Platt Sheffield Fellowship Lecture

Managing Innovation: An Oxymoron?
Lewis E. Platt
Sheffield Fellowship Lecture
February 28, 1997

Visual #1 title slide

Good afternoon. It's a real pleasure to be here at Yale ... and a great honor to be named a Sheffield Fellow.

I strongly believe in the spirit of the Sheffield School -- namely, the value of a close interaction between the academic world and the business community.

Dean Bromley, I'd like to congratulate you and your colleagues on what you've accomplished in making Yale's engineering program both world class and highly relevant to the needs of industry.

We at HP are proud to have played some small role. And we're delighted at the prospect of bringing some of Yale's bright graduates into the company.

I was talking to one of our R&D managers the other day about the importance of the young engineers we recruit, and she summed things up this way: "People right out of school are important members of a project team, because they don't know that something is impossible to do."

And that's the beauty of the close interaction between the academic and business worlds. Universities are the birth places of many creative new ideas. Industry is the proving ground where the value of those ideas gets determined by people's willingness to pay for them.

Separately, academia and business are incomplete. Together, they form a complete cycle.

Bill Hewlett tells an interesting story about that dynamic tension between the creativity that leads to innovation ... and the hard-headed practicality required to bring a product to market and earn the profit that makes possible the next round of creativity.

In a 1986 speech on creativity, Bill recalled the time he quoted Thomas Edison to an HP engineering manager. You’ve probably heard Edison's famous quip ... "There ain’t no rules around here. We're trying to accomplish something."

When Bill said that, the HP manager replied, "Don't say that. Creativity is what screws up my engineering schedule."

Bill's next comments were eloquent, so let me quote him verbatim:

These two comments say a great deal about the creative process. It works well when it is not too structured. But, in the long run, it must be tamed, harnessed, and hitched to the wagon of mankind's needs."

That discussion sets up the question I'd like to explore with you today -- namely, how HP manages to both stimulate creativity and harness that creativity to produce real products, on time, and on budget.

Thus the question my speech title poses --Is the term "managing innovation" an oxymoron?

Let me start by sharing with you some of the kinds of innovation HP has brought to market during its more than a half-century of existence.

Visual # 2 Analytical Innovations

In 1965, HP entered the market for analytical instrumentation -- that is, electronic instruments used for chemical analysis. Four years later, we introduced the first instrument with robotics for preparing the sample to be tested.

This made it possible for people to run the systems unattended or overnight ... greatly reducing the cost of chemical analysis.

By 1974, we'd produced the industry's first instrument controlled by a microprocessor. That made it possible to make ten readings in 20 minutes ... compared to hours for a single reading in previous models.

It didn't require a Ph.D. in chemistry to operate ... but, instead, could be used by laboratory technicians. The result was an even more dramatic reduction in the cost of analysis ... which helped open up the market for environmental analysis.

Visual # 3 Medical Innovations

In 1967, HP introduced the world’s first non-invasive technology to monitor fetal heart-rates... which made it possible to evaluate a baby’s condition during labor.

Here you're looking at another non-invasive approach to patient monitoring. It's part of a new family of reusable sensors that measure arterial oxygen.

As you know, a human being cannot survive for more than 5 minutes without an oxygen supply to the brain.

This device means that doctors no longer have to draw blood in order to gauge how things are going ... but, instead, can monitor the situation continuously.

They're not the only ones happy with this advance. If we'd photographed this baby's face instead of his foot, you'd see he was smiling, ... which probably wouldn't have been his reaction to the needle required to draw blood.

Visual # 4 Information Innovations

Many innovations are what we call "killers" in that they render another industry obsolete. Here you are seeing products that killed the sliderule industry.

On the left, the first programmable desktop calculator, introduced in 1968. On the right, the pocket-sized version, ... which was developed in response to Bill Hewlett's challenge to HP engineers. It came out in 1972.

I know you probably can't imagine solving problems without it. Some of us -- those who graduated in the B.C. era, ... Before Calculator -- can remember what life was like before this indispensable tool arrived on the scene.

By the way, a marketing study commissioned before we introduced this the product showed that there wasn't much interest in it. I bet you're glad no-one listened.

And that brings up an interesting question: When do you listen to that kind of feedback, and when do you ignore it? John Doyle -- who retired from HP just a few years ago and who played an important role in many innovations --coined an expression that summarizes what's required, ... and that is "an imaginative understanding of customer needs."

Customers don't always know what they want, because they don't know what’s possible.

3M’s "yellow stickies" are an example. No prospective customer said, "I need little pieces of yellow paper with glue on them, that kind of stick to paper but that don’t stick too much."

Visual # 5 Printing Innovations

What you're looking at is a close-up photograph of inkjet technology. This was born around the coffee pot at HP Labs, our central research facility, as a couple of engineers discussed the principle of vaporization that operates coffee perculators.

That led to the development of small resistors, heated by an electric pulse, that created a vapor that ejects ink through a nozzle.

That work began in the late 1970's -- before the days of drip coffee makers or the rise of Starbucks, for that matter. We didn't come out with a product based on the technology until 1984. It was the HP ThinkJet. It sold for $495, and it bombed.

Back to the drawing board. Four years later, we came out with another version that delivered laser-quality print for under $1000. That was the first of the HP DeskJet ... a product that has become the world’s best-selling printer.

Visual # 6 Printing Innovations

Here's what's coming out of inkjet printers today. It's truly photographic-quality -- so much so, even, that when we put Kodak prints next to our inkjet prints and asked Kodak executives to guess which was an actual photograph, some of them picked the inkjet print.

We're already combining these capabilities with our scanners, CD-ROMs and PCs to produce home photography systems that allow people to feed a negative into the system, edit the image, and print their own family calendars, Christmas cards, whatever. Soon, you can expect to see those capabilities enhanced by the addition of digital cameras.

Working with Kodak, Microsoft and a Bay Area company called Live Picture, we've also developed a new digital file format that will make it much easier to transmit photographic-quality images like these over the Internet.

Today, it takes a long time to download an image -- leading the British magazine The Economist to dub the Net as the Interminable Net. That's a problem we’re helping solve. Soon, businesses will be able to show their products with real-life accuracy, ... making it possible to sell via the Net.

Visual # 7 Illumination Innovations

In the 1960s, our central laboratory began working on the physics and chemistry involved in making light-emitting diodes, or LEDs, as they are called. No product division picked up the technology, but we continued to invest, nonetheless.

That was a wise decision, because advances in LED technology helped make possible the pocket-sized calculator I spoke of earlier.

By the mid-seventies, we'd produced yellow and green LEDs, but they weren't bright enough. We continued fundamental research and developed a process based on aluminum gallium arsenide technology, which produces very bright lights.

As a result, LED technology is moving beyond the digital display of your calculator or alarm clock. They’re being used in outdoor signage like you see here.

Some cities have started using red, amber and green LEDs in their traffic signals. They offer lots of advantages, because they require only half as much electricity as incandescent bulbs... and they never need to be replaced.

If you watched football this past season, you might have seen a commercial for another application -- namely, to light exterior rear-view mirrors and turn signals. It makes your intention to change lanes visible to motorists who would have had you in their "blind" spots.

Looking forward, we've just perfected blue LEDs. And that means we can combine the colors to produce white light. Remember the advantages -- energy efficiency and, essentially, no need for replacement.

So do you think there might be a market for them? Will HP go into the light bulb business? Stay tuned.

Visual # 8 Computing Innovation

Here's my last anecdote in this oral history of HP innovation. This chart shows two trend lines for the amount of computing power available for a given price. The dotted line on the bottom is the famous Moore’s law that summarized the computing industry until the mid-1980s.

From the inception of the microprocessor until that time, the amount of computing performance available for a given price would increase by 30 percent annually, thanks to the shrinking geometries and improved processes for microprocessor development.

What you see on top is the price/performance gains of a totally new architectural approach HP pioneered in the mid-1980s -- something called Reduced Instruction Set Computing, or RISC as the acronym goes.

HP was the first major computer vendor to move to RISC-based technology. And, of course, people couldn't couldn't resist the play on words the acronym suggested. So we got a lot of grief about our RISKY decision to move to the new architecture.

The results soon silenced the skeptics. Because RISC-based technology delivered 50-70 percent more power for a given price. And it has become a mainstream architecture used by most vendors.

We're now working with Intel on the microprocessor architecture that will succeed RISC. It will deliver even greater performance improvements and will reach the market before the end of this decade.

That willingness of HP to create a new technology like RISC --and then work to render it obsolete by developing another -- says a lot about HP. So let me move on now to what I believe are the key ingredients behind this ability to reinvent ourselves so regularly.

Visual # 9 Environment of Innovation

The factors at work fall into three categories -- organization, management and culture. All are really interdependent and reinforce each other. But for purposes of discussion, I'll group my comments in these three buckets. I'll start with how we're organized.

Visual # 10 Organizational balance from Stanford or Sloan presentation

HP is a very decentralized organization. We push decision-making and accountability to the lowest possible level. Here you see how we've divided our activities.

Those on the left are the same companywide. We wouldn't, for example, want to have different personnel policies in different businesses, because that would limit our ability to move people around the organization and leverage their learning.

On the right, you see the activities that are unique to each business. They determine their own business strategy. Nobody waits around for orders from some omniscient team of senior managers telling them which hill to take.

Instead, business strategy is set by the people closest to the customers, technologies and competitors. And, as you'll see from what else is on that list, the businesses control all the resources required to execute those strategies. They are empowered and, therefore, accountable.

The businesses keep their eye on the ball in the arenas for which they are responsible. They’re very focused on their strategic intent in that space, and their people have frequent and passionate discussions of what they're doing and what it takes to be great.

Visual # 11 The Role of HP Labs

Hewlett-Packard Laboratories is a second organizational factor in HP's ability to innovate. HP Labs bridges the gap between the kind of pure research that universities like Yale perform and the product-development responsibility of HP divisions.

They perform what we call applied research, working on many of the same challenges our businesses face, ... but with longer time horizons in mind.

HP Labs has two roles. First, it explores areas of research that would move HP's current businesses forward.

Secondly, its researchers are looking quite creatively across HP's breadth of expertise in measurement, computation and communications to identify ways we might combine them to create entirely new businesses.

I visit the labs once a month, and I never fail to come away with an enormous enthusiasm about the future. The place bubbles with intellectual energy.

Visual # 12 An Environment of Innovation

Let me move on now to the subject of management, beginning with "the vision thing," as George Bush called it. I'll start by reading the minutes from the first meeting Dave Packard and Bill Hewlett had, back in 1938. They go like this ...

"It seemed the general consensus of opinion that the work should be limited to manufacturing and merchandising our own manufactured goods entirely. The question of what to manufacture was postponed to a later date."

How's that for vision? Blindly clear, right? And, as the HP historians have chronicled, Bill and Dave subsequently went on to design a notable number of failures.

There was the automatic foot-fault finder for bowling alleys, ... an electronic toilet flusher for the dormitories at Stanford ... and an electronic lettuce picker that destroyed a farmer's entire field and made them run for their lives.

How many of you have read "Built to Last" by James Collins and Jerry Porras? The book reports their analysis of visionary companies and is well worth your time.

In studying visionary companies, the authors concluded that Bill and Dave's uncertainty about what they would produce had a very positive effect.

Because instead of concentrating on building a particular product, they concentrated on building a visionary company.

Visual #13 Two approaches to vision

Here you see a somewhat simplified summary of two very different approaches to vision. In the first paradigm, vision is conceived of and driven by the top.

A visionary leader aims at directing change. The top management articulates a vision, motivates others to implement it, and remains visible so everyone knows where to focus their efforts.

In the second, top management creates the environment in which others' visions may emerge, and then provides the resources so that people may realize their visions.

When attention is focused, it is at those in the organization who have done some pioneering work ... and not on top management.

In the paradigm on the left, a visionary leader emerges. In the one on the right, you have the makings for a visionary company. And, of course, HP's style more closely matches the second description.

For example, when Joel Birnbaum, who heads up HP Labs, started a renewal in his organization a few years back, he asked his people, "If we wanted to become the world's best industrial research organization, what would that look like?" The question provoked a lot of discussion and many initiatives.

At first, people worked on somewhat tactical issues, like the complexity of some administrative processes. They then moved on to the technical infrastructure and updated their computing environment.

Next came information sharing. Researchers voluntarily put together what they called "chalk talks," where people interested in a particular subject or project could come together and share ideas.

Discussions during the Labs’ annual review were posted on a secure Web site, allowing people to ask questions to management during the actual review. Answers were posted as they occurred. That day, the Web site had 13,000 hits -- coming from an organization of just 1100 people.

Ultimately, the renewal process reached the organization's research agenda. They began to work across their organizational silos in cross-disciplinary teams to envision future businesses HP could enter by combining its expertise in measurement, computation and communications.

Visual #14 MC2

That discussion leads me to senior management's role in an organization like HP. A couple years ago, I saw a statement in a McKinsey Company publication that summarized how I see my particular role. It went like this: "The role of the CEO is to make the invisible visible."

The acronym MC2 is an example of my playing that role at HP. The term stands for the areas of expertise I just mentioned in my discussion of Labs -- measurement, computation and communications.

HP is one of only three companies in the world that has competency in all three areas. And so, if HP can combine these areas of expertise in new and interesting ways, we have growth opportunities that few companies could even envision.

Actually, MC2 is more than an acronym. It's a mathematical equation to define the many opportunities within the space defined by the axes of our three core competencies.

I show this image and talk about the many opportunities it suggests to encourage HP people to look beyond the confines of their current business and explore new possibilities.

I don't insist that any HP business pursue a particular MC2 opportunity. Instead, they have to be motivated to do so by their own self-interest. In short, I dangle a carrot instead of issuing orders.

Visual # 15 The domesticated computer

Here's another example of vision at work in HP. It's a poster developed by our people at the Labs, and the image captures the notion of what we call "the domesticated computer."

Early in his career at HP, Joel posed the question, "Why do most people fear or loath computers?"

He found his answer in the famous book "The Little Prince" by Antoine St. Exupery.

In that story, the flower tells the fox how sad he is to learn that this flower he loved so much wasn't so very unique ... but, instead, just a common rose.

The fox replies: "To you, I am nothing more than a fox, like a hundred thousand other foxes. But if you want a friend, tame me. One only understands the things that one has tamed."

And so was born our vision of "the domesticated computer" -- one that adapted to people, rather than asking the people to adapt to the machine. The image had a powerful effect on our engineers, ... spurring them to develop the technologies required to make computing as domesticated as this image suggests.

This visioning goes on at all levels within HP. But perhaps no person plays a more important role than the R&D section manager. These are people who came up through the engineering ranks and who are steeped in the technology relevant to their business. They embrace an idea and sell it up the management chain.

By and large, it's a pretty easy sell, ... because many HP managers also come from the technology side of the business and are willing to invest for the long term.

Last year, HP invested $2.7 billion in R&D. That's a very important element in creating an environment where visions can emerge and take shape in the form of real products.

Visual # 16 Phase Review Process

OK, so we've created this environment where creative ideas are encouraged and where management is willing to take risks and invest with a long-term perspective.

What about the concerns voiced earlier by that HP engineering manager who told Bill Hewlett that creativity killed his engineering schedule?

Well, we've got a process in place to make sure that doesn't happen. It's called the phase review process, and you see a simplified version of it here.

The rigor imposed by this process helps translate creativity into products that can be shipped. Everybody knows what each phase entails, and so they are quite clear about what needs to be accomplished before moving on.

More rapid time-to-market is one of the real benefits to having those phases clearly defined. Let's take product definition, as an example.

Years ago, we did a major survey of HP engineers, trying to identify what made products late to market. The number one cause was unstable product definitions.

Said differently, people kept changing the product specifications by adding elegant features that our customers could live without and which increased costs and development time.

So we spent a lot of time honing our skills in product definition. And we made it very clear that, after a project had moved past Phase One, the product definition couldn't be changed.

What makes this discipline bearable to our creative engineers is their knowledge that the product under development is just the first of a family. We never design assuming that we won't go back and make it even better in a second iteration.

And so, our engineers know that if they couldn't do something in the initial introduction, they can do it in the follow-on product.

Visual # 17 3-pronged image, culture highlighted

I'd like to move on now to culture, because I think it's perhaps the most important ingredient at work.

The most important thing about HP's culture is the assumption it is built upon -- namely, that people want to do a good job, a creative job, and will do so if given the right environment.

That statement is Bill Hewlett's definition of the HP way. It's central to everything we do. And, based on my visits to other organizations, I think the assumption is quite unique.

Combine that assumption with our stated reliance on people's creativity, and the result is the goal of making HP the employer of choice in our industry.

We want to be able to attract the brightest people (especially new college graduates) from around the world ... and then to earn their loyalty and enthusiastic commitment.

Visual # 18 HP way

We also work hard at keeping our core values alive and using them as the basis for everything we do. In fact, I consider one of my most important roles at HP the stewardship of those values. They're real -- not just something we put on a piece of paper.

I was talking about this with a former colleague the other day, and he said that the values also served as a screen in interviewing people.

He told about the time he and his colleagues interviewed a brilliant technologist from a very prestigious university. At the end of the day, the section manager asked everyone just one question: "Which one of you want this candidate to work on your next project?"

No-one raised a hand. Why? Because the candidate appeared to be arrogant, and nobody wanted to work with him.

The interviewee was out of sync with a basic HP value: We have trust and respect for individuals.

Let me read the other four to you; they're all equally short ... and equally essential.

We focus on a high level of achievement and contribution.

We conduct our business with uncompromising integrity.

We achieve our common objectives through teamwork.

We encourage flexibility and innovation.

Five short sentences, but very important ones. Besides creating an environment where creative and committed people feel at home, the values have another very practical benefit:

We don't need a thick rule book that identifies every possible business situation and prescribes the appropriate response.

Instead, we rely on a common set of values and people's ability to do the best in any circumstance. This approach makes us much more flexible than a rule-bound organization.

Visual #19 TMO change conclusion

How do you create an organizational culture that is open to change? HP's Test and Measurement Organization recently underwent a very significant transformation process, and their conclusion is this: Change occurs when people's dissatisfaction with the status quo exceeds their level of anxiety about change.

T&M is an old business for HP -- founded more than half a century ago. It is also a business where we have always been a leader.

And so, HP people in TMO were pretty comfortable -- and, I must say, somewhat overly confident and tempted to believe that they knew better than their customers.

In the late 1980s, their world changed dramatically. The Berlin Wall came down, and aerospace/defense spending dropped significantly. For a few years, TMO reported negative order growth -- something which almost never happens at HP.

In the early 1990s, they had a general managers' meeting where they all vented their frustration. About halfway through it, they got tired of hearing themselves complain.

They decided to stop feeling victimized by change -- and to instead view it as an opportunity. "The future is ours to create" became their motto -- and they set about doing just that.

They started really listening to their customers. They began a much more systematic and rigorous process of scanning the external environment.

As they became more outwardly focused, their view of the opportunities ahead became much broader and more exciting.

The organization turned around completely. You can feel a difference when you walk through it.

Visual # 20 Teeter-totter on change ... same as above

Let me remind you of the simple equation our TMO people articulated: Change occurs when satisfaction with the status quo exceeds anxiety about change. Well, being engineers, they of course tried to identify every factor in the equation.

Obviously, past success -- and the assumption that one is somehow entitled to keep that leadership position -- work against dissatisfaction with the status quo.

That's why I spend so much time preaching the perils of complacency when I talk to HP people. I keep reminding them that great companies stumble when they continue doing for too long that which made them successful in the past.

A number of factors help tip the scales in favor of dissatisfaction with the status quo:

-- a very strong focus on customers, one that includes lots of listening;

-- an emphasis on innovation and risk-taking, where you expect a certain percentage of your R&D projects to fail;

-- and very rigorous analysis of the marketplace and competitors -- one where you compare yourselves to the leaders, rather than taking comfort from the fact you're ahead of the laggards.

What makes people anxious about change? Well, certainly, the degree of loss that change brings. People are less willing to eliminate redundancies or simplify processes if they believe doing so will eliminate their jobs and there are no new opportunities for them.

And, of course, an organization that's insensitive to the very real challenges presented by change -- that won't honestly address the legitimate questions it poses -- merely creates an environment where fear flourishes.

Open communication helps alleviate anxiety. So does an environment that encourages people to embrace exciting, alternative futures.

The reward system also helps tip the balance. If an occasional failure dooms a manager forever, he or she will never take a risk.

And, finally, change is much easier to embrace if one has been involved in architecting that change. Change imposed from above is often change avoided. People who create their own futures are those who embrace them.

Visual # 21 HP growth, growth of Fortune 25 companies

So far, you've just heard the positive side of the HP story. It's very true, but it's not what keeps me awake at night.

This is. Here you see HP's annual revenue and that of whatever company was tenth on the list of the Fortune 500 -- with the Y axis plotted in log scale.

It is a cautionary tale. HP’s compound annual growth rate, since its formation, is 19.5 percent -- a momentum that has propelled us to #20 in the Fortune list.

The growth rate for the #10 position is 4.2 percent. For companies in the #1 through 9, it’s even less than that.

And so we ask ourselves, "What happens if or when we get that large?"

And so, we ask ourselves is how HP can break the mold and continue to grow rapidly, despite our size. We are exploring this issue on a number of fronts.

Visual # 22 3-pronged image

I don't yet have an answer to the fundamental question I've just posed. I probably won't have one until we've actually done it. To do so, we'll probably have to innovate on a number of fronts --not just in the technology arena, but also with new approaches to organization, management and our culture.

I have great confidence that if any company can disprove the adage that large companies can't grow rapidly, it will be HP -- especially if we hire some bright Yale graduates who think that nothing is impossible. I hope some day to return and tell you the next chapter of our story, and thanks again for honoring me today.

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[Sheffield Fellowship]