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

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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.

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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.

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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.

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    Jaakko Aspara

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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

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