David Packard's principles for building HP over half a century

Executive overview

Most companies optimise for profits. Packard asked a different question: what can we contribute? That obsession with customer value — not earnings — drove a virtuous cycle that made HP one of the most important companies in Silicon Valley history.

Packard built HP on a small set of durable principles: grow from profit, not debt; focus narrowly and do it well; demand quality without compromise; innovate rather than copy.

The company that asks "what can we contribute?" consistently outperforms the one that asks "how do we make money?"

Origins: Stanford, Fred Terman, and the garage

• Packard's childhood interest in electrical devices led him to Stanford, where professor Fred Terman sparked his path into electronics.
• Terman introduced students to working radio company founders, noting that those firms had been built by people with little education — implying that trained engineers could do far more.
• Packard met Bill Hewlett at Stanford; the two became fast friends and, along with others in Terman's class, formed the nucleus of HP's future management team.
• HP was founded in a one-car garage in Palo Alto in 1939; California later designated it a historical landmark and "the birthplace of Silicon Valley."
• The company name was settled by a coin flip — Bill Hewlett won.
• HP was profitable from its first year and remained profitable every year for the next 50.

Early lessons that shaped HP's culture

• At General Electric before founding HP, Packard was told "there's no future for electronics at GE." HP eventually grew larger than all of GE was at the time of that advice.
• At GE he solved a quality problem on mercury vapour rectifier tubes by spending time on the factory floor, working directly with production staff. Lesson: personal communication is often necessary to back up written instructions — the genesis of management by walking around.
• A Wells Fargo banker visiting the young HP delivered a line Packard repeated throughout his life: "More businesses die from indigestion than starvation."
• From ranching: applying steady, gentle pressure moves cattle through a gate; press too hard and they scatter, slack off and they drift back. He applied the same insight to managing people.

Growing from profit, not debt

• Packard grew up during the Great Depression and observed which businesses survived: those that had not borrowed against their assets kept them intact; those that had were foreclosed on.
• HP operated on a pay-as-you-go basis for more than half a century, financing growth primarily from earnings.
• The company found it could finance 100% annual growth by reinvesting profits.
• Packard kept his own salary below what it should have been during the war years, because he did not think it fair for his pay to exceed Bill Hewlett's Army salary.

Focus, differentiation, and the refusal to copy

• HP concentrated on a group of complementary products — measuring and testing electronic instruments — rather than pursuing unrelated opportunities.
• "Bill and I knew we didn't want to be a me-too company merely copying products already on the market." (Edwin Land used the same phrase about Polaroid; Steve Jobs applied the same principle at Apple.)
• Wall Street's fixation on quarterly earnings is dangerous for technology companies: cutting R&D inflates short-term profits but destroys the innovation pipeline. "Good new products are the lifeblood of technical companies."
• In 1964 HP did $125 million in revenue, entirely from instruments — not a penny from computers. By 1994, computer products alone were $20 billion. Doing the best with current opportunities unlocks future ones that cannot be predicted.

Hiring, talent, and the Honors Cooperative Program

• HP partnered with Stanford on the Honors Cooperative Program: top engineering graduates were hired on full HP salary and the company paid their tuition for graduate degrees at Stanford.
• More than 400 HP engineers obtained master's or doctoral degrees through the programme.
• This gave HP a systematic edge in attracting and retaining the best engineering talent from universities across the country.

Quality: the 400x lesson from Japan

• HP's printed circuit board failure rate was about four per thousand — roughly 0.4%. The team considered this good; it matched what other companies were achieving.
• HP's Japanese unit achieved a failure rate of 10 per million — 400 times better.
• The difference: HP's US operation optimised each adjustment to be done as quickly as possible; the Japanese operation optimised each adjustment to be done as accurately as possible.
• "Gains in quality come from meticulous attention to detail. Every step in the manufacturing process must be done as carefully as possible, not as quickly as possible."
• Once the rest of HP understood this, quality targets across the company were raised far beyond what had seemed achievable.

Entrepreneurship inside HP: the Chuck House story

• Engineer Chuck House was told by Packard to abandon a display monitor project. Instead, he took a vacation, drove around California showing a prototype to potential customers, and used their positive reaction to justify continuing.
• He persuaded his R&D manager to rush the monitor into production. HP sold more than 17,000 units, generating $35 million in revenue.
• Packard later awarded House a medal for "extraordinary contempt and defiance beyond the normal call of engineering duty."
• On the difference between insubordination and entrepreneurship: "I was not trying to be defiant. I really just wanted a success for HP."

The founding obsession: customer contribution

• The question Packard returned to throughout his life: "Do our products offer something unique? Are people's lives improved because of what we do?"
• "Customer satisfaction second to none is the only acceptable goal. If you cannot lead your organisation to achieve that goal, we'll find somebody who can."
• HP's success created a virtuous cycle: contribution enabled investment, which produced greater success, which enabled greater contribution.
• Upon his death, Packard bequeathed nearly all of his $5.6 billion estate to charity.