What is Qualitative Analysis?
In business and management, qualitative analysis involves leveraging subjective judgement to evaluate a company’s worth or potential, drawing upon non-quantifiable factors like managerial proficiency, industry trends, the robustness of research and development efforts, and labour dynamics.
Unlike quantitative analysis, which centres on numerical data typically found in reports like balance sheets, qualitative analysis focuses on softer, more nuanced aspects. Nevertheless, both methodologies are frequently employed in tandem to scrutinise a company’s operations and gauge its potential as an investment opportunity.
Key points:
- Qualitative analysis relies on subjective judgement and non-quantifiable data.
- It grapples with intangible and imprecise information that can pose challenges in collection and measurement.
- Automated systems face difficulties in conducting qualitative analysis due to the inability to assign numeric values to intangibles.
- Human-centric insights into people and company cultures are pivotal in qualitative analysis.
- Adopting a customer’s perspective and comprehending a company’s competitive advantage are instrumental in qualitative analysis.
How Qualitative Analysis Works
The contrast between qualitative and quantitative approaches echoes the disparity between human and artificial intelligence. Quantitative analysis relies on precise inputs such as profit margins, debt ratios, earnings multiples, and similar metrics. These can be fed into computerised models to produce exact outcomes, such as the fair value of a stock or forecasts for earnings growth. Nonetheless, human intervention is necessary to program these models, which inherently involves a degree of subjective judgement. Once programmed, computers can execute quantitative analysis in mere fractions of a second, a task that might take even the most skilled and extensively trained humans minutes or hours.
Conversely, qualitative analysis delves into intangible, imprecise realms that belong to the social and experiential domain rather than the strictly mathematical one. This method relies on a form of intelligence that machines currently lack, as aspects such as brand affinity, management credibility, customer satisfaction, competitive positioning, and cultural shifts are challenging, arguably impossible, to encapsulate using numerical inputs.
Understanding People Through Qualitative Analysis
Qualitative analysis might evoke notions of “listening to your gut,” and indeed, many qualitative analysts argue that intuition has its role in the process. However, this doesn’t diminish its rigour. In fact, qualitative analysis often demands more time and energy compared to its quantitative counterpart.
At the core of qualitative analysis are people. An investor may initiate the process by thoroughly acquainting themselves with a company’s management, scrutinising their educational and professional backgrounds. Of paramount importance is their industry experience. Beyond the tangible, their work ethic and decision-making prowess come into focus—are they known for diligence and sound judgement, or do they rely more on networking or affiliations? Equally significant are their reputations; are they esteemed by colleagues and peers? Additionally, investigating their relationships with business partners is crucial, as these dynamics can directly impact company operations.
Company Culture and Qualitative Analysis
The perspective of employees towards the company and its management holds significant weight. Are they content and driven, or do they harbour resentment towards their superiors? The turnover rate among employees can offer insights into their loyalty levels. Additionally, examining the workplace culture provides valuable clues about the company’s ethos. Environments characterised by excessive hierarchy often foster intrigue and competitiveness, draining productivity. Conversely, a lacklustre, uninspired atmosphere may indicate that employees are merely going through the motions. Ideally, companies aim to cultivate vibrant, innovative cultures that draw in top-tier talent.
Qualitative Data
Collecting data for qualitative analysis can present challenges. Fortune 500 CEOs aren’t typically available for casual chats with retail investors or tours of corporate headquarters. Warren Buffett’s adeptness with qualitative analysis partly stems from his unique access to people and information. For the rest of us, obtaining insights involves sifting through news reports and company filings to glean details about management’s track records, strategies, and philosophies.
Qualitative data can be gathered through various methods such as interviews, focus groups, ethnographic studies (participant observation), archival research, and document analysis. These data are meticulously reviewed and thematically coded to uncover patterns, themes, and trends.
Qualitative Analysis in the Business Context
Customers hold a pivotal role in a company’s success, even more so than management and employees, as they are the primary source of revenue. Paradoxically, prioritising customers’ interests over shareholders’ may lead to better long-term investment prospects. Whenever possible, assuming the customer role can offer valuable insights. For instance, consider contemplating an investment in an airline that boasts cost-cutting measures, consistently surpasses earnings expectations, and intends to repurchase shares. However, upon experiencing the airline’s service firsthand, encountering a glitch-ridden website, unhelpful customer service representatives, unreasonable fees, and disgruntled fellow passengers, one realises the company’s disregard for customer satisfaction. This firsthand encounter prompts caution when considering an investment in the airline.
A company’s business model and competitive edge serve as pivotal aspects of qualitative analysis. What sets the firm apart from competitors in the long run? Does it possess groundbreaking technology with formidable barriers to replication or robust intellectual property safeguards? Does it offer a distinctive solution to customer needs? Is its brand globally renowned for positive reasons? Does its product evoke cultural significance or nostalgia, ensuring sustained market relevance over time? If envisioning another company effortlessly outperforming it, the barrier to entry might be insufficient. It’s essential to assess why an upstart would succeed in disrupting the market and why it wouldn’t subsequently face displacement itself.
Example of Qualitative Analysis in Business
Quantitative analysis aims to quantify phenomena, while qualitative analysis seeks to comprehend them. The latter necessitates a comprehensive perspective and a narrative grounded in factual evidence. Context is pivotal. For instance, while a CEO without a college degree might raise concerns in certain contexts, exceptions like Mark Zuckerberg and Steve Jobs exist, particularly within the unique landscape of Silicon Valley. Examining the financials of McDonald’s Corp (MCD) a few years ago would have failed to indicate the impending backlash against cheap, unhealthy food. Conversely, a purely qualitative approach is susceptible to distortion due to blind spots and personal biases. Quantitative metrics serve as a safeguard against these tendencies.
Qualitative Analysis vs. Quantitative Analysis
Qualitative analysis hinges on rich descriptions and profound comprehension of the subject under scrutiny, garnered through extensive interviews, observations, and meticulous examination of texts. This research approach often delves into case studies, offering insights into local phenomena.
Conversely, quantitative analysis revolves around statistical scrutiny of numerical data derived from surveys, experiments, or administrative records. Through this method, inferences are drawn, and correlations between variables are dissected to elucidate broader patterns and phenomena.
DISCLAIMER: This article is for informational purposes only and is not meant as official business advice. Avante Partners is not affiliated with any organisation mentioned.