David Packard (Founder of HP)

1. 0:00 – 3:01

   Packard's Philosophy: Contribution Over Profit

   1. DSDavid Senra0:00

      David Packard rejected the idea that a company exists merely to maximize profits. "I think many people assume wrongly that a company exists simply to make money," Packard said. While this is an important result of a company's existence, we have to go deeper to find the real reason for our being. Do our products offer something unique? Are people's lives improved because of what we do? If the answer to any of these questions is no, then Packard would deem HP a failure. Most entrepreneurs pursue the question, how can I succeed? From day one, Packard pursued a different question: what can we contribute? As a result, HP attained extraordinary success. This success, in turn, enabled them to invest more in making a contribution, which produced even greater success, which led to increased contribution, which created even greater success. This virtuous cycle eventually enabled Packard and Hewlett to personally contribute at levels far beyond what they would've dared to imagine as young men. In 1995, Packard attended a dinner at Stanford University. The Dean of Engineering mentioned to Packard that he and Hewlett had donated, on a present value basis, as much to Stanford as Jane and Leland Stanford had given to fund the university. Upon his death, Packard bequeathed nearly all of his $5.6 billion estate to charity. But if you were to think of David Packard and the HP way as being all about benevolence and charity, you would be terribly mistaken. Packard and Hewlett demanded performance, and if you could not deliver, HP held no place for you. "Customer satisfaction second to none is the only acceptable goal," admonished David Packard. "If you cannot lead your organization to achieve that goal, we'll find somebody who can." That is an excerpt from the book that I'm gonna talk to you about today, which is David Packard's autobiography. It is called The HP Way: How Bill Hewlett and I Built Our Company. And so nearly all the words from here on in are going to come directly from a very wise 82-year-old founder. What's amazing to me is how many times you and I have seen this. David Packard publishes this book in 1995, and he passes away in 1996. There's at least 20 episodes in the Founder's Archive where you'll find the exact same thing, this desire to document what they learned over, in David's case, over 50 years, half a century, as an unbelievably successful entrepreneur, to document what he learned during that time and pass it down to future generations of entrepreneurs. And so I'm gonna put this book down. I wanna revisit that section from the introduction, though, because really, if you read between the lines of what he's saying over those sev- several pages is it's gonna be very similar to the lesson that, uh, you and I just went over in episode 282, uh, the third time I read Jeff Bezos's shareholder letters. Something Jeff repeats over and over and over again in those letters is that you need to obsess over customers. That's the exact same message that David Packard is writing in that introduction. So I'll come back to that in one second. In the meantime, I have another book in my hand.

2. 3:01 – 6:04

   Why Learn From David Packard: Silicon Valley's Standard

   1. DSDavid Senra3:01

      It is called The Intel Trinity: How Robert Noyce, Gordon Moore, and Andy Grove Built the World's Most Important Company, and it was written by Michael Malone. I read this book, like, four or five years ago. I'm going to eventually read it, reread it in the next few weeks and make another episode about it. And the reason I wanna start here is because I think a lot of people can look at HP in its current state and not realize how important David Packard and Bill Hewlett were to the history of Silicon Valley. And so the author of the book that I hold in my hand, Michael Malone, you can consider him, like, a historian of Silicon Valley. He's written I think at least 10 books on Silicon Valley history. This paragraph that he has towards the end of this book is an excellent overview on why you and I should spend time learning from David Packard. He says, "In the Valley, the ultimate career standard was set by David Packard. Start a company in a garage, grow it into a leading innovator in its field, take it public, and then take it into the Fortune 500, then take it into the Fortune 50, then become the spokesman for your industry, then go to Washington, and then become a historic global figure. Only Packard had accomplished all of this. He set the bar, and the Valley had honored his achievement by making him the unofficial mayor of Silicon Valley." And then I wanna pick up the biography of Steve Jobs written by Walter Isaacson and just read you this paragraph. "Steve called me late on the afternoon of New Year's Eve 2009. He was at home in Palo Alto with his sister. His wife and his three children had taken a quick trip to go skiing, but he was not healthy enough to join them. He was in a reflective mood, and we talked for more than an hour. He began by recalling that he had wanted to build a frequency counter." Remember this for later in, in David, uh, David's autobiography. "He began by recalling that he had wanted to build a frequency counter when he was 12, and he was able to look up Bill Hewlett, the Founder of HP, in the phone book and call him and get parts." Bill also gave a young Steve Jobs a summer job working on the assembly line assembling frequency counters. Back to this. "Jobs said that the past 12 years of his life since his return to Apple had been the most productive in terms of creating new products, but his more important goal, he said, was to do what Bill Hewlett and David Packard had done, which was to create a company that was so imbued with innovative creativity that the company would outlive them." And so if you think about the context around that paragraph in that biography, Steve has less than two years to live. He is so sick he cannot travel with his family on vacation, and one of the things on his mind is how much Bill Hewlett and David Packard influenced his building of Apple. I think that speaks to why you and I should learn from David Packard. So let's go back to the introduction, which in my opinion is just really several pages of, "Hey, you need to obsess over your customers." And I think David demonstrates the importance of that by some of the phrases that he uses. These are spread over multiple pages, but it... the theme is consistent. "Do our products offer something unique? Are people's lives improved because of what we do? What can we contribute?" And finally, "Customer satisfaction second to none is the only acceptable goal." And then the autobiography

3. 6:04 – 11:39

   Childhood, Determination, and Fred Terman at Stanford

   1. DSDavid Senra6:04

      starts, and the first thing he does, the first page in the first chapter, he highlights an institution and a person that changed the course of his life. "As we get older, we have the opportunity to look back over many years and see how certain events, seemingly unimportant at the time, had a profound effect in shaping our business and our professional careers." The first event that he's referencing is the fact that he was admitted into Stanford University. The second was who he met at Stanford. "The second event was becoming acquainted with Professor Fred Terman at Stanford. It was Fred who sparked my interest in electronics and who later encouraged and helped Bill and me go into business for ourselves. His interest and faith in our abilities, even at a young age, and in the midst of the Great Depression, gave us confidence and helped set a course for us." And then he tells us a little bit about his childhood, the fact that his love of reading and experimenting was something that was present from a very early age. You'll see that he has ... HP is founded on the fact that they wanna produce electronics. He was interested in electrical equipment since he was a little kid. He says, "Even as a young child, I spent hours curled up with my fam- the Family World Book Encyclopedia. I got a thrill from looking at pictures of railroads, bridges, motors, generators, and other mechanical and electrical equipment. I tried to simulate some of these devices with small-scale models in our backyard." So this idea where he's sitting down, he's reading the entire encyclopedia as a child and teaching himself about the world around him, we just saw this last week. A young Bill Gates did this exact same thing. His mom in that book says, I think when he was, like, seven or eight years old, he read the entire collection of encyclopedias that the family owned. One of the things that you'll find if you read this book spread throughout the pages is there's these random hints that as polite and well-thought-out as he appears to the reader, there'll be these flashes where you understand, oh, underneath all that is a person that possesses this steely level of determination. You don't live the life and build the career that Michael Malone described that David Packard did without being a, without turning yourself into a formidable individual. And this is the first hint of the extreme levels of determination that David Packard possessed while he was alive. "When I was 11 years old, my father bought me a horse. I would saddle him up in the morning, and when I got on him, he would buck and rear up. Then my father would hit him on the behind with a broom, and the horse would go out of the driveway at full gallop. The horse would spot a patch of alfalfa, race up to it at full speed, and then plant his legs to stop and eat. I would go flying overhead and hit the ground." Remember, he's 11 years old when this is happening. "He knew," the horse knew, "all the tricks to get rid of its rider, such as running next to a barbed wire fence to scrape him off." And this is the most important sentence in this section and describes the very important lesson that his father is teaching him. "My father wouldn't let me quit, however, so I finally learned how to handle the horse." And so I think that's David's preferred method of teaching. He's gonna tell you these little stories, these little anecdotes, and from there you'll infer the lessons that he's trying to impart to you. And so then he moves the timeline forward, and he talks about what he learned from competing in high school sports, and we're gonna see aga- again another, uh, inclination that he's a very determined individual. "I enjoyed athletics and learned some lessons that were helpful in managing Hewlett-Packard." And so then he tells us a lesson that he learned from his coach, Mr. Porter. "Mr. Porter said that many times two teams playing for a championship each have equally good players. In this case, teamwork becomes very important. Given equally good players and good teamwork, the team with the strongest will to win will prevail. I have remembered that advice, and it has been a guiding principle in developing and managing HP. Get the best people, stress the importance of teamwork, and get them fired up to win the game." And so we see another example of one of my favorite quotes, this idea that Jeff Bezos says that our, we don't choose our passions, they choose us. And so David Packard said, "I had decided as far back as grade school that I wanted to be an engineer, and because of my interest in radio and electrical devices, I had narrowed that to electrical engineering." That's actually a really important sentence because this interest leads him to going to Stanford, which then leads in turn to the founding of HP. Because when he's at Stanford, he is still pursuing this grade school interest in radio and electrical devices. It says, "Stanford had an amateur radio station. The radio station was near the laboratory of a new young professor named Fred Terman. Fred invited me into his office and suggested that I take his graduate course in radio engineering during my senior year. That was the beginning of a series of events that resulted in the establishment of the Hewlett-Packard company." And so Stanford is also where David is going to meet his co-founder, Bill Hewlett. He gives us a brief overview of Bill Hewlett, and something that pops out that I can't really explain, and I'll tell you that in one minute. He says, "As a youngster, Bill gave early evidence of what became a prominent trait, an insatiable curiosity. He wanted to know how things worked and why they did what they did, and he often conducted homemade experiments to find out. Some involved explosives, and like me, he was lucky to survive." And so what David's referencing there is earlier in the book, he mentioned that he liked to experiment with explosives as well when he was young and that one of these experiments actually exploded in his hand. And the fa- and then he says the fact that he, ever since that experiment, he had lived his entire life with a distorted left thumb. And so when I said this is something that I can't really explain, what I'm referencing there is how many times this comes up in the early lives of these company founders, the fact that they like building bombs. This was front of mind because a few weeks ago, I think on episode 278, I just reread Peter Thiel's book Zero to One, and there's a line in that book that talks about this. He says, "Of the six people who started PayPal, four had built bombs in high school." And now we see with David Packard and Bill Hewlett, they did the same thing, but even younger than high school.

4. 11:39 – 16:39

   Terman's Influence and the Lessons of General Electric

   1. DSDavid Senra11:39

      So then David goes back to this idea where that HP will likely not exist if him and Bill did not meet Professor Fred Terman. A lot of the people that he's going to actually meet in Terman's class are going to form ... He says it's the nucleus of the management team at HP. And he says, "Largely because of Terman's classes, the four of us," uh, Bill, him, and these two other guys, "became fast friends. It is not a coincidence that a few years later, this group would become the management team of HP." Many of them working for over 30 years in the company. Fred Terman's keen interest in radio engineering induced him to become acquainted with almost all the pioneers in that industry, many of whom were located in the Palo Alto area. Now, why is that important? Fred becomes friends with all these, these early company founders, then he takes his students on tours. It says Terman's, uh, course included visits to some of these firms. And Terman makes the point, since this is the beginning of the industry, a lot of these company founders, it's not like you could be an expert in the field. They're creating the field, right? So it's like, what if you actually studied the field intently, then what could you actually do if you, if you founded your own firm? I remember Terman saying something like, "Well, as you can see, most of these successful radio firms were built by people without much education." Adding that business opportunities would likely be greater for someone with sound theoretical background in the field. That got us thinking. And so even before they're graduating, these, this small group of guys is like, "Okay, why don't we start our own company?" And so they have tentative plans to start an unnamed company. They don't know what the product, uh, what products they're gonna make, they just know that they wanna build electrical components. But there's a ... The Great Depression is gonna give this diversion. Says, "Our plans were set aside when I received a job offer from General Electric. The country was then in the throes of the Great Depression and jobs were scarce. Terman encouraged me to take the GE job, pointing out that I would learn a great deal that would prove useful in our own endeavor." And so he drives across the country, he goes to the East Coast. There's two stories that he's gonna tell. He's gonna be at GE, uh, for a few years, but there's two main stories that he tells about his time working for General Electric that he's gonna use later at HP. The first one is that you should follow your own intense interests, and at the beginning of industries or markets, you can't possibly predict how large they're gonna be. So it says, "On my first day, I met with a Mr. Boring," who, as you'll see, is aptly named. Uh, "He knew of my interest in electronics," his [laughs] intense interest in electronics, "But he told me there's no future for electronics at General Electric and recommended that I concentrate my work and interest on heavy components for public utility plants." And why was this conversation so important that David is telling us, uh, relaying it, you know, 40 years after it happened? "I have often thought of the irony of Mr. Boring's advice because our electronics firm, HP, has become larger than the entire General Electric company was at the time that he gave me this advice." And then the second important story about his time at HP is really this is how David is able to succeed where others people, other people's failed, and he's gonna use this idea over and over again when he's building HP. Uh, the background here is he is in, responsible for quality control. They're producing, General Electric's producing these things called mercury vapor rectifier tubes, and the quality of the tubes are not good. A lot of them are failing, a lot of them are blowing up, and so this is how he figured out how to fix that. "I learned everything I could about possible causes of failure, and I decided to spend most of my time on the factory floor to make sure every step was done properly." And so what he's gonna realize is the engineering department where he's working, right, they're not communicating properly with the people that are actually making it, the factory people. "It soon became apparent that the instructions the engineering department gave the factory people were not adequate to ensure that every step would be done properly. I found the factory people eager to do the job right. We worked together to conduct tests and identify every possible cause of failure. And as a result, every tube in the batch passed its final test without a single failure. That was a very important lesson for me, that personal communication was often necessary to back up written instructions." That is his punchline. Let's repeat that. "That personal communication was often necessary to back up written instructions. That was the genesis of what became management by walking around at the Hewlett-Packard company." And so after a few years, he's still talking to Bill, he's still talking to Fred. They still have this idea as like, "Hey, we should start our own, uh, company." So he's on, like, a break from General Electric. He drives all the way back across the country, uh, back to Palo Alto, and he has the f- what, what they consider the first official meeting of what's gonna turn into HP. "We had our first official business meeting. The minutes of the meeting are headed Tentative Organization Plans and a Tentative Work Program for a Proposed Business Venture." Must be a riveting document to read. [laughs] "The product ideas we discussed included high-frequency receivers and medical equipment, and it was noted that we should make every attempt to keep up on the newly announced technology of television." And so the reason that is important is because he's telling you, "Hey, we started a company before we knew what product we wanted to make." And so they decide to start the company in Bill's garage. This garage is gonna become really famous. This goes on for, like, a ... There's, like, a, about a year, year and a half while he's on, like, a break from GE, uh, until he actually formally resigned.

5. 16:39 – 21:11

   Starting in the Garage and Learning Self-Reliance from Charlie Litton

   1. DSDavid Senra16:39

      So before I wanna get to where the founding of their company in the garage, which becomes, like, Silicon Valley lore, I just wanna read this one paragraph that I thought was fascinating, and it really talks about, like, this, the feeling that you have when you're taking your jump from employment to, "I'm gonna run my own business. I'm gonna take this giant risk." And so even though this is just one paragraph and a few sentences, it's like I, I paused here and I just stared at it after I underlined and made, made notes on it. So it's like, what is David's life if he never did this? What if he just stayed at GE? What if he just played it safe? And so he writes, "I didn't formally resign from GE until nearly a year later. Lucille," which is his, uh, wife, "always remembered the moment she dropped my letter of resignation in the mailbox. Mailing that letter cut our financial ties, but we were hopeful and excited about what the future had in store." And so this is his schedule at the very beginning of the company. He's also going to school and working. And so it says, "Bill found a two-story house in Palo Alto. There was also a one-car garage, and that became our workshop. In 1989," so 50 years later, "the state of California designated that garage as a California historical landmark and the birthplace of Silicon Valley. My schedule then was to go to classes at Stanford in the mornings, work with Bill, and also find time to study in the afternoon, and then go to Litton Laboratories in the evening." And so this is his first mention of Charlie Litton, who's actually, he's working for, but he's also going to become a competitor in the future, and really a friend. He learned a lot from Charlie Litton. They wind up exchanging information, and Litton actually becomes really important in his life. But there's something that jumped out to me that you, you, you realize when you read all these founder biographies, especially the found- the American founders around World War II, they didn't really believe that they had limits on what they could do or what they could learn to do, and they would do so many things themselves. And so when I got to this section, I actually thought of this book, this biography of Edwin Land that I read for the first time probably like four years ago. I think it was episode 40. It's called Insisting on the Impossible. I just reread it, uh, probably, I don't know, maybe like a year ago. But this is what David is learning from Charlie. It says, "Charlie was able to do everything better than anyone else. When he wanted to build a new plant, he didn't hire a contractor to do the excavating. Instead, he bought a cater- a Caterpillar, like a bulldozer, and ex- excavated the site himself. I helped him, and then I became fairly proficient with a bulldozer. When Bill Hewlett and I acquired a ranch in 1954," so it was like 15 years later, "I bought a bulldozer and then helped build more than 20 miles of roads." And so I have no idea why, but when I got to that paragraph, I thought about this paragraph that I've never forgot since I read it, you know, four or five years ago, whenever episode 40 came out. And I'm gonna read it to you. And what's fascinating... Now, this is crazy how all these things fit together, right? So, uh, David Packard and Bill Hewlett are building their company at the exact same time in history that Edwin Land is building Polaroid. And back on page 437 of this giant biography, almost 500-page biography of Edwin Land that I, that I, um, that I read, there's this young guy named Ken Olsen who's going to wind up being an entrepreneur. He was gonna wind up founding D- uh, DEC, Digital Equipment Corporation. Now, here's the crazy part. He is describing... Actually, I'll tell you the crazy part after this. Let me read this paragraph from Insisting on the Impossible. It's Ken Olsen, who's, you know, a generation younger than Packard and, and Edwin Land is, and he's describing just how different they were. Says, uh, "Land represented a generation of scientists that Olsen encountered as a young researcher in the late 1940s. These older generation scientists blew their own glass. They did their own machining. They made their own parts. They knew everything, and they were independent. They created radar and the atomic bomb and all these wonderful electronics. These self-reliant old-timers came up against the fearful challenges of World War II and said, 'You know, this war's not going too well. What problem should we solve for them?'" And so what Ken is picking up there as a young researcher, right, looking at these older generations, this generation older than him, he's like, "This is extreme levels of self-reliance," which is exactly what David Packard is describing what he learned from Charles Litton in the book. Now, here is how this always blows my mind how this all connects. This is why I think about founders just as one giant conversation you and I are having on the history of entrepreneurship that's just spread over, has to be separated in episodes, but it's just one conversation, right? Ken Olsen is quoted in the Edwin Land book that I'm holding in my hand. Later in David Packard's autobiography, he talks about meeting with a young Ken Olsen and trying to buy his company, Digital Equipment Corporation. So let's go back to this book. There's several pages it goes on. They're trying to figure out, "Okay, we know we wanna develop electronics. What do we wanna build?" They're not too sure.

6. 21:11 – 24:13

   First Product, the Disney Sale, and Early Growth

   1. DSDavid Senra21:11

      They're gonna do a bunch of different things. They're gonna do contract work just to pay the bills. Uh, oh, interesting to note, HP was profitable from the very first year, and it was profitable every year for 50 years after that. That's crazy. But the reason it's called HP is because that was a result of a coin flip. They couldn't decide, is it gonna be Packard-Hewlett or Hewlett-Packard? We flipped a coin to see whose name would come first in the company. Needless to say, Bill won. And so eventually they think they have an idea for a product. It is called an audio oscillator, and we see very, very humble beginnings to what is gonna become a very valuable company. So it says, uh, "The first pr- uh, the audio o- oscillator represented the first practical low-cost method of generating high-quality audio frequencies. We built one model, and then we took it to a radio engineers conference. The response was positive, so we decided to take pictures of it and produced a two-page sales brochure that we sent to a list of about 25 potential customers provided by Fred Terman." There's Fred again. "We designated this first product the Model 200A." This made me laugh. Uh, we d- [chuckles] we designated this first product the Model 200A because we thought that the name would make it look like we had been around for a while. We were afraid that if people knew we never actually developed, designed, and built a finished product, they'd be scared off. We weren't expecting much from our first mailing, but amazingly enough, in the first couple weeks, several orders came back, and some were accompanied by checks." And so they don't have a bunch of money at this time, so this is where they're, where Charlie Litton does them another, uh, favor. "He was a tremendous help in getting us started in production. He gave us access to his shop so we could do things we weren't able to accomplish in the garage on our own." And this is what I meant, that technically they're competitors, but they're sharing information and they're friends. "Charlie Litton and his equipment made an important difference during a period when time and money were very tight. He never saw us as competitors but always as compatriots." And he also thought it was very important for them to get together and share ideas. "He also did something else that was very important. He loved to expound and philosophize, philosophize on new ideas, and he, whenever he wanted to learn more about something, he'd organize a seminar at his shop, and he would invite me and a few other people. These seminars occurred several times. We also talked about business philosophy." So in addition to mailing and trying to do outbound sales, uh, for their audio oscillator, they actually take it to all these conferences. So they take it to another, uh, technical conference, and this is where they're gonna get their first big sale. They actually sell, uh, a batch to Walt Disney. And more importantly, David tells us why he's able to get the sale. "There was people who expressed considerable interest, uh, in our audio oscillator. One of them was B- Bud Hawkins. He was the chief sound engineer from Walt Disney Studios. Hawkins was developing the sound equipment for Disney, uh, the Disney movie Fantasia. He was planning to buy audio oscillators from another company for $400 each. Our model would cost less than $100. Hawkins decided to buy our oscillator instead of General Radio's." And so David summarizes the advantage that his young company ha- had and why he received Disney's money as opposed to General Radio's. "We enabled Disney to buy a good product at a price considerably less than our competitors." And so one of the things I loved is

7. 24:13 – 27:25

   Financing Lessons: Banks and Growing From Profits

   1. DSDavid Senra24:13

      David takes us through the history of the company, is they grow, they need more space, and every time they need more space, it's like, "We can't possibly need more space than this." And so this is the first of many examples. Uh, he says, "By 1939, our business had grown to the point where we needed additional space. We set up an office in the front section of our new building, while the back room held a few machine tools and assembly benches. It seemed as if we had all the space that we would ever need. In those early days, Bill and I had to be versatile. We had to tackle almost everything ourselves, from inventing and building products to pricing, packaging, and shipping them. From dealing with customers and sales reps to keeping the books. From writing the ads to sweeping up at the end of the day." And so essentially what he's describing there is this is a form of education. "Many of the things I learned in this process were invaluable and not available in business schools. Cash flow was a frequent problem during those early days." And he's gonna give us advice that you need to shop around for your financing options. So he goes into the largest bank in California. The largest bank in California at the time is Bank of America. "We tried to establish some credit, some credit with the Bank of, uh, with the Bank of America. Uh, they sent a man out to look us over. He was not impressed." So that's a no from Bank of America. So then David walks over to his little local bank, uh, which is called Palo Alto National, and, "I introduced myself to its president," this guy named, uh, Judd Crary. "I described our initial success, and then I explained how we now needed a loan to expand our business. He listened carefully, asked some questions, and then wrote out a note for me to sign. That little leap of faith on Crary's part was the beginning of a long and happy relationship between us. When we finally grew to the point where our financing requirements went beyond the bank's legal limits, we went to Palo Alto National's associate bank, Wells Fargo." The Wells... This is, this is so important. He's gonna repeat... This is one of the greatest lines I've ever heard, but he's gonna repeat this, this piece of advice that he gets from the gentleman at Wells Fargo a few times throughout the book. "The Wells Fargo Bank sent a retired engineer to visit us. I spent a full afternoon with him, and I remembered ever since some advice that he gave me. He said that more businesses die from indigestion than starvation. I have observed the truth of that advice many times since then. More businesses die from indigestion than starvation." So at this point in the company history, America gets pulled into World War II. Bill Hewlett gets called into service in the Army, so now David's gotta run the company while Bill's gone. And it says, "Bill and I decided that we were going to reinvest our profits." This is something he repeats over and over again, grow, grow from profits, grow from profits. He is very, uh, because he grew up in the, the Depression, which he goes into more detail, uh, very wary of, of debt a- and growing way faster than you should. Uh, "Bill and I decided we were going to reinvest our profits and not resort to long-term borrowing. I felt very strongly about this issue. We found we were clearly able to finance 100% growth per year by reinvesting our profits." And then we see an example of good guy David, the note I left myself when, uh, I read the sentence that he's about to describe here, that you need to... It's really important to work with people that you like, admire, and trust. "I kept my salary at a lower level than it should have been because I did not think it was fair for my salary to be higher than Bill's Army salary."

8. 27:25 – 29:46

   Wartime Growth, Cost Control, and Focused Strategy

   1. DSDavid Senra27:25

      So as you can imagine, the demand for the war, their business is gonna grow because they're selling a lot of these, uh, uh, like, their devices and their electronic equipment to the US government. But even then, even when they were selling them to, to companies, they kept their... He talks about keeping, the importance of, like, keeping control of your costs, obviously m- a main theme for the history of entrepreneurship. But he's like, "Just because we're selling to the government doesn't mean, like, we can artificially inflate, like, what these things cost." He says, "We had controlled our cost to the extent that the government could not get better products from anyone else at a lower price." And then they also did something very smart here. They're building products for the Naval Research Laboratory of the US government, and they just asked them, like, "What else do you need us to make? What else do you guys wanna buy?" We were interested in selling them our standard products, but also interested in finding out what other instruments they might need. When I got to that section, I thought of, uh, Jeff Bezos in the early days of Amazon. He sent 1,000 emails to some of, uh, to 1,000 early customers at Amazon. He's like, "Well, okay, you, you bought a book from me. Like, what else would you buy?" One guy replied back. He's like, what he learned about that, the, the, those emails or the email interactions, was the fact that the answers that people... The answers to Jeff's question were whatever they happened to want at that particular moment, and that's where he realized. He's like, "Oh." Like, one guy's like, "Hey, I really wish that you would sell... That I'd be able to order windshield wipers from Amazon, 'cause I need to replace the windshield wipers on my car." And Jeff's like, "Oh, like, I can s- we can sell anything this way." And so as a result of asking this question f- to the Naval Research, uh, Laboratory, they wind up being able to build a bunch of different products for the Navy, and more importantly, the knowledge on how to develop these instruments that they previously did not know how to manufacture. And so he's describing all these different things that they're building during the war, and he's like, "Listen, they may seem..." It, it, it almost seems like counter to the advice he's about to give us, which is, like, the importance of maintaining a narrow focus and then optimizing for the long term. But he's like, "These products may look different, but they're all complementary." So he says, "Though these instruments differ from one another, all were designed to measure and test electronic equipment." That is their main focus in the early days of HP, measuring and testing electronic equipment. Uh, "They reflected our strategy to concentrate on a b- on building a group of complementary products rather than becoming involved in a lot of unrelated things. I believe this decision to focus our efforts was extremely important. I felt that we should take on no more than we could reasonably handle, building a solid base by doing what we did best, designing and manufacturing high-quality instruments." And I

9. 29:46 – 32:21

   Hiring Talent and the Cattle-Driving Lesson

   1. DSDavid Senra29:46

      think that's one of the main themes of, uh, of the story that he's telling us, is the fact that they were very methodical. They were not trying to rush their growth. They were very... It says, "We had built a good foundation on which to grow." So you remember earlier in the book where David is talking to, I think it's the dean of engineering at Stanford. It's like, "Hey, it's pretty incredible that you guys actually donated more to Stanford than the actual founders of Stanford." And part of that is because Packard felt he owed... Not only did, you know, he, him and Bill attend there, but he- they got so much value from their close relationship with Stanford University and all of the talent that came out of that school. And so this program that David and Bill are about to start with Fred Terman, you can actually think about like what's happening there is like they're figuring out how to create an edge in hiring talent. And so they start this thing with the university called the Honors Cooperative Program. And this is what it is. "It allowed qualified HP engineers to pursue advanced degrees at Stanford. This program made it possible for us to hire top-level young graduates from around the country with the promise that if they came to work for us, and we thought it appropriate, they could attend graduate school while on full HP salary. The company would pay all of their tuition. More than 400 HP engineers have obtained master's or doctorate degrees through this program. It has enabled us to hire the top engineering graduates from universities all across the country for a number of years. This was an important factor in the ultimate success of our company." And so in addition to building a company with Bill, uh, David and Bill also, uh, purchased ranches, and they actually, in like their spare time, would actually act as c- full-on cattle ranchers. And so this is another example of what I mentioned earlier, the fact that a lot of the way that he's conveying these lessons to the reader, to you and I, is the fact that he tells like these little stories of experiences that may not be directly related to business, but they're actually lessons he drew from those, these life experiences and applied them to his business. "I've enjoyed many pleasures as a result of my experience as a rancher. I've learned a thing or two. Every season, we would round up the cattle from the range and drive them to the corral. Along the way, we'd come to a gate. The trick was to get them through the gate and not stampede them. I found, after much trial and error, that applying steady, gentle pressure from the rear worked best." That is the most important sentence in this section, that applying steady, gentle pressure from the rear worked best. "Eventually, one would decide to pass through the gate. The rest would follow. Press them too hard, and they'll panic, scattering in all directions. Slack off entirely, and they just head back to their old grazing spots. This insight was useful through my management career."

10. 32:21 – 35:39

    Profit, the Great Depression, and No Long-Term Debt

    1. DSDavid Senra32:21

       And so this is where he goes more into his company-building philosophy. One, uh, theme that he repeats over and over again, the one I mentioned earlier, it's his belief in the growth, growing your company from profit, and he's gonna tie this into his experience during the Great Depression. And so he goes into the fact, "All companies, they have access to people, materials, facilities, money, and time. These are the resources available to us for conducting our business. By applying our skills, we turn these resources into useful products and services. And if we do a good job, customers will pay us more for our products than the sum of our costs in producing and distributing them. This difference, our profit, represents the value that we add to the resources that we utilize. It is impossible to operate a business for long unless it generates a profit. The profit we generate from our operations is the ultimate source of funds we need to prosper and grow. It is the foundation of future opportunity and employment security." And then he states why he optimizes for growing from profit as opposed to, like, growing from debt. "60 years ago, our country was in the depths of the Great Depression. Thousands of businesses had shut their doors. Bill and I were raised during that depression. We had observed its devastating effects on people, including many families and friends who were close to us." And mat- a matter of fact, when I got to this section, it made me realize or made me remember that, uh, in one of b- uh, the biographies I read on Warren Buffett talks about the fact that he keeps newspapers from the Great Depression on his office wall to serve a r- uh, as a reminder about how bad things can get. So back to David. "My father had been appointed as a bankruptcy referee to the st- for the state. I often helped my father in looking up the records for those companies that had gone bankrupt. I noted that the banks simply foreclosed on firms that had mortgaged their assets, and these firms were left with nothing. Those firms that did not borrow money had a difficult time, but they ended up with their assets intact and survived during the Depression years that followed." So that is something, like a main theme of this book, that experience that he's having with his father. This idea is like, okay, well, who are the, the companies that actually went under th- during the Depression? Like, why did they fail, and who are the ones that survived? "I noted that the banks simply foreclosed on the businesses that mortgaged their assets, and those businesses were left with nothing. The businesses that did not borrow money, they had a difficult time, but they ended up with their assets intact, and they survived. From this experience, I decided our company should not incur any long-term debt. For this reason, Bill and I determined we would operate the company as a pay, on a pay-as-you-go basis, financing our growth primarily out of earnings rather than borrowing money, and we have for more than half a century." And so eventually, HP is gonna go public, but what he says he did not like that Wall Street had this, like, fixation on quarterly earnings. And he points out that those are really easy to manipulate, that, like, you could cut back on, like, R&D, and suddenly you have more profits, and Wall Street's like, "Oh, that's fantastic. This company may be doing well." He's like, "No, this is a, that's, uh, a f- a description of short-term thinking. You have to avoid that because you're a technology company, and technology companies need to constantly create great new products. It is always possible to improve profits for a time by reducing the level of your investment in new product design and engineering. But in the long run, we will pay a severe price for overlooking any of these areas. Good new products are the lifeblood of technical companies."

11. 35:39 – 39:50

    No Me-Too Products and Doing Your Best With Opportunities

    1. DSDavid Senra35:39

       And so then he has an entire chapter on his commitment to innovation, right? And so go back to the beginning of this podcast, where it's like one of the first things he says is like, are our products offering something unique? And if the answer to that question is no, and people's lives are not being improved by our unique products, then he would consider HP a failure even if it made a lot of money. And so there's just a single sentence here in the chapter on commitment to innovation that spawned an entire... Like, I just filled up the page with notes. And it says, "Bill and I knew we didn't want to be a me-too company, merely copying products already on the market." And so that biography of Edwin Land that I was reading from earlier, Insisting on the Impossible, there's a line in that that says the exact same thing. "Edwin Land clearly did not wish to waste his powers on me-too products." They use the exact same language. And then that line also made me think of something I learned when I was reading Jony Ive's biography. This is episode 178. You've gotta listen to that podcast. Listen to it. If you haven't listened to episode 178, Jony Ive, The Genius Behind Apple's Greatest Products, listen to it after this episode. I think you'll really like it. But there's a story that they tell that Jony's telling in that book where at the time, I think this is, like, late '90s, maybe early 2000s, there was, uh, this computer product called a Netbook. And so at the time, Netbooks accounted for 20% of the laptop market, and Apple never seriously considered making one. And so this is Steve Jobs explaining in the Jony Ive biography why he doesn't wanna make a Netbook. Netbooks aren't better than anything. They're just cheap laptops. Jony tells a story. Uh, Steve directs the energy. Instead of, uh, using Apple's resources, time and, and resources to make a Netbook, they actually start doing development and experimentation on a product that eventually turns into the iPad. And then the last thing that popped to mind is in, uh, Jeff Bezos' shareholder letters. He talks about, uh, l- this is in a couple, like, probably, like, 15 years into Amazon, where he talks about, like, you know, we have a lot of experience. There's a lot of, uh, company history where people inside of Amazon have seen what starts out as, like, a small business, you know, maybe a $10 million a year business, uh, grow into a billion or 10 billion a year business. And he had a line in there that, that stuck in my mind. He's like, "Listen, we don't, uh, we don't demand that these new businesses that are born inside of Amazon are big on the day that they are born, but we do demand that they're differentiated." And that is just Jeff's way of saying, "I'm not wasting my powers making me-too products." And we see that exact same thinking, you know, 40, 50, 60 years ago with Bill and David. Bill and I knew we did not want to be a me-too company merely copying products already on the market. Let's go back to this idea that David repeats over and over again. Hey, your company should have a lar- uh, a very solid foundation that you can, you can build upon for, you know, half a century in David's case. And so he does this fantastic, uh, description of, like, why that's so important because he talks about, uh, HP survived long enough. You know, they started in the 1930s. There is no such thing as what we think about, about computers at that point. He's like, "And yet we've su- successfully transitioned into the computer age." It's not that he designed this. He was actually... He says he's pulled into the computer age. But look what he says here. He's like, "In 1994, HP sales and computer products were $20 billion 30 years earlier." Okay? So 1994, they're making 20 billion from computer products. In 1964, 30 years before, our sales total were just 125 million, and they were entirely in instruments. Not a penny was from computer sales. And I think that's another example of something you and I see in these books over and over again, that you have to do the best with the opportunity that's in front of you. And if you do the best with the opportunities in front of you, it will unlock g- in some cases, giant opportunities in the future that you cannot possibly predict. When David was operating, he's already... Think about it. He's 30, almost 30 years into his business in 1964. He's got a successful company. He's doing $125 million a year in 1964 dollars. That's insane, right? Making entire- only in instruments, he was able to succeed to hold on to the best w- the, to the best of his ability with the opportunities in front of him. So 30 years later, the company is doing... And that's, that's 20 billion in computer products. That's only 80% of their total revenue. That's incredible. They're doing 20 billion a year, and 30 years earlier, not a penny was from computer sales.

12. 39:50 – 41:45

    A Maverick's Persistence and Customer Focus

    1. DSDavid Senra39:50

       And then we get to what might be my favorite story [chuckles] in this book. It is titled A Maverick's Persistence. Or another way to think about this, this is the type of teammates that you want to hire. Uh, sometimes management's turn down of a new idea doesn't always effectively kill it. One of our bright, energetic engineers, Chuck House, was advised to abandon a display monitor that he was developing. Okay, so he's told by his bosses, including David, "Hey, don't do that." This is what he does instead. Instead, he embarked on a vacation to California, stopping along the way to show potential customers a prototype model of the monitor. Their reaction spurred him to continue with the project even though he found that I had requested it to be discontinued. And so what happens? Not only is he not going to stop, he's going to speed it up. He persuaded his R&D manager to rush the monitor into production, and as it turned out, HP sold more than 17,000 display monitors, representing sales of $35 million for the company. Several years later, I presented Chuck with a medal for extraordinary contempt and defiance [chuckles] beyond the normal call of engineering duty. So how does a company distinguish between insubordination and entrepreneurship? To this young engineer's mind, the difference lay in the intent. "I was not trying to be defiant," he said. "I really just wanted a success for HP." He started the book saying, "Hey, we're gonna obsess over customers. We're gonna create new differentiated products. They're gonna make the cust- the lives of our customers better. Customer satisfaction second to none is the goal." He repeats it again. The fundamental basis for success in the operation of HP is the job that we do in satisfying the needs of our customers. We encourage every person in our organization to think continually about how their activities relate to the central purpose of serving our customers.

13. 41:45 – 44:34

    Japan's 400x Quality Lesson

    1. DSDavid Senra41:45

       And then he's got another great story about the lesson he learned. So this is how the Japanese division of HP is gonna teach David Packard and the rest of the company the importance of working with people with excessively high standards. So they have this joint venture going on in Jap- Japan. It's, like, middle of the pack in performance. It's, it's, you know, not the best, not the worst. They're thinking, "Okay, I guess this is just what this thing is." And then one, uh, this is going on for a few years, and then it says, uh, a bright young Japanese manager named Kenzo Sasako cornered Bill and me one day. He said, "Why don't you let me run this? You s- you sent an American manager to us to oversee our work. We think we can do better." And so Bill and David are like, "Okay, you're gonna run the operation." The following year, uh, this division grew at a faster rate than ever before, but that is not the most important part. This is the most important part. This is how they find a 400x improvement. We had been making printed circuit boards. Our best failure rates were about four in 1,000. We thought that was pretty good, a little less than .5%. And that was the rate we found a lot of other companies were achieving. So remember, this is a story about how the, David and the rest of the company are gonna, uh, realize the importance of working with people with excessively high standards. So, okay, we have a half of a percent failure rate. We think that's good. We, we stick our head up. We look around the industry. They're about accomplishing the same thing. This must be as good as it can get. Wrong. Our Japanese unit, on the other hand, came in with a failure rate of only 10 per million. So they were doing four per thousand, right? Now, the Japanese are doing 10 per million. That is 400 times better than anything we had been able to do. That shook a lot of people up, and it changed a lot of thinking within the company. It clearly showed that our targets on quality just were nowhere near what could be achieved. The result was that the thinking and the work that they were doing in Japan was soon reflected all over our company. We were able to raise quality targets in many divisions far beyond anything that we thought we could have done before. And it was an issue of how much time you're willing to put in. They, they just analyzed, like, "Well, how the hell did you guys do this?" Uh, the people in our operation in Japan spent considerable time making sure that every adjustment was done just as accurately as possible. That same adjustments were done at HP in Palo Alto just as quickly as possible. So one had the goal of being as accurate as possible. The other had the goal of being as quick as possible. And this is the main punchline to what David learned from this. Gains in quality come from meticulous attention to detail, and every step in the manufacturing process must be done as carefully as possible, not as quickly as possible. This sounds simple, but it is only achieved if everyone in the organization is dedicated to quality.

14. 44:34 – 52:52

    Packard's Optimism About the 21st Century and Closing

    1. DSDavid Senra44:34

       And one of the things I absolutely loved about David Packard's perspective is the fact he's writing this book when he's in his 80s, very close to the end of his life, and he's still relentlessly optimistic. When I think of the phenomenal growth of the electronics industry over the last 50 years, I realize how fortunate Bill and I were to be in on the ground floor. But it reminds me of a story I like to tell on myself. In my sophomore year at Stanford, I took a course in American history and had the opportunity to study the westward movement beginning with the early pioneers and continuing throughout the 19th century. I remember lamenting that I had been born 100 years too late, that all the frontiers had been conquered, and that my generation would be deprived of the pioneering opportunities offered our forebears. But in fact, we went on to make breathtaking advances in the 20th century. In the 20th century, we have experienced dizzying progress. Everywhere I look, I see the potential for growth, for discovery, far greater than anything we have seen in the 20th century. Exponential growth is based on the principle that the state of change is proportional to the level of effort expended. The level of effort will be far greater in the 21st century than it has been in the 20th century. Just as it has in the past, growth in the future will come from new products. By new products, I mean products that make real contributions to technology, not products that copy what someone else has done. This must be our standard in the future, just as it has been in the past. The 21st century will be an age in which many kinds of new products contribute to a better life for all the people in the world. And that is where I'll leave it. For the full story, highly recommend picking up this wonderful little book. If you buy the book using the link that's in the show notes in your podcast player, you'll be supporting the podcast at the same time. The link's also available at founderspodcast.com. You can also support the podcast by signing up for the Founders Premium feed. I just recorded another AMA episode. I'm getting exce- excellent questions. One of my favorite questions that I've gotten is who would be on my seven-person personal board of directors, which I just answered that, and along with other questions from listeners in the latest episode. That link, if you're interested in that, is down below in the show notes, as with every other link, and is also available at founderspodcast.com. That is 291 books down, 1,000 to go, and I'll talk to you again soon. Okay, so all the way back on episode 227, I read this fantastic book called The Essays of Warren Buffett. So all the way back on episode 88, I read every single one of [laughs] Warren's shareholder letters. But what this book that was put together by Lawrence Cunningham, uh, called The Essays of Warren Buffett, uh, did that was so smart is that he took the shareholder letters, and instead of organizing them by year, which is standard, he organized them by topic. And so in the original podcast I did on this book, which again is episode 227, one hour and 28 minutes into the podcast or thereabouts, I go over this letter that I'm about to read to you now. It's under the heading titled On Selling One's Business. And the reason I'm bringing this up is 'cause one of the sponsors of this episode is Tiny. And one way that Tiny has been described is that they're building the Berkshire of the internet. And you can go to tiny.com and read the testimonials and see all the founders that have sold their business to Tiny and how their main differentiation, just like Warren Buffett and Charlie Munger, is there's no BS. We're gonna make this transaction as simple and easy as possible. Where a lot of people that buy businesses make you jump through hoops, and it's just a, a headache. And so if you think about what Warren is doing here in this letter is his business is buying businesses. And so his customer are founders or managers of businesses. And so he is essentially writing a letter to a guy. So he wrote this letter in, uh, 1991 to a guy who indicated he might wanna sell his family business. And so I'm just gonna pull out a few highlights here, and really think about what Warren's doing is he is differentiating his services from other people that also buy businesses. He says, "If you sh- if you should decide to sell, I think Berkshire Hathaway offers some advantages that most other buyers do not Practically all of these buyers will fall into one or two categories. And so now Warren is going to describe his competition. If you go to tiny.com, you'll see they described their comp-- in, in some ways their competition, which is typically VCs or private equity companies, okay? So Warren says, "Number one, a company located elsewhere but operating in your business or in a business someone akin-- somewhat akin to yours. Such a b-buyer, no matter what promises are made, will usually have managers who feel they know how to run your business operations and sooner or later will want to apply some hands-on," and he puts the word help in quotation marks. Obviously, Warren does not think that the managers they're gonna install in that business are actually gonna be helpful at all. The second other option, "a financial maneuverer invariably operating with large amounts of borrowed money who plan to resell either to the public or to another corporation as soon as the time is favorable. Frequently, this buyer's major contribution will be to change accounting methods so that earnings, earnings can be presented in the most favorable light just prior to his bailing out." And then listen to this persuasion technique that he uses 'cause he's writing to somebody that he knows it's a family business, which means they put a lot of their time and life energy into. So he says, "If the sole motive of the present owner is to cash their chips and put their business behind them, and plenty of sellers do fall into this category, either type of the buyer that I just described to you is satisfactory. But if the seller's business represents the creative work of a lifetime and forms an integral part of their personality and sense of being, buyers of either type have serious flaws." So he's just described his competitive landscape. He says, "Listen, there's option one, there's option two, but then there's a new option, something that's completely different and better," and he's describing the services that he provides to founders, right? So he says, "Berkshire is another kind of buyer, a rather unusual one. We buy to keep." Tiny does too, by the way. "All of the businesses we own are run autonomously to an extraordinary degree. When we buy a business, the sellers go on running it just as they did before the sale. We adapt to their methods rather than vice versa." And in Tiny's case, it's up to the founder if they wanna stay or if they wanna go. Tiny's fine with either solution. And then Warren does something fantastic. He's like, "Listen, you know who the pa- the past businesses that we bought. In fact, I'm including in this letter a list of every single person we've ever bought a business from." Tiny does something very similar on their website, which you can go see. "You know some of our past purchases. I'm enclosing a list of everyone from whom we have ever bought a business, and I invite you to check with them as to our performance versus our promises." And then Warren says, "Hey, I'm gonna keep it simple with you. If you should decide to do a business-- do business with Berkshire, we would pay in cash." Tiny says the exact same thing on their website. "Your business would not be used as collateral for any loan by Berkshire. There would be no brokers involved." Warren also says, "You deal with me. And finally, you would know exactly with whom you are dealing. You would not have one executive negotiate the deal only to have someone else in charge a few years later or have the president regretfully tell you that his board of directors required this change or that change." And because Warren has hacked away at the unessential, all that is left is simplicity, and his pitch is simple. Do you want a great home for your business? Then call me, and I will do a cash transaction really fast. Same thing that Tiny does. "I will not pester you. If you have any possible interest in selling, I would appreciate your call. I would be extraordinarily proud to have Berkshire, along with the key members of your family, own blank." So he took out any identifying information of who he's writing to, okay? "I believe we would do very well financially, and I believe you would have just as much fun running your business over the next twenty years as you have during the past twenty. Sincerely, Warren Buffett." I think reading the entire letter is worth your time. If you buy the book, it's on pages two thirty through two thirty-three, and make sure you go back and listen to episode two twenty-seven, The Essays of Warren Buffett, if you have not done so already. And if you have a business that you're interested in selling now or in the future, make sure you go to tiny.com.

Episode duration: 52:53