Walton or Ford?

01Apr12

Ford

In the beginning of the 20th Century, an industrialist had a couple of revolutionary ideas. It is reasonably well known that he applied the moving assembly line to automobile production, which brought the cost of automobiles down to mass-market levels.

He worked the other side of the equation, too: introducing a high (for the time) wage for his lowest-paid employees ($5 per day — more than double the previous minimum daily pay). There were a few effects of introducing a significantly higher wage for his employees:

  1. It attracted the best employees. Everyone wants to work where they can get the best compensation for their time and effort. Though compensation goes far beyond money, the money certainly helps.
  2. It produced loyalty among the employees, for many of the same reasons. (Which reduced training costs for his skilled workforce.)
  3. It made more of his employees able to purchase his automobiles.

Obviously, his employees were a small market, and Ford was not going to become a successful manufacturer if he was only selling to his highly-paid employees. However, there were a couple of knock-on effects of his higher daily pay:

  1. His competitors had to raise their wages, which meant that if their manufacturing process was less efficient, they found it hard to compete on price.
  2. His competitors’ employees were also more able to buy automobiles, and with Fords being the least expensive, they were able to buy Fords before a competing product.
  3. His employees’ (and his competitors’ employees’) ability to buy cars introduced a car culture to socio-economic groups who could not have dreamed of such a luxury before, which increased demand for Ford’s cars even more.

Before long, Ford’s model of production was the standard throughout the United States, and the rest of the industrialized world: high wages meant a robust middle class and a relatively affluent working class, while efficient manufacturing practices meant low prices. This model remained the standard of American employment for decades, before beginning to disappear in the late 20th century.

Walton

In Arkansas, toward the end of the 20th century, Sam Walton put into practice a different type of working practice: in his retail chain, he chose to sell at the lowest possible prices he could afford — buying in huge volumes, and hiring staff at the lowest wages possible.

Being in retail, Walton wasn’t as concerned about training costs — because the service sector doesn’t require as much training as manufacturing. Where Ford’s higher wages attracted more talented and skilled employees, Walton hired the best he could get at minimum wage. Wal-Mart’s rise was accompanied by the growth of the global market place, and Wal-Mart’s drive for low prices led to their buying goods from overseas manufacturers. As American companies increasingly moved their manufacturing overseas, Wal-Mart’s growing dominance in the retail sector accelerated the process, as some American manufacturers moved production overseas in order to keep their prices low enough to maintain their Wal-Mart accounts.

Where Ford’s wages gave his employees the ability to purchase his factories’ products, Walton’s wages only allow his employees the ability to shop at his stores. Where Ford’s treatment of his employees created a culture that promoted his products, Walton’s treatment of his employees creates a culture that promotes his store as the only viable retailer.

Ford’s model worked at a time when markets were national, not global, and resources were plentiful (and even though Ford paid his workers well, the coal and iron miners who produced his raw materials were not). I doubt that we can re-create the Ford model of production. It’s tough to see globalization being rolled back in a way that will rebuild an environment of high wages coupled with low prices.

The Walton model of low-price retail is ultimately unsustainable, too. Eventually, as wages drop in the retail market, even the cheapest goods will become unaffordable.

I don’t know how, but we need to build a broad high-skilled labor environment that will create the wages which can sustain the growth of standard of living, across national boundaries and socio-economic classes. It’s hard to see what the future holds, but hopefully it will be more inspired by Ford than Walton.

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