RIGA TECHNICAL UNIVERSITY STRATEGIC MANAGEMENT COURSE E-TRADE FINANCIAL CORPARATION CASE STUDY by Asli Seven Nazir Emre Adir Shamla Tsargand Lecturer: Andrejs Chirjevskis Autumn 2011 Question 1. Revise E-Trade Vision and Mission Statement. Develop a SWOT anaylses. When we have a look at E-Trade’s vision statement, we see that they emphasize on self-directed investors and the world market. For the company being reachable from even sitting at home is important.
They say “It’s about bringing it home. ”Accessebility in anywhere in the world is the main point about the avaliabilty. But there are some missing points in the vision statement. From our point of view the vision statement could be revised as below: “To empower self-directed investors to make the information avaliable all over the world by using an integrated technology in order to let them control their financial future anytime and be able to reach to world’s major investments markets. When we look the E-Trade’s mission statement, we see that they emphasize on the usage of technology to set the standard for innovation, service, and value for investors seeking more control over their investments. E-Trade’s rich suit of products and services can be customized to reflect a customer’s unique needs and interests, including portfolio tracking, free real-time quotes, market news, and research available 24 hours a day, seven days a week.
Customers can access their E-Trade accounts virtually any time anywhere around the world. If we would like to revise E-Trade’s mission statement: “To establish long-term shareholder value through superior performance driven by the delivery of a diversified range of innovative , customized service to reflect customer’S unique needs and interests and supported by a strong culture based on achieving highest level of teamwork, efficency and integretiy. Here is the SWOT analysis of E-Trade Company: SWOT ANALYSIS OF E-TRADE |STRENGHTS |WEAKNASSES | |*Strong operating record |*Loss of some foreign markets | |*Over 4. million clients |*Decline in operating income | |*Strong position in the market |*Weak net revenue growth | |*Improved management of costs |*Decline in interest income | |*High brand recogination | | |OPPORTUNUTIES |THREATS | |*Growth options in new markets |*Incresead competition | |*Outsourcing of technologhy development |*Reduced spreads | |*Possibility of aqusaiton of a brokerage company |*Client banckrupctys | Question 2. Could E-Trade be more effectively structured? Recommend an improved organizational structure from the chart provided in the case. Support your proposed new structure. [pic] E-Trade using a Functional structure:
It is cheap model of company structure which is good for crises times. Advantages of the model: Chief executive in touch with all operations, reduces/simplifies control mechanisms, clear definition of responsibilities, specialists at senior and middle management level. Disadvantages: Senior managers neglect strategic issues, co-ordination between function difficult, senior managers overburdened with routine matters, difficult to cope with diversity, failure to adapt. Recommendations for E-Trade for improved performance in the next years given optimistic, moderate and pessimistic scenarios for the future: Create educational investing streaming website videos.
We think E-Trade should leverage their technological infrastructure and create streaming videos on their website that explain the different aspects of investing. These videos would be broken up by subject like “Short Selling”, “Buying Bonds”, etc. and would be geared toward the entry or intermediate investor. Since E-Trade’s investor is significantly more technologically adept than A. G. Edwards they should cater to this capability by providing on-line training. Streaming videos would allow E-Trade’s customer to educate themselves about aspects of the investing they are not familiar with. it will help bring in a new market of individuals. We think this recommendation would pay dividends and be beneficial regardless of the future scenario. Lower Company Debt
E-Trade should try to improve their balance sheet by lowering their overall debt load. E-Trade’s debt load has been a burden on their growth in the last couple of years and with the overall stagnation in the investor services market this could help them gain a competitive advantage. Improving the balance sheet is a common tactic for companies to try to continue to grow earnings-per-share in tight economic times. E-Trade’s debt load would not put them at a disadvantage in the optimistic scenario but would cause a disadvantage in the moderate or pessimistic scenarios. Broad Low Cost Differentiation E-Trade should continue to push their low cost differentiation strategy.
E-Trade’s strength lies in their technological infrastructure which allows them to service customers at a much lower cost per customer level that A. G. Edwards or Charles Schwab. E-Trade’s revenues per customer, based on the earlier financial tables, indicate that E-Trade is able to leverage their lower cost structure to produce a huge cost advantage. A low cost differentiation strategy would be most successful in the pessimistic and moderate scenarios but would still have some positive results even in an optimistic scenario. Increase On-line Consulting E-Trade should leverage their technological infrastructure to over investor’s on-line consulting opportunities. This would allow E-Trade to pool their resources (i. e. people) in a few locations while still offering advanced, human, service offerings to the segment of the population that is not comfortable only using a computer. Additionally, there are some situations where even technologically advanced users would prefer to be able to talk on-line either via a “chat” client or web cams. This method would be successful in all there scenarios because it again allows E-Trade to capitalize on the huge investment they made in technology infrastructure. Our recommendations for the future are the same whether using the Newtonian and Euclidean analysis. We believe that using a Euclidean set of assumptions throughout the analysis, may lead us to different predictions about future conditions allowing for the consideration of interdependencies.
The current permissive conditions are also expected to continue into the future period for both the moderate and optimistic scenarios. Under the moderate scenario, we predict that performance will remain same, however, under the optimistic scenario, we predict a performance increase. Under the pessimistic scenario, conditions are expected to shift to Power of Entry and Exit, while the industrial structure stays the same. Under these conditions, a more competitive environment will emerge, which may lead to further declines in the company’s over all performance. The declines might be attributed to economic environmental factors, threat of terrorism and high oil prices which drive the market industry. 1) Recommendations for Moderate and Optimistic Scenarios.
E-Trade business strategy has been soundly running as achieving significant improvement in ROE over the three time periods. Under the optimistic scenario, we observe the possibility of having benefits the demanding environment conditions; especially, more people will be getting into trading securities as the Internet has opened up the field of investment. Therefore, E-Trade should be upgraded the technology infrastructure as the demand grows. Even though this investment creates a temporary excess capacity, marginal costs will fall when Internet based approach achieves enough economic scale because the cost of adding another customer account or offering a new product in an online would be very low.
In addition, as more consumers visit the site and buy its products, E-Trade should offer better deal to its customers than competitors. With these factors in mind, E-Trade should continue to expand their target market, such as other countries, to acquire even more consumers which should have dramatic increases in their revenues. 2) Recommendations for Pessimistic Scenario. Under the pessimistic scenario, E-Trade’s risks are due to the nature of its industry and company itself. First of all, the environmental conditions will continue to be demanding and Investment Services industry will continue to dampen down due to the decrease in assets available for investment.
E-Trade must watch out for future online competitors not only Investment Service firms but also those with bigger capitals like traditional brokerages, mutual fund companies, and maybe even banks someday. E-Trade, the company which receives and processes trade orders mostly through the Internet, depends heavily on the electronic systems. E-Trade’s systems could slow down significantly or fail for numerous reasons, such as undetected errors, or defects of software or heavy stress during certain peak trading times. In any case, the company could get damaged because the company compensates customers for their losses and consequently, it hurts E-Trade’s brand name.
Again, E-Trade needs to invest to improve the electronic infrastructure to insure its leading technology as well as secure its position as the value leader with a high differentiation, low cost control strategy. Question 3. Identify 2 acquisition candidates which you fell E*Trade should try to obtain. How much are these 2 companies worth? Basically, E*Trade has 2 competitors. I believe that acquiring TD Ameritrade is quite worth comparing with Charles Schwab. E* Trade can handle its weaknesses purchasing with TD Ameritrade. Here are some comparisons between E*Trade and its competitor. Etrade vs Charles Schwab: Pros Etrade • Very good trading tools No IRA account fees, no minimums with electronic statements and confirms • Minimum to open: $1,000 for cash account, $2,000 for margin account • Banking products: checking, savings, money market accounts, CDs and credit cards • No surcharges on large orders, penny stocks and extended hours trading • Great research amenities Charles Schwab • Traditional banking features: credit cards and checking accounts • Around 300 offices for personal visits and deposits and 24/7 support • Great, varied research • Rich selection of investment products • Low minimum balance requirement: $1,000 • Excellent customer service • Free dividend reinvestment Etrade vs Charles Schwab: Cons Etrade | | | |Charles Schwab | |High commissions on all investment products |High commissions on stocks, options, mutual funds and ETFs | |High margin rates |Average trading tools | |Customer service complaints |Outdated and difficult to navigate website | Etrade or Charles Schwab: Comparison Summary Charles Schwab (Charles Schwab Review) and Etrade (Etrade Review) are some of the best known online brokerage firms in the country. Unfortunately, they are both not cheap: $8. 95 for a stock/ETF trade and $49. 95 for a mutual fund transaction at Charles Schwab and $9. 99 for a stock/ETF trade and $19. 95 for a mutual fund transaction at Etrade. There are no surcharges on large rders, stocks under $1 and extended hours trades at either company as well as no maintenance and inactivity fees. Etrade developed more professional, intuitive and versatile trading tools than Charles Schwab. Both companies offer their clients decent banking services. Neither one of these firms is recommended Broker for Beginner Investors: they don’t offer online community, where users could get help, learn from more experienced traders and even get investing ideas. They also don’t provide virtual trading environment for users to practice trading without risking their money. Etrade and Charles Schwab do not have IRA setup and annual IRA fees. They did not, however, made it into our Best IRA Accounts list.
Etrade and Charles Schwab have commissions that are higher than average in the industry and we see no good reason to overpay brokerage company. Etrade would be our suggestion for “buy-and-hold” investors that rarely trade. For everyone else there are better priced, very reliable and highly-rated by investment magazines Brokerage Firms to consider. TD Ameritrade vs Etrade: Pros TD Ameritrade No surcharges for penny stocks, large orders and after-hours trading • Large and well known company with many branches • Free IRA accounts • No maintenance and inactivity fees • Free streaming quotes • Large selection of third-party research Etrade • Very good trading tools No IRA account fees, no minimums with electronic statements and confirms • Minimum to open: $1,000 for cash account, $2,000 for margin account • Banking products: checking, savings, money market accounts, CDs and credit cards • No surcharges on large orders, penny stocks and extended hours trading • Great research amenities TD Ameritrade vs Etrade: Cons | | TD Ameritrade • $9. 99 commission for stocks/ETFs is high, $49 commission for mutual funds is high • Occasional poor order execution • The website is sometimes very slow or even down on the most crucial days Etrade • High commissions on all investment products • High margin rates • Customer service complaints. Etrade vs TD Ameritrade: Comparison Summary
Etrade (Etrade review) and TD Ameritrade (Ameritrade review) are some of the best known brokerage houses in the nation as well as publicly traded companies. They both have high commissions though: $9. 99 per stock and ETF trade. Etrade and TD Ameritrade don’t have surcharges on penny stocks, extended hours trading and large orders. Both companies don’t charge account maintenance and inactivity fees. Etrade offers its customers richer selection of banking services than the competitor. The firm does not suffer from website sluggishness and order execution problems that happen at TD Ameritrade occasionally on high-volume days and during extended hours. Both online brokerages do not have IRA setup and annual IRA fees, and we recommend TD Ameritrade for a fee-free IRA account.
There are better brokerage firms for beginner investors, that offer vibrant online communities, where users could ask questions, learn from more experienced traders and even get investment ideas. Some online brokers also offer virtual trading environment, that allows users to practice trading without risking their money. If you are new to investing, check out our Best Brokers for Beginners recommendations. TD Ameritrade bought one of the best online brokers – ThinkorSwim and it benefits a lot from this acquisition. The firm provides rich selection of third-party research, free streaming quotes and very good trading tools. TD Ameritrade is offering more value to prospective customers than Etrade and we strongly recommend it to all investors. Question 4. What new countries should E*Trade expand into?
E*TRADE plans to expand its global presence by launching branded web sites in the top 20 financial markets worldwide, and has taken a key step toward becoming the first online global trading network with its recently completed acquisition of TIR Holdings. In addition to the US, E*TRADE presently has branded web sites in Japan, the UK, Sweden, France, Australia, New Zealand and Canada. There are numerous developing countries that might be involved E*Trade’ s expansion such as India, China,Taiwan,Russia, Israel(serving since 2011 May) and South Africa. Question 5. Develop a BCG Matrix and McKinsey Matrix based on information in the case. Explain the strategic implications and reccomondations of your BCG and McKinsey. BCG MATRIX [pic] E-Trade should maintain a balanced portfolio of products. Having a balanced product portfolio includes both high-growth products as well as low-growth products.
A high-growth product is for example a new one that we are trying to get to some market. It takes some effort and resources to market it, to build distribution channels, and to build sales infrastructure, but it is a product that is expected to bring the gold in the future. A low-growth product is for example an established product known by the market. Characteristics of this product do not change much, customers know what they are getting, and the price does not change much either. This product has only limited budget for marketing. The is the milking cow that brings in the constant flow of cash. In the case of E-Trade the BCG Matrix is like below: STARS |QUESTION MARKS | |Online brokerage service |Banking | |CASH COWS |DOGS | |Online brokerage service |Retirement | | |Mortgage(Not enough data) | MCKINSEY MATRIX The nine-box matrix offers a systematic approach for the decentralized corporation to determine where best to invest its cash. Rather than rely on each business unit’s projections of its future prospects, the company can judge a unit by two factors that will determine whether it’s going to do well in the future: the attractiveness of the relevant industry and the unit’s competitive strength within that industry. Criteria |Significance for |In comparison with the competition |Weighty value | |Business strenghts(competitiveness) |the market | | | | | |Weak |Average |Strong | | | | | | | | | | | |1 2 3 |4 5 6 |7 8 9 | | |Market share |3 | | | Criteria of the market attractiveness |Significance for |Attractiveness |Weighty value | | |the company | | | | | |Low |Average |High | | | | | | | | | | | |1 2 3 |4 5 6 |7 8 9 | | |Market size |3 | | | Industry attractiveness | | | | | | | | | | | | | | | Business strengths 5. 93 0 3 4. 73 6 Question 6. E-trade may be subject to an acquisition. How much is the company worth in cash. Use the four methods described in the text? We can calculate the company worth in cash using Net Worth analysis (December, 2007 in millions). • Stockholders Equity + Goodwill=5,008+2,072,920= 2082128 • Net Income x 5 = 1,227 x 5= 6,135 Share price = EPS x NI =53,739,303 x 1,227= 65,938,124,781 • Number of Shares Outstanding x Share price = 460 x = 65,938,124,781 • Method Average = 30,331,537,399,260 The company worth in cash approximately is 30,331,537,399,260. Question. 7. Develop a clear marketing strategy for E-Trade given the cut-throat price competition in the online securities industry. How much would you reccomend E-Trade spend annualy on marketing? How should this $ be spent in terms of media and target auidiences? E*TRADE Corporate Services should invest in and deliver powerful products, services and technologies to support and empower stock plan administrators and participants, as well as finance and HR executives.
The following key enhancements can be used for a marketing strategy: -Social Media Advertising: By the increase of the usage of social networks, companies are compiting on the social media tools such as Facebook,Twittter or Youtube. For E-Trade, we can suggest a campaign in order to attract more clients. It can be some promotions through following on Twitter or answering some pools on Facebook. -New Welcome Center : E-Trade can design for easy navigation to learn about unique tools and resources available to customers of E*TRADE Securities. This will make easier to reach the services and give a competitive advantage by being simple. -Increase Promotion with Hilton:
The company’s current Hilton promotion campaign should be expanded to enhance online banking platform domestically and globally. By looking at the financial balance sheet of E-Trade, for a marketing budget we suggest that 130 $ million would be enough to cover the expenses annually. E-TRADE EPS/EBIT ANALYSIS | |Common Stock Financing |Debt Financing | | |Recession |Normal | |Recession |Normal |Boom |Recession |Normal |Boom | |EBIT |500M |1000M |3000M |500M |1000M |3000M | |Interest %7 |4. 2 |4. 2 |4. 2 |9. 8 |9. 8 |9. 8 | |EBT |495. 8 |995. 8 |2995. 8 |490. 2 |990. |2990. 2 | |Taxes%35 |173. 53 |348. 53 |1048. 53 |171. 2 |346. 57 |1046. 57 | |EAT |322. 27 |647. 27 |1947. 27 |319 |643. 63 |1943. 63 | |# Shares |489 |489 |489 |472. 4 |472. 4 |472. 4 | |EPS |0. 65 |1. 32 |3. 98 |0. 67 |1. 36 |4. 11 | | Based on the EPS/EBIT Analysis we can conclude that %70 Percent Debt -%30 Percent Stock Financing would be more beneficial for the company. ———————– Mitchel H. Caplan CEO and Director President, E-Trade Bank CAO, E-Trade Financial President, E-Trade Capital Markets President, COF CFO Chief Communication Officer Chef Marketing Officer, President, E-Trade General Counsel and Corporate Secretary