Strategic Audit

Lowes Home Improvement Inc.

Case Number 33
Group #1
Steve Shapiro, Michael Egan, Ketrone Wallace, Chris Stubbs,
Dylan Young

November 10th 2010

I. Current Situation
A. Current Performance
 Good financials exceeded $10 Billion in sales for the first time in
history, price/earnings ratio positive.
  Company aggressively grew with from 15 stores in 1962 to
over 1000 by 2004.
 In 1989 the company redefined its business and positioned
itself as a “big box” home improvement retailer.
 Company made conscience decision in 2004 to gain market
share domestically across the United States versus introducing
itself internationally.
 Has become the second largest U.S. home improvement retailer
with approximately 9% of the market share.
 From 1999 have increased their actual store locations
approximately by 100 each year through the year 2004.

B. Strategic Posture
 Mission
 Stores incorporated in 1952 and operated 15 stores selling
commodity-type products to home builders by 1962.
 In 1989, redefined its business and positioned itself as a “big
box” home-improvement retailer, selling a wide variety of
higher margin merchandise.
 The Company serves homeowners, renters and commercial
business customers. Homeowners and renters primarily consist
of do-it-yourself (DIY) customers and do-it-for-me (DIFM)
customers who utilize its installed sales programs, as well as
others buying for personal and family use.
 Commercial business customers include those who work in the
construction, repair/remodel, commercial and residential
property management, or business maintenance professions.

 Objectives

 "Lowe's has been helping our customers improve the places

they call home for more than 60 years”.

 Driven to be one of the most successful companies in the

world. H

 “We will provide customer-valued solutions with the best

prices, products and service to make Lowe’s the first choice for
home improvement."

 In order to make their vision a reality, Lowe's focuses its

employees on these values, Customer Focused, Teamwork,
Ownership, Passion for Execution, Respect, and Integrity
  Strategies

 Multi-domestic growth through targeted geographic locations,

increased leverages with vendors and focus on promoting “do-
it-yourself home improvement.

 Stores diversified by appealing to more women shoppers with

the merchandise that is offered. These products consisted of
interior home decorating items, including lamps, window
treatments, and designer towels which were non-existent in
their competitors stores.

 Differentiate themselves by offering higher margin

merchandise.

 Policies

 Diversity of thought is fundamentally supported throughout the

company. Building from this corporate-wide platform of
inclusion, and going beyond mere words to put the beliefs into
action.

 Aggressively seeks programs that involve the community.

II. Strategic Managers

A. Board of Directors
 Mix of Management Directors and Independent Directors
 Management Directors- both present and former employees of
Lowe’s
 Independent Directors- (majority) does not have a material
relationship with Lowe’s
 Size of Board is no less than 3 members (usually 9-12)
 The Governance Committee of the Board recommends individuals for
nomination to the Board
 Must possess:
 High professional ethics
  Policy-making experience in business, government,
education, or technology
 Willingness to allocate time required to carry out duties
 Must commit to several years for knowledge development
 Represent best interests of shareholders
 Board retirement age of 72
 Should retirement age be flexible if a member possesses
irreplaceable knowledge?
 Is the ratio of Management and Independent Directors
sufficient?
B. Top Management
 Chairman & CEO- preferred to have vast experience in business financial
and executive responsibilities
 President & COO- responsible for store operations, merchandising,
marketing, logistics, and store support
 Executive Vice Presidents- multiple positions specializing in finance,
business development, operations, merchandising, and logistics

III. External Environment (EFAS Table; see Exhibit 1)

A. Natural Environment.

 Availability of land for development.

 Fees and regulations for the development of land.

B. Societal Environment

 Economic

 Current Housing market is soaring, through which new

homeowners and existing owners are performing upgrades and
renovations. (O)
 Store size will be an important factor in determining what
markets to enter and which store size to choose. (T)
  Technological

 Advances in the effectiveness and affordability of “Green”

building products will drive for wider product selection. (T and
O)
 Advances in manufactured product offerings will dictate the
inventory needs for the coming years. (T)

 Political- Legal

 National minimum wage increases increasing the costs associated

with operating expenses. (T)
 Pending legislation regarding the reduction of emissions and
reducing the carbon footprint. (T)
 1st Time Home-buyer programs making it more affordable for
citizens to purchase their first home. (O)

 Sociocultural

 With the increase of televised and advertised product placement,

the need to maintain a high quality of life and have designer
products in rapidly increasing. (O)
 The current split household rate, due to divorce and career
mobility, causes the need for increased products per family. (O)
 Dual-career couples with limited time resources, causes the need
for more energy and time efficient household products and
materials. (O)

C. Task Environment

 High amount of new homes being built will lead to the increased need
to improve more homes. (O)
 Increased market competition, while relatively small in the “Big
Name” department, is an issue that must always be evaluated. (T)
 Merging with partners that are established in areas of proposed
expansion. (O)
 Opening new stores in heavily populated metropolitan areas increases
visibility and potential profitability. (O)
 1st Time Home-buyer program increasing the amount of homes
manufactured and improved. (O)
 Maintaining a variety in vendor products allows Lowe’s survivability
if one or more vendors were to go under. (O)
 Housing forecast for the next 10 years. (T)
 Increasing government regulation on “Green” building supplies and
the need to reduce carbon emissions. (T)
  Brand Identification. Ensuring that the Company name is associated
with excellence and quality. (O)

IV. Internal Environment

A. Corporate Structure
 In the service sector of the home improvement industry

 Capitalize on the nationwide growth of the housing market and the “do
it yourself’ in the metropolitan populations

 Projected an annual growth rate of 16% to 17% a year over the next
three years

B. Corporate Culture
 A equal balance between employees and shareholders

 Very involved with communities, public education

 Promotes social responsibilities within company

C. Corporate Resources
A. Marketing
 Developed an installed sales programs in the “buy-it-yourself” (BIY,
or “do-it-for-me”) market that was successful.

Lowe’s targeted retail and commercial business customers through
promotional mix that included television, radio, direct mail,
newspaper, event sponsorships, and in-store programs.

Stores with wider aisles, brighter lighting, more signs and its more in
stock of products for home decorating attracted more customers

B. Finance

 Saw significant product/market growth opportunities expanded into

western United States to build 100+ new stores to also increase profit.
  Net earnings, assets, shareholder’s equity and company’s recorded sales
increased significantly from 2002 to 2003.

 Home Depot leads Lowes with an overall market share 18% to 9%.

C. Research and Development (R&D)

 N/A

D. Operations and Logistics

 Operates 10 regional distributions centers (RDC) and nine smaller

support facilities strategically located throughout the US to handle
special merchandise.

 No plans of international expansion, competitive edge goes to

competition.

 Fifty percent of merchandise is shipped through RDC while remaining

through Global Sourcing Division is shipped through vendors.

E. Human Resources

 N/A

F. Information Systems

 N/A
EXHIBIT 1 EFAS TABLE FOR LOWES
WEIGHTE
EXTERNAL FACTORS WEIGHT RATING D SCORE COMMENTS
Opportunities 2 3 4 5
By 2004, 45 states had
Expansion to Western States
0.2 4.25 0.85 stores
Concentrating on Metro
Focusing on highly populated
areas with 500,000 +
metropolitan areas
0.2 4.00 0.80 population
1999- Bought out Eagle
Buying out established businesses in
Hardware an existing West
new markets
0.1 3.50 0.35 Coast hardware store
Current Housing Market is
Current Housing Market
0.1 2.00 0.20 rising considerably
This transition adds profit
Transition from D-I-Y to B-I-Y base
0.05 3.00 0.15 through installation services
Diversity within vendors
Maintaining an Equal percentage of
means not too much risk if a
vendor based products
0.05 4.50 0.23 vendor goes under
Identifying new product lines
that may provide reduced
Expanding Supply Chain vendor
costs to the company and
base
increase customer
0.05 1.75 0.09 satisfaction.
Threats      
Revitalizing product
offerings and providing
Need for higher quality product
customers with the best
lines and product advances
products available on the
0.05 2.50 0.13 market.
One other known "Big
Name" competitor. But must
Competition from "Big Name"
surpass their growth and
home improvement stores
product offering to maintain
0.05 4.00 0.20 market share
Unknown volatility in the
Current and Forecasted Housing housing market could lead to
Market over the next 10 years increase or decrease in
0.1 2.00 0.20 profitability
US Government is pushing
Increased government regulation on
towards regulations on
green building products
0.1 1.50 0.15 building requirements
TOTAL SCORES 1   3.34  
 EXHIBIT 4   2002 2003 2002 2003 2004
Ratio Analysis for 1. LIQUIDITY RATIOS  
Lowe's Company
Inc.        
  Current     1.56 1.55 1.22
  Quick     0.36 0.42 0.14
             
  2. LEVERAGE RATIOS          
  Debt to Total Assets          
  Debt to Equity     0.94 0.84 0.84
             
  3. ACTIVITY RATIOS          
  Inventory Turnover-sales     4.58 4.64 4.05
  Inventory Turnover-cost of sales          
  Avg. Collection Period-days     79.69 78.66 90.12
  Fixed Asset Turnover          
  Total Assets Turnover     1.62 1.64 1.72
             
  3. PROFITABILITY RATIOS          
  Gross Profit Margin          
  Net Operating Margin     5.66% 5.94% 6.39%
  Profit Margin on Sales          
  Return on Total Assets 10.70% 11.70% 10.20% 11.04% 11.55%
  Return on Equity 22.00% 22.60% 21.10% 22.03% 21.21%

EXHIBIT 5   2002 2003 2004

Common Size Net Sale
Income
Statements for
Lowe's Company
100.00 100.00 100.00
Inc.
% % %
  Cost of Sales 71 69 69
  Gross Profit 29 30 31
  Selling, general/admin. Expenses 18 18 18
  Reorganization Expenses 0 0 0
  Operating Income 8 10 10
  Interest Expense 1 1 1
  Other-net 0 0 0
  Income before accounting changes 0 0 0
Effect of accounting changes for
post-retirement benefits other than
  pensions and income taxes 0 0 0
  Total Operating Costs and Expenses 0 0 0
  Net Income 5 6 6