Centralizing Business – Home Depot

In what ways can (a) decentralizing and (b) centralizing authority help an organization like Home Depot to improve its performance? From 2000 to 2007, Robert Nardelli, a former senior executive at GE (General Electric), served as CEO of Home Depot. Almost immediately, he transformed Home Depot’s logistics and leadership structure from decentralized to centralized. It was one way to respond to the pressures of competition from the Internet and other rivals, and sales increased. With that said, we can see in the scenario that Nardelli (Jones, p. 145): Over time, he recentralized authority and removed store managers’ ability to choose what products to stock for their individual stores. His goal was to streamline and centralize Home Depot’s purchasing activities at its Atlanta headquarters and thus reduce costs. ” The strength in such a maneuver is economies of scale, something modern organizations cannot do without, if possible. Centralizing authority, in theory, can save an organization money and effort through bulk purchase of inventory and efficiencies in operations. It also allows a clear vision to flow down from management to each employee.

If the vision is strong, workable, and sustainable, then success is sure to follow. In many ways, centralization of authority is basically increasing bureaucracy. Gareth Jones (2010, p. 134) describes bureaucracy as “a form of organizational structure in which people can be held accountable for their actions…” Rules, SOPs (Standard Operating Procedures), and norms clarify expectations from higher management, and ensure every in the organization is aware of the rewards and punishments for performance and poor behavior. The problem arises when managers fail to control the bureaucracy and it becomes “tall, centralized, and inflexible. (Jones, p. 138) Decentralizing authority, however, has two distinct advantages. First, it allows the local leader on the ground to make decisions they feel is in their store’s best interests. This, in turn, generally reflects well on the company’s best interests. By ensuring customized shopping experiences for each store, specific to certain geographic regions or customer demographics (e. g. more roofing supplies in Seattle, less insulation in South Carolina), consumers are more satisfied and become repeat customers. Also, ensuring local management teams are “empowered” is essential to continued success.

This second advantage to decentralizing authority cannot be underestimated. According to Jones (2010, p. 142), empowerment is the “process of giving employees at all levels in an organization’s hierarchy the authority to make important decisions and to be responsible for their outcomes. ” It has been extremely successful in organizations as diverse and varied in scope as Southwest Airlines (Jones, 2010, p. 18) and the U. S. military. Contrary to popular belief, though the military is by nature a hierarchical, top-down organization, there is a great deal of autonomy and leeway afforded lower-level leaders to get the job done.

This type of empowerment is vital in ensuring mission goals are met and a minimum of trouble results. There is some controversy over Nardelli’s use of centralized planning at Home Depot. Commentary from business reporter Steve Tobak (CBS, 2012) pulls no punches when he discusses Nardelli’s lackluster performance: “Named one of the “Worst American CEOs of all time” by CNBC after sending Chrysler into bankruptcy, Nardelli served as interim CEO for gunmaker Freedom Group and director of NewPage Corp.

He recently stepped down as CEO of the operations and advisory company at private equity giant Cerberus Capital Management, which owned all those companies. ” One pivotal point in the “Case for Analysis” article from the text (Jones, p. 145) is wrong; Nardelli is said to possess a “military background” when in fact he never served in uniform a day in his life. His autocratic ways and “military-style structure” have been roundly criticized. It is interesting to note that when Nardelli was denied the top spot at GE, he was in at Home Depot less than a month later in late 2000.

He resigned in January 2007 after much controversy and loss of market share (and stock price). He then manages to become CEO of Chrysler for two years (2007-2009), during which time the company goes from a $9 billion bailout to bankruptcy. New York Times business columnist Joe Nocera (2006, p. C9) wrote, “Mr. Nardelli, you see, has become this year’s version of Mr. Overpaid C. E. O. He’s earned this status, in part, by the sheer sum of money his board has awarded him in the five years since he was recruited from General Electric to take over Home Depot: $245 million, including $37. 1 million just this last year.

At the same time, Home Depot’s stock has fallen 12 percent, while shares of its chief competitor, Lowe’s, have risen 173 percent. You’ve heard of pay for performance? This is the classic definition of pay for pulse. ” Every company must choose its leaders extremely carefully, in addition to choosing a centralized or decentralized power structure (perhaps a mix of both? ). At the end of the day, when an organization (such as Home Depot) decides to centralize its authority, it would be well advised to select a leader with great judgment, an excellent track record, and a willingness to listen to critics. . What kinds of factors change the decision to centralize or decentralize authority over time in a competitive environment such as the home building supply industry? With respect to the home building supply industry, there are so many variables and unknowns that the entire sector is either in a standstill or lucky to still be standing. In the current economic environment, a mix of both centralized and decentralized authority may be necessary to ensure corporate profits and survivability over the long run. At a time when new ousing starts are virtually non-existent, no one is able to afford a house (or rather, take out a home loan), and housing stocks are in a glut, the home building supply industry must ensure authority is properly distributed to maximize efficiency. One industry magazine, citing a report issued by the National Lumber and Building Material Industry (NLBMDA), noted that Congress must focus on “reviewing and eliminating burdensome regulations” to help businesses with economic recovery. Seasonal factors are another one of the key elements of the construction industry.

Forest fires (such as in the Rocky Mountains this year) and abnormally dry or rainy weather can all help or hinder a company looking to predict how to purchase inventory and market to consumers unsure of when to seal a deck, update a swimming pool, or mow the lawn/shovel snow. Clearly, the industry Home Depot occupies is subject to so much unknown factors that to centralize all authority and decision making is tantamount to putting handcuffs on managers. There is no doubt that Home Depot is operating in a competitive environment, and that it must adjust its strategy on a continual basis to keep up with its rivals.

References Jones, G. (2010). Organizational Theory, Design, and Change. Upper Saddle River, New Jersey: Prentice Hall. Tobak, Steve. (2012, April 23). America’s Worst CEOs: Where Are They Now? CBS Money Watch. Retrieved from http://www. cbsnews. com/8301-505125_162-57417988/americas-worst-ceos-where-are-they-now/ Nocera, Joe. (2006, May 27). The Board Wore Chicken Suits. New York Times. p. C9. Retrieved from http://www. nytimes. com/2006/05/27/business/27nocera. html Staff. (2012, January 26). NLBMDA Releases 2012 National Policy Agenda for

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