Skip to main content

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

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.

This is a preview of subscription content, access via your institution.

Fig. 1

Notes

  1. The expected earnings or profits (as “discounted” to their present value) determine the price that the investors are willing to pay for the company’s stock, which, if bought, essentially gives its holder-investor a right to a share of the company’s future earnings and hence, also determine the stock’s market valuation/price.

  2. When announcing new products, companies indeed imply—in their customer and/or investor communication—some of their features as the most important ones, relative to existing products in the market. This can be done explicitly by pointing out “the most important new features” of the new product, or implicitly by listing or mentioning certain features while not mentioning others.

References

  • Adner, R., & Zemsky, P. (2006). A demand-based perspective on sustainable competitive advantage. Strategic Management Journal, 27(3), 215-239.

    Article  Google Scholar 

  • Anderson, J. C., & Narus, J. A. (1999). Business market management: understanding, creating, and delivering value. Prentice Hall: Upper Saddle River, NJ.

    Google Scholar 

  • 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

  • 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 

  • Beunza, D., & Garud, R. (2005). Securities analysts as frame makers. Working paper, New York University, New York.

    Google Scholar 

  • Boni, L., & Womack, K. L. (2006) Analysts, industries and price momentum. Journal of Financial and Quantitative Analysis, 41(1), 85-110.

    Google Scholar 

  • Booz, Allen, & Hamilton. (1982). New product management for the 1980s. New York, NY: Booz, Allen, and Hamilton.

  • 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 

  • Borja de Mozota, B. (2003). Design management: using design to build brand value and corporate innovation. New York, NY: Allworth Press.

    Google Scholar 

  • Borja de Mozota, B. (2006). The four powers of design: a value model in design management. Design Management Review, 17(2), 44-53.

    Article  Google Scholar 

  • 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 

  • 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.

    Article  Google Scholar 

  • Boztepe, S. (2007). User value: competing theories and models. International Journal of Design, 1(2), 57-65.

    Google Scholar 

  • Bradshaw, M. T. (2004). How do analysts use their earnings forecasts in generating stock recommendations? Accounting Review, 79, 25-50.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Buchanan, R. (2001). Design research and the new learning. Design Issues, 17(4), 3-23.

    Article  Google Scholar 

  • Buchanan, R. (2008). Introduction: design and organizational change. Design Issues, 24(1), 2-9.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Clark, G. L. (2007). Governing finance: Reconciling functional imperatives with stakeholder representation in financial institutions. Working paper, Oxford University and Harvard University.

    Google Scholar 

  • 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.

    Article  Google Scholar 

  • Damasio, A. R. (1994). Descartes' error: emotion, reason, and the human brain. New York, NY: G.P. Putnam & Sons.

    Google Scholar 

  • Davis, E. P. (2002). Institutional investors, corporate governance and the performance of the corporate sector. Economic Systems, 26(3), 203-229.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Fanelli, A. (2003). Securities analyst responses to CEO charismatic images: a symbolic perspective. Unpublished Doctoral Dissertation, University of Florida, University of Florida.

  • 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.

    Article  Google Scholar 

  • 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.

  • 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.

    Article  Google Scholar 

  • 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 

  • Frieder, L., & Subrahmanyam, A. (2005). Brand perceptions and the market for common stock. Journal of Financial and Quantitative Analysis, 40(1), 57-85.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Garner, S. (2004). An introduction to design and designing, Block 1, T211 Design and Designing Open University Worldwide.

  • Gigerenzer, G., Todd, P. M., & ABC Research Group (Eds.). (1999). Simple heuristics that make us smart. Oxford, UK: Oxford University Press.

    Google Scholar 

  • 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

  • Grinstein, Y., & Michaely, R. (2005). Institutional holdings and payout policy. Journal of Finance, 60(3), 1389-1426.

    Article  Google Scholar 

  • Hamel, G., & Prahalad, C. K. (1994). Competing for the future. Boston, MA: Harvard Business School Press.

    Google Scholar 

  • 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 

  • Hertenstein, J. H., & Platt, M. B. (1997). Developing a strategic design culture. Design Management Journal, 8(2), 10-19.

    Google Scholar 

  • Heskett, J. (2001). Past, present, and future in design for industry. Design Issues, 17(1), 18-26.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Jevnaker, B. H. (2000). Championing design: perspectives on design capabilities. Design Management Journal, 11(4; SUPP/1), 25-39.

    Google Scholar 

  • Jevnaker, B. H. (2005). Vita activa: on relationships between design (ers) and business. Design Issues, 21(3), 25-48.

    Article  Google Scholar 

  • 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 

  • 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.

    Article  Google Scholar 

  • Kotler, P. (2000). Marketing management (10th ed.). Upper Saddle River, NJ: Prentice Hall.

    Google Scholar 

  • Krippner, G. R. (2005). The financialization of the American economy. Socio-Economic Review, 3(2), 173-208.

    Article  Google Scholar 

  • Kuran, T., & Sunstein, C. R. (1999). Availability cascades and risk regulation. Stanford Law Review, 51(4), 683-768.

    Article  Google Scholar 

  • Lakonishok, J., Shleifer, A., & Vishny, R. W. (1994). Contrarian investment, extrapolation, and risk. Journal of Finance, 49(5), 1541-1578.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • March, A. (1994). Usability: the new dimension of product design. Harvard Business Review, 72(5), 144-149.

    Google Scholar 

  • 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 

  • 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 

  • 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.

    Article  Google Scholar 

  • 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.

  • 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 

  • 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, forthcoming

  • Norman, D. A. (2004). Emotional Design: Why We Love (Or Hate) Everyday Things. New York, NY: Basic Books.

    Google Scholar 

  • Olson, E. M., Cooper, R., & Slater, S. F. (1998). Design strategy and competitive advantage. Business Horizons, 41(2), 55-61.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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 

  • Prahalad, C. K., & Hamel, G. (1990). The core competence of the corporation. Harvard Business Review, 68(3), 79-91.

    Google Scholar 

  • Priem, R. L. (2007). A consumer perspective on value creation. Academy of Management Review, 32(1), 219-235.

    Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • 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.,

  • 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 

  • Schipper, K. (1991). Analysts’forecasts. Accounting Horizons, 5(4), 105-121.

    Google Scholar 

  • Shapiro, C. (1983). Premiums for high quality products as returns to reputations. The Quarterly Journal of Economics, 98(4), 659-680.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Shefrin, H., & Statman, M. (1995). Making sense of beta, size, and book-to-market. Journal of Portfolio Management, 21(2), 26-34.

    Article  Google Scholar 

  • Srinivasan, S., Pauwels, K., Silva-Risso, J., & Hanssens, D. M. (2009). Product innovations, advertising, and stock returns. Journal of Marketing, 73(1), 24-43.

    Article  Google Scholar 

  • Tainio, R. (2003). Financialization of key Finnish companies. Nordiske Organisasjons-Studier, 5(2), 61-86.

    Google Scholar 

  • 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.

  • Useem, M. (1996). Investor capitalism. New York, NY: Basic Books.

    Google Scholar 

  • Weigelt, K., & Camerer, C. (1988). Reputation and corporate strategy: a review of recent theory and applications. Strategic Management Journal, 9(5), 443-454.

    Article  Google Scholar 

  • Whalen, C. J. (2002). Money manager capitalism: still here, but not quite as expected. Journal of Economic Issues, 36(2), 401.

    Google Scholar 

  • 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 

  • 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:

  • 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 

  • Zuckerman, E. W. (1999). The categorical imperative: securities analysts and the illegitimacy discount. American Journal of Sociology, 104(5), 1398-1438.

    Article  Google Scholar 

  • Zuckerman, E. W. (2000). Focusing the corporate product: securities analysts and de-diversification. Administrative Science Quarterly, 45(3), 591-619.

    Article  Google Scholar 

  • Zuckerman, E. W. (2004). Structural incoherence and stock market activity. American Sociological Review, 69(3), 405-432.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

Download references

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.

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Jaakko Aspara.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Aspara, J. How Do Institutional Actors in the Financial Market Assess Companies’ Product Design? The Quasi-rational Evaluative Schemes. Know Techn Pol 22, 241–258 (2009). https://doi.org/10.1007/s12130-009-9093-9

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s12130-009-9093-9

Keywords

  • Strategic design
  • Design strategy
  • Financial market
  • Investors
  • Investment analysts