Submitted by John Beasley…
Henry Ford was not just an engineer with a vision for building an automobile. He had a vision for building a “business model” that would allow his Ford Motor Company to sell an unknown and unproven product, in a nonexistent marketplace, to a customer who could not afford to buy the product. To accomplish this Herculean task Henry Ford had to invent a new business model. Today the fruits of that business model are referred to as “economic populism” accomplished through what has become known as “supply chain management design.”
The business model Henry Ford created to be able to sell his automobiles would become the defining activity of his lifetime. He would, arguably, become the father of economic populism and the resulting American middle class. His business model would ignite a war with the U.S. oligarchs and Wall Street bankers. This war with the bankers would become Henry Ford’s crucible. He wrote a book about this battle.
Competing Economic Models
Between 1899 and 1901 Henry Ford started his first automobile company. It was called the Detroit Automobile Company and then renamed the Cadillac Automobile Company. Henry Ford wanted to use his economic model to mass-produce a small simple inexpensive automobile for the people. Henry Ford wanted to increase the productivity of his employees and pay them a higher wage for their “increased productivity.”
Henry Ford and the banking cartel that provided the capital for the business did not agree on the direction the Cadillac automobile company should take. In Henry Fords’ mind the bankers took control of his company and pushed him out. In 1903 Ford started his second automobile company, the Ford Motor Company. The economic strategies employed by these two automobile companies, Cadillac and Ford, formed the perfect dichotomy between the oligarchs top down economic business model and Henry Ford’s vision of economic populism.
At Cadillac they built the premier American automobile for a small wealthy elite. Cadillac sold the automobiles for about three thousand dollars and was able to sell four thousand to five thousand cars a year. They paid their laborers the standard wage of two dollars a day. It would take Cadillac 50 years (1899- 1949) to build and sell one million automobiles.
Henry Ford built cars for the working class, sold them for eight hundred twenty five dollars each. To lower costs Henry Ford created what was referred to as “scientific manufacturing” and the assembly line. Scientific manufacturing was simply a way to minimize costs and maximize productivity. Henry Ford believed the least expensive way to build anything is to build it right the first time.
Henry Ford increased the productivity of his employees by three to five times the industry standard. Henry Ford paid his employees fairly for their increased productivity; he paid them three to five times the industry standard wages. To Henry Ford, the critical element was rewarding workers for “increased productivity” so they could afford to consume the items that were produced. Henry Ford produced on average seven hundred fifty thousand Model T Ford’s a year. In just twenty years (1908 – 1927) Ford Motor Company produced fifteen million Model T automobiles.
Just consider the differences in cash flows between the oligarch bankers Cadillac business model and Henry Ford’s business model. Cadillac made about five thousand automobiles a year and sold them for about three thousand dollars to a small group who could afford them. Over the ten-year life expectancy of the Cadillac automobile replacement parts would cost another three thousand to five thousand dollars. The Cadillac automobile company was grossing fifteen million dollars a year, replacement parts over ten years was probably another twenty five million, for a total gross revenues of forty million dollars for one years production of automobiles. On average, Ford was selling seven hundred fifty thousand cars a year for eight hundred twenty five dollars each. Replacement parts for those automobiles cost two to three times as much as the car over the ten-year life expectancy of the automobile. The total gross revenues for Ford’s business model was about six hundred and nineteen million in annual sales and another one billion eight hundred thousand in replacement parts over the ten-year life expectancy of one years production of automobiles. The process, the supply chain, is worth more than the product, the automobile.
Henry Ford was reinvesting the profits of Ford Motor Company to grow the company. Henry Ford complained that investors wanted him to pay them six percent dividends a year for the use of their capital. If he wanted to grow the company they wanted him to borrow money to expand the company. The bankers wanted to pull all the “cash” out of the business and receive appreciation in the value of their stocks as well. They also did not approve of him paying his employees high wages. In 1919 Henry Ford bought out all the stockholders in Ford Motor Company and kept the company privately owned until 1957.
The Big Payoff
To understand Henry Ford I suggest you read two of his books, “Today and Tomorrow” and “My Life and Work.” These two books are difficult to decipher because the reader has to connect the dots for him or herself. I suggest you do just
what Toyota Motor Company did with their employees in the 1950’s and 1960’s. Toyota had group “Bible Study” sessions every week and discussed these books until they understood Henry Ford’s economic vision.
The business model Henry Ford designed included concepts like, economies of scale, supply chain management, logistics, scientific management practices, and economic populism. All these pieces of his vision resulted in not just an automobile but also in building a new business model that would redefine the United States economy for a generation. Ford’s business model would help establish what is called “the middle class” in the United States. It was a redistribution of wealth financed by increased productivity.
In Henry Fords’ business model a profit is taken on the production process not on the end product. This, of course, is the foundational logic used in “supply chain management” business modeling. The product becomes a “business driver” and not a “profit center.” Today this business model is used successfully by discount airline companies that use “air travel” as a “business driver” to buy and pay for new jetliners every few months. The jet liner industry is worth hundreds of billions of dollars to the economy. As well, the ship cruise line industry uses all-inclusive “vacationing packages” as a business driver to buy and pay for the manufacturing of huge cruise ships. The ship building industry is worth infinitely more than the ship cruise vacation industry. The ship cruise vacation industry is a means to pay for ships, that otherwise would not be built.
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of The Duran.