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27 Nov 2017, 10:48
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Hello GMATClub,
My test day is swiftly approaching and I would love if I could get some feedback from you all! Thanks for all the help
Prompt:
The following appeared in a memorandum from the vice president of Road Food, an international chain of fast-food restaurants: “This past year, we spent almost as much on advertising as did our main competitor, Street Eats, which has fewer restaurants than we do. Although it appeared at first that our advertising agency had created a campaign along the lines we suggested, in fact our total profits were lower than those of Street Eats. In order to motivate our advertising agency to perform better, we should start basing the amount that we pay it on how much total profit we make each year.” Discuss how well reasoned . . . etc.
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The vice president of Road Food has commented on the overall success of their recent advertising campaign. Unfortunately, the campaign has not performed as well as the company would have liked and the Vice President is attributing the unsuccessful campaign to their advertising agency. As a result, the VP has proposed make their ad spend with the advertising agency proportional to the company’s profit. Unfortunately, this argument is ill reasoned because it creates an arbitrary benchmark for success by comparing profits of one company to another, overlooks a number of factors that could lead to changes in profit, and could possibly lead to a negative feedback loop, which ultimately leads to zero ad spend, and zero profit. Each of these factors should be addressed before the VP makes any significant decisions that affect their advertising strategy.
First, the VP rules that campaign was unsuccessful only because a competitor with fewer locations had greater profit with a similar advertisement spend. This overlooks the possibility that profit increased more this previous period than any other period. Additionally, while the competitor has less stores, it may have larger capacity in each store. In this regard they could have the ability to support greater sales and thus greater profits. It can be reasoned that just because a competitor has achieved greater profitability, does not mean that the company itself did not also achieve significant success. The VP should review his or her company’s performance against the previous performance of the company and then evaluate if the advertising budget was used appropriately.
Second, the VP attributes all of the profit of the company to the advertising campaign. This thought process overlooks a number of other factors which may negatively affect the company’s performance. For instance, the VP fails to recognize the possibility that the company may have faced bad PR this year from customers getting sick – a situation which has occurred to the likes of Chipotle and Burger King before. The VP also does not consider the driving factors of profits such as, ingredient costs, food quality, and target market. Potentially the competitor has acquired a better deal of the cost of ingredients, and because costs are down, profits are up. Consideration should also be given to food type, quality, and price. These factors can lead to different demand for food. In this regard, if the food the company sells is bugs, there may not be a significant market for the product. While entomologists would appreciate the advertising campaign, many normal consumers would steer away.
Lastly, if the company does ignore the potential pitfalls of the argument as described above. The new strategy will most certainly fail. If advertising is based directly to the profitability of the company, and as described in the passage, the profitability is directly related to the quality of the advertising campaign, then as profitability goes down so will ad dollars. The less ad spend from the company will lead to a less expensive campaign, which will again lead to less profitability. This negative feedback loop will continue until profits become zero, and consequently ad spend becomes zero. This cycle can be avoided is the advertising budget decision makers make clear considerations into how their decisions will impact the growth of the company.
While the VP of Road Food attempts to make a strong argument about the “unsuccessful” advertising campaign, he or she falls short by failing to consider all aspects and consequences of the proposed strategy. Before making any decisions on the advertising spend of the company the VP should first attempt to understand the actual results of the advertising campaign compared to a more reasonable benchmark, determine factors other than advertising that could negatively affect profitability, and take a keen look at the long term consequences of any proposed strategy before implanting it. If the VP does takes these ideas into consideration he or she will likely reexamine his or her point of view and derive both a new culprit for underperforming sales (if any) and a new strategy to address such performance.
My test day is swiftly approaching and I would love if I could get some feedback from you all! Thanks for all the help
Prompt:
The following appeared in a memorandum from the vice president of Road Food, an international chain of fast-food restaurants: “This past year, we spent almost as much on advertising as did our main competitor, Street Eats, which has fewer restaurants than we do. Although it appeared at first that our advertising agency had created a campaign along the lines we suggested, in fact our total profits were lower than those of Street Eats. In order to motivate our advertising agency to perform better, we should start basing the amount that we pay it on how much total profit we make each year.” Discuss how well reasoned . . . etc.
--------------------------------------------------------
--------------------------------------------------------
The vice president of Road Food has commented on the overall success of their recent advertising campaign. Unfortunately, the campaign has not performed as well as the company would have liked and the Vice President is attributing the unsuccessful campaign to their advertising agency. As a result, the VP has proposed make their ad spend with the advertising agency proportional to the company’s profit. Unfortunately, this argument is ill reasoned because it creates an arbitrary benchmark for success by comparing profits of one company to another, overlooks a number of factors that could lead to changes in profit, and could possibly lead to a negative feedback loop, which ultimately leads to zero ad spend, and zero profit. Each of these factors should be addressed before the VP makes any significant decisions that affect their advertising strategy.
First, the VP rules that campaign was unsuccessful only because a competitor with fewer locations had greater profit with a similar advertisement spend. This overlooks the possibility that profit increased more this previous period than any other period. Additionally, while the competitor has less stores, it may have larger capacity in each store. In this regard they could have the ability to support greater sales and thus greater profits. It can be reasoned that just because a competitor has achieved greater profitability, does not mean that the company itself did not also achieve significant success. The VP should review his or her company’s performance against the previous performance of the company and then evaluate if the advertising budget was used appropriately.
Second, the VP attributes all of the profit of the company to the advertising campaign. This thought process overlooks a number of other factors which may negatively affect the company’s performance. For instance, the VP fails to recognize the possibility that the company may have faced bad PR this year from customers getting sick – a situation which has occurred to the likes of Chipotle and Burger King before. The VP also does not consider the driving factors of profits such as, ingredient costs, food quality, and target market. Potentially the competitor has acquired a better deal of the cost of ingredients, and because costs are down, profits are up. Consideration should also be given to food type, quality, and price. These factors can lead to different demand for food. In this regard, if the food the company sells is bugs, there may not be a significant market for the product. While entomologists would appreciate the advertising campaign, many normal consumers would steer away.
Lastly, if the company does ignore the potential pitfalls of the argument as described above. The new strategy will most certainly fail. If advertising is based directly to the profitability of the company, and as described in the passage, the profitability is directly related to the quality of the advertising campaign, then as profitability goes down so will ad dollars. The less ad spend from the company will lead to a less expensive campaign, which will again lead to less profitability. This negative feedback loop will continue until profits become zero, and consequently ad spend becomes zero. This cycle can be avoided is the advertising budget decision makers make clear considerations into how their decisions will impact the growth of the company.
While the VP of Road Food attempts to make a strong argument about the “unsuccessful” advertising campaign, he or she falls short by failing to consider all aspects and consequences of the proposed strategy. Before making any decisions on the advertising spend of the company the VP should first attempt to understand the actual results of the advertising campaign compared to a more reasonable benchmark, determine factors other than advertising that could negatively affect profitability, and take a keen look at the long term consequences of any proposed strategy before implanting it. If the VP does takes these ideas into consideration he or she will likely reexamine his or her point of view and derive both a new culprit for underperforming sales (if any) and a new strategy to address such performance.
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