Monday, December 21, 2015

Review of I Invented the Modern Age: The Rise of Henry Ford by Richard Snow

Who knew that Henry Ford (who said "I Invented the Modern Age!") had so much in common with Steve Jobs?

A blacksmith named David Bell who worked for Henry Ford starting with the Quadricycle said "I never saw Mr. Ford make anything". Ford's employees and family (he didn't have any "colleagues") would say that he had a gift for getting other people to work for him - like Steve and Woz.

Ford had early exposure to engines, such as the Westinghouse portable steam engine, which he used as a tool on the family farm. When he was 28, he started at the Edison Illuminating Company in Detroit. Since he was responsible for fixing the steam engines used for electrical generation when they broke down, he had free time to tinker with his own gasoline engines and auto-mobiles.

Ford had the instinct that every man would have a gasoline engine paired with a horseless carriage, just as Jobs had the instinct that every man would have a computer.

Ford's accomplishment was not inventing the auto-mobile, which was simultaneously invented, but creating an organization that could mass produce it at an affordable price. As with Jobs, it is not clear how much of the company's success was from Ford and how much was from brilliant employees. Ford could never stand to share the spotlight, with the result that he couldn't (or didn't want to) keep his most capable lieutenants with the company. This includes James J Couzens, who became Mayor of Detroit, and William Knudsen, who became president of General Motors.

Mass production needs interchangeable parts, and this is something that manufacturers had known long before Ford. It was the increasing accuracy of machine tools a century ago that made perfectly interchangeable parts possible. Ford employee Walter Flanders was the one who introduced highly specialized machine tools (for producing one part or performing one operation), and oriented them in the factory so that vehicles being assembled moved from one tool station to another - the way they are made today.

Ford used these increases in efficiency to continually lower the price of the car, passing along most of the gains to the customer and maintaining a small profit margin like Costco or Bezos today. Why did he do this? Did he have a sense of an experience curve, as coined by BCG in the 1960s? That is, the production of goods shows an effect where each time cumulative volume doubles, costs fall by some constant percentage. Note the Wikipedia page for experience curve shows a plot of the experience curve for the Model T, from the original BCG paper!

Ford's shareholders eventually sued him for reinvesting too much in the business (and running the business for the benefit of "stakeholders" like customers and employees and for the pleasure of increasing production) and won a court ordered dividend, with the result that Ford borrowed money and bought them all out.

This was a wonderful read because it is so well written, but it reinforces the lessons from other business biographies. Ford was talented and apparently had a compulsion to democratize the auto-mobile. But he was flawed and may not have had a happy life, with his only child Edsel dying before him. He also left significant amounts of money on the table by driving talented employees to his competitors, waiting far too long to upgrade the Model T (which was great for GM), and never integrating horizontally (say into consumer goods) using his true comparative advantage at mass production.



AllanF said...

Also, both named their over-engineered, ahead-of-its-time, flop-in-the-marketplace product after their kid. Coincidence, or tell?

Merry Christmas CB!

CP said...

Great point Allan - Edsel and Lisa!

Merry Christmas!