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."

The above excerpt that appears as part of an annual report sent to stockholders by Olympic Foods, a processor of frozen foods, states that the company will soon be celebrating its 25th birthday. More importantly, because of its 25 years in the industry, Olympic Foods can expect to minimize costs and thus maximize profits.

However, while the above may be true, the argument is based solely on what has transpired within the color film processing industry. The processing costs of film and the time needed to process film, have decreased in the last 15 or so years. Therefore, the annual report believes that Olympic Foods can likewise expect similar findings in the food processing industry. This is the argument’s biggest flaw. Just because a phenomenon has occurred in one industry does not mean that it has occurred in another.

First of all, the food industry is different from the film industry. With more and more people switching to film that is digital, traditional film has been disappearing. Naturally, if there is little demand for actual film, the costs to process it will go down. The frozen food processing industry however has not experienced such an undertaking. For all intents and purposes, frozen food is still frozen food. There is not a technologically superior version that is rendering the older version obsolete. Therefore if anything, costs to process it should remain about constant.

Secondly, while processing costs may have gone down, and it is absolutely reasonable to believe that Olympic Foods has increased its efficiency in the last 25 years, what about other operational costs such as salaries and benefits? Just because one area of costs has dropped doesn’t mean that profits will rise because it is very likely that another area of costs within a company has risen.

Lastly, while the company is experienced, the food processing industry may have changed in the last 25 years. For example, Olympic Foods may have been one of a few companies operating 25 years ago, whereas today, it is one of hundreds. If there are more companies, there is going to be more competition, and there will be fewer profits available.

Upon first glance, the argument appears to be fairly sound. Olympic Foods has been in the frozen food processing industry for a good amount of time and surely it must have picked up some tricks along the way that would make it capable of operating in a more efficient manner compared to how it operated 25 years ago. Still, Olympic Foods would be wise to not base its hopes on what has occurred within an entirely different industry.