Charles Schwab in 2008
1. Analyze the competitive structure of the brokerage house industry using Porter’s five forces model. What are the principle drivers of profitability in this industry? How have changing regulations, demographics, and technology impacted competition over the last two decades?
Five Forces Analysis assumes that there are five important forces that determine competitive power in a business situation. These are:
1) Bargaining Power of Supplier
2) Bargaining Power of Buyers
3) Intensity of existing Rivalry
4) Threat of New Entrants
1) Bargaining Power of Supplier
In the on-line brokerage firms, we have 3 major categories of ...view middle of the document...
Charles Schwab, E*TRADE, Waterhouse Securities, Fidelity Investments and Datek are considered to be the largest players in this industry. These large firms account for 57% of the on-line discount brokerage business and the boutiques catering to niche markets account for the other 43%. The industry is highly competitive with the large companies engaging in fierce competition between themselves and with the boutiques for market share. This results in the consumer getting a bigger share of the surplus. Notably, one trend in the past two years has been that boutique firms have increased their market share at the expense of the bigger players.
4) New Entrants
Despite fairly high sunk costs, the lure of the visibility of Internet-based businesses attracts more entrants all the time. At this time, most new entrants are focusing on particular segments of a fragmented market. Another likely entrant is a full service brokerage firm.
In Addition to the above, and with the continuous technological changes that will make it possible for new entrants to enter the market and that is considered to be a threat for the existing companies who are using less sophisticated infrastructure.
As we can analyze from the case that the full-service brokers are considered to be substitutes for the discount brokers, however dealing with a full service brokerages is considered to be higher ,another options customer have is that they might start trading between themselves in different on-line marketplace, however this is not an easy option due to economies of scale and scope and volume that the brokerages have achieved
As for the Profitability drivers, and as concluded from the case We can conclude that the profitability in this industry is driven by the favorable economic environment:
* Changes in the value of interest rates. The fall in the interest rates will increase the underwriting income, corporations and governments tend to issue more securities, people encouraged to invest in stock market and increase merger and acquisition activities.
* New IT advances. This industry relies very much on the IT development.
* Steady economic expansion, which translated into growing profit and rising stock prices.
* Baby boomers started to save for retirement and the speculative behavior of retail investors.
Macro environment has a great influence on this industry and specifically speaking the Political .Legal, Social and Technological Factors
* The deregulation of the industry allowed for the emergence of discount brokers such as Charles Schwab.
* Act of Congress known as the Glass-Steagall Act causes high segmentation in the financial service industry and erected a wall between commercial banking commercial banking and investment services; barring commercial banks from investing in shares of stocks, limiting them to buying and selling securities as an agent, prohibiting them from underwriting and dealing in securities...