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."
In the preceding statement, the author claims that in length of time organizations become more efficient due to experience they collect. The author cites that the cost of print in film processing industry decreased dramatically in some period of time and on the basis of this fact he concludes that stockholders should expect the same effect in the processing of food industry. Moreover, the author concludes that this could be the reason for the Olympic Food to become more efficient. Though his claim may well have merit, the author's argument is not convincing because it is based on too many assumptions.
First of all, the author does not provide substantial basis for his comparison of film processing industry and food industry. He cites that the same principal of cost decrease in length of time can take place in both industries but there s no logical connection between these businesses. Moreover, it could be said that film processing industry is in strong connection with technology progress and the success in the cost of print decrease is the reward for technology progress achieved in these years but not for the increasing effectiveness in the film industry. On the other hand, food industry has much less connection with technology sector and costs of the final product are mostly formed from the costs of products used in the production process and therefore they are stable enough.
Second, the author cites that decrease in costs directly influences on profits. That could be true but not in the case presented. If the author talks about long-term factors that influence the costs of production then he should take into account other long term factors that influence the final price of products and thus profit margins. According to various market effectiveness theories it is clear that the decrease of costs and margin increases in some industry leads to the increase of competitors in that industry so that profit margins go back to the normal values. For instance, after film producing procedures became more effective, the price of the final products in this industry - films - decreased correspondingly. So, the expectation of higher profits due to collected experience can be considered as unreasonable.
In sum, the author's argument is not persuasive and convincing as it stands. The argument would become more conclusive if the author paid attention to some other aspects of business effectiveness such as better logistics or better management in the company achieved due to long experience. These factors would have convinced shareholders in the effectiveness of the company much better.
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."
In the preceding statement, the author claims that in length of time organizations become more efficient due to experience they collect. The author cites that the cost of print in film processing industry decreased dramatically in some period of time and on the basis of this fact he concludes that stockholders should expect the same effect in the processing of food industry. Moreover, the author concludes that this could be the reason for the Olympic Food to become more efficient. Though his claim may well have merit, the author's argument is not convincing because it is based on too many assumptions.
First of all, the author does not provide substantial basis for his comparison of film processing industry and food industry. He cites that the same principal of cost decrease in length of time can take place in both industries but there s no logical connection between these businesses. Moreover, it could be said that film processing industry is in strong connection with technology progress and the success in the cost of print decrease is the reward for technology progress achieved in these years but not for the increasing effectiveness in the film industry. On the other hand, food industry has much less connection with technology sector and costs of the final product are mostly formed from the costs of products used in the production process and therefore they are stable enough.
Second, the author cites that decrease in costs directly influences on profits. That could be true but not in the case presented. If the author talks about long-term factors that influence the costs of production then he should take into account other long term factors that influence the final price of products and thus profit margins. According to various market effectiveness theories it is clear that the decrease of costs and margin increases in some industry leads to the increase of competitors in that industry so that profit margins go back to the normal values. For instance, after film producing procedures became more effective, the price of the final products in this industry - films - decreased correspondingly. So, the expectation of higher profits due to collected experience can be considered as unreasonable.
In sum, the author's argument is not persuasive and convincing as it stands. The argument would become more conclusive if the author paid attention to some other aspects of business effectiveness such as better logistics or better management in the company achieved due to long experience. These factors would have convinced shareholders in the effectiveness of the company much better.
