David Packard (Founder of HP)

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 rurs pursue the question how can I succeed from day one Packer 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 huet to personally contribute at levels far

beyond what they would have 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 huet 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 Beed 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 about benevolence and charity you would be terribly mistaken Packard and huet 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 excert from the book that I'm going to talk to you about today which is David Packard's autobiography it is called the h P way how Bill huet

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 founders 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 going to put this book down I want to revisit that section from the introduction though because really if you read between the lines of what he's saying over those SE several pages is it's going to be very similar to the lesson that you and I just went over in episode 282 uh the third time I read

Jeff beas'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 it is called the Intel Trinity how Robert no Gordon Moore and Andy Grove built the world's most important company and is 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 want to 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 huet 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 silicom 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 want to pick up the biography of Steve Jobs written by Walter isacon 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 huet 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 job 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 huet 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 hulet 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 that 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 the theme is consistent do our products offer something unique are people's lives improve 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 starts and the first thing

he does the first page and 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 Turman 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 found founded on the fact that they want to 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 f 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 EX 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 wellth 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 Packer 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 barbwire 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 going to tell you these little stories those 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 he talks about what he learned from competing in high school sports and we're going to see again again another inclination that he's a very determined individual I enjoyed Athletics and learned some lessons that were helpful in managing huet 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 bezo says that are 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 Turman 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 were resulted in the establishment of the hulet Packard company and so Stanford is also where David is going to meet his co-founder Bill huet he gives us a brief overview of Bill hulet and something that pops out that I can't really explain and I'll tell you that in one minute 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 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 fact 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 mine because a few weeks ago I think on episode 278 I just reread Peter Teal's book 0 to1 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 huet they did the same thing but even

younger than high school so then David goes back to this idea where that HP will likely not exist if him and Bill did not meet Professor Fred Turman a lot of the people that he's going to actually meet in turman's class are going to form he says it's the nucleus of the management team at HP and he says largely because of turman's classes the four of us Bill him and these two other guys became 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 turman'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 he says turman'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 termin saying something like well as you can see most 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 product they're going to make they just know that they want to build electrical components but there's a the

Great Depression is going to give this diversion says our plans were set aside when I received a job offer from General Electric the country was then in the throws 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 Gres to the east coast there's two stories that he's going to tell he's going to be a 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 going to use later at HP the first one is that you should follow your own intense interests and at the beginning of Industries or Market you can't possibly predict how large they're going to be so it says on my first day I met with a Mr boring who as you'll see is apply named uh he knew of my interest in electronics his 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 Bing'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 going to use this idea over and over again when he's building HP the background here is he is responsible for quality control they're producing General Electric is 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 a 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 going to realize is the engineering department where he's working at they're not communicating properly with the people are actually making it the factory people it soon became 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 huet Packard company and so after a few years he's still talking to Bill still talking to Fred they still have this idea is 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 what what they consider the first official meeting of what's going to 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 the product ideas we discussed included highfrequency 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 decided to start the company in Bill's Garage this garage is going to become really famous this goes on for like uh there's like about a year year and a half while he's on like a break from GE uh until he actually formally resigned so before I want to get to where the founding of their company in the garage which becomes like Silicon Valley lore I just want to read this one paragraph that I thought was fascinating it really talks about like this the feeling that you have when you're taking your jump from employment to I'm going to run my own business I'm going to take this giant risk and so even though this is just one paragraph in a few sentences it's like I I paused here and I just stared at it

after I underlined and made notes on it just 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 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 onecar 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 Lon lab atories in the evening and so this is his first mention of Charlie lton who's actually he's working for but also going to become a competitor in the future and really a friend he learned a lot from Charlie Lon they wind up exchanging information and Lon actually becomes really important in his life but there's something that jumped out to me that 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 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 cat a caterpillar like a bulldozer and excavated the site himself I helped him and then I became fairly proficient with a bulldozzer when Bill huan and I acquired a ranch in 1954 so was that 15 years later I bought a bulldozer and then helped build more than 20 mil 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've read it you know four or five years ago whenever episode 40 came out and I'm going to read it to you and what's fascinating now this is crazy how all these things fit together right so David Packard and Bill huet are building their company the exact same time in history

that Edwin land is building Polaroid and back on page 437 of this GI biography almost 500 Page biography of Edwin land that I that I um that I read there's this young guy named Ken Olsson who's going to wind up being an entrepreneur he's going to wind up founding 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 Olson who's you know a generation younger than Packard and and Edwin landz and he's describing just how different they were says uh L represented a generation of scientists that Olson encountered as a young research 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 came up against the fearful challenges of World War II and said you know this war is 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 Linton 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 just spread over has to be separated in episodes but it's just one conversation right Ken Olsson 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 olssen and trying to buy his company

digital Equipment Corporation so let's go back to this book there's several pages that goes on they're trying to figure out okay we know we want to develop Electronics what do we want to build they're not too sure they're going to do a bunch of different things they're going to 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 coin flip they couldn't decide is it going to be Packard hulet or hulet Packard we flipped a coin to see whose name would come first in the company needless to say Bill one 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 going to become a very valuable company so it says the first the audio

oscillator represented the first practical lowcost method of generating highquality 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 rare that we sent to a list of about 25 potential customers provided by Fred Turman there's Fred again we designated this first product the model 200a this made me laugh uh we we designated this first product model 200a because we thought that the name would make it look like we'd 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 of 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

where Charlie Linton 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 their friends Charlie Linton 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 going to get their first big sale they actually sell 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 radios and so David summarizes the advantage that hij young company H had and why he received Disney's money as opposed to General radios we enable

Disney to buy a good product at a price considerably less than our competitors and so one of the things I loved is David takes us to 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 it says by 1939 our business had grown to the point where we need 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 going to give us advice that you need to shop around for your financing options so he goes into the largest Bank of California 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 Pao Alto National and I introduced myself to its president this guy named uh Jud CR I described our initial success and then 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 C'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 Alo Nationals Associate Bank where Wells Fargo the wells this is this is so important he's going to repeat this is one of the greatest lines I've ever heard but he's going to 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 huet gets called into service in the Army so now David's got to 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 depression which he goes into more detail uh very wary of of debt 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 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 so as you can imagine the demand for the war the business is going to grow because they're selling a lot of these like their devices and 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 a main theme for 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 Arch laboratory the US government and they just asked them like what else do

you need us to make what else do you guys want to 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 basos in the early days of Amazon he sent a thousand emails to some of uh to a thousand early customers an I was like well okay you bought a book for me like what else would you buy one guy replied back he's like what he learned about that those emails those 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 realiz it's like oh like one guy's like hey I really wish that he would sell that i''d be able to order windshield wipers from Amazon because I need to replace the windshield wipers on my car and Jeff's like oh like I can we can sell anything

this way and so as a result of asking this question 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 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 almost seems like counter to the advice he's about to give us was 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 complimentary so he says those 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 on building a group of compliment 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 highquality instruments and I 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're very it says we had built a good foundation on which to grow so you remember early in the book where David is talking to I think his the dean of engineering at Stanford it's like hey it's pretty incedible 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 him and Bill attend there but 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 Turman 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 obtain Master's or doctor 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 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 re worked best that is the most important sentence in the 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 and so this is where he goes more into his companyb building philosophy one uh theme that he repeats over and over again the one I mentioned earlier is his belief in the growth growing your company from profit and he's going to 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 imposs possible 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 a matter of fact when I got to the section it made me realize or made me remember that uh in one of the biographies I read on waren Buffett talks about the fact that he keeps newspapers from the Great Depression on his office wall to serve a as a reminder about how bad things can get so back to David my father had been appointed as a bankruptcy referee to the for the state I often helped my father in looking up the records for those companies that had gone bankrupt I noted that the bank 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 he's having with his father this idea is like okay

well who are the the companies that actually went under during the Depression like why did they fail and who are the ones that survived I noted that the bank simply forclosed on the business 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 going to 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 she's like oh that's fantastic this company may be doing well he's like no this is a that's a 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 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 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 was reading from earlier insisting on the impossible there's a line in that that it says exact same thing Edwin L clearly did not wish to waste his powers on me to products they use the exact same language and then that line also made me think of something I learned when I was reading Johnny IV biography this is episode 178 you've got to listen to that podcast listen to it if you haven't listened to episode 178 Johnny IV 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 Johnny's telling in that book where at the time I think this is like late 90s maybe early 2000s there was 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 Johnny ey biography why he doesn't want to make a netbook netbooks aren't better than anything they're just cheap laptops Johnny tells the story uh Steve directs the energy instead of uh using Apple's resources time 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 B Sher letters he talks about uh this is a couple like probably 15 years into Amazon he talks 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 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 it's 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 l 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 survive long enough you know they start in the 1930s there is no such thing as what we think of about computers at that point he's like and yet we've 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 in 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 25 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 opportunities in front of you and if you do the best with the opportunities in front of you it will unlock 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 $964 it's insane right making entire only instruments he was able to succeed to hold on to the best to the best of his ability with the opportunities in front of them so 30 years later the company's 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 and then we get to what might be my favorite story 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 turndown 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 metal for Extraordinary contempt and Defiance 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 going to obsess over customers we're going to create new differentiated products they're going to make the C 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 and then he's got another great story about the lesson he learned so this is how the Japanese division of HP is going to 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 J Japan it's like middle of the- pack in performance 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 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 going to 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 4 in a th000 we thought that was pretty good A little less than 05% 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 going to realize the importance of working with people with excessively high standards like 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 things 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 and 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 spend considerable time making sure that every adjustment was done just as accurately as possible that same adjustments were done at HP and 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 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 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 Founders podcast.com you can also support the podcast by signing up for the founders premium feed I just recorded another AMA episode I'm getting EXC excellent questions one of my favorite questions that I've gotten is who would be on my seveners 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 Founders podcast.com that is 291 books down 1,000 ago 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 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 because one of the sponsors of this episode is Tiny and one way that tiny has been described is that they're building the birkshire 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 going to 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 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 or 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 want to sell his familys business and so I'm just going to 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 if you should decide to sell I think birkshire hathway 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 compet 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 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 going to install in that business are actually going to 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 that he uses cuz 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 SE ious 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 birkshire 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 for the sale we adapt to their methods rather than vice versa and in Tiny's case it's up to the founder if they want to stay or if they want to go Tiny's fine with either solution and then waren doeses something fantastic he's like listen you know who the P the past businesses 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 going to keep it simple with you if you should decide to do a business do

business with birkshire 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 birkshire 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 birkshire 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 20 years as you have during the past 20 sincerely Warren Buffett I think reading the entire letter is worth your time if you buy the book it's on pages 230 through 233 and make sure you go back and listen to episode 227 the essays of Warren Buffett if you have not done so already and if you have a business that you're interested and selling now or in the future make sure you go to tiny.com