Overall Changes in The Charles Schwab Corporation - Assignment Example

Overall Changes in The Charles Schwab Corporation Introduction The case study provides details about the overall changes which took place during a particular period of time within The Charles Schwab Corporation (firm). There are various issues, which indicate as to how the company managed to keep itself flexible enough to accommodate the changes which were taking place externally. The main focus of the case, therefore, is on the exploration of the various steps which firm undertook in order to ensure that it remain competitive in a market which remained volatile during the period under study. Some of the issues which contributed towards this strategic shift also include technology as the major element. Some of the most important strategic steps taken by the firm utilized technology as the major source of competitive advantage. Firm works in an industry which has gone through substantial change over the period of time due to the economy as well as the changes in the technology. This aspect of change, therefore, brought changes not only within the industry but within the firm also as there was a gradual shift in the strategic focus of the firm. The changes in the organizational structure as well as the consolidation of the business, therefore, may be considered as the direct result of the changes which took place externally. This analysis will therefore, present a critical analysis of the key issues, problems and opportunities faced by the firm besides presenting a discussion on the change which took place within the firm and whether this change will be favorable to the firm or not. Key Issues & Problems- Business Changes Before discussing the changes in the business since 2002, it is critical that a discussion shall be provided with respect to the circumstances which forced the firm to bring in more subtle and important strategic changes in the way it use to conduct the business. Schwab’s share trading volume as well as the share prices relatively declined during the period of 1998 to 2006. During 2000, stocks of Schwab were trading around $38 per share which subsequently declined and almost touched $3 per share in 2002-2003. This decline in the stock prices reflects the overall attitude of market towards Schwab and its financial strength as during this period Schwab went through critical business changes which could not proved entirely successful and firm has to take decisions which potentially proved costly for the shareholders. A closer look at the financial statements of the firm will indicate that the Schwab shifted its focus from investor services to institutional as well as other services. This strategic shift resulted into the costly changes which forced Schwab to lose market to its competitors. This section will therefore discuss the different business changes which took place during the period and what key issues and problems emerged during this period. The firm’s business model was focused on providing highly efficient and effective brokerage services to its customers at affordable cost. What is also significant to note that the firm has been able to leverage its services through technology which ultimately provided it the necessary competitive advantage over other competitors? There was however, a consistent decline in the customer services offered by the firm due to higher volume of trades executed and the firm’s inability to offer same level of service to all its customers. This decline in the customer services may be directly attributed to the fact that technology started to change and competitors were able to provide better and more efficient technology which could allow the investors to get real time quotes as well as to execute the trades more rapidly. In the meantime, other competitors developed their expertise too and provided more cost effective services to the customers thus forcing firm to slash its revenue commissions. It is also critical to understand that most of the revenue for the firm was coming through the retail commissions and as such reductions in the commission rates forced the firm to look for other options to sustain its revenue and remain competitive. One of the most important issues which brought the resulting changes in the way business was conducted by Schwab was the decline in the revenues. This was mainly due to the busting of dot com bubble on which firm relied heavily in order to provide critical support and trading platform to its customers. Further, despite reduction in the trade commissions, firm was incurring heavy overheads on the investment which made in its information technology platform to offer its cutting edge services. In year 2000, revenues declined by 3% followed by a further 1% decline in the same in following year. This may be the direct result of the fact that during 2002, firm started to raise the commission rates against its retail customers also thus forcing the customers to look for alternative brokers which could offer the same level of service at relatively affordable cost. This increase in the commission rates therefore resulted into the decline of the revenue of the firms however, profitability increased during this period owing to increase in the commission rates charged to retail customers. There came a period of strategic acquisitions also as Schwab attempted to utilize the strengths of other firms in order to remain competitive in the market. It focused on acquiring the firms which could potentially provide it efficient information technology platform to serve different customers. As a result of the changes in its external environment, if acquired US Trust and other firms so that the information technology expertise of these firms can be utilized. One such acquisition was that of the SoundView Technology Group in order to combine and develop one platform where all type of customers i.e. retail as well as institutional investors can actually get investment advice and research in order to better execute the trades. However,, amid this change was the fact that Schwab really failed to understand what type of information technology platforms it requires and how it can really combine its original core competencies with the new changes which it undertook. It is therefore possible that the Schwab might have failed to reconcile the type of technology it required and the type customers it wanted to serve. This mismatch between the two aspects of managing the change in the firm resulted into the investments which potentially could not provide the desired results to the firm. Considering the above business changes, it can be easily concluded that these changes were the direct result of the changes in the external environment of the firm. Key Issues and Problems- Acquisitions As discussed above that Schwab took important steps in order to ensure that it remains competitive in the market. Some of the changes also included acquisitions of different firms in order to provide the necessary edge to the firm in a competitive market which was largely driven by technological superiority. This section therefore will discuss the key issues and problems faced by the firm while making acquisitions of different firms. Industry trends during this period also indicated a period of consolidation among the discount brokers in order to increase efficiency and capacity to service. Schwab responded relatively late to this change and therefore paid the price as the customers started to shift towards competitors due to low rates and same level of services received. Resultantly Schwab has to cut the trading commissions also for its retail customers owing to competitive pressures. This aspect also indicates that Schwab clearly failed to anticipate the changes in its external environment and became complacent in terms of managing its business dynamics. During this period, the most important changes which took place were mostly related with the acquisitions made by Schwab in order to remain competitive. The question of whether these business changes were taking the company in right direction need to be assessed from the perspective of how well the firm understood and explored its external environment. It seems that the firm could not anticipate the changes in its external environment and most of the changes which took place were direct result of the competitive pressures. This is despite the fact that Schwab has a history of successfully operating in the market and providing retail discount brokerage services to its customers since years. Schwab’s acquisition of US Trust was also questionable because of its failure to comprehend that the information technology systems used by the Trust were relatively costly to use thus invariably increasing the cost of maintaining and running the system in a period when revenues were on decline. Though this acquisition may be considered as a step towards achieving the competitive advantage in the market and utilize the core competencies of the acquired firm however, it seems that this acquisition was not in-line with the overall strategic direction of the firm. Schwab, over the period of time, has developed itself as a discount broker and major chunk of its revenues were generated from offering retail brokerage services. By acquiring US Trust, it basically shifted towards managing high net worth clients and utilizing an expensive technology to manage retail customers. Further, it seems that US Trust was not managed properly as there were frequent changes in the higher management of the firm as well as the changes in the way the firm was managed. This conflict between the organizational cultures of two organizations therefore was relatively neglected at the time of making acquisition. It is critical to note that the firm’s acquisitions were generally made in order to create synergies and combine the core competencies of the firms. These acquisitions however, point out towards the fact that the business changes which underwent during this period were mostly driven by the changes which took place externally. To assess whether these acquisitions were taking Schwab in right direction therefore depends upon the overall strategic focus of the firm. During the period, Schwab seem to have taken steps which did not point towards any specific strategic direction as the firm attempted to serve all segments of the market while ignoring the fact that its core competencies included offering discount brokerage services to retail customers. This shift from strengthening the core competencies of the firm resulted into the acquisitions of firms which were doing business in relatively different segment of the market and as such might not prove as the best strategic fit for the firm. This lack of convergence between Schwab and other firms therefore may be the key reason behind the acquisition failures. Key Issues and Problems- A General Discussion The overall changes and the problems faced by the firm are also reflecting upon the overall management style of the management of Schwab and how it tackled the overall state of affairs. The organizational structure of the firm, under Pottruck was relatively different indicating the nature of leadership style both the leaders possessed. The acquisitions made under Pottruck were mainly driven at deriving value through responding to the changes in the market however, Pottruck failed to capitalize on the essential core competencies of the firm. The basic difference between the approaches of two leaders therefore is in their ability to visualize the future and anticipate the changes which might take place in the market. Pottruck clearly failed to anticipate as to how market will behave and how Schwab can actually utilize its strengths to overcome the external threats. Thus Pottruck attempted to achieve growth through the acquisitions of new businesses which can offer firm an advantage in terms of offering efficient technology back-up to provide seamless services to the customers. Charles Schwab however seems to be a relatively different leader with a vision to develop a business which can live to its reputation. Some of the actions taken by Schwab also included the rationalization of the technology organization of the firm thus allowing it to become more efficient and effective. The relative strength of Schwab lied in the fact that he knew how to align the core competencies of the firm with its strategic objectives. From it beginning Schwab focused on aligning the needs and interests of its customers and company together in order to reduce the conflict of interest. However, Schwab, under Pottruck, drifted towards the fact that it was focusing too much on itself giving relatively low consideration to its customers. Charles Schwab therefore attempted to refocus the firm’s strategy and aligned it with its core strength. This therefore resulted into the leveraging of the firm’s information technology base in such a manner that it can serve and accommodate its customers in most efficient manner. Thus Charles Schwab’s focus was on the development of a business which cannot distinguish itself from its customers and provide efficient services. A good leader always seem to possess the ability to visualize the future and present a concise and clear policy statement regarding the overall direction in which the firm can move. It is however, critical to note that the leaders must not be reactive otherwise all the energies and efforts often go into reacting towards the market changes rather than making strategies to anticipate the market changes. The basic difference therefore between a good leader and bad leader is always dependent upon how good a leader is in anticipating the changes in external environment of the firm. It seems that CEO before Charles Schwab lacked the ability to clearly anticipate the external challenges as well as to understand the core competencies of the firm. Thus the basic differences between the leadership styles of both the men were deeply rooted in their abilities to assess the core competencies of the firm and than realigning them with the overall strategic direction and objectives of the firm. Opportunities for Schwab Different facts and figures provided in the case study also point towards the various opportunities which firm may have exploited in order to take advantage of the competitive changes which took place in the market. First of all, it is important to note that the retail customers actually looked for more cost effective and efficient services to execute their trades. This also meant that the firm could have simply upgraded or bundled their services in a manner which can relatively mask its problems in terms of executing the orders. Over the period of time, the revenue share from this segment of the business declined despite the fact that Schwab reduced the price in order to remain competitive. What is significant to note that the firm could have utilized its banking services to provide leverage services to its retail customers through bundled offers? By doing so, Schwab could have locked in the customers. The resulting changes in the technology could also have provided the firm with new opportunities in terms of providing efficient services. Different acquisitions made by the firm were mainly aimed at improving the technological base of the firm however; these acquisitions were not focused on the utilization of the core competencies of the firm itself. Thus the firm potentially lost the opportunities of aligning its core competencies with that of the acquired firms. Another important aspect which needs to be considered is the fact that firm could have expanded its product base when it acquired different firms. It continued to sell its earlier products with very little emphasis on new product development. Though the firm has in place a product development unit however, it failed to provide clear product delivery. For example, with the acquisition of US Trust, it also acquired high net worth clients but failed to serve their needs and offered them some really admirable. This was because of the fact that this acquisition was mainly focused at obtaining an information technology platform which can offer the firm a readily available backbone to manage its retail customers. Having acquired such a sophisticated information technology back-up firm actually failed to innovate and offer new products and services to its customers. Rather it focused on the accommodating its existing client base with existing products and services. How Schwab is doing today? Schwab’s condition and financial strength is not so good in current circumstances also as owing to financial crisis, the industry as a whole has suffered. Though its revenue has increased during this year but this was after the two years of decline. Further, its income also fell during the last quarter thus indicating that the things may not be all good for the firm in current circumstances. It has been reported that Schwab is making recovery however its slow and the stock trading activity is not relatively picking up. Total revenue as of Dec 31,2009 is $4.193B1 which is even less than what the firm will earning in 2005. This consistent decline in the revenue can be attributed to different factors including the financial crisis which caused many firms to either go out of the business or sustain the losses on relatively longer stretch of time. The most recent performance of the firm is not healthy too as its stocks are on continuous decline and fell by 1% in a single day. The overall expectations of the analysts regarding the future performance of the firm are not healthy too as market is not yet fully satisfied with the performance of Schwab. (Lau, 2010). It is critical to note that the current decline in the shares trading activity may be attributed to the fact that the economic situation is plagued with uncertainty and investors- specially retail investors, are inclined towards savings rather then investing. This trend therefore is resulting into the decline in the stock trading activity thus reducing the revenues and profitability for many firms including Schwab. Recommendations Above discussion leads to the conclusion that the firm need to refocus itself on the development and utilization of its core competencies in order to achieve the required level of growth as well as the market stability. Schwab has been making changes in order to tackle with difficult external environment due to better competition as well as the changing preferences of its customers. Schwab’s customers preferred to trade with the brokers which could provide the cost effective services with good technological support. Considering the overall strengths of the firm as well as the available resources, following set of recommendations is discussed: Market Development Market development as a strategy requires that the firms look into the possibility of entering into new markets in order to sustain their growth. Historically Schwab has been working in US market despite the fact that other economies also grew at higher rates. This lack of presence in different markets therefore increased the overall risk of Schwab for working pre-dominantly in one market. Since technology has become a dominant force in this market, the survival of the firms therefore depends upon how good they are at adapting the new technologies. Firms which are slow in adapting the changes therefore either need to respond by upgrading to the new technology or can tap into the opportunity of investing into a new market where it can utilize its existing strengths to achieve the desired level of growth. Schwab therefore has to look for making an entry into a new market including India and Middle East where it can offer relatively straight forward services by utilizing its existing level of technology. Markets like India offer lucrative opportunities because of its large market and improving economic conditions causing the increase in the economic status of the masses. The emergence of new Middle class in the country therefore provides a very well defined market with lot of growth potential. Further, India is an investor friendly country and firm can make an easy entry into the market with strong brand recognition as well as the historical reputation that it carries with it. Product Development An alternative approach which Schwab can undertake is to look into the possibility of developing new and cost effective products. It has the technology but it lacks on competing at price therefore the new product development will help the firm to look into the possibility of developing niche markets which can be served in more appropriate manner. Identification of Niche markets not only allow firms to focus their strategies on a single and well defined market but also offers it an opportunity to get full market intelligence about the niche market and how it can be better served. Thus the product development process shall be combined with the identification of the new niches and subsequently offering them the product which is desired by them. Since Schwab is already managing high net worth clients therefore it can further look into the possibility of offering new products to its high net worth clients and attempt to cross sell to them also. New product development can range from the development of equity based products or offering the investors an opportunity to invest into mutual funds. Further, through forming strategic alliances with different firms, Schwab can actually cross sell its products through them and offer a wider range of choices to its customers in terms of product selection. Rather than focusing on the new acquisitions firm should therefore focus on the formation of new strategic alliances. Conclusion The above discussion indicates that Schwab failed to take into account its own core competencies and rather relied heavily on changes which took place externally and followed them. It can be clearly established from the facts provided in the case study that Schwab was not the market leader in terms of having sizeable market lead but rather it attempted to follow what others were doing. This may be due to the ability and style of the different leaders who were heading the firm during this period. The CEO before Charles Schwab seems to possess the excellent skills of identifying the new firms to acquire however, he failed to reconcile and align the core competencies of the firm with that of the acquired firms. In the absence of such vision and ability, it was relatively difficult to take advantage of the market conditions and changes which took place externally. Charles Schwab attempted to rationalize the management structure and focused on the development and use of technology to achieve the lost glory and reputation of the firm. It is important that if firm look into the possibility of new product development as the same will offer the firm an opportunity to tap into new niches of the market and serve them in a better manner. It is also critical if the firm can look into the possibility of entering into new markets like India where it can utilize its existing technological base to offer cost effective services to newly emerging middle class in UK. Bibliography Lau, A. (2010). Charles Schwab leads financials into the red. Retrieved October 16, 2010, from Market Watch: http://www.marketwatch.com/story/charles-schwab-leads-financials-into-the-red-2010-10-11 Read More