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E*Trade: Case Analysis

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Executive Summary

E*Trade was a first-mover in the online brokerage market !ecause of

this" they achieved early brand name recognition and an ade#uatecustomer base $owever" by the late %&s" com'etition was heating u'and the offline brokerages were waking u' E*Trade needed to changeits strategy to face these challenges They needed to ex'and theircustomer base to other investors beyond the online world !ut to do so"they faced barriers to entry with their lack of com'lementary assets inthe offline world E*Trade overcame the traditional barriers to entry by

s'ending significant amounts of money on their technologicalinfrastructure and aggressive advertising E*Trade (rou' wantsconsumers to use its financial services for E*verything and marketingthe E*Trade name has been a key com'onent of their successE*Trade)s strategy focused 'rimarily on customer ac#uisition andbuilding a strong brand ver the last two years" E*Trade s'ent +,&million on brand recognition and marketing Schwab" which is eleven

times the si.e of E*Trade" s'ent only +/0& million in the same timeframe123 The E*Trade 45onkey riding through a deserted dotcom ghosttown) advertisement" which aired during Su'er !owl 66678 in 0&&& andreached an audience of 29& million" was named the greatest Su'er!owl advertisement of all time by consumers

123 Chen" $uang" ;ong" and ;ong" ibid 

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Executive Summary

The com'any continues to ex'and itsservices to make u' for shortfalls in tradingincome resulting from 7nternet fallout The

7nternet fallout caused their stock to fall andalso online traders to decrease their use ofE*Trade service This continued slum' couldmake E*Trade a takeover target for a larger

financial services firm looking to broaden itsonline services

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S;T Analysis and Sustainability

Strength Weakness

Strong reputation as the first online broker Quick accessWide variety of products and servicesIntroduction of clicks-and-mortar strategy

 Not the lowest priceWeak in research and advisory services

Opportunity Threat

High growth of online trading marketEpand business to International market

Easy entry!apidly changing environment

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E*Trade has focused on customer ac#uisition andbuilding a strong brand since the beginning This iscritical because in the financial industry" es'ecially

on the 7nternet" trust and brand-awareness arecrucial for success due to the 'erce'tion of lowsecurity 7t has established a firm 'osition as the firstonline broker in the online trading market ;hilemany brokers have entered and exited this market"

E*Trade has ex'erienced 'henomenal growth and isamong the to' 'layers in the industry

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>ecently" the online brokerage industry has undergone changes andcom'anies have changed their strategies as a result ?uring the firststage" online brokerages could attract customers sim'ly by havinglower commission fees than traditional full-service brokers$owever" by the late 2%%&@s" all kinds of brokers have begun onlinetrading services" and following the 'ure-'lay online brokers" have'rovided lower and lower 'rices So" the discount strategy is no

longer sustainable arge" traditional brokers like 5errill ynch" anddiscount brokers like Charles Schwab" can 'rovide new services bycombining their old off-line services with new technology They havestrong ca'abilities" huge assets" strong analysis and research skills"and large staffs 5oreover" new customers to the online market arenot as active as early 7nternet traders They trade less often and are

less 'rice sensitive 7n addition" in e-business" including onlinetrading" switching costs are very small so customers can havemulti'le accounts with multi'le brokers" #uit transactions midstream"or shift to other brokers easily 7n these difficult circumstances" 'ure-'lay online brokers have 'ursued other strategies to kee' attractingnew customers

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E*Trade began 're'aring early for a shift in strategy 7t hastried to diversify its business and sources of revenuebeyond transaction fees They not only offer a variety of'roducts - including mutual funds" 'ro'rietary mutual

funds" bond trading" and access to initial 'ublic offerings -but have also begun to offer services other than tradingE*Trade started 7nternet banking services in 2%%%" and it isthe third largest o'erator of AT5s in the BS The com'anyhas also become interested in the bricks-and-mortarmodel E*Trade decided to establish a branded bricks-and-

mortar 'resence with its E*Trade ones" which will serveas a branch office to com'ete directly with both discountand full-service brokers 7t also decided to 'artner withTarget to 'ut both E*Trade ones and AT5 machines inover 0& Target locations

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These new strategies have brought changes in E*Trade)srevenue structure ;hile the most im'ortant source ofrevenue is interest on customers@ assets andinvestments" mortgages" and fees from banking and AT5

services are increasing Every e-business com'anyfaces cutthroat com'etition 5ost of the entrants arekicked out of the market and very few com'anies cansurvive 5oreover" it is more difficult to make a 'rofitEven seemingly very successful Ddot com com'anies"

such as Ama.oncom" face difficulties getting out of thered 7n such an environment" E*Trade)s lack ofde'endence on transaction fees gives it financialstrength" and greater ability to ex'and its business

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Fow E*Trade seeks to enlarge its marketshare both in the BS and globally 7t alsocontinues to ex'and its services" loans" and'ersonal banking Sustained revenue growthand good cost management will 'osition thecom'any for sustained growth

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87?E Analysis

E*Trade began life as a dee'-discount online broker Asone of the first online brokerages" E*Trade catered toactive" inde'endent" knowledgeable investors whowanted to execute trades as chea'ly as 'ossible and

who did not need ex'ensive advice Gor these investors"even discount brokers were too ex'ensive They wereearly-ado'ters of new technologies" including those whowere online in the late 2%H&s and early 2%%&s" and werecomfortable with the new online environment E*Trade)svalue 'ro'osition was meaningful to a s'ecific marketsegment and" as an early mover" allowed E*Trade togrow

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Since it)s earliest days" E*Trade faced com'etition fromother dee'-discount online brokerages Though itsmarket was growing" no-frills trading was a limitedmarket" so the com'any sought to broaden its services

to reach other segments rather than com'ete strictly on'rice This was a significant strategic decision Since thattime" E*Trade has ex'anded its services into many otherarea The com'any offers mortgages" mutual funds" andreferrals 7t has built the 9rd largest AT5 network in theBS and ex'anded internationally 7t sells ads for all ofits websites

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E*Trade offers banking services" such as de'osits"C?s" and loans I along with all of the bundling andcross selling o''ortunities that come with varied

banking and brokerage services 7t is nowex'anding into the bricks-and-mortar world with itsE*Trade ones" which are essentially branch officeswhich offer research and investment advice throughmore 'ersonali.ed service E*Trade has entered

into an agreement with Target to o'en E*Tradeones and AT5s in Targets stores

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5any of these moves were executed by E*Trade throughac#uisitions E*Trade has made over 2/ ac#uisitions since theearly 2%%&s This method is consistent with the com'any)s desireto move #uickly to attack larger com'etitors" and 're-em't othersimilar com'etitors

These moves to diversify by E*Trade have allowed it to attractmore customers and offer more services to its growing customerbase The wide range of services adds value to E*Trade)scustomers because it allows them to consolidate their bankingand brokerage needs in one 'lace E*Trade becomes anintermediary between a customer and their money !y

consolidating their financial services with E*Trade" a customerbuilds loyalty because a switch will mean incurring switchingcosts

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E*Trade has s'ent a considerable amount of money building its'ortfolio of services" 'articularly its bricks-and-mortar o'erationsThe effect of this has been to build somewhat of a defense" and ithas worked Some other 'ure-'lay online brokerages have indicatedthat they will not actively 'ursue the building of similar ca'abilities

7n the long run" of course" E*Trade)s moves are imitable bycom'etitors !ut in the short-run" it would be very difficult for anotheronline broker to co'y E*Trade)s success as a late mover E*Trade)sex'anded array of services set it a'art from its com'etitors

ne of the significant benefits of the wider range of 'roducts andservices offered by E*Trade is its ability to cross-sell 5any mergersfail because antici'ated synergies fail to materiali.e $owever" thebanking industry has consistently 'roved to be an excellent exam'leof synergy in its ability to effectively cross-sell 'roducts andservices

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E*Trade can continue to add value by offering additional 'roductsand services and it can cross-sell across these offerings !ydoing so" it differentiates itself by allowing a more com'letefinancial solution for customers $owever" the greatest threatE*Trade faces is its inability to build effective long-term barriers"

allowing it to ex'loit the short-term com'etitive advantagesgained by its innovations 7n the long-term" it is easy for otherfirms to build branches and AT5 networks 5any other firmsalready offer research and investment advice E*Trade is'articularly vulnerable against the larger 'layers They witnessedthe dramatic growth of 7nternet usage and online brokerage firms

during the late 2%%&s !y the late 2%%&s" they began entering theonline market

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Some 'redicted the demise of 'ure-'lay online brokerages whenthe large" established 'layers began to enter the marketE*Trade" however" has continued to grow This is des'ite the factthat the environment has only deteriorated since the late 2%%&sboom in valuations and day-trading activity 7n the current market"

customers are more conservative" executing fewer transactionsE*Trade)s real com'etitive advantage" its core com'etence" is itsability to read the market and innovate" adding value tocustomers before its com'etition 7t would seem unlikely that anu'start 'ure 'lay dee'-discount broker would be able to take ongiants such as 5errill ynch and Charles Schwab E*Trade has

not so much as taken them on as it has outran them And itcontinues to do so

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5odels of 7nnovation

7nnovation models can be a''lied to E*Tradeto give us insight into the com'any)s successin the face of com'etition from traditional full-service and discount brokerage houses

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Teece Model 

Teece argued that two factors were instrumental in rea'ing 'rofits froman innovation The a''ro'riability regime" which is the extent to whichthe technology can be 'rotected from imitation" and com'lementaryassets" other non-technological ca'abilities the firm needs to ex'loit thetechnology123

E*Trade)s technology was easy to imitate as evidenced by the largenumber of com'etitors who have entered the online brokerage market7nitially" they were able to use their run strategy to stay ahead of thecom'etition" but this did not 'revent imitation by others Com'lementaryassets became one of E*Trade)s distinguishing features" but this wasnot the case at the outset 7t took heavy marketing" advertisingcam'aigns" ac#uisitions" and alliances to develo' a now enviable set of

tightly held com'lementary assets

123 Afuah" Allan D7nnovation 5anagement" xford Bniversity Jress"2%%H

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Utterback-Abernathy Dynamic Model 

The Btterback and Abernathy model details the dynamic changes froma fluid 'hase to a transitional 'hase to a s'ecific 'attern Technologicaland market uncertainties com'rise the fluid 'hase and is a key time forentry by entre'reneurial firms E*Trade entered the market during thisfluid 'hase when the changing technology and acce'tance of the worldwide web 'rovided them with an o''ortunity to build a 'ure-'lay 7nternettrading 'latform

Com'anies enter the transitional 'hase when they begin introducingmore and varied 'roducts The market uncertainty is reduced andresearch and develo'ment investment increases are Kustified This'hase also re#uires maKor 'rocess changes due to rising volumes !ythis time" E*Trade had entrenched itself in the online trading market and

established a strong brand name E*Trade changed its focus toex'anding services and technologically accommodating a large"changing customer base The addition of E*Trade)s wide range ofservices including online banking" financial advice" mortgages"insurance" college savings 'lans" etc signified their entrance into this'hase

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The transitional 'hase eventually leads to a s'ecific'attern whereby cost reduction becomes the focusThis 'hase is also characteri.ed by a more formalcor'orate culture with a greater number of levels ofauthority E*Trade has not moved fully into this'hase as it continues to diversify and reinvent itself123

123 Abernathy and Btterback" DJatterns of 7ndustrial7nnovation" Technology Review " LuneMLuly 2%NH

Utterback-Abernathy Dynamic

Model 

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Exhibit 1: Stock Price History

Source: Yahoo! wwwyahoocom

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Exhibit 0: 8alue Chain

Investor/Investor/

DecisionDecision

Maker Maker 

Investor/Investor/

DecisionDecision

Maker Maker 

Broker/Broker/

IntermediaryIntermediary

Broker/Broker/

IntermediaryIntermediaryExchange/ rade Executer Exchange/ rade Executer Exchange/ rade Executer Exchange/ rade Executer 

Retail Securities Industry Value Chain (Simplified)

!u"" Service:!u"" Service:!ranch infrastructure!ranch infrastructureGinancial ConsultantsGinancial Consultants

Discount:Discount:ow Transaction Geesow Transaction GeesGast tradesGast trades

Internet:Internet:ower Transaction Geesower Transaction GeesGaster tradesGaster trades0MN availability0MN availability

 Access anywhere Access anywhere

Retail Brokerage EvolutionRetail Brokerage Evolution

Stage I Stage II Stage III

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Exhibit 9: !alance Sheet for E*Trade

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Exhibit /: E*Trade 5arket Share

Online Brokerage Market Share by Total Assets*

Charles Schwab 9HP

Gidelity 9&P

T? ;aterhouse 2&P

E*Trade /P

 Ameritrade P

CSG! ?irect 0P

?atek 2P

F?! 2P

Scottrade 2P

?reyfuss 2P

Quick O >eilly 2P

ther ,P

*?ata as of ,M9&M0&&&

Source: Brokerages Need Banking to Keep Customers, Web Finances, 5 (7): Apri 5, !""#, Securities $ata %ubis&ing'

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Exhibit : 7ncome Statement for E*Trade

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Exhibit ,: !roker Com'arison Table

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Exhibit N: nline !rokerage TradingCosts