Fast Company

Bob Nardelli is Watching

He's a by-the-numbers GE vet--but he has turned massive, unwieldy Home Depot into an innovation machine.

From the comfort of his 22nd- floor office at Home Depot's bustling corporate headquarters in Vinings, Georgia, CEO Bob Nardelli is watching you. And yes, that means you. If you ever venture into a Home Depot store in search of a rake, a grill, or even that shiny black toilet seat you've always coveted, Nardelli can see you in real time. A computer terminal on his desk allows him to gaze into the parking lots, checkout lines, or even shopping carts of his consumers in any of 1,962 stores with the click of a mouse.

Originally created to help reduce "shrink," or lost inventory--which has fallen by around 50%--the company's closed-circuit television system, called HDTV, has also given executives the ability to see what's moving and whether enough staff members are on the floors. "Let's look at Kenner [Louisiana]," Nardelli says, clicking on a New Orleans-area store that has just reopened after Hurricane Katrina. It's doing decent business, but less than expected because so few people have returned.

I can do my job better if I have firsthand exposure to the good, the bad, and the ugly."

But Nardelli is no desk-bound manager. He also spends at least one week a quarter as a "mystery shopper," popping in unannounced to as many as 10 stores a day. "There was a perception that I was going out to catch people," he says. "Over time they understand that I just want to see it like a customer. I can do my job better if I have firsthand exposure to the good, the bad, and the ugly."

Nardelli runs an $80 billion megacompany--the 13th largest in the country and the second-largest retailer after Wal-Mart--but that doesn't mean he manages by memo. To be the CEO of a major public company today--in a Sarbanes-Oxley world in which the boss practically has to sign the financials in blood; in a scandal-and-scoundrel tinged era in which the Bernie Ebbers defense gets you a trip to the hoosegow--requires a leader who is as able to zero in on the tiniest details as he is to grasp the big picture.

To succeed in the CEO's job (where the average tenure is just five years) now takes a variety of complex, often contradictory, skills. For Nardelli, that means an ability to focus both on the distant horizon--housing starts, say--and on close-in details like the gross margins on house paint. It means blending in with the starched shirts of Davos and, the next day, sharing a plate of barbecue with a part-time worker. It is this fluidity that has helped Nardelli transform a company that few knew needed a major revamping when he arrived five years ago. He has dramatically hiked sales, from $45.7 billion to an estimated $80 billion in fiscal 2005, increased earnings per share by 20% annualized, and shifted the company from a big-box retailer stuck in a trench war with rival Lowe's to one that is succeeding in new segments such as the fragmented $410 billion professional construction market.

It has hardly been an easy go. Nardelli, 57, first struggled to impose a foreign culture--the meeting-and-metrics-obsessed style of General Electric, his alma mater--on the entrepreneurial style of founders Bernie Marcus and Arthur Blank. There was turnover, strife, and investor distrust, but Nardelli persevered. Today, the man once best known for coming up short in the most public succession story in business--the race to replace Jack Welch--wears the mantle of leader with confidence. "He really is the best manager, execution-wise, I've ever encountered," says Welch. "His real ability is to motivate lots of people around a mission, excite them about it, and make it happen."

In a journey that began at a conference on corporate citizenship and encompassed a needle-filled city park, a corporate jet ride, an all-day budget process, a staff dinner, a disaster briefing, and a visit to Home Depot's top-secret innovation center, Nardelli not only shared his views on management with Fast Company but also showed us exactly how he runs a large corporation. The result is an unusually intimate portrait, in real time, of what it takes to be a leader in the 21st century.

The Public Face

3:00 p.m. / Monday
Park cleanup, Washington, DC

It's safe to say that not too many CEOs have ever ventured into Watts Branch Park, a Washington, DC, spot that for years has served as a dumping ground for trash, drugs, and sometimes people. Today it's pushing 90 degrees, and yet 200 orange-shirted employees from 26 Home Depot stores and hundreds of other volunteers have spent the day planting trees, clearing away debris, and building a new community center in an old club where Marvin Gaye got his start. All told, the group found--and removed--about 7,000 hypodermic needles and seven-and-a-half tons of trash.

Usually, I'm told, Nardelli works all day at such events, digging or raking alongside the associates who man the cash registers and garden centers. "Part of the importance of it for him is putting the sweat equity in," says Michelle Nunn, cofounder and CEO of the Hands On Network, an umbrella group promoting volunteerism that works closely with the company.

But today, Nardelli, arriving after keynoting the National Conference on Citizenship, is playing the role of brand ambassador. Hopping out of a chauffeured Lincoln Navigator and quickly pulling on an orange Home Depot T-shirt, he works the crowd like a politician, doling out hugs, interviewing passersby, and even signing T-shirts for excited staffers who walk away, eyes shining. He helps in the "board cutting" ceremony that's part of every Home Depot project and new store opening (a commemorative piece of lumber is sawed in half) and leads the crowd in a spirited, if cheesy, chant.

High-profile public service, of course, has long been a standard part of the CEO's Kabuki dance. But Nardelli, who has significantly boosted Home Depot's commitment to volunteerism and chairs a national service group of business leaders, sees it as both the right thing to do and smart business. It unifies employees, helps the communities Home Depot serves, and builds brand awareness. "Customers are looking for more associations," he says. "People who volunteer are usually your best associates. If they are willing to take care of their communities, they're able to take care of customers."

And even as Nardelli walks the park, he's working it. He pulls aside Congressman Tom Davis (R-Va.), who chairs the committee analyzing the government's response to Katrina, to remind him how Home Depot can help with reconstruction. And as an associate shows him the disease-resistant elm trees he is planting, the wheels start turning. "We have the largest garden club in America," he says, calling out to a regional vice president. "Let's look at broadening our offerings" to include the elms.

The Messenger

5:30 p.m. / Monday
En route to Atlanta on the corporate jet

Nardelli, having washed off the sweat from the park, settles into a leather seat, nibbles on a plate of nachos, and morphs from public image-maker to high-level strategist. Although he was a guard on his college football team, he is a bit shorter and his voice a bit higher than you'd expect, with the twang of the Pennsylvania coal-mining town where he grew up. (Nardelli followed his dad to GE after getting a BS in business, topped off by an MBA.) Rather than trying to intimidate you, he'll try to disarm you. "Turn that tape recorder off," he tells me. "I want to know more about you."

Eventually, the tape recorder goes back on, and Nardelli explains his corporate vision--one that is so simple it can be expressed on one page, and one that hasn't changed since he arrived. It consists of one goal--"To improve everything we touch"--with three objectives: Enhance the core with innovative merchandise, modern stores, and good leaders; extend the business through new services and channels; and expand the market by moving upstream and overseas. "What I love about it is the simplicity," he says. "With 325,000 associates, you want to have something that is easily communicated and actionable." Nardelli is repeating a mantra he has chanted for five years running. He is playing the role of visionary and messenger--two skills critical for any leader.

Translating that one page into reality, however, was a hell of a task. Nardelli arrived at Home Depot from GE--where he'd expanded GE Power Systems from $5 billion to $20 billion in sales--just days after Jack Welch told him that he'd chosen Jeffrey Immelt to succeed him. Shocked and disappointed, Nardelli jumped when a recruiter approached him about becoming Home Depot's CEO. After years of stunning growth and one of the best stock rides in history, the retailer looked solid. But termites were gnawing at its foundation. Home Depot, squeezed between Wal-Mart and Lowe's, saw same-store sales and profit growth start to sputter. The celebrated power given to store managers created erratic performance and sacrificed benefits of scale. Technology was so poor that Nardelli couldn't even send an email out to the stores. He resolved to impose GE-style discipline on a place that had until recently thrived in its absence.

Nardelli's changes rattled company vets, says Bernie Marcus, Home Depot's cofounder: "Many didn't like the discipline."

In his first two years, he made huge moves, such as centralizing merchandising, launching a massive $2 billion technology project, and instituting a new performance-measurement system where decisions on talent and hiring had long been made ad hoc. Naturally, there was discontent. Spooked by the rapid changes, investors sent the stock price down 50%. And the famously freewheeling store managers recoiled at Nardelli's vision of order. Says Bernie Marcus, Home Depot's cofounder and former CEO, who remains a big shareholder: "A lot of the entrepreneurs didn't stay. Many didn't like the discipline too well."

In 2003, Home Depot turned the corner. Since then, both the top and bottom lines have grown dramatically, thanks to back-end efficiencies and a growth strategy focused on contractors, services, and international expansion. Customers, too, are spending more, with the average ticket up 18% over five years, to about $58 in the second quarter of 2005. When asked if he feels vindicated, Nardelli won't answer directly. But a small smile says it all.

The Facilitator

7:00 p.m. / Monday
Leadership team dinner, corporate headquarters, Atlanta

Nardelli is an unapologetic data freak who never met a process he didn't like. Conversations with him inevitably turn to the latest average ticket or the upward ticks on an employee satisfaction survey. "Facts are friendly," he loves to repeat. But Nardelli also understands the value of emotional intelligence. Often that means listening, without needing to set the agenda. That's what's happening tonight at a casual dinner for his 12 direct reports in a wood-trimmed executive boardroom. Although the team meets every Monday for two hours to conduct a cross-functional, real-time business review, Nardelli also hosts dinners with them and other groups to create more unstructured discussions.

Although most team members are new to Home Depot, there are also a few holdovers, such as CFO Carol Tomé and Tom Taylor, EVP for merchandising and marketing. As the group lines up at the salmon-and-beef buffet, it's clear they feel comfortable with one another and equally clear that they operate as a brain trust, cross-pollinating ideas across different segments of the company.

Tonight's conversation jumps from hurricane planning to leadership programs to The Same Page, the company's live TV show that communicates weekly plans to store managers. Nardelli says very little. Everyone chimes in with ideas that stretch beyond his or her functional roles, and there is little of the deference to power so often seen in large corporations. Says Harvey Seegers, who runs the online and catalog business: "I see him doing the same thing he did at [GE Transportation, where the two worked together]. He's building a collection of very talented people and has instituted a no-BS performance culture. Everyone wants to work harder because no one wants to let anybody else down."

The Manager

9:00 a.m. / Wednesday
Meeting with Harvey Seegers, Bob Nardelli's office

"He really is the best manager, execution-wise, I've ever encountered," says Jack Welch.

It's 9:00 a.m., but Nardelli is already well through a morning that began when his alarm sounded at 5:15 a.m. He rose to watch two news shows simultaneously and pore over the previous day's numbers. He then drove to the office, just a few miles from the Atlanta home he shares with Sue, his wife of 34 years, in his black Lexus SC 430 two-seater. He's there by 6:30, early for an 8:00 a.m. sit-down with Frank Blake, EVP for business development and corporate operations. Blake has good news on a new contractor loan program, but Nardelli's eyes dart to the few problem areas on a chart measuring customer satisfaction with in-home installations.

As Blake leaves, Seegers bounds into Nardelli's office, holding a catalog for the new 10 Crescent Lane home decor brand. Seegers goes straight to the metrics. "It's a fairly routine custom with Bob," he says. "You start out with the numbers, and if business is doing well, you can proceed on to the next topic, and if not, the agenda gets changed right in front of your face." Nardelli seems enraptured as he leafs through the catalog, admiring some lamps and a pop-up gazebo. "This is our most successful catalog launch in the history of the company," he says. This is the one I'm most proud of--the feel, the touch, the texture, the aspiration of it." The next catalog, for tools, doesn't get the same response: Too "foofoo" for tough-guy customers, he says. "We were taking full pages to show a wrench. That's not what pros want when they throw this in the truck."

The Talent Scout

10:00 a.m. / Wednesday
Meeting with Dennis Donovan, EVP, human resources

In many companies, the head of human resources has little clout. The opposite is true at Home Depot, which will create 20,000 new jobs this year. Dennis Donovan, another GE expat, advises on nearly every executive decision, from new store sites (are there enough workers nearby?) to marketing (can the company's hot NASCAR sponsorship be used to reward top employees?).

Like most former GE executives, Nardelli is obsessed with talent. So he was astounded to realize that there was no organized recruiting and retention system at his new company. In fact, there wasn't even a head of human resources. "Talk about shocking moments," says Nardelli. "It would be like trying to run NASA without a head engineer." The changes here have been radical: 98% of Home Depot's top three layers of management are in new positions since April 2001, and 56% of them are new to the company. Donovan enters Nardelli's office holding a thick binder detailing the company's HR strategy for 2006. It's of critical interest to the CEO, who personally interviews every officer candidate and signs off on many senior hires. "If we don't select right," he says, "what we create is a dislocation and a distraction."

Also critical is the ability to develop great performers. The meeting that follows covers an alphabet soup of training and development programs and rigorous talent assessments. Home Depot has created hiring programs for retirees, Hispanics, and military officers. For established high performers, there's the Accelerated Leadership Program. Others include the Business Leadership Program for MBAs and the Store Leadership Program for new hires with some leadership experience. Many in this last group--529 so far--are ex-junior military officers, a talent pool that Nardelli first tapped at GE. With so much training, it's hard to see how employees manage to actually work. But Donovan and Nardelli insist that increased sales and lower turnover prove the strategy.

The Commander-in-Chief

11:00 a.m. / Wednesday
Crisis Management Command Center, corporate headquarters

This morning, Home Depot is recovering from one disaster while preparing for another. That's not as hard as it might be, because Nardelli has made a science of disaster recovery by opening the command center, using three years of data collected after hurricanes. It is a comprehensive system that determines which stores should close when, what to do with displaced employees, and how to stage recovery supplies. The company was able to get all but two of the eight stores severely damaged by Hurricane Katrina up and running within a week (the others remain underwater).

Nardelli walks into the gray, windowless room, eager for a briefing on Hurricane Rita. "How're we doin'?" he asks, greeting those he knows by name. David Whatley, Home Depot's VP for risk management, shows him the map of Texas, with pushpins representing the 41 stores potentially in Rita's way. Bob Puzon, senior director of operations, shows him the phone banks of employees talking to suppliers about cranking up production of key items. Nardelli gazes at the five television screens transmitting the Weather Channel, news, and HDTV tuned to a Houston-area store that has just sold 272 generators. Here, Nardelli works to shore up morale, aware that his presence may be a distraction at a stressful time.

The Salesman

3:30 p.m. / Wednesday
Home Depot's top-secret Innovation Center, Atlanta

The brick building, somewhere in Atlanta, could be any old warehouse. But inside, behind tight security, are the top-secret new products being tested by focus groups and by Home Depot's top merchants. The center, modeled on Procter & Gamble's, opened in 2004.

Watching him tour the center is like watching a hen with a brood of chicks. As he moves from lighting to tiles with the same awe he once showed for turbines at GE, it's worth remembering how much flak Nardelli took for his lack of retail experience. He gloats over a line of appliances and caresses the blades of a ceiling fan. "Just look at the richness and presentations," he exults. But Nardelli is not merely preening; he is also constantly probing, quizzing merchandisers on their plans for power tools and showerheads. He also can't help trying to create a new customer. "Wouldn't you love to have that patio furniture?" he asks. I say that I need a patio first. "We're gonna sell you something before you get out of here," he promises.

Although most of Nardelli's promises have come true, with the real estate market showing signs of stress, some analysts worry about Home Depot's vulnerability to a cyclical downturn in housing and the continuing strength of Lowe's. Nardelli says that the strategy he laid out five years ago remains on track and that, if executed correctly, the opportunities are virtually limitless.

Regardless of what happens next, Nardelli has expertly wielded the diverse tools of modern leadership to work a renovation from the joists out. "He did everything we thought he would do," says Bernie Marcus. "The results are good and profits have been good. This is now his company." Bob Nardelli is truly home at last. nFC

Jennifer Reingold (jreingold@fastcompany.com) is a Fast Company senior writer.

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