GMAT - Graduate Management Admission Test

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.( )

In this memorandum, the vice president of Road Food suggests that the company motivate its advertising agency to perform better by basing the agency�s pay on the Road Food�s profits. In support of this suggestion, the vice president points out that although Road Food initially thought the ad agency was following company recommendations, competitor, Street Eats earned higher profits last year. The vice president also notes that Street Eats has fewer restaurants than Road Food, and that Road Food spent nearly as much money on advertising as Street Eats did. This argument is unconvincing, since it relies on dubious assumptions and comparisons.

Page numbers AWA First, the vice president assumes that the ad campaign caused the low profits. However, the vice president ignores many other factors that contribute to profitability. In particular, the fact that Road Food has been spending less advertising money per restaurant than Street Eats suggests that its unwillingness to spend more may be the main reason for disappointing profits. Second, the author implies that the ad agency failed to implement Road Food�s guidelines, and that this failure was the reason for disappointing profits. However, it is equally possible that the ad agency faithfully followed all suggestions from Road Food, and that those suggestions were the cause of the disappointing profits. In this respect, the author unfairly shifts blame from Road Food to the ad agency.

Third, the author�s comparison between Road Food and Street Eats is less relevant than a comparison between Road Food�s own profits prior to its latest ad campaign and its profits during this campaign. Comparing its own profits during these time periods would more accurately reflect the ad agency�s effectiveness than comparing profits of two different companies.

Finally, the author assumes that the ad agency will be more motivated if its fee is based on Road Food profits. However, the author does not support this claim. In fact, given that Road Food�s profits have been lower than expected, it is just as likely that the ad agency would be less motivated by the suggested fee structure than by some other fee structure.

In conclusion, the argument is unconvincing as it stands. To strengthen it, the vice president must provide evidence that the ad campaign caused last year�s disappointing profits, and must examine and rule out other factors that may have contributed to disappointing profits.