Quality of Management and Project Quality

In the preceding section we examined some of the factors that determine the attractiveness of the projects a firm will face. While some factors, such as government restrictions on entry, may largely be out of the control of incumbent management, there are other factors that can clearly be influenced by management.13 may largely be out of the control of incumbent management, there are other factors that can clearly be influenced by management. Considering each of the factors discussed above, for instance, we would argue that a good management team can increase both the number of and the returns on available projects by

• taking projects that exploit any economies of scale that the firm may possess; in addition, management can look for ways it can create economies of scale in the firm's existing operations.

• establishing and nurturing cost advantages over its competitors; some cost advantages may arise from labor negotiations, while others may result from long-term strategic decisions made by the firm. For instance, by owning and developing SABRE, the airline reservation system, American Airlines has been able to gain a cost advantage over its competitors.

• taking actions that increase the initial cost for new entrants into the business; one of the primary reasons Microsoft's was able to dominate the computer software market in the early 1990s was its ability to increase the investment needed to develop and market software programs.

• increasing brand name recognition and value through advertising and by delivering superior products to customers; a good example is the success that Snapple experienced in the early 1990s in promoting and selling its iced tea beverages.

• nurturing markets in which the company's differential advantage is greatest, in terms of either cost of delivery or brand name value. In some cases, this will involve expanding into foreign markets, as both Levi Strauss and McDonalds did in the 1980s in order to exploit their higher brand name recognition in those markets. In other

13 When government policy is influenced by lobbying by firms, it can be argued that even these factors may be affected by the management of a firm.

cases, this may require concentrating on segments of an existing market as The Gap did, when it opened its Banana Republic division, which sells upscale outdoor clothing.

• improving the firm's reputation for customer service and product delivery; this will enable the firm to increase both profits and returns. One of the primary factors behind Chrysler's financial recovery in the 1980s was the company's ability to establish a reputation for producing quality cars and minivans.

• developing distribution channels that are unique and cannot be easily accessed by competitors. Avon, for instance, emplyed large sales force to go door-to-door to reach consumers who could not be reached by other distribution channels.

• getting patents on products or technologies that keep out the competition and earn high returns; doing so may require large investments in research and development over time. It can be argued that Intel's success in the market for semiconductors can be traced to the strength of its research and development efforts and the patents it consequently obtained on advanced chips, such as the Pentium.14

While the quality of management is typically related to the quality of projects a firm possesses, a good management team does not guarantee the existence of good projects. In fact, there is a rather large element of chance involved in the process; even the best laid plans of the management team to create project opportunities may come to naught if circumstances conspire against them - a recession may upend a retailer, or an oil price shock may cause an airline to lose money.

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