ELDA PUKA Merril Lynch Case Study

Case Questions:
1. Do you believe that Merrill Lynchs competitive strategy in response to online initiatives by competitors (e.g. Charles Schwab) was timely and appropriate? Merrill Lynch new strategy was initially announced on June 1999 and put in place over the next six months, which was later than the online innovations introduced by competitors. Before that, Merrill Lynch was a full service brokerage company leading the market. Its strategy relied on the exceptional service provided by experienced financial advisors. Their compensation relied heavily in brokerage fees (65%) In the new era of internet trading (due to deregulation and technological development), Merril Lynch started to loose market share to its competitors who were competing both in price and technology. In 1998 Shwab assets grew by 39% as compared to 18% of Merill Lynch. Therefore it initiated a new strategy which would address these two issues (price and technology), called the Integrated Choice. It proved to be an appropriate strategy, which was launched after a careful study of the new market trends. It was announced on time to the company staff, preventing any confusion that could create the news revealed by the media.

2. What are the key differences between approaches by Merrill Lynch and Charles Schwab? Merrill Lynch was a full service brokerage company, while Charles Schwab a discount brokerage company. As such, Merrill Lynch charged higher commissions and had much higher cost of maintaining its brokers (training & salary). Schwab had a cost advantage over Merrill. Schwab brokers charged on trading basis and did not

focus on advisory service. Another difference is the aggressive advertising Schwab used to promote its lower prices and online trading. Shwab also developed tools used by the full service brokerage (asset allocation, stock selection) Shwab identified three customer segments: 1)the self directed, who relied on internet trading 2) the delegators, who needed financial advise to make a decision and 3) the validators, who wanted to trade directly online but needed a second opinion (professional) to confirm their decision. A Merrill Lynch approach was the change of pricing structure, from commission based to a mix of asset based (unlimited access) and trading base (direct channel). 3. What is Integrated Choice? What are Merrills assumptions underlying the Strategy? Integrated choice is a new strategy which implied online trading and new pricing structure. The assumptions were that a new trend was rapidly developing, that of open architecture and direct trading through internet, where customers could trade and get advise at any time. This was a long-term trend predicted to completely transform the market, therefore Merrill Lynch had to be act flexibly, otherwise it would loose market share. It created the Direct Channel, which allowed customers to buy securities online at a basic charge per trade. It created the Unlimited Advantage service, priced at 1% of assets, which benefited both the financial consultant and the client, since both parties had a strong interest on growing customers assets. 4. What are the implications of Integrated Choice? For Clients? For financial consultants? And for the Merrill Lynch Organization? For Clients: Before Integrated Choice was launched, clients could only benefit from the traditional advisory services that professional financial advisors offered. But after IC was implemented, new customers approached the company; those that

were more high tech oriented and preferred self - online trading. Except for the new trading options, clients benefited from lower prices too. For financial consultants: They benefited from the creation of Unlimited advantage service. They would be compensated based on the clients assets, so they were highly motivated to offer exceptional advisory service that would lead to assets growth. On the other side, there were concerns about a decline in compensation, due to the change in the pricing structure. For Merrill Lynch: The company was offering a wider array of products and services to meet customers needs and market trends. That meant that the company was still a leader in the market and had proved to be flexible enough, innovative and competitive. A long-term reputation had been secured.

5. Which firm do you believe will be more successful five years from now? Why? I think Merrill Lynch will be more successful, because it relies on a highly professional staff (financial advisors) as compared to Schwab or other competitors. And human resources I believe are the most valuable asset a company can have. It has shown ability to conduct study groups and come up with appropriate solution to be on top of market. It has identified its customer segment groups and has developed products and services for each of them, being price competitive at the same time. Therefore it really serves its scope: to be a full service brokerage, a onestop shop where everyone can find the product or service that desires.