, 56% of job changes involved bringing new managers in from outside the company. Says one former executive: “Every single week you shuddered when you looked at e-mail because another officer was gone.”

As a manager, Nardelli is relentless, demanding, and determined to prove wrong every critic of Home Depot. He treats Saturdays and Sundays as ordinary working days and often expects those around him to do the same. “He’s the hardest-working guy you’ll ever see,” says his former boss, Jack Welch. “If I was working late at GE and wanted to feel good at 9 p.m., I would pick up the phone and call Bob. He would always be there.” Privately, Nardelli admits that the move to Home Depot has sometimes been a tough slog. When he first took over — having no retail experience and replacing the beloved Bernie and Arthur — he often felt as though he were fighting a lonely, uphill battle to convert Home Depot’s legions of workers to his new vision for the company.

Nardelli’s history of surrounding himself with military recruits goes back to his GE days. At GE Transportation in the 1980s, he pioneered a program of hiring junior military officers, in part because few people were willing to move to “Dreary Erie, Pa.,” where the unit is headquartered. Former grunts, used to sitting in mud holes, found the locale less of a problem. William J. Conaty, senior vice-president for corporate human resources at GE, says: “Places like Erie or Fort Wayne, Ind., didn’t look desolate to these guys.” Welch soon expanded the program throughout GE.

Welch characterizes Nardelli as “an unusual patriot…a true flag-waving American.”

Nardelli’s father, Raymond, served in Europe during World War II with the Pennsylvania Keystone unit of the National Guard. As a freshman at Rockford Auburn High School in Rockford, Ill., Nardelli joined the Reserve Officers’ Training Corps (ROTC) and eventually became company commander and a member of the rifle team. He also played football. “You could either take gym class or ROTC,” recalls Nardelli. “I took ROTC and enjoyed the hell out of it.” When it came time for college, he applied to the U.S. Military Academy at West Point, N.Y. But the Army academy accepts applicants in part by congressional district, and the young Nardelli missed the cut by one person: He was the first alternate from his region of Illinois. Instead he attended Western Illinois University in Macomb. After graduating in 1971, his draft number was called, but, he says, he did not pass his physical. Later he went on to the University of Louisville for an MBA.

As an adult, Nardelli’s passion for the military persists. At Home Depot headquarters, 1,800 “blue star banners” hang in the main hallway in honor of employees serving in Afghanistan, Iraq, and elsewhere. He is frequently shadowed by Marine Fellow Izen. During one recent project to help Home Depot hone its motivational message to 317,000 store troops, Izen consulted the Marine Corps Doctrinal Publication 1 on “War-Fighting.” MCDP 1, as it’s called in the Marines, includes a chapter on “developing subordinate leaders,” which Izen found a handy guide for Home Depot workers, too. “It’s about how to out-think your enemy,” says Izen [emphasis mine].

When you look at Nardelli’s plan, he focuses on Three-Es (enhancing the core, extending the business, expanding the market) but totally omits the most important C - customer service (perhaps a direct result of his experience in finance-driven General Electric and his total lack of retail experience).  Again, from Businessweek:

The University of Michigan’s annual American Customer Satisfaction Index, released on Feb. 21, shows Home Depot slipped to dead last among major U.S. retailers. With a score of 67, down from 73 in 2004, Home Depot scored 11 points behind Lowe’s and three points lower than much-maligned Kmart. (SHLD ) “This is not competitive and too low to be sustainable. It’s very serious,” says Claes Fornell, professor of business at the University of Michigan and author of the 12-year-old customer satisfaction survey, which uses a 250-person sample and an econometric model to rate companies on quality and service. Fornell believes that the drop in satisfaction is one reason why Home Depot’s stock price has declined at the same time Lowe’s has soared. A former executive who spoke on condition of anonymity says that Nardelli’s effort to measure good customer service, instead of inspiring it, is to blame: “My perception is that the mechanics are there. The soul isn’t.”

Nardelli angrily disputes the survey. “It’s a sham,” he says, jabbing his finger in the air for emphasis. Nardelli notes that, in 2003, Fornell shorted Home Depot stock in his personal portfolio, before his survey results came out. Fornell says the trades were part of his research into a correlation between companies’ customer-satisfaction scores and stock price performance. The University of Michigan banned the practice the next year. Home Depot executives add that internal polling shows customer satisfaction is improving, but they won’t release complete results. They point to Harris Interactive’s 2005 Reputation Quotient, an annual 600-person survey that combines a range of reputation-related categories, from customer service to social responsibility. The survey ranked Home Depot No. 12 among major companies and reported that customers appreciated Home Depot’s “quality service.”

By squeezing more out of each orange box through centralized purchasing and a $1.1 billion investment in technology, such as self-checkout aisles and in-store Web kiosks, profits have more than doubled in Nardelli’s tenure, to $5.8 billion. Home Depot’s gross margins inched up from 30% in 2000 to 33.5% last year. But fast-growing Lowe’s is still Wall Street’s darling, in large part because analysts are only now getting comfortable with Nardelli’s strategy. Based in Mooresville, N.C., Lowe’s has seen sales grow an average of 19% a year since 2000, and it has narrowed the gap in gross margins vs. Home Depot. Since the day before Nardelli’s arrival on Dec. 14, 2000, Lowe’s split-adjusted share price has soared 210%. Home Depot’s is down 7%.

Nardelli does an excellent job of promoting Nardelli, and he was further assisted via the scribing of Ram Charan in the Harvard Business Review.  The before-linked HBR article is behind the paywall, but CLWill blogs the cliffnotes here, closing with the following:

Bob, sir, forgive me, but even in the military you have to explain things to people, get their buy-in, heck even consider that private’s opinion.  This fancy “culture change” ain’t working, and no amount of force-feeding’s going to make it work.  But you don’t care, you’re off to the bank.

The end result of Nardelli’s turnaround was the creation of personal wealth out of the destruction of the value and culture of Home Depot.  Stockholders were outraged at his $210 million severance package, and enraged over the stock’s loss of 8% of its value over his tenure, and incensed at his behavior at a shareholders’ meeting.

The title of those post is a swipe at the brouhaha over Wesley Clark’s statement that John McCain’s POW and military experience does not alone qualify him for military service.  In General Electric, the military, and the culture that Nardelli was trying to create at Home Depot, men who were given orders and executed were prized.  Unfortunately, some of those same men frequently don’t question the validity, morality, legality, or ethics of those same orders.  I don’t want those values in the modern world in my CEO or Commander-in-Chief.

I had one feeling when Nardelli took over the helm at Cerberus-owned Chrysler - he was taking them to the chop shop.  I don’t think I’ll be wrong.