management: charles schwab case
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Management: Charles Schwab CaseTRANSCRIPT
Group Case Report
Case 4: Charles Schwab In. in 1999
New Jersey Institute of Technology School of Management
Management of Technology MGMT 620 - Fall 2010
Instructor: Shanthi Gopalakrishnan
Nathalie Brogan James Caristia Ivan Cavieses
Michael Lawson Mehmet Secilmis
October 12th, 2010
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Table of Contents History of Brokerage Industry ............................................................................... 3 The Brokerage Industry as of the early 1990s ...................................................... 4 Schwab’s Competitive Advantage up until the mid 1990’s .................................... 5 The Internet and the Brokerage Industry .............................................................. 7 Company’s Financial Data in 1999 ....................................................................... 9 Schwab’s Strategy and Competitive Advantage in 1999 ..................................... 10 An action plan in 1999 to protect and leverage its strategic position .................. 12 References ......................................................................................................... 16 Appendix ............................................................................................................. 18
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History of Brokerage Industry
The first recorded brokerage system in history dates back to 11th century
France. Constituents of the French agricultural industry developed the “concept of
trading debt for different banks”, subsequently creating the “first ever” brokerage system.
It wasn’t until the 14th century that this system started to become formalized and
ubiquitous within the major French cities, such as Flanders and Amsterdam. French
traders began having meetings as a means of setting standards so as to unify the
system, and before long they applied their knowledge basis to government securities,
thus securing the importance of their trade. The concept of modern stock was
implemented for the first time in 1602 as exemplified by the East India Company and
their offering to extend ownership to shareholders of their business. The stocks
expanded the company, giving the larger business more ground to succeed, thus the
modern brokerage system was born (Chavis).
Although France led the way in developing the concept of stock brokerage and
exchange, it was in London where the more impactful firms were established. Within
coffee houses around the city, brokers formed organizations which allowed individuals to
buy stock. Soon thereafter, in 1801 the London Stock Exchange was established so as
to create policies and regulate the exchange of stock between brokers. This structured
exchange was modeled across the world, including in New York City, which is now home
to the NYSE (Chavis).
The next largest change of the brokerage system was a gradual transition in the
way of money markets. The method of quoting the buying and selling prices of securities
became common practice, in turn benefiting the industry greatly because brokers were
now able to profit off of an “immediate sale of securities to an investor (Chavis)”. An
issue that immediately arose, from the development of formalized security exchanges,
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was that of ‘insider trading’ or, as it is more explicitly known as trading based on
knowledge that is not publicly known. Consequently, the regulatory systems of “Chinese
Walls” was developed as a means to limit the lines of communication between different
areas of a company, therefore decreasing the temptation of disclosing non-public
information to others (Chavis).
The Brokerage Industry as of the early 1990s In the early 1990’s the brokerage industry was still dominated by traditional full-
service houses that provided customers with investment advice, discretionary services
(broker’s are responsible for client’s portfolio) and the means to process transactions for
a fee. They were also associated with personal client services and the use of physical
locations where brokers made money from commission fees. The full service house
competition consisted of companies such as Charles Schwab and a few other
companies that provided less customized services, for a significantly reduced
commission fee.
By the end of the 1990’s online trading was starting to boom and was a threat to
full-service houses. New online trading accounts were increasing very rapidly and
Schwab was well positioned by being the dominant online market share holder against
companies like E*Trade and Fidelity Investments (Discount Broker).
In this new era of online trading and e-commerce the online entrants to the
industry focused on trade execution through web interfaces that were easy to use and
responded to individual concerns for a low fee. In the past traditional full-service
brokerage firms would bundle trade execution with associated investment services and
research. This practice of bundling trades became much less appealing to investors due
to the increasingly lower commissions of the online brokers and the increased
accessibility of real time financial information, as provided through the internet.
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Investors were now are able to access large amounts of financial data and do their own
research, making trade execution much more affordable. This affordability has led to the
growth of the “self-directed” market segment in the brokerage industry. (Bakos)
Schwab’s Competitive Advantage up until the mid 1990’s
Charles Schwab & Company Inc. is a prime example of a company that worked its way
up through the brokerage system by quickly evolving to meet the demands of its industry
and share holders by appropriately forecasting the importance developing
telecommunications technologies and applying them accordingly. Charles Schwab and
his two partners founded the First Commander Corporation in April of 1971 in California.
The corporation was just a subsidiary of Commander Industries until 1972 when Charles
Schwab bought out all of the investors in Commander Industries and renamed the newly
formed company Charles Schwab & Company Inc. It was at this point the company
started offering discount brokerage services by charging investors notably lower fees
than other brokerages, but with significantly less advisory support. Within the first
couple of years of its inception Schwab, as well as other small discount brokerage firms,
generated relatively small amounts of profit, all of which did nothing to impress older,
more traditional brokerage firms and warrant their entrance into this market. However,
through reliability and excellent customer service, the Charles Schwab & Company Inc.
began to make a name for themselves as the forerunner of discounted stock brokering
(Charles Schwab Corp.).
In the following years, Schwab implemented many tactics to differentiate itself
from mainstream brokerage firms. The company made significant efforts to
accommodate investors with new and innovative ideas. A 24-hour phone service,
dubbed ‘Telebroker’ was set up to allow investors to place orders at their discretion.
This phone service exploited the use of newer telecommunication technologies in order
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to increase the volume of call and orders with ease. Schwab’s marketing strategy
employed the use of aggressive advertising by flooding different media avenues with
positive and reliable images of the company. Additionally, the company vigorously
displayed its new “brick and mortar” branches as a symbol of its growth and success.
Many believe that Schwab’s business tactics were responsible for the emergence of
discounted brokering into the already established brokering industry. (Charles Schwab
Corp.)
The quick expansion of the company was quite costly and in 1983, Schwab sold
part of its holdings to Bank of America in order to establish necessary financial backing
needed to make the company go public. During this time, Schwab introduced the
‘Mutual Fund Marketplace’, which allowed clients to invest in 250 different mutual funds
and easily “switch between them using Schwab as the bookkeeper” (JRank). By 1985
Schwab had over 1.2 million clients scattered around ninety different branches, all of
helped the company produce $202 million dollars in revenue. Two years later, in 1987
Schwab, along with a group of investors, bought back the company from Bank of
America. Ever since then Charles Schwab & Company Inc. has been on the forefront of
investing and continues to this day to remain a prominent force in the brokerage
industry. (Charles Schwab Corp.)
Some of the key factors underlying Schwab’s competitive advantage up until the
mid 1990’s was its strategy to always commit to invest in technology and to provide low
cost services in order to maximize in house cost savings, as well as transfer them to end
consumers. After the deregulation of brokerage fees in 1975, Schwab decided to
provide services that empowered their customers and did not need as much intervention
from its brokers, most notably through the development and implementation of three
major brokerage facilitating systems:
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• 1989 - TeleBroker: an automated order system allowed customers to trade 24
hours a day.
• 1991 - SchwabLink: provided fee-based advisors with back-office custodial
services like record-keeping and statement preparations.
• 1992 - OneSource: fund supermarket that helped customers purchase no-fee
Schwab and no-Schwab no-load mutual funds.
These factors reinforce one another because Schwab is able to continually reapply
its core competencies, using technology to deliver newer more cost-efficient products, as
a means to provide their customers with services that fulfill their brokerage more
conveniently and cheaper than its competitors.
The Internet and the Brokerage Industry
The internet quickly and profoundly changed the way the brokerage industry
functioned; it is by far the most radical development in this industry since the
deregulation of 1975. By the early 1990’s the brokerage industry had started to become
more mature, and like the 1975 deregulation, the internet was the ‘discontinuous
change’, the ‘environmental jolt, that lead to “a new series of product and process
innovations” and re-revolutionized the industry (Damanpour and Gopalakrishnan, 46). As
the PC industry and internet use grew customers versed in personal computing
technologies were able to gain autonomy when making their own trading decisions. They
no longer required to use the telephone for transactions and were able to easily gather
investment information published on the web, thus further minimizing the need for input
that a brokerage house had to provide certain customers, subsequently reducing the
demand for direct client services. The interest in Internet trading came from all corners
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of the securities brokerage business, including initially reluctant full-service brokerage
houses and some of their older investors that relied heavily on their services. The
availability of real-time market information from third-party news media and brokerage
firms allowed customers to execute trading decisions within minutes or even seconds at
any given time, anywhere is the world, as long as the consumer had an internet
connection. The ease of internet derived transactions, in conjunction with their low cost
trading, fueled the demand for this type of brokerage service.
The internet also allowed new brokerage firm entrants to easily compete in the
brokerage industry as most of the full-service brokerage houses were “not ready” for
online trading and did not see the value in providing online service at a substantially
discounted fee rate than their traditional modes of trading operations. One of the main
reasons new entrants were now able to compete was because of newly developed, low
cost, and now readily available micro-processor computer power that allowed companies
to sustain online traffic and trade without the need to invest in expensive mainframes for
back end processing. Newly formed companies could now enter the market with less
start up costs and without needing large trade volumes. Some of the specific changes
that the Internet brought about were:
• Globalization of services as new potential customers were available anywhere in
the world
• Savings for customers from cheaper trading commissions and services.
• Lower operating costs for brokerage firms
• Faster end-to-end transactions
• Increased trading volumes
• Proliferation of free investment information
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• Power-shift from the firm to customers
• Made market entry easier for new “internet based” brokerage firms
Company’s Financial Data in 1993 - 1999
Between 1993 and 1999, Schwab’s growth had been extremely rapid. Customer
assets grew from $96 billion in 1993 to $725 billion in 1999, signifying a 48% increase
from the end of 1998. Net new assets in 1999 were $107 billion, a 35% increase from
1998. Revenues over this span of six years had nearly increased five times.
Furthermore, Schwab’s total revenue increased from $965 million in 1993 to $3.9 billion
in 1999 (Source: Carnevale - Figure 1.3). Furthermore, net income had grown at
average annual rate of 26% from $118 million to $589 million in 1999. Share prices
increased roughly by 195%, from $27.75 in 1993 to $54.25 in 1999.
By the end of 1999, 5,800 independent investment managers had $213 billion in
client assets at Schwab, a 46% increase from 1998. Total customer assets in
International markets grew by 104% to $24 billion by the year’s end. Revenues from
international operations rose 68%. Corporate retirement plan assets grew to $28 billion
in 1999, an increase of 40% over 1998. Revenues from the Capital Markets segment
grew by 64%, or $215 million, from 1998. Customer assets in SchwabFunds® and
Schwab’s Mutual Fund Marketplace®, including Mutual Fund OneSource® and other
third-party funds, at year-end 1999: $285 billion, up 35% over year-end 1998 (Source:
Figure 1.7 1998 Annual Report)
.
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Schwab’s Strategy and Competitive Advantage in 1999
Schwab has always shown a strong desire to lead the market with their
technology. One of their core competencies has been to develop and better utilize
technology as a means to reach and empower its clients. They have excelled in creating
easily accessible financial products and did so far better than their competition. By the
late 1990s the current business environment required most businesses to use or plan to
use the Internet and web applications for doing business; e-business was by now a
reality and well established even though its design was evolving at the time and continue
to do the same to this day. As new technological innovations emerged, new competitive
entrants began to compete with Schwab, but lacked the head start and competitive
advantages that Schwab’s existing complementary assets, such as marketing,
manufacturing, and customer support, granted the company. By 1999, with the
introduction of e.Schwab and the widespread acceptance of internet trading, the
company’s dedicated investment to technology and know-how was beginning to
substantially pay off. They were now leading in the online market against both, online
only discount firms and the full-service firms who where late starters in the online trading
game.
Schwab, a high-performing organization, responded to the e-business
predictably, as Damanpour and Gopalakrishnan state, “at the firm level […] a product-
process pattern is more likely than a process-product pattern in response to an
environmental jolt” (46). New products had to be introduced in order to maintain
competitive advantage and to differentiate the firm. Process innovation could be
introduced later, when the market share was secured, although it in itself closely
followed. The reality of the time was that the Internet in itself introduced a process
change to the way of doing business, Schwab and any other company that wanted to
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embrace e-business as an innovation, had to evolve in both the product and service
dimensions virtually at the same time.
By this time, Schwab also made the decision to increase their “overall trade
processing capacity by nearly 70 percent and enhanced web site capabilities with the
Analyst Center” in order to continually differentiate themselves from the competition
(Jiffynotes). New online account numbers kept increasing rapidly, Bancorp’s Piper
Jaffray estimated that between 1997 and 1998, the number of accounts had nearly
doubled from 3.7 million to 7.3 million and the company clearly understood that it needed
to invest in infrastructure to be able to support increased transaction volumes
(Burgelman, 645).
Schwab had defined a new niche, the semi discount brokerage firm. This niche
was a strong position although some, like Pottruck, questioned if Schwab was getting
“squeezed in the middle”, by the larger more powerful brokerage houses, such as Merrill
Lynch, and the flood of cheaper, discounted online services like E*Trade (Burgelman,
654). The pressure was primarily coming from full service brokers and not the discount
brokers. Schwab’s customer base showed little defection to the $12-per-trade
brokerages (Frick). In 1999 Schwab “handily won the war against its full service rivals,
gaining about 60,000 clients while losing 30,000 to them. But defectors were mainly big
customers who wanted the extra services the big brokerage firms provide” (Frick).
Although Schwab was clearly increasing its client base, the loss of 30,000 clients to full
service brokerages needed to be addressed.
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An action plan in 1999 to protect and leverage its
strategic position
Improving the company’s position would involve appealing to the more upscale
clientele that were leaving for highly reputed brokerages such as Merrill Lynch, while
maintaining their base in the semi discounted brokerage market. Schwab knew that its
customers primarily left for full service brokerages. A key aspect of moving forward, as
of 1999, would be to offer more by way of financial advising in order to protect their client
base. In essence, Schwab should provide different levels of service and customized
portfolios of services, all for a fairly affordable price. For example, financial advising,
specifically retirement advice is a sector of the brokerage market that is in growing
importance due to the large population of baby boomers, whom are getting “geared up”
for retirement, the majority of which are the upscale clientele Schwab has targeted.
Furthermore, Schwab should posture themselves to offer initial public offerings (IPO),
doing so embraces the current financial climate, and is extremely appealing to wealthier
investors that can afford to participate in IPOs.
Government regulation and deregulation of the financial industry pose some of
the biggest threats to Schwab and the company should prepare to deal with both
accordingly. Regulations such as the Gramm-Leach-Bliley Act of 1999 had important
implications to the financial services industry. The act “repealed part of the Glass-
Steagall Act of 1933, opening up the market among banking companies, securities
companies and insurance companies” (Gramm-Leach-Bliley Act). This allowed for new
extremely wealthy entrants into the brokerage industry, WingspanBank.com serving as
an example, as well as allowing brokerages to expand into new territory. In order to not
fall behind, Schwab must carefully study how this deregulation is being used by the
competition in their respective developments of competitive advantages. On the positive
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side, Schwab can now offer a much more complete array of services. They can now
offer services traditionally offered by banks such as bill paying, a cash machine card,
and a high rate of interest on cash balances in customer accounts. Furthermore, these
features can be fully integrated with the already existing full internet account access and
stock trading.
Opening up and maintaining operations throughout the world are also enticing to
wealthier clients who are not relegated to trading domestically because they are more
likely to travel and maintain business relations abroad. It can be of great service, and
comfort for that matter, for a client to know his or her financial institution is also well
established in the places he or she travels. Schwab should analyze investing in
globalization, although this type of expansion should proceed slowly and with extreme
precaution. Schwab’s understanding of foreign markets is significantly less than the
understanding of the American market. Additionally, Schwab’s development of
technological advantages over its competition is almost entirely relevant to American
markets and relies heavily on the country’s infrastructure. This technological advantage
can be severely impeded by international borders. So, while international expansion is
important to continuing growth and maintenance of a more upscale client base, the firm
needs to make sure that it can be technically supported (core competencies) abroad and
operate properly within foreign legal systems.
Schwab has been known as a reliable company that customers can confide in.
Public image has always been strong due to a different approach in brokering,
nationwide advertising and marketing programs primarily localized through printed media
and television. From its beginning, Schwab has maintained a core belief that the
traditional way brokerages do business presents a conflict of the customer’s interests.
Specifically, this is reflected in the common practice of brokers offering very positive
advice on stocks that their own firm is actually keeping track of - Schwab brought this
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message to the public with strong advertising campaigns. Commitment to strong
advertising campaigns should continue, and advertising should be expanded into new
avenues such as the internet and mobile media advertising.
The market of 1999 is excited about technology, and this should be embraced
due to such public demand. Schwab has been a pioneer in the field of financial
technology, but much of the financial world has caught up with its technology and
subsequently making it more difficult for Schwab to maintain its competitive edge. Since
Schwab is historically “a first mover”, technology for the company has come at a greater
price - other companies can gain the same technology at relatively cheaper prices.
“Moore’s law guarantees that the longer you wait to make an IT purchase, the more you
will get for your money, and you will be investing in IT capabilities that become more
homogenized as opposed to proprietary” (Aboy). In an increasingly competitive
environment, while Schwab may not see as much financial return of technology
investment, there is still great value in the pursuit. Much of Schwab’s reputation comes
from the implementation of technology and its appeal to the “tech savvy” clientele. The
firm’s clientele also has a reputation for being more tech savvy. Being a first mover and
trying to always own your technology, has given Schwab great understanding and know-
how in financial technologies. “Schwab’s ability to quickly prototype, test, and
successfully introduce to market new services (e.g. e.Schwab in 1996, Schwab
Brokerage Site in 1998, Schwab Alerts in 1999, Signature Service in 1999) … as well as
the numerous awards received since 1998 are an indication of Schwab’s capability and
potential for sustainable success through continuous innovation in finding new ways to
add value for customers in order to retain their loyalty” (Aboy). A continuing commitment
to technology will offer Schwab great flexibility in a rapidly changing financial market and
will continue to provide the needed edge to best their competition. Investing in emerging
technologies can also set them apart from their converging competition. One possibly is
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to employ the use of internet over mobile devices, in turn introducing a new way to
connect with customers who are always on the move and may not have access to
computers at all times. Schwab can gain a strong competitive edge here because the
utilization of this technology has not yet being thought of much by the competition.
Schwab can continue to be a leader in financial technologies by retaining its focus on the
application of new technologies and the potential profitability of employing their use.
Additionally, management must continue to promote and enforce Schwab’s culture of
“embracing new technologies quickly” in order to evolve with them and not be left behind
by companies that can.
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References
"1998 Annual Report." The Charles Schwab Corporation. 1998. Web. 4 Oct. 2010. <http://www.aboutschwab.com/annualreport98/SN108_001.html>.
"About Schwab: History." Charles Schwab Corporation. N.p., 2010. Web. 6 Oct 2010. <http://www.aboutschwab.com/about/history/index.html>.
Aboy, Mateo. “Examination of the Relationship Between Charles Schwab’s Business and IS/IT Strategy.” Information Technology and Systems. May 2009.
Bakhru, Anjali and Brown, Ann. "Online Broking Strategies: Surviving the Downturn at Merrill Lynch, Charles Schwab, and E*Trade." Cases to Accompany Contemporary Strategy Analysis. By R.M.Grant. 5th ed. Oxford: Blackwell.
Bakos, Yakos, Henry C. Lucas, Jr., Wensoek Oh, Gary Simon, Siva Viswanathan, and Bruce Weber. "The Impact of E-Commerce on Competition in the Retail Brokerage Industry." Information Systems Research. May 2005. Web. 11 Oct. 2010. <isr.journal.informs.org/cgi/content/abstract/16/4/352>.
Burgelman, Robert A., Clayton M. Christensen, and Steven C. Wheelwright. Strategic
Management of Technology and Innovation. Boston: McGraw-Hill Irwin, 2009. Print.
Carnevale, Chuck. "Charles Schwab: The Investment Advisor's Choice -- Seeking
Alpha." Stock Market News, Opinion & Analysis, Investing Ideas -- Seeking Alpha. 4 Sept. 2009. Web. 15 Sept. 2010. <http://seekingalpha.com/article/159967-charles-schwab-the-investment-advisor s-choice>.
"The Charles Schwab Corp." Web.
<http://www.aboutschwab.com/annualreport99/yearinreview/content old.htm>.
"The Charles Schwab Corp." Jiffynotes.com - Novel Resource Guide and Literary Analysis. Web. <http://www.jiffynotes.com/a_study_guides/book_notes/cps_01/cps_01_00064.html>.
"The Charles Schwab Corporation." JRank. N.p., 2010. Web. 6 Oct 2010.
<http://companies.jrank.org/pages/4174/Charles-Schwab-Corporation.html>. Chavis, Jason. "The History of Stock Brokerage Fims." eHow: Business and Finance.
N.p., 2010. Web. 6 Oct 2010. <http://www.ehow.com/about_4600019_history-stock-brokerage-firms.html>.
Damanpour, Fariborz, and Shanthi Gopalakrishnan. "The Dynamics of the Adoption of Product and Process Innovations in Organizations." Journal of Management Studies 38.1 (2001): 45-65. Print.
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"Discount Broker." Reference For Business - Encyclopedia of Small Business, Business Biographies, Business Plans, and Encyclopedia of American Industries. Web. <http://www.referenceforbusiness.com/encyclopedia/Dev-Eco/Discount-Broker.html>.
Frick, Robert. "Shootout On Wall Street - Charles Schwab - Company Profile - Kiplinger's Personal Finance Magazine Articles | Find Articles at CBS MoneyWatch.com." Find Articles at BNET | News Articles, Magazine Back Issues & Reference Articles on All Topics. Mar. 2000. Web. <http://findarticles.com/p/articles/mi_m1318/is_3_54/ai_59486112/>.
"Gramm-Leach-Bliley Act." Wikipedia, the Free Encyclopedia. Web.
<http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act>.
"SCHW Income Statement | Charles Schwab Corporation (The Stock - Yahoo! Finance." Yahoo! Finance – Business Finance, Stock Market, Quotes, News. 4 Oct. 2010. Web. 4 Oct. 2010. <http://finance.yahoo.com/q/is?s=SCHW Income Statement&annual>.
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Appendix
Figure 1.2 – Schwab’s Stock Performance (1988 – 2010) (Data Source: SCHW Income Statement)
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Figure 1.3 – SCHW 20yr EPS & Price History Correlation (Source: Carnevale)
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Figure 1.4 – Schwab v E*Trade 1996 - 2010 (Data Source: SCHW Income Statement)
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Figure 1.5 – Schwab v T Rowe Price 1989 - 2010 (Data Source: SCHW Income Statement)
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Figure 1.6 – Charles Schwab & Co. Inc. Composition of Revenues, 1995 - 1998 (Data Source: 1998 Annual Report)
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FINANCIAL AND OPERATING HIGHLIGHTS (In Millions, Except Per Share Amounts and as Noted)
Growth Rates Compounded Annual 5-year 1-year 1993-1998 1997-1998 1998 1997(1) 1996 1995 1994 1993
Revenues (2) 23% 19% $ 2,736 $ 2,299 $ 1,851 $ 1,420 $ 1,065 $ 965
Net income 24% 29% $ 348 $ 270 $ 234 $ 173 $ 135 $ 118
Basic earnings per share (3) 24% 28% $ .88 $ .69 $ .60 $ .45 $ .35 $ .30
Diluted earnings per share (3) 24% 29% $ .85 $ .66 $ .58 $ .43 $ .34 $ .29
Dividends declared per common share (3) 31% 16% $ .1080 $ .0933 $ .0800 $ .0622 $ .0416 $ .0281
Weighted-average common shares outstanding — diluted (3) 412 409 404 402 394 401
Closing market price per share (at year end) (3) 64% 101% $ 56.19 $ 27.96 $ 14.22 $ 8.94 $ 5.17 $ 4.80
Book value per common share (at year end) (3) 30% 24% $ 3.55 $ 2.87 $ 2.17 $ 1.62 $ 1.21 $ .97
Number of common stockholders of record (at year end, in thousands) 33% 7.1 7.1 2.7 2.1 1.9 1.7
Pre-tax profit margin 21.1% 19.5% 21.3% 19.5% 21.1% 21.4%
After-tax profit margin 12.7% 11.8% 12.6% 12.2% 12.7% 12.2%
Borrowings (at year end) 14% (3%) $ 351 $ 361 $ 284 $ 246 $ 171 $ 185
Stockholders' equity (at year end) 30% 25% $ 1,429 $ 1,145 $ 855 $ 633 $ 467 $ 379
Return on stockholders' equity 27% 27% 31% 31% 32% 37%
Full-time equivalent employees (at year end, in thousands) 15% 5% 13.3 12.7 10.4 9.2 6.5 6.5
SELECTED CASH FLOW HIGHLIGHTS Net income plus depreciation and amortization 25% 23% $ 487 $ 395 $ 332 $ 241 $ 190 $ 162
Capital expenditures— cash purchases of equipment, office facilities and property, net 19% 33% $ 185 $ 139 $ 160 $ 166 $ 32 $ 77
Cash dividends paid 31% 16% $ 43 $ 37 $ 31 $ 24 $ 16 $ 11
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(1) (2) (3)
1997 includes charges for a litigation settlement of $24 million after-tax ($.06 per share for both basic and diluted earnings per share). Revenues are presented net of interest expense. Reflects the December 1998 three-for-two common stock split.
Figure 1.7 – The Charles Schwab Corporation – 1998 Annual Report (Source: 1998 Annual Report)
TALK TOCHUCK
Natalie BroganManagement of Technology
Case 4: Charles Schwab Inc. in 1999
James CaristiaIvan Cavieses
Michael LawsonMehmet Secilmis
Mgmt 620‐101 Fall 2010Presented: 6.12.10
Professor Shanthi Gopalakrishnan
History of the Brokerage Industry
o 11th century France First brokerage system by trading agricultural debt
o 14th century expanded to major French cities ando 14 century expanded to major French cities and became formalized
• Began having meetings to set standards• Became involved with government securities thus securing theBecame involved with government securities thus securing the
importance of the trade.o In 1602 the East India Company extended ownership to
shareholders in the form of stockshareholders in the form of stock.• This was the birth of the modern stock as well as the modern
brokerage system.
History of the Brokerage Industry
o The concept took hold and soon it had spread.• In London, brokers began forming firms which allowed private investors
to buy stock.• Starting from small groups in London coffee houses, the industry grew
and firms began to grow • The industry continued to developed and in 1801 the London Stock
E h dExchange opened.o The brokerage system took a gradual turn to money markets
• The method of quoting the buying and selling prices of securities b tibecame common practice
• This benefited the industry greatly because brokers were now able to profit off of an “immediate sale of securities to an investor
o Insider trading became an immediate concerno Insider trading became an immediate concern• Chinese Wall
The Brokerage Industry in the 1990’s
o 1990’s‐ industry dominated by traditional full service houseso Charles Schwab Corp.
• Competition to traditional houses providing less customized services p p gfor reduced fee• By 2000, online trading began to boom‐ Schwab was correctly positioned to hold a dominate positionin the market
o Online trading and e‐commerce entrants focused on trade execution through easy tog yuse web interface for a low feeo Affordability and access to real time financial data by the common user led tofinancial data by the common user led to the growth of “self‐directed” market segment
Charles Schwab’s Competitive Advantage
o First Commander Corporation in April of 1971 in California• 1972 Charles Schwab bought out the investors in Commander
Industries and renamed the company Charles Schwab & Company Inc.o The new company offered discount brokerage services
• charging investors notably lower fees, significantly less advisory support• Reliability and excellent service enabled Schwab to make their mark
o Differentiate from the mainstream• 24‐Hour phone service, aggressive advertising, brick and mortar branches
o Bank of America – 1983 sold company• Mutual Fund Marketplace• 1987 Schwab and a few investors bought the company back
Charles Schwab’s Competitive Advantage
o Schwab’s competitive advantage up until the mid 1990’s • Deregulation of brokerage fees in 1975• Empower investors development and implementation of three
major brokerage facilitating systemso 1989 ‐ TeleBroker: an automated order system allowed customers to trade 24 hours a day.
o 1991 SchwabLink: provided fee based advisors with back officeo 1991 ‐ SchwabLink: provided fee‐based advisors with back‐office custodial services like record‐keeping and statement preparations.
o 1992 ‐ OneSource: fund supermarket that helped customers purchase no‐fee Schwab and no‐Schwab no‐load mutual fundspurchase no fee Schwab and no Schwab no load mutual funds
o Continued to reapply core competencies• Used technology to deliver newer more cost‐efficient products, as a
means to provide their customers with services that fulfill theirmeans to provide their customers with services that fulfill their brokerage more conveniently and cheaper than its competitors.
The Internet & the Brokerage Industry
o The internet was by far the most development the industry had seen since its deregulation in 1975
• Costumers versed in computing technologies were able to gain p g g gautonomy when making trade decisions• Reduced demand for direct client services• Availability of real‐time market info allowed costumers to execute trades within a few seconds • Ease and low cost fueled demand for this type of brokerage service
o Main Reason why new entrants to the market were able to compete:• Newly developed, low cost, and readily available micro‐processor
computer power • Ability to sustain online traffic and trade without need to invest in
mainframes
The Internet & the Brokerage Industry
o Changes the internet brought to the industry:• Globalization of services as new potential customers were available anywhere in the world• Savings for customers from cheaper trading commissions and services. • Lower operating costs for brokerage firms • Faster end‐to‐end transactionsI d di l• Increased trading volumes
• Proliferation of free investment information• Power‐shift from the firm to customers• Made market entry easier for new “internet based” brokerage firms• Made market entry easier for new internet based brokerage firms
Schwab Financial Data
A RECORD OF GROWTH AND VALUE
RETURN ON
REVENUE GROWTHSTOCKHOLDERS'
EQUITY (ROE)AFTER TAX PROFIT
MARGIN
1998–1999 44% 32% 15%
1994–1999* 30% 30% 13%
OUR LONG‐OUR LONGTERM OBJECTIVE 20% 20% 12%
*Compound annual revenue growth, and average annual ROE and after‐tax profit margin.
The Schwab Strategy
o One of Schwab’s core competencies has been to develop and utilize technology as a means to reach and empower its clients
• By 1999 with e Schwab and the acceptance of internet trading the• By 1999, with e.Schwab and the acceptance of internet trading, the company’s dedicated investment to technology substantially pay off
• Schwab was the leader in both on‐line and full‐service firms
• Analyst Center – in crease capacity by 70%
o Schwab’s new niche: semi‐discount brokerage firm• Getting squeezed in the middle?
• Loss of 30,000 clients
Action Plan‐1999
o Appeal to more upscale clientele• Offer financial advising• Schwab needs to provide different levels of service and customized portfolios of service for affordable prices• Offer IPO’s so to embrace current financial climate
o Prepare for Regulation and Deregulation• Gramm‐Leach‐Bliley Act of 1999• Study competition’s actions• Integrate services into existing full internet account access and stock t ditrading
o Globalization• Slowly and with extreme precaution
T h i ll t i b d d t l ithi l l• Technically support services abroad and operate properly within legal systems
Action Plan‐ 1999
o Maintain strong public image• Commitment to advertising campaigns• Expanded advertising into internet and media advertising
o Maintain competitive edge in financial technologies• First Mover = Higher price• Appeal to “tech‐savy” clientele• Investment in emergingtechnologies: Mobile Devices
TALK TOCHUCK
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