Joined: 11 Jun 2011
Location: United States
WE: Investment Banking (Investment Banking)
, given: 1
AOA review [#permalink]
11 Jun 2011, 11:06
Hi, would appreciate some comments. I tried to time myself but I'm finding it hard to hit 500 words.
I've read Chineseburned's guide and as you can see, I've more or less copied the concluding paragraph for this example.
The following appeared as part of an annual report sent to stockholders by Olympic Foods, a processor of frozen foods:
“Over time, the costs of processing go down because as organizations learn how to do things better, they become more efficient. In color film processing, for example, the cost of a 3-by-5-inch print fell from 50 cents for five-day service in 1970 to 20 cents for one-day service in 1984. The same principle applies to the processing of food. And since Olympic Foods will soon celebrate its 25th birthday, we can expect that our long experience will enable us to minimize costs and thus maximize profits.”
Discuss how well reasoned . . . etc.
The argument claims that as a company grows in age, it increases in efficiency because they learn to do things better. This in turn enables the firm to minimize costs and thus maximize profits. Stated this way, the argument fails to mention several key factors, on the basis of which it could be evaluated.
Firstly, the argument assumes that as an organization grows in age, it learns how to do things better and thus increases in efficiency. This statement is a stretch since it is not guaranteed that an organization will increase in efficiency as it grows. In fact, a start up that used to be nimble and adaptable to the economic environments could become bureaucratic and cumbersome as it expands. This inefficiency of large companies is illustrated by the recent financial crisis where scores of Fortune 500 companies are forced to cut costs to survive. The argument could have been much stronger if specific examples of how Olympic Foods has learnt to do things better and thus increased efficiency was given.
Secondly, the argument attempted to support its argument with an example of the color film processing industry. This is an extremely weak example as it is an apples to oranges comparison whereby the argument compared an industry to a single company. While it may be true that manufacturing costs for the food processing industry went down as a whole due to improvements in technology, Olympic Foods might not have improved to the same extent as the rest of the industry. Failing to secure a competitive advantage in terms of reducing cost would be meaningless since it would mean competitors can reduce their prices to compete for market share.
Lastly, the argument wrongly assumed that as costs go down, profits will be guaranteed to improve. This claim does not consider the other key factor that would affect the profitability of a company other than cost, which is revenue. Merely reducing cost will not improve profitability if revenue is not at least maintained at current levels. For instance, while the cost of the 3-by-5 inch print have plummeted since 1970, one can be sure that profits of color film processing companies have been badly hit by the advent of digital cameras. The numerous factors other than cost that contribute ultimately to profitability discredits the argument's view of profitability of Olympic Foods.
In conclusion, the argument is flawed for the afore-mentioned reasons and is therefore unconvincing. In order to assess if Olympic Foods long experience will be relevant in minimizing costs and maximizing profits, it is essential to have full knowledge of all contributing factors. Without this information, the argument remains unsubstantiated and open to debate.