Steve Blank

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

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.

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

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 20^th 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

Filed under: Customer Development, Technology | Tagged: Early Stage Startup, Entrepreneurs, Fred Terman |