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As early as 1968, Ford was receiving complaints about the growing size of the Mustang, especially from stockholders who thought the Mustang was losing its sporty car appeal. In 1970, Ford president Lee Iacocca, who had spearheaded the creation of the original '65-'66 Mustang, requested concepts to return the Mustang to its original size for '74. He envisioned a more luxurious, "elegant" Mustang for the 1970s.
The first concepts for what would become the Mustang II were based on the compact Maverick and subcompact Pinto vehicles. The Pinto version eventually won out. However, by the time the new Mustang was completed, it was so completely reengineered that the only vestiges of its Pinto heritage were the rear floor pan along with a few drivetrain and chassis components.
The smaller '74 Mustang II was introduced near the end of August 1973 to replace the larger Mustangs of '71-'73. Available as a hardtop and notchback, it was the first Mustang model offered without a convertible - or a V-8 engine, with a four-cylinder standard and V-6 optional. Even the Mach 1 model lacked the performance becoming of its name, something not lost on the automotive enthusiast magazines of the day.
The Mustang II was not well-received at first because dealers were stocked with well-optioned models as part of Iacocca's demand for luxury, resulting in buyers driving off in less expensive Mavericks and Pintos instead. However, when the OPEC oil embargo caused low fuel supplies and rising prices just two months after the Mustang II's debut, buyers flocked to the new Mustang with its fuel-efficient engines and optional luxury upgrades, a combination that was not available in other compact cars at the time. Ford sold nearly 386,000 Mustang IIs in its first year, making it the fourth best-selling Mustang of all-time.
Offered without a V-8 engine for '74, Ford upgraded the Mustang II slightly for '75 to accommodate a 302 cubic-inch V-8. The ‘74 would be the only Mustang ever offered without a V-8 engine.
A Stallion package added performance appeal to the '76 Mustang, but it was an outsourced Cobra II package that sparked new enthusiasm for the Mustang II. Jim Wangers, who is credited with creating the '64 Pontiac GTO, approached Edsel Ford II, then on Ford's board of directors, about offering a special Mustang with Shelby-like hood and side stripes, hood scoop, front chin spoiler, and a rear spoiler. Built by Wangers' Motortown Corporation, the Cobra II did not feature enhanced engine power or handling, but did provide the Mustang II with a much-needed performance image.
For '77, Ford brought the Cobra II package in-house, offering it as a stand-alone model along with the regular hardtop, hatchback, and Ghia.
Following the "sticker musclecar" trend started by the Firebird Trans-Am, Ford introduced the Mustang II King Cobra, based on the Cobra II but equipped with black-out grille, color-keyed "lacy spoke" aluminum wheels, IMSA-like front air dam, flares in front of the wheelwells, and a "cobra" snake decal on the hood.