Companies are often forced to make decisions designed to give them the best possible outcome. In some cases, these decisions can be difficult, and the right path forward might be uncomfortable in the beginning. In looking at these decisions to conduct analysis, one is in the business of determining whether a decision is “good” or “bad.” Though these are simple terms, they should be defined for the purposes of this analysis. A “good” decision is one that provides the most benefits to the person making the decision in comparison to all other available options. It should be noted that many “good” decisions are not perfect. There are downsides and limitations to the good that flows from that decision. Still, if the person or company identifies the alternative that provides the most potential benefit in comparison to other available options, then that person has succeeded in making a “good” decision.
In this case, Pollo Tropical was a restaurant that relied heavily on the support of the local community to keep going. However, over time, local support declined, as people went to other restaurants and even the competitors of Pollo Tropical. With its revenue declining and its popularity on life support, the owners of Pollo Tropical had to make a decision. Should they continue to operate the company? Should they close down because of the lack of support? They ultimately chose to close down the restaurant. This was a good decision given the constraints they were facing, and even though the end result is less than ideal, it is a better result than the company would have faced if the company had gone in another direction.
1. Premise: Continuing to lose money without any potential for upside is bad. 1. Premise: The restaurant was going to continue to lose money. 1. Premise: The restaurant did not have any upside in the future. 1. Premise: if an outcome is bad, then the decision behind it is not good. 2. Conclusion: Closing the restaurant was a smart decision.
Ultimately the company was facing a difficult choice because it was losing money in the wake of the lost interest of the public. This is true because restaurants have certain fixed costs that require them to have a steady amount of sales in order to survive. While some restaurants have variable costs—such as the cost of the food that is bought—that can be adjusted downward when there is little interest, there are other costs that will remain the same no matter how many people come through the door. These costs are many. For instance, the company will have to pay the same amount of rent on its building whether it is full of eaters or completely empty. There are similar staffing costs, unless the company is going to lay off a huge chunk of its workers whenever there is a dip in popularity. There are also costs associated with marketing, with administration, and with businesses licenses that remain the same. This means that the restaurant’s ownership is on the hook for a large commitment of money in these situations, and if people are not coming to eat there, then these are sunk costs. Given the constraints the company faced, it had to consider whether it was a good idea to continue spending this money. Losing money in a business is certainly a bad thing, but some companies are willing to lose money for a while if they know they will recoup those losses on the back end through some kind of enhanced productivity down the line. In this case, the owners recognized that continuing to lose money month over month was a negative outcome for them, so they made the wise decision to shutter the doors rather than keeping the cycle alive.
There is an exception to the rule that losing money is always necessarily bad. That has to do with the concept of loss leadership (Li, Gu, & Liu, 2013). Some companies will have elements that are loss leaders. Their entire concept might be a loss leader in itself for a while. A loss leader is something that takes a knowing loss for a while because of the knowledge that the temporary loss will lead to long-term gain. 1. Premise: If a company is losing money because that loss will enable them to make money in the future, then this is good. 1. Premise: Pollo Tropical was not losing money with the eye on making money in the future. 2. Conclusion: Pollo Tropical was not operating as a loss leader. 2. Conclusion: Pollo Tropical’s decision to close was a smart one.
One can think of many examples of loss leadership in business. Uber is currently using a loss leadership strategy with its ride sharing. It is losing money year over year with its policy of offering cheap rides through discounts and subsidizing the cost. The goal is to get people so user to the idea of Uber that taxis are driven out of the industry. When that happens, and when people are so accustomed to ride sharing as their primary means of transportation, then the taxi industry will be no more. This would remove the major competitor from the market, allowing Uber to charge much more later and actually turn a profit. Other companies use loss leadership as a means of making money in other areas. For instance, for the longest time, Las Vegas casinos would use their hotels as loss leaders (Hess & Gerstner, 1987). They gave away many rooms and operated their hotel operation at an intentional loss so they could get people in the building to gamble (Eadington, 1999). They would then make up the loss in gambling revenue, leading to a long-term net gain for the company. These are strategic leaks that are positive in nature. Pollo Tropical, on the other hand, was not operating as a loss leader. There was no long-term strategy for the company to benefit from the losses it was taking. It was driving no other company out of the market, and it was not bringing a disruptive technology to market that would pay dividends over the long run. When trying to make a good decision on how to move forward and whether there is a future, a company must assess its own upside. Is there some reason why the results a company is seeing currently will change in the future? Ultimately Pollo Tropical made a good decision because it figured out that there was no reason why the existing conditions had to change going forward, and it was much more likely that the situation would remain the same into perpetuity.
Ultimately Pollo Tropical had a good decision for a number of reasons. The company figured out the right premises—that losing money is bad and losing money can only be good if there is a strategy behind it or if there is reason to think that it might change going forward. Given the situation Pollo Tropical was in, the company made the right decision to close down as opposed to throwing bad money after bad money. The company cut its losses, so to speak, with the owners living to fight another day potentially in another business.
Deductive reasoning example: This paper used deductive reasoning when going from the premise that losing money is always bad to Pollo Tropical losing money to Pollo Tropical needing to close because it should not make a bad decision.
Inductive reasoning example: This paper operated from the general position that losing money is always bad unless there is a loss leadership strategy. It then reached the conclusion that a company should only continue if it was using a loss leadership strategy or making money.
Eadington, W. R. (1999). The economics of casino gambling. The Journal of Economic Perspectives, 13(3), 173-192.
Hess, J. D., & Gerstner, E. (1987). Loss leader pricing and rain check policy. Marketing Science, 6(4), 358-374.
Li, X., Gu, B., & Liu, H. (2013). Price dispersion and loss-leader pricing: Evidence from the online book industry. Management Science, 59(6), 1290-1308.