On Henry Ford's 150th Birthday, His Greatest Insight Has Been Tragically Forgotten

[Ajit Basrur]

Henry Ford, who was born 150 years ago today, is remembered as the guy who unleashed the full potential of the assembly line, beginning in 1913 when the Ford Motor Company cranked out Model T's much faster and cheaper than anyone could imagine.

But his business philosophy, known as Fordism, went beyond the implementation of mass production.

http://www.slate.com/blogs/business...50th_birthday_his_fight_for_higher_wages.html

 

[Marc]

Re: On Henry Ford's 150th Birthday, His Greatest Insight Has Been Tragically Forgotte

Yup - I know I've cited Ford's philosophy in some threads here with respect to this aspect of Ford (the following is copied from the article):

Ford set a powerful precedent in 1914 when he doubled wages for workers on his assembly line in Dearborne, Mich. The move was in part a reaction to high turnover among his workers, who found the work too hard and unrewarding. At the same time, he argued that it was good for his business.

High wages support a good market:

If we can distribute high wages, then that money is going to be spent and it will serve to make storekeepers and distributors and manufacturers and workers in other lines more prosperous and their prosperity will be reflected in our sales. Country-wide high wages spell country-wide prosperity, provided, however, the higher wages are paid for higher production.

High wages lead to good products:

The kind of workman who gives the business the best that is in him is the best kind of workman a business can have. ... If a man feels that his day's work is not only supplying his basic need, but is also giving him a margin of comfort and enabling him to give his boys and girls their opportunity and his wife some pleasure in life, then his job looks good to him and he is free to give it of his best. This is a good thing for him and a good thing for the business.

Whatever the reason, Ford's higher wages were successful. Applications to work at the Dearborn, Mich. factory soared and turnover plummeted.

Thanks for the link, Ajit. Good article.

 

[TPMB4]

Re: On Henry Ford's 150th Birthday, His Greatest Insight Has Been Tragically Forgotte

Ford was undoubtedly an innovator in many aspects of his business but it has got me thinking about his development of the production line and what innovations led to it.

For example I remember hearing that a lot earlier a British businessman started the standardisation of common parts, IIRC it was the screw or bolts. IIRC he defined a standard which was taken up by others and allowed for the parts he produced to be made as near identical as possible. His product was rifles I believe and prior to that most rifles were effectively one offs and slightly different each one. By his process of standardisation he was able to make rifles with closer tolerances that made them more accurate in use.#

Sorry, this is off topic and perhaps I should start a new thread for it.

 

[Big Jim]

Re: On Henry Ford's 150th Birthday, His Greatest Insight Has Been Tragically Forgotte

Competition is part of what lead to the demise of at least some aspects of Fordism. Competition forces efficiencies.

In a mature industry, in the fight to stay viable, only those that learn to continually become more and more efficient get to stick around.

Later in Ford's life, as competition became fierce in the auto industry, he was faced with bitter labor disputes. This was hard for him, believing that his employees were well taken care of and should have had unfailing loyalty to him. He was not longer the only game in town for competitively priced automobiles.

 

[MIREGMGR]

Re: On Henry Ford's 150th Birthday, His Greatest Insight Has Been Tragically Forgotte

Paying production workers at a greater-than-economically-competitive rate so that you'll be an attractive employer is only viable if two things remain true: your product somehow is able to sustain a greater-than-competitive-marketplace gross margin, and the rest of the economy doesn't respond to your workers' incomes.

The former factor might remain true even if you have competitors if you and they collude to maintain elevated prices, and your and their products are of a type that is so useful compared to the alternatives that people will pay your elevated price. If however the anti-trust folks come calling, or the market becomes competitive because someone recognizes that they can get a greater share of the volume by undercutting your price, that game is done.

The latter factor requires that the places where your workers spend their increased income not recognize that there's more money on the table, so they raise their prices; and your competitors see your attractive-workplace pay level as a competitive issue, so they raise their pay. Once those effects occur, the reason you raised pay--to make your workplace more attractive--has been diffused, and you're left with only the higher costs.

This aspect of Fordism ultimately would have been a failure if the UAW hadn't come along and colluded with the auto manufacturers to politically fend off anti-trust attention and maintain the elevated pricing levels that allowed elevated pay levels...now enforced by UAW contracts...to remain.

This of course eventually failed in slow motion when non-UAW competitors became significant, eventually resulting in the GM and Chrysler quasi-bankruptcies.

Ultimately, the only economically viable way to compress compensation from boardroom to line worker, Ben-and-Jerry-style, is via society-wide tax policy plus trade barriers.

 

[Marc]

Re: On Henry Ford's 150th Birthday, His Greatest Insight Has Been Tragically Forgotte

You are right. I do wonder what the world will look like, especially the US, 20 to 50 years from now. I won't be alive to see it but it's getting interesting as incomes continue to fall and true inflation (especially food and energy) continues to rise.

 

[MIREGMGR]

Re: On Henry Ford's 150th Birthday, His Greatest Insight Has Been Tragically Forgotte

USA has to get back to making more of what we consume. A nation has to either create exportable value through manufacturing and/or external service provision, or extract exportable natural resources, in order to be able to pay for the stuff it wants to import.

Fortunately for us, our major economic competitor/partner, China, recognizes this at a strategic level and is allowing us to massively devalue the huge amount of money they're trading for our debt instruments, resulting in their currency hugely appreciating relative to ours, which will have the effect soon of making us economically viable as a mass manufacturing nation again.

So I don't think that that aspect of our national economic viability is a problem. My worries rather are with progressive elimination of low-education jobs through automation/robotics, and progressively increasing income inequality. I don't like seeing us moving toward becoming a Central-America-style society with the wealthy and the employed living in walled guarded compounds--and I don't mean "walled" like Sanford, Florida with a wimpy little fence, I mean like an inside-out prison, with the mass of "prisoners" on the outside and the pleasant lifestyles on the inside, and the primary job of the local police being to watch the walls. But we're heading in that direction.

 

[kgott]

Re: On Henry Ford's 150th Birthday, His Greatest Insight Has Been Tragically Forgotte

I believe Henry Ford also once said something along the lines of "if workers knew how money works there would be a riot before dawn."

 

[SmallBizDave]

Re: On Henry Ford's 150th Birthday, His Greatest Insight Has Been Tragically Forgotte

Paying production workers at a greater-than-economically-competitive rate so that you'll be an attractive employer is only viable if two things remain true: your product somehow is able to sustain a greater-than-competitive-marketplace gross margin, and the rest of the economy doesn't respond to your workers' incomes.

I think there is a chicken/egg issue here. Does one first get higher margins than competitors and that allows one to pay higher wages, or does paying higher wages allow for greater margins?

I worked for a company where the assumption was that good employees were worth keeping so pay was good - more than competitive salaries plus fully paid medical, life, etc. plus profit sharing. We had almost no turnover and the company was profitable for 20+ years. That company fell apart after being sold to a large prime but the owner moved on and built another company with a similar philosophy.

I've seen estimates that replacing an employee costs anywhere from $40K to $60K. If that's correct, paying a good employee a few thousand a year extra is a good business decision and will increase margins over the alternative. In most companies payroll is the biggest single expense, but giving everyone, say, a 5% raise is still easily offset by savings in recruiting and training costs. But there are probably some MBAs out there who will explain why I'm out in left field.

 

[MIREGMGR]

Re: On Henry Ford's 150th Birthday, His Greatest Insight Has Been Tragically Forgotte

I don't have an MBA, but one consideration is that your scenario assumes that all of the competitors in a marketplace either have poor management, normal compensation, high turnover and thus high costs, or good management, higher compensation, low turnover and thus lower costs, and therefore that the latter competitors have the thickest margins and can either have fat profits or set the going price.

If however there is one competitor that has normal compensation and still achieves low turnover, that company will have still lower costs and thus the thickest margins of all, and if it chooses can drive the others to an unprofitable price point.

Complacent, cooperative, market-sharing companies may choose to be satisfied with one of the first two scenarios, but aggressively competitive, profit-maximizing companies will try to achieve the third.