“Destroying the culture!” cried the masses in my post about rose-colored glasses. It is a unique fiction in Silicon Valley that Bil Hewlett and Dave Packard were friendly to anything but an engineering culture that demanded results and held managers personally accountable for their decisions. I once got in trouble with the company’s director of marketing and communications for suggesting otherwise in a public forum.
Even in an engineering company with “Invent” in its name, fundamentals matter. In the Fall of 2001, I was giving a series of speeches at HP labs around the world. Part of my job was to clearly communicate progress to the technical staff of HP’s far-flung divisions, but–increasingly–it involved keeping a lid on things.
The share price free-fall of November 2000 was due in part to a significant earnings miss that had undermined the markets confidence in CEO Carly Fiorina’s ability to execute her way the kind of growth and market share she had promised. The senior management of the company had fixed on the idea that growth meant growth in market share and profits. Market share was the ever-present context for discussing why HP’s computer businesses were not performing. Fiorina talked incessantly about it. It was penciled into my speeches to industry analysts.
Growth was supposed to be the result of wrenching changes, but it seemed to me like HP’s employees wanted to talk about the “wrenching” part. It was, however, a combination of events that was the hardest to contend with.
The IT industry was in chaos, and most of HP’s employees had never experienced a bursting bubble. The number of companies that only a few months ago had seemed incapable of making a bad bet but were now winking out of existence.was terrifying. Pessimism spread throughout the company in early 2001.
Then, in rapid succession, the announcement of the Compaq merger and the terrorist attacks of 9/11 seemed to push everybody over the edge. I remember walking into the executive suite after an especially difficult visit to the East Coast, to find much of the corporate staff huddled around Carly’s TV. It was tuned to CNBC, and an analyst was making doom-and-gloom predictions about the merger. He was sour on HP’s strategy and technology stocks in general. The ticker flickering at the bottom of the screen seemed to confirm every dire forecast. Someone looked up and said, “What’s going on, Rich?” It was not really a question. It was an accusation.
The engineers were in a particularly foul mood. Carly had embraced their strategy–three technology directions that they all believed would position HP as a serious internet contender (I’ll talk about that in a later post and about why I believe that HP’s fumbling of WebOS is such a tragedy). In truth, the CNBC guy was right. The merger was a massive distraction. Aside from the printing business–which continued to motor along by figuring out new ways making a lot of money out of selling colored water–execution was anemic. That was why I was pushed over the edge when in a Town Hall meeting that was supposed to help build a fire under the development teams, someone in the back of the room called out, “Bill and Dave would not have done this to us!”
Anna Mancini, the HP archivist whose offices were just down the corridor from mine, had been in the audience, and a few days later she walked quietly into my office and plopped a folder onto my desk. It was a transcript of a David Packard speech that had been handed to her by Dave Kirby, HP’s first director of public relations. Anna called them “give’em hell” speeches. I had seen one of the transcripts before. They were circulated among line managers as graphic illustration that it was ok to raise your voice to employees. These transcripts, however, were unvarnished. They were about fundamentals, and as Anna told me, they were about “the fact that he definitely held his managers accountable for their performance.”
Kirby’s cover memo gave some bakground for the speeches which were made in early 1974 to a group of HP managers:
HP had experienced a disappointing year in 1973, at least in the eyes of Packard and Bill Hewlett. Inventories,accounts receivable and other expense items exceeded appropriate levels and there was even talk among some managers of seeking outside funding–incurring some long-term debt–to get the company over its rough spots.
After apologizing for a Bill Hewlett PA system address during which
…you know Bill got a little mad about it and I guess he got carried away over the PA.
Dave got to the heart of the problem:
…I thought it might be helpful to take a few minutes and turn around see if we can really define what some of our management objectives in this company should be…for some reason we’ve gotten a little bit off track in the last couple of years…For some reason we’ve got this talking about one of our objectives is to increase the share of the market, and I want to start right out by telling you that that is not a legitimate management objective of this company, that it leads you to the wrong kind of decisions, and that hereafter if I hear anybody talking about how big their share of the market is or what they’re trying to do to increase their share, I’m going to personally see that a black mark get s put in their personnel folder.
It must have been a stem-winder, because he catalogs all the profit shortfall, division-by-division. Accounts Receivable comes under fire,
It’s your job to see that this gets done and we just didn’t do it last year. Everybody thought it was somebody else’s business, and I even found some cases where a salesman had gone out and…told a customer that he doesn’t have to worry about when he pays his bill.
So does engineering project management
…if anything you might argue that the R&D costs ought to be allowed to grow as rapidly as our sales,
and capital equipment,
We don’t have to have every goddamn thing we’re doing gold plated.
But what really struck me was the harsh tone he directed to a strategy that valued maximizing profit growth above all else. Packard was a student of Peter Drucker:
To Drucker, businessmen who talk about profit maximization are doing more to hurt the system than anyone else…What strikes Drucker as most moronic is that the maximum profit which management hopes to achieve with their maximum profit goals is often less than the minimum profit needed to keep the business healthy and growing.
In the Fall of 2001, the entire company was transforming itself for growth. The kind of growth that the IT industry had become accustomed to. But in the early months of 1974, David Packard told his employees,
The growth company is not a sound investment. Such a company sooner or later, and usually sooner, runs into real difficulties. Sooner or later it runs into tremendous loses, has to write off vast sums, and becomes in fact unmanageable.
HP’s transformational strategy was based on growth envy. Carly Fiorina was in a fierce battle with Scott McNeely of Sun Microsystems over his seemingly boundless capacity to chew up huge portions of the Unix server market. On the other hand, Apple’s share of the PC market hovered around 6% (even today it it only has 10% of the total PC market). It ranked 287th in the Fortune 500. When Oracle acquired Sun in 2009, effectively shutting down a growth-driven powerhouse, Sun’s market cap was slightly under $8 Billion. When the market closed last Friday, Apple’s market cap was well over $300 Billion. It was more valuable than Exxon, the next largest company.
What about HP’s transformational strategy? In January of 2001, the total market cap of HP, Compaq, and Agilent (which was in the process of being spun out in an IPO) was slightly over $75 Billion when adjusted for inflation. In July 2011, after a decade of mergers, acquisitions, and divestitures- all aimed at increasing size and market share–the market cap of HP hovered around $72 Billion.
in 1974, David Packard told his managers,
Now I guess that you’ve judged by now what what I am getting back to is that one of the traditional policies of this company has been that we were going to manage it so we would finance our growth from earnings, cash flow, and as we somehow seem to have gotten away from that I see absolutely no reason why that should not still be our basic objective.
It mattered, because
The market doesn’t give a damn about your sales, they don’t give a damn about your share of the market; the only thing that counts is the rate of growth of earnings if your going to be in a growth company, and a growth company is not growing in size, it’s growing in earnings potential., and this is the thing that is so important for all of us to understand and is so important to do something about because we’re just facing a disaster if we don’t.
If culture matters on the world of innovation, then it also matters in the world of execution. The HP-Compaq merger and subsequent events were under the watchful eye of an experienced board of directors. Many of them had long ties with both companies, and it’s possible that some of them were in Dave Packard’s audience that February day in 1974. I never heard any of them talk about, though.
All non-director officers were tossed out of the boardroom when “strategic” matters were discussed, so I guess it’s possible that someone showed up to “giv’em hell” and I never knew about it. Culture trumped strategy in 2001, but not in the way that most people think. Strategy was in the hands of an executive culture that placed their bets on company size, market share, and earnings potential that never materialized.