Business Ethics – Case Study - The Ford Pinto Case - Cost Benefit Analysis In the 1960’s, USA was flooded with subcompact models of cars like 'Beetle' from Volkswagen of Germany. The US is the biggest market for automobiles in the world and Ford is the traditional number 2 behind GM in terms of volumes. The legendary manager, Mr. Lee Iacocca was the President of the company at that time. FMC wanted to enter this market and decided to develop its own subcompact which was named "Pinto" and introduce it before 1970. The normal prototype development and testing for automobiles, before commercial launch, is 4 years but Mr. Iacocca managed to reduce it to 2 years.
All automobile manufacturers test their products at secret sites and Pinto was no exception. Early tests showed that reverse crash testing the model at 25 MPH led to ruptured fuel tanks. In most cars, the fuel tank is placed at the rear adjacent to the boot. Reverse crash testing is done in automobiles and tests showed that the earlier models did not pass the tests at 20 MPH. This is a mandatory test carried out to find out what happens, if some car crashes into your car's rear bumper at high speed on the highway. This is possible, if your car stalls in a high-speed lane or in heavy traffic where some careless driver can drive into your car's rear. Your car must not burst into flames by the impact. The reverse crash test speed is low because the relative velocities are taken into consideration. The frontal impact tests are at much higher speeds. All manufacturers test their vehicles at speeds which are much higher than the maximum permissible legal limits.
In highly competitive engineering industries, people have to scrounge around to save even a single cent, leave alone a dollar. Ford planned to make 12.5 Million vehicles. In such cases, we in engineering industry take the help of probability theory and statistics for risk analysis. This is later compared with Cost Benefit analysis and decisions taken. The National Highway Traffic Safety Administration of USA and such authorized bodies all over the world normally estimate the social costs of accidents and such documents are generally made available for law enforcement. This agency estimated the social costs for loss of life at USD 200,725 based on cost of living of an average American in 1971.
The then Director of Automobile Safety at FMC, estimated that it would cost 11 dollars per vehicle for improving the safety standards and it would total to USD 137 Million for 12.5 million vehicles. However, based on statistical analysis, he estimated the benefits of compensating for accidents at 49 million USD. This is a fairly established method. It would not be out of place to point out that Life Insurance industry uses statistics and probability theory for calculating the life expectancy and according to risk analysis, the premium is decided. This is what an actuary in an insurance industry does and he or she gets heavily paid for it.
Unfortunately, between 1970 and 1978, Pinto was involved in nearly 53 accidents and FMC was deluged with number of court cases. In 1978, the jury awarded USD 128 million to all victims. In most legal cases of such nature the plaintiffs and defendants settle the matter out of court and the real number of cases is never known. In this case, statistics and probability theory did not help. FMC ended up paying a lot more money and lost a great amount of goodwill. It should be remembered that FMC did nothing wrong and followed standard industry practices. God was not on its side. History has an amazing tendency of repeating itself. FMC got embroiled few years back with similar problem in the "Explorer" SUV. In this case the tire manufacturer "Bridgestone"
also got involved in the imbroglio. In such cases it leads to "Recall" of vehicles or items involved, leading to huge losses.
It is essential that regulators come up with necessary safety standards and make it mandatory and uniform for all vehicles. However, in the above case study, was FMC at fault and can it be accused of not adhering to business ethics? Please send your opinions and views to madhavan@mmg.name and we will publish the best of them in these pages.
© June 2007. www.madgopes.com. All rights reserved.
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Madhavan T Gopalachary
(Visit Madhavan's Website)
Madhavan Gopalachary, nick name "madgopes"
(g pronounced as in go) given by IIT
classmates, is a Mechanical Engineer and
an alumnus of Indian Institute of
Technology, Madras having passed out
specializing in IC Engines &
Thermodynamics.
He has nearly 35 years of experience in
the Corporate World. He started off as a
trainee and handled sales, marketing,
manufacturing, product management, profit
center management, strategic planning and
corporate development including R & D in
various organizations and at various
levels before becoming a CEO. His last two
professional assignments were at CEO level
before embarking to start management
consultancy business on January 01, 1998.
He has worked for British, Swedish MNCs as
well as very large Indian business houses.
He has spent a large portion of his time
from June 1998 till date in East African
Countries practicing as an independent
Management Consultant.
More details can be obtained at the
following web sites:
mmg.name/
mtg.html
mmgconsu
lting.biz/
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