Home Depot (pg. 2)

For several years Nardelli's strategy seemed to work. Earnings per share more than doubled, driven by cost savings from centralizing operations and by a blistering real estate market. But all that attention to growth and efficiency came at a price. Store managers were suddenly measured on a bewildering array of metrics, such as the average hourly labor rate; none related to customer service. By centralizing, Home Depot saved money - but robbed managers of the power they'd had to make decisions based on neighborhood quirks (more vacation rental units, say) or the regional popularity of small iridescent tiles. "There were beach chairs in Kansas City when it was snowing outside," says a regional manager during a visit to a store in Southlake, Texas. "The focus was on the metrics below the sales line, but not sales itself." Stores became dirty; employees, surly or scarce. The result: a company that looked better on paper but felt much unhappier in person. And in the retail business, where the customer experience is what matters most, that unhappiness eventually showed up at the cash register.

The data-driven Nardelli, who loved to say, "Facts are friendly," didn't really grasp what was going on, says Ken Langone, a co-founder of HD who had helped recruit Nardelli. Belatedly, in 2006, Nardelli agreed to increase slightly the percentage of employee hours devoted to the stores - but Langone says the CEO grudgingly predicted, "The company will get nothing for it." Says Langone: "I think Bob didn't appreciate the importance of a kid on the floor with an apron on. You just can't measure productivity in a retail store." Nardelli declined to comment for this story.

Nardelli made matters worse with a tendency to squelch dissent and dismiss criticism of his pay, which reached $30 million in 2005 as the company began to struggle. In January 2007, after the board asked to renegotiate his pay package, he instead stepped down and famously collected a severance payout worth - including comp from his original contract - $210 million. One of his favorite hires, vice chairman Blake, succeeded him. (In August 2007, Nardelli became CEO of Chrysler; the two haven't spoken since he left.)

Blake was not an obvious choice. He had spent most of his career as a lawyer, working as a clerk to Supreme Court Justice John Paul Stevens, then moving to GE and also serving as a deputy counsel to George H.W. Bush when he was Vice President. Blake says he never aspired to be a CEO and in his previous job had spent more of his time thinking about retail locations than the products sold inside them. Nor is he a rally-the-troops type: Blake is soft-spoken, relatively free of platitudes, and refreshingly unscripted. He shares, without prodding, what his wife said when she saw a videotape of him speaking in front of Home Depot's store managers in March: "'That's appalling.' And actually looking at that, you say, 'Yeah, that's right. I do need to communicate better.'"

Blake may have lacked experience, but you wouldn't know that from his first move as CEO, which carried symbolic weight: He placed a call to company founders Marcus and Blank, asking for their help and advice. Marcus, still among Home Depot's largest shareholders, had become estranged from Nardelli; he hadn't set foot in a store in three-and-a-half years. "I couldn't take it emotionally," he says. But when Blake reached out to him, he responded immediately, agreeing to speak at the company's March 2007 store managers' meeting and taking Blake on store walks to teach him the ropes. "My advice was to get into the stores," Marcus says. "Get the associates to talk to you, to trust you. Get them to understand that if you see something wrong in the store, you're not going to have them fired." Blake, whose son Frank Jr. is a store manager in North Carolina, did so - and rapidly decided that the company was involved in so many initiatives that it wasn't succeeding at any of them. At the first meeting of his management team in early 2007, he got his point across. "You know that sign in the lobby that says improve everything we touch [HD's internal slogan under Nardelli]?" Blake asked. "Please don't."

Blake has boiled his strategy down to a few priorities, all of which revolve around stores (engaging employees, making products readily available and exciting to customers, improving the store environment, and dominating the professional contracting business, an area in which Home Depot's closest rivals trail far behind). "To me, it just makes more sense to have one integrated business," he says by way of explaining why he sold off the wholesale business. (The sale price, originally agreed upon at $10.3 billion, was renegotiated down to $8.5 billion in August 2007 as the M&A market collapsed - an embarrassment at the time that today actually looks good.)

To spruce up the stores, Blake restriped the parking lots and improved lighting. He bulked up his merchandising team, headed by Craig Menear, which has, in turn, empowered the field merchants, whose job it is to understand local markets. Menear wants to make sure that the focus is on the customer's project rather than the product being sold. "Our whole job is to help customers solve their problems," he says. "You need to make sure you think about that from a project standpoint. If not, you can fall into the trap of selling commodities."

NEXT: Home Depot (pg. 3)

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