2. Introduction to Corporate Research & Research Methodologies Chapter 5 & 6

3. Research is a structured enquiry that relies on scientific methodology to answer questions and create NEW knowledge. Remember “research” is comprised of two syllables – “re” and “search” This means the careful “re”thinking and systematic search for facts related to some area of curiosity.

4. Research is divided into two broad categories: (1) Basic (2) Applied NEW Basic Research is the pursuit of NEW Knowledge for the sake of Knowing NEW Applied Research is the pursuit of NEW Knowledge for a specific Purpose.

5. Basic Research   Basic Research attempts to improve the "knowledge of humanity.“ Applied Research   Applied Research attempts to improve the "condition of humanity."

6. Corporate research is a branch of applied research. It involves two initial steps: (1) Formulating a research question or questions. (2) Pursuing answers by exploring (mining) multiple data sources. Sources include: Independent technical reports by performance analysts Media reports about the firm's achievements and behaviors The 10-K, 10-Q, 8-K, Annual Report, Proxy Statements, etc. Direct observations of the firm – specifically on site visitations and inspections

7. Research Basic Applied Corporate Research ContextPerformance

8. For YOUR PDE ( Project Demonstrating Excellence )… The Corporate Research question contains three dimensions: 1) Did the company appropriately fulfill its social responsibilities? 2) Did the company adequately fulfill its financial objectives? 3) Did the company position itself for future growth and prosperity?

9.  Ethical  Appropriately People-sensitive  Environmentally sensitive  Balanced for all stakeholders Were decisions and actions:

10.  Was firm performance in each of the four crucial financial measurement areas satisfactory? The four areas are known as the Financial Four:  1. Profit, Equity, & Share Value Management  2. Debt Management  3. Cash Management  4. Asset Management

11.  Does the firm have clear vision and mission statements?  Does the mission statement seem grounded in logic?  Do these statements suggest a company committed to forward thinking?  Has the TMT suggested the need to balance between long- term and short-term priorities? sustainable  Has the company achieved a sustainable competitive advantage?  Can the firm cope with rapid changes in the general and competitive environments?  Does the TMT appear to be capable of innovative thinking?  Has the TMT entertained expansion plans?  Does the firm have a history of making plans without successful implementation?

12. The C orporate A nalysis T emplate (CAT) guides three crucial activities: 1. Research Activities ( gathering & organizing ) assessing 2. Evaluation Activities ( assessing ) reporting 3. Reporting Activities ( reporting )

13. Research Evaluate Report CAT

14. CAT Corporate Analysis Template Research Activities (Contextual and Performance Data) 1. General Environment 2. Competitive Environment 3. Internal Environment 4. Qualitative Performance 5. Financial Performance Evaluation Activities (Target and Benchmark) 1. Profit, Equity, & Share Value 2. Debt (financial leverage) 3. Cash 4. Asset (utilization) 5. Organizational Citizenship 6. Strategic Positioning Reporting Activity (Findings and Conclusions) 1. Grade assigned to each performance category 2. Overall performance assessment 3. Rationale for conclusions

15. I. Two categories of “data mining” in the CAT system:  (1) Context (The firm’s external environment – general & competitive)  (2) Performance ( The firm’s behavior and achievements ). II. Data mined involves both: primary and secondary information.  “Primary” refers to observable data directly related to performance  “Secondary” refers to opinions of other analysts about performance

16. DataMining ContextDataPerformanceData TargetCompany BenchmarkCompanyGeneralEnvironmentCompetitiveEnvironment Qualitative Financial Qualitative Financial Research Activities

18. Context data relate to the external environment Context data are crucial to the understanding of the conditions and challenges confronting TMTs Context data help identify strengths and weaknesses as well as its opportunities and threats. Context Data are crucial to the accurate and fair assessment a firm’s Performance Data. The External Environment = General + Competitive

19. Context Data General Environment Competitive Environment

20. Sociocultural Technological Political/Legal Demographics Economic TargetCompany General Environment

21. Competitive Environment Suppliers Unions Associations NewEntrants OtherInterestGroups Competitors Creditors Customers Substitutes TargetCompany

22. General Environment Competitive Environment Demographic Sociocultural Political/LegalEconomicTechnological Customers Creditors Competitors Suppliers Substitutes Unions Associations New Entrants Interest Groups Target Company Resources Leadership

24. Performance Data QualitativeFinancial How well did the company perform within the general and competitive environments?

25. Includes a firm’s decisions, actions, & results – Examples:  Reputation  Relationships  Behaviors  Competitive advantages  Strategies  Financial achievements There are multiple sources for performance data: 1. The firm’s annual report and/or 10K 2. The Internet 3. Newspapers and periodicals including The Wall Street Journal, Barron’s, Fortune, Newsweek, etc. These can reveal additional data related to the firm’s financial health, credit rating, rumors, scandal, litigation, or bankruptcy potential.

27. Organizational Citizenship EmployeesCustomersCompetitorsDirectorsGovernmentEnvironmentCommunityStockholdersCommunicationPersonaVendors

28. Strategic Positioning Vision Mission Competitive Advantage Environment Adaptability Innovation Plan & Progress

30.  Balance Sheets  Assets  Liabilities  Equity  Income Statements  Revenues  Expenses  Statement of Cash Flows  Operating Activities  Investing Activities  Financing Activities

31. Financial Performance Profit, Equity, & Share Value DebtCashAsset

33. DebtManagement AssetUtilization StrategicPositioning OrganizationalCitizenship Cash Management Profit, Equity, & Share Value PerformanceScorecardPSC The CAT system guides the collection of crucial data that is then entered into the computerized PSC analysis program for a coalesced summary of corporate performance.

34. PerformanceEvaluation Qualitative Data FinancialData OrganizationalCitizenshipStrategicPositioning Profit, Equity, & Share Value ManagementDebtManagementCashManagementAssetManagement Evaluation Activities

35. Corporate Research Methodologies – Data Mining Methods Chapter 6

36. CAT PSC DataMining Corporate research is a process of mining (extracting) valuable informational gems from existing databases. Corporate Research Methodologies – Data Mining Methods

37. Search, Investigate, Collect

38. (1)Profit, Equity, & Share Value (2)Debt Management (3)Cash Management (4)Asset Management (Social Responsibility) (5)Organizational Citizenship (Social Responsibility) (Sustainable growth) (6)Strategic Positioning (Sustainable growth)

39. Data Mining Corporate Performance 1.Establish Context (Gather information about the external environment [General and Competitive] to develop a clear understanding of the context in which the target firm competes) 2. Assemble Internal Data (Gather information about the firm's internal environment [Resources and Leadership] to understand the infrastructure the TMT has created) General & Competitive environments = sources of Opportunities and Threats Resources & Leadership = sources of Strengths and Weaknesses

40. Data mining involves researching & collecting two types of data: (1) Context Data (2) Performance Data

41. Step 1: Select a target company Step 2: Select a benchmark company Step 3: Determine the primary industry in which your target competes Step 4: Research information about the competitive environment Step 5: Research information about the general environment Step 6: Search for published information about the target’s internal environment and its qualitative and financial performance. Step 7: Research how the company views itself – ( Its self-perception ). Find this information on the company website and in the letters to shareholders in the annual report. Step 8: Repeat steps 6 & 7 for your benchmark. 5-folder system Step 9: Organize your data into a 5-folder system.

42. Folder 1: All data pertaining to the target’s external environment ( general & competitive ) Folder 2: All data pertaining to the target’s internal environment and qualitative performance Folder 3: All data pertaining to the target’s financial performance Folder 4: All data that identifies the internal environment and qualitative performance of the benchmark Folder 5: All data that pertains to the benchmark’s financial performance

43. Drawing an OVERVIEW of… Industries, Data Mining, and Annual Reports

44. An industry is an environment in which a number of companies are providing services or producing products that are closely related. Remember: The condition of an industry is a window into the challenges and opportunities that your target company is facing.

45. These are government codes to identify industries. They are helpful in identifying and collecting data about the target’s competitive environment. SIC = Standard Industrial Classification NAICS = North American Industrial Classification System For more information on SIC & NAICS see Chapter Two in your text.

46. Categories of Industries

47. The annual report is “The Mother Lode” of company-specific performance data. It includes information about both – ► Financial Performance ► Qualitative Performance The letters to the stockholders contain numerous clues about the internal environment of the company and how management is coping with the competitive and general environments.

48. An annual report is a written document detailing certain aspects of performance as well as the company’s philosophy and plans. Many annual reports also include information about the firm’s perception of its VISION and MISSION.

49. General segments of the Annual Report Report of Management Board Chair accepts responsibility for annual report and asserts that it complies with SEC requirements. Also indicates control systems and internal auditing procedures are in place. Auditor’s Report Public accounting firm summarizes its independent audit of the company and indicates whether or not the company appears to be fairly representing its financial condition. It also states an opinion about the adherence to generally accepted accounting principles. Management Discussion This is management’s interpretation of its own performance. It includes a gamut of items both quantitative and qualitative. It will discuss results of operations and funding items.

50. Mandated general segments of the Annual Report (cont) Financial Statements Income Statement Statement of Earnings (Income Statement), Balance Sheet Statement of Financial Position (Balance Sheet), and Statement of Cash Flows are basic requirements by the SEC. Other items can be included. Selected Financial Data This provides information helpful for making comparisons over longer periods of time.

51. Statement of Earnings (Income Statement) – The Income Statement summarizes the revenues and expenses for a complete accounting period. Generally three years of data are included in the Income Statements Statement of Financial Position (Balance Sheet) – The Balance Sheet reveals the year-end values of assets, debts, and equity. Generally two years of data are included in the Balance Sheets.

52. Statement of Stockholders’ Equity – The NET value in the stockholder’s account is simply… Assets less Debts. A comprehensive detail of changes in stockholders’ equity is usually provided. Statement of Cash Flows – Consists of a three-category summary of how cash has been flowing through the company. The broad categories are: Operating Activities Investing Activities Financing Activities

53. Proxy statements Proxy statements are available from all publicly traded companies. It contains information such as: Invitation to the annual meeting Legal rights and administrative details available to the shareholders Biographies of all directors (most with pictures) Board committees & board compensation Executive compensation Shareholder proposals SEC Form DEF 14A SEC Form DEF 14A is a filing with the Securities and Exchange Commission (SEC) used in combination with an annual proxy. It includes: 1.Adequate information to allow shareholders to make informed decision when voting their shares. 2.Date, time and place of shareholder meetings, 3.Dissenter’s right of appraisal, modification or change of securities, voting procedures, and other relevant issues and data.

54. Corporate Analysis Template [CAT] ResearchEvaluationReport FinancialQualitativeSynthesize Defend Recommendation Financial Recommend Action Qualitative Profit, Equity, Share Value Debt Cash Asset Organizational Citizenship Strategic Positioning Holistic Judgment Holistic Data Review Employees Investors Customers Directors Governments Competitors Environmental Community Vision and Mission Competitive Advantage Innovation Cultural sensitivity Creditors Other Stakeholders Growth Plans

55. Read Chapter 7: Research: Qualitative Domain Also: 1 st Term Secretary Report due