INTERNATIONAL BUSINESS STRATEGY June 2002 FILY Nicolas LE CORRE Jean-Marie Charles SCHAWB inc. Creating an international market space EXECUTIVE SUMMARY SITUATION OVERVIEW Schwab, pioneer and leader of the online broking market, has to face new challenges due to the boom of the E-business and the internationalisation of its operations. New competitors have appeared: the foreign e-bookers represent a new threat locally as they have a regional expertise…and many US-based e-brokers have chosen to expand abroad… PROBLEM STATEMENT / OBJECTIVES Schwab has to put all its efforts on the online broking market, which is the future of the brokerage industry. As the US online market is already mature and largely explored by many companies, the internationalisation of the operations is necessary for the growth of the firm. How to continue this development abroad ? How to compete effectively with the regional competitors as well as the US-based e-brokers abroad ? ALTERNATIVES 1) To continue the same strategy: to leverage its brand name through joint ventures and acquisitions. 2) To use a franchise model: Schwab will be the franchiser and the indigenous e-players that have a local expertise will be the franchisees. SOLUTION The franchising system is the most appropriate solution to go on the internationalisation strategy on the online broking market. The return on investment can be quicker than in the case of an acquisition strategy, and the brand notoriety will insured. INTRODUCTION Schwab, pioneer and leader of the online broking market, has to face new challenges due to the boom of the E-business and the internationalisation of its operations : the e- trading is attracting more and more investors who dream to reach high profits in a minimum of time. The online broking market is getting global, and the physical frontiers do not exist anymore: it will be possible to trade anywhere on any exchange at anytime in a close future. Thus, new competitors have appeared: the foreign e-bookers represent a new threat locally as they have a regional expertise…and many US-based e-brokers have chosen to expand abroad… EXTERNAL ANALYSIS Boosted by deregulation, the brokerage industry has tremendously changed. Where full service brokers used to supply their investors, mostly rich professionals, with brokering services, financial advices and access to privileged information, information technology has helped the market to grow rapidly to a much wider base of customers, and the market has seen the apparition of new players (discount broking, information only firms). The online broking market is growing very fast: it reaches actually 14% of all equity trades vs. 7% two years earlier. Technological environment : Thanks to Internet, the access to the information is much more easier. So Internet has bypassed the tasks usually offered by full-service brokers. People prefer to buy directly some shares on Schwab.com rather than to choose a traditional investor that would give them some advice on the management of their assets… PORTER Analysis: Barriers to new entrants Low entry barriers: “all new entrants needed was an online service provider”. Government actions Regional governments in Asia encouraged local technology growth. Rivalry among competitors A much more stronger competition: as the entry barriers are low and the profits‟ potential may be huge, the competitors are more and more numerous, particularly on the online market and out of the US. Schwab‟s competitors are: - US-based e-brokers such as E*Trade. - Banks providing online trading services such as the Bank of Montreal in Canada. - Indigenous players, such as Boom.com, who have an expertise in a local market. Power of suppliers The online service providers play an important role as they are directly involved in the technology of the service. Power of buyers The number of customers is increasing as it is more and more simple to trade and as Internet is getting very popular. This growing base of customers attracts more and more players and has Internet makes it easy to change supplier, buyers (here the investors) have a tremendous power on the firm. INTERNAL ANALYSIS Schwab, who was known as a discount brokerage business, has chosen to differentiate itself by offering a larger range of products. Thus, the company hopes to attract new customers (and more particularly sophisticated investors) by providing strategic information and expert advice. The strategy of the firm consists to expand its service and leverage its brand name. Schwab positions itself as a full service electronic investment specialist. Products and services : Retail brokerage, mutual funds, support services for independent investment managers. With the launch of the web site in 1996, Schwab became a sophisticated financial service provider : - On-line tools and services: margin loans, money transfers, trading options, equity report cards, market highlights… - Planning resources: a retirement savings planner, a college planner… SWOT Analysis: Strengths - Technological advantage: Schawb has always been keen on using the latest information technologies and has now a technological knowledge and experience that gives him a good advance on its competitors as Schawb is known as the pioneer of the online broking business - Strong Brand Image: From the start, Schawb has been known for its low fees, good quality services and technological advances in the US market. It gives the firm an advantages on new entrants - Competitive pricing: Schawb price are considered highly competitive compared to the service it offers. Even though it is not anymore the leader in terms of price, its whole mix is considered a good deal. - Large range of products and large variety of customers: Schawb has smartly increase its range of services to attract different kinds of customers - Better expertise on the local markets abroad compared to other US based online brokers - Access to the US stock market. - Diversified sources of revenues: Schwab keeps a consequent part of its revenues from the traditional brokering market. Weaknesses - Fewer local trading facilities: On the foreign market, Schwab offers trading facilities on the US market and few local market opportunities while competitors such as E*trade or local players offer a wider range of services. - No first mover advantage: If Schwab has a first mover advantage on its home market, it does not beneficiate from it on the foreign ones as other players are already installed. - Expertise in foreign markets: The subsidies do not have necessarily a good market expertise on the foreign markets Opportunities - Easy international expansion thanks to Internet: The low barrier of entry that may be a threat on its local markets is an opportunity to enter new markets. - Dynamics of the online trading market: The online trading market capture the most part of the growth of sector. - Market is not mature in the foreign markets: The customer base is expanding internationally and it is therefore easier to gain new customers in the new markets, easier that in a mature market like in the US. - Growing desires to have more power on its investment: Investors are willing to have more control on their investment. Online trading allows a further control than through full services brokers. - New strategy: To exit the race to low price and keep margins, the new strategy is to provide a more complete mix with new services to attract more sophisticated customers - Potential of foreign markets, especially in Asia and Europe which are growing markets. Threats - Loss of dominance in the US Market: Schwab may lose its market share by focusing too much on its international expansion - Potential loss of customer in the US market: The differentiation proposed may lead the loss of customers that are looking for only low price trading. - The expertise of local companies on their market may threaten the expansion of Schwab internationally. - Very competitive market: The online broking market is very competitive due to the numbers of players. It brings the margins down. Strengths Weaknesses Technological Advantage Fewer local trading facilities on foreign Strong Brand Image market than its competitors Competitive Pricing No first mover advantage Wide range of products Few market expertise on foreign markets Diversified base of customers Better expertise on foreign markets than other US based companies Offers access to the US market Diversified sources of revenues Opportunities Threats Easy international expansion Loss of dominance in the US Market Dynamics of online trading markets Potential loss of its customer base Potential of foreign market Threat from local players abroad Growing desire of investors for control Very competitive market Market not mature in foreign markets So, Schwab benefits from a good brand image and the company knows a growth period: its financial performance makes Schwab the leader of the online broking market, which is its first source of revenues (more than the half of its revenues in 1998)and allows it to develop its operations abroad. Its range of products is really important and its technology is a strong competitive advantage. Nevertheless, its market share on the online market is decreasing: it went from 30,1% in Q3/98 to 27,6% in Q4/98 as new entrant get in the market. This phenomenon is due to the entrance of many new players, attracted by the E-business, which was seen at this period as a good way to develop quickly a very profitable business. On the other hand, Schwab has to face the competition of the brokers who have a local expertise like Boom.com. The key point concerning the international development is to offer local market trading facilities instead of offering only the possibility to buy and sell US stock. MAIN ISSUES First, Schwab has to put all its efforts on the online broking market: this sector is the most dynamic and already accounts for more than the half of the company‟s revenues. As the US online market is already mature and largely explored by many companies, the internationalisation of the operations is necessary for the growth of the firm. So, the key point to keep the market shares is the master of the international development. How to continue this development abroad ? How to compete effectively with the regional competitors as well as the US-based e-brokers abroad ? FORMULATION OF ALTERNATIVES 1) To continue the same strategy: to leverage its brand name through joint ventures and acquisitions. In this case the aim is to mainly to offer the possibility to buy and sell US stock instead of local stock. 2) To use a franchise model: Schwab will be the franchiser and the indigenous e-players that have a local expertise will be the franchisees. As Schwab has a strong competitive advantage with its technological advance, it could license its technology to these local competitors; in exchange, these last ones will sell their services under the Schwab name. Thus, these local competitors will offer to Schwab their knowledge of the local market. In this case, the aim is rather to trade anywhere on any exchange at any time. DECISION GRID Alternative 1 Alternative 2 (same strategy) (Franchising system) Cost (0.2) 1 3 Time to implement (0.3) 3 3 Market experience (0.3) 1 3 Brand notoriety (0.2) 3 2 Average mark 2 2.8 The marks vary from 1 to 4, 4 being the best mark. Explanation of the criterions, coefficients and marks: The cost : The cost of expansion through acquisition and joint ventures is far more expensive than through franchising, where the franchisee participate for a large part to the initial investment. Franchising would also bring regular revenues through royalties. This is why we decided to give a better score to the second alternative. The coefficient of 0.2 is due to the financial situation of the company that allows it to expand both way. The time to implement : Time to implement received a high coefficient (0.3) due to the market competitiveness that sees a lot of new entrants. The priority for Schwab is to be present in major markets in order to efficiently leverage its brand name. Both way would be as long as finding a franchisee would take as much time as to create a new company in the country. Market experience : The experience of the market is a major criteria (0.3) as it is a very technical market that requires a good knowledge of the country‟s market. A franchisee has a very good knowledge of its domestic market ; the franchising system respect more often the independence of the team and allows it to adapt the strategy to the specificities of the market. The development of the brand notoriety : Schwab is not very well known on most of the international markets and needs to leverage its brand (coef 0.2). A development by acquisition enables to better control the brand image as the company has a stronger control on the management than trough a franchising system, even though the franchisees have to respect strict rules concerning the image of the brand. SOLUTION / RECOMMANDATIONS The main threat abroad come from the indigenous e-players. It is clear that the international development requires to offer local market facilities in order to compete effectively this kind of companies. That „s why we have chosen to implement the second alternative, the franchising system. Implementation : In order to beneficiate from its technological knowledge while leveraging its brand name, Schwab has to accelerate international expansion to take position on more markets and gain expertise on those to offer a wide range of services. If it keeps it policy of acquisition or joint-venture instead of taking a franchise policy, international expansion would be slowed down. Franchise would: 1- Help expansion internationally at low cost, compared to the development by acquisitions. 2- Be faster to implement, therefore get a wider audience throughout numerous markets (and leverage the brand name) and beneficiate from the technological advances. 3- Beneficiate from local expertise 4- Make franchisees beneficiate from the access to the US market (at first) then to other foreign market as the franchisee base expand. .