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 twenty-fifth birthday, we can expect that our long experience will enable us to minimize costs and thus maximize profits."
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My Response:
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The company is trying to convince the stockholders that by using its long experience in the industry the company can minimize the production cost and increase the profit. In this process the company is giving the example of the film processing and showcases how the process has become so cost effective after many years of the experience.
The argument that the company presents however lacks evidences and depends on many assumptions which are neither stated in the argument nor are very obvious.
The company compares the process of the film production with the processing of the frozen food. The way the cost effectiveness is reached in the film processing is also not disclosed. It is true that experience helps a lot in the cost reduction but cost reduction in the film processing has been phenomenal. The efficiency in the film processing may be because of the extensive research done in this science. May be it is an evolving technology and latest research may have resulted in the cost effectiveness of the process. This may not be true for the processing of the frozen food. The process might have reached the pinnacle of the technology use and further cost effectiveness may not be possible.
Also the two industries the company is comparing in the argument are completely different in the processes and the products. The biggest challenge in the frozen food processing company may be the storage of the food. That may require maintaining lower temperature in the storage area to prevent the food from being perished. There is no such requirement in the film processing.
Also, the cost effectiveness the film processing has demonstrated may not be solely by the experience. Other factors may also have played major role in the achievement. It may be possible that demand for the films rose dramatically in the decade of 1970s which resulted in the drop of the prices. This may not be true for the frozen food industry.
At last, even if we assume that the two industries are comparable and the experience in the frozen food processing will help the company to reduce the processing cost, we cannot assume that this will surely mean the increase in the profits. Frozen food market may be very competitive which may push the company to lower the prices. This may not result in the desired profit increase.
To strengthen the argument the company should have presented with an example of a similar company who has achieved the cost effectiveness in due course of time being in the industry. The company should have also provided the statistics proving that the market conditions remain at least same if not better for the frozen foods and there are no drop in the selling price of the product and thus any reduction in the processing cost will directly result in the increase in the profits.
"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 twenty-fifth birthday, we can expect that our long experience will enable us to minimize costs and thus maximize profits."
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My Response:
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The company is trying to convince the stockholders that by using its long experience in the industry the company can minimize the production cost and increase the profit. In this process the company is giving the example of the film processing and showcases how the process has become so cost effective after many years of the experience.
The argument that the company presents however lacks evidences and depends on many assumptions which are neither stated in the argument nor are very obvious.
The company compares the process of the film production with the processing of the frozen food. The way the cost effectiveness is reached in the film processing is also not disclosed. It is true that experience helps a lot in the cost reduction but cost reduction in the film processing has been phenomenal. The efficiency in the film processing may be because of the extensive research done in this science. May be it is an evolving technology and latest research may have resulted in the cost effectiveness of the process. This may not be true for the processing of the frozen food. The process might have reached the pinnacle of the technology use and further cost effectiveness may not be possible.
Also the two industries the company is comparing in the argument are completely different in the processes and the products. The biggest challenge in the frozen food processing company may be the storage of the food. That may require maintaining lower temperature in the storage area to prevent the food from being perished. There is no such requirement in the film processing.
Also, the cost effectiveness the film processing has demonstrated may not be solely by the experience. Other factors may also have played major role in the achievement. It may be possible that demand for the films rose dramatically in the decade of 1970s which resulted in the drop of the prices. This may not be true for the frozen food industry.
At last, even if we assume that the two industries are comparable and the experience in the frozen food processing will help the company to reduce the processing cost, we cannot assume that this will surely mean the increase in the profits. Frozen food market may be very competitive which may push the company to lower the prices. This may not result in the desired profit increase.
To strengthen the argument the company should have presented with an example of a similar company who has achieved the cost effectiveness in due course of time being in the industry. The company should have also provided the statistics proving that the market conditions remain at least same if not better for the frozen foods and there are no drop in the selling price of the product and thus any reduction in the processing cost will directly result in the increase in the profits.
