A Road to Renewal : HP Unit Looks Beyond Cuts to Embrace Change
Talk about testing a manager’s mettle. Three years ago, Hewlett-Packard Co.’s legendary, if obscure, Test & Measurement Organization lumped together some aging products for measuring radio and microwave frequencies and handed them to Duane Hartley without expecting much.
Like many other businesses in the recessionary early ‘90s, the company was deep into a campaign to shrink its payroll to cut costs and stay competitive. But it dawned on Hartley, a 33-year HP veteran who had started on the assembly line, that it wasn’t much fun managing a downwardly mobile outfit with ho-hum prospects.
“So we decided we were going to grow the organization,” he said. “We wanted to make it vibrant and robust.”
Hartley, whose division is now prospering, can credit an epiphany that American business is finding it can ignore only at its peril: Cost cutting is not enough. Long-term success must come from revitalizing and reinvigorating operations.
A decade of slimming down, restructuring and re-engineering has left companies leaner but not necessarily richer, said Dwight Gertz, a Boston-based vice president with Mercer Management Consulting.
Corporations that extensively retrench have paid a steep price in anxious workers who are reluctant to take risks. Indeed, evidence is mounting that zealously pared-down companies generally continue to perform worse than their industry peers. Just look at CBS, Westinghouse, Unisys, A&P; and Kmart--to name a few laggards.
As Gertz wrote in a recent book, “Grow to Be Great,” “Corporate anorexia is not a sensible way to get healthy.”
Having shed the fat, many companies now must seek ways to gear up and get growing again--or risk having to settle for a future of dwindling expectations and diminishing returns. Key to that, management experts say, will be identifying new markets and building the foundations necessary to take advantage of them. A crucial step is getting workers--discouraged by years of hunkering down--to embrace dramatically different ways of doing business and to acknowledge that change will be a constant.
Halfway through a five-year transformation effort, the Test & Measurement Organization, or TMO, as it is known within HP, is showing renewed verve. In HP’s second quarter, the unit recorded the highest profitability within the company and tied with the more glamorous computer systems operation in growth of orders.
To effect their rebound, TMO managers immersed themselves in management books and held emotional meetings to talk about how their business had gone awry and what they could do to set it straight again. They booted obsolete products and brainstormed to devise new ones. A few brave managers became “early adopters,” dabbling in cutting-edge techniques for managing change.
As managers’ commitment to teamwork grew, they began adhering to a notion made popular by Dwight D. Eisenhower: “Plans are nothing; planning is everything.”
Predictably, TMO’s gain has not come without pain--notably among employees discomfited by rapid change. But other managers seeking clues about how to get their companies back on a growth track could learn a thing or two from TMO’s process--developed for the most part without high-priced consultants.
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The Test & Measurement Organization is where it all began for HP. Although by far the smallest of the four sectors that make up the $25-billion Silicon Valley giant, it nonetheless had 1994 sales of $2.7 billion--enough to qualify for inclusion on this year’s Fortune 500 if it were a stand-alone company.
Years before Hewlett-Packard became a powerhouse in calculators, workstations and printers, its first product was an audio oscillator--invented by Bill Hewlett in the late 1930s and perfected in the now famous garage behind Dave Packard’s Palo Alto house. The instrument represented the first practical, low-cost method of testing sound equipment. Walt Disney ordered eight of the machines for production of his animated film “Fantasia.”
From there, TMO went on to develop a variety of products with banal-sounding but important roles--to test radio and microwave frequencies, to conduct spectrum analyses and to measure voltage. Companies used them to assess the accuracy of all sorts of electronic gear, radar, aircraft and satellites. And with defense and aerospace companies as their biggest customers, these mundane product lines flourished for nearly 50 years.
Then, in the late 1980s, the defense industry began to founder, and TMO’s profits headed into a slide.
The toppling of the Berlin Wall and the end of the Cold War didn’t, of course, go unnoticed by TMO managers. But those developments, momentous as they were, failed to hasten the sort of change that the onset of global peace--however shaky--should have dictated.
It was a time when all of HP was being rocked by rapid innovations in technology, cutthroat price competition and the increasingly global scope of its businesses. When company profits did not keep pace in the 1980s, the stock price drooped, as did morale.
During this period, an in-house task force discovered a troubling concern among workers companywide: that HP was losing its way--literally.
The company had long ascribed its success to a set of values developed by Hewlett and Packard that came to be known as the “HP Way.” Among the key tenets were open communications, decentralized management, employment security and growth as an imperative for survival. One manager years ago coined the term “management by walking around” to describe the company’s approach.
Yet HP managers were starting to behave like executives everywhere--looking to cut costs by shaving the payroll through attrition, transfers and enhanced severance or retirement packages. Employees felt that the vaunted HP way--long viewed as a competitive advantage--was falling victim to the turbulent times.
In May, 1992, TMO managers were rattled by their sector’s first monthly loss in history--a crisis that finally created a sense of urgency. They launched a crash program to figure out how to manage change.
While some of his colleagues were still plunging into management literature and seminars, HP veteran Hartley moved forward. Aware that top HP executives expected many of the products in his microwave instruments division to wither away as the defense industry shriveled, he grew determined to find a way to build new markets and get products to them more quickly.
“I think sometimes in big corporations people have a tendency to say, ‘We can’t do this because the corporation won’t like it,’ or ‘We’re victims of circumstances,’ ” he said. “I decided we could control our own destiny.”
Another general manager came up with an expression that, though a blatant cliche, became the TMO motto: The future is ours to create.
A top priority was discerning how to communicate all the changes to and instill enthusiasm in a skeptical work force. At his division’s Santa Rosa headquarters, Hartley began regular coffee talks--and countless hallway chats--to discuss results and vision. One advantage was that Hartley was a member of a six-person task force formed by TMO to steer the company’s transformation, dubbed Project TMO. As he heard about new management techniques, Hartley could cherry-pick what he thought might work for his division.
The key was trying to create a success--even a small one--with one product and build on it. “This was a big step made up of a whole lot of smaller ones,” Hartley said.
He and his divisional team eliminated some dead-end products and surged into newer markets such as testing signals for cellular phones. He also imposed some subtle changes. To encourage workers to identify more closely with customers, departments were renamed: Research and development became product-generation process, marketing was dubbed order-generation process, and manufacturing is now order-fulfillment process.
The upshot is that Hartley’s once stagnant business is experiencing double-digit sales growth, though HP won’t disclose figures for the unit.
Another maverick experimenting with “change management” techniques was Jim Rundle, then marketing manager of TMO’s Spokane, Wash., division.
“Ten years ago, 60% of our business was from the United States, especially defense,” said Rundle, a 26-year HP employee who went to night school to get a master’s degree in business administration. “That didn’t seem like such a good idea. We were getting fed up with the lack of good strategic management.”
Spokane unit leaders had already gone through conflict-resolution training in an effort to ease differences between R&D; and manufacturing. A consultant reminded them that “a fish rots from the head.”
The group practiced the fine art of airing personal grievances and criticisms in front of one another without getting their backs up. They learned to ask one another tough questions about where their business should head and to work as a team.
In short order, the division, which had been achieving middling results as a maker of general-purpose test machines for customers designing electronic equipment, beefed up its relatively small wireless communications operations to appeal more to high-profile companies such as LA Cellular, Motorola and Sprint. It scored big by being first with various technologies for testing mobile phones in Europe--a risky move that paid off. About 75% of its sales now come from outside the United States.
Even though sales and profits are soaring, managers still set aside four hours a week to review strategic issues, and once each year they devise a new 3 1/2-year plan. “The worst thing is ignoring and being blindsided by change,” said Rundle, now the division’s general manager.
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In retrospect, Rundle finds it ironic that the downsizing he started in knee-jerk fashion to cut the division’s costs haunted him once the emphasis on wireless sparked heated growth. “For what we saved,” he said, “I lost five times that much in business to competitors because I couldn’t deliver in time. I’d tend in the future to be slower on the trigger.”
Throughout TMO during this period, “a whole bunch of learning went on to think about change,” said Edward W. (Ned) Barnholt, a longtime manager of one of TMO’s four main groups who was named in 1990 to head the entire organization.
Problems had been building for some time. It was clear to Barnholt that TMO, which was reassembled in 1990 after five years of being split up around Hewlett-Packard, did not have the proper structure to deal with the swiftly mutating environment. But as growth stagnated and profits eroded, Barnholt turned to conventional approaches--reducing TMO’s 17,000-worker payroll through attrition, transfers and enhanced severance or retirement packages.
He and the rest of the leadership team were determined to transform the entire organization, going way beyond the mere re-engineering of processes such as order fulfillment to deal with deeply rooted strategies and cultural issues.
“Our methods and processes had evolved in a stable environment,” said Susan Curtis, TMO’s director of strategic planning and change management in the company’s Santa Clara headquarters. “What we had to do was step back and say: ‘It’s not working for us any more. Our products are missing the mark, and we need to understand why.’ ”
Even more important, the managers realized that the company needed to change its whole culture so that employees could learn new skills and behaviors to thrive in a fast-changing world. What was needed, they all agreed, was a systematic approach that dealt with all aspects of the organization, especially the human side.
Eye-opening conversations with customers showed that TMO had remained too internally focused and needed to concentrate on becoming a provider of complete solutions rather than products. After all, customers’ markets were in flux, too.
This revelation led the company to change its mission statement--from “Be the leading supplier of test and measurement equipment” to “Use our core competencies to help our customers improve their business results.”
At Nokia Mobile Phones’ research and development center in San Diego, TMO’s strong customer focus is welcome--and it’s paying off.
“They’re working much earlier with their customers,” said Sean Broderick, manager of product engineering at the center, a unit of a Finnish company that is the world’s second-largest cellular phone manufacturer after Motorola.
“They’re asking us what we want rather than telling us,” Broderick said. “They get input, and we get the products we want.” He also gets monthly status reports from the Spokane division on products designed to test next-generation digital phone products.
TMO also needed to get its house in order. One problem, Barnholt said, was that many of the market changes cut across divisional lines, making it tough to respond quickly. Some products were shifted from one of TMO’s 23 divisions to another. In one of the most dramatic instances, Barnholt stripped all the basic microwave instrumentation products from the so-called Stanford Park division, the oldest within HP, and asked the unit “to get us into the video business.”
That break with the past created “a lot of anxiety,” he noted. But because managers were able to build “a compelling vision for the future that got people excited,” he said, it worked. After a heavy dose of employee retraining, the division is now building “broadcast servers” that digitally insert ads into TV programming and “video servers,” designed for such budding interactive technologies as movies on demand.
In a joint venture with Oracle Corp., which supplies the software that dishes up the digitized video, the unit will provide interactive TV equipment for Pacific Telesis, owner of Pacific Bell.
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Guiding the managers in their transformation effort was a strategy-development method called scenario planning. Scenario planning entails imagining a variety of possible futures--from doomsday to pie in the sky--and evaluating how a company would respond to each.
For TMO, scenarios ran the gamut from the demise of the company’s market as computers took over the test and measurement business to a boom that would garner annual sales of $10 billion--or even $20 billion--from wireless communications and other sizzling markets.
At a recent session in Colorado Springs, Colo., where managers reviewed their progress at midpoint, they exhibited “a level of enthusiasm and excitement” far different from their previous woe-is-us attitude, Curtis said.
“Rather than fearing [change],” she said, “they are embracing it.”
Early on, when robust sales and profits were a gleam in the managers’ eyes, the transformation team put out a volume titled “Project TMO.” The book jacket promised “the inside story” of the leadership principles that transformed TMO and allowed it to maintain its leadership in current markets and achieve dominance in new markets. The pages inside were blank.
“Now,” Curtis said, “we could probably fill it 10 times over.”
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Measuring HP
REVENUE
Hewlette-Packard revenue, in billions of dollars:
1994: $25
EARNINGS
Net income, in billions of dollars:
1994: $1.6
REVENUE SOURCES
Total 1994 revenue, by sector:
Components: 3%
Analytical: 3%
Medical: 5%
Test & Measurement: 11%
Computers:78%
Test & Measurement Organization at a Glance
The Test & Measurement Organization, one of four major businesses within Hewlett-Packard, is a leading supplier of customized and standard test systems and equipment, instruments, components and accessories for telecommunications, data communications and multimedia networks.
* Founded: 1939
* Headquarters: Santa Clara, Calif.
* General manager: Edward W. (Ned) Barnholt
* 1994 sales: $2.7 billion
* Employees: 15,000
* Divisions: 23 in North America, Europe and Asia, with sales and support staff in more than 110 countries
Note: Fiscal year ends Oct. 31.
Source: Company reports
