Home Depot knows when to call it quits

CEO Frank Blake went against the grain and pulled the plug on building more stores in the U.S. and China. And he and his company are reaping the benefits.

Home Depot CEO Frank Blake

FORTUNE – The business world is a slave to growth stats. That's how most analysts and other company watchers gauge a firm's success. If you run a retail operation, growth often means building more stores. And if you want in on the best growth rate, you'll head to China. That's where the new middle class and wealthy consumers are. "Grow and grow in China," urges the Greek chorus of corporate spectators.

Home Depot (HD) has balked at all of this. CEO Frank Blake decided to close the hardware chain's operations in China and refrained from building new stores  in the United States. And the company has benefited  At the end of 2011, Home Depot had earned $70.4 billion in revenue, up 3.5% from 2010. As of this October, a share of Home Depot costs more than $60, an increase of nearly 70% from the same time last year. How did Blake pull this off? Part of it has to do with calling it quits on growth.

Of course, pulling the plug on big projects for the good of the company isn't the only skill Blake has brought to Home Depot. He also made key operational changes when he replaced Robert Nardelli in 2007. Nardelli had slashed employee benefits and focused on expansion and acquisitions. Blake reversed that tactic and set to get the company's damaged customer service reputation back up to snuff and cut costs without killing morale.

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Blake realized that returning the company to its employee-empowered roots would take a great deal of work. So much, in fact, that building new stores didn't seem like the best use of money, despite the general pressure to grow. "Frank looked at the world and said, 'We're fully stored, why don't we focus on improving the existing stores that we have rather than growing for growth's sake?'" says Gary Balter, an analyst who covers Home Depot for Credit Suisse. Blake saw, he says, that growing to placate Wall Street didn't make good business sense.

Similarly, Home Depot had announced plans to expand in China in 2004 under then-CEO Nardelli. But the company's do-it-yourself hardware approach never took off in the region, Blake says. Much of this was due to a combination of having the wrong regional leaders at the company, challenges adopting its big box model to China's distribution system, and a cultural mismatch. In China, Blake recently told Fortune, "Doing it yourself is not a point of pride." More

Posted in: Alan Mulally, China, Frank Blake, growth, Home Depot, Starbucks

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