Home Depot

2281 Words Nov 3rd, 2012 10 Pages
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Home Depot’s Business Strategy
Home Depot 's target market is individual homeowners/small contractors. Even though the traditional ideology is that cost leadership and product differentiation business strategies are mutually exclusive, Home Depot was successful at using a combination strategy. First, Home Depot optimized the cost leadership strategy by offering low and competitive prices to its customers by emphasizing higher sales volumes with lower margins, while instituting a high inventory turnover. Home Depot successfully offered a warehouse product strategy to the individual consumer for the first time. Previously, this type of price discounting was only available to professional contractors who earned product price
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However in 1985, Home Depot’s 9.7% ROE was much lower than Hechinger’s 15.8%. The main factor for this big drop was the ROE component, Ratio of Profit before Taxes to Sales. Home Depot’s 1.66% profit before taxes to sales trailed the 7.8% earned by Hechinger. It suggests that Home Depot had expense control issues. However depending on Hechinger’s growth strategy in 1985, Home Depot may have had a lower profit ratio due to its expansion strategy, and therefore the expense ratio is incomparable if Hechinger was not employing a significant growth strategy.

Home Depot utilized its assets with better efficiency to generate revenues in all three years than Hechinger Company. The higher asset turnover demonstrated Home Depot’s ability in resources control. Home Depot’s financial leverage increased more than 50% from 1984 to 1985, but outperformed Hechinger in 1984 and 1985. It borrowed more debt to support its expansion plan. There were minimal differences for average tax rate between Hechinger and Home Depot in 1983 and 1984. However, Home Depot had a much lower effective tax rate in 1985. Due to the fact that Home Depot did not pay cash dividends, Home Depot’s sustainable growth rate equaled its ROE, which decreased through the years due to the drop in earning and increased

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