Bradley turns PCs to gold for Hewlett-Packard

On a rainy day in Cupertino, Calif., Todd Bradley picks through products that his division at Hewlett-Packard has recently introduced.

There's a sleek laptop called the Voodoo Envy for hard-core gamers, a tiny pink-and-red computer created with fashion designer Vivienne Tam, and the industry's first touchscreen notebook. Impressive offerings 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-computer 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 wrong, from competitive 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 Mark V. Hurd reported fourth-quarter 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, including 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 workstation 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 like Dell would dominate the industry with its low-cost, no-frills, direct-sales model. With remarkable speed, 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 colleagues 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 boss Tony Prophet then uses those projections to negotiate long-term contracts at favorable 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 PC business. If it kept trying to sell boring boxes at the lowest cost, it would be locked in a brutal struggle with Dell.

So with marketing lieutenant Satjiv S. Chahil, Bradley asked a local ad agency to create a video to convince the executive board that HP needed a new approach. The video argued that PCs had become a commodity because makers had ceded all innovation to chipmaker Intel and Microsoft. The clip then outlined how HP could get out of the commodity game. "'Wow!' is what sells," says Bradley.

Hurd was convinced. The result: a marketing campaign stressing how HP computers are different from others. Hip-hop mogul Jay-Z and tennis star Serena Williams talked about using HP PCs to watch movies without first waiting for Windows to launch as well as to look at photos 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 easily navigate the 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. The 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 the right balance between innovation and price. To hit the mark, he uses a metric that HP insiders call "R&D productivity." It measures R&D spending as a percentage of gross margin for each product line. A standard desktop computer with low margins may get one or two innovative features, while a high-end laptop with fat margins would get enough flash to make it stand out. To determine the appropriate R&D level, HP does three-year projections of expected gross margins.

Last year, for example, HP introduced 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 the touch technology would make it easier for families with kids, among others, to use. The TouchSmart PC, which can go for more than $2,000, has helped boost profits and sales, says Phil McKinney, the division's chief technology officer.

Today, Bradley frets about maintaining HP's momentum. His concerns are evident in mandatory conference calls he has with his top 16 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 holiday gift," says McKinney. "He ended the call a few minutes early."