FORTUNE magazine named Henry Ford as Businessman of the Twentieth Century.
In the late 1960s, the Ford Motor Company decided to introduce a sub-compact car. The design team led by Lee Iacocca had the task of meeting the “2000 and 2000 challenge.”
The car had to cost no more than $2,000 and weigh no more than 2000 pounds.
The Ford Pinto was a spectacular commercial success.
The first trouble for the Pinto occurred in 1972. A lady was driving the Pinto with her thirteen-year-old daughter as the other passenger. Another car traveling at 30 miles an hour hit the Pinto from the rear. The gas tank exploded. The lady died and the daughter suffered devastating injuries. In the suit that followed, the court awarded the family $560,000 and the injured daughter $2.5 million in compensatory damages.
A few years later, the Pinto was in the news again. A truck allegedly carrying prohibited substances hit a Pinto from the rear. The gas tank exploded. All three women in the car died.
What came out during the trials was a design flaw in the Pinto. The positioning of the gas tank was such that it was susceptible to explode in a rear collision.
Prevention is better than cure. Designers could easily enhance the Pinto’s safety by a relatively simple alteration costing $11 per car. As Ford’s internal records showed, the alteration never happened.
In deciding not to carry out the $11 alteration, the managers at Ford relied on a tool widely used in the industry and being taught even today in business schools across the world – cost-benefit analysis.
Exhibit – Ford’s use of cost-benefit analysis in the Ford Pinto
Benefits and Costs Relating to Fuel Leakage
Associated with the Static Rollover
Test Portion of FMVSS 208
Savings: 180 burn deaths, 180 serious burn injuries, 2100 burned vehicles
Unit Cost: $200,000 per death, $67,000 per injury, $700 per vehicle
Total Benefit: 180 x ($200,000) + 180 x ($67,000) + 2100 x ($700) = $49.5 Million
Sales: 11 million cars, 1.5 million light trucks
Unit Cost: $11 per car, $11 per truck
Total Cost: 11,000,000 x ($11) + 1,500,000 x ($ I 1) = $137 Million
From Ford Motor Company’s internal memorandum: “Fatalities Associated with Crash-Induced Fuel Leakage and Fires.” Source: Douglas Birch and John H. Fielder, THE FORD PINTO CASE: A STUDY IN APPLIED ETHICS. BUSINESS AND TECHNOLOGY. p. 28.1994.
Subsequent analysis of the cost-benefit shows that Ford’s “break-even” point was $3.96 per car. Scale economies might well have achieved this level.
While some judicial pronouncements accept the reasoning behind the cost-benefit approach, others don’t. In one instance, a jury awarded punitive damages of $135 million.
The case is a reminder of the limits of economic reasoning while dealing with human lives.
1. Is it morally and ethically acceptable for any organization to place a pre-determined dollar value on human life and injuries?
2. How do you measure the trauma and possible life-long suffering that affected families undergo?
3. Can a justice system that places a mighty cash-rich corporation and a middle-class customer with limited means on an equal footing be fair?
Fifty years down the line, we still do not have definitive answers to these questions.
What have we learned?
Negligence in quality and safety continue to plague practically every industry.
We will examine these in subsequent columns.
Meanwhile, I will leave you with this thought to ponder over:
In a survey covering 3,500 senior executives from 29 industries and 70 countries, the skill that recruiters are least interested in graduating students happens to be microeconomics.
For all the tall talk of preparing leaders of tomorrow, has any business school stopped teaching microeconomics? Or cost-benefit analysis? At the very least, are faculty aware of the limits of such models?
If you have an answer, I would love to hear from you. Before you post anything, please read all about the Ford Pinto. Thanks to the ubiquity of information, the entire story is available online.