Charles Schwab Corporation (A)

Submitted by : Group 4, Section B

Chirag Arora Dhruv Aggarwal Neha Sushilkumar Bhomia Nidhi Singh Nitya Saxena 2013PGP112 2013PGP128 2013PGP248 2013PGP249 2013FPM008

Prasenjit Chakrabarti

2013FPM009

Alternatives for David Pottruck

David Pottruck could resolve the distinction between e.Schwab and regular Schwab customer services by offering all customers low priced Internet trading with full complement of Schwabs customer service options through expanded Internet offering He thus considered three price points - Since it had no intention of price war with brokers, it was not a viable option - Schwabs idea was based on great service at great price, its brand would hurt as would not be able to provide associated services at this price - The range of services commanded at least a $10 price premium to the mid sized firms and a $20 premium on the bare bone providers - At this price point, there is no sufficient revenue addition by increasing the volume - Internal analysis projects less price elasticity at this price point - At this price point, price is more elastic as compared to $39.95 - It could still determine the industry standard and would have the scope to drop the price later owing to competition

$29.95

$19.95

$39.95

Reasons for not cutting prices

To compete in highly contesting category of trading, it should reduce its price to prevent low cost internet brokerage firm from eating away its market share By improving on its internet trading capability on competitive term, it can retain its heavy traders and attract new customers from full service brokerage by providing low price and high quality Also the company possessed right core competencies to make Internet trading expansion a successful initiative, thus leveraging Internet as transformational technology for favorable customer response Charles Schwab has always capitalized on long term value of taking aggressive decision and capture the early market position Although, this initiative estimated revenue and profit reduction in first year, but in long run, projected earnings shortfall could be offset by other parts of its business

It should thus combine its two existing Internet offerings into one new offering and lower the price
Decision : Thus, Lower the price to $29.95 and capitalize by expanding Market Share

Key IT issues faced by Dawn Lepore

Charles Schwab commission-charging system was overdue for an upgrade To provide additional pricing flexibility in order to handle the large number of new customers who will be adopting internet trading, the upgrading was a necessity Internet offering was expanding at a fast rate, pricing flexibility was needed to handle the growth. Currently, it could handle only one type of pricing structure and limited number of pricing schedule

They had developed a workaround for the e.Schwab product but it would be difficult to upscale the system
Internet trading capabilities needed to be enhanced to tackle competition and retain heavy traders and also attract new investors. The work on upgrade was going on but it was far from complete Some of the IT initiatives of Schwab were leading to cannibalization of their core business and a way-out need to be found for this problem They were spending heavily on training, spending on average $2000 per IT staff member per year. Hiring people with experience was focused on due to huge growth of the organization

Merrill Lynch late Entry Right or Wrong?

There was a 5-fold growth in Internet trading market during 1995-97 ( 14million to 69 million). Online trading firms enjoyed the growth by leveraging their IT capabilities .Merrill Lynch, being a late entrant , needed to build the IT capabilities and so ,it could not enjoy the growth There was a shift happening in investment and trading market towards do-ityourself model .Being a Investment Bank, Merrill Lynch had positioned itself mainly as research and advisory services. So , Merrill Lynch lost the market of those investors who opened their online trading accounts to other online brokerage firms Industry was going through intense price war. It was not possible for Merrill Lynch , being a late entrant , to reach scale in terms of IT investment within a very short period of time. So, it would be difficult for them to fight price war Data shows that , Schwabs customer asset had shown CAGR of 42% between 199097, compared to 15% at Merrill Lynch.

Thus, Merrill Lynch was not right being a late entrant in the market