The Problem with Equity

Like any ‘vicious circle,’ the more equity you already have invested, the more likely you are to invest more. Companies are often so eager to get the product or service to market, that they begin to allocate budget to engineering, production, marketing and promotional elements, adding more burden. In so doing, they forfeit the possibility of changing a large portion of what might make their idea more valuable. By the time most companies realize that the product isn’t creating a better experience for people, so much time and money has already been invested, it’s too late or expensive to change course. In some cases, quite literally, “the die is cast.”

The problem is compounded by the fact that the ultimate costs of production and implementation are often determined by decisions made quite early in the development process. It is estimated that over 80% of a project’s costs are determined during the first 20% of its design phase! So it becomes critical for firms to develop an understanding of what it takes to make customers and users happy early in the process, when equity in any one “version” is at a minimum.

The costs of proceeding with development without an early understanding of the user issues can be substantial. In the case of Dell Computer Corporation, a new line of notebook computers that had already been introduced to the market had to be scrapped because it was so frustrating to use. The product was “too late to market and too clunky to compete.” In addition, the new machines suffered from hard-to-read displays, awkward keyboards and a mouse that was difficult to use. They decided to cut their losses, which ultimately amounted to much more than the amount invested in the product development. The move lowered Dell’s first-quarter pretax income by $20 million and reduced per-share earnings by 35 cents, sending the company’s once high-flying stock down 23%.