Elephants Can Dance – Reinventing HP

I was at the Stanford library going through the papers of Fred Terman and came across a memo from 1956 that probably hasn’t been seen or read in over 50 years. It had nothing to do with the subject I was looking for, so I read it, chuckled, put it back in the file and kept leafing through the other papers. About a minute later I did a double-take as it hit me what I had just read. (I’ll show you the memo in a second. But first some background.)

Things Change
In 1956 Hewlett Packard (HP) was a 17-year old company with $20 million in test equipment sales with 900 employees.  It was still a year away from its IPO.

Its latest product was an oscilloscope, the HP 150a.

HP 150a Oscilloscope 1956

HP 150a Oscilloscope 1956

In March of 1956, Fred Terman, the Stanford professor who encouraged Bill Hewlett and David Packard to start HP, wrote Bill Hewlett asking for help.

Terman, who now was the Provost of Stanford, had joined the U.S. Army Signal Corps advisory board, and the Army was going to acquire their first computer for research.  No one in the Army Signal Corps knew much about computers. (To be fair in 1956 not too many people in the world knew much either.) So the Army asked Terman for help.

Fred Terman wrote to Bill Hewlett asking if he or anyone at Hewlett Packard could help them figure out these “computers.”

Hewlett’s answer, in the memo I discovered in the Stanford library, is below.

HP Letter

I have no personal knowledge of computers nor does anyone in our organization have any appreciable knowledge.

We Changed Our Mind
In 1966, 10 years after Hewlett’s memo, Hewlett Packard’s revenue and headcount had grown ten fold; $200 million and 11,000 employees – all from test and measurement equipment.  That year HP introduced its first computer, the HP 2116A, as an instrument controller for HP’s test and measurement products. (Hewlett’s partner Dave Packard wanted to get into the computer business.)  It was priced at $22,000 – equivalent to about $140,000 in 2009 dollars.

HP2116B Computer

HP2116B Computer

Thirty-three years after introducing its first computer, Hewlett Packard split into two separate companies.  The original Hewlett Packard which made test and measurement products was spun-out and renamed Agilent.  The remaining company kept the Hewlett Packard name and focussed on computers.

  • Agilent is a $5.8 billion dollar test and measurement company.
  • Hewlett Packard (HP) at a $118 billion is the largest PC and notebook manufacturer in the world.

That’s a pretty long way from a company that admitted it knew nothing about computers.

Elephants Can Dance
HP’s complete makeover made me wonder about other large companies that reinvented themselves.

Intel was founded in 1968 to make memory chips (bipolar RAM) but 17 years later they got out of the memory business and become the leading microprocessor company.

IBM had a near death experience in 1993, and moved from a product-centric hardware company to selling a complete set of solutions and services.

After failing dismally at making disposable digital cameras in 2003 Pure Digital Technologies reinvented their company in 2007 to make the Flip line of camcorders.

Apple was a personal computer company but 25 years after it started, it began the transformation to the iPod and iPhone.

A few carriage makers in the early part of the 20th century made the transition to become car companies. A great example is William Durant’s Durant-Dort Carriage Company. Durant took over Buick, in 1904 and in 1908 he created General Motors by acquiring Oldsmobile, Pontiac, and Cadillac.

Elephant Graveyard
Reinvention of large companies, while making for great case studies are rare.  For the first 25 years HP’s business model was static. It got bigger by inventing new test and measurement equipment and it hired people who knew how to execute that strategy. Of course HP did ship new products and innovate, but their center of innovation was sustaining innovation, around the core of their existing business. (Clayton Christensen describes this brilliantly in the Innovators Dilemma.)

However, no markets last forever. Technology changes, culture changes, customer needs change, more agile competitors emerge, etc.  So what causes some big companies to reinvent themselves and others to remain static?

Creative Destruction
Most established companies fall into the seductive trap of following short term profits all the way into the ground – leaving only their t-shirts and coffee cups. It’s not the executives are stupid it’s just that there are no incentives (or corporate DNA) for doing otherwise.  General managers of divisons are compensated on division P&L not long term innovation. CEO’s and the executive staff are watching the corporate bottom line and earnings per share. Wall Street wants quarterly earnings.

It’s a pretty safe bet that left to their own devices most large corporations wouldn’t last more than a generation without major reinvention.  And venture capital and entrepreneurship has made life even tougher for the modern corporation. Over the last 35 years venture capital has funded nimble new entrants (on a scale never imagined by Schumpeter) who exist to exploit discontinuities in technology or customer behavior. Startups have forced an accelerated cycle of creative destruction for large companies that didn’t exist in the first half of the 20th century.

Cultural Revolution at Large Corporations – the Founders Return
Of the companies that do reinvent themselves it’s interesting that often its the founder or an outsider that has the insight and makes the radical changes. At HP the founders were still at the company and still running the business. It was David Packard who wanted to get into the commercial computer business – over the objections of his co-founder Bill Hewlett and most of the company.  Packard had the stature and authority to encourage the shift and the internal political acumen to acquire a minicomputer company and label the first HP computer as a “instrument controller.”

At Apple the company reinvented itself on Steve Jobs return.  Howard Shultz came back at Starbucks, Michael Dell reengaging at Dell. Outsiders like Lou Gerstner at IBM and Jon Rubenstein at Palm were brought in to reinvent their companies.

Lessons Learned

  • It’s the founders that can reinvent a company by seeing market shifts that professional managers focused on execution can not
  • If the founders aren’t around, bring in outsiders with fresh insights

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15 Responses

  1. Brilliant! Thx for sharing (and researching)! I’m reminded of how revisionist history can be. Had HP gone out of business, this memo would be a painful foreshadow instead of just funny.

  2. Thanks for showing this letter. It’s so interesting!

    We always have a perception that corporate giants cannot innovate because of bureaucracy and slow moving speed. But your story has proved that big companies are able to innovate when they have the right corporate culture. Recently, I have read a story about Google that is related to your post too.

    Sergey Brin once said, “Instead of having our employees in large buildings, we could have several thousand houses each with a garage – there’s nothing stopping us from doing that.”

    With this kind of commitment to innovation, it’s not difficult to image that companies like Google & Apple can achieve sustainable innovation.

  3. You talk about companies like they deserve immortality.

    I think it is perfectly healthy and desirable for companies to go out of business. Instead of bemoaning the demise of an old company we should be celebrating new companies that develop new helpful technologies. New companies are a much better laboratory for improving organizational structures, than the romantic cliché of making an elephant dance.

    What is a company anyway? You cannot say it is the people (owners, manager or workers). The people components of a company are dynamic, fluid and constantly changing. People are not immortal, why should companies be immortal?

    If you drop the sentimentality, a company is a merely a brand-name for a historical context. And brand-names are ultimately are just commodities that can be bought and sold (e.g., RCA, Pontiac, Plymouth, and any number of relocated sports teams).

  4. What a great find! Thank you.

    -Ben

  5. Peter Drucker: Entrepreneurs need to be more managerial.

    Steven Blank: Managers need to be more entrepreneurial.

    Me: You got to listen to them BOTH.

  6. [...] Hewlett-Packard įkūrėjo Williamo Hewletto pagalbos dėl perkamo kompiuterio, gavo atsakymą: „Aš asmeniškai neišmanau kompiuterių, kaip ir kiti mūsų firmoje“. Žinoma, būtina atsižvelgti į tai, kad 1956-aisiais apskritai nedaug kas kompiuterius išmanė, [...]

  7. This is great, thanks a lot for that great research and writing.

    But one more question about your “lessons learned”, as the option is not there: what happens when:
    i) the founder is still around
    ii) you’ve got a business in the middle of a huge transition (think media in present times) and
    iii) you’ve also got the “new guys with the fresh vision” on the management team.

    Does the ecosystem go “Bang!”?

  8. What a great entry. For those of us who have worked in both startup and corporate environments these pictures are all too vivid.

    Your insights on HP made me wonder how would you characterize (or rate) HP’s attempts at “re-invention” during the last ten years? Certainly Carly Fiorina’s tenure will be a controversial topic for some time to come, but the cultural angst generated by the loss of thier founders notwithstanding, HP seemed to really reach stall speed around 2000.

    It would be nice to hear your thoughts.

    KC

    • Ken,
      HP was a pretty complex story. I don’t know enough about the company other than what I read in the press.
      However, the CEO as the “Rock Star” always reminded me of why I fired any PR agency that was getting more press than the company it represented.

      steve

  9. [...] carry on reading. AKPC_IDS += "376,"; (No Ratings Yet)  Loading … Posted in Leadership | Tagged Amp, [...]

  10. The lore inside of HP was that the guys who did the 2116B had really wanted to develop a computer but had been told repeatedly, “NO – we are not in the computer business! Stop it! DO NOT develop a computer!” They had to go about it in an extremely stealthy way and could only get it through the system by calling it an ‘instrument controller’.

    By the time ‘management’ figured out that they had been played, the product was a big success. Both Hewlett and Packard used this example to communicate the principle that, “sometimes you have to do what you KNOW is right, even if ‘management’ doesn’t get it – and you won’t get fired for it around here.”

    The lesson stuck. Twenty years later when I joined HP, people were still telling this story. This type of principle-centered leadership and support of internal entrepreneurship was the real source of HP’s ability to reinvent itself.

  11. Excellent observation. I have oftentimes wondered how complete underdogs and maybe almost dead companies come to completely reinvent themselves. It seems that we underestimate the founders intuition, which created the company in the first place.

  12. [...] and realigning the organization, in case it’s stuck in the ‘short term thinking trap’. Bring the elephant to dance again!, as Steve Blank puts [...]

  13. [...] and realigning the organization, in case it’s stuck in the ‘short term thinking trap’. Bring the elephant to dance again!, as Steve Blank puts [...]

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