What's Wrong With This Printer? Believe it or not, it's too solid. So Hewlett-Packard spent $1 billion to replace it with new machines that won't hold a person's weight. But they sell for less--and can squash rivals.
By Noshua Watson

(FORTUNE Magazine) – The bet-the-company project that came to be known within Hewlett-Packard as the Big Bang started out with a whimper. And with grumbles and complaints that it shouldn't and couldn't be done. That was how the printer engineers who gathered for a kickoff meeting in Vancouver, Wash., three years ago reacted to the mandate laid down by their boss, Vyomesh Joshi. The mandate was to build a $49 printer--one $30 cheaper than HP's least expensive model at the time. Making a cheap printer was not itself an earth-shaking proposition, but how Joshi intended to go about it certainly was. He didn't want just one low-end model; he wanted the engineers to conjure an entire new line of more than 50 consumer products--inkjet printers, digital cameras, "all in one" printer/fax/copier/scanners, and more. He wanted the engineers to ignore the models then being sold and start from scratch. He wanted HP to be able to introduce the entire product line in one fell swoop. And he wanted to take it from concept to store shelves in less than three years--18 months faster than HP had ever accomplished a product launch.

The designers in the conference room that day, however, weren't in a history-making frame of mind. They were justifiably proud of the high-quality printers they'd been building, and if high quality meant higher prices, so what? Quality was what HP was known for.

To explode their complacency and focus their attention on the real need to build a frugal machine, manager Tom Alexander finally grabbed an HP printer and set it on the conference room floor. Then he stood on it, all 200 pounds of him. The point behind his grandstanding? Customers aren't going to use printers as step stools, so don't add costs by building them strong enough to withstand the weight of a grown man. Instead, design them to fit in the kitchen and print nice pictures.

Alexander's Stand helped open the way to a project that was audacity itself. Manufacturers often dream about reengineering an entire key product line, but few actually dare try. The risk is enormous--not only because of the direct capital expense, but also because the market moves on. While the manufacturer is tied up getting the new line out the door, customers stray and competitors pounce.

With Joshi's Big Bang, the $47-billion-a-year company (before its merger with Compaq) was betting more than $1 billion: $125 million for R&D, $900 million for manufacturing, and $200 million for marketing. More important, HP was gambling its crown jewel. Printers, ink, and related products accounted for 43% of HP's sales and 65% of HP's profits. If the new product line stalled or flopped when it debuted, it would sap HP's strength and very likely hammer the stock.

The gamble didn't scare Joshi, 48. The greater risk, he felt, was to maintain the status quo. HP had gained preeminence in the printer market by relying on the "waterfall" or "cascade" method of product development. Engineers would design a printer, put it on the market at a high price, and then gradually tweak the design to reduce the manufacturing cost. Meanwhile they'd also work on developing the next-generation machine. When the new generation eventually hit the shelves, HP would lower the prices on the old machines. The waterfall method worked: It put the emphasis where HP was strongest--on its superior engineering--and allowed it to dominate the inkjet-printer market during the 1990s. But in late 1997, HP got a shock when competitor Lexmark introduced the first inkjet printer to sell for less than $100. By mid-1999 Lexmark had doubled its market share to 14%, according to market researcher ARS. The price pressure was on.

Joshi predicted that HP's low-end printer business would slowly but surely erode unless HP abandoned the waterfall practice and went head-to-head with Lexmark on price. That meant the cost of making printers had to come down--way down.

When Joshi came to that conclusion in 1999, he was not yet in charge of the printing group, and CEO Carly Fiorina was new to the company, having come from Lucent just four months before. The head of the printing group, Carolyn Ticknor, then Joshi's boss, saw the urgency in his proposal and pushed for the massive capital investment. Other division heads objected--it was a risk they felt HP could not afford--but Joshi and Ticknor prevailed. Convinced that the imaging business would be a high-growth area and merited a billion-dollar investment, Fiorina overrode the objections, cut the check, and gave Joshi free rein.

Joshi's cost-cutting concept was this: He wanted his engineers to build 14 inkjet printers and seven all-in-ones using two new, cost-efficient platforms while he squeezed productivity from every link in the supply chain. The printer platforms consist of the main chassis and printer carriage on which the plastic casing and output trays rest. The Malibu mechanism was developed for high-performance, top-of-the-line models like the 7350 and the 5550 that start at $150. But the key to the Big Bang's low-end strategy was the Crossbow platform, a design that taxed the Vancouver engineers' ingenuity.

In developing the Crossbow line, HP engineers had to count pennies for the first time. To make money on low-end printers, HP would have to make more than a million Crossbows a month. At that volume, each additional cent in unit manufacturing costs adds up quickly. For three months the engineers brought design after design to management only to be told that it wasn't cheap enough. And the heat was on: The old waterfall cycle had taken about four years. "We wanted to do it in less than three years," says Joshi, "because Lexmark was already there."

Finding the solution, the designers finally realized, depended on a kind of printer-engineer Zen. To clear their minds, they began to conceive of the printer not as a complex mechanism but rather as an empty box. It was perfectly light and inexpensive but would get heavier and costlier with every new feature. The object of the exercise was to think simply, adding only what the customer would absolutely need. Suddenly bells and whistles like the ability to print on glossy paper or card stock seemed easy to live without.

But frugality had its limits. One of the fiercest debates broke out over the power switch. Technically there is no need for an on-off switch, since a PC can turn on a printer automatically, and installing a manual switch adds about $1 per machine in cost. The engineers thought they had hit on easy savings until the marketing department got wind of it. The marketers argued that the average customer wouldn't understand how the printer could turn on and off without a power button and would become frustrated looking for it. The power switch stayed.

While the Vancouver engineers were perfecting the Crossbow mechanism and case designs, engineers in Corvallis, Ore., were racing to overhaul the most technologically complex part of the printer: the cartridge. "If a printer is a car, the cartridge is the engine and the gas tank," says Keith Bartlett, a cartridge group vice president. HP's intellectual-property stronghold in cartridges is formidable: Each cartridge is supported by nearly 100 patent applications, and in their own extension of Moore's law, HP's engineers have succeeded in doubling the number of ink drops per second every 18 months.

The little jewel boxes are also big money. For every printer on a store shelf, HP makes ten to 20 cartridges. Some go in the printers, and the rest go to retail stores as replacements, where they sell for between $20 and $35 each. A customer spends more on cartridges over time than on the printer itself. Not surprisingly, cartridges and other supplies account for half of the imaging group's revenues and a higher percentage of its profits.

Because of the high volumes, savings on the manufacturing cost of the cartridges would be even more significant than savings on the printer itself. The cartridge engineers shaved off "nickels and dimes," says Bartlett, by using thinner plastic on the cartridge casings and covering the top with a paper label rather than a plastic cap.

THE BIGGEST SAVINGS WERE TO BE FOUND BY ALTERING the cartridge's engine head, the most important part of the inkjet system. The head consists of a silicon plate perforated by ink nozzles and glued to a piece of flexible plastic embedded with metal circuits. The flexible plastic wraps around the bottom of the cartridge, which skims back and forth above the paper's surface. When it's printing at full speed and top quality, the nozzles fire eight to ten million drops of ink a second.

The more ink-shooting nozzles on the engine head, the better the printing speed and quality. But engine heads are cut from pricey silicon wafers. The HP engineers' challenge was to make the heads smaller, thus using less silicon, without sacrificing the number of nozzles. In the end they managed to shrink the engine head to half its original size and still squeeze 30% more nozzles onto it by making each nozzle narrower. (They also refined the ink.)

By early 2001 Joshi, now head of the imaging and printing group, was ready to move the new line into the plants. To guard its cartridge-making secrets, HP designs and manufactures the little boxes almost entirely in-house, at a design and fabrication facility in Corvallis and high-volume manufacturing plants in Ireland, Singapore, and Puerto Rico. Printers, meanwhile, are farmed out to contract manufacturers in Southeast Asia, China, and Mexico.

HP's contract factory owners were in for a big surprise. After test runs were complete, Joshi wanted to increase production from zero to one million units a month within three months, ten times faster than any previous ramp-up for an HP product. To support the huge volume, HP's manufacturers would have to build factories, and do it faster than ever. Under the old system, engineers would design the production line in the U.S. to get out the kinks before sending the plant blueprints overseas. That process typically took about 18 months. But under the pressure of the Big Bang, Joshi gave them only one year. To speed up building the plants, engineers passed along tooling specifications to the factories before the printer designs were final. There wasn't a minute to lose, and everyone felt it. Paul Speer, who supervises the Vancouver engineers, recalls debating alternatives in his cubicle with two program managers when the fire alarm went off. Sent out into a rainstorm, Speer and his staffers huddled behind a passenger van in the parking lot to continue their discussion.

Building printers from just two platforms--the Malibu and the Crossbow--made the production line more efficient. Before the Big Bang, HP had built printers using multiple platforms, and the production line had to shut down and retool when switching from one platform to the other. Now several different models could be built from the Crossbow alone. The line could run continuously, splitting into smaller lines to finish off different products. The Crossbow printer's compact dimensions doubled the number that HP could pack on a shipping pallet, saving shipping costs. Even a 20-year veteran like Speer was awed by the millions of machines spilling from the production lines by early 2002. "I walked into a factory in Singapore and looked all the way down the line to the curvature of the earth," he claims. "All I could see were Crossbow printers."

Back home, HP's marketing department was preparing to sell this sea of Crossbows. The timing couldn't have been worse. HP's merger with Compaq had just been announced. The tech sector was in a slump. Still, the marketers knew they had to go all-out to make sure Big Bang wasn't a bust. After mailing one million direct-mail "magalogs" and outfitting three tractor-trailers with HP products and demos to tour the U.S., the company invited major retailers, including Circuit City, Office Max, and Best Buy, to Cupertino, Calif., for product demos. The retailers were hesitant to commit to buying the Big Bang line. HP was making a lot of demands: It wanted better displays, with all its new printers lined up together in a single aisle. At the same time, HP had disappointed many retailers by failing to keep them stocked with its old products. Without a guarantee that the new machines would be in the stores on time, the retailers wouldn't advertise the Big Bang printers in their Sunday circulars.

HP marketers promised to supply more than 8,000 stores by July 28, 2002. To make that date, the printers would have to be shipped from Asia in May or June at the latest. Most of the factories kept to the schedule, but by June it was apparent that thousands of printers weren't going to make it onto ships because of manufacturing problems in Singapore. Rather than jeopardize its relationships with retailers, HP paid a huge sum to transport tens of thousands of printers from Southeast Asia by air. By July 28, HP had put more than one million printers on store shelves.

Joshi had been waiting for that moment for three years. Despite the economic slump in general--and the tech slump in particular--he was optimistic. "I was extremely confident," Joshi says. "I felt like a proud parent." In the next few months the market justified his pride. In a year when overall printer sales fell 10%, HP's printer sales increased by 3% between June and December. Shipments of color inkjet printers to stores grew by 18%. Joshi was particularly pleased by the results in the high-margin all-in-one market: After the Big Bang, HP took 20 percentage points of market share--most of it from Lexmark--to grab nearly 70% of the market. In June, Joshi had promised Wall Street that his $20 billion business would grow 10%, with 12% to 15% margins. In the fourth quarter his results made analysts purr--record revenues of $5.6 billion, representing 12% year-over-year sales growth. His margins: 16.5%.

Joshi's lieutenants now brag that he wants a Big Bang every year. "We're improving our cost structure all over HP," says Larry Lesley, senior vice president in the imaging and printing group. "This isn't an endgame; it's an ongoing philosophy." Leveraging its new competitive advantage, HP plans to launch new products in June and to continue to make the existing Big Bang line faster and better. As John Solomon, printer category manager, summarizes the success of the new line, "It's much cheaper to make, much better in terms of image quality and speed, and it's half the size." But success does have its price: "Of course, you can no longer stand on it."