Q60 STRATEGIES

By Cliff Edwards
On a rainy day in Cupertino, Calif.,

How HP Got Todd Bradley picks through products

that his division at Hewlett-Packard
has recently introduced. There's a
sleek laptop called the Voodoo Envy for

The Wow! Back hard-core gamers, a tiny pink-and-red

It became the world's top PC maker through a
combination of innovation and cost cutting
computer created with fashion designer
Vivienne Tam, and the industry's first
touchscreen notebook. Impressive of-
ferings perhaps, but Bradley looks more
pained than pleased. "All I see when I
look at these things is that our cost [of
production] is never low enough and
our customer service is never good
enough," he says.
The head of HP's personal-com-
puter division has helped the company
become the top PC maker in the world
and has fattened profits at the same
time. But he can't stop worrying about
what could go v^Tong, from competi-
tive threats to the global economy's
meltdown. "We'll never be done,"
Bradley says.

BEATING DELL
As the deepening recession hits
companies around the globe, HP
is navigating through the crisis
relatively smoothly. On Nov. 25, CEO
MarkV. Hurd reported fourth-quar-
ter earnings that handily beat Wall
Street expectations and predicted
the company will emerge from the
downturn even stronger. While there
are many reasons for that, includ-
ing HP's expanding services business
and lucrative printer franchise, a big
factor is Bradley's division, which
brings in $42 billion annually from the
sale of PCs, handhelds, and worksta-
tion computers. Even as rivals such
as Dell and Lenovo have seen a sales
slowdown recently, Bradley's group
reported double-digit revenue gains.
"The market is terrible, [but] they've
done a good job," says David M.
Klaskin, chief investment officer at
Oak Ridge Investments, which holds
the company's stock.
Three years ago, when Bradley was
brought in, investors wanted HP to
jettison the PC business. IBM had just
sold its unit to Lenovo, and it looked
Under Bradley, like Dell would dominate the industry
the PC division
has seen sharp
with its low-cost, no-frills, direct-
gains sales model. With remarkable speed.

THE BRADLEY EFFECT
HP'.s Todd Bradley has boosted market share
and profits since he arrived three years ago
JUNE 14, 2005
Former Palm CEO Bradley
joins HP. The profit margin of the
PC division is 2%.
MAY 2006
"The computer is personal
again" ad campaign launches.
FALL 2006
HP surpasses Dell to become the
world's largest PC manufacturer.
Profit margin hits 4.3%.
JANUARY 2007
HP unveils the industry's first
touchscreen all-in-one desktop.
JULY 2007
HP announces Voodoo Envy
ultraslim notebook PC.
SEPTEMBER 2008
HP introduces slimmer
TouchSmart desktop. Profit
margin is 5.5%.
Sources: Hewlett-Packard, IDC
however, HP has knocked Dell on its
heels and shown it's not just Apple that
can innovate in the computer business.
The man behind this turnaround is a
tall 50-year-old, described by col-
leagues as an unapologetic workaholic.
Before HP, he had a tumultuous tenure
as chief executive of handheld pioneer
Palm. He tangled with the company's
founders over strategy as Palm lost
share in the handheld market, though
it gained ground in smartphones.
Bradley's strategy at HP has been
a blend of hard-nosed execution and
practical innovation. The approach
depends on creating fresh designs and
eye-catching marketing campaigns.
Behind the scenes, though, Bradley and
his team use a bucketful of metrics to
ensure the operation is tuned just so.
They measure profit margins for every
PC and how many R&D dollars go into
each product line. They also revamped
purchasing so costs are rock-bottom.
HP used to buy parts such as memory
chips and batteries on the spot market,
getting prices close to those
of its rivals. Now behavioral
scientists from HP's research
lab forecast demand for
components. Supply chain
HP'S PC boss Tony Prophet then uses
MARKET those projections to negotiate
SHARE
long-term contracts at favor-
1 n.D'Vo ^^^^ prices. There's risk if the
forecasts are wrong, but the
savings can be 20% or more.
Bradley believed from the
start that HP had to change its
15.4 PC business. If it kept trying to
sell boring boxes at the lowest
cost, it would be locked in a
16.7 brutal struggle with Dell. So
with marketing lieutenant
Satjiv S. Chahil, Bradley asked
a local ad agency to create a
video to convince the execu-
18.0 tive board that HP needed a
new approach. The video
argued that PCs bad become
18.7 a commodity because makers
had ceded all innovation to
chipmaker Intel and Micro-
Ifl fi soft. The clip then outlined
bow HP could get out of the
commodity game. " 'Wow!' is
what sells," says Bradley.
Hurd was convinced. Tbe
result: a marketing campaign stressing
how HP computers are different from
others. Hip-bop mogul Jay-Z and ten-
nis star Serena Williams talked about
using HP PCs to watch movies without
first waiting for Windows to launch as
well as to look at pbotos and edit music.
The TV spots wrapped with a slogan:
"The computer is personal again."
THE RIGHT BALANCE
The timing was fortunate. When the
campaign began in 2006, consumers
were looking for laptops that could eas-
ily navigate tbe Web, play games, and
store digital content. They also were
buying more from retailers such as Best
Buy, where they could try out the latest
technology. Tbe trends gave Bradley an
edge over Dell, which had no presence
in retail stores at the time and stressed
low costs. HP quickly surpassed Dell to
become the world's top PC seller.
Bradley's key challenge has been
striking tbe right balance between
innovation and price. To hit the mark.
WHAT'S NEXT
be uses a metric that HP insiders call
"Rt&D productivity." It measures R&D
spending as a percentage of gross mar-
gin for each product line. A standard
desktop computer with low margins
may get one or two innovative features,
wbile a high-end laptop with fat mar-
gins would get enough flash to make
it stand out. To determine the appro-
priate R&D level, HP does three-year
projections of expected gross margins.
Last year, for example, HP intro-
duced the first touchscreen, all-in-one
desktop. While few other PC makers
were putting money into desktops, HP
saw an opportunity for a premium-
priced product if tbe toucb technol -
ogy would make it easier for families
with kids, among others, to use. The
TouchSmart PC, which can go for more
tban $2,000, has helped boost prof-
its and sales, says Phil McKinney, the
division's chief technology officer.
Today, Bradley frets about maintain-
ing HP's momentum. His concerns are
evident in mandatory conference calls
he has with his top í6 executives every
Thursday at 7 a.m. Pacific time. This
year he led the call on Thanksgiving
morning as the Macy's parade played
silently on his TV. Among other things,
Bradley wanted to make sure none of
HP's suppliers would come up short for
the holidays. "We did get a little holi-
day gift," says McKinney. "He ended
the call a few minutes early." 1 BW I
Business Exchange
Read, save, and add content on BW's
new Web 2.0 topic network
The Return on Innovation
What's the best way to get a
company focused on innovation? In
Tribes: We Need You to Lead Us,
Seth Godin offers a set of
principles for leading a
company out of mediocrity,
such as the need for leaders to
publicly question the status
quo so employees will follow
suit. He backs up the principles
with real-world anecdotes.
To read a review of the book, go to
http://bx.businessweek.com/
leadership/reference
DECEMBER22,2008 I BUSINESSWEEK
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