How People Drive Growth: The Story of Ford Motor Co Past, Present, and Future
A business is an abstract idea without people. Abstract ideas have no inherent value. People bring ideas to life. People create value. That’s true across the board. Now the role of human resources in a given firm — or how people create value — depends on the industry and the level of innovation at the company.
In other words, the value of staff and the policies that should be put in place to motivate them depend on the organization type and strategic goals. I’ll explain this using the Ford Motor Company — past, present, and future — as an example to illustrate the strategic management concepts of Assets and Capabilities Value (ACV), Employed Resource Value (ERV), and Governance Value (GV).
In 1914, when Henry Ford instituted the now famous $5 daily wage, he did so for one strategic purpose, to reduce turnover. Ford revolutionized the factory floor by creating the assembly line, but in doing so he turned what had previously been a highly skilled job that required craftsmanship into a repetitive job that left workers feeling like cogs in a great machine. The pride and dignity that had come with mastering a craft was gone.
Ford ushered in a new age where workers were valued primarily for their productivity, as human extensions of the machine. As a result, Ford faced incredibly high turnover rates. In 1913 he hired more than 52,000 men but by the end of the year only 14,000 remained. High turnover led to halts in the production line and high employee training costs.
An assembly line only works if there are sufficient resources to do the assembling.
At this early stage in Ford’s long history the car manufacturer was an Assets and Capabilities Value or ACV leaning corporation. This means that the majority of their value was wrapped up in assets and capabilities. Their core assets included manufacturing plants, machinery, and car designs, while their capabilities were how they transformed raw materials into finished goods via their innovative assembly line.
In an ACV leaning firm employees can be easily swapped with the next best talent, but the goal of management is to get them to operate as efficiently as possible. The $5 wage was Ford’s solution to the motivation problem. And it was a gamble that paid off. Worker productivity surged, and the company doubled its profits in under two years. Despite a hefty cost, Ford ended up calling it “the best cost-cutting move he ever made”.
While the vast majority of Ford’s workforce was replaceable, Henry Ford himself generated significant Employed Resource Value or ERV. Ford possessed that particular leadership trifecta of strategic vision, entrepreneurial spirit, and an innovative mindset that elevates one to “titan of industry” status. He was a disruptor who transformed the auto industry.
To illustrate this point, he once said, “Be ready to revise any system, scrap any method, abandon any theory, if the success of the job requires it.” And Ford was true to his word. His experiments in 1913–4 cut the time needed to build a Model T from 12½ hours to a mere 93 minutes.
Due to the nature of manufacturing (an ACV leaning industry), one man was able to have an outsized impact. This is somewhat counterintuitive because the average factory worker had very little impact and could easily be swapped out, but from his position at the top of the hierarchical organization Ford was able to make changes — tweaks to the machine — that had a multiplier effect.
With Henry Ford at the helm the company excelled and heralded in a new age of mass production. If someone else had been in the driver’s seat the world might look different today. The synergies between Ford as an individual and the assets and capabilities at his disposal demonstrate what’s known as co-specialization. In those scenarios 2+2=5.
In my research on the $5 daily rate I was surprised to learn that there were some serious strings attached. It turns out about half of the $5 was guaranteed pay, while the other half was a bonus contingent on a worker meeting certain “character requirements”. This is where Governance Value or GV comes into play.
Governance is about putting structures in place to enable the generation of ACV. These company policies set the rules of the game. If you play by the rules you win. In Ford’s case the rules were more draconian than we might permit today.
The character requirements were enforced by a Sociological Department that visited employees’ homes to ensure they were living a pious life free of social ills like drinking or gambling. If an inspector discovered a “violation”, an employee’s bonus would be withheld until the behavior was corrected. Not surprisingly, Ford’s workers came to resent this intrusion into their personal lives and by 1921 the Sociological Department was dissolved.
I believe that Ford’s somewhat authoritarian foray into mass surveillance as a governance strategy reveals a lot about how he viewed his workers. Ford’s assembly line was a technological marvel, a feat of engineering. It could pump out thousands of cars every week. But Ford still had a problem. While he had standardized production, he hadn’t standardized his workforce.
The weak spot in his system were the people. Because people make mistakes, machines don’t. So he set out to make his perfect worker. A worker that met his moral standards and did things the “American way.”
Today we see companies like Amazon using algorithmic management to push warehouse workers to the absolute limit of their productivity potential, counting the seconds it takes to complete a task or get from Point A to Point B. In both cases workers are made to fit a particular mold, to be the perfectly shaped cog that the machine requires. The higher than average pay for non-skilled labor is what keeps workers in these rigid — ACV leaning — environments.
Over the last century the auto industry has changed dramatically. Cars are now computers on wheels. This puts pressure on automakers like Ford to attract top talent from technology fields like Computer Science or Artificial Intelligence. In essence, assets and capabilities are not enough to succeed anymore. Having the biggest or most efficient factory will only get you so far.
As Klaus Schwab, Founder and Executive Chairman of the World Economic Forum has said “I am convinced of one thing — that in the future, talent, more than capital, will represent the critical factor of production.” Ford now has to compete with companies like Google, Facebook, and Apple for top tech talent.
Let’s take for example the race to develop a fully autonomous vehicle. There are only a handful of advanced research labs around the country producing experts in this field. This creates intense competition for these rare human resources. Each employee with this prized skillset stands to create significant Employed Resource Value for Ford. Their salary of +$300k could unlock billions of dollars in value if Ford becomes the leader in the future of mobility.
So how can Ford attract the talent it needs to make it through the next century? Offering a competitive compensation package is a given. What sets Ford apart is an opportunity to solve interesting problems with cutting edge technology. This is the “Mission” that motivates employees to show up and give it their all each day.
As an article from Payscale puts it, “The more interesting the problems, the more your position will incentivize top tech talent.” Ford is able to offer prospective talent an opportunity to wield their considerable assets and capabilities, which is precisely how ERV is created.
To keep up with the times Ford is becoming more like the tech companies with which it competes for talent. An article on the Ford corporate website celebrates the more than 3,000 recently hired team members with advanced computing degrees and other technical skills, while noting they are still seeking to fill hundreds of openings.
They position work with Ford as a chance to work on “coding projects that come to life” including “fun and futuristic” projects like all-electric SUVs. And to keep up with the Jones’ they’re modernizing their Dearborn Michigan campus by offering a “dogs-at-work pilot and even free coffee.” I wonder what Henry Ford would think of that? Employee retention strategies have certainly changed over the past 100 years.
In addition to bringing talent in-house, Ford is using strategic partnerships to generate ERV. Another way of thinking about ERV is the value to a firm that results from superior matching of particular human capital to ACV. This is the idea of “fit” or finding the right people for the job.
Ford’s partnership with Bryan Salesky’s startup Argo is a perfect example of superior matching. In 2017 Ford invested $1 billion over five years into Argo to develop its self-driving car capabilities. To those unfamiliar with the space this was a head scratcher. Argo had no cars, little software, and few employees. It was weak in ACV, but strong in ERV.
Salesky, Argo’s founder had come out of Carnegie Mellon’s Robotics Institute and had worked at Google on their autonomous vehicle project. He grew frustrated at Google because the company’s ACV was designed for software innovation, not car production.
Salesky left Google thinking “The work of building vehicles was best left to the automakers.”
John Casesa, Ford’s head of strategy, who spearheaded the autonomous vehicle project, knew Ford needed more than fresh talent. It needed a different governance structure that would insulate the work from Ford’s bureaucracy, allowing the team to spend lavishly with little expectation or guidance on how much money it would make back, or when.
In essence, Ford would need to carve out space in its ACV leaning business for an ERV leaning software startup to thrive. On the other side of the bargaining table, Salesky knew that when it came to building vehicles at scale, no tech venture could compete with Detroit.
As Salesky saw it, “Argo would be the yin to the auto industry’s yang: sharp on software but letting the manufacturer handle the manufacturing of vehicles.” This win-win is an example of the synergy between ACV and ERV. Salesky gets to access Ford’s manufacturing prowess and Ford gets access to Argo’s technology talent. Together, 2+2 is certainly greater than 5.
