As Hewlett Packard goes, so goes the world

By Peter Sims
September 28, 2011

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 Whitman’s strengths as a person, she is not the right leader for HP. If anything, HP’s challenges exemplify why power-centric bureaucracies fail.

Let’s rewind for a moment. I’ve spent over 10 years learning about HP as a venture capital investor, student and researcher of HP’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 newbie’s), partners, customers, here are a few observations.

1) HP grew, on average, 18% a year for 60 years — a remarkable feat.  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.  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 Packard’s philosophy of “management by walking around,” almost no one ever got fired. The “two martini” 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 “leaders,” often from the outside, to shake up the culture and spurn reinvention and innovation.

3) Astute observers and students of HP’s leadership woes almost always say that the leadership problems began to hit hard during John Young’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. It’s what Barnholt and many other execs call the “tyranny of large numbers,” 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 HP’s people and customers. Senior HP execs and managers describe her as largely keeping to herself in her office, unlike Packard’s famous mantra of walking around.  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 it’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 Hurd’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 isn’t short-termism, I don’t know what is. But when incentive structures reward company performance in the short term, not say 5 years after an exec is CEO, it’s easy to understand why Hurd made the decisions he did. This is an endemic problem that leads to all kinds of bad decisions – and detracts the focus from what HP’s mission was and should have been all along – to better serve its customers’ problems and needs.

In situations like these, “leadership” often becomes all about power and extrinsic ego needs, not a broader mission or purpose. That dynamic – of power over mission – 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 HP’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 Stanford’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 Whitman’s appointment as CEO is that “at least it’s a change.” That’s a very poor reason for bringing someone in as CEO.  Whitman was a brilliant consultant at Bain, and has strong traditional marketing chops dating back to her time at Procter & Gamble, but I’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 – of customer focus, invention and innovation, and value of people over profit – die. Viewed more optimistically, perhaps that’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 don’t create real value. Value gets created by solving problems or needs in the world that others aren’t, and by constantly learning how to do that better and faster.

 

 

 

 

4 comments

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A good article, but insiders at HP have known this for years (particularly when the Compaq acquisition/merger occurred). A couple of additional points to the article. While HP grew via M&A activity, they never bothered to integrate into one culture, and this created negative competition and decisions made in silos. (similar to our own immigration problem in the US…..we don’t ask or expect individuals to assimilate), so we wind up with competing cultures ….. Old HP was consensus, Compaq was strict hierarchy with little input ……as an example, Compaq was an acquisition, but HP approaches all M&A activity as a merger …..this is a naïve (and risky way), to conduct M&A activity……..this continues today and will for the foreseeable future .

Posted by HP2007 | Report as abusive

Interestingly, in business school we dived deep on the topic of leadership with an emphasis on understanding the role of the visionary and the role of the operationalist. HP was used as a case example, specifically related to the appointment of Mark that was made right near semester’s end. The Fiorina/Hurd era was challenged by the perception that vision and operations get seen as an “or” rather than an “and.” We came to the conclusion in 2005 that Mark should have been hired as President under Carly rather than a new CEO (a point that seems to be well understood by a certain company up in Redwood Shores…). Leo needed an operations lead…of that, there’s no question.

I also would build to suggest that Meg will not operate alone. Ray’s influence will be strongly felt, and their ability to work in concert will be the deciding factor for success. To hang the future on Meg may be missing a meaningful duality that harkens back to what worked in the past, and I’d suggest a deeper analysis of their leadership styles and backgrounds to project forward what the combination will be capable of accomplishing.

Posted by gj352 | Report as abusive

Peter,
as a 14 year ex-Compaq/HP employee I can only speak pre Compaq aquisition, they were lost we we came in to the company. Carly did the right thing in my opinion because HP Consumer/Commercial equipment was a non-seller. The Compaq ProLiant servers where a huge hit. Carly seemed employee centric the opposite of “hit them hard Hurd” to meet the bottom line. Cut the heads, travel, options, salaries, etc. The employees saved the company, taking salary cuts in 2008, which Leo just gave back this year. The employee didn’t mean squat and then I was WRF’d in 2010. Definately going downhill and will continue to do so. Bill and Dave were HP, it just could not be sustained once they were gone. Sad.

Posted by exhp | Report as abusive

Insightful article that leaves out only the spinoff of Agilent by Lew Platt. This was supposed to give the remaining HP some much-needed focus as a computer company, rather than an “anything high-tech” company, and it worked, but at the cost of severely limiting the scope for innovation in an increasingly commoditized marketplace where growth comes only via economies of scale.

Ronald Coase wrote many years ago about how companies grow until their internal transaction costs exceed the revenue generated by the those transactions. HP’s improvements in efficiency have come at the cost of a rigorous planning process whose rigidity makes it almost impossible to do anything quickly in order to react to a rapidly-evolving marketplace.

Reducing opportunities for innovation and slowing the pace of incremental changes in order to maintain strict cost control is a recipe for stagnation that can be successful in mature industries, but it’s a formula for failure in technology.

Posted by g3e | Report as abusive