Henry Ford built a long-term resilient business by controlling every aspect of the supply chain and building new markets. In doing so, he built the idea of vertical integration and supply chains.
Henry Ford can still teach us a thing or two about business
He thought long term — not something many businesses do today, sometimes at their peril.
By Isaac Cheifetz
June 25, 2022 at 1:00PM
He didn't worry about rewarding shareholders with profits through dividends or higher stock prices, according to an analysis by the New York Times on what today's manufacturers could learn from Ford.
In a fundamental sense, that aspect of Ford's legacy has been lost. Shareholder value is accepted as the principal value of publicly owned markets. Also, just-in-time manufacturing, with its focus on leveraging efficiency to perpetually reduce the "buffer" in a company's supply chain, has dominated industry for decades.
Lastly, vertical integration the way Ford envisioned it — with a giant company owning the production of all the materials in its supply chain to ensure availability and reliability — has long dissipated in favor of a focus on corporate core competencies, where companies outsource everything else to global business partners.
And yet, current events force us to revisit the balance between long-term resiliency and short-term profitability. In the example of Ford Motor Co., thousands of cars currently still sit unfinished at manufacturing plants in Detroit because of a supply-chain crunch for semiconductor chips manufactured by a single company in Taiwan.
Interestingly, as described in the Times article, Ford has shown "greater inclination" to limit dividends and preserve capital. The chip companies, though, are limiting capacity to maintain high prices.
So what's the bottom line? Shareholder value, just-in-time supply chains and outsourcing are not going to go away. They have been proven over time to be the most efficient way to manage large corporations.
But the lessons of Warren Buffett (a financier, not a builder of new businesses) have value here. Buffett long ago posed the following hypothetical to goad businesses to focus on long-term resiliency to ensure long-term profitability: If you owned 100% of a company, as opposed to a massively diversified portfolio, what decisions would you make to increase the chances of its long-term survival and success?
Applying Buffett's question to Ford's current chip gap, you would almost certainly choose to diversify your sources of key semiconductors, rather than the short-term lowest cost option of having a single provider in a location as fraught with uncertainties as Taiwan.
Isaac Cheifetz, a Twin Cities executive recruiter, can be reached through catalytic1.com.
