How Bill Hewlett and David Packard built HP and the HP Way

Executive overview

HP was built without outside financing, without bureaucracy, and without chasing growth for its own sake. David Packard and Bill Hewlett developed a management philosophy — the HP Way — grounded in profit as purpose, trust in people, and staying focused on what they did best.

The HP Way is not a single rule but a system: values drive objectives, objectives guide daily decisions, and practices reinforce both. Its lessons cut against most conventional management instincts — avoid debt, decentralise authority, share downturns with employees, and let good people leave.

More businesses die from indigestion than starvation.

Starting small and staying focused

• HP began in a garage in 1939 with $5,369 in first-year sales and $1,563 in profit.
• First product: an audio oscillator marketed to ~25 potential customers via a two-page brochure.
• They named it the Model 200A to appear more established than they were.
• Hewlett handled circuit technology; Packard handled manufacturing — complementary skills, not identical ones.
• They flipped a coin to decide whose name came first. Hewlett won.
• They declined large wartime production contracts that fell outside their core competence.
• Strategy: build a group of complementary products rather than scatter into unrelated areas.

Profit and the no-debt rule

• Profit = the value added to the resources utilised — not a reward, a measure.
• Profit is the prerequisite for meeting every other objective.
• Packard's father was a Depression-era bankruptcy referee; Packard watched banks foreclose on leveraged firms while debt-free firms survived with assets intact.
• HP operated on a pay-as-you-go basis, financing growth from earnings.
• Benchmark: General Radio had built a successful business without outside financing — proof it was possible.
• Avoiding debt was not timidity; it was a deliberate competitive strategy.

Trust in people and avoiding layoffs

• During the 1970 recession, HP faced a potential 10% workforce reduction.
• Instead: a 9-day fortnight — 10% pay cut, 10% fewer hours, applied to everyone including executives.
• Result: no layoffs, skilled workforce retained, employees kept through the recovery.
• Continuing education is a requirement, not a benefit — techniques that are relevant today will be outdated.
• Select the most capable people for each role; then keep developing them.
• Some HP employees left to start their own companies, collectively employing 40,000+ people. Packard considered this a point of pride, not a loss.

Managing like a rancher

• Packard applied lessons from cattle ranching to management.
• Steady, gentle pressure from the rear moves people through change without panic.
• Press too hard: people scatter. Slack off entirely: they drift back to old habits.
• The lesson: consistent, moderate pressure produces movement; force produces chaos.

The maverick engineer

• Engineer Chuck House continued developing a display monitor after management — including Packard — had ordered it discontinued.
• He took a vacation to California, showed the prototype to potential customers, confirmed demand, and persuaded his manager to rush it into production.
• HP sold 17,000+ units, generating $35 million in revenue.
• Packard later gave House a medal for "extraordinary contempt and defiance beyond the normal call of engineering duty."
• The lesson: turn-down of an idea doesn't always kill it, and sometimes shouldn't.

The perils of centralisation

• In the 1970s, HP shifted toward computers and modelled itself on IBM's centralised structure.
• Committees multiplied: councils, task forces, the Computer Business Executive Committee.
• By 1990, decision cycles had ballooned; paralysis spread beyond the computer division; stock fell to $25.
• Packard and Hewlett visited facilities at all levels to diagnose the problem directly.
• Fix: removed management layers, disbanded the CBEC, gave operating units autonomy to plan and decide.
• By 1993, stock had recovered to $70.
• The pattern built over nearly 20 years; it was not a sudden crisis.

Books, compounding knowledge, and optimism

• Books are hyperlinks: Steve Jobs led Packard to Hewlett, which led to this book.
• Learning compounds when you follow curiosity from one source to the next.
• HP took 40 years to reach $1 billion in annual sales; in fiscal year 1994 alone, it added $5 billion.
• Packard's closing thesis: the 21st century will not just be an information age — it will be an age of new products contributing to a better life for everyone.
• Real contribution means making products that advance technology, not copying what others have done.