He decided to simplify and democratize the automobile.

The idea of democratizing the automobile inspired Ford. His great insight was that the key was price. If he could make a car cheap enough, it would, he believed, sell in vast quantities. He had some supporting evidence: in 1905–6, Ford made two models, one priced at $1,000 and the other at $2,000. The company sold 1599 cars that year. The following year he simplified both models and slashed the prices: “The big thing was that [my] cheapest car sold for $600 and the most expensive for only $750, and right there came the complete demonstration of what price meant. We sold 8,423 cars, nearly five times as many as in our previous biggest year.”⁵

He also paid great attention to the materials that went into his cars. For example, he pioneered the use of vanadium steel, a French invention that was both very light and very strong — ideal to create usefulness for the customer. There were initial difficulties to overcome: no steel maker in America could manufacture it. So Ford found a small company in Canton, Ohio, and covered the cost of the early trials himself. As he recounted, “the first heat was a failure. Very little vanadium remained in the steel. I had them try again, and the second time the steel came through.”⁸ The new product had a tensile strength of 170,000, about 260 percent that of normal American steel. The vanadium steel disposed of most of the weight in Ford’s car — decreasing fuel consumption — yet actually cost less than the traditional alternative.

The other plank of Ford’s low-price car was a new production system, geared to make vehicles at high scale and low cost. He built the world’s biggest factory — not just the biggest car factory — on a massive sixty-acre site at Highland Park, near Detroit. It opened on New Year’s Day, 1910, and the gain in productivity was marked: “Contrast the year 1908 with the year 1911 . . . The average number of employees [rose] from 1,908 to 4,110, and the cars built from a little over six thousand to nearly thirty-five thousand. You will note that men were not employed in proportion to the output.”⁹

However, although Ford managed to increase the number of cars produced per employee by nearly three times in just three years, and his cars became much cheaper to make than those of any of his rivals, the absolute level of efficiency remained low. The real breakthrough came with a proprietary innovation, designed by his production managers: the move from batch production to a continuously moving assembly line. This didn’t happen until 1913, and it was then that Ford famously insisted that all of his cars would be painted black, because only Japan black paint could dry quickly enough to keep up with the speed of the line.

The effect of simplification and scale was to move the price 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 result that sales soared to 785,432. In 1920, 1.25 million Model T’s were bought. Compared to 1909, a price reduction of 63 percent — to almost 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 increase in the number of cars Ford sold.

Compared to Ford’s sales in 1905–6 (the year before the simplifying strategy began), the sales in 1920 marked a 781-times increase. Simplifying made the company’s cars both easier and cheaper to make. And the price reduction was enormously effective in boosting the whole market as well as Ford’s share of it. By 1920, his share had soared to 56 percent, three times larger than that of his nearest rival, General Motors, which was an agglomeration of five different car brands. Ford was by far the most profitable car company in the world, both absolutely — relative to sales — and relative to capital employed.

Even Henry Ford himself was surprised by how much demand responded to the lower price. A price reduction to 35–40 percent of the original price boosted sales by more than 700 times. We shall see this pattern repeated throughout this book — the impact of a really chunky price reduction on sales is always grossly underestimated. The relationship between price reduction and demand expansion is asymmetrical. If you cut price by half or more, demand rises exponentially — by tens or hundreds or thousands of times. This is one of our most important findings. Radical cost reduction is one of the most powerful economic forces in the universe.

Henry Ford is our first price-simplifier. His overriding objective was to cut the price of his cars dramatically — to well below a half of the previous level. His case perfectly illustrates how cost and price reduction is not a one-off affair, but a gradual, continual process, fuelled by a few big 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 be slashed in half immediately. Instead, a virtuous circle can be created, where the first cost reductions create a larger market and greater market share, with the benefits of greater scale subsequently lowering costs and prices, and raising demand further. What is essential, however, is a dogged commitment to achieve the lowest possible cost and price.

Though Ford’s main objective in simplifying was always to cut costs, he also simplified to achieve two other objectives — a more useful car (higher utility) and one that was easier to drive and maintain (greater ease of use). One reason why the Model T was more useful was that it used a new grade of steel that was both stronger and lighter than earlier versions. As a result, Ford’s car was both more rugged and more economical to run than its rivals — fuel consumption rises with weight. He designed the car for “simplicity in operation — because the masses are not mechanics,”¹⁰ introducing a “planetary transmission” that made the gears easy to change and the car easy to maneuver. Hence the slogan “Anybody can drive a Ford.” Because the car was simplified into four structural units (the power plant, the frame, and the front and rear axles), and these were easily accessible, no special skill was required to repair or replace broken parts.

All of these design changes combined lower cost with greater utility and ease of use. Specifically, Ford’s cars were lighter, cheaper to run and maintain, more rugged and reliable, and easier to drive, maintain, and repair.