In what is considered to be one of the greatest business decisions of all time (Harnish et al., 2012), Henry Ford provides a classic example of how productivity can be a force for prosperity. A force that can make it possible to achieve the seemingly incompatible business goals of reducing prices for customers, increasing wages for employees, and improving profitability.
When Henry Ford introduced the assembly line in 1913, it that made the production of the Model T so efficient that he was able to double output with the same number of workers. The problem was that the narrowly defined, repetitive, and physically demanding assembly line jobs were causing turnover to skyrocket. In a bold move to improve employee retention, Ford made a decision to double the wages of his workers in January of 1914.
Within the following year, annual labor turnover fell from 370% to 16% and productivity was up from 40% to 70%. Between 1910 and 1919, Henry Ford reduced the price of a Model T from $800 to $350, solidified his position as the world’s greatest automaker, and made himself a billionaire. With their pay doubled, Ford’s autoworkers were able to afford the very cars they were producing which expanded the overall market for the Model T. While explaining to reporters his decision to double wages, Ford said, “We believe in making 20,000 men prosperous and contented rather than follow the plan of making a few slave drivers in our establishment millionaires.”
Based on this example, do you believe that it’s in the long-term best interest of any business to share profits generated by increases in productivity with customers (through reduced prices), employees (through increased wages and/or improved working conditions), and business stakeholders/shareholders (through increased profits)? If not, why not? If so, what do you think the optimal split of profits should be between customers, employees, and the business? Should any one group get more than another or should the split be equal?
I look forward to your comments!