SWOT Analysis of The Charles Schwab Corporation

Incorporated in 1986 and headquartered in San Francisco, California, The Charles Schwab Corporation (CSC) is a leading company in the financial services industry. CSC provides a full range of brokerage, banking, money management, and financial advisory services and operates 300 branch offices in 45 states, along with branch offices in Puerto Rico, London, and Hong Kong (“The Charles Schwab Corporation,” 2012, p. 1). As of December 31, 2012, the company reported $1.95 trillion in total client assets, the operation of 8.8 million active brokerage accounts, 1.6 million in corporate retirement plans, and of 865,000 banking accounts (2012, p. 1). Additionally, the corporation operates three subsidiaries, including Charles Schwab & Co, Inc., Charles Schwab Bank, and Charles Schwab Investment (2012, p. 1). Further, CSC estimates that it hires an equivalent of 13,800 full-time employees at its corporate and branch locations combined. Through the widespread locations of its branch offices, Charles Schwab maintains a strong presence in the United States market.

While operating in the financial service market, Charles Schwab provides a wide range of services to its consumers. Its two primary services include investor services and institutional services. Investor services include retail brokerage and banking services that are made available to individual investors. The products that the company provides through its investor services include brokerage services, mutual funds, exchange-traded funds, advice solutions, banking, and trust custody services (2012, p. 2). Further, the company seeks to enhance the investor experience and provide additional support by offering educational materials, advice on the future of investments and annuities, research and analytic tools, performance reports, and market analyses to all clients (2012, p. 3). Thus, technological tools provide an important component of the services that the company offers. Schwab provides a variety of Internet research tools that aid its clients in the analysis of stock and portfolio options so that they can effectively meet their financial goals (2012, p. 3). Further, Schwab offers in-person investment advisors to provide clients with a point of contact and to enable clients to establish a stronger relationship with the company (2012, p. 3). Improving the quality and efficiency of its investment services is an important concern for the company.

The second service offered by CSC is institutional services. CSC institutional services aim to improve the performance of CSC investment advisors and enhance their ability to assist CSC clients by providing them with training and technological support (2012, p. 4). Because investment advisors play a critical role in enhancing the relationship between CSC and its investors, the role of institutional services in aiding investment advisors is important to the company’s overall strategy. Additionally, this segment provides support by overseeing retirement plan services, specialty brokerage services and additional mutual fund services (2012, p. 1). The institutional services segment of the company consists of advisor services, retirement plan services, retirement business services, and corporate brokerage services (2012, p. 4). In order to help investment advisors attract and retain new clients at their branch offices, advisor services provide CSC advisors with marketing and business development training, business strategy and planning assistance, and transition support (2012, p. 4). Further, advisor services provide its advisors with legal and regulatory compliance support and technology implementation and development support (2012, p. 4). In order to ensure the performance of sensitive investments, such as retirement plans and mutual funds, the company designates these functions to institutional services to ensure that the proper financial analysis of investments is explored and funds are managed competently and efficiency.

Analysis of the FivetForces of Competition

CSC operates in the financial services industry, which includes companies that provide a wide range of investment and banking services to the public. As CSC notes, the primary competitors to the investment advisory segment of its business includes institutional financial custodians, other traditional and discount brokers, banks, investment, and advisory firms, and trust companies (2012, p. 2). An analysis of the financial services industry utilizing Porter’s Five Forces of Competition can aid CSC in leveraging its distinctive competencies against its competitors in order to maintain a lead in the industry.

Threat of New Entrants

The first factor to consider in Porter’s model is the threat posed by new entrants to the financial services industry. The regulatory environment creates significant entry barriers that provide limited protections for businesses that offer investment services to the public. Following the 2008 economic downturn, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which serves to strengthen regulations over the financial services market and provide stronger oversight (Important Laws, 2013). The increased regulatory environment serves to inhibit the entrance of firms that lack the resources to ensure compliance with the laws. Additionally, in order to sell securities to investors, CSC and competing firms must be registered with the Financial Industry Regulatory Authority, which is a private corporation that oversees securities firms (How the Industry is Regulated, 2013). Additionally, a firm that sells securities or provides financial services is subject to oversight by state regulatory institutions that oversee licenses and provide further regulations for financial service providers (2013). The financial, administrative, and legal support that is necessary to ensure compliance with a network of federal and local laws and regulations serves as a primary barrier to new entrants to the financial services market.

Threat of Substitute Products or Services

While CSC’s provision of brokerage services offers less competition, the Internet undermines many of its educational products and advisory services. Though securities transactions are tightly regulated, the Internet provides opportunities for low-scale operations to emerge and develop niches that disrupt the consumer base of larger firms in the industry (Bodily and Venkataraman, 2004, p. 16). Thus, smaller competitors who can offer advisory services, software programs, low-service brokerage products, and educational products at a low cost have the opportunity to take advantage of digital technology in order to provide substitutions for CSC’s services.

Bargaining Power of Customers

Beginning in the 1990s, price competition served to increase the power of consumers in the brokerage industry. According to industry analysts, the emergence of price competition as a strategy in the investment services industry led to an unprecedented increase in competition (Currier, 1993, p. 4). Further, the Internet contributes to price competition by cutting overhead costs for firms and enabling consumers to enjoy a broader selection of products. As price competition becomes the main strategy of brokerage firms and technology increasing consumer options, it can be expected that the power of customers will increase in the industry.

Bargaining Power of Suppliers

The regulatory environment serves to strengthen the power of suppliers in the investment service market. The main product that is provided in the industry, securities, and other investment industries, is highly regulated by the federal and state governments. As a result, interest rates, money supply, and other factors that contribute to the price of financial instruments are largely outside of the control of investment firms. One strategy that firms can adopt to impact policy and industry conditions is to lobby and petition Congress. However, the unique nature of the product provided by the industry provides it with significantly low leverage against its suppliers.

Intensity of Competitive Rivalry

The 2008 recession and the regulatory environment serve to reduce competition for lead firms in the industry. Even prior to the 2008 recession, in 2007, there were 5,000 broker-dealers officially registered in the United States, a figure that declined from 9,515 in 1987 (Hill, 2010, p. 132). During the deregulatory period of the 1980s, firms in the industry engaged in widespread consolidation, which led to the acquisition of smaller firms by larger firms that eventually emerged to become leaders in the industry (2010, p. 132). However, as a discount brokerage, CSC offers limited full-scale services in comparison to full-scale brokerage firms (2010, p. 133). As a result, the discount brokerage segment is more accessible to market entrants than the full-service segment because fewer resources are needed to employ expert financial advisors and full-scale support services for clients. Thus, while the brokerage industry generally faced steep barriers because of the presence of large-scale firms and stringent regulations, competition in the discount brokerage segment can be expected to face increased competition because of the relative ease of providing low-scale investment services to consumers.

SWOT Analysis

As an innovative firm in its industry, CSC enjoys a clear lead as a provider of discount brokerage services. As CSC states, its purpose is to “champion every client’s goals with passion and integrity” (The Charles Schwab Corporation, 2012, p. 1). The corporation asserts that putting the client first forms the basis of its long-term strategy of r growth and that seeing their business through the eyes of the clients is the best method for earning the trust of clients (2012, p. 1). The values that CSC maintains are to serve clients ethically, empathically, and proactively (2012, p. 1). Further, CSC expresses the desire to embody these values by innovating its services to meet the needs of clients and being a good steward of the company’s assets and resources (2012, p. 2). However, in order to enact its stated purpose and values, the company must continue to leverage its strengths while addressing potential weaknesses that will undermine its future growth. The following SWOT analysis provides an overview of the opportunities and challenges that CSC must consider in strategic planning in order to maintain its market lead.

Strengths

The first strength that CSC possesses is its leading position in the discount brokerage segment of its business. The company has maintained strong growth records over the last three fiscal years. Between 2009 and 2012, CSC’s brokerage accounts reported a compound annual growth rate of 5 percent (MarketLine, 2013, p. 4). Additionally, the company’s retirement plan participants received a compound annual growth rate of 2 percent with 1.6 million individuals enrolling by the end of the fiscal year 2012 (2013, p. 4). Further, after opening Schwab Bank in 2003, the company’s banking operations received a compound annual growth rate of 6 percent by 2012 with .9 million individuals enrolled in banking services by the end of the fiscal year 2012 (2013, p. 4). As analysts contend, these consistent growth rates can be attributed to CSC’s reputation as a pioneer in the discount brokerage market and its consistent focus on maintaining the satisfaction of its clients (2013, p. 5). Through these company strengths, CSC can expect consistent growth moving forward.

The second strength that CSC possesses is that its business model focuses on diversification as a method of decreasing risk. In order to broaden its offerings to clients, CSC acquired Thomas Partners, Inc., an asset management firm that specialized in growth and dividend income, in December 2012 (“The Charles Schwab Corporation”, 2013, p. 1). Previously, it had acquired Windward Investment Management, Inc., an advisory investment firm that managed diversified portfolios that comprised of exchange-traded securities in November 2010 (2012, p. 1). As a result of the company’s attention to diversification, it has expanded its business to include over 300 offices, 865,000 banking accounts and $1.95 trillion in total client assets (MarketLine, 2013, p. 4). An assessment of the company’s investment ratios reveals that 42 percent of revenues are from asset management and administration fees, 36 percent of revenues are from net interest, 18 percent of revenue is generated through trading activities, and 4 percent of revenue is generated through miscellaneous activities (2013, p. 4). As these figures demonstrate, the company is in a strong position to resist fluctuations in the business cycle because of its strategy of diversification.

The third strength that CSC possesses is its use of asset-liability management practices to create consistent growth. During 2008 and 2012, during a severe economic downturn, CSC assets received a compound annual growth rate of 27 percent, even as many industry competitors reported significant losses following the recession (2013, p. 5). Further, an assessment of the company’s financial performance reveals that cash and liquid assets composed $55 billion of $133 billion total assets at the end of the 2012 fiscal year (2013, p. 5). The ability of the company to develop a strong capital base and manage risk during difficult economic times enabled the company to maintain its lead and widen its advantage over its peers during difficult economic periods.

Weaknesses

The primary weakness identified for CSC is that it has significantly high operating expenses. In the fiscal year 2012, the total operating expenses for CSC increased to $3,433 million, up from $3,122 million in the 2008 fiscal year (2013, p. 5). Further, the company’s total operating expenses were reported to grow at a rate of 2 percent during the 2008 fiscal year (2013, p. 5). Factors that attributed to these increased operating costs include increased compensation and benefits for employees, spending on professional services, expenditures for equipment, and increased advertising and marketing development spending (2013, p. 5). The company’s increased operating costs decrease its margins and might potentially impact CSC’s ability to remain a price leader in the industry.

A second risk that CSC faces is its lack of expansion to international markets. Currently, the company operates primarily in the United States and maintains a physical presence in the market through over 300 domestic branch offices. However, the company only maintains three major branch offices in Puerto Rico, London, and Hong Kong. Additionally, in 2002, the company closed its operations in Australia and Japan because of its inability to meet its financial objectives in the region (2013, p. 5). Further, the company scaled down its international operations significantly when it sold its brokerage subsidiary Charles Schwab Europe and its share of London-based Aitken Campbell (2013, p. 5). As the financial services sector becomes increasingly global, CSC will miss the opportunity to capitalize on high-growth markets because of its inability to successfully compete in foreign markets.

Opportunities

The primary advantage that CSC can benefit from is the increased demand for technological services. According to the Securities and Financial Markets Association, online financial services transactions increased significantly over 2012, with the number of bank transfers being conducted by the computer increasing by 196 percent (Canning, 2013, p. 5). Further, it is estimated that one-third of consumers research financial instruments exclusively through the Internet (Canning, 2013, p. 7). Additionally, wealthier investors are found to be more technologically savvy. For example, it is found that tablet owners possess an overage income of over $100K and possess a higher percentage of investable assets while affluent individuals are also 85 percent more likely to access the Internet using their phones on a daily basis (2013, p. 7). CSC made a beneficial move to accommodate the growing market of technologically savvy investors when it acquired Xpress Holdings, Inc. in September 2012. Xpress Holdings, Inc. was on online brokerage firm that focused on equity options and security features and that featured a platform that enabled investors and traders with the tools, analytics, and educational materials that they needed in order to execute various trading strategies (“The Charles Schwab Corporation”, 2013, p. 1). Through this acquisition and its focus on improving its technological offerings to consumers, CSC will be in a strong position to compete for the growing number of technologically oriented investors.

Threats

The regulatory environment serves as a primary risk faced by CSC. Subject to increased scrutiny, it is posited that the retail brokerage industry is especially at risk of litigation and regulatory fines and actions (MarketLine, 2013, p. 7). Further, an increasing number of investors have been empowered to seek legal action against financial service providers after experiencing loss in the financial markets. As a recent example of this trend, CSC clients filed a lawsuit against the company as a result of declines in their investments in 2007 (2013, p. 7). Further, in 2012, CSC paid a penalty of $200 million and $35 million as a result of a federal lawsuit and a lawsuit filed in the state of California (2013, p. 8). As avenues for redress increase for consumers of financial services products, it is likely that CSC will be the target of increased legal actions.

Strategy Recommendations

The two strategies successfully employed by CSC are cost leadership and asset-liability management. By implementing technological innovations, CSC has been able to successfully provide competitive prices to its consumers and increase the efficiency of its services. This is evidenced by the firm’s consistent expansion and leadership position in the discount brokerage segment of the investment services market. Additionally, the firm has successfully enacted its value of wisely utilizing company resources through its practice of asset-liability management. Further, by avoiding excess, the company has evidenced sound corporate social responsibility, which has contributed to its consistent earnings and growth. Through these two management strategies, CSC has been able to obtain significant growth, even during difficult economic periods, while increasing its share of consumers in the discount brokerage market.

However, there are several weaknesses that the company must address moving forward. First, the company must reduce its operations expenditures in order to remain competitively priced. In order to meet the needs of its consumers, CSC must offer convenient, competitively priced securities. Currently, CSC’s strategy of maintaining branch offices to provide in-person connections comes at the sacrifice of achieving organizational flexibility. Further, it's increased spending on compensation for employees reduces its ability to provide competitively priced services for its consumers. Yet, as more consumers research and purchase securities and investment products through the Internet, they will expect CSC to offer similar prices to the competitors. Thus, the company should prioritize technological innovation over the maintenance of branch offices and other operations that require high expenditures to maintain.

Though CSC’s failure to enter international markets is a foreseeable threat, this objective should be given low priority. As a brand with a significant presence in the United States, CSC is in the position to understand and meet the needs of the domestic market. Because the firm must focus on reducing its operations costs by reducing unnecessary expenditures in its domestic operations, it is not in the position to expand its operations internationally. As an alternative, CSC should focus on developing its technological infrastructure so that it can reduce the presence of its branch operations and obtain the flexibility that is needed for successful expansion abroad. By focusing on its domestic strengths, CSC can maintain its position as a leader in the discount brokerage segment of the investment services industry.

References

Bodily, S., & Venkataraman, S. (2004). Not walls, windows: Capturing value in the digital age. The Journal of Business Strategy,25(3), 15-25. Retrieved from http://search.proquest.com/

Canning, J. (2012, June 19). Financial services digital marketing trends. Securities and Financial Markets Association. Retrieved from http://www.sifma.org/research/reports.aspx

The Charles Schwab Corporation: Annual report on form 10-K. (2012). Charles Schwab. Retrieved from http://www.aboutschwab.com/images/investor/10k_2012.pdf

Currier, C. (1993, Jun 21). Price competition is creeping into industry series: Of mutual interest; money & investing. St. Petersburg Times. Retrieved from http://search.proquest.com/

Hill, Charles W.L. (2010). Cases in strategic management: An integrated approach (9th ed.). Mason, OH: Cengage Learning.

How the industry is regulated. (2013). Securities and Financial Markets Association. http://www.sifma.org/education/industry-basics/how-the-industry-is-regulated/how-the-industry-is-regulated/

Important laws regulating the financial industry. (2013). Securities and Financial Markets Association. http://www.sifma.org/education/industry-basics/how-the-industry-is-regulated/important-laws/

MarketLine. (2013). Company profile: The Charles Schwab Corporation. Retrieved from http://www.EBSCOhost.com