The following appeared in a memorandum from the owner of Movies Galore a chain of video rental stores In order to reverse the recent decline in our profits we must reduce operating expenses at Movies Galore s ten video rental stores Since we are famous fo

One question which needs to be addressed before implementing the recommendation is whether there are not other ways to improve profits besides cutting operating expenses. Without proof, the author decides, first, that there are only two viable options for increasing the profits of Movies Galore: raising rental prices, and cutting costs. He rules out the first course, and hence claims the second option must be chosen. But it seems there may be alternative methods of increasing profits, such as initiating advertising campaigns or closing unprofitable Movies Galore locations.
Even if it is granted that there are only two options for increasing profitability—cutting costs, and raising rental prices—one might wonder why raising rental prices is so unthinkable. The author implies that because Movies Galore is famous for special bargains, raising the rental prices would eliminate this competitive advantage and decrease profitability. However, in making this conclusion, he makes several assumptions without considering questions that need to be addressed. First, he assumes that there is no room to raise current prices and yet maintain lower prices than competitors. One would need to ask if prices could be increased slightly, while keeping them cheap. Even if there is no room for such a strategy, the author assumes that Movies Galore’s reputation for bargain pricing would evaporate if they increased their prices slightly. Perhaps such a reputation would be widespread enough to persist despite a slight increase in prices. And thirdly, even if the reputation for bargains would be eliminated by an increase in prices, the author assumes that Movies Galore cannot change course and be successful in some other way. Perhaps it could instead become known as the store with the friendliest employees. Perhaps it already is, and the author is wrong to believe that a causal relationship between bargain prices and success exists, when the real cause of Movies Galore’s good reputation is entirely independent of its prices. The author needs to answer these questions to convince us that profits are caused by bargains, and not by the other factors that may be involved.
Another question that needs to be raised is whether or not the downtown Marston store is truly analogous to the other nine Movies Galore stores. The author seems to assume that because the cost-cutting measures worked at the Marston location, it will work at the others, but this is far from clear. Perhaps the patrons of the other Movies Galore locations would resent such changes in the hours and stock of their local stores.
Perhaps the most important question that needs to be asked is whether the Marston location’s changes truly increased profitability. The author writes that the Marston store decreased operating expenses by closing earlier and cutting its stock, but he makes no mention of increased profitability. It is quite possible that the Marston location’s profits decreased as a result of their cost cutting, and this is a question that needs to be addressed. The author then jumps to the conclusion that taking similar measures would increase profitability at other locations, though such a connection has not even been established at the Marston store.
Even if the cost-cutting measures increased profitability at the Marston store last month (and a causal relationship, though presumably assumed, is still far from evident), there is no guarantee that such measures would continue to increase profitability over time. One would need to ask: Why not observe how the Marston location’s action affect profitability over several months, before implementing such sweeping changes at every store? A single month is a very short time span, and the habits of customers may change slowly. As word gets around that the Marston store has cut their hours and their selection, they may in fact jeopardize their reputation for offering “great movies at low prices.” After all, the name of the franchise is Movies Galore, and by drastically reducing the available selection, they may alienate their customer base. If, as mentioned above, Movies Galore is famous for more than its great bargains—if customers prefer Movies Galore because of its selections, as well—then such a move may drastically reduce profits over time. It seems extremely rash to implement such a new and relatively untried strategy at every Movies Galore location, before the effects can be fully observed and interpreted.