This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Learning by Doing in Markets, Firms, and Countries Volume Author/Editor: Naomi R. Lamoreaux, Daniel M. G. Raff and Peter Temin, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-46832-1 Volume URL: http://www.nber.org/books/lamo99-1 Publication Date: January 1999 Chapter Title: Assets, Organizations, Strategies, and Traditions: Organizational Capabilities and Constraints in the Remaking of Ford Motor Company, 1946-1962 Chapter Author: David Hounshell Chapter URL: http://www.nber.org/chapters/c10233 Chapter pages in book: (p. 185 - 218) 5 Assets, Organizations, Strategies, and Traditions: Organizational Capabilities and Constraints in the Remaking of Ford Motor Company, 1946-1962 David A. Hounshell During World War II, Detroit became widely known as "the arsenal of democ- racy. "I The sheer magnitude of the automobile industry's output of jeeps, trucks, tanks, aircraft engines, machine guns, bombers, and other tools of war was staggering and played a critical role in the Allied victory. 2 After the war, the automobile industry served as an engine of growth for the domestic econ- omy. In the decade after Detroit had fully reconverted to domestic automobile manufacture, factory sales of automobiles increased from 2,148,699 in 1946 to 7,920,186 in 1955. By 1965 that number reached 9,305,561. In that first full decade of domestic production after the war, labor productivity in motor- vehicle factories more than doubled, rising from 4.7 vehicles per worker to 10.2. Total factory sales of vehicles in these two decades were 141,001,445, representing a value of $235.5 billion.3 Factory sales of motor vehicles in 1955 and 1965 represented, respectively, 3.6 and 3.2 percent of the United States' David A. Hounshell is the Henry R. Luce Professor ofTechnology and Social Change at Carne- gie Mellon University, where he is a member of three departments: history, social and decision sciences, and engineering and public policy. 1. For evidence of Detroit's role in the war effort, see Thomas D. Wolff, "Safeguarding the Arsenal of Democracy: A History of the Detroit Office of Civilian Defense in World War," M.S. thesis, Wayne State University, 1952; Freedom sArsenal: The Story ofthe Automotive Council for War Production (Detroit: Automobile Manufacturers Association, 1950); Allan Nevins and Frank Ernest Hill, '~rsenal of Democracy," in Ford: Decline and Rebirth, 1933-62 (New York: Scrib- ner's Sons, 1962), 197-227. 2. For a succinct statement of Detroit's output of war materiel during World War II, see James J. Flink, The Automobile Age (Cambridge: MIT Press, 1988), 275-76. 3. All statistics cited above derive directly from or were calculated from Automobile Facts and Figures, 1957 (Detroit: Automobile Manufacturers Association, 1957) and Automobile Facts and Figures, 1967 (Detroit: Automobile Manufacturers Association, 1967). Figures are not adjusted for inflation. 185 186 David A. Hounshell gross national product.4 The expression "the car culture" well described Ameri- can's love affair with and dependence upon the automobile. 5 While the automobile industry grew in size and output in the two decades after the war, it virtually also completed the profound restructuring, commonly known as a shakeout, that had actually begun in the 1910s. By the end of the 1930s, the number of firms in the U.S. automobile industry could be counted on two hands. 6 After the war, the industry became even more highly concen- trated. In 1946, the so-called Big Three (General Motors Corporation, Ford Motor Company, and Chrysler Corporation) accounted for 84.7 percent of the passenger cars made in the United States; by 1955, they made 95.6 percent.? Most of the "independents" had folded or were near extinction. When World War II ended, the Ford Motor Company itself, by all accounts, appeared to be heading toward bankruptcy and perhaps even extinction. Ford's market share had declined sharply from its high point in the early 1920s, and the company's once-famous manufacturing assets had eroded greatly during the Great Depression of the 1930s and the war. 8 The company became leader- less during the war when Edsel Ford, the son of the company's founder Henry Ford, died prematurely, when Henry Ford himself became too senile to man- age, when the company was bleeding cash at a rate unrealized because its ac- counting systems were so poorly designed, and when the company's top man- agers engaged in internecine rivalry for managerial control of the firm. Yet, in spite ofthese severe problems, the Ford Motor Company endured. For reasons partially explored in this essay, the company actually experienced what the historian Allan Nevins and his coauthors called a "rebirth." 9 How Ford Motor Company successfully staved off extinction, regained mar- ket share, and restored profitability surely constitutes one of the great stories in the history of American business. This transformation is not, however, the central focus of this study, although it certainly motivates it. My goal is to account for the outcome of a single meeting of Ford's Executive Committee- 4. These figures are calculated from GNP statistics reported in current dollars in Series FI-5 of U.S. Bureau of the Census, Historical Statistics of the United States: Colonial Times to 1970 (Washington, DC: Government Printing Office, 1975), 224, and from values of motor-vehicle fac- tory sales reported (in current dollars) in Automobile Facts and Figures, 1968 (Detroit: Automobile Manufacturers Association, 1968). 5. I borrow this expression from James J. Flink, The Car Culture (Cambridge: MIT Press, 1975). 6. Philip Hillyer Smith, Wheels within Wheels: A Short History ofAmerican Motor Manufactur­ ing (New York: Funk & Wagnalls, 1968). On the shakeout, see Steven Klepper and Kenneth L. Simons, "Innovation and Industry Shakeouts," Business and Economic History 25, no. 1 (1996): 81-89. 7. Charles E. Edwards, Dynamics ofthe United States Automobile Industry (Columbia: Univer- sity of South Carolina Press, 1965), table 1, 13. ., 8. The Ford Motor Company's Annual Report for 1947 shows that the company's market share had dropped from about 42 percent in 1930 to below 20 percent in 1941 and showed no signs of reversal had the war not intervened. The report also noted that "for five of the past ten years the Company has used up plant, property, and equipment faster than it has replaced it, leaving a sub- stantial capital deficit." 9. Nevins and Hill, Ford: Decline and Rebirth. 187 Assets, Organizations, Strategies, and Traditions an outcome that decisively changed the strategic course of the company, a course that had been formulated and implemented with no little care, a course devoted to bringing about a major revitalization of the company in the years after World War II, a course charted to make the Ford Motor Company a formi- dable competitor of General Motors, which had long since eclipsed it. The meeting itself, however, wa's not supposed to be about the strategic direction of the company; its nominal purpose was to settle a question about how funds would be allocated to build engine-manufacturing capacity for the company. But, in fact, the meeting transformed an operational question into a strategic one, and in doing so it put on the table the company's history, its in-place physi- cal assets, and its core capabilities alongside its strategic objectives and oppor- tunities. For our purposes, the archival records surrounding this fateful meeting could not be more ideal. We have detailed reports of the plans that led up to the meeting, and we have reasoned commentaries on those plans. We have docu- ments that executives carried into the meeting. We have a list of all the execu- tives who attended the meeting, and we know a good deal about the back- grounds of these executives and the positions they came into the meeting with. Finally, we have minutes of the meeting itself. Fortunately for us, however, the minutes report only the final decision arrived at in the meeting-a major departure from a unanimous decision reached by the same Executive Commit- tee less than a month earlier. Other than reporting on how the initial positions were laid out, the minutes provide only the barest shreds of evidence of what took place in the meeting, who said what, and who did what. We are left with nothing but our own wits-our theories of firms, organizational behavior, and organizational capabilities-to explain the outcome. This paper is, therefore, an exercise not unlike those relished by Sir Arthur Conan Doyle's fictional character Sherlock Holmes-shifting through seemingly contradictory and of- ten parsimonious evidence, bringing behavioral insights into the analysis, mak- ing careful and reasoned inferences, and testing theories against known "facts." Such an exercise can be both entertaining and illuminating. 5.1 The Fateful Meeting On 2 December 1949, the Executive Committee of the Ford Motor Com- pany, the second largest automobile company in the world, convened a meeting that included not only its own members but also a group oftop managers repre- senting the company's manufacturing, marketing, product engineering, and in- ternal control and monitoring organizations. One item stood at the top of the committee's agenda: deciding how the company would produce engines for its future models. But everyone attending the meeting knew that a lot more than engine production lay at stake. All comprehended at some level that Ford's strategic plans and the very organizational design of the company as a whole turned on the meeting's outcome. The issues faced by the group were not new.