As this Wikipedia entry notes, the Mustang II was well-regarded by the public and sold well. Furthermore, by a stroke of luck for Ford Motor Company, if not the rest of the USA, its timing was perfect: A small, sporty car launched just as gasoline supplies dropped and prices rose following the oil embargo resulting from the Yom Kippur War of October 1973. The entry also notes that, whereas it was Motor Trend magazine's Car of the Year for 1974, more recent evaluations tend to be less favorable regarding the Mustang II.
The original Ford Mustang, announced in April 1964, was a huge sales success. Regarded by many potential and actual buyers as a sports car, it was basically a Ford Falcon sedan that was given a sporty, bustle-back body along with some mechanical improvements. But 1967 and 1969 facelifts and mechanical upgrades turned the car into a heavy-looking high-performance car. This drift from the affordable, sporty-car concept pleased some potential buyers while discouraging many more.
Ford management decided to redesign the car to conform more to the original theme. The Falcon was long gone, so the compact Pinto was used as the basis for what became the Mustang II. Wheelbase was reduced from 108 to 96.2 inches (2700 mm to 2443 mm), making it much smaller than the original. At first, only a fastback style was planned, but car clinics revealed that many potential customers preferred a bustle-back. This is explained in this interview with stylist Dick Nesbitt, who was responsible for the bustle-back version.
I have no serious complaints regarding Mustang II styling which Nesbitt regards as not quite as nice as his original concept (see photos of full-size styling models in the interview link). Because it was a Mustang, cues from the original design had to be included, and I have no problem with that: Nesbitt and other stylists did a tasteful job. To today's viewers, a major defect would seem to be the awkward bumpers, but they were the result of (1) new government regulations and (2) a lack of time for engineers and stylist to accommodate those regulations.
All told from a What Were They Thinking? standpoint, Ford management's decisions regarding Mustang were excellent from a sales perspective. But the drastic shrinkage resulted in a car that I and others now regard as not being a true Mustang. Even Ford came to agree, because recent Mustangs are more evocative of the original in size and style than the Mustang II.