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Scharles Schwab Case - Group 5 - Section A

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Charles Schwab Corporation

The Way Forward


11 October, 2010

Course Instructor: Prof. Mahesh Ramamani


Compiled by: Group 5, Section A
Alok Singh
Lalit Beniwal
Nishant Hingu
Omkar Panicker
Pawan Kumar
Rajasekar V.
Shashikant K.
Table of Contents

 Charles Schwab Corporation: Background


 Changes in Marketplace
 The Way Forward
 Alternative We Propose
 Merrill Lynch: ‘No’ to ‘E’
 Key Learning
Charles Schwab Corporation: Background

 Opportunity created by the abolition of fixed rate commissions on brokerage trades


led to the origin of discount brokerage firm, Charles Schwab Corp. (CS)
 Offers third party investment alternatives and generalized financial advice
 Features that differentiated CS from the competitors:
• Paid brokers in terms of salary and bonus, instead of commissions on trades
• Focus on quality rather than price
• High reliance on technology
• Offered many innovative products and services
• Adopted multi-channel service model (branch based, telephone, internet, etc.)
 Consistent performance over the years
• In the last four years, company’s annual revenues and net income grew by
24% and 23%, respectively
Changes in Marketplace

Number of Internet Users Worldwide Number of Firms Offering Internet Number of Online Brokerage Account
(Mn) Trading (Mn)
80 70 16 14.4
69 60
70 60 14
60 50 12
50 10
40
40 8
30
30 6
20 14 20 15 4 3
10 10 2
0 0 0
1995 1997 1996 1997 1997 2002e

Impact
 Reduction in prices, margins, and commission
 Shift of investment from people to technology
 Evolution of Low Service – Low Price Models
 Customer becomes more self-dependent
 Increase in trade volume
 Increase in popularity of portals like AOL and Yahoo among investors
The Way Forward

Continue with Existing Business Model Integrate All Product Offerings under
One-Standard Price

Features Features
 Offer services under three different plans  Offer one universal Internet trading account at
• Standard retail commission for $80/trade, $29.95 to all customers with all associated
with all services services
• Internet trading option with full customer
services at $64/trade Implications
• Internet trading option through e.Schwab at  May result in immediate loss in revenue due to
$29.95/trade, without some services sales cannibalization of offline business
 Decline in profits may result in fund crunch for
Implications marketing and advertisements
 No immediate loss in revenue  Will require upgrading the commission charging
 Less risk, low investment option system and other IT investments
 Service differentiation among customers  In sync with changing market scenario, may
impacts customer service representatives’ provide early mover advantage
performance
 Low service plans dilute Schwab’s brand name,
known for its customer service
 Cause of concern if customers shift to deep
discount online brokers
Alternative We Propose

 Spin off a new company ‘E-Click Trading Corp.’, as a subsidiary of the Charles Schwab Corp
• This new company offers internet trading accounts at discounted prices
• Existing company keeps offering High-Quality Premium Products as per the existing model
 Use IT infrastructure of the existing company, but different brand name
 One option of spinning off a new company could be acquiring one of the ‘bare-bone’ trading company
and integrating it with the new trading company (this decision is subject to more information on market
cap, IT infrastructure, funding sources, market presence, etc.)

Implications
Positive Negative
 No brand dilution  Lot of re-structuring required
 Opportunity to cater to all customers  May not be able to leverage Schwab brand
segments value in internet business
 Better efficiency  May create management difficulties
 Immediate market entry and positioning  Integration issues, if acquisition occurs
Merrill Lynch: ‘No’ to ‘E’

Merrill-Lynch did not go online before due to the following concerns:

Structural Constraints
 Commission based Payment Structure: The company paid its brokers
commissions on trades, rather than salaries. Internet option would have caused
resentment among the employees
 High Cost Structure: ML has huge investments in research, sales and trading
divisions. Any move to low-cost internet trading was feared of causing huge
cannibalizations to existing offline business

Different Customer Profiles


 Customers of ML demanded investment advisories and service rather than do-
it-yourself model
 ML catered to high account-balance customers, who preferred offline services
over internet trading
Key Learning

 Monitor the changes in marketplace is necessary for survival

 Technology offers a huge competitive advantage

 Focus on Customer Service and Demands pays

 Flexibility to change with market helps in growth

 Rewards are directly proportional to risk appetite

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