5. Partners: Bill Hewlett, Dave Packard, and Fred Terman at HP and Stanford (1930-1970)

by Arun Rao

THESE ARE EXCERPTS FROM THE BOOK A History of Silicon Valley

 

The Team that Built Silicon Valley

Fred Terman was the founder of Silicon Valley, if any single person can be given credit for it. He was one of the most successful American administrators of science, engineering, and higher education in the 20^th century. He made the Stanford engineering department one of the best in the country and laid the foundations that would make Stanford one of the world’s preeminent research universities. He single-handedly created the university, government, private industry partnership model that still characterizes Silicon Valley in the twenty-first century. Bill Hewlett and Dave Packard were two of Terman’s favorite engineering students, and certainly his most successful protégés. They left behind a Global Fortune 50 company that in 2010 sold products around the world (it is Silicon Valley’s largest corporation by revenues) and multiple multi-billion dollar charitable foundations.

The history of the three is best combined, as is the partnership of Stanford University with the federal government and private industry; the Hewlett Packard Corporation (HP) provides the best example. Their friendship and admiration for each other was genuine. David Packard showed it at Terman’s Memorial Service in January 1983, in Stanford California, when he mentioned knowing Terman for more than 50 years. Packard said he enjoyed Terman’s “friendship and benefited in many ways and on many occasions from his council, his advice, and his wisdom. . . Fred Terman was an engineer’s engineer.” Terman was unique in that he loved technical theory but also loved to build useful products and companies, to see practical things get done.[6]  

Bill Hewlett showed the depth of his affection after hearing of his best friend Packard’s death in a March morning in 1996. Another friend came by to pay his condolences. The friend went into the kitchen and saw Hewlett sitting on his wheelchair by a table in the breakfast nook. Hewlett was staring into the distance; his staff watched him sitting there from the early morning into the afternoon hours, with a deep and sad look on his face.[7]

The HP history is an admirable one of two close friends building a multinational company which during their lives was one of the world’s most admired companies for both its profit growth and its employee-oriented culture. 

 

Fred Terman Settles in California

In 1905 the Terman family moved to Southern California from the Midwest, as Terman’s father needed the warm climate to get over tuberculosis. Terman’s father took a Stanford Education School professorship in 1910, and so the family moved to the place where Fred Terman would both grow up and die. Terman went to Palo Alto High School just as Federal Telegraph Corp. (funded by Stanford President David Starr Jordan) became a major radio company in Palo Alto.

Federal Telegraph is important for both the Valley and Terman. Cy Elwell‘s company convinced the inventor Lee DeForest to leave the East Coast and come to Palo Alto to be his Chief Scientist. DeForest created the electronic amplifier (found in so many electronics devices today), but was still being persecuted and had even been sent to jail for stock fraud charges for a previously failed New York startup.  Elwell had to post bail, and California was a much more amenable place to work for a risky electronics venture. Federal Telegraph went on to have the first intercontinental radio broadcast in 1919 (Annapolis Maryland to Bordeaux France) and was one of the major radio manufacturing companies in the US. Alas, the glamour of Federal Telegraph didn’t last, as it slowly faded around a handful of products till Marconi acquired it in 1931 (two entrepreneurial employees left to found Magnavox).

Federal Telegraph was doubly important because all the neighborhood techie kids became amateur radio enthusiasts, hanging around Federal Telegraph’s labs. In fact, ham radio may have been the first Silicon Valley boom, with its low cost of entry and simple technology, and hence accessibility to a large group of technical-minded people. The inspiration of radio never left Terman – environment was destiny in his case.

Terman studied Chemical Engineering at Stanford, than took a double graduate course load in Electrical Engineering to get a PhD in the subject. With his studies in Palo Alto maxed out, he went to Boston Tech (later renamed as MIT), and studied under Arthur Kennelly (electronics whiz and discoverer of the earth’s ionosphere), Norbert Weiner (nonlinear mathematician and cybernetics theorist), and most importantly, Vannevar Bush, his faculty research advisor. This relationship was very important to the future development of Silicon Valley and Stanford. Bush was a sociable, politically well-connected engineer – he would become President of the Carnegie Institution, help found the National Science Foundation, and most importantly, he was director of President Roosevelt’s Office of Scientific Research and Development. This organization gave massive amounts of US federal funding to engineering schools to develop military technology, and it favored a small group of schools, of which MIT and Stanford sat at the top.

Terman wasn’t the sole star graduate of Stanford. Charlie Litton was a mechanical genius and a few years behind Terman, graduating in 1924 (just as Terman returned). Litton was a self-taught expert at creating vacuum tubes (used in all radios and eventually early computers) out of glass and metal. After working for Bell Labs and then Federal Telegraph, Litton formed Litton Engineering Labs in Redwood City (near Palo Alto) in April 1932.

Litton Engineering Laboratories designed and manufactured glass-working machinery and equipment for power vacuum tubes used in radios. Twenty years later it was a billion dollar company. Litton became one of the US’s wealthiest people and an early model of a technology millionaire. Yet Litton would say when he was asked about his success:  “I was just a lucky kid.”  Litton himself lived as an eccentric technology entrepreneur:  he breakfasted in the late afternoon, went to the office in evening, and worked till morning so he could have a productive day in the night’s quiet hours. Once he built a new building for the company by showing up with a bulldozer one day to do foundation excavation. Litton lived a simple life and liked to hike in the Sierras. The vacuum tube side of the company became Litton Industries (of California) in 1946, and it sold only to the Department of Defense. In 1953, Litton sold the stock of Litton Industries (of California) to Electro-Dynamics and it became Litton Industries, Inc. He could stop worrying about operating a company or taking care of his estate, and so could focus on research. Litton later moved to Carson City, Nevada, where he died in 1973.

Upon returning to Stanford, Terman contracted tuberculosis and became immobilized. He lay in bed with sandbags on his chest for nine months, then suffered a burst appendix and the resulting eye vision problems lasting for years. However Terman used the time to write a book on electrical transmission and found that he could join circuit theory with amplifiers and vacuum tubes. He became more interested in radio engineering. While in bed, he received offers from both Stanford and MIT to teach, and he chose Stanford due to loyalty and the good weather. It was a good decision as MIT turned its back on radio, even though retail US sales went from $2 million to $325 million from 1920-25. Stanford, on the other hand, had a well-stocked radio lab because of a partnership with private companies like AT&T, Western Electric, and Pacific Telephone.

In 1932 Terman wrote and published a textbook on Radio Engineering; after numerous editions it was the seminal text on radio technology. Terman never took vacations and he wrote daily. He married Sibyl Walcutt around that time, in what would be a 47 year marriage till she died in July 1975.

 

Terman’s Precocious Protégés

Terman‘s two most famous students also grew up on the West Coast. Bill Hewlett grew up in San Francisco on Union Street. His father was a medical physician and professor at Stanford (who died young in 1925). Dave Packard grew up in Pueblo, Colorado; his father was a lawyer, his mother a teacher. Packard was a star scholar-athlete growing up, and would outshine Hewlett in terms of publicity for their lives.

In the fall of 1930, Hewlett and Packard met as freshmen at tryouts for the Stanford football team. Stanford had at that point a football team for 40 years. It played in four Rose Bowl tournaments and won a national championship a few years before. Glenn S. “Pop” Warner was the coach at Stanford. Packard had lettered in three sports (football, basketball, and track) and was a star athlete, unlike Hewlett who had heart but very little talent. In his studies, Packard was also a star electronics student whereas Hewlett was a mediocre student who had a knack for mechanical things. Packard made the football team and not Hewlett. Yet both met on the playing fields and saw each other over years in campus. They became close friends their senior year. They would take trips in Hewlett’s car (a rarity in the Depression) to hiking in mountains or go fishing. After graduation in 1934, they took a two-week backpacking trip to the San Juan Mountains in Colorado. So began a 60-year friendship and business partnership.

Terman and his radio lab were the biggest influence on both of them. Terman would take his students on tours to local entrepreneurs’ labs:  Charlie Litton’s lab, Kaar Engineering in Palo Alto, Eitel-McCullough in Burlingame, and Philo Farnsworth’s lab in San Francisco (where the first TV emission was sent). Packard was inspired to see “young entrepreneurs working on new devices in firms which they themselves had established.” Terman confided to Packard that most of the firms they had visited were founded by men with little formal education. Terman believed formally-trained engineers with a little business sense might be even more successful.[8]

It was liberating to graduate in the Depression. There were so few jobs that graduates had to start something. Packard knew Terman by hanging around the radio lab. He took Terman’s graduate course in radio engineering as a senior in Spring 1933, and said of it: “That was the beginning of a series of events that resulted in the establishment of the Hewlett-Packard Company.”  The smartest engineering student was Barney Oliver, later HP‘s Chief or Research.

Packard graduated and went to GE in February 1935. He hated it but learned “management by walking around” when he worked on the shop production floor to lower defects in mercury vapor rectifiers. Terman guided Hewlett to get a graduate degree and pursue studies in resistance capacity oscillators (which would be HP‘s first product). Hewlett spent some time in MIT to get his degree, then returned home to a job Terman found him building oscillators. Packard visited to see his girlfriend Lucille (“Lu”) Salter, and he held a “business meeting” with his buddy Hewlett to discuss businesses they could start (they were a team looking for an idea). They took minutes. The meeting was dated August 23, 1937 to discuss “tentative organization plans and tentative work program for a proposed business venture.”  They discussed products like high-frequency receivers and medical equipment, or something for TV. Ultimately they started their business and partnership without a product. They were a team of two who liked and trusted each other and wanted to build a company. They were friends before partners; they had the same values, interests, and ambitions. They liked and trusted each other.

Packard took a one-year leave of absence with an offer to work in Terman‘s lab (a low risk departure from GM) and a 50% pay cut. He worked with Russell Varian, an interesting entrepreneur himself. Varian graduated high school at 21 and was a dirt poor student at Stanford. He knew where all the fruit and nut trees on campus were (for snacking) and helped invent the klystron tube. This was as important as integrated circuits and the digital computer, crucial to radar detection and eventually air travel, cellular telephony, and microwave ovens. Millions in royalties over time came to Stanford professors and the university itself from the invention. Packard worked at a new klystron lab at Litton Labs, which Litton loaned to Varian (the early entrepreneurs cooperated and helped each other out often).

 

The Modest Start and Immodest Growth of Hewlett Packard Corp.

In 1938, Hewlett and Packard rented a house at 367 Addison Avenue in Palo Alto. Packard and his new wife Lucille lived inside while Hewlett moved into the shack of a garage, took a cot, and put up shelves and workbenches (some consider the garage to be the birthplace of Silicon Valley). They flipped a coin to name the company, and Hewlett won, so it became the Hewlett-Packard Company. With no products, they took contract work. They designed lane signaling equipment for a bowling alley, a synchronous motor drive for the telescope at Lick Observatory, a self-flushing toilet, audio oscillators to tune harmonicas, and an exerciser with electric impulses to let people get workouts while sitting. Basically, they lived on Lu’s income as a secretary.

They wanted to make something. Hewlett knew circuit technology and Packard was good at manufacturing. They signed a partnership agreement in January 1939. Hewlett’s audio oscillator seemed to have market demand, so they built a professional case and called it the 200A, priced at $54.40. The price was picked randomly to seem thoughtful, but was dumb because it was priced below cost. Yet the competition’s product was about ten times the price, so they raised their price quickly and still sold it. The first major sale was to Disney for its Fantasia movie. They quickly decided to dump contract work and become manufacturers. An early contract salesman sold in Southern California to Hollywood movie makers and aerospace buyers. By the end of 1939 they had $5,369 in sales, pre-tax profit of $1,653, with $500 cash, no debt, and many orders. The pair even went to Litton’s lab to do design work. Litton magnanimously saw HP not as competitors but as “compatriots” (later when a fire destroyed the Litton Labs factory, Packard allowed them to use HP facilities at night). Bill married Flora Lamson, a UC Berkeley biochemistry grad (it was very rare in those days for a woman to go to college, let alone study the hard sciences).

As the business grew, Hewlett and Packard built audio oscillators in a new shop on corner of Camino Real and Page Mill, the first true HP facility (the building is now destroyed). Hewlett and Packard had to be versatile to:  invent, build, and price products; package and ship them; deal with customers and sales reps; keep accounting books; write ads and market the product; sweep up the shop and clean the toilets. They even burnt the entire shop once and broke the windows multiple times. They barely made payroll in 1940 at one point, by building a fixed-frequency oscillator for ITT, since they had done an all-cash business. The experience forced them now got a line of credit from Palo Alto National after being refused by Bank of Italy (now Bank of America). An initial $500 loan led to millions of dollars of profits for the banks for developing the relationship.

Growth signs were healthy. Their first products after oscillators were basically lab testing tools (a distortion analyzer, a harmonic wave analyzer, a square wave generator) to help engineers in other manufacturing labs test devices they were making. In June 1940 HP gave $5 to 5 local charities (18 months after the partnership was founded, with 5 employees). For the year all employees got a production bonus. Revenues grew to $34,396 in 1940, $106,548 in 1941, and nearly $1 million by 1943. Much of business was from the US Naval Research Lab, with key contracts referred their way by Terman.

While things were going well an amazing thing happened. Hewlett was called to war duty by the Army Signal Corps in late 1941 and he left for 4 years. Packard ran the company in his absence but did not re-negotiate their partnership percentages or contract – they both worked on trust as Packard waited patiently for Hewlett to return. Packard moved into a factory cot and worked through many nights; he took the same salary that Hewlett earned at the US government. Noel Eldred came in as an operations executive to help.

After the war ended, Hewlett returned as if nothing had happened, to a much larger company. Yet there was a post war slump, with revenues falling from $1.6 million in 1945 to less than $800,000 in 1946. The founders had to fire employees, reducing the workforce from 200 to 80. The experience was so painful that they never again had a mass layoff, even during the harsh 1973-74 recession. In the mid-1960s, when an HP executive John Minck asked Hewlett why they gave buyouts to independent sales representatives instead of just firing them like competitors, Hewlett responded:  “Goddamnit, Minck, you just don’t understand the situation. These reps are all personal friends. For a decade we did business with them, on a handshake. We owe them most of our success.”  The humanity learned from hard times stuck.

 

Terman Guides the Development of Stanford’s Engineering and Science Programs

In 1941, Vannevar Bush at MIT hired Terman to run a radio research lab at MIT by Vannevar Bush. Terman ran the lab with its staff of 850 to develop electronic countermeasures and jammers for the Navy and Air Force. HP later recruited many talented lab members. Terman also made numerous federal government contacts that we would later pass on to startups; he also connected entrepreneurs with the influx of contracts from the Office of Naval Research (ONR).

By 1946 Terman returned to Stanford as Dean of the Engineering School. Terman had come with a plan for putting Stanford’s engineering school on the map as one of the premier programs in the nation. At the Harvard radio lab, he learned a formula for success. It involved using government funding, mainly ONR contracts, for two reasons:  to build a premier faculty in areas of electronics, which Terman was confident would be the major engineering growth area in the post-war environment; to create a large PhD program, transforming Stanford’s curriculum from one offering just practical engineering training to one rooted in the hard subjects of physics, chemistry, and mathematics. Terman created Stanford Honors Cooperative Program in 1954 for engineers to work after undergrad and do part-time studies for masters; soared from 16 students to 243 in first three years, and became a third of the graduate students in the department. By 1950, Stanford with a much smaller faculty awarded as many electrical engineering PhD degrees as MIT.

Terman‘s biggest focus was on attracting people. He called his plan “steeples of excellence,” and he said:  “It’s better to have one seven foot jumper on your team than any number of six foot jumpers.”  Terman would rather have one star professor than a group of merely good ones. The steeples were small groups of experts who were leaders in their professions. Terman wanted these professors to be self-financing. So instead of using government grants to increase salaries of faculty already on staff, Terman pursued what he termed “salary splitting.”  He would pay for half of the salary of a new faculty member from grants and contracts, as opposed to the operating budget. Research associates and other personnel working on sponsored projects would be entirely covered from contract funds. Both groups would have to be entrepreneurial in getting funds to make their positions stick. These faculty members would over the years attract millions in grant money and the finest students from around the world, starting a virtuous cycle of talent attracting talent. Terman’s other goal was for the program to be strong in areas of mainstream interest and importance rather than in “niche” areas.

In sum, Terman had many components in the 1950s for his “recipe for distinction,” such as: using government grants and contracts to finance “steeples of excellence”; splitting faculty salaries to grow the faculty;

concentrating on graduate student research and production of MS and PhD degrees; establishing the Stanford Research Park as a means to create profitable exchange relations between industry and Stanford research labs, particularly in areas of electronics; creating a Honors Cooperative Program as incentive for companies to locate near Stanford; encouraging the licensing of Stanford inventions and establishing faculty consulting relations as means for getting Stanford ideas into the core of industry.

Terman became Stanford‘s provost (the highest academic officer in the university) in 1955 and stayed there till retirement in 1966, when he went on the HP board. Under Terman, the total government grants and contracts to Stanford went from $3 million in 1951 to over $50 million in 1964.

 

HP Develops the Valley’s Big Hi-Tech Company Model

On August 18, 1947, the HP partnership was changed into a corporation. Packard was President and the outside man (public relations, marketing, and finance), while Hewlett was the Vice President and the operations and research man. Yet they could also do each other’s work, as Packard designed a series of highly profitable voltometers and Hewlett kept them light on debt. The company had 36 products in its catalog. 1947’s revenues of $851K grew to 1948’s revenues of $2.2 million, and employment went up to 128 people.

The most extraordinary thing was their policies. “Management by Walking Around” (MBWA) was an extension of their open factory floor. Basically, instead of waiting for subordinates to report to their own hermetic offices (as much of corporate America was then organized), the founder-executives would walk around the offices and factory and pro-actively engage everyone else. Another breath of fresh air was the Open Door policy, again very different from corporate America at that point. Any employee could take a problem to his supervisor, or next level up. If the employee still felt dis-satisfied, he could take it straight to Hewlett or Packard, who would then mediate (and teach lower supervisors better management skills). The two founders had a deep trust in their employees, as all equipment parts rooms to be left open. Once when Hewlett came late at night to do a project and came across a locked parts room, he cut off the lock and left a note for the manager to never lock the room again.

Hewlett and Packard had unique views about business. One key view was that while profit was important, it was not the sole objective of a company. Packard gave a speech in 1948 to a gathering of corporate CEOs where he stated that beyond profit, a company had responsibilities to employees, customers, suppliers, and society. The other CEOs and executives laughed and dismissed him as naïve. The debate still hasn’t ended in 2010, as the “profits and shareholder value maximization as sole objective” view is still a short-sighted modern school of thought, propagated by University of Chicago types following the lead of the brilliant economist Milton Freedman. Or as Packard said in a 1960 training speech, he felt that many people wrongly assumed a company exists to make money. While money was an important result of a company’s existence, Packard felt the measure of success should be how well a company makes its product.[9] 

One nice fact was that the founders were always in harmony. Or as the technology pioneer John Granger stated:  “You could ask either of them a question on any matter, any important matter, and you’d be sure the answer you got reflected the feeling of the other one as well… they understood one another perfectly.”

HP did very well in the 1950s. From 1950 to 1960, revenues grew from $2 million to over $60 million, and employees went from 146 to over 3,000. The core management team in 1942 was Noel Porter in production, Barney Oliver in R&D, Frank Cavier in finance, and Noel Eldred in sales. Three out four were Stanford grads who trained under Terman, and the team stayed stable for almost next 20 years, till their death or retirement. This is very unusual as Silicon Valley is a disloyal and promiscuous place, with managers coming and going like flies on fly-light. Lucille added a personal touch by buying a wedding gift for every married employee and a blanket for every child. During company picnics, Bill, Dave, and senior executives served food and answered questions.

The two founders developed some other unique views and traditions. They bought a parcel of land in the Santa Cruz Mountains, an hour away from Palo Alto, in a redwood forest for retreats and camping called Little Basin. They also bought a ranch at San Felipe for personal family time and off-site management meetings. These properties became a way of developing their friendship and business partnership. For example, they learned lessons on leading people from corralling cattle, as Packard noted:  “Press them too hard, and they’d panic, scattering in all directions. Slack off entirely, and they’d just head back to their old grazing spots.”  They also encouraged company traditions like: the coffee break, two breaks, at 10AM and 3PM daily, where the company provided coffee, donuts, and Danish rolls and everyone mingled; the Friday afternoon beer bust, where employees left early to have beer at a local bar and talk shop; and casual dress Fridays, which eventually became casual dress everyday across Silicon Valley.

While times were good the founders still made mistakes (very dumb ones). In the 1950s they made the mistake of developing an electronic lettuce thinner for farmers in the Salinas Valley. It was foolish and their lesson was not to stray too far from their core competency of electronic testing and measurement equipment. Also in 1954 they produced the 150A low frequency oscilloscope, which was much worse than the competition (Tektronix), who had a much more reliable device with better repairmen and service. Their lesson was to wait to launch a better product, and to improve their support services.

Meanwhile, in 1949 Terman was developing the Stanford Industrial Park, 9,000 unused acres of land near campus. He wanted to attract companies to hire faculty and graduates as consultants and workers, and simultaneously the university could provide real-time training to workers for graduate degrees in the Honors Co-op Program. Terman teamed with the university’s business manager, Alf Brandin, to create modern facilities with landscaped setbacks, parking hidden behind shrubs and trees, and flowing lawns from property to another. Stanford signed long-term leases with the tenants. Varian Associates was the first occupant. Terman convinced several other electronics firms to move research facilities to the 450 acre sector of land designated for commercial development by the Board of Trustees in 1950. The plan also called for the development of the Stanford Shopping Center, and later the Medical Center that would move from San Francisco to the Stanford Campus in 1958. In the early 1950s, Terman even encouraged William Shockley to locate his company in Mountain View, near Stanford; the company and its progeny would have a lasting influence on the Valley.

Nearby to the park was the new HP corporate headquarters at 1501 Page Mill Road. It was a modernist building with a sawtooth roof and lots of glass and natural light. Inside the space was split with dividers, or proto-cubicles, for the workers, which created a new level of white-collar worker (only Hewlett and Packard had formal offices, and this was more for visiting dignitaries than for daily use). HP went public on November 6, 1957 at $16 per share (the same month as the Walt Disney Company). The company opened a Geneva Switzerland European headquarters in April 1959 and started selling aggressively into that market.

One turning point amidst all the growth was to institutionalize the principles of the founders. A 1957 retreat at the Sonoma Mission Inn (north of San Francisco) was on how to deal with growth and organizational structure. One decision was to decentralize the firm around divisions like GM. The thought was at about 1200 people, the company was at a right size to divide into two or more units. Packard also articulated his “Management by Objective” program:  “If managers know what kinds of decisions are wanted, they are best able to make those decisions from their level rather than from above.”  He believed managers just need guidelines from above, and then the autonomy to execute.

With their senior managers, Hewlett and Packard then created corporate objectives (a philosophy or set of values to guide the company). These were:  Profit (“the best single measure of our contribution to society”), Customers (to create quality, useful products that have value), Field of Interest (to focus but seek growth), Growth (as a corollary of success – useful products should be scaled), and Employees (to give job security and personal satisfaction from work). Later objectives were Organization (an environment that fosters individual motivation, initiative, and creativity) and Citizenship (to be good citizens of a community and contribute to local institutions). The Sonoma retreat formalized annual off-sites for executives, often with a skit lampooning the founders.

Hewlett and Packard were also comfortable with profit sharing and stock option plans, but the danger was complacency and the risk of becoming too inward or hermetic. They instituted a plan where employees could buy shares at 2% to 5% discount to market prices. This reduced salary overhead and re-invested funds in the company, creating long-term owners. However, they were disappointed that many short-sighted employees sold the stock right away (a few held on for more than a decade and became millionaires). The founders later added in a vesting period.

The late 1950s and the decade of the 1960s were good times. In October 1958, HP acquired F.L. Moseley Company, which sold “Autograf X-Y plotters,” early printers. This would later become the base of the firm’s profitable printer family. John Young, the future CEO and chosen successor, joined in 1957 from Stanford‘s MBA program. He held marketing to sales roles, becoming a division manager for the Microwave division at a young age. In the 1960s, Hewlett encouraged communications luncheons, where a senior executive has lunch with people 1-2 levels lower and asks:  “Tell me what you’ve been doing, tell me what we should be doing.”  Lunches would begin formal and strained till an icebreaker question showed the executive was serious; then a stream of questions would come forth. The company hired major polling company International Survey Research Corp. to regularly poll employees on opinions about their workplace and compare it to other companies. Over 90% of employees were consistently satisfied in the 1960s. In 1967, the company introduced flex-time at a HP plant in Boeblingen Germany. Workers could arrive between 6:30AM to 9:30AM and work an 8 hour day. This gave them the ability to balance work and family lives, while keeping a core six hours from 9:30AM to 3:30PM for meetings. The founders gave employees the freedom to make choices.

 

The Business Philosophy of Bill and Dave

A few key business principles made Hewlett and Packard unique (in addition to the ones mentioned above). Both men were products of the Great Depression, and so they didn’t want to run a “hire-and-fire operation,” but wanted to share the company’s prosperity with workers. Moreover, they wanted to run the company on a “pay-as-you-go” basis and finance growth with earnings, not debt.

Fostering innovation was also important. Hewlett met all new ideas with enthusiasm, excitement, and support. A few days later, he would come in an inquisition mode to ask tougher questions and probe the idea more, but with no decision. Later, he would meet with the inventor-proposer and come up with a judicious decision – hence not stifling the desire to innovate. Hewlett felt that “the creative process works best when it is not too structured, but it must, in the long run, be tamed, harnessed and hitched to the wagon of man’s needs.”  As an employer, Hewlett believed it was very difficult to spot a creative individual using a resume or a quick analytical interview. Instead, engaging in the creative process to solve problems was long and arduous, where problems were “organized and dissected, then key issues isolated and defined.”  Next came a period of gestation where an engineer could mull over issues, consciously or unconsciously working at them at odd hours of the day or night. Hewlett’s analogy for this problem-solving was “trying to place a name on the face of someone you’ve met before,” where the final solution came the same way you eventually recall the name.[10]

Hewlett emphasized that being on the cutting edge was very important for motivating talented engineers. If they didn’t feel they were pushing boundaries, they could always leave HP for academia or other companies that were, and this brain drain would be lethal for a company’s innovation.

Meanwhile, both founders understood the importance of people, the core of any organization. Hewlett thought that the “efficient utilization of people,” getting them to think, innovate, and bring imagination and inner motivation, was the most important skill of a leader. Packard presented in the 1958 Sonoma retreat his rules to deal with people (whether managing up or down):

§         Think about the other person first.

§         Build up the other person’s sense of importance and don’t forget to respect the other person’s “personality rights” (the right to be different). Try to understand and empathize with the other person (consider how you would react in similar circumstances in their shoes).

§         Give sincere appreciation. Don’t openly try to reform people.

§         Eliminate the negative. Focus on the solution and what works and not on what can’t be done.

§         Examine your first impressions on people, products, and companies (especially dislikes based on differences).

§         Take care with the little details (watch your smile, tone of voice, your greeting, your appearance, your use of names and dates, etc.).

§         Develop a genuine interest in other people. [11] 

Hence soft skills, people skills that most engineers or technology company heads lack, were high up in the thoughts of these institution builders.

Between 1970 and 1981, 30% of Fortune 500 companies fell off the list after two financial crises, rampant inflation, oil and commodity shocks, and so on. HP grew sales from $365 million to $3.6 billion, and employees from 16,000 to above 66,000. Profits grew at a rate of 27% annually, with 26 manufacturing plants around the world, and sales in 65 countries.

Packard left the company in January 1969 to become Deputy Secretary of Defense (under Mel Laird). It was a very unsatisfying two years for him in Washington while Hewlett ran the company effectively with Ralph Lee and Ed Porter. So 37 years after Hewlett left to join the US Army and relied on Packard, Packard did the same and knew he could rely on Hewlett. The measure of Hewlett’s character was shown in the brutal 1972 to 1974 recession. As revenues and profits dove, he instituted a policy of no layoffs, but a 10% across the board pay cut, along with a nine day workweek. Only sales kept going full-time (to maximize revenue). The order applied from the CEO to janitors – it was a pragmatic solution for tough times, and it saved the skin of many people creating gratitude and love for the company that would list. As Hewlett disapproved of arbitrary firing, he put down a solid policy to avoid it, stating:  “It is not humane. It is not HP-like. It is not justified.”  The broader policy was to give notification and training to employees, move them around, and finally, if that didn’t work, part with respect (and solid documentation).

Eventually both founders would retire and a competent John Young would take over one of the most admired companies in the US and around the world.