The HP Way — How Bill Hewlett and Dave Packard Built Their Company

AuthorAthenarium / Posted on

The HP Way - How Dave Packard and Bill Hewlett built their company

Managing and investing the HP way

HP Inc (NYSE: HPQ) and HP Enterprise (NYSE: HPE) have had a long and illustrious history. It goes all the way back to the late 1930s, when their 26 year old founders, David Packard and Bill Hewlett, began producing electronic measurement equipment. Since then, HP has become one of the world’s largest multinational information technology companies. They’re an important fixture of Silicon Valley’s history.

Dave Packard wrote a short but wonderful book in 1995, entitled The HP Way. The book provides a concise account of HP’s early history and the principles that enabled their growth and success. Much of Packard’s philosophy remains timeless and bares similarities to other prominent business leaders such as Warren Buffett, Mark Leonard and Jeff Bezos. In this post, we’ll review the lessons we took from Packard’s book and work.

Skip ahead

HP’s humble beginnings

The duo first began in a humble one-car garage on Addison Avenue in Palo Alto, 1937 (the State of California would later designate this office as the “birthplace of Silicon Valley”). Packard and Hewlett had not yet developed an area to focus on, but held a simple and ambitious goal: to make “important technical contributions to the advancement of science, industry and human welfare”. Interestingly, Packard described how they never foresaw the impact of computers on industry. He believed it more accurate to describe HP’s success as a partial consequence of the electronic revolution itself..

Early naiveties…

Their early days focused on the development and manufacturing of numerous instruments, such as vacuum pumps, oscillators, tuners and interferometers. They later made more significant contributions to light emitting diodes, solid state technologies and integrated circuit technology. Packard also described some of their early naiveties in business. For instance, they named one of their earlier products the Model 200A to convey a sense of history; and priced it at $54.40, as a reference to the Oregon boundary dispute in 1844. Their growing pains and sensibilities were quite the joy to read.

And the early lessons

Early on, Packard describes the educational value he derived from taking classes in business law and management accounting. The former gave him exposure to partnerships, contracts and incorporation, while the latter helped them to organise and balance their books. Packard also reminisced about how versatile he and Hewlett needed to be to succeed in the early life of their company. This ranged from research, to pricing, packaging, logistics, sales, accounting and sweeping at the end of the day. Packard remarked this as an invaluable learning experience that one cannot obtain from business schools.

Sporting observations

Sports also had a strong and early influence on Packard’s business philosophy He observed that when two teams with equally skilled players and teamwork face off, it is the team with the greatest motivation to succeed that wins. As a guiding principle, Packard believed strongly in finding and motivating the very best people to work together to win.

Additionally, Packard made the observation that it is sometimes more fruitful to have two start-ups in competition. When introducing a new technology, having two players instead of one may actually lift the credibility of the enterprise. This may improve the customer’s willingness to pay and risk appetite.

The HP Way

The cornerstones of the HP way began to take shape in the late 50s and 60s. Hewlett and Packard, in collaboration with the company’s managers and supervisors, prescribed several written objectives, which we summarise in brief:

  1. Commit to customers and continuous improvement
  2. Create an organisation that fosters initiative and creativity towards agreed objectives
  3. Support employees to pursue personal satisfaction and share in company success
  4. Deliver profit and growth to build company strength and meet objectives
  5. Focus on a field of interest in which the company has capability and opportunity
  6. Meet the responsibilities of good citizenship and contribute to the community

These are common sense principles. The challenge was not in its development, but in its execution and staying power. It was interesting to learn from Packard and his experience against each of these pillars.

Commitment to customers, quality and innovation

“We’re not selling hardware; we’re selling solutions to customer problems”.

Noel Eldred, VP Marketing, HP

Packard highlights how great companies will commit to a culture of continuous improvement. They are always seeking new ways to increase the quality, utility and value of their solutions for customers. They wanted HP to remain close to their customers, to listen to their problems and to develop solutions accordingly. Packard wanted this commitment to quality and improvement to pervade across company operations. He notes how attention to detail, high operating standards and sound incentives were important to this. This sounds very much like Jeff Bezos in his annual letters to Amazon shareholders.

The quality circle

More interesting was what Packard describes as HP’s quality circle. In production, the circles refer to the co-location of the final assembly areas with their final testing areas. This encouraged communication without bureaucracy. Packard believes these circles fostered informal exchange of ideas. This in turn translated into greater productivity and product quality. Furthermore, quality circles didn’t apply just to assembly lines, but to business locations as well. Packard preferred to locate plants near universities, airports and nice living spaces to attract the very best talent. He would also establish partnerships with universities like Stanford to help ensure their pipeline of talent.

Conservative investors sleep well

As I read The HP Way, I also couldn’t help but draw similarities to Phil Fisher’s investment framework. Those familiar with Fisher’s record will recall his success with investing in technology stocks following the Great Depression. In his books, Common Stocks and Uncommon Profits and Conservative Investors Sleep Well, Fisher outlines his preference for companies with healthy profit margins and attractive growth prospects; excellent research, sales and accounting divisions; first-in-class managerial relations and bench; and a culture for honesty and integrity. Success across these factors requires managerial and capital discipline, as well as attention to detail. As you read on, you may think all this similar too.

The innovator’s challenge

Unsurprisingly, Packard discusses quite in length the importance of sustained innovation and product development – “The lifeblood of Hewlett-Packard”. The major challenge he highlights is not in finding new ideas but in selecting ideas that can meet the needs of society and industry. Packard notes that very few ideas are actually practical, useful and economical for the customer and company. HP would select only the projects with the potential to generate lifetime returns at a six-to-one ratio to development cost. Packard observed that the projects that yielded the greatest returns were typically the most innovative.

Next-bench syndrome

As a preliminary test of new ideas, Packard describes his concept of “next bench” syndrome. He suggests that if one engineer’s idea can appeal to another at the next bench, then the idea may appeal to the company’s customers as well (remember that HP sold mostly electronic instruments during their early days). Of course, feedback and input from non-engineering customers are just as critical to product development.  

Alpha and omega

Packard also talks about the necessity and pain of cancelling projects that become too expensive, or deviate too far from the company’s core principles. Knowing when to stop is as important as knowing where to start. For example, he laments the termination of HP’s early computing project Omega, citing its development costs and the uphill battle with then dominant IBM. However, this also pushed HP’s passionate engineers to develop a more sophisticated and lower-cost machine (Alpha), which became HP’s first general purpose computer in 1972.

Hewlett’s three hats

The HP Way makes it clear that management must handle the ideation process effectively to deliver great R&D outcomes. On this note, Packard reflects on Bill Hewlett’s ‘hat-wearing’ strategy to help employees remain enthusiastic after a setback or rejection.

Hewlett’s hat-wearing strategy was three fold. Firstly, when an employee comes to him with a proposal or invention that they are excited about, Hewlett likes to listen and share in their excitement. He called this the “enthusiasm” hat. Hewlett then brings his “inquisition” hat to the second meeting. Here, he will ask a lot of probing questions, with plenty of room for give and take.

Only after this meeting will Hewlett wear his “decision” hat. If a rejection is necessary, he will communicate with logic and sensitivity. This process was important because it gave both parties the opportunity to engage meaningfully in new inventions and ideas. Even if the proposal was unsuccessful, the inventor could walk away with some personal satisfaction and enthusiasm for the next opportunity.

Creating value and sharing the benefits

Another principle that emerged early in HP was for employees to share in the company’s success and profits. Hewlett and Packard wanted to recognise and encourage the hard work and contributions of every employee, regardless of their status within the company. The practice of paying every employee a bonus supported company morale, particularly during tough periods (e.g. HP’s production lines during World War II).

Additionally, Packard describes the importance of sharing in both the company’s benefits and burdens. If a workforce layoff is required during a temporary recession, HP would opt for an employee-wide reduction in work schedule and pay to preserve total employment instead.

However, Packard notes one early mistake made with their preferential stock purchase plan. The plan did not require employees to hold their stock, with many selling their stake almost immediately. The fortunate few that held on did enjoy tremendous returns as the company grew.

Responsibility to shareholders

Packard also described their responsibility to HP’s shareholders and investment community. He wrote about HP’s responsibility to be ‘forthright and candid’, and to ‘practice full and prompt disclosure’. Packard wanted his company to operate with the highest levels of integrity and honesty.

Good citizenship

Packard and Hewlett also wanted a company that encouraged good citizenship. They wanted to support the communities, institutions and environment in which they operate and have been supported by. This stemmed from their experiences during the Great Depression, observing how families and communities would support the less fortunate during the most difficult of times. Packard felt an obligation to the communities and institutions that contributed to HP’s success.

An open-door policy

In technical fields like electronics, Packard believed that the little details in business and technology can bring about large benefits or detriment to the company. Hence, it is vital for employees to raise issues, express ideas and communicate solutions. He describes how an open-door policy for “frequent, friendly, unfocused, and unscheduled” can help achieve this. The relationship between the manager and employee is also critical here. Packard reminds readers that HR doesn’t exist to replace the manager’s responsibilities, but to aid in their functions. This is sometimes lost with large congolomerates.

Lucille’s impact

In HP’s commitment to employees, Packard describes the importance of ensuring continued education, enthusiasm and care for all employees at all levels of the organisation. He also talked about the value of initiatives like annual picnics, overnight camping and being one of the first employees in the 1940s to offer substantial medical insurance to employees. Packard credits the strength and early direction of HP’s culture to his wife Lucille Packard. She believed that a company must have a strong sense of responsibility and care for every employee. 

Symbols of trust

Trust was also critical to HP and its open door policy. For example, in the earlier days, Hewlett and Packard ensured that storerooms and parts bins were left unlocked, even during weekends. They found easy access to encourage tinkering and new ideas among the engineers. More importantly, it was a symbol of trust in their employees. A safe, trusting and supportive workplace is important to long-term innovation and continuous improvement.

Lessons from ranching

In fostering cultural change, Packard drew lessons from his experiences as a rancher. Packard tells us that the trick to rounding cattle well is to apply steady and gentle pressure from the rear. After one or two have moved through the gate, you can expect the rest of the herd to follow. Push too hard and it will create panic but push too little and the cattle will simply return to their old spots for grazing. Quite the analogy for change in Silicon Valley.

Decentralised harmony

“More businesses die from indigestion than starvation”

Dave Packard, HP

Packard and Hewlett wanted an organisational culture and environment to foster “motivation, initiative and creativity” in every individual. The founders wanted to provide all employees with the freedom to work towards the company’s overarching objectives. Packard believed that HP’s decentralised strategy was important to fostering achievement and responsibility in each individual. He also credits HP’s early success in management to the relationship and harmony he shared with Bill Hewlett. Their mutual understanding helped them to run the company more effectively.

Stay close to the problem

They believed it important that the company keep decision making as close as possible to the customer or problem. In most cases, this will be as low as possible in the organisation’s hierarchy, and as close as possible to the customer. Likewise, each of HP’s operating divisions in the 1960s were self-sustaining and responsible for their own development, manufacturing and marketing of products. Packard notes that while many CEOs agree with the benefits of decentralisation, many are reluctant to implement it, often in fear of loss of control. 

Management by objective and walking around

Packard notes the importance of contributions from managers and supervisors in the development of HP’s objectives. This helped to build buy-in and consensus. By agreeing on the same objectives and a shared direction, you can then give the employees the creative freedom to achieve these goals. This became what Packard would call “management by objective”.

Furthermore, from his experiences on the factory floor, Packard believed it invaluable to pair written communications with personal communications. This helped inspire HP’s philosophy of “management by walking around”. Packard describes how management by objective and walking around, as opposed to control, is important for an effective decentralised strategy.

Succession planning

Packard also identifies succession planning as an important responsibility for managers. HP believed strongly in promoting from within and focused on selecting and training high quality successors. Under their management by objective model and decentralised structure, they would give managers of each product line full responsibilities and P&L accountability. This gave high quality managers the experience to handle more senior responsibilities at HP in the future.

The case at Constellation Software

The HP Way also reminded us of an earlier post that we wrote on Constellation Software (TSE: CSU). Today, Constellation Software is probably one of the few large software-conglomerates to deploy a decentralised strategy with great success. In his letters to shareholders, Constellation’s president Mark Leonard describes how the acquisition of companies with great economics, managerial alignment and operating freedom can create enduring value.

He also describes how their decentralised strategy helps the head office to manage the complexity and focus activities like capital allocation. Like Packard, Leonard advises managers and investors to be alert to the risk of bureaucracy, excessive layers and faltering coordination. Leonard’s philosophy is somewhat reminiscent of The HP Way.

Profit and growth the HP way

Packard notes that profit is a measure of the company’s contribution to society and source of the company’s strength. Profit and growth allows the company to serve their customers, finance research, reward employees, and contribute to the community. It is the source of future opportunity and security for employees.

Leverage and growth

Hewlett and Packard’s experience during the Great Depression had a strong influence on their attitudes to leverage and growth. Packard observed how easily banks can foreclose a company and their assets during a catastrophe. By contrast, unleveraged companies are more likely to survive a depression with their assets in place. For this reason, HP avoided long-term debt, at least during their early years. They used their profits to finance growth instead.

Working capital discipline

Packard also paid careful attention to the management of assets and working capital. He describes how a ‘pay-as-you-go’ model to growth requires enormous discipline with capital. The company worked hard to manage inventories, receivables and payables to finance growth without long term debt. He described this as one of the critical tests for HP.

The cost of market share

Packard also warns about the dangers of pursuing market share at all costs. Too often companies under price to grow volume, with an expectation of future price increases. However, companies will often fail to realise the latter, which results in poor lifetime profits. Instead, Packard likes to see market share as a consequence of superior value creation for customers. This combines fantastic products with cost-conscious operations and sensible pricing.

The cost of acquisitions

Similarly, Packard was wary of excessive growth via acquisitions. While M&A can offer benefits by way of entry, expansion or consolidation, Packard was concerned with its impact on company culture. Acquirees for example are often reluctant to give up their independence. Hence, Xerox’ $36 billion hostile bid for HP Inc (NYSE: HPQ) in early 2020 was potentially inconsistent with The HP Way, if we consider the cultural impact of an unsolicited merger.

Wall Street noise

The HP founder shared a few warnings about Wall Street’s quarterly obsession too. While a company can reduce spending to boost immediate profits, insufficient investments in engineering and sales will hurt the company’s long-term strengths. Another common sense but important reminder for readers.

Packard’s epilogue

I’d like to end this post with my two favourite snippets and lessons from the book. One is about a supermarket, and the other is about Packard as a sophomore in college.

The HP supermarket

As the company expanded in the early 1950s, HP needed to build several general-purpose buildings alongside their existing facilities. Packard described how HP’s future was not yet certain. But if they were to fail, he could lease the building as a supermarket instead. This in turn influenced the design and architecture choice of HP’s new building. Packard’s reflection here left a particularly strong impression on me. It spoke to his foresight, conservatism and level-headedness. Contrast this with the extravagant capital purchases that other executives are often too happy to make.

One hundred years too late

In his sophomore year at college, Packard remembers lamenting that he was born a hundred years too late. At that time, he believed that all major frontiers in science and technology had been conquered, and that the opportunities for his generation were sparse. How wrong that view turned out to be with the progress society has since made in science and technology. It is also a striking and fitting epilogue for those that read his book today: that maybe with some perseverance, fortune, opportunity and humility, there remains unimaginable possibilities for us to pursue.

Further reading

Do keep in mind that The HP Way describes only one of many managerial philosophies. While it reflects HP’s aspirations and legacy, the company’s history is far more complex, with plenty of ups and downs. This includes the Agilent spin-off in 1999, merger with Compaq in 2001, and defense against Xerox’s takeover in 2020. Likewise, Carly Fiorina’s memoir, Tough Choices, presents another view during her tenure as HP’s CEO in the early 2000s. It’s an interesting follow up to The HP Way. You might also enjoy:

References

  • Packard, David. (1995). The HP Way. How Bill Hewlett And I Built Our Company.