Edward Jones As One Of The Famous Organization In The Brokerage Industry - Case Study Example

? Case analysis Executive Summary Edward Jones one of the famous organization in the brokerage industry has been involved in this business since past30 years and with prior experience it has decided to enter international markets as the demand has increased and it has been able to create brand value and name for its firm. The firm deals in individual bonds and stocks and mainly targeted the rural and sub urban areas. But wit time as the firms succeed, it decided to enter the fast growing economies but to its shock it faced difficulty in entering the urban areas with its concept. Thus the paper deals with the strategy that the firm adopted in order to stay competitive and competitive advantage over its competitors. The brokerage industry suffered a huge threat from the financial analysis such as the banks which also started to provide similar kind of offerings as the brokerage firms. To overcome this threat and make a place in the minds of the customers the firm decided to adopt the differentiation and expansion strategy offering the customers services which they look forward for and ensure high savings. The report deals with internal and external assessment of the industry and the firm by implementing the tools such as PEST analysis, Porters five force and VIRO Analysis. The current strategies have been discussed along with the current issues and each of the alternatives is evaluated and finally recommendation has been provided to Edward Jones to adapt to the expansion strategy. Contents Executive Summary 2 External Assessment 4 Internal Assessment 5 Current Strategies 6 Key Issues 7 Implementable Strategic Alternatives 8 Criteria and Evaluation of Alternatives by Criteria 9 Recommendation and its Implementation 10 Limitations and Critique of Recommendation 10 Reference 12 Exhibits 13 Exhibit 1: External Assessment 13 Exhibit 2: Internal Analysis 15 Exhibit 3: Structure of strategic Alternatives 17 Exhibit 4: Assumption and Justification 19 Exhibit 5: NPV of Expansion Strategy 20 Exhibit 6: Action plan 21 External Assessment The retail brokerage industry enabled the individual consumers to invest in financial assets such as bonds and stocks. The industry has grown in the second half of the 20 century which has increased the individual ownership of financial assets and also increased the demand for brokerage services. A fundamental shift in the income level has also increased the responsibility of individuals for retirement’s assets. The brokerage business also grew with the rise in value of stock market. This increase made the stock much more attractive. With the baby boomer generation reaching the phase of retirement their financial concern has shifted from the accumulation of savings for retirement to the distribution of the assets. The retail brokerage industry showed growth opportunity in the field on technology and social factors. With an increased in the pension plans, people started to invest more giving rise to retail brokerage. Also with low substitute, the retail brokerage industry has the opportunity to grow and regain its place which it had made few years back. Opportunity lies with the adoption of new and latest technology along with moderate price, the retail brokerage industry has a wide opportunity to flourish in the world of online investment. This factor can also lead to threat because the number of online users has increased, missing out the attention by individual broker (Exhibit 1) However threat lies with the risk of entry of potential competitors which tends to increase the number of competitors and diversity of the products. Another weakness lies with the firm’s brand value which still stands behind in terms of brand awareness in the urban areas and with more of the clients using off the online services poses a huge threat for Edward Jones. Internal Assessment Edward Jones is a brokerage firm and serves only individual consumers and has segmented customers based on three criteria, retires preretirees and the small business owners. Edward Jones became the fourth largest broker in US and believed that end consumers were the only client of the firm. The product offered by Edward Jones proved to have a sustainable competitive advantage. The products offered are of high quality and one can invest for a longer period of time. The average holding period for mutual fund was 13.1 year as compared to average holding years of 5.1 years. The products offered gave valuable, rare combination and is profitable for the organization. Along with the customer service which also proved to be valuable and rare at the same time acts as strength for the firm and it would help it to stay competitive. In terms of marketing aspect the firm initially did not spend much on advertising but latter spent about 55million on newsletters and was successful in generating awareness about the products. It increased the value of the product but the act cannot be regarded as rare because the entire firm generates awareness through advertising. This activity can be referred to as strength as it adds to the competitive parity of the firm (Exhibit 2). Other internal factor which forms an integral part of the VRIO framework includes location. Edward Jones expanded into big cities and tried to place most of its branches in convenient and high traffic storefronts. The firm had become national in terms of coverage. Location tends to be the most valuable part for the organization and by expanding into urban areas Edward Jones have strengthen its position and create a competitive parity. Although expansion is nothing rare in its kind, all successful organization does so. In terms of FA development, the company hired individuals and provided them with internal training but at a future stage it did not add enough value for the firm as most of the FA left the organization and started off their own business resulting in about 15% attrition rate. The situation can be referred to as weakness for the firm and it can create only temporary competitive advantage. Although the firm provided handsome incentive as well as reward programs which added value and can be regarded as strength for the organization. Based on the previous financial year as shown in the case, it can be said that net revenue has increased over a period of time from $2,480,549 in 2003 to about $3,134,959 which shows an increasing graph and it is predicted that in the years to come the net revenue would increase would have a positive impact in the financial statement of the firm. Current Strategies The strategy adopted by the firm tends to focus on the need of the customers and introducing schemes which would be profitable for the customers. The firms marketing along with the product has the capacity to leverage competitive advantage and it is categorized as business strategy. Further it plans to introduce schemes for the customers above the age of 55 and achieve a distinctive competencies and the need of the customers are satisfied. Central to the strategy the firm believed that the end consumers were the only reliable client for the company. Every step the firm took was in collaboration with the customers and designed in order to deliver value to its client. Moreover every client wants to be treated equally and afforded the dame high ethical; standard and access to services. Edward firm has adopted the strategy of international expansion and its functional level strategies are rooted with its customer service along with its increased efficiency. Therefore the functional strategies aim to give the firm superior, efficiency, quality, innovation and customer responsiveness which ultimately lead to competitive advantage and superior profitability and profit growth. The firm tends to follow the same strategy as it did in its initial stage. Edward Jones followed strategy of expansion over the years and still continues to apply the strategy of international expansion. The global strategy is applicable when the firm decides to enter international markets with superior products and services. As per John Bachman the firm follows an ambitious expansion strategy. The firm aims to grasp all the opportunity and the growth of the firm which will not be limited due to lack of ability. The firm possesses a great knowledge about the business than any other prevailing firm giving a competitive edge over its competitors and the new ideas generated needs to be implemented. This way the firm also possesses a competitive strategy which influences industry competition (Collis and Smith, “Position in 2006”). Key Issues The firm faced occasional challenge in its initial stage of operation. In the year 1980 real estate partnership that the firm distributed, unfortunately turned out to be bad investment. This showed that the development of product review department charged with the responsibility of approving new products and given the authority to decline the participation of the firm in such types of investment. Another issue faced by the firm was that since it focused and targeted customers from the rural and suburban areas it became difficult for the firm to explore the fast growing market segments such as African Americans, Asia Americans and Hispanic Americans. The efforts made by the firm proved to be difficult and since most of the investors lived in the urban areas it did not make sense for the firm to keep looking for client in rural and suburban areas. Also the firm had less than 200 African American FAs, 200 Hispanic FAs and about 100 Asian FAs. Implementable Strategic Alternatives Based on the above discussion it can be said that the firm has been facing few issues which has all the possibility to hamper the growth of Edward Jones, a brokerage firm. Although with geographic expansion into several different areas the firm has been able to achieve a competitive advantage over the other firms. But in order to maintain its position in the brokerage industry where Edward Jones currently shares the fourth position the firm needs to expand more into other urban areas and places where the investors are likely to invest upon and over the years gain the top position in the brokerage industry. The firm needs to adopt a differentiation strategy to attract its customers because with time many financial services and financial planners have evolved offering the same services to its customers as Edward Jones. Thus it needs to differentiate its offering so that the existing clients stick to Edward Jones as well as attract the potential clients. Two strategic alternatives which have been chosen are differentiation strategy and expansion strategy (Exhibit 4). The reason for adopting differentiation strategy is that the firm needs to be competitive in the industry and with the growth of internet and online business the demand for the broker have highly decreased. The products are offered to individuals and according to their feasibility the internet is the fastest and safest growing trend. To overcome this Edward Jones came up with differentiation strategy of offering is customers stocks and bonds that will yield more profit and are easily accessible. Through differentiation strategy the firm will have the opportunity to bring out innovative schemes and attract the customers. Secondly, expansion into developing countries (Exhibit 4) sounds to be profitable because with increase in the disposable income people are willing to save for the future and offering the people with schemes which match the demand and the rate of interest will surely increase the demand of the firm. Also with the current economic situation people are more interested in saving rather than spending. The firm has the opportunity not only to target the individuals but also the institutional business which would further strengthen and add sustainable advantage to the firm. Third alternative is to emphasis products which are appropriate for client above the age of 55 and introduce schemes such as annuities and lifecycle funds. Criteria and Evaluation of Alternatives by Criteria The expansion strategy of the company is often adapted for increasing the customer base of the company. This in turn will appreciate the sales of the company; with this view the expansion strategy is generally implemented by the company. Since the expansion strategy is adopted by the company we can observe that the revenue earned by the company has increased over the year. Generally in the expansion stage the company has to undergo a lot of changes which results in the increase in the operating income of the company. The operating income of the company has increased from $179,000,000 in 2006 to $199,000,000 in 2007. In the process of expansion the company requires capital which is usually taken from the bank or other financial institutions in the form of loan. This resulted in the interest payable by the company to increase by 15% approximately. We can notice a probable rise in the net income of the company to $107,879,000. The rise in the capital expenditure has resulted in the decrease of the cash outflow. In the process of adapting the expansion strategy the company may go through some increased operating expenses but in due time that will tend to be off-set by the positive income earned by the company. Based on the projections thus made for the company, it can be said that the company’s decision to adopt the expansion strategy is a right one related to the changing economic scenario (Exhibit: 5) Recommendation and its Implementation Based on the criteria stated in the above sections and also the internal and external analysis conducted, it is recommended that Edward Jones should pursue the expansion strategy into developed as well as developing regions. The reason behind choosing such strategy is that investing in developing countries would prove to be profitable because with high income level the savings tends to increase at a high level. The strategy proposed aims to produce positive net income as well as net present value and would leverage the success of the firm in implementing standards as per the needs of the client. The firm has in the previous years have also expanded into developed countries and has achieved success over the years. People are much more interested in savings rather than spending. The expansion strategy would start off early 2006 targeting the developing nations as there are greater chances of growth in the developing nations then the developed ones. Limitations and Critique of Recommendation One of the biggest limitations of the recommended strategy is that the firm might not get accepted in the target market due to established players in the foreign markets. It would be highly difficult for the firm to set up its business in the countries where brokerage industry is already an established one. If Edward Jones is not able to generate awareness about its offerings, it would result in net loss because expansions are usually a costly affair and the firm has to take into consideration many factors associated with expansions. It is highly recommended that the firm should stay in budget while implementing the strategy. Another limitation is the budget and especially the amount allocated for marketing. When a firm enter international ground it becomes increasingly necessary to create a brand image so that it can survive in the competitive market and thus creating awareness is necessary. With a limited budget it would be difficult for the firm to generate the desired respond and profit for the organization. Reference Collis, Smith. “Edward Jones in 2006: Confronting Success.” Harvard Business School 9 (2009): 1-13. Print. Exhibits Exhibit 1: External Assessment Porters five force Bargaining power of consumers Few buyers and buys in small volumes They are price sensitive Bargaining power of suppliers Many suppliers resulting is low to moderate power Many alternatives available Substitutes Few substitute for retail brokers industry. The financial planner can be termed as the substitute for the industry. High switching cost Risk of entry by potential competitors The risk is moderate to high Low barrier to entry Rivalry among firms As more and more financial services came into the picture, the rivalry among the firms got intense and increasing the level of competition. PEST Analysis Political factors The industry is regulated through government and also private sectors. Many financial services have come up and as such many banks have also opted for serving its customers with the various financial services. Brokerage industry shaken up by the abolition of regulation with respect to fixed commission for trade. Economic factors The brokerage industry had evolved from its roots as service for wealthy investors. The swing in the stock market led to fluctuation of trades on the capital market. Social Factors The growth in pension lead the people invest more and increased individual ownership of financial assets which increased the demand for brokerage services. Technological Factors With rise in the technology, the brokerage industry suffered a setback as with the introduction of the internet and online services. The PEST analysis shows that economic and social factors showed signs of opportunity and porters five indicates low substitute. Exhibit 2: Internal Analysis VRIO Analysis Activities Attributes V R I W/S/DC/SDC O Implication Customer service Served individuals and target client through FA; quality service; Yes Yes No Strength Yes Able to stay competitive Marketing Little advertising initially; spent 55million Yes No Yes Strength Yes Competitive parity Generate awareness Yes No Yes Competitive advantage Yes Competitive parity Product Quality product; mutual fund 13.1 yrs; investment and financial services Yes Yes Yes/No Competitive advantage Yes Sustainable competitive advantage Location Expanded into big cities; national in coverage Yes No Yes Strength Yes Competitive parity FA Development Hired individual and gave internal training No Yes No Weakness Yes Temporary competitive advantage Incentives Reward programs Yes No Yes Strength Yes Competitive parity Exhibit 3: Structure of strategic Alternatives Name of the Alternatives: Differentiation strategy Customer needs: products that will yield more profit Customer group: the individuals Basis for competition: focus on customer segment and differentiation Corporate strategies: stay focused on its role and applies the strategy suited to its current situation Other: target the urban population also and also consider implementing new technology Key issues: Many financial firms has evolved both private and public posing intense competition Feasibility Justification for this strategy Environmental opportunity: introduce schemes which may sound profitable both for the urban population and suburban people and both are willing to spend as well as yield a high rate of return. Environment threat risk: there could be lack of demand due to rise in the online business and internet Present corporate attributes: years of experience; employment generation, opportunity. Insufficient corporate attributes: introduce schemes which are appealing to its clients Name of the Alternatives: Expansion into developing areas where rate of household income is more Customer needs: future savings Customer group: the individuals and also the institutional business Basis for competition: expansion into developing countries Corporate strategies: stay focused on its work and takes into consideration the institutions also Other: build on its strength and sustainable advantage Key issues: The firm was not able to expand in urban countries with fast growing market share as it invested mainly into rural and suburban areas. Feasibility Justification for this strategy Environmental opportunity: Target the urban people with high income level and who are willing to spend on bonds and stocks. Environment threat risk: there could be lack of demand due to rise in the online business and internet Present corporate attributes: years of experience; employment generation, opportunity. Insufficient corporate attributes: introduce schemes which are appealing to its clients Exhibit 4: Assumption and Justification Differentiation Strategy Most likely scenario assumes that implementation of differentiation strategy in terms of schemes and technology will takes optimistically 2 years and pessimistically 4 years. Research and development in different schemes would be implemented in 1 year time optimistically and pessimistically within 2 and half years. Expansion Strategy Enter new market by the beginning of 2006 Revenues are expected to increase in 2006 and 2007 due to market penetration Depreciation and interest to follow similar trends Capital expenditure likely to increase by 25% during expansion is the most likely situation, where 15% is the optimistic scenario and 35% in the pessimistic scenario. Exhibit 5: NPV of Expansion Strategy Exhibit 6: Action plan 2006: Annual budget: Establish branches in different areas Develop procedures which will be effective in managing and controlling the various offices to be set up Recruit and Hire employees for the new offices Start off with promotional activities 2007: Monitor the ongoing work Implement the strategy and marketing aspects Begin operating Make necessary changes Read More