Lee Iacocca, who had been one of the forces behind the original Mustang, became President of Ford Motor Company in 1970 and ordered a smaller, more fuel-efficient Mustang for 1974. Initially it was to be based on the Ford Maverick, but ultimately was based on the Ford Pinto subcompact.
The new model, called the "Mustang II", was introduced two months before the first 1973 oil crisis, and its reduced size allowed it to compete against imported sports coupés such as the Japanese Toyota Celica and the European Ford Capri (then Ford-built in Germany and Britain, sold in U.S. by Mercury as a captive import car). First-year sales were 385,993 cars, compared with the original Mustang's twelve-month sales record of 418,812.
Lee Iacocca wanted the new car, which returned the Mustang to its 1964 predecessor in size, shape, and overall styling, to be finished to a high standard, saying it should be "a little jewel." However not only was it smaller than the original car, but it was also heavier, owing to the addition of equipment needed to meet new U.S. emission and safety regulations. Performance was reduced, and despite the car's new handling and engineering features the galloping mustang emblem "became a less muscular steed that seemed to be cantering."
The car was available in coupé and hatchback versions, including a "luxury" Ghia model designed by Ford's rececently acquired Ghia of Italy. Changes introduced in 1975 included reinstatement of the 302 CID V8 option (after being without a V8 option for the 1974 model year) and availability of an economy option called the "MPG Stallion". Other changes in appearance and performance came with a "Cobra II" version in 1976 & 1977 and a "King Cobra" in 1978.