Warren Buffett

Questions 1: Evaluate Home Depot's business strategy. Do you think it is a viable strategy in the long run?

The Strength Weaknesses Opportunities Threats (SWOT) analysis brought forward by Albert Humphrey of the Standford University in the 1960s (Wang 2012, p.2) provides a useful tool in order to evaluate Home Depot's business strategy.

Hereby, the SWOT analysis considers both the internal and external environment of Home Depot on the levels of financial resources, human capital, market share, customer, product quality, product range and availability as well as marketing. The strengths and weaknesses analysis accesses the capabilities of Home Depot within the environmental conditions in which it operates, depicting the opportunities and threats. (Ferrell 2011, p.120)

Strengths and weaknesses refer to a company's internal environment over which it has control, whereas opportunities and threats cannot be influenced by Home Depot. What cannot be forgotten is that strengths can quickly turn into weaknesses and vice versa if environmental conditions such as technology, consumer taste change or new companies enter the market. (Henry 2008, p.117)

Looking at Home Depot's strengths as depicted in figure 1, it becomes apparent that the skilled workforce was one of its key drivers making Home Depot the market leader in the DIY segment. Home Depot's educated staff paired with the commitment to high product quality allows Home Depot to build an image of trustworthiness and "customized solutions" resulted in a loyal customer base. A correlation can be found in the earnings/sales ratio and the number of employees and customer per store. When the employees per store and customer per store decreased, earnings dropped in 1985.

The large product variety paired with the long opening hours make Home Depot a one-stop supplier for DIY homebuilders. More than 25,000 separate stock-keeping units in each store cater for each possible arising need.

Home Depot's ability to offer low prices to customers may be explained by the high inventory turnover. The company is able to achieve economies of scale by entering into agreement with suppliers which provides a competitive advantage of sourcing the lowest cost of merchandise. The high marketing leverage may also contribute towards the increase in sales which further supports the above argument.

The high penetration of individual markets allows Home Depot to bundle promotion efforts and thus generate savings compared to competitors. Also, the clear defined target market being individual home owners and small businesses paired with its distinct locations in the suburbs, allows Home Depot to design advertising and promotion campaigns efficiently. Additionally, the high scale of growth provides Home Depot with a competitive advantage in economies of scale in purchasing compared to its competitors. The abundance of interim storage space on the same side allows Home Depot to save on additional warehousing costs.

The Cash & Carry concept allows Home Depot to instantly access its funds and use them for financing of new operations or working capital expenditures.

Taking a deeper look at Home Depot's ratios, it becomes apparent that inventory cannot be held at the levels that management aspires, which means that certain products are not available in the store (Target: 1.8 $ million per store vs. 1.7 $ million actual financial closing 1985). The introduction of the new information system is arguably going to reduce this potential shortcoming.

Other weaknesses deriving also from Home Depot's strengths are the impersonal warehouse environment that might irritate some customers as well as the potential stock obsolesces that come along with the vast inventory assortment. Additionally, the low prices that Home Depot offers through its economies of scale and the nature of its generic products eliminate any product uniqueness