Monday, September 10, 2007

Systematic Analysis: The Corporate Overview

A company typically does not exist in a vaccuum. There are typically many different firms competing for marketshare in the same area. This area is known as an Industry. Each of these firms forms business strategies in order to compete in their industry. Using this information, an investor can form a Corporate Overview.

The Corporate Overview is the third part in my series examining Systematic Analysis.
Previous Entries include:
  • Systematic and Consistent Financial Analysis Decisions
  • Systematic Analysis: The Purpose Of The Financial Analysis

  • The Corporate Overview examines the industry a company works in and what business strategies companies are following to gain marketshare.


    INDUSTRY
    There are a couple of ways to examine what industry a company belongs in. The easiest is perhaps using the internet to it for you. Yahoo Finance and Reuters have whole sections just devoted to looking at the industries. Some of the industries include: Semiconductor- Memory Chips, Personal Computers, Farm Products, Foreign Utilities, Toys & Games, Drugs - Generic, Networking & Communication Devices, and Medical Instruments & Supplies. This is just a small sampling, but it should give you an idea. Companies within an industry are likely to face similar obstacles and will be selling to similar markets.

    There are two government provided industry codes that some investors may want to try as well. SIC Standard Industrial Classification Codes and NAICS North American Industry Classification System Codes. Each of these codes file companies under very narrow definitions, which may help in finding an appropriate industry.

    As an example, I'm going to use the CIGNA Corporation. Under the SIC Code, CIGNA is considered a Finance company, which provides it with the first number 6. Furthermore, it is an insurance carrier, which makes the second number 3. The number 24 signifies that CIGNA is in the business of providing "Hospital and Medical Service Plans ". Put it together and you have CIGNA's SIC code of 6324. Other companies with the same SIC or NAICS number can be considered industry peers.


    BUSINESS STRATEGY
    Developing a business strategy is also an important part of the Corporate Overview. Investors seek to find how companies intend to beat the competitors. The three areas that should be looked at in the strategy are as follows:
  • Cost Leadership - Is the first maintaining efficiency and eliminating waste? A company that is able to do the same thing as a competitor, but at a lower cost, may be considered a better investment.

  • Product Differentiation - This one relates to brand names and how a similar offering is perceived to be "better" or "different". Consider how some people consider Tide to be a better cleaning product, even though many store brands use similar cleaning chemicals and agents. Tide has differentiated itself as a product in a market. Companies can do the same thing.

  • Core Competencies - Firms that focus on the thing that they do best, can often find more efficiencies and may turn a greater profit. For example, firms that have the core competency of making pizzas, probably shouldn't be producing the pizza boxes too. The company should stick to what it is best at.


  • The combination of an industry review and a review of business strategy provide an investor with the Corporate Overview. Next time, I will look at the next step in Systematic Analysis: Quantitative Financial Analysis. Thanks for reading and drop me a comment. --------Sincerely, Trevor Stasik



    I would like to remind you to visit the website of Gary Giroux, a very knowledgeable author in financial analysis: www.wiley.com/college/giroux.
    Much of the material in this series of blog entries contains wisdom borrowed from his book "Financial Analysis: A User Approach"



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