(FORTUNE Magazine) – The first big thing that Bob Nardelli wanted to be was a pro football player. But at 5-foot-10 and 195 pounds, he was the smallest guy on the line at Western Illinois University. "The rest of the world got bigger, and I didn't grow any more," he recalls. So he got practical about his future, earned a business degree, and took a job at General Electric, where his father had worked a lifetime in the factories.

The second big thing that Bob Nardelli wanted to be was CEO of GE. Though never a blazing intellect, he logged the longest hours, tackled the toughest turnarounds, and became "the best operating executive I've ever seen," says Jack Welch, his former boss. But again, somebody outgrew Nardelli. "I had to go with my gut," Welch told him in November 2000 when he passed him over for the polished, Ivy League-educated Jeff Immelt.

It's been said that luck is what you have left over after you give 100%. If that's true, Bob Nardelli never got his due until the day he lost the GE succession race. Minutes after the new CEO was announced, Nardelli, who was then in charge of GE Power Systems, got a call from Ken Langone, a GE board member who is also an influential director at Home Depot. "You probably could not feel worse right now," the raspy-voiced Langone boomed, "but you've just been hit in the ass with a golden horseshoe. And I've got the horseshoe." Within a week, Home Depot's board pushed out co-founder Arthur Blank and installed Nardelli as CEO.

At first, Nardelli looked like a pretty lucky loser: Immelt, not he, was the one grappling with rampant criticisms of GE's accounting practices and a falling stock price (down 25% since Welch's departure last September). During Nardelli's first six months at Home Depot, investors cheered the new guy. The company's shares, at $39 when he arrived in December 2000, rose to $53 by the next May. But lately Nardelli hasn't been looking so lucky. "This is one of the most unpredictable periods in my 35 years," Nardelli, 54, says over breakfast at his Atlanta office, three days after he announced a 35% increase in Home Depot's first-quarter profits, beating the Street's expectations. Promptly the stock sank more than 10%--now it sells for about $40. "I can understand not getting rewarded," he says, "but I don't understand getting punished."

Today Nardelli is having one hell of a time convincing investors that he's leading a go-go growth company. Rival Lowe's is stealing his customers and investor favor (see Street Life). Analysts worry about his aggressive efforts to transform Home Depot's legendary culture from loosey-goosey to disciplined--and to transform the business from an operator of big-box home-improvement stores to a multidimensional provider of goods and services. Some say his goal of increasing sales from $53 billion in 2001 to $100 billion in 2005 is too ambitious. Others wonder whether Nardelli is the right guy to lead the company. Not only is he the first executive without retailing experience ever to become CEO of a major nonfood retailer, he is also one of the very few outsiders to take over a well-known company from a founder.

But don't count the new CEO out. The essential thing to know about Bob Nardelli is that he is driven by much more than a simple desire to see his company excel. He's also driven by a burning personal need: to prove that Jack Welch picked the wrong guy.

If you spend time with Nardelli, inevitably he will cite his core belief: "There is an infinite capacity to improve upon everything you do." That faith in human performance has guided him his entire life. A mediocre student, Nardelli got B's and C's in school, but he hustled and excelled outside the classroom. He was an altar boy, a Boy Scout, a star athlete, editor of the yearbook, a class officer, and an ROTC cadet. At Western Illinois, no football player prepped harder than Nardelli, the co-captain and fierce offensive guard. "He was always the first in to study the films of the games," says his coach, Bob McMahan. "He was one of the few kids who really cared that he was carrying his load and doing right." Football gave Nardelli his first lesson in Six Sigma quality control, which became his gospel at GE: "Everybody had to do his job impeccably well. A case of 'we all win or we all lose.'"

Nardelli sold his motorcycle to raise the cash to buy an engagement ring for his college girlfriend, Sue, and they married in 1971, the year they graduated. And after rejecting the idea of becoming a football coach because he was wary of the unpredictability of the profession, Nardelli started at GE that same year at the lowest salaried level, as a $9,600-a-year manufacturing engineer. He worked his way up, taking night MBA classes at the University of Louisville. Jack Welch, who met Nardelli in the late 1970s, says that the young man hounded him relentlessly about Nardelli's own performance. "He would always say, 'What am I doing that I need to do better?' " In 1988, Welch refused to give Nardelli, then a manufacturing VP, a general management job. Nardelli quit. "The issue is not between you and I," he told Welch when Welch tried to persuade him to stay. "It is what is between you and I." Nardelli didn't get the grammar right (a perception that he's inarticulate marked his image early on at GE), but his point was that he needed a business to run to prove he was a worthy contender for CEO of GE.

Nardelli spent the next three years as an executive vice president at Wisconsin-based industrial-equipment maker Case, where he ran the worldwide parts and then the construction divisions. He returned to GE in 1991 to run the company's appliance business in Canada--and was on the CEO track at last. Within the year, Nardelli got the top job at GE Transportation, where he showed the right stuff. In three years he pacified hostile unions, modernized the product line, expanded into services, took the business global, and more than doubled profits. He abided by the one firm request that Sue Nardelli has made in these past 31 years of marriage: that they never live overseas. But he globetrotted all the time. "He was everywhere getting orders--Africa, Mexico, China, Eastern Europe," says GE alum Larry Johnston, who has known Nardelli for 20 years and is now CEO of food retailer Albertson's. Still, Nardelli has never missed a summer vacation with Sue and their four kids, now ages 16 to 27. Welch calls Nardelli "the perfect dad and perfect husband."

But at GE, Nardelli was struggling to get the kind of recognition that would lead to the big job. "There was always this rap against me about being functionally proficient but not very strategic," he says. In 1995 he left Transportation to become CEO of GE Power Systems; he completed 50 acquisitions and increased profits nearly sevenfold in five years. "Jack and I used to marvel at his ability to execute," says Bill Conaty, GE's human resources chief. "With Bob, it's very, very difficult to have a surprise, because he's into the details down to the level of the shop floor."

Nardelli never missed his targets. He never made a significant mistake, Welch says. Asked whether he had the best record on paper at GE, Nardelli replies, "Yes, by a lot. A lot!" Unlike his rival Jim McNerney, who was having job talks with 3M months before the GE succession race ended (and ultimately became CEO of 3M), Nardelli was fielding calls from Lucent, Kodak, Ford, and other companies, telling all that he had promised Jack he wouldn't talk to anyone until Welch made his decision.

"I went with my heart in my throat," he says about the cold, sleeting Sunday night two Novembers ago when he met Welch at the Albany, N.Y., airport. "How do you describe this? It's something you strive for for 30 years. You're hanging on every word. You're focused on his mouth, and the final words: 'I've elected to give it to Jeff.' And you're like, Did I really hear it right?" Unlike McNerney, who took his bad news in stride, Nardelli hammered Welch: "You've got to tell me why. Tell me what I could have done better. Tell me the numbers weren't there, the innovation, the talent development, the relationships with the Street. Give me a reason." Welch said to Nardelli, "It was my call, and I had to go with my gut."

To this day, it eats at Nardelli that Welch never told him why Immelt was a better man to be CEO of GE than he. Asked whether he thinks age--at 46, Immelt is eight years younger than Nardelli--was a significant factor in Welch's decision, Nardelli dismissively replies, "I don't know." He adds, "I told Jack, 'I need an autopsy here.' " Does he still want one today? "Absolutely," he says. "Let's exhume the body."

Meanwhile, at Home Depot, the board of directors was having its own debate about who should be CEO. Founded in 1978, the company was led in its first two decades by Bernie Marcus, a charismatic and beloved visionary--Home Depot's own Sam Walton. Marcus was succeeded by his co-founder, Arthur Blank. What no one knew at the time--it hasn't been revealed publicly till now--is that the board never fully supported Blank's elevation; some directors had to be coaxed to endorse his step-up to CEO in 1997. An uninspiring former accountant, Blank was a fine numbers man and No. 2 to Marcus, but as CEO he was seen as arrogant and dismissive. For instance, when Home Depot's directors, who are required to evaluate five stores every quarter, returned from their visits with poor report cards, Blank denied serious problems. He was slow to return their phone calls--a sure way to enrage big egos. After he and the directors had clashed about people, strategy, and other issues, Blank lost their support in the summer of 2000. "This is a board of directors who did their jobs well, while most directors sit on their asses," says Frank Borman, the onetime astronaut and Eastern Air Lines chief who retired from the Home Depot board last year. Says Marcus: "There are no wallflowers on this board. They're more like man-eating plants."

Led by billionaire investment banker Ken Langone, who gave Marcus and Blank their startup capital 24 years ago, the board zeroed in on Nardelli. As soon as they got him, the directors told Blank, now 59, that he had to cede the CEO title. The night the vote took place, at an emergency board meeting in an Atlanta hotel, a stunned Blank said he felt "set up," according to people who were there. Three months later, when the directors, including Nardelli, asked him to give up the co-chairman title and leave the board, Blank told them, "Every time I meet with you, you take something more away from me." Blank, who wouldn't comment for this story, has since bought the Atlanta Falcons football team and a ranch in Montana.

Meanwhile, Marcus, 72, gave up the chairman title at Home Depot in January and left the board in May. "It's like when you marry a daughter off," he says wistfully. "You're giving her over to a strange man. It's the same kind of feeling here, except I had the ability to live in the house, which most fathers don't get to do." Indeed, Marcus --who owns about $2.4 billion of Home Depot stock--runs his own foundation from an office directly below Nardelli's. If he's unhappy, Marcus jokes, he'll just bang on the ceiling with a broomstick.

When Nardelli arrived at Home Depot, he found himself a strange man in a strange place. The management style that Marcus and Blank promoted was "do it yourself," the same philosophy embraced by the retailer's customers. The co-founders used to boast that the chapter on merchandising in Home Depot's policy manual didn't have a single word in it. Merchants and store managers wrote their own rules. The cowboy culture worked well for Home Depot's first 20 years, during which the company grew faster than any other retailer, including Wal-Mart. But as inventories ballooned and growth sputtered during the Blank era, the system--or lack thereof--buckled under its own weight. Home Depot needed "shoring up--some pilings underneath this huge enterprise," as Nardelli says. His mission: to teach this gangling organization of proudly independent entrepreneurs to grow up.

He leads by example. Up at 5 A.M., he is in the office by 6:15 and usually works until at least 9 P.M. Saturday and Sunday are workdays--and unlike Blank, Nardelli has his executives in for weekend meetings. "It's not a job," he says. "It's a life." He is intensely hands-on: While Blank had ten people reporting to him and gathered them quarterly for business reviews, Nardelli meets with his 21 direct reports every Monday at noon, zeroing in on KPIs (key performance indicators, such as customer counts and average tickets) and action plans. "I love data," he effuses. "I love to know what's going on in the company totally." Former executives say that the new environment is "command and control" and "all business all the time." Though the company doesn't measure employee morale (Nardelli says he plans to start soon), some insiders say that lately it's been sinking with the stock. "There's quite a lot of anxiety about the changes to the culture," says Prudential analyst Wayne Hood, who has followed Home Depot for 19 years and has many friends who work there. (Despite his concerns, he has a buy rating on the stock.)

Many of Nardelli's changes come down to dollars and cents. "Cash is king," says CFO Carol Tome, a tough Nardelli ally. They have eliminated the company's famous cash-return policy--a move akin to defacing "the Holy Grail," Nardelli notes. Marcus and Blank held sacred the promise that if you bought any item at Home Depot and returned it to any store, receipt or no, next year or next decade, you got cash back, no questions asked. Abuse was flagrant. Nardelli and Tome collected data on how much the policy was costing, created spreadsheets, and shared the findings with store managers--who, pre-Nardelli, were not linked by e-mail. The new policy--no receipt, credit only--will save Home Depot well over $10 million annually, Nardelli says. He has also centralized buying, consolidating it from nine regional offices to one, in Atlanta. That has turned out to be a Darwinian exercise that squeezes out many local suppliers and gives the edge to efficient biggies that can serve Home Depot nationwide.

These are no-brainer fixes that almost any professional manager would make. Nardelli's more substantial and, frankly, riskier change is to the DNA of the place: the people. He has lost 24 of 39 senior officers in the first 19 months--some were fired, others quit. And he has brought in a bunch of nonretail people, including many GE alumni. "This is a business that has to reach outside of itself," Nardelli says.

If you want to know how much stock the new Home Depot puts into recruiting and developing its talent, just look at Dennis Donovan. A human resources executive who worked with Nardelli at GE Power Systems, he joined Home Depot as HR chief a year ago and got a $21.5 million pay package for 2001. That made him the second-highest-paid person at Home Depot last year (after Nardelli, who pulled in $24 million)--and probably the best-paid HR guy in America. "Yeah, Bob screwed me, but I came anyway," says Donovan, laughing. Says Nardelli: "A lot of HR people are just theorists. Dennis is the ultimate practitioner. He's the most effective HR manager I've ever known."

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 under- performers 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?

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