The HP Way

By David Packard
Foreword by
May 2005
On August 23, 1937, two recently-graduated engineers met to consider the idea of founding a new company. They put their thoughts to paper, beginning with a general statement about design and manufacture of products in the electrical engineering field, followed by a startling statement: "The question of what to manufacture was postponed . . ."

Later, they brainstormed ideas, making a long list of product possibilities. They considered phonograph amplifiers. They considered air conditioning controls. They considered television receivers, welding equipment, and public address systems. They even considered medical equipment (making a special point to avoid "quackery"). So long as they could make a technical contribution, any product would be fair game to get the company out of the garage. In the months after that first meeting, the young engineers kept their start-up alive with contract projects, including an electronic shock jiggle machine to help people lose weight. Finally, they hit upon the audio oscillator and sold eight units to Walt Disney, earning the company its first substantial revenues.

In teaching a class on entrepreneurship at the Stanford Graduate School of Business in the early 1990s, I would start the first class session by reading the founding notes from the 1937 meeting, careful to disguise the names of the founders. Then I'd challenge my students: "Rate this start-up on a scale of 1 to 10, and jot down strengths and weaknesses of their approach." The average score would be about a 3, my MBA students blasting the founders for lack of focus, lack of a great idea, lack of a clear market, lack of just about everything that would earn a passing grade in a business plan class. Then I'd say, "Oh, one more little detail. The names of the founders were Bill Hewlett and David Packard."

The students sat in stunned silence. How could this be? "But we're taught that you need a clear understanding of how you will create competitive advantage—a great idea for launching an enterprise."

"But they had a great idea—the ultimate source of competitive advantage—if you can just see it," I'd push back. "What might that be?" After ten or fifteen minutes, someone would likely voice the key point: Bill Hewlett and David Packard's greatest product was not the audio oscillator, the pocket calculator or the minicomputer. Their greatest product was the Hewlett-Packard Company and their greatest idea was The HP Way.

This wonderful book, which David Packard wrote shortly before his death, outlines the history of the company and the development of the HP Way. The HP Way reflects the personal core values of Bill Hewlett and David Packard, and the translation of those values into a comprehensive set of operating practices, cultural norms, and business strategies. The point is not that every company should necessarily adopt the specifics of the HP Way, but that Hewlett and Packard exemplify the power of building a company based on a framework of principles. The core essence of the HP Way consists of five fundamental precepts.*1) The Hewlett-Packard company exists to make a technical contribution, and should only pursue opportunities consistent with this purpose; 2) The Hewlett-Packard company demands of itself and its people superior performance—profitable growth is both a means and a measure of enduring success; 3) The Hewlett-Packard company believes the best results come when you get the right people, trust them, give them freedom to find the best path to achieve objectives, and let them share in the rewards their work makes possible; 4) The Hewlett-Packard company has a responsibility to contribute directly to the well-being of the communities in which its operates; 5) Integrity, period.

Today, we take the tenets of the HP Way almost for granted, but when first formulated, they were visionary—indeed, quite radical for the times. In 1949, David Packard, attended a gathering of business leaders. As the day wore on, Packard became increasingly frustrated with the parochial, small-minded perspective of his fellow CEOs. Peering down from his 6' 5" frame, the 37 year-old Packard voiced a contrary view: A company has a responsibility beyond making a profit for stockholders; it has a responsibility to recognize the dignity of its employees as human beings, to the well-being of its customers, and to the community at large. Packard later reflected in a 1964 Colorado College commencement speech: "I was surprised and shocked that not a single person at that meeting agreed with me. While they were reasonably polite in their disagreement, it was quite evident they firmly believed I was not one of them, and obviously not qualified to manage an important enterprise."

Hewlett and Packard rejected the idea that a company exists merely to maximize profits. "I think many people assume, wrongly, that a company exists simply to make money," Packard extolled to a group of HP managers on March 8, 1960. "While this is an important result of a company's existence, we have to go deeper to find the real reasons for our being." He then laid down the cornerstone concept of the HP Way: contribution. Do our products offer something unique—be it a technical contribution, a level of quality, a problem solved—to our customers? Are the communities in which we operate stronger and the lives of our employees better than they would be without us? Are people's lives improved because of what we do? If the answer to any these questions is "no," then Packard and Hewlett would deem HP a failure, no matter how much money the company returned to its shareholders.

Most entrepreneurs pursue the question "How can I succeed?" From day one, Packard and Hewlett pursued a different question: "What can we contribute?" and thereby HP attained extraordinary success. This success, in turn, enabled them to invest even more in making a contribution, which produced even greater success, which led to increased contribution, which created even greater success. This virtuous cycle eventually enabled Packard and Hewlett to personally contribute at levels far beyond what they would have dared to imagine as young men. In 1995, Packard attended a dinner at Stanford University. Former engineering dean Jim Gibbons mentioned to Packard that, by his rough calculation, he and Hewlett had donated on a present-value basis as much to Stanford as Jane and Leland Stanford had given to fund the university. As Gibbons related in the June 1996 issue of Stanford magazine, Packard showed something he rarely allowed: a moment of visible pride. It passed quickly, and all Packard said was, "That's very interesting." Later, upon his death, Packard bequeathed nearly all of his $5.6 billion estate to a charitable foundation.

But if you were to think of David Packard and the HP Way as being all about benevolence and charity, you would be terribly mistaken. Packard and Hewlett demanded performance, and if you could not deliver, the HP Way held no place for you. In 1978, Bill Krause, then an HP marketing manager (and later chairman of 3COM), gave a presentation to HP senior management on customer satisfaction issues in the computer division. Eight years before, Krause had been laid up for months in the hospital following a car crash, and Packard personally called to assure Krause that his job was secure. According to Krause's account in the San Jose Mercury News (March 27, 1996), David Packard showed a much tougher side when he interrupted Krause's explanations for less-than-stellar performance. "Customer satisfaction second to none is the only acceptable goal," admonished Packard. "If you cannot lead your organization to achieve that goal, I'm sure we can find someone who can."

Therein we find the hidden DNA of the HP Way: the genius of the And. Make a technical contribution and meet customer needs. Take care of your people and demand results. Set unwavering standards and allow immense operating flexibility. Achieve growth and achieve profitability. Limit growth to arenas of distinctive contribution and create new arenas of growth through innovation. Never compromise integrity and always win in your chosen fields. Contribute to the community and deliver exceptional shareholder returns. Behind these specifics lies the biggest "And" of all, the principle that underpins every truly great company: preserve the core and stimulate progress.

Any great social enterprise—whether it be a great company, a great university, a great religious institution, or a great nation—exemplifies a duality of continuity and change. On the one hand, it is guided by a set of core values and fundamental purpose that change little over time, while on the other hand, it stimulates progress—change, improvement, innovation, renewal—in all that is not part of the core guiding philosophy. In a great company, core values remain fixed while operating practices, cultural norms, strategies, tactics, processes, structures, and methods continually change in response to changing realities. Lose your core values, and you lose your soul; refuse to change your practices, and the world will pass you by. Those who build the most iconic and enduring institutions know the difference between what is truly sacred and what is not, between what should never change and what should be always open for change, between "what we stand for" and "how we do things."

HP struggled in the 1990s in part because it confused operating practices with core values. A "consensus" decision style is not an HP core value. "A job for life" is not an HP core value. "Engineering-driven" is not an HP core value. "MBWA" is not an HP core value. People at HP began to believe that the culture, the practices, the traditions themselves were sacred which—ironically—obscured the enduring essence of the HP Way. As HP struggled with the tension between preserving core values and changing cultural practices, it found itself outflanked by faster moving competitors.

Then in the late 1990s and early 2000s, HP veered off course, making a series of decisions incompatible (in my judgment) with the fundamental precepts that made the company great in the first place. HP brought in a charismatic CEO from the outside and embarked on a costly acquisition whose success depended largely upon a market share and cost cutting arguments, not unique technical contribution. Whether the HP-Compaq merger proves to be a success remains to be seen, although the verdict of history from similar mergers indicates low odds. Even if HP were to beat the odds and emerge with a substantial financial return on the Compaq deal, I do not think that David Packard would have been pleased at all with the state of HP in early 2005.

Yet the ultimate test of a great company is not the absence of difficulty, but the ability to recover from setbacks—even self-inflicted wounds—stronger than before. Any company can fall from great to good if it ceases to live its core values or if it refuses to change its practices, but equally, a company can return to greatness by reigniting its core values with imaginative new practices. Will HP become great again? I don't know. Can it? Yes, absolutely. And it can do so first and foremost by embracing not the forms, but the enduring spirit of the HP Way.

Jim Collins
Boulder, Colorado
May 31, 2005

*I would like to thank the Hewlett-Packard Company archives and HP archivist Karen Lewis for invaluable help during the research phase for the book Built to Last, coauthored with Jerry Porras. I have drawn extensively from that research in creating this Foreword.
Copyright © 2005 Jim Collins, All rights reserved.