HomeBase, Inc (HBI)

ACase Study

Peter F. Drucker Graduate School of Management02 ·17 · 01

Group Members:Anindya Chatterjee , Atul MundadaChona Bunaguen, Stephen Meade

HBI: A failure HBI: A failure

Demise of an inefficient organization High cost of sales Abysmally low net profit margin Poor inventory management Sub-normal productivity Below-average shareholder return- no

trust Poor corporate image

Targeted customer: Women, age 35-54 Higher-margin business Less seasonal Offer consumers unique shopping

experience…emphasis on a wide range of price points, special conveniences and added services, as well as customer service

The Idea: House2HomeThe Idea: House2Home

(HomeBase Press Release, January 2001)

Threats, Opportunities Strengths, Weaknesses

Creation of Strategy

Evaluation and Choice of Strategy

Implementation ofStrategy

Strengths, WeaknessesThreats, Opportunities

Creation of Strategy

Evaluation and Choice of Strategy

Implementation ofStrategy

H2H SWOT AnalysisH2H SWOT Analysis

•Existing Infrastructure•Business Know How•Financial Capacity

•Inefficiency•Mgmt Lack of Vision•Size•Lack of Aggressiveness

•Differentiation•First Mover Advantage – New Niche

•Timing (Economic Recession)•Competition•Buy Out

H2H SWOT AnalysisH2H SWOT Analysis

•Existing Infrastructure•Business Know How•Brand Recognition (?)•Financial Capacity

•Inefficiency•Mgmt Lack of Vision•Size•Lack of Aggressiveness

•Differentiation•First Mover Advantage – New Niche

•Timing (Economic Recession)•Competition•Buy Out

Barriers to Entry is High for New Entrants

Bargaining Power of Buyers is lower in this Industry

Bargaining Power of Suppliers is low for this industry

Threat of Substitutes – Neutral Threat from Existing Competitors

1. No Direct Competition2. Disaggregated Competition

Porter’s Five Forces for H2HPorter’s Five Forces for H2H

Intra Industrial AnalysisIntra Industrial Analysis

Home Depot Expo

Stroud's

Linens N Things/Bed,

Bath & Beyond

House2Home Target

High Cost

Low Cost

Limited Offerings

Broad Mix

Good Idea (targeted marketing)Need to address other core

deficiencies

Conclusion: H2H will not Conclusion: H2H will not succeedsucceed

H2H SWOT AnalysisH2H SWOT Analysis

•Existing Infrastructure•Business Know How•Financial Capacity

•Inefficiency•Mgmt Lack of Vision•Size•Lack of Aggressiveness

•Differentiation•First Mover Advantage – New Niche

•Timing (Economic Recession)•Competition•Buy Out

Why diversification alone Why diversification alone will not workwill not work

Com

peti

tive S

cop

e

Cost Focus

Differentiation

Differentiation Focus

Cost Leadership

H2H

McKenney & McFarlan Quadrant Analysis

Bro

ad

Targ

et

Narr

ow

Targ

et

H2H will not

manage to move

up

We recommend: Change in We recommend: Change in business practice business practice

Customer Focus

Efficiency Drive with right Alliances and Partnerships

Threats, Opportunities Strengths, Weaknesses

Creation of Strategy

Evaluation and Choice of Strategy

Implementation ofStrategy

Attacking H2H’s Core Attacking H2H’s Core Problems Problems

Inefficiency Effective IT investment will improve

efficiency Shift in management focus and

strategy- the willingness to do it (IT)!

Trust of Shareholders / Low Corporate Image

Transparency and effective communication

Customer focus

H2H: Business StrategyH2H: Business Strategy

McKenney & McFarlan Quadrant Analysis

S

trate

gic

im

pact

of

exis

tin

g I

T

syste

ms

Strategic impact of IT applications under development

Support

Strategic

Turnaround

Integration of Business Chain

H2H

H2H: Learning from Past H2H: Learning from Past MistakesMistakes

Home Depot installed Mobile ordering platform and strengthened direct SCM link with manufacturers

HBI lacked in efficiency drive – IT focus. 1998/99 were years where competitors could cash on it like never before.

More Efficient P.O.S. More Efficient P.O.S. Architecture Architecture

We recommend a Linux-based system

Front / Back-office integration - ‘one face to the customer’

Effective implementation of a CRM strategy

Systems Integration- ERP Systems Integration- ERP focus focus

Identify, and design a streamlined e-Procurement chain

Configure a supply integration matrix- value chain

Select the right package/vendorIntegration

H2H: Web Interface H2H: Web Interface StrategyStrategy

Reasons why customers go to website Compare costs Company Information Browse product mix Gain product knowledge

Difficult to sell online

H2H: Web Interface H2H: Web Interface StrategyStrategy

Suggestions for a good websiteDynamic section for Q & A and

Customization conceptData mining and Customer

profilingPush and Pull Marketing Strategy

Threats, Opportunities Strengths, Weaknesses

Creation of Strategy

Evaluation and Choice of Strategy

Implementation ofStrategy

H2H Business Strategy: Cost H2H Business Strategy: Cost and Benefits and Benefits

With the right efficiency drive: Reduce SG&A by 10% & 20% in 1st & 2nd yr

increase sales by 2% in 2nd yr (2004)+

Tighten Inventory cycle by 7-10 days-

Raise IT budget by $50m over 2yrs=>

3yrPV of DEPS improves from –0.82c to –0.08c

H2H: The AlternativesH2H: The Alternatives

H2H- assumptions announced by management

In total, the company currently expects a net loss for next fiscal year of approximately $80 million, or $2.13 per diluted share

$0.50 per diluted share in the fiscal year ending January 2003

$1.00 per diluted share by January 2004

H2H: The Results H2H: The Results H2H EPS will jump to $2.55 by 2004 H2H can reap advantage of being

the first mover Collecting and processing

information will play a key role An effective CRM will be easy to

implement once the systems integration is in place

The whole process may easily take 18 months

Threats, Opportunities Strengths, Weaknesses

Creation of Strategy

Evaluation and Choice of Strategy

Implementation ofStrategy

H2H: Focus on People H2H: Focus on People

Proper Implementation needs:Management Adaptability

and WillingnessProper training of workforceFlow of information from

bottom to topOwnership

Conclusion Conclusion

The success of the H2H concept lies on effective marketing

H2H can reap advantage of being the first mover

Collecting and processing information will play a key role

An effective CRM will be easy to implement once the systems integration is is place

The whole process may easily take 18 months

HBI: Cost InefficiencyHBI: Cost Inefficiency

78.15

72.01 71.65

69

71

73

75

77

79

HomeBase Industry Home Depot

Comparison

Cost of Sales (5yr MA)% of Total Revenue

market.forbes.com, Financials

HBI: Less ProfitableHBI: Less Profitable

1.01

4.87 5.14

0123456789

10

HomeBase Industry Home Depot

Comparison

Net Profit Margin (5yr MA)

market.forbes.com, Financials

HBI: Poor Inventory HBI: Poor Inventory ManagementManagement

Comparison Home Base Industry Home Depot

Quick Ratio 0.2 0.22 0.24

Current Ratio 2.21 1.53 1.55

Receivable Turnover 53 60.4 60.59

Inventory Turnover 2.97 5.02 5.19

market.forbes.com, Financials

HBI: Low ProductivityHBI: Low Productivity

152,589

228,538221,139

150,000

170,000

190,000

210,000

230,000

250,000

HomeBase Industry Home Depot

Comparison

Gross Revenue/Employee

market.forbes.com, Financials

HBI: Poor Returns to HBI: Poor Returns to ShareholdersShareholders

-16.01 -31.1 3.23

24.46 26.27

18.31

25.23 27.6

18.93

-20

-15

-10

-5

0

5

10

15

20

25

30

HomeBase Industry Home Depot

Comparison

Sales - 5 Yr. Grow th Rate EPS - 5 Yr. Grow th Rate Return On Equity - 5 Yr. Avg.% chg YoY

market.forbes.com, Financials

HBI: Lack of AggressivenessHBI: Lack of Aggressiveness

-23.9

20.14 18.58

-20-15-10-505

1015202530

HomeBase Industry Home Depot

Comparison

Capital Spending - 5 Yr. Grow th Rate

% chg YoY

market.forbes.com, Financials

Shareholder’s nightmareShareholder’s nightmare

Point of divergence

as IT started having greater

impact on the bottom

line

www.finance.yahoo.com

HBI: Current Movements in HBI: Current Movements in SharesShares

HBI Closing Price

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.501-

Sep

-200

0

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ep-2

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15-S

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Sep 09, HBI announces new strategy (H2H)

Dec 8, HBI announces Qtly Results

$/Sh

Management and employees bought HBI shares, shareholders giving benefit-of-doubt

www.finance.yahoo.com

The Porter Value ChainThe Porter Value ChainSupport Activities

Primary Activities

Firm InfrastructureHuman Resource ManagementTechnology DevelopmentProcurement

InboundLogistics

OperationsOutboundLogistics

MarketingSales

Service

H2H: The Alternatives H2H: The Alternatives

96

16

-0.683

22

11

-60

-82

-102

1925

38

-150

-100

-50

0

50

100

150

25-Jan-1997 30-Jan-1999 30-Jan-2001 31-Jan-2002 1-Feb-2003 2-Feb-2004

-3

-2

-1

0

1

2

3  Income After Taxes Diluted EPS

Projected

HBI

HBIHBI

Alternative

Alternative

Alternative

$mn Diluted EPS

www.forbes.com, HomeBase press releases, Our research

H2H: The Alternatives H2H: The Alternatives

96

16

-0.683

22

11

-60

-82

-102

1925

38

-150

-100

-50

0

50

100

150

25-Jan-1997 30-Jan-1999 30-Jan-2001 31-Jan-2002 1-Feb-2003 2-Feb-2004

-3

-2

-1

0

1

2

3  Income After Taxes Diluted EPS

Projected

HBI

HBIHBI

Alternative

Alternative

Alternative

$mn Diluted EPS

www.forbes.com, HomeBase press releases, Our research

www.forbes.com, HomeBase press releases, Our research

0

2

4

6

8

10

12

BB

&B

Line

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Thin

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Peir1

Expo

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et

Str

ouds

Look Navigable Content Know ledge given e-commerece

Relative score

(subjective 1 to 10 scale)