As Hewlett Packard goes, so goes the world
By Peter Sims
The opinions expressed are his own.
If there is one company that best exemplifies the crisis (and deficit) of leadership that we face worldwide, it is Hewlett Packard. For all Meg Whitmanâ€™s strengths as a person, she is not the right leader for HP. If anything, HPâ€™s challenges exemplify why power-centric bureaucracies fail.
Letâ€™s rewind for a moment. Iâ€™ve spent over 10 years learning about HP as a venture capital investor, student and researcher of HPâ€™s leadership and innovation, from my vantage points at Stanford Business School and the Stanford Institute of Design. Based on hundreds of discussions with HP leaders, managers, employees (long timers and newbieâ€™s), partners, customers, here are a few observations.
1) HP grew, on average, 18% a year for 60 years — a remarkable feat.Â Long-time HP veterans like Ned Bornholt, HP senior executive and former Agilent CEO, and Chuck House, the respected HP historian and coauthor of The HP Phenomenon, attribute this remarkable growth to a few factors.
One was the highly effective and balanced partnership between Bill Hewlett and Dave Packard.Â Hewlett was the more creative, intuitive pillar, known for spending a lot of time with customers and the R&D team, and for fostering a climate of innovation, especially by encouraging small bets.
Packard, meanwhile, was an operational force, and could optimize any core business. For many years, HP was extremely decentralized, with thousands of product skews, and an engineering culture that prided building products (and services) for customers than betting big on great ideas that resonated like printers and computers, while selling small increments of the other products. House reckons that out of their giant catalog, in many cases, maybe 10 units per year became breakthroughs.
2) One critical problem with the original HP culture was that for all its admirable values, such as Packardâ€™s philosophy of â€śmanagement by walking around,â€ť almost no one ever got fired. The â€śtwo martiniâ€ť lunch culture of the 1960s persisted well into the 1990s, by which time HP had clearly started to lose its way to outsiders. Complacency was a real threat to the business and the dotcom bust. The company then looked to â€śleaders,â€ť often from the outside, to shake up the culture and spurn reinvention and innovation.
3) Astute observers and students of HPâ€™s leadership woes almost always say that the leadership problems began to hit hard during John Youngâ€™s tenure, who was CEO from 1978 to 1992. Of course, the question of exactly what went wrong is very nuanced, but by the time David Packard stepped down as chairman in 1993, the company had a leadership vacuum. My feeling is that HP just could never replace the yin and yang balanced leadership of Packard on operations and Hewlett on creativity innovation. (Steve Jobs and Tim Cook have had a similar partnership, as have many other companies who have managed to balance innovation with great operations).
4) As HP grew larger and larger by the late 1990s, it faced another big problem, this one more common to large organizations. As Barnholt described for me during my research for Little Bets, HP execs felt increasing pressure to make bigger and bigger bets to get larger and larger chunks of revenue. No longer was incremental organic growth enough; they needed hundreds of million dollar chunks of revenue to hit their double-digit growth targets. Itâ€™s what Barnholt and many other execs call the â€śtyranny of large numbers,â€ť and this is an extremely well documented problem that large companies face (see Innovators Dilemma or Innovators Solution by Clayton Christensen for the empirical analysis). So, HP did the logical thing, what managers are trained to do: they started making big bets.
5) By the time Carly Fiorina arrived to HP the company had already lost its way. It was a company that increasingly forgot what it was all about and where it came from. Fiorina is a masterful speaker and marketer, yet also extremely detached from HPâ€™s people and customers. Senior HP execs and managers describe her as largely keeping to herself in her office, unlike Packardâ€™s famous mantra of walking around.Â The acquisition of Compaq, another big bet, was controversial enough from a business strategy perspective, yet even more damaging was the deeply scarring proxy battle with the Hewlett and Packard families. By the time Fiorina departed, with her well-publicized $42 million severance package, HP had lost its soul.
6) By the late 2000s, I think itâ€™s fair to say HP had forgotten how to learn. In speaking with dozens of employees, they described a culture of fear, risk aversion, and very little innovation. For all of Mark Hurdâ€™s operational prowess, his strength was squeezing every additional penny out of the company through cost cutting, not innovation and inventing revenue. People took a back seat to an obsession with numbers.
During his tenure, R&D and small bets, the essence of what had made HP one of the most innovative companies the world had ever seen, suffered enormously. Under Hurd R&D spending got cut to 3%-4% of sales
got cut. If this isnâ€™t short-termism, I donâ€™t know what is. But when incentive structures reward company performance in the short term, not say 5 years after an exec is CEO, itâ€™s easy to understand why Hurd made the decisions he did. This is an endemic problem that leads to all kinds of bad decisions â€“ and detracts the focus from what HPâ€™s mission was and should have been all along â€“ to better serve its customersâ€™ problems and needs.
In situations like these, â€śleadershipâ€ť often becomes all about power and extrinsic ego needs, not a broader mission or purpose. That dynamic â€“ of power over mission â€“ strikes at the heart of challenges for American capitalism today, long known for its creative entrepreneurial fervor.
7) That brings us to the HP of today. With HPâ€™s board in very well documented shambles, Leo Apotheker never seemed to have a chance. He never seemed to have the confidence of a fractured and weak board (a problem Stanfordâ€™s Robert Sutton has studied closely and says is decades in the making, well before the pre-Compaq merger). Although the board was going through significant turnover, did he connect well with the rank and file. A common reaction inside HP to Meg Whitmanâ€™s appointment as CEO is that â€śat least itâ€™s a change.â€ť Thatâ€™s a very poor reason for bringing someone in as CEO.Â Whitman was a brilliant consultant at Bain, and has strong traditional marketing chops dating back to her time at Procter & Gamble, but Iâ€™ve never encountered someone at eBay or an eBay partner who believes that she spent enough time with eBay customers or really cared about them. Those who have worked closely with her have a lot of respect for her intelligence, yet the picture that consistently emerges is that she is most interested in power, rather than purposeful leadership.
It is very sad to see the old HP culture â€“ of customer focus, invention and innovation, and value of people over profit â€“ die. Viewed more optimistically, perhaps thatâ€™s just a part of the natural cycle of organizations, especially companies that forget how to learn.
These leadership and innovation questions get to the core of how our companies are led and how our incentive systems are currently structured. HP is merely a leading example. Sadly, I think HP will continue to unwind and decentralize. After all, imperial CEOs squeezing out profit for a quarter or two donâ€™t create real value. Value gets created by solving problems or needs in the world that others arenâ€™t, and by constantly learning how to do that better and faster.