Organizational change: how not to do it
Bob Nardelli’s tenure at Home Depot has been described as an excellent example of change management. But I see it as a bloodbath that destroyed a valuable corporate culture. Here we look at it with our memetic viewpoint.
Home Depot was founded in Atlanta in 1979 and changed little in the first 20 years of its growth. A Home Depot store was a large, typically 10,000 m2, warehouse full of racks of pipe, washers, tools and screws - anything the do-it-yourselfer needed. The stores were famously dingy, cluttered and dark (just like a giant version of the garden shed that every bloke instinctively yearns for), but the staff were genuinely passionate about serving customers.
Within those first 20 years, the chain grew to 1300 stores and a turnover in excess of $40 billion. You couldn’t go to a large town in the USA without seeing the famous orange Home Depot signs.
Home Depot’s co-founders, Bernie Marcus and Arthur Blank, had iconic status within the company, and were widely loved by their employees. The dominant meme they promoted was one of autonomy: store managers had an extraordinary degree of freedom to adapt to local market conditions. Bernie and Arthur’s worldview was simple: leave the managers to get on with the business of serving customers.
The culture was such that the head office issued a rubber ‘B.S.’ stamp so that store managers could express their opinion on unnecessary paperwork. Thanks to Bernie and Arthur, working at Home Depot was fun and, to its staff, Home Depot felt like the world’s largest startup. Home Depot loyalists said that ‘orange blood’ ran through their veins.
If you've read the section on diagnosing meme clashes you will recognise here an incredibly weak set of tactical memes, and unsurprisingly not all was well in the warehouse. While local autonomy (taken almost to the point of organisational anarchy) kept the mind of the store manager on their customers, it did little for Home Depot’s efficiency. Procurement and supply chain planning were ignored and the focus on ‘sales at any cost’ increased revenues but eroded profitability. Charan (2006) talks of poor inventory turns, low margins and weak cash flow, which are all killers as far as any retail businesses are concerned. Meanwhile Home Depot’s main competitor, Lowe’s, was attracting women shoppers in droves with its brightly lit, well-organised stores.
From anarchy to totalitarianism
The founders knew that, if the business was going to continue to grow, a new approach was needed. To that end, Bernie Marcus (71 years old by this time and looking forward to a well-earned retirement) and Arthur Blank appointed Robert Nardelli as the company’s new CEO in December 2000.
Bob Nardelli had proved highly successful as one of Jack Welch’s rising stars at GE. Nardelli was efficient, controlling, detail-obsessed and an advocate of the six sigma quality improvement process. But he was a controversial choice: not only was he completely lacking in retail experience, he also took about $25 million a year in salary, as opposed to $1 million a year each for Bernie and Arthur.
The vision that Nardelli announced was unquestionably good: he wanted to improve sales and profitability per store, increase the market size both geographically and by attracting new customer bases, and extend into more profitable services such as home installation of products. He knew he could not achieve these without accurate data from the stores - the time for running the business on intuition and ‘B.S.’ stamps was over.
Nardelli’s control mechanisms revolved around a tight set of control metrics. Most of these metrics were financial, but measurement extended throughout the business: for example, formal customer perception mechanisms were put in place to replace the intuition and qualitative perceptions of the store managers. In addition, a new performance appraisal system was introduced that focused on financial measures rather than customer service, embedding the move towards quantitative control.
Nardelli also moved Home Depot from being a loose regional organisation to a tightly controlled central one. He centralised the purchasing function, and insisted that store contents and layouts should be standardised. This is not uncommon in retail chains, but it meant that the autonomy of the store managers was sharply reduced. A weekly videocast (the ‘Bobcast’) told the managers what to do, what to think and how to act.
A lot of Nardelli’s ideas did not work. When he decreed that inventory turns should rise (i.e. the amount of stock sitting on the shelf decreases) managers just stopped ordering things and of course the shelves were soon empty. Introduction of an annual company-wide strategic planning process meant that innovation became an annual, rather than continuous, event. Nardelli learned from his mistakes, changing the processes when they did not work, but he was addicted to detail and the overall trend was towards ever tighter control.
Centralisation and tight control squeezed out costs and improved profits, but the soul of retailing is customer experience, and that relies to a very great extent on the knowledge and passion of the people in the organisation. A lot of the more experienced Home Depot staff, raised on strong strategic memes and weak tactical memes, hated the new regime and voted with their feet. Nardelli also instituted a move towards fewer full-time and more part-time employees to reduce costs, and this proved a disaster. The newly hired part-timers did not know the store layouts and did not share the passion for the business - as a result, customer service suffered.
The type of manager also changed. Like Ross Perot at EDS, Nardelli liked to hire ex-servicemen, and BusinessWeek reported that in 2006 almost half the staff on an advanced training programme were ex-military. This new cadre of managers was fiercely loyal to Nardelli and did not believe in the old ways. Staff turnover among established employees was frightful: when interviewed, they described the new management style as a ‘culture of fear’ in which employees didn’t wonder if they would be fired, but when.
The beatings will stop when morale improves
At the time Nardelli took over, Home Depot had a 20-year record of growth that outpaced even Wal-Mart. Under Nardelli’s stewardship, revenue and profits continued to grow healthily - sales and profits both almost doubled in the six years of his stewardship, and Home Depot soon became the world’s third largest retailer. The news was not so positive though for the owners of the company - share dividends were good, but the share price declined by 7% during Nardelli’s tenure while Lowe’s share price grew by 210%.
How on earth did that happen? Here is a clue: BusinessWeek reported in 2006 that the University of Michigan’s annual Customer Satisfaction Index showed that Home Depot had the lowest satisfaction ratings of any major US retailer. Part of that can be attributed to replacement of full-time staff with part-timers, but I suspect it was largely a reflection of the culture of fear - retailing is a people business, and, if the staff are scared and demotivated, the customers will soon pick up on it.
Another challenge was the sheer scale of the organisation. By now, Home Depot employed more than 300,000 people. A whole raft of training (I would say ‘re-memeing’) programmes was designed to get the finer points of the new culture across, and, while these programmes touched thousands of employees, they inevitably missed hundreds of thousands of others, leaving a massive rump of the unconvinced.
I’m not criticising many of the things that Nardelli did (such as the introduction of metrics, the centralisation of purchasing and the reining-in of anarchy) and he undeniably raised Home Depot’s profitability. But while he did well on the hard metrics, he persistently failed on the softer issues, and he completely failed to build the case for change among the employees. Rather than subverting the current culture, he tried to overwhelm it: when he attacked the values that had made the staff so loyal to Home Depot and its founders, he squandered the passion and commitment of the managers, and this was reflected in the experience of the customers.
Nardelli’s strong command-and-control mindset relied on having store managers who would follow orders without question, hence the large number of ex-military personnel. That strategy worked well for Ross Perot at EDS, so here’s an interesting question: why did it fail so dramatically for Bob Nardelli at Home Depot?
You can’t get there from here
The answer is that Perot was starting with a clean sheet of paper. As he had nothing to displace, he was able to sketch out a culture based on values that a homogeneous military culture felt very comfortable with. Nardelli did not have a clean sheet of paper, and he tried to move straight from an anarchic, almost hippy, culture to a command-and-control structure in one jump. The people who built Home Depot rejected the memes, so Nardelli’s only option was to cull.
Charan (2006), an expert on change, describes the Home Depot culture change as ‘perhaps the best I have seen in my 30-year career’, yet he admits that most of the top executive team left within Nardelli’s first year. Blank was supposed to stay on for a couple of years as chairman - he lasted a few weeks, and then quit. In fact, just three of the top 170 executives survived through Nardelli’s reign. If a 98% loss of senior management represents a good example of culture change, then I would hate to see what a bad one looks like.
So if drenching the boardroom carpets in orange blood was the wrong approach, what would have been the right approach? In my opinion, Nardelli did two things wrong. The first of these was to adopt an inappropriately brutal style of management, and the second was to drive straight to his desired end state without thinking (or, perhaps, without caring about) the deeply held values and beliefs of the employees he started with.
Radical culture change can work, but only when an organisation is crying out for it, which Home Depot was not. The organisation could not continue as it was, but it was not in deep trouble and did not need (or deserve) the battering it took from Nardelli. His personal style was to manage through ‘fear’ and ‘control’ memes rather than ‘hope’ and ‘empowerment’ memes, and Home Depot was never a place where that would work. Perhaps the saddest thing about this story is that when the shareholders, frustrated at a share price that hadn’t increased in six years, finally forced the board to remove Nardelli, he left with a pay-off widely reported to be $210 million of their money.
And that ends our story, at least for now. It strikes me that Nardelli’s obvious strengths and hard-changing approach are the kind of things that win battles, and invasion and domination are certainly ways to achieve organisational change, as Machiavelli has pointed out.