ETrade: Case Analysis

1
ETrade Case Analysis
2
Executive Summary

• ETrade was a first-mover in the online
  brokerage market. Because of this, they achieved
  early brand name recognition and an adequate
  customer base. However, by the late 90s,
  competition was heating up and the offline
  brokerages were waking up. ETrade needed to
  change its strategy to face these challenges.
  They needed to expand their customer base to
  other investors beyond the online world. But to
  do so, they faced barriers to entry with their
  lack of complementary assets in the offline
  world. ETrade overcame the traditional barriers
  to entry by spending significant amounts of money
  on their technological infrastructure and
  aggressive advertising. ETrade Group wants
  consumers to use its financial services for
  Everything and marketing the ETrade name has
  been a key component of their success. ETrades
  strategy focused primarily on customer
  acquisition and building a strong brand. Over the
  last two years, ETrade spent 640 million on
  brand recognition and marketing. Schwab, which is
  eleven times the size of ETrade, spent only 520
  million in the same time frame.1 The ETrade
  Monkey riding through a deserted dot.com ghost
  town advertisement, which aired during Super
  Bowl XXXIV in 2000 and reached an audience of 130
  million, was named the 4 greatest Super Bowl
  advertisement of all time by consumers.
• 1 Chen, Huang, Wong, and Wong, ibid.

3
Executive Summary

• The company continues to expand its services to
  make up for shortfalls in trading income
  resulting from Internet fallout. The Internet
  fallout caused their stock to fall and also
  online traders to decrease their use of ETrade
  service. This continued slump could make ETrade
  a takeover target for a larger financial services
  firm looking to broaden its online services.
  (Hoover)

4
SWOT Analysis and Sustainability
5

• ETrade has focused on customer acquisition and
  building a strong brand since the beginning. This
  is critical because in the financial industry,
  especially on the Internet, trust and
  brand-awareness are crucial for success due to
  the perception of low security. It has
  established a firm position as the first online
  broker in the online trading market. While many
  brokers have entered and exited this market,
  ETrade has experienced phenomenal growth and is
  among the top players in the industry.

6

• Recently, the online brokerage industry has
  undergone changes and companies have changed
  their strategies as a result. During the first
  stage, online brokerages could attract customers
  simply by having lower commission fees than
  traditional full-service brokers. However, by the
  late 1990's, all kinds of brokers have begun
  online trading services, and following the
  pure-play online brokers, have provided lower and
  lower prices. So, the discount strategy is no
  longer sustainable. Large, traditional brokers
  like Merrill Lynch, and discount brokers like
  Charles Schwab, can provide new services by
  combining their old off-line services with new
  technology. They have strong capabilities, huge
  assets, strong analysis and research skills, and
  large staffs. Moreover, new customers to the
  online market are not as active as early Internet
  traders. They trade less often and are less price
  sensitive. In addition, in e-business, including
  online trading, switching costs are very small so
  customers can have multiple accounts with
  multiple brokers, quit transactions midstream, or
  shift to other brokers easily. In these difficult
  circumstances, pure-play online brokers have
  pursued other strategies to keep attracting new
  customers.

7

• ETrade began preparing early for a shift in
  strategy. It has tried to diversify its business
  and sources of revenue beyond transaction fees.
  They not only offer a variety of products -
  including mutual funds, proprietary mutual funds,
  bond trading, and access to initial public
  offerings - but have also begun to offer services
  other than trading. ETrade started Internet
  banking services in 1999, and it is the third
  largest operator of ATMs in the U.S. The company
  has also become interested in the
  bricks-and-mortar model. ETrade decided to
  establish a branded bricks-and-mortar presence
  with its ETrade Zones, which will serve as a
  branch office to compete directly with both
  discount and full-service brokers. It also
  decided to partner with Target to put both
  ETrade Zones and ATM machines in over 20 Target
  locations.

8

• These new strategies have brought changes in
  ETrades revenue structure. While the most
  important source of revenue is interest on
  customers' assets and investments, mortgages, and
  fees from banking and ATM services are
  increasing. Every e-business company faces
  cutthroat competition. Most of the entrants are
  kicked out of the market and very few companies
  can survive. Moreover, it is more difficult to
  make a profit. Even seemingly very successful
  dot com companies, such as Amazon.com, face
  difficulties getting out of the red. In such an
  environment, ETrades lack of dependence on
  transaction fees gives it financial strength, and
  greater ability to expand its business.

9

• Now ETrade seeks to enlarge its market share
  both in the U.S. and globally. It also continues
  to expand its services, loans, and personal
  banking. Sustained revenue growth and good cost
  management will position the company for
  sustained growth.

10
VIDE Analysis

• ETrade began life as a deep-discount online
  broker. As one of the first online brokerages,
  ETrade catered to active, independent,
  knowledgeable investors who wanted to execute
  trades as cheaply as possible and who did not
  need expensive advice. For these investors, even
  discount brokers were too expensive. They were
  early-adopters of new technologies, including
  those who were online in the late 1980s and early
  1990s, and were comfortable with the new online
  environment. ETrades value proposition was
  meaningful to a specific market segment and, as
  an early mover, allowed ETrade to grow.

11

• Since its earliest days, ETrade faced
  competition from other deep-discount online
  brokerages. Though its market was growing,
  no-frills trading was a limited market, so the
  company sought to broaden its services to reach
  other segments rather than compete strictly on
  price. This was a significant strategic decision.
  Since that time, ETrade has expanded its
  services into many other area. The company offers
  mortgages, mutual funds, and referrals. It has
  built the 3rd largest ATM network in the U.S. and
  expanded internationally. It sells ads for all of
  its websites.

12

• ETrade offers banking services, such as
  deposits, CDs, and loans along with all of the
  bundling and cross selling opportunities that
  come with varied banking and brokerage services.
  It is now expanding into the bricks-and-mortar
  world with its ETrade Zones, which are
  essentially branch offices which offer research
  and investment advice through more personalized
  service. ETrade has entered into an agreement
  with Target to open ETrade Zones and ATMs in
  Targets stores.

13

• Many of these moves were executed by ETrade
  through acquisitions. ETrade has made over 15
  acquisitions since the early 1990s. This method
  is consistent with the companys desire to move
  quickly to attack larger competitors, and
  pre-empt other similar competitors.
• These moves to diversify by ETrade have allowed
  it to attract more customers and offer more
  services to its growing customer base. The wide
  range of services adds value to ETrades
  customers because it allows them to consolidate
  their banking and brokerage needs in one place.
  ETrade becomes an intermediary between a
  customer and their money. By consolidating their
  financial services with ETrade, a customer
  builds loyalty because a switch will mean
  incurring switching costs.

14

• ETrade has spent a considerable amount of money
  building its portfolio of services, particularly
  its bricks-and-mortar operations. The effect of
  this has been to build somewhat of a defense, and
  it has worked. Some other pure-play online
  brokerages have indicated that they will not
  actively pursue the building of similar
  capabilities. In the long run, of course,
  ETrades moves are imitable by competitors. But
  in the short-run, it would be very difficult for
  another online broker to copy ETrades success
  as a late mover. ETrades expanded array of
  services set it apart from its competitors.
• One of the significant benefits of the wider
  range of products and services offered by ETrade
  is its ability to cross-sell. Many mergers fail
  because anticipated synergies fail to
  materialize. However, the banking industry has
  consistently proved to be an excellent example of
  synergy in its ability to effectively cross-sell
  products and services.

15

• ETrade can continue to add value by offering
  additional products and services and it can
  cross-sell across these offerings. By doing so,
  it differentiates itself by allowing a more
  complete financial solution for customers.
  However, the greatest threat ETrade faces is its
  inability to build effective long-term barriers,
  allowing it to exploit the short-term competitive
  advantages gained by its innovations. In the
  long-term, it is easy for other firms to build
  branches and ATM networks. Many other firms
  already offer research and investment advice.
  ETrade is particularly vulnerable against the
  larger players. They witnessed the dramatic
  growth of Internet usage and online brokerage
  firms during the late 1990s. By the late 1990s,
  they began entering the online market.

16

• Some predicted the demise of pure-play online
  brokerages when the large, established players
  began to enter the market. ETrade, however, has
  continued to grow. This is despite the fact that
  the environment has only deteriorated since the
  late 1990s boom in valuations and day-trading
  activity. In the current market, customers are
  more conservative, executing fewer transactions.
  ETrades real competitive advantage, its core
  competence, is its ability to read the market and
  innovate, adding value to customers before its
  competition. It would seem unlikely that an
  upstart pure play deep-discount broker would be
  able to take on giants such as Merrill Lynch and
  Charles Schwab. ETrade has not so much as taken
  them on as it has outran them. And it continues
  to do so.

17
Models of Innovation

• Innovation models can be applied to ETrade to
  give us insight into the companys success in the
  face of competition from traditional full-service
  and discount brokerage houses.

18
Teece Model

• Teece argued that two factors were instrumental
  in reaping profits from an innovation. The
  appropriability regime, which is the extent to
  which the technology can be protected from
  imitation, and complementary assets, other
  non-technological capabilities the firm needs to
  exploit the technology.1
• ETrades technology was easy to imitate as
  evidenced by the large number of competitors who
  have entered the online brokerage market.
  Initially, they were able to use their run
  strategy to stay ahead of the competition, but
  this did not prevent imitation by others.
  Complementary assets became one of ETrades
  distinguishing features, but this was not the
  case at the outset. It took heavy marketing,
  advertising campaigns, acquisitions, and
  alliances to develop a now enviable set of
  tightly held complementary assets.
• 1 Afuah, Allan. Innovation Management,
  Oxford University Press, 1998.

19
Utterback-Abernathy Dynamic Model

• The Utterback and Abernathy model details the
  dynamic changes from a fluid phase to a
  transitional phase to a specific pattern.
  Technological and market uncertainties comprise
  the fluid phase and is a key time for entry by
  entrepreneurial firms. ETrade entered the market
  during this fluid phase when the changing
  technology and acceptance of the world wide web
  provided them with an opportunity to build a
  pure-play Internet trading platform.
• Companies enter the transitional phase when they
  begin introducing more and varied products. The
  market uncertainty is reduced and research and
  development investment increases are justified.
  This phase also requires major process changes
  due to rising volumes. By this time, ETrade had
  entrenched itself in the online trading market
  and established a strong brand name. ETrade
  changed its focus to expanding services and
  technologically accommodating a large, changing
  customer base. The addition of ETrades wide
  range of services including online banking,
  financial advice, mortgages, insurance, college
  savings plans, etc. signified their entrance into
  this phase.

20
Utterback-Abernathy Dynamic Model

• The transitional phase eventually leads to a
  specific pattern whereby cost reduction becomes
  the focus. This phase is also characterized by a
  more formal corporate culture with a greater
  number of levels of authority. ETrade has not
  moved fully into this phase as it continues to
  diversify and reinvent itself.1
• 1 Abernathy and Utterback, Patterns of
  Industrial Innovation, Technology Review,
  June/July 1978.

21
Exhibit 1 Stock Price History
Source Yahoo!, www.yahoo.com
22
Exhibit 2 Value Chain
23
Exhibit 3 Balance Sheet for ETrade
24
Exhibit 5 ETrade Market Share
Online Brokerage Market Share by Total Assets
Source Brokerages Need Banking to Keep
Customers, Web Finances, 5 (7) April 5, 2001,
Securities Data Publishing.
Source Disclosure, Inc., www.disclosure.com
25
Exhibit 4 Income Statement for ETrade
26
Exhibit 6 Broker Comparison Table
27
Exhibit 7 Online Brokerage Trading Costs