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Case Study:
Charles Schwab & Co. ... History of Company
Charles Schwab, a Stanford M. ... Schwab understood that the bundling of transaction services and advice increased the costs to savvy investors who felt comfortable making their own investment decisions. Schwab’s primary focus is on serving individual investors, providing them a wide selection of brokerage and investment services at prices that are substantially lower than those of full-service firms.
Following the deregulation of brokerage commissions on May 1, 1975, Schwab decided that, unlike full-service firms, his company would not sell advice to customers on what and when to trade. Instead, Schwab focused on providing investors low-cost execution services, becoming the first broker to discount commissions.
At the time the case was written (November 1999), David Pottruck, president and co-CEO of Charles Schwab Corp. ... The shocking article was fit to stir up the brokerage community, such that Merrill Lynch, a top Schwab competitor, was going to launch their own online trading on December 1, 1999. ... Pottruck was faced with idenitfying how this was going to impact Schwab as a company. ... Pottruck must decide and communicate Schwab’s next move to protect (and strengthen) its position in the brokerage industry. Furthermore, Schwab’s other many and varied competitors, such as E*Trade and WingspanBank, are competing for similar customers, yet in varying ways. ... Key Management: Beliefs, Values, Philosophies, Training, Experience, or Background
David Pottruck is the President and CEO of Charles Schwab Corporation (CSC).
Schwab’s philosopy:
III. ... )
full service
discounters
deep discounters
new on-line brokers
Merrill Lynch, E*Trade, WingspanBank
Do not under estimate the challeges that Schwab faces from the full service brokers like Merrill Lynch that are offering volume discounts to its larger customers and the pricing pressures from the deep discountes and brokers that operate exclusively on-line like E*Trade. ... Leading this transition was Charles Schwab. ... Up until the mid-1990’s, how did Schwab position itself in the brokerage industry?
Up until the mid-1990’s, Schwab’s general product positioning strategy was to occupy the “middle” of the market, away from both low-end discounters and full-service brokers. In addition, Schwab employed a dual-approach strategy based on brand-name recognition and IT-based innovation.
Schwab’s marketing strategy has been based on establishing the Schwab brand name. ... A related marketing tool is Schwab’s extensive branch network. Even though most discount brokers do not have numerous branches, Charles Schwab’s belief that customers want to see something tangible before they entrust their money to the firm was proven by the three-fold increase in business in areas where new branches opened. In 1998, Schwab spent $155 million (6% of revenues) on advertising, compared to only 2. ... Schwab’s advertising investment seems to have paid off: Over the nineties, its customer based increased by a factor of five.
The other distinctive feature of Schwab’s strategy has been the emphasis on IT-based business solutions. Exhibit 4 presents Schwab’s key product innovations over the 1975-98 period; all are enabled by IT. Schwab’s product innovation strategy has proven successful, resulting in attractive products valued by customers and in efficient and effective operations.
To wit, Schwab’s compensation and benefit costs as a percentage of revenues has consistently been lower than the rest of the industry. ... How did Schwab impact the industry?
Early and large IT investments gave Schwab a technological edge in an industry that thrives on information. Schwab took advantage of its San Francisco location, just a few miles north of Silicon Valley, which was inventing the future of technology. ...
Over the years, Schwab has repeatedly and successfully leveraged IT to introduce innovations that transformed the brokerage industry. In 1982, Schwab was the first brokerage firm to offer its customers 24 hours a day access to their accounts via telephone, using a nearly paperless office operation. Another major innovation was Schwab’s mutual fund “supermarket” that offered customers access to no-load mutual funds they could buy or sell without paying a transaction fee. Schwab’s TeleBroker automated telephone touchpad order entry system, introduced in 1989 and extended later to four languages, is one of several ways in which order entry has been fully automated. ... What were the key factors underlying Schwab’s competitive advantage up until the mid-1990’s?
There were several underlying key factors that contributed to Schwab’s competitive advantage up until the mid-1990’s. The first key factor was Schwab’s decision to take advantage of the deregulation of commissions early on.
The second key factor that contributed to Schwab’s competitive advantage at this time was their concentrated inestment in technology. “…Schwab owed much of its succes to the heavy investments it had made in technology and automation systems, which allowed the company to build extremely cost-effective operations.”
The third contributing key factor was Schwab’s approach to customer service and relationships.
Technology was Schwab’s major advantage, but it could also become its Achilles’ Heel. In the mid-nineties, Schwab was facing the challenge of the Internet, which made trading without the active involvement of a broker easy and inexpensive, threatening to turn trading into a commodity business. Low capital costs and an open network reaching vast numbers of investors lowered barriers to entry, and online brokers like E*Trade and Ameritrade were driving down prices, endangering Schwab’s commission revenues.
At one time the ability to confirm trades while the client was still on the telephone was a unique capability for Schwab. ...
Since its products are always IT-based, product brochures can help to better understand the role of IS within Schwab. ... The customers benefited from the cost-effectiveness in that, as a percentage of revenue, Schwab’s compensation and benefits costs were significantly less than others in the brokerage industry. ... More recently, Schwab has emphasized its E-Schwab approach and the importance (dominance) of the Internet. ... The threat was particularly serious for Schwab, whose customers were well-educated, sophisticated, computer-savvy do-it-yourselfers who could easily switch to the low-cost and convenience of the Internet. Schwab’s Co-CEO David Pottruck described his Company’s concerns: “We were very worried about what [the Internet] represented as a threat to our business. ... SCHWAB AND THE INTERNET
The Threat
In 1995, the Internet caught everyone by surprise with its potential to rapidly transform the
brokerage industry. ...
The Internet had a particularly significant impact on discount brokers like Schwab, which
historically used technology to lower costs and offer superior service at lower prices to
investors who did not want to pay for investment advice. While the Internet was another
channel that Schwab could use to reach these customers, pure transactional services were
becoming a commodity business, and lower costs coupled with the entry of competitors were
driving prices down. ...
The typical Internet investor was similar to the typical Schwab customer. ... To a
large degree, Web-based brokerage firms were attractive to Schwab’s most profitable
customers: those who traded often, usually through electronic channels. Thus, Internet
discount brokers presented a threat to Schwab’s commission revenues. ... Schwab initially held back, concerned with the inevitable cannibalization of its
commission revenues. ... ” These
factors, along with the lack of suitable technology to seamlessly integrate the Web interface
to Schwab’s mainframe-based back-end, led Schwab to adopt a wait-and-see approach to
Web-based trading.
The waiting was over in late 1995, when Dawn Lepore, Schwab’s CIO, invited Charles
Schwab to a technology demonstration. The demo showed a Schwab server accepting an
order from a Web browser running on a PC, routing it through the complex back-end
mainframe systems, executing it and sending a confirmation back to the PC. ... Lepore and Schwab
quickly recognized the implications of this quick-and-dirty demo. ... This resulted in the creation of a separate Electronic Brokerage (“EB”) Enterprise
reporting directly to Schwab’s co-CEO, David Pottruck.
Schwab launched its Web-trading service on March 31, 1996. New customers had to
open an account with a physical check or wire transfer, but after that they could trade by
logging onto the Schwab Web site. ... Schwab’s goal was
to have 25,000 Web-based accounts by the end of 1996.
Approximate Word count = 6863
Approximate Pages = 27.5
(250 words per page double spaced)
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