Advertisement

Knowledge, Technology & Policy

, Volume 22, Issue 4, pp 241–258 | Cite as

How Do Institutional Actors in the Financial Market Assess Companies’ Product Design? The Quasi-rational Evaluative Schemes

  • Jaakko AsparaEmail author
Original Paper

Abstract

While various strategic business issues related to product design have been explored by academicians and practitioners, one issue has largely been ignored: how do financial markets assess and evaluate companies’ product design? The purpose of this article is to examine this issue, especially when it comes to the assessments and evaluations made by the most essential actors of contemporary financial markets: investment analysts and institutional investors. I develop propositions concerning the product design-related evaluative schemes and heuristics used by the financial market actors in evaluating companies as investment opportunities. I illustrate my propositions with examples from, e.g., the mobile phone industry as well as with interview excerpts from interviews with investment analysts and institutional investors. Propositions are provided both for assessments of companies’ individual end products (‘design as the end product’ perspective) and for assessments of companies’ design capabilities (‘design as a capability’ perspective). In essence, the propositions highlight that the evaluative schemes used by financial market actors are partly rational, yet involve biases and are likely to lead to overvaluation and undervaluation of certain kinds of product designs by certain kinds of companies. Thus, even from the perspective of profit-maximization, many of the evaluative schemes of the financial market actors are, at most, quasi-rational. Moreover, the evaluative schemes of the financial market actors may motivate company managers to pursue certain kinds of product design rather than others—and may even lead to self-reinforcing (vicious or virtuous) circles of certain kinds of product designs being advocated.

Keywords

Strategic design Design strategy Financial market Investors Investment analysts 

Notes

Acknowledgement

The author is indebted to research assistant Bo-Axel Blomberg for conducting interviews quoted in the article. The author also wishes to thank Jenny and Antti Wihuri Foundation for obtaining a grant for research related to the topic of the article.

References

  1. Adner, R., & Zemsky, P. (2006). A demand-based perspective on sustainable competitive advantage. Strategic Management Journal, 27(3), 215-239.CrossRefGoogle Scholar
  2. Anderson, J. C., & Narus, J. A. (1999). Business market management: understanding, creating, and delivering value. Prentice Hall: Upper Saddle River, NJ.Google Scholar
  3. Aspara, Jaakko (2008), “Creating and capturing design value”. In T. Keinonen (Ed.), Design connections—knowledge, value and involvement through design. Working paper F34, University of Art and Design, Helsinki, Finland (pp. 28-37). Available at http://www.taik.fi/images/stories/Tutkimusinstituutti/WorkingPapers/34.pdf
  4. Benner, M. J. (2007). The incumbent discount: stock market categories and response to radical technological change. Academy of Management Review, 32(3), 703-720.Google Scholar
  5. Beunza, D., & Garud, R. (2005). Securities analysts as frame makers. Working paper, New York University, New York.Google Scholar
  6. Boni, L., & Womack, K. L. (2006) Analysts, industries and price momentum. Journal of Financial and Quantitative Analysis, 41(1), 85-110.Google Scholar
  7. Booz, Allen, & Hamilton. (1982). New product management for the 1980s. New York, NY: Booz, Allen, and Hamilton.Google Scholar
  8. Borja de Mozota, B. (2002). Design and competitive edge: a model for design management excellence in European SMEs. Design Management Journal, Academic Review, 2, 88-103.Google Scholar
  9. Borja de Mozota, B. (2003). Design management: using design to build brand value and corporate innovation. New York, NY: Allworth Press.Google Scholar
  10. Borja de Mozota, B. (2006). The four powers of design: a value model in design management. Design Management Review, 17(2), 44-53.CrossRefGoogle Scholar
  11. Borja de Mozota, B., & Clipson, C. (1990). Design as a strategic management tool. In M. Oakley, B. Borja de Mozota & C. Clipson (Eds.), Design management: a handbook of issues and methods (pp. 73-84). Oxford, UK: Basil Blackwell.Google Scholar
  12. Bowman, C., & Ambrosini, V. (2000). Value creation versus value capture: towards a coherent definition of value in strategy. British Journal of Management, 11(1), 1-15.CrossRefGoogle Scholar
  13. Boztepe, S. (2007). User value: competing theories and models. International Journal of Design, 1(2), 57-65.Google Scholar
  14. Bradshaw, M. T. (2004). How do analysts use their earnings forecasts in generating stock recommendations? Accounting Review, 79, 25-50.CrossRefGoogle Scholar
  15. Brusoni, S., Prencipe, A., & Pavitt, K. (2001). Knowledge specialization, organizational coupling, and the boundaries of the firm: why do firms know more than they make. Administrative Science Quarterly, 46(4), 597-621.CrossRefGoogle Scholar
  16. Buchanan, R. (2001). Design research and the new learning. Design Issues, 17(4), 3-23.CrossRefGoogle Scholar
  17. Buchanan, R. (2008). Introduction: design and organizational change. Design Issues, 24(1), 2-9.CrossRefGoogle Scholar
  18. Bushee, B. J. (2004). Identifying and attracting the" right" investors: evidence on the behavior of institutional investors. Journal of Applied Corporate Finance, 16(4), 28-35.CrossRefGoogle Scholar
  19. Chaney, P. K., Devinney, T. M., & Winer, R. S. (1991). The impact of new product introductions on the market value of firms. Journal of Business, 64(4), 573-610.CrossRefGoogle Scholar
  20. Clark, G. L. (2007). Governing finance: Reconciling functional imperatives with stakeholder representation in financial institutions. Working paper, Oxford University and Harvard University.Google Scholar
  21. Creusen, M. E. H., & Schoormans, J. P. L. (2005). The different roles of product appearance in consumer choice. Journal of Product Innovation Management, 22(1), 63-81.CrossRefGoogle Scholar
  22. Damasio, A. R. (1994). Descartes' error: emotion, reason, and the human brain. New York, NY: G.P. Putnam & Sons.Google Scholar
  23. Davis, E. P. (2002). Institutional investors, corporate governance and the performance of the corporate sector. Economic Systems, 26(3), 203-229.CrossRefGoogle Scholar
  24. Davis, G. F., Diekmann, K. A., & Tinsley, C. H. (1994). The decline and fall of the conglomerate firm in the 1980s: the deinstitutionalization of an organizational form. American Sociological Review, 59, 547-570.CrossRefGoogle Scholar
  25. Davis, G., & Useem, M. (2002). Top management, company directors, and corporate control. In A. M. Pettigrew, H. Thomas & R. Whittington (Eds.), Handbook of strategy and management (pp. 233-259). London, UK: Sage.Google Scholar
  26. DiMaggio, P. J., & Powell, W. W. (1983). The iron cage revisited: institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48(2), 147-160.CrossRefGoogle Scholar
  27. Edwards, F. R., & Hubbard, R. G. (2000). The growth of institutional stock ownership: a promise unfulfilled. Journal of Applied Corporate Finance, 13(3), 92-104.CrossRefGoogle Scholar
  28. Fanelli, A. (2003). Securities analyst responses to CEO charismatic images: a symbolic perspective. Unpublished Doctoral Dissertation, University of Florida, University of Florida.Google Scholar
  29. Fanelli, A., & Grasselli, N. I. (2006). Defeating the Minotaur: The Construction of CEO Charisma on the US Stock Market. Organization Studies, 27(6), 811-832.CrossRefGoogle Scholar
  30. Fligstein, N., & Shin, T. (2004). Shareholder value and the transformation of the American economy, 1984-2001. Working paper 19, Center for the Study of Economy and Society, Cornell University.Google Scholar
  31. Folkman, P., Froud, J., Johal, S., & Williams, K. (2007). Working for themselves? Capital market intermediaries and present day capitalism. Business History, 49(4), 552-572.CrossRefGoogle Scholar
  32. Fombrun, C. J. (2001). Corporate reputations as economic assets. In M. A. Hitt, R. E. Freeman & J. S. Harrison (Eds.), The Blackwell handbook of strategic management (pp. 289-312). Oxford, UK: Blackwell.Google Scholar
  33. Frieder, L., & Subrahmanyam, A. (2005). Brand perceptions and the market for common stock. Journal of Financial and Quantitative Analysis, 40(1), 57-85.CrossRefGoogle Scholar
  34. Froot, K. A., Perold, A. F., & Stein, J. C. (1992). Shareholder trading practices and corporate investment horizons. Journal of Applied Corporate Finance, 5, 42-58.CrossRefGoogle Scholar
  35. Garcia, R., & Calantone, R. (2002). A critical look at technological innovation typology and innovativeness terminology: a literature review. Journal of Product Innovation Management, 19(2), 110-132.CrossRefGoogle Scholar
  36. Garner, S. (2004). An introduction to design and designing, Block 1, T211 Design and Designing Open University Worldwide.Google Scholar
  37. Gigerenzer, G., Todd, P. M., & ABC Research Group (Eds.). (1999). Simple heuristics that make us smart. Oxford, UK: Oxford University Press.Google Scholar
  38. Grewal, R., Kayande, U., & Roberts, P. W. (2005). Reputation, reputation coherence and performance reliability. Working Paper, Emory University, Atlanta, Georgia. Available at: http://goizueta.Emory.edu/faculty/PeterRoberts/documents/WP-ReputationandCoherence.Pdf
  39. Grinstein, Y., & Michaely, R. (2005). Institutional holdings and payout policy. Journal of Finance, 60(3), 1389-1426.CrossRefGoogle Scholar
  40. Hamel, G., & Prahalad, C. K. (1994). Competing for the future. Boston, MA: Harvard Business School Press.Google Scholar
  41. Hawley, J. P., & Williams, A. T. (2000). The rise of fiduciary capitalism: how institutional investors can make corporate america more democratic. Philadelphia: University of Pennsylvania Press.Google Scholar
  42. Hertenstein, J. H., & Platt, M. B. (1997). Developing a strategic design culture. Design Management Journal, 8(2), 10-19.Google Scholar
  43. Heskett, J. (2001). Past, present, and future in design for industry. Design Issues, 17(1), 18-26.CrossRefGoogle Scholar
  44. Hotchkiss, E. S., & Strickland, D. (2003). Does shareholder composition matter? Evidence from the market reaction to corporate earnings announcements. Journal of Finance, 58(4), 1469-1498.CrossRefGoogle Scholar
  45. Jevnaker, B. H. (2000). Championing design: perspectives on design capabilities. Design Management Journal, 11(4; SUPP/1), 25-39.Google Scholar
  46. Jevnaker, B. H. (2005). Vita activa: on relationships between design (ers) and business. Design Issues, 21(3), 25-48.CrossRefGoogle Scholar
  47. Johansson, U., & Holm, L. S. (2006). Brand management and design management. In J. E. Schroeder, & M. Salzer-Mörling (Eds.), Brand Culture (pp. 136-152). New York, NY: Routledge.Google Scholar
  48. Johansson, U., & Woodilla, J. (2008). Designers dancing within hierarchies: the importance of non-hierarchical power for design integration and implementation. The Design Journal, 11(2), 95-117.CrossRefGoogle Scholar
  49. Kotler, P. (2000). Marketing management (10th ed.). Upper Saddle River, NJ: Prentice Hall.Google Scholar
  50. Krippner, G. R. (2005). The financialization of the American economy. Socio-Economic Review, 3(2), 173-208.CrossRefGoogle Scholar
  51. Kuran, T., & Sunstein, C. R. (1999). Availability cascades and risk regulation. Stanford Law Review, 51(4), 683-768.CrossRefGoogle Scholar
  52. Lakonishok, J., Shleifer, A., & Vishny, R. W. (1994). Contrarian investment, extrapolation, and risk. Journal of Finance, 49(5), 1541-1578.CrossRefGoogle Scholar
  53. Lane, V., & Jacobson, R. (1995). Stock market reactions to brand extension announcements: the effects of brand attitude and familiarity. Journal of Marketing, 59(1), 63-77.CrossRefGoogle Scholar
  54. March, A. (1994). Usability: the new dimension of product design. Harvard Business Review, 72(5), 144-149.Google Scholar
  55. Martin, R., Casson, P., & Nisar, T. M. (2007). Investor engagement: investors and management practice under shareholder value. New York, NY: Oxford University Press.Google Scholar
  56. Minsky, H. P. (1993). Schumpeter and finance. In S. Biasco, A. Roncaglia & M. Salvati (Eds.), Market and Institutions in Economic Development: Essays in Honor of Sylos Labini (pp. 70-88). New York, NY: St. Martin's Press.Google Scholar
  57. Mol, J. M., Wijnberg, N. M., & Carroll, C. (2005). Value chain envy: explaining new entry and vertical integration in popular music. Journal of Management Studies, 42(2), 251-276.CrossRefGoogle Scholar
  58. Moreton, P., & Zenger, T. R. (2005). Corporate strategy, analyst coverage, and the uniqueness discount. Working paper, Olin School of Business, Washington University in St. Louis.Google Scholar
  59. Nelson, H. G., & Stolterman, E. (2003). The design way: intentional change in an unpredictable world: foundations and fundamentals of design competence. Englewood Cliffs, NJ: Educational Technology Publications.Google Scholar
  60. Nicolai, A., Schulz, A., & Thomas, T. W. (2009). What Wall Street wants—exploring the role of security analysts in the evolution and spread of management concepts. Journal of Management Studies, forthcomingGoogle Scholar
  61. Norman, D. A. (2004). Emotional Design: Why We Love (Or Hate) Everyday Things. New York, NY: Basic Books.Google Scholar
  62. Olson, E. M., Cooper, R., & Slater, S. F. (1998). Design strategy and competitive advantage. Business Horizons, 41(2), 55-61.CrossRefGoogle Scholar
  63. Pauwels, K., Silva-Risso, J., Srinivasan, S., & Hanssens, D. M. (2004). New products, sales promotions, and firm value: the case of the automobile industry. Journal of Marketing, 68(4), 142-156.CrossRefGoogle Scholar
  64. Porac, J. F., Ventresca, M. J., & Mishina, Y. (2002). Interorganizational cognition and interpretation. In J. A. C. Baum (Ed.), Companion to Organizations (pp. 579-598). Oxford: Blackwell.Google Scholar
  65. Prahalad, C. K., & Hamel, G. (1990). The core competence of the corporation. Harvard Business Review, 68(3), 79-91.Google Scholar
  66. Priem, R. L. (2007). A consumer perspective on value creation. Academy of Management Review, 32(1), 219-235.Google Scholar
  67. Priem, R. L., & Butler, J. E. (2001). Is the resource-based" view" a useful perspective for strategic management research? Academy of Management Review, 26(1), 22-40.CrossRefGoogle Scholar
  68. Rao, H., & Sivakumar, K. (1999). Institutional sources of boundary-spanning structures: the establishment of investor relations departments in the Fortune 500 industrials. Organization Science, 10(1), 27-42.CrossRefGoogle Scholar
  69. Rao, H., Greve, H. R., & Davis, G. F. (2001). Fool's gold: social proof in the initiation and abandonment of coverage by Wall Street analysts. Administrative Science Quarterly, 46(3), 502-526.CrossRefGoogle Scholar
  70. Raub, W., & Weesie, J. (1990). Reputation and efficiency in social interactions: an example of network effects. The American Journal of Sociology, 96(3), 626-654.CrossRefGoogle Scholar
  71. Rhodes-Kropf, M., Fisman, R., & Khurana, R. (2005). Governance and CEO turnover: do something or do the right thing. Working Paper, Columbia Business School, 2005., Google Scholar
  72. Rindova, V. P., Williamson, I. O., Petkova, A. P., & Sever, J. M. (2005). Being good or being known: an empirical examination of the dimensions, antecedents, and consequences of organizational reputation. Academy of Management Journal, 48, 1033-1049.Google Scholar
  73. Schipper, K. (1991). Analysts’forecasts. Accounting Horizons, 5(4), 105-121.Google Scholar
  74. Shapiro, C. (1983). Premiums for high quality products as returns to reputations. The Quarterly Journal of Economics, 98(4), 659-680.CrossRefGoogle Scholar
  75. Shefrin, H. (2001). Editorial commentary: do investors expect higher returns from safer stocks than from riskier stocks? Journal of Behavioral Finance, 2(4), 176-181.CrossRefGoogle Scholar
  76. Shefrin, H., & Statman, M. (1995). Making sense of beta, size, and book-to-market. Journal of Portfolio Management, 21(2), 26-34.CrossRefGoogle Scholar
  77. Srinivasan, S., Pauwels, K., Silva-Risso, J., & Hanssens, D. M. (2009). Product innovations, advertising, and stock returns. Journal of Marketing, 73(1), 24-43.CrossRefGoogle Scholar
  78. Tainio, R. (2003). Financialization of key Finnish companies. Nordiske Organisasjons-Studier, 5(2), 61-86.Google Scholar
  79. Terrey, N. A Complex organisation: discovering design. International DMI Education Conference, Design Thinking: New Challenges for Designers, Managers and Organizations,14-15 April 2008. ESSEC Business School, Cergy-Pointoise, France.Google Scholar
  80. Useem, M. (1996). Investor capitalism. New York, NY: Basic Books.Google Scholar
  81. Weigelt, K., & Camerer, C. (1988). Reputation and corporate strategy: a review of recent theory and applications. Strategic Management Journal, 9(5), 443-454.CrossRefGoogle Scholar
  82. Whalen, C. J. (2002). Money manager capitalism: still here, but not quite as expected. Journal of Economic Issues, 36(2), 401.Google Scholar
  83. Zeithaml, V. A., Rust, R. T., & Lemon, K. N. (2001). The customer pyramid: creating and serving profitable customers. California Management Review, 43(4), 118-142.Google Scholar
  84. Zorn, D., Dobbin, F., Dierkes, J., & Kwok, M. (2004). Managing investors: how financial markets shaped the American firm. In K. Knorr Cetina, & A. Preda (Eds.), The Sociology of Financial Markets. London: Oxford University Press:Google Scholar
  85. Zorn, D., Dobbin, F., Dierkes, J., & Kwok, M. (2005). Cui bono: institutional investors, securities analysts, agents, and the shareholder value myth. New public and private models of management: sensemaking and institutions, Copenhagen, Denmark.Google Scholar
  86. Zuckerman, E. W. (1999). The categorical imperative: securities analysts and the illegitimacy discount. American Journal of Sociology, 104(5), 1398-1438.CrossRefGoogle Scholar
  87. Zuckerman, E. W. (2000). Focusing the corporate product: securities analysts and de-diversification. Administrative Science Quarterly, 45(3), 591-619.CrossRefGoogle Scholar
  88. Zuckerman, E. W. (2004). Structural incoherence and stock market activity. American Sociological Review, 69(3), 405-432.CrossRefGoogle Scholar
  89. Zuckerman, E. W., Kim, T. Y., Ukanwa, K., & von Rittmann, J. (2003). robust identities or nonentities? Typecasting in the feature-film labor market 1. American Journal of Sociology, 108(5), 1018-1074.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media B.V. 2009

Authors and Affiliations

  1. 1.Helsinki School of Economics HSEHelsinkiFinland

Personalised recommendations