What's Donovan doing to deliver a return on his sweet deal? He has started by working with Nardelli to make long-overdue changes. They have revamped the evaluation process: Home Depot used to have 157 appraisal forms; now there are two for 295,000 employees. Salaried associates, from the CEO on down, are rated by co-workers, above and below, on identical criteria such as "gets results," "develops people," "drives change," and "displays character." Graded on overall performance from A (outstanding) to D (improvement required), they're paid based on how they score. (Unlike at GE, the bottom 10% don't automatically get the ax; Home Depot is a company that plans to hire 100,000 people this year.) Succession planning, Nardelli says, used to be "a carpal tunnel exercise, flipping pages in a book." Now the CEO participates in performance reviews of each of Home Depot's 130 officers, keeps detailed notes, and scrutinizes every promotion. "I absolutely believe that people, unless coached, never reach their maximum capabilities," he says.

Nardelli and Donovan are even creating a leadership institute at Home Depot's Atlanta headquarters that's modeled on GE's Crotonville, where high-potential executives meet with the CEO. A learning center will offer courses on leadership, merchandising, store planning, financial operations, and Six Sigma, of course. "They are building the most systematic teaching organization that I've seen in a retailer," says Noel Tichy, a management professor at the University of Michigan Business School who once ran the Crotonville facility. "Wal-Mart does a great job training people in the stores, but at Home Depot there's more of a mindset to build leadership throughout the organization."

Nardelli says he wants to create a "coaching environment" at the company. And he's as eager to be coached as to play the coach himself. Most mornings at seven, Ken Langone calls Nardelli at his office and asks, "How's it going?!" Sometimes he adds, "Did you sleep there last night?" Nardelli tells him about the day ahead; frequently he asks for advice. Since Marcus has retired from the board, Langone, who is lead director, is arguably the most powerful person at Home Depot. (Langone disputes that: "Bob is most powerful--he has complete control, and the board totally supports him.") Nardelli, no fool, calls Langone a "tremendous asset." And he actually seems to relish the board's scrutiny. Recently he sent Depot's directors in pairs to visit divisions and corporate functions like marketing, finance, law, and HR. "Bob doesn't have any secrets," says Roger Penske, a GE director whom Nardelli has added to Home Depot's board. "Between meetings, he calls and asks for advice. Typically, you don't see that."

With his own management, too, Nardelli seeks counsel. Before firing anyone, for example, he checks in with veteran executives. "I say, 'Look, here's my view. Am I seeing this right?' " And he tells underperformers explicitly why they're not good enough. "I tell them all face to face, and I try not to tell them that I can't tell them why," he says. Proud of his conscientious approach to delivering bad news, Nardelli takes a dig at his old boss: "I learned from experience. Sometimes you have to fail to win."

There are many doubts about Nardelli, and he has trouble accepting any of them. One worry is that his impressive squeezing of inventory, payroll, and overall costs is hampering sales growth. "Are they still wed to the dot-com era idea that top-line growth is the most important thing?" he asks, incredulous. Usually Nardelli doesn't carry work worries home, but Sue says recently she's been "letting him vent" over the drop in Home Depot's stock price. She adds, "Bob is really good at dealing with X-Y-Z situations"--when cause and effect are logical. But he doesn't find it logical that investors would sell after he announced better than expected earnings. It has hit Nardelli hard, like "that whole succession race thing," she says.

Another concern of investors: Lowe's, which lately has been growing faster than Home Depot. Only yesterday, it seems, Lowe's was a second-rate operator of small stores in small markets, mainly in the Southeast. But it's now invading Home Depot's core metro markets and stealing customers, particularly women, who prefer its cleaner, brighter stores. The new flagship Home Depots are stocked with decor products and appliances, a lot like Lowe's. "We need to be much more female-friendly," Nardelli says.

Then there's the fear that "Home Depot is changing too much, too fast," says UBS Warburg analyst Aram Rubinson, who downgraded the stock to hold in late May. Nardelli counters, "The rate of internal change must be greater than the rate of external change, or we will fall behind." Aiming to double sales and more than double profits by 2005, he says, "We have to change the business model. What got us here may not get us there."

His growth strategy is to upend Home Depot's traditional retail model. Nardelli is opening Home Depot Pro stores for professionals, who, research shows, outspend do-it-yourself consumers three to one. He also plans to sell to corporations. Back when Home Depot was decentralized, it could barely serve major corporate accounts; but now with streamlined operations and upgraded technology, Nardelli says he can buy lumber, lighting, and other products for any company that builds or operates facilities. "It's fertile ground for Home Depot," says Bruce Karatz, CEO of homebuilder KB Home, which sold 25,000 homes last year. "Lumber is clearly the big category, but you could go way beyond this." Nardelli is eyeing General Motors and retailers such as Staples. In May he snagged his first big account: Disney. The deal came about after he had a chat with CEO Michael Eisner. "Our companies have the same customer focus, the same values," Nardelli says. The multifaceted partnership involves Depot's supplying Disney hotels and theme parks, while Disney will provide the retailer with an exclusive line of paints, kids' furnishings and the like. Says Nardelli, as eager as a kid himself: "We'll have faucets with Mickey gloves and mirrors with ears."

He is also planning a major push into home services. Aging baby-boomers, research shows, want someone else to landscape the yard, build the deck, or fix the toilet. "Do-it-yourself is shifting to do-it-for-me," says Nardelli, who wants to repair your appliances, control your pests, secure your home--and finance the jobs for you too. It is a tricky business. Former Sears CEO Arthur Martinez, who tried and failed to reach $10 billion in home-service sales a few years ago, says, "Yes, it's a natural for Home Depot. And an extraordinarily difficult executional challenge. The biggest misjudgment I made was that we could bring scale to this business. It's an intensely local business--dealing with the repairman, technician, carpet cleaner. How do you assure quality, consistency, and compliance?" Says Nardelli confidently: "This is not easy, but it is worthwhile doing." With $5.2 billion in cash and a solid balance sheet, he can buy or ally with service providers. "You approach this like a franchise, as Coke has entrusted its bottlers." (Nardelli recently joined Coca-Cola's board--a sign that he's been accepted into Atlanta business society.) "You put in the right metrics. You do the same screening, the same drug tests, the same bonding we do with our own associates." His revenue goal for services? "Five years out, it should be $10 billion," he says, up from $3 billion currently.

At the end of the day--which, mind you, does not necessarily exist for Bob Nardelli--being chief executive of Home Depot is not about processes or metrics or controls. It is most critically about exciting customers and serving them consistently well. While Nardelli thinks big, he had best stay grounded in that fundamental rule of retailing. If he does--and he turns out to be as smart and lucky as he is hardworking--he may well prove himself the right leader for these challenging times. And he might also, just maybe, leave Jack Welch wondering, What if?