What did Henry Ford use to sell more automobiles

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The following extract is from Richard Koch and Greg Lockwood's bookSimplify. Purchase it at present fromAmazon | Barnes & Noble | iTunes

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Probably no one in business today tin think the earthquake caused by Henry Ford, and even in business schools, his case is rarely taught. Only Ford's story has priceless lessons for any ambitious entrepreneur or executive today.

When he was 45, and a moderately successful industrialist, Ford took a brave stand that shook the earth. The decision not but created his fortune but made him a leading architect of the twentieth century and one of the most celebrated and influential people on the planet.

Related: Toll Simplifying Vs. Proposition Simplifying: Understanding Your Options

Ford recalled the turning-point in his autobiography:

"What I am trying to emphasize is that the ordinary way of doing business is not the all-time way. I am coming to the bespeak of my entire departure from the ordinary methods. From this point, dates the boggling success of the company. We had been fairly following the custom of the trade. Our motorcar was less complex than any other. Nosotros had no outside money in the business organisation. But bated from these two points, nosotros did not differ materially from the other automobile companies."

When Ford had his light-bulb moment, several hundred rival entrepreneurs were making cars. They were much the same in background and activity: all engineers; nearly all production designers; all auto enthusiasts, entering cars in motor races and taking a groovy interest in who won; and all making no more than a few cars a day. They sold them to the same type of customer, too -- the only market at that time for cars -- rich and leisured gentlemen, commonly motor "basics," skilled in driving and maintaining their beautiful beasts. Ford, though not the market place leader, was one of the biggest manufacturers, making around five vehicles a day.

But however conventional he appeared in 1908, there was e'er something odd near Henry Ford and his opinions. Though his whole industry was in the business organization of providing "pleasance cars" for the rich, Ford conceived a vision of something completely different.

To their horror, he told his salespeople: "I volition build a motor automobile for the not bad multitude. It volition be large plenty for the family merely small enough for the private to run and care for. Information technology volition be constructed of the all-time materials, by the best men to be hired, after the simplest designs that modern engineering tin devise. Merely it will exist so depression in price that no human making a good salary would be unable to ain one -- and enjoy with his family the blessing of hours of pleasance in God's corking open spaces."

The idea of democratizing the automobile inspired Ford. His corking insight was that the cardinal was toll. If he could brand a motorcar inexpensive enough, information technology would, he believed, sell in vast quantities. While it'south all very well to realize that cost might be the key to expanding sales, how did Ford manage to keep his prices sufficiently low to create a new mass market? His start thought was to redesign the production and make but one standardized, simple model:

"In 1909 I announced … without any previous warning, that in futurity we were going to build only one model, that the model was going to be the 'Model T,' and that the chassis would exist exactly the same for all cars ... I idea information technology was upwardly to me every bit the designer to make the motorcar so completely simple that no ane could fail to understand it. That works both ways and applies to everything. The less complex an article, the easier it is to make, the cheaper information technology may exist sold and therefore the greater number may exist sold."

So, by making a single product -- for more than a decade, with few variations and options permitted -- Ford could reduce his costs considerably. He also paid bully attention to the materials that went into his cars. For instance, he pioneered the use of vanadium steel, a French invention that was both very calorie-free and very strong -- ideal to create usefulness for the customer. The vanadium steel disposed of most of the weight in Ford's car -- decreasing fuel consumption -- withal actually cost less than the traditional culling.

Related: The Better Skills Test: How to Determine If You Should Toll or Suggestion Simplify Your Concern

The other plank of Ford's low-price car was a new production system, geared to make vehicles at loftier scale and low cost. He built the globe's biggest factory -- not just the biggest car manufacturing plant -- on a massive threescore-acre site at Highland Park, near Detroit. It opened on New Year's Day, 1910, and the gain in productivity was marked: The average number of employees rose from 1,908 to 4,110, and the cars built from a little over 6,000 to virtually 35,000.

The real breakthrough came in 1913 with a proprietary innovation, designed past his production managers: the motility from batch production to a continuously moving associates line. The effect of simplification and scale was to move the toll of a Model T down to $550 by 1914, when 248,307 of them were sold. By 1917, the price had fallen even further, to $360, with the issue that sales soared to 785,432. In 1920, Ford sold 1.25 million Model T's. Compared to 1909, a price reduction of 63 pct -- to virtually a third of the original price of the Model T, which was itself a good fifth cheaper than comparable cars -- had resulted in a sixty-sevenfold increment in the number of cars Ford sold.

Simplifying made the company'southward cars both easier and cheaper to make. And the cost reduction was enormously effective in boosting the whole market equally well every bit Ford'southward share of information technology. By 1920, his share had soared to 56 percent, three times larger than that of his nearest rival, Full general Motors, which was an agglomeration of 5 different car brands. Ford was by far the nigh profitable motorcar company in the world, both absolutely -- relative to sales -- and relative to capital employed.

Fifty-fifty Henry Ford himself was surprised by how much demand responded to the lower cost. A price reduction to 35-40 percent of the original price boosted sales past more than 700 times. The fact is, the relationship between price reduction and need expansion is asymmetrical. If you cut price by half or more than, demand rises exponentially -- past tens or hundreds or thousands of times.

Henry Ford's example perfectly illustrates how cost and price reduction isn't a 1-off affair, but a gradual, continual process, fueled by a few large innovations -- in Ford's case a simplified car model, standardizing on one model and the moving assembly line -- and a mass of smaller ones. Prices don't have to exist slashed in half immediately. Instead, a virtuous circle can exist created, where the first cost reductions create a larger market and greater market share, with the benefits of greater scale afterwards lowering costs and prices and raising demand farther. What'southward essential, notwithstanding, is a dogged commitment to attain the lowest possible cost and toll.

Key points

One way to create a huge new market -- with a different type of customer, but able or willing to pay a much lower price -- is to simplify your product so that it is much easier and cheaper to make, and hence sell.

Related: The Gap Test: How to Determine If You Should Simplify Your Business

But in order to price-simplify, you need to reduce the toll past at least 50 pct. This doesn't need to happen all at in one case, simply y'all need to continue cutting costs and prices each year -- by about x percent a twelvemonth.

Accept a lesson from Ford:

• Redesign your product from showtime principles, cutting out unnecessary or costly parts.
• Reduce product-line variety and if possible standardize on a single "universal product."
• Reduce the number of components.
• Eliminate frills and unnecessary options.
• Employ dissimilar, new, lighter and cheaper materials.
• Become for volume and production facilities that are far larger than those of your rivals.
• Organize tasks to maximize the specialization of your workforce.
• Automate tasks.

If you're a price-simplifier, cutting your prices is the primary objective. Simply, like Ford, you should too increase your production'due south quality, utility and ease of use if this can be done without incurring extra costs.

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Source: https://www.entrepreneur.com/article/282218