1. CASE II - 14

2. 1963: Chuck Schwab and two other partners launch Investment Indicator, an investment advisory newsletter. At its height, the newsletter had 3,000 subscribers, each paying $84 a year to subscribe. 1971: In April, the firm is incorporated in California as First Commander Corporation, a wholly-owned subsidiary of Commander Industries, Inc. to conduct a conventional broker-dealer securities business and publish the Schwab investment newsletter. In November, Chuck Schwab and four others buy all stock from Commander Industries, Inc. Company History

3. 1972: Chuck Schwab buys all stock from what was once Commander Industries. 1973: The corporate name changes to Charles Schwab & Co., Inc. So Charles Schwab & Co., Inc. has began. Company History

7. Schwab The Innovator: 1971-1995 In 1975, brokerage commissions were deregulated. Following deregulation in 1975, a group of brokerage firms reduced commissions to almost half that of the standard full service firms. They offered cheap execution of stock trades for people who knew what they wanted to buy or sell.

8. Schwab The Innovator: 1971-1995 But not only them, Charles Schwab decided to take advantage of the opportunities offered by deregulations too. Charles Schwab would not sell advice on which securities to buy and when to sell as the full-service brokerage firms did. Instead, Schwab would focus on providing informed investors with low-cost access to security transactions.

9. Schwab The Innovator: 1971-1995 From the beginning, Schwab invested heavily in technology as a way to lower costs. In 1985 Schwab was one of the first firms to recognize that the personal computer could be used as a distribution channel for financial service. And in that year Schwab introduced a DOS-based software product called Equalizer that allowed retail investors to conduct online transactions and research via their personal computer. Then in the late 1980s and on into early 1990s, Schwab developed several technology-based services that would became central components of its business:

10. TeleBroker In 1989 Schwab has introduced TeleBroker, a fully automated telephone system that allowed customers to retrieve real-time stock quotes and place orders. In 1995, 80 million calls (75 percent of total) and more than 15 million trades were handled electronically, and service was offered in English, Spanish, Mandarin and Cantonese.

11. SchwabLink In 1991 Schwab introduced a service for fee-based financial advisor called SchwabLink. Schwab Link provided fee-based advisor with back-office custodial services. Advisors could plug into Schwab’s computer to trade both Schwab and non-Schwab products. They could outsource all transaction, record-keeping, and statement preparation duties to Schwab’s computerized system for fee based on the number of transactions and the size of customer account and assets.

12. OneSource In 1992 Schwab introduced the Schwab Mutual Fund OneSource program, a revolutionary fund supermarket that helped customers purchase Schwab and non-Schwab no-load Mutual funds with greater ease and without paying transaction fees. OneSource generated revenue by charging fund providers for listing the fund in the fund supermarket and providing them service.

13. Schwab in 1995 Schwab owed much of its success to the heavy investments it had made in technology and automation system, which allowed the company to build extremely cost-effective operations. In 1995 Schwab spent almost double the average level of advertising and communications expenditures for a brokerage firms. By year-end 1995, Schwab’s commissions is rise to $751 million from $244 million in 1990.

14. The Evolving Brokerage Industry Mid-1990s: The Rise of the Internet In 1995 the Internet caught everyone in surprise with its potential to quickly and profoundly change the economics of the brokerage industry. In October that year Schwab introduced e.Schwab, a product that provided investors with account and research information over the internet. In early 1996, Schwab announced an upgraded e.Schwab and became the first major brokerage to offer trading via the Internet.

16. New Entrants in the Industry While many of the established brokerages were debating their next moves, new firms entered the scene and forged ahead. Electronic brokers such as E*Trade and eBroker sprang up and offered prices as low as $12 per trade. In three month in 1996, E*Trade watched Web-based trading grow from zero to 20 percent of their total volume. By mid-1996, competition among online traders had increased considerably: 13 online trading channels existed in addition to Schwab.

17. New Entrants in the Industry Furthermore, prices had dropped rapidly between 1993 and 1996. E*Trade had reduced prices seven times since launching trading in1993. When introduced, e.Schwab trades were priced at $39 for up to 1,000 shares but in January 1996 Schwab reduced its e.Schwab price to $29.95. And in December 1996 Schwab’s Web Trading service provided a 20 percent discount off Schwab’s regular trading comissions.

18. Charles Schwab &Co., Inc. Composition of Revenue, 1996-1998 Composition of Revenues 1998 1997 1996 Commissions 48 % 51 % 52 % Principal transactions 10 11 14 Total trading revenues 58 62 66 Mutual fund service fees 20 19 17 Net interest revenue 17 15 14 Other 5 4 3 Total non-trading revenues 42 38 34 Total 100 % 100 % 100 %

19. Late 1990s: Online Trading Gains Momentum As online Web site evolved, they began to provide readily available, mostly free financial information to investors. By 1998, online trading was a compelling force in the brokerage industry. An assets held at online brokerages equaled one-eight of the total amount of assets held at the top five brokers in the country. By 1999 it was estimated that there were about 100 online brokerages.

21. Late 1990s: Online Trading Gains Momentum As the full-service broker came on board in 1999, however, Schwab was already a forced to contend with. In June, Schwab reported 2.5 million active online accounts, an increase of 1.3 million accounts from year-end 1997. Schwab was the top Internet brokerage firm and handled almost one-third of all Internet trades. Even though Schwab’s share was estimated to be more than double that of the next largest competitor, the company carefully watched the Internet strategies of companies like E* Trade.

23. E*Trade and Beyond: New Models of the Brokerage Firm E*Trade Group Inc. was incorporated in California in 1982 and began to provide online investing services to self-directed investors through its Web site in February 1996. In 1998, the company’s reported goal was to replicate full-service firms’ spectrum of services electronically, but without using human brokers or building branch. As companies like E*Trade sought to reshape the brokerage industry, Schwab was actively developing an alternative model to the full-service brokerage.

24. Full-service(commission) brokerage market size

25. E*Trade and Beyond: New Models of the Brokerage Firm Schwab’s model was based on providing investors with the degree of advice and service they wanted, through the channel they preferred. Executive VP Daniel Leemon, Schwab’s chief strategist, believed that Schwab would succeed in growing a new sort of firm in retail investment. But Exactly what kind of customer could the company hoped to win ?

27. Three types of Investors

28. Managing Growth at Schwab In an organization of Schwab’s size, energizing and motivating employees was crucial to growing the business. On March 13,1999, Schwab held a daylong companywide event called VisionQuest. Through interactive sessions, employees learned about Schwab’s role in the investment market, changes in the financial services industry, and timely issues such as baby boomers and the Internet.

30. Managing Growth at Schwab Evelyn Dilsaver, a senior vice president at Schwab commented that Schwab’s key characteristic was to “be able to turn on a dime, adapting quickly to change.” She emphasized that being a “change junkie” was critical at Schwab. Schwab gave employee power to create change and the technology to implement it. As Dawn Lepore, Schwab chief information officer put it, “We have a culture that embraces technology. We have 14,000 employee, but we think of ourselves as having 14,000 technologists.”

31. New Initiatives in 1999 The company planned to open at least 200 new offices and to offer on-site training sessions and seminars. On the international front, the company expanded operations in The United Kingdom and Canada and had plans for the Japanese market. Dave Pottruck, president and co-CEO of Charles Schwab commented “I wouldn’t be surprised to see us operating in 15 leading countries two or three years down the road.”

32. June 1999: The Competitive Environment Widens By mid-1999, Schwab’s business model had proven successful compared against online brokerage like E*Trade. But Merrill Lynch’s announcement of upcoming online trading meant there would be pressure from the other direction.

33. Merrill Lynch &Co., Inc. Merrill Lynch was the big player in the full-service brokerage business. It managed nearly $1.5 trillion in customer assets, almost triple what clients invested at Schwab. Of Merrill’s client, 400,000used Merrill Online to manage their accounts, which totaled $300billion assets. The firm was considered a powerhouse in investment banking and assets management. But Schwab had created tremors at Merrill Lynch, and on Wall Street in general, when its market capitalization topped $36 billion in June 1999, surging past Merrill Lynch’s $26 billion market capitalization.

34. WingspanBank.com Less than a month had passed since Merril Lynch had announced its strategy to provide online trading and investment services. On June 24, Bank One announced that it had established a new business unit, WingspanBank.com, to sell a range of financial services over the internet. WingspanBank was a virtual bank through which financial services could be distributed over the Internet. The new bank offered checking accounts, certificates of deposit, credit cards, mortgages, insurance, mutual funds, electronic bill payment, brokerage services, and online trading.

35. Reference http://www.mclellancreative.com/portfolio/speeches/Schwabcom_PresidentGideonSasson--HarvardPresentation.pdf http://www.aboutschwab.com/about/history/index.html http://www.1000ventures.com/business_guide/cs_fast_company_schwab.html http://www.aboutschwab.com/annualreport98/SN108_001.html Robert A. Burgelman, Clayton M. Christensen, Steven C. Wheelwright; Strategic Management of Technology and Innovations, p.637-p.654