The Innovation Metric Bill Hewlett and Dave Packard Used

In this episode of Killer Innovations, Phil McKinney dives into the overlooked innovation metric used by HP co-founders Bill Hewlett and Dave Packard—gross margin as a measure of innovation success, rather than R&D spending as a percentage of revenue. McKinney reveals that while Wall Street and most public tech companies rely on the R&D-to-revenue ratio, HP instead focused on margin, which directly reflects product differentiation and customer willingness to pay. By tracking the gap between cost and price, HP created a self-sustaining innovation cycle: successful products with high margins funded future R&D. McKinney uncovers this insight through a pivotal conversation with Chuck House, a former HP engineering director, who shared a decades-old paper proving the strong correlation between R&D investment and margin growth. He also explores the 'six to one ratio'—a key metric where successful products generated six times their development cost in profit—illustrating how HP prioritized outcomes over inputs. The episode exposes a critical flaw in modern innovation management: combining research and development into a single metric obscures strategic decisions and enables manipulation. McKinney concludes that true innovation success is measured not by spending, but by margin, differentiation, and long-term business impact. The episode challenges leaders to shift from input-based metrics to outcome-driven ones.