A Company in Flux: The Road to Losing the HP Way

While I think that HP is headed in the right direction now thanks to new leadership, not that long ago, I felt like the company had lost its way. This is an essay explaining my thoughts that I wrote while I was a student at the Katz School of Business at the University of Pittsburgh:

The year was 1939 and out of a rented garage, Bill Hewlett and David Packard formed a partnership under the name Hewlett Packard. From these humble beginnings came a company that in 2013 had assets of over $100 billion. Hewlett Packard was developed with an idea of how things should be done called the HP Way. This ethic is described in length in David Packard’s 1995 book of the same title. The goal of this paper is to investigate the HP Way and the culture it created at HP. Additionally, this paper will look at how HP has changed through mergers, acquisitions, and spinoffs and their impact on adherence to the HP Way as a part of their corporate culture.

Since HP’s founding in 1939, the Palo Alto based company has gone through a great deal of growth and change. During WWII and leading into the 1950s and 1960s, the company experienced some of its most rapid growth. In an effort to allow decision-making to occur at the lowest possible level while the company grew, David and Bill developed seven objectives, which they published. The objectives are the core of the HP Way: profit, customers, field of interest, growth, employees, organization, and citizenship. Each of these objectives was picked for a very particular reason as described below.

Profit was picked at the first objective, because it could be used as a measure of both success and societal contributions of the company. The goal according to David was to create products that are both useful and worthwhile. Beyond this, profit is more than just dollars and cents, but that the dollars and cents are important to make everything happen at the company.

Customers are listed next, because they are who the products are being made for. This value wasn’t about traditional customer service, but about making truly quality products and continuously improving them. This was pretty forward thinking for the time in terms of product innovation.

Field of interest is the third value described, which is about the company being able to expand into new markets.. The idea is that HP should be a part of markets where I can make a positive contribution and already had the talent to succeed. This is a reinforcement of some of the ideology described in the first objective. David is careful to describe markets where the company already has capabilities. “We always asked, “How can we make a contribution based on our strengths and our knowledge?” Then we’d ask, “Who needs it?” (Packard, 124)

Growth is the fourth objective of the HP Way. This is value more quantitative, but measurable in a similar way to profit. While some of the other objectives describe specifics to growth, this concept was more focused on financial health of the company. The company’s goal was also to self-finance projects rather than take on long-term debt. David explains, “Our long-standing policy has been to reinvest most of our profits and to depend on this reinvestment, plus funds from employee stock purchases and other cash flow items, to finance our growth.” (Packard 113)

The fifth objective was about HP’s employees. The goal was to provide a well-rounded job with good compensation, shared success (profit sharing), job security, and regular performance evaluation. The goal of this objective was to recruit and retain the best and brightest employees for HP and make sure they feel both happy and satisfied with the work they are doing.

The sixth objective is related to a more macro view of the organization. The objective is, “To maintain an organizational environment that fosters individual motivation, initiative and creativity, and a wide latitude of freedom in working toward established objectives and goals.” (Packard, 110) These values get to the entrepreneurial spirit of HP. Freethinking and creativity helps the best ideas reach the top and allow HP to innovate smarter.

The seventh and final objective is citizenship. This isn’t citizenship like being a US citizen, but rather about being a good corporate citizen. Doing this is about being a member of a community and not just a company. It is also about embedding yourself in the institutions of your area, whether that means running for office, volunteering, or anything else. It is also about helping those that helped you.

David Packard and Bill Hewlett truly believed in these values and described them by saying, “We have a set of values — deeply held beliefs that guide us in meeting our objectives, in working with one another, and in dealing with customers, shareholders, and others. ” (Packard, 110) These are the guides that HP holds itself to, or at least aims to. The values were influenced by people outside of HP going back to David and Bill’s time at Stanford.

Of those outside of HP that influenced the culture, Stanford professor Dr. Fred Terman was likely the greatest contributor. An argument can be made that without Terman, there would be no HP. David credits Dr. Terman with encouraging him to learn about electronics, “It was Fred who sparked my interest in electronics and who later encouraged and helped Bill Hewlett and me go into business for ourselves. His interest and faith in our abilities, even at our young age and in the midst of the Great Depression, gave us confidence and helped set a course for us.” (Packard, 30) Terman helped provide both David and Bill with resources in the community. Terman is even described by some as the father of Silicon Valley.

Terman’s lessons outside of the classroom helped the pair to understand that competitors in the industry could work together to create new standards. Terman introduced the pair to Charlie Litton, whose shop gave birth to some of the first HP instruments. Charlie’s willingness to allow young engineers like Bill and David use his shop in the early days inspired Bill and David to keep space for HP employees to tinker and invent. Later on Bill and David would pay back Charlie by allowing his employees to use their shop after a fire in Charlie’s shop.

Through all of the things described above, David and Bill hoped to make HP a company where decisions could be made swiftly and effectively at the lowest possible level with the same HP values considered each time. These standards could be a measuring stick for transactional and strategic decision making. Early on at the company while Bill and David were around, it seemed to work.

To see some of the innovation that came to HP, look no further than the development of light emitting diodes. HP’s values, led to innovation in fields where the company thought it could make a difference and improve the lives of its customers. Without knowing where this technology would advance, HP developed an essential element of successful future products including the pocket calculator. Further innovation by HP includes work in the printing industry. The development of inkjet and laserjet printers that could be used by both businesses and consumers may be the most disruptive innovation in the company’s history.

Fast-forward to the HP of 2014 and the company seems to be lost. The company doesn’t seem to follow the HP Way the ways it had in the past that led to such great success, but it didn’t happen over night. While the size of HP had some part of changing the company, mergers, acquisitions, and spinoffs played a major role in changing the culture at HP.

Look no further than the year 1999 as the first clue of these changes. Hewlett Packard decided to focus on its core products and spun-off the company’s original business. Agilent Technologies was the spinoff created from the original core products of HP. Included in this portfolio were testing and measuring equipment and medical devices. While hindsight is 20–20, having a relationship with hospitals and doctors through their medical devices would have allowed more innovation with the current core products.

Along the same lines of the Agilent spinoff, the acquisition of Compaq was a culprit in the changing culture of HP. Unlike HP, who had more diverse product offerings at the time of the acquisition, Compaq was singularly focused on the personal computers. Despite warnings from shareholders and colleagues alike, HP CEO Carly Fiorina pushed through the acquisition of Compaq in late 2001. (Gaughan, 493) The acquisition wasn’t made with the objectives set forth in the HP Way, so the kind of growth expected wasn’t reached. HP forced itself into a bigger battle in the PC market rather than carefully targeting strategy to more profitable areas of their company like printers. Bill Hewlett was likely rolling in his grave when he learned of this acquisition. Bill’s quote about not attacking strong existing businesses applies to this situation well, “Don’t try to take a fortified hill, especially if they army on top is bigger than your own.” (Packard, 130) For decisions like these and because of HP’s performance, Fiorina was forced out of office and replaced Mark Hurd.

In 2005, HP showed that they had stopped trusting their employees the way that David and Bill would have wanted under the HP Way. HP Chairwoman Patricia Dunn launched an internal investigation to get to the root of leaks of information that could have only come from director level to major news sources like the NY Times. The now former chair hired a private investigation firm that used illegal means to try to obtain this information. The paranoia and lack of trust at the highest levels of HP in 2005 showed how far the company had gotten away from its original values.

Despite the no hire to fire policy of the HP Way, HP had major layoffs in 2012. The company cut somewhere between 25,000 to 30,000 jobs while trying to slim down for this move. In reference to this, the Wall Street Journal, discuses a slimmer HP. The authors allude to HP’s inability to say fresh and innovative, “HP has been slower than most other corporate-technology sellers in pushing into emerging areas such as cloud computing, mobile technology and services to help organizations modernize.” (Ovide and King) Cutting jobs isn’t the way to make HP more innovative or to create trust among employees. The way that HP laid off employees is not the HP Way.

Just a few weeks ago, HP just announced plans to split the company into two separate publicly traded companies. The proposed split would create one company that sells corporate hardware and business services, which will be called HP Enterprises and another company selling PCs and printers, which will be called HP Inc. Each of the new companies will be publically traded. While the change is being made to help the company compete, this is not the HP Way. This adds little value to customers. This looks more like a hail-mary pass to save a company that hasn’t innovated enough and that is facing mounting shareholder pressure to make money today.

HP is a PC company that hasn’t learned how to adjust to a world where people aren’t buying PCs like they used to. HP’s 2013 10-K shows that company seem to understand this, but has shown little ability to fix the problem. The 10-K describes in its first risk factor (1A) the need to address business challenges. In this section, the 10-K talks about how the market is dynamically shifting towards tablets and more portable computing devices and that there is a need to move the company to better serve this audience. (17 of HP 10-K) “Personal Systems net revenue decreased 10.2% (decreased 9.0% on a constant currency basis) in fiscal 2013. The Personal Systems business continues to experience significant challenges due to the overall PC market contraction as a result of a customer shift, particularly consumers, to tablet products.” (59 of HP 10-K)

HP also lost its place as the leader in PC shipping to Chinese competitor Lenovo. (Lublin, Mattioli, and Cimulluca) The company’s current attempt at the tablet market, the HP Slate was not well received by the market. The CNET review for the 2013 shows that HP is lost in the tablet market in part due to the way it has stopped following the HP Way and instead is racing to the bottom in some cases. The review concludes that the low price of the device doesn’t make up for the important features the tablet is lacking as well as a less than impressive touch screen. (HP Slate 7 Review) The HP Way would have told HP to create something a premium product with features that add things that people want, but instead, they are creating what already exists in the market, an inexpensive tablet with extremely limited features. This is something that Bill and David would never have allowed.

HP is on a path that neither David Packard nor Bill Hewlett could have imagined or be proud of. HP has spent the last five to ten years underwhelming consumers to meet the short-term demands of shareholders. The HP Way says no to this kind of behavior and would have created strategic long-term plans that consider profit, but also give a path for the company to follow forward that is sustainable. While it is unclear if the split up of HP into HP Inc and HP Enterprise is the kind of change that could save the company, time will only tell if one of the original Silicon Valley firms will live on. Maybe it is time for a look back at the HP Way.

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