USA: The source of HP's success - HEWLETT PACKARD.

USA: The source of HP's success - HEWLETT PACKARD. - Drawing on 50 years of experience, two gurus of change have defied the computer doldrums.

by Peter Wilsher.
Last Updated: 31 Aug 2010

Drawing on 50 years of experience, two gurus of change have defied the computer doldrums.

The computer industry is in crisis. Everywhere the news is of plunging profits, sagging sales, massive lay-offs and a headlong rush to form defensive alliances. The mighty pioneers, including IBM, and the thrusting newcomers, such as Compaq and Dell, are suffering from their failure to keep pace with accelerating change. A growing number of computer billionaires, including Apple's Steve Jobs and Digital's Kenneth Olsen, are being forced out by disenchanted colleagues in boardroom coups.

Yet there are outstanding, and in many ways surprising, exceptions to these chronicles of doom. The Hewlett-Packard company is one (Microsoft, see page 54, is another). HP was founded in 1938 when its home state of California was mainly associated with sun, fun and Hollywood, and the word "electronics" had barely entered the dictionary. The firm goes from strength to strength, with its two founding fathers still playing a significant role in its affairs. It more than holds its own in old markets and finds highly remunerative opportunities in niches that others have abandoned. Furthermore, with its inkjet printers, the company has found a mass-consumption product that has allowed it to establish and maintain a, so far, almost unchallenged global lead. In a recent American study of successful management, HP is admiringly described as an "adaptive paragon".

Actually HP's original move into the computer business was itself a piece of necessary adaptation. The company started life (in the garage behind David Packard's Palo Alto home) as a maker of high-precision measuring and testing instruments, and its first big deal was to sell eight oscillators to Walt Disney when he was developing the revolutionary sound track for Fantasia. It was not until 1966, almost 30 years later, that Packard and his partner, Bill Hewlett, finally decided they could not afford to rely on bought-in technology, and built their first digital controller, the HP 2116A.

Once the plunge had been taken, though, they did not hang around. In 1968, the year before Dave Packard quit full-time business and went to Washington as US Deputy Secretary of Defence, they introduced the world's first desktop scientific computer. From that day on they were in competition with the big boys, first at the very high end, among the leading-edge researchers and the space-age engineers, and then, progressively, further and further across the board. Today they rank as number five, by turnover, in the global information technology league and in many key sectors they are the one the others have to beat. Most of the time they have thrived on the challenge. In the decade up to 1980 - the year which saw the launch of their first general-purpose personal computer - they produced the first handheld calculator (thus, as they cheerfully claim, "making the slide-rule obsolete") and saw the workforce quadruple, to 57,000, while revenues multiplied tenfold, to $3 billion.

Since then, the overall growth rate has slowed down appreciably, as it has for the whole industry. But in HP's case it has remained uniformly positive, and the latest full-year earnings, for 1991, came in at just short of $15 billion. And although there has been some small shrinkage in the numbers employed, from 1990's peak 92,200 to the 89,000 on the worldwide payroll today, it is almost invisible by comparison with the rest of the industry.

None of this, of course, happened as a result of lucky accident. It took careful strategic planning, dating back to the euphoric days of the early 1980s. Then, most people in the computer business thought they were climbing a magic beanstalk, with sales and profits guaranteed to climb skywards for ever. Packard, however, stuck to his motto, "only innovate in bite-sized chunks."

But it is true that the seeds of foresight took an inordinately long time to germinate. There was a widespread belief, restated only this summer in an otherwise highly-flattering Wall Street Journal report, that as recently as 1990 Hewlett-Packard had allowed itself to become "a torpid dinosaur among fleet-footed little predators". Only since then, the authors suggested, had the company changed tack: sloughing off decades of sluggish bureaucracy to become, almost overnight, a finely-tuned economic athlete.

The description of the company's present state of fitness is accurate enough. But the timetable of its achievement is absurdly foreshortened. To trace the policy decisions underpinning the company's present success it is necessary to go a long way back: arguably to the 1978 appointment of John Young as president and chief executive officer, when Hewlett followed his partner's example and retired from day-to-day involvement.

Three ingredients have been crucial to the recent transformation. Collectively they put the company in a position whereby it could turn up the commercial heat to "incandescent" just when its competitors were faltering.

First, its research-and-development pipeline has been able to deliver a rapid-fire fusillade of new products - so intense that it could claim in its most recent report that more than 50% of current orders are for items that two years ago had still not left the laboratory. And they are confident, they say, that there is plenty more where these came from. The latest offering, designed to take the battle right into the IBM heartland, is a line of super-powerful work-stations which claim mainframe performance, with custom-tailored flexibility, at two-thirds of the equivalent price. But the next is just as likely to be a cheap and cheerful bit of electronic wizardry, appealing to the housewife, the motorist or the couch-potato. One mark of the new, confident HP, is that it no longer focuses exclusively on the professional purchaser: it is ready to take its expertise and reputation anywhere where it thinks they can be profitably sold.

Hence the second leg of the strategy. By husbanding its financial strength it had equipped itself to take an extremely aggressive stance, just about the time it became clear that the market was moving into recession. Even in those areas, such as laser printers, where it already held a dominant position, its systematic concentration on cutting costs and raising specifications has given it scope to offer customers a winning combination of higher quality and lower prices. As a result its reputation has remained unscathed, and even been enhanced, while others who tried to hold their margins and then panicked, now look as though they are engaged in a round-the-clock clearance sale.

Young and his senior executives' third great insight was to recognise and even anticipate the profound changes that were taking place in the way computers and their infinite variety of related products are sold. Where once anything with a half-respectable label could be handled only by experts talking to experts, they saw very early on that the balance of activity was rapidly moving into distribution channels. By general agreement, they have been among the most skilful in exploiting the openings offered by the new international networks of high volume discount retailers.

The net result has been to offer their rivals an object-lesson in how to prosper mightily in an era of faltering demand and shrinking margins. The policy's continuing success has been amply confirmed in the published results for the first two quarters of 1992. Right against the industry trend, these have shown year-on-year earnings growth at close to 50%.

Young, now 62, has just announced his own early retirement, in favour of his long-standing number two, Lew Platt. "It is time to move on," he said recently. But, unlike so many of his beleaguered corporate contemporaries, he will quit on a high note, with the plaudits ringing in his ears. During his 14-year tenure HP has moved from being a relatively staid and parochial instrument-maker to become America's 29th largest and 15th most profitable corporation, with more than 70% of its activity in the intensely competitive computer sector, and almost 60% of its sales overseas. As for the shareholders, they have seen the value of their stake jump by 168% since it hit the last low point, in January 1991.

When Young took over the top job from the two founders, he inherited an elaborate company culture. From the start this had always emphasised a number of key conceptions, which are lucidly summed up by Bill Hewlett, who still, at 78, not only sits on the main board but also spends several days a week at HP's central research laboratories. Look after the staff and the customers, he says. Give everyone the same proportional production bonus, from janitor to senior manager. Show competitors what you're doing - they'll learn soon enough - but don't tell them what you're thinking of doing next. Concentrate on what you do well, and never stop trying to make it better. Never bother with products others can sell cheaper. And above all treat change as inevitable - don't try to resist it.

On that foundation, Young proceeded to initiate a number of crucial innovations, each of which turned out to have profound (and often unexpected) long-term effects on the way the business evolved.

The most successful of these has been the move into computer printing, which not only accounts for a quarter of the company's current earnings, but has also achieved the feat of turning the once low-profile Hewlett-Packard ("only professionals had ever heard of us") into an instantly-recognisable international brand name.

John Golding, who heads HP's extensive UK operations, tells the story in his Somerset burr. "Nine years ago we'd never made a printer in our lives. But we were looking around for an unguarded hill - a slice of the market that no-one else was cultivating and someone thought about the possibility of replacing those awful noisy, fuzzy, Japanese dot-matrix machines that every user loathed."

The first attempt was with laser printers, which went pretty well, and confirmed Young's instinct that here was a really promising market. But it depended (and still depends) on basically Japanese technology, and HP has never had much fondness for the me-too product. So the research teams were put even more intensively to work, and finally came up with the jackpot: a tiny, near-trouble-free machine called the Deskjet 500, which works (in near-silence, and with extreme accuracy) by squirting minute ink dots at the paper, and can be profitably sold everywhere at a retail price of under £300. At the latest count, some five million of these were sitting on desk tops around the world, and along with the lasers, they have given HP more than 50% of a fast-growing global market already valued at $5 billion a year.

But that is only part of the prize. As Golding says, there is a quantum leap in a company's thinking when it moves from manufacturing 12 state-of-the-art measuring devices each month for sale to ultraspecialists, to producing 125,000 Laserjets a week and sending them to computer supermarkets and mail order warehouses worldwide.

As these are now the main market place for all computers short of the most powerful mainframes, detailed knowledge of their needs and the way they work are also central to HP's other core business, the manufacture of PCs, workstations, networking software and the vast array of peripherals needed to keep ahead in Information Technology. Where both long-established rivals and the newer breed of fast-moving interloper are all struggling to come to terms with these new distribution channels, HP has its new market methodology all firmly in place.

That special entree, though, would have had only limited utility without the necessary product range. Here HP has benefited enormously from a set of shrewd choices which were made back in the early 1980s. Essentially, though, these boiled down to just two. First came a clear recognition that the future of the computer business must lie in some form of Open System, leaving the customer free to harness into a single effective network the power and capability offered by a whole range of hard-and software providers. Anyone offering a "my machine or nothing" deal would be left among the also-rans.

But, at least equally important, was the task of identifying the best technical base from which to maximise market share in this new open world. Young's masterstroke, as things have turned out, was to fasten on the then new and relatively untested concept of the RISC chip, which has been the platform (apart from the printers) for all HP' s subsequent advances. The initials stand for Reduced Instruction Set Chip (as opposed to CISC, or Complex Instruction Set Chip) and the idea behind this particular form of semi-conductor development is that, in order to enhance computer performance, the cheapest and most effective method is to trade-off versatility in favour of simplicity and power. By concentrating the cream of its formidable innovative skills (and a large part of its $1.5 billion a year R and D budget) on RISC technology, HP's basic chip, the PA - meaning Precision Architecture) - is now acknowledged, even by the hypercritical analysts at Byte magazine, as simply the best performing microprocessor on the market.

Incorporated in an immense range of models, from palm-tops to near mainframes, this has given the company a very significant edge, and enabled it to find buyers (and even more importantly, profits) where others have given up in despair. It is gaining once more in workstations, where the competition is most notably intense, and increased sales by 25% last year even in mini-computers, where most producers report virtually vanishing growth.

A large slice of the responsibility for keeping ahead of the opposition has been given to Dr John Taylor, an ex-Ministry of Defence and GEC scientist who now runs the company's British research complex, just outside Bristol. Roughly one-third of R and D spending now comes here, including much of the leading-edge work which, if successful, will keep HP thriving well into the next century.

Taylor spends much of his time pondering the fast-slow paradox which has always plagued the industry. Many of its most resource-consuming developments, like the Unix operating system, which is central to effective networking, can take 20 years of gestation and still not achieve universal approbation. But when the time finally comes to bring them to market, a 24-hour delay can cost millions. A large part of his job, he says, is seeing what will be needed some day in the distant future, and then making sure that, when that day comes, the product is both world-class in performance and ready bang on schedule. "Only that way can we be sure we'll stay around."

He strongly approves of the home-spun philosophy that Packard and Hewlett developed in their Palo Alto garage: "Stick to your knitting, never do anything where you cannot be best and cheapest, but always be ready to take a 45-degree turn when you see a direction that is new and promising". It has served the business very well for its initial 54 years. But he recognises that the challenges are unlikely to get easier in a world that, just in the past half-decade, has multiplied both the number of its active computers, and the average memory of each of them, by more than 1,000-fold. "At that rate of change," he muses, "a well reasoned no can be a lot more valuable than an over-hasty yes."

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