Charles Schwab

Corporation (A)
Case Summary

GROUP - 1
2021PGP113 DIGVIJAY SINGH RATHORE
2021PGP185 LARA LAVANYA
2021PGP264 PRINCY ERA KUJUR
2021PGP278 RAJDEEP SIL
2021PGP355 SHIVASHISH KUMAR GUPTA
2018IPM105 SHYAM SUNDER SHRIVASTAVA
Company Background
● Charles Schwab Corporation was launched by Charles Schwab.
● Opened its first branch in Sacramento, California, in 1975. By December 1997, Schwab operated 272 domestic
branch offices in 47 states.
● Schwab seized opportunity and business in “discount broker” and was the First Discount Brokerage Firm after
Securities & Exchange Commision abolished fixed rate commission on brokerage trades.
● Its strategy was to empower the individual investors by offering unbiased products and services at discounted
price.
● By 1982 it had grown to $54 million in revenues and in 1983 Bank of America bought Schwab for $57 million
● The entrepreneurial culture at Schwab and conservative culture at Bank of America caused four-year clash
,which persuaded Charles Schwab to lead a $280 million management-led buyout of the firm in 1987.
● Schwab differentiated itself from its competitors through innovative products & services and used technology
to generate both productivity improvements and to develop superior customer service.
● Some of its customer service includes - Automated phone service, access to “live” customer service
representatives and automated Telebroker phone service.
● Schwab’s regional customer service centre was located in Indianapolis, Denver, Phoenix & Orlando which
operated for 24/7.
Competition & Internet Market
● Competition:
○ Internet trading firms had increased from 15 in 1996 to ~60 in 1997
○ Major amongst them were Schwab, DLJdirect, e-trade, Waterhouse securities etc - But Schwab held lead in terms of Online trading
○ Increased price war amongst the competitors - ex AmeriTrade decreased its commissions to as los as 8$ per trade - This led to a 3-5$
marginal cost per trade for a firm to achieve break even
○ Although many firms adopted low flat rate - Additional charges were levied for trade >1000 shares, OTC trades etc
● Market segmentation:
○ Segment 1: Firms targeting Price-sensitive internet trader segment with deep discounted commission
○ Segment 2: Firms targeting less-price-sensitive Internet traders with higher commissions & value added services
● Internet Market:
○ Number of Internet users increased from 14mn in 1995 to 69mn in 1991 - Portals like AOL & Yahoo received high visitors
○ Portals earned through charging for advertisements based on the number of consumer visits each day
○ E*Trade and AmeriTrade emerged as public “ pure-play” online brokerage. Both were trading at comparable profits to Schwab.
○ This made Schwab doubtful of receiving much of “Internet trading premium” by expanding their internet strategy
○ Also, due to the price competition in the internet trading market, the high priced players came under pressure at the end of 1997.
Problems & Dilemma
PROBLEMS :
● Those availing the e.Schwab product, could
not be helped due to the terms of the
product, this countered Schwab’s values of
being fair, empathetic and responsive.
● Schwab was seeing some of its heavy
traders migrate to deep discount online
brokers.
● Schwab’s commission-charging system could
not handle multiple price structures.
● As a result, if expanded Internet was
pursued, the projected earnings shortfall
could not be offset by tinkering with
commissions in other parts of the business.
DILEMMA :
● How long would 80$ commission per trade would be
justified for full service internet trading - as more firms offer
deep discounts on Internet trading
● It was a known fact that Internet was a transformational
technology for brokering.
● And Schwab was known for securing an early market
position with innovative technologies to benefit in the long
run.
● But going for expanded Internet offering meant a $100
million in forgone profits in the short run, affecting its
prospects at the Wall Street.
● And since, Schwab already had 5x the number of Accounts
with E*trade, immediate benefits would not show up on
Wall Street, even though in the longer run it can prove to be
a strategically sound move.
● Thus, the dilemma of going for expanded Internet is a good
move or not
Alternatives Solutions
● The growing competition among the firms offering Internet Trading, has led to an intense
price competition, wherein AmeriTrade is offering $8 per trade, the lowest commission in
the business.
● Pottruck decided to provide an integrated brokerage service at a low price for all its
customers. Internal Analysis led the firm to decide on $29.95, since the impact of
moving to $39.95 or to $29.95 would be same.
● This move will cannibalize over its offline and full service online business which will
cost them around $125 million in revenue in 1st year.
● The firm observed that the heavy traders (20%) who contributed 80% of the
revenue where shifting to discounted online trading, going forward with the
integrated offering at lower price makes sense.
● Rebrand: Instead of name e.Schwab ( low price per trade with limited services) naming it
e something (not including the company’s name) will help the firm market it as a
discounted, limited service channel.