Recently I gave a talk about how Henry Ford used disruptive innovation to democratized and made accessible to millions of people what used to be an elite product for an elite few.
Before Henry Ford’s Model T, cars were toys for the rich.
They were only accessible to the rich, kings and queens. Henry Ford revolutionized the ownership of cars by millions of people who could not access or afford them before.
My talk was but one side of the equation. Here is another equation, more interesting angle.
By 1916, the Ford Motor Company had accumulated a cash surplus of $60 million (the modern day equivalent of $1.35 billion).
The price of the Model T, Ford’s signature product, had been cut over the years, yet the wages of the employees had increased dramatically, and these generous investments had been publicized.
Two brothers, John Francis Dodge and Horace Elgin Dodge, owned 10% of Ford’s company.
They had been the manufacturers of the main chassis for the Model T for a dozen years.
Henry Ford to clash the prize of Model T so that it was affordable and accessible to thousands of people who couldn’t afford them.
But more than that, he took one of the most controversial decisions at the time.
In 1914, Henry Ford made a big announcement that shocked the country. It caused the financial editor at The New York Times to stagger into the newsroom and ask his staff in a stunned whisper, “He’s crazy, isn’t he? Don’t you think he’s crazy?”
That morning, Ford would begin paying his employees $5.00 a day, over twice the average wage for automakers in 1914.
In addition, he was reducing the work day from 9 hours to 8 hours, a significant drop from the 60-hour work week that was the standard in American manufacturing.
Henry Ford understood that paying his employees would do two things:
- It will encourage worker to remain in their jobs and continue to do monotonous work that the assembly line required. You see, when the industrial revolution started, people left their jobs within two months because they couldn’t mean doing the same thing over and over again. It was boring, dispiriting and inhuman to work in a factory. A $5 wage per day was a good incentive to keep them working.
- Lowering prices of the car made is affordable and accessible to normal customers.
- A $5 wage per day meant that they can afford to buy the very same cars they are producing. This is good for Ford because it increases his sales revenue.
The Dodge brothers saw this and they were not happy.
They decided to challenge Ford’s idea of investing these surplus funds into the infrastructure of the company and giving raises to the employees.
They argued, it is a business, not a charity.
“The Michigan Supreme Court held that Henry Ford could not lower consumer prices and raise employee salaries.”
The court ruled that the primary focus of a for-profit business is to profit the shareholders first. However, this has been extrapolated as a case that is the rule for profit maximisation and wealth creation. Rather than a single case that was ruled on over 100 years..
This true story is where we get the idea that business profits are for the shareholders first, not the partners, not the customers, not the employees, not the community. But solely for the shareholders.
“The myth that profit maximization is the sole purpose of business has done enormous damage to the reputation of capitalism and the legitimacy of business in society,” wrote John Mackey, founder and president of Whole Foods Market.
“We need to recapture the narrative and restore it to its true essence: that the purpose of business is to improve our lives and to create value for stakeholders.”
The end of the story is interesting.
Ford threatened to start a rival competitor to be able to obtain complete ownership. But ended up, the Dodge brothers used their $1.9 million [$42.5 million today] earnings from the settlement to continue to fund their own booming business, Dodge Brothers Company.
This case is only one. Contrary to myth, it is not the rule.
Boards, committees, executives, and managers have to make decisions that favor the stakeholders, but that does not mean their decisions have to slight employees and communities in return.
There can be a double-bottom line more often than not.
There can be many roles of great business. What is yours?
- Create value for stakeholders.
- Create meaningful employment for thousands.
- Provide healthy and high-quality food for customers.
- Serve communities.
- Make lots of money for yourself.
- Solve local problems.
- Change the world.
Be very selective when you choose partners.
Know your roles.
Recruit the right partners.
And go change your part of the world.
Henry Ford made “taking a Sunday afternoon drive” or “taking a road trip” possible for common people.
Enjoy your ride.