Excerpt from the Inclusive Leader

Case Study – Change at the Home Depot the Nardelli Style
In 2006, Ram Charan posed the question: 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?

Seemingly a successful company, the fastest growing in retail history, Home  Depot was facing what similar successful companies face: Growing the business  at a faster rate than growing its people, taking short cuts and neglecting processes to achieving quick results, and covering deep legal, cultural, and business wounds by bandages. Taking the organization from a $40 billion “Startup” company to a $100 billion global corporation within 5 years required “transformational change” under some legendary leadership.

As a successful GE executive, Bob Nardelli became the CEO of The Home Depot replacing popular founders Bernie Marcus and Arthur Blank, both in their 50s at the time, to specifically transform the Home Depot. Nardelli hired a colleague from GE, Dennis Donovan, as Home Depot’s head of Human Resources. Donovan and Nardelli started their change efforts by formalizing and standardizing the corporate culture where data replaced intuition in decision-making, and specific performance criteria and metrics replaced gut-feel and spontaneous approach to performance reviews. Six Sigma replaced “Stack it high and watch it fly”. Within 5 years, two amazing things happened:

  1. Successfully, the organization more than doubled its earnings per share and became $80 billion organization.
  2. Surprisingly, share price dropped from $70 in the late 1990s to $20 in 2003.

In 2007, Bob Nardelli resigned from the Home Depot under controversial circumstances. Nardelli’s severance package was estimated at $210 million. He was succeeded by The Home Depot vice chairman and executive vice president, Frank Blake who also worked closely with Nardelli at GE.

Many would argue that Nardelli’s sudden resignation and departure represented a failure to change management efforts at The Home Depot. As a District Manager with the Home Depot at the time, the first author of this book argues the opposite. Granted, in hindsight the process of change could’ve been different but overall Home Depot was changed as an organization, grew as a business, and today the organization remains the number one home improvement company in the world.

As a leader, Nardelli had some of the best consultants in the world to guide his decisions including Ram Charan. So, the successes and disappointments that he brought and encountered are great lessons to evolving change management leaders.

Successes

As witnessed by the first author and summarized by Ram Charan, among the tools Home Depot have used are:

  1. Data templates, detailed forms to organize performance data for quarterly business review meetings, which encourage personal accountability, give employees a deeper understanding of business performance, and foster collaboration by putting people on the same page when making decisions.
  2. Strategic Operating and Resource Planning, or SOAR, which is built around an annual eight-day session when Home Depot’s 12 top executives work together to balance priorities and select the investments most likely to achieve financial and other business targets.
  3. Disciplined talent reviews, conducted frequently, and consistently from one to the next, which emphasize the need for candor and fairness in dealing with employee performance.
  4. Store manager learning forums that, through role playing, simulations, and other exercises, highlighted the level of competitive threats and made transparent the company’s future plans, helping attendees understand the need for the new strategy.
  5. Monday morning conference calls, involving the company’s top 15 executives, during which accountability (for business results and for promises made the previous week) is emphasized, as is sharing information (about operations, customers, markets, and competitive conditions).
  6. Employee task forces, staffed by individuals from all levels of the company, to elicit unfiltered input from the people closest to a problem and gain their support for the changes the solution requires.
  7. An array of leadership development programs, including the Future Leaders Program, the Store Leadership Program, and the Merchandising Leadership Program, which raise the bar for performance and ensure continuity of the culture.
  8. Mapping of the HR process, which identified 300 ways that HR tasks could be improved and highlighted the importance of instituting processes to sustain cultural change.

Disappointments

From Nardelli’s perspective one would wonder about three fundamental questions:

  1. For a company that doubles its earnings per share within 5 years and achieves what it did in the previous 25 years, why on earth didn’t the stock price react positively to those impressive financials?
  2. In a capitalist society, does it really matter how much individuals earn?
  3. Resistance to change is normal and expected but “fierce resistance” coupled with negative media for a change and a leader that was brought in by the founders who supported this type of change is incomprehensible.

Buy-in of followers to change efforts remains one of the most important aspects of successful change management. In depth understanding of the technical aspects and operations of the organization is also critical to success. Take the perception that customer service declined at the Home Depot under Nardelli, for example. In reality, Nardelli wanted to offer customers safer conditions and improved service. Prior to Nardelli, Home Depot employees moved dangerous loads of lumber, concrete, and heavy doors during shopping hours and within an 8-month period, 3 people died at the Home Depot due to unsafe practices. In November 1999, Mary Margaret Penturff and her daughter stopped by their local Home Depot in Santa Monica to buy lattice for their patio. A 75-pound box of wood fell from a shelf above the 79-year-old Penturff, leaving her bleeding on the sales floor with a fatal head wound. Six months later, on a Memorial Day weekend, the Horner family went to their local Home Depot store in Twin Falls, Idaho, to shop and more than 2,000 pounds of kitchen countertops fell about 10 feet from a forklift that was moving them, hitting their 3-year-old daughter, Janessa. She died four hours later at a local hospital. Two months after that, Jerry Mead, 41, and his brother were shopping in a Home Depot store in Danbury, Conn., when they were hit by 2,000 pounds of falling landscaping timbers. Jerry Mead was killed and his brother was seriously injured.

So prior to Nardelli, stores had customers and employees everywhere in the store operating together in a dangerous environment. Nardelli decided to focus on overnight operations and move resources / heavy lifting to overnight when customers were not shopping to allow employees faster and safer movement and to protect customers during daytime from potential hazard of operations. However, shifting resources away from customers’ eyes gave the perception that Home Depot is severely cutting service. Granted, Home Depot could’ve made certain moves to minimize and / or negate the negative consequences of shifting resources but those who resisted change focused on some of the negative consequences of change instead of thinking creatively to overcoming certain obstacles that may come with change.

Among the tools that leaders should use while leading change, we recommend:

  1. People / frontline employees should be involved in the process of change. No involvement, no buy-in. No buy-in no execution.
  2. Change should look and feel like bottom-up not top-down especially in large organizations.
  3. Winning the hearts of the organization is perhaps more important than winning the minds of the organization. Effective leaders are usually rational and because of the pressure of reality they have little room for emotions. However, more important than providing a sound case for change is winning people’s heart not only for the idea that change is needed (usually people see it and know it) but more so for the changes that are introduced.
  4. Always ask: What are the potential negative consequences of change on all those who are involved: customers, employees, and shareholders. Create a mitigating plan and most importantly create actions to minimize or, preferably, eliminate those negative consequences.
  5. Anticipate fierce resistance to change especially when change has to do with the way people work and / or when change appears to jeopardize people jobs. For example, when Nardelli introduced Six Sigma to the Home Depot, employees and executives were terrified that they would be replaced by those who know Six Sigma. Nardelli’s intention was to train employees on a new skill that is beneficial for the organization and for employees. However, the naysayers rushed to oppose Six Sigma and declare that what worked for Nardelli in the industrial setting of GE will not work in the service setting of the Home Depot.
  6. The more fundamental the change needed the more time and resources should be allocated.
  7. Define what success looks like and monitor progress against time and budget.

The book “The Inclusive Leader: An Applied Approach to Diversity, Change, and Management” is available at:
Barnes and Noble
Amazon.com
Balboa (Publisher)