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Jeff Antenucci Jennifer Breslin Neil Crescenti. Ryan McCue Peter Zimmerman. Presentation by :. “NICE MANSION, TOO BAD IT BELONGS TO YOUR BROKER”. History of E*Trade. 1982 : Max Ule initiates Tickerscreen, the first online investment service

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  1. Jeff Antenucci Jennifer Breslin Neil Crescenti Ryan McCue Peter Zimmerman Presentation by: “NICE MANSION, TOO BAD IT BELONGS TO YOUR BROKER”

  2. History of E*Trade • 1982: Max Uleinitiates Tickerscreen, the first online investment service • 1983:William Porter forms TradePlus-computerized order entry system • 1990: William Porter establishes E*Trade Securities Inc. • 1993: TradePlus and E*Trade combine revenues exceed $2million and E*Trade posted earnings of $100,000 • 1996: E*Trade makes first appearance on World Wide Web courtesy of its alliances with AOL and CompuServe • 1996: Porter turns the company over to Christos Cotsakos and E*trade makes its IPO

  3. What E*Trade Does • Provider of personalized financial products & services: • Automated stock & option transactions portfolio tracking - (these account for 68% of revenue) • Charting & quote applications • Market commentary, analysis, & news • Profession research reports • Over 3000 mutual funds • Bond trading • Access to IPO’s

  4. For Whom? Individual Investors • The 10 to 15 million people who track investment information online but still trade offline, as well as those already involved in online trading. • E*Trade is seeking to carve a niche among trigger-happy traders who may flip a single stock several times during the day.

  5. Mission Statement To be the branded global leader and recognized authority in electronic personal financial services by radically transforming how these services are designed, delivered, purchased, and managed.

  6. Vision Statement E*Trade is already the place to go for personal financial services on the internet, someday it may be the place to go for personal financial services period.

  7. Problem Statement: How can E*Trade continue to grow in the online brokerage industry segment as it becomes increasingly more competitive? Don't Let Commissions Bite Your Assets

  8. Industry AnalysisOverview The securities brokerage and investment services industry is dominated by major institutional traders (Goldman-Sachs, Merrill Lynch, etc.), controlling most of the revenues and market. Discount traders, such as Charles Schwab and Fidelity, offer services to the retail segment that consists of individual investors. The proliferation of the Internet has given rise to a new segment within this industry, allowing players such as E*Trade, Datek, and Ameritrade to carve out distinct niches and serve a whole new segment of retail investors. This is the most rapidly growing segment in the industry, forcing institutional and discount traders to offer similar services to this market.

  9. Competitive EnvironmentIndustry Analysis

  10. Economic StructureSecurities Brokerage and Investment Services • The industry is highly concentrated with the top 10 firms accounting for 50.4% of total revenues in 1997 - TIGHT OLIGOPOLY • The two largest brokerage firms are Morgan Stanley, Dean Witter & Co. (equity capital of $14.5 billion at February 28, 1998) and Merrill Lynch ($ 9.0 billion at March 31, 1998).

  11. Life Cycle StageIndustry • The security brokerage and investment services industry is in shakeout • “M&A in the industry have been fueled by more cross-border transactions and by management’s desire to use acquisitions as a growth strategy in the face of maturing markets” S&P’s Industry Surveys

  12. Industry Attractiveness • Industry is attractive for incumbents based on continuation of growth. • Industry is NOT attractive for new entrants based on the following: - economic structure - life cycle stage - large capital requirements

  13. External Assessment General Environment: • Economic • Demographic • Social-Cultural • Technology • Regulatory/Political • Global

  14. Opportunities Continuation of healthy economy: In 1997 GDP rose nearly 4% with inflation held below 2% Unemployment reached a new low of 4 1/2% in 1998 which increased consumer spending Continuation of investing of disposable income, as reported share volume increase from 104,636.2 in 1996 to 169,744.6 in 1998 Threats “Irrational Exuberance” Tech stocks have been rising steadily despite their ability to make a profit. A slow in the economy If the economy slows so will corporate earnings Economic Environment

  15. Opportunities More women in the work force, - Women’s Median Income: $9,595 (1980) to $13,703 (1997) Minorities are also making advancements in the work force leading to new consumer groups. - Average Income: Blacks $11,566 (1995) to $12,351 (1997); Hispanics $9,794 (1995) to $10,773 (1997) Millions of Baby Boomers are preparing financially for retirement-create approximately 26% of total Internet users. Threats Income inequality is increasing, which decreases consumer base - In 1970 the bottom 20% of Americans made $19,820; whereas, the top 5% made $94,240. This number has since increased to $20,586 and $142,400, respectively, in 1997. Demographic Environment

  16. Opportunities Number of households connecting to the internet increasing: 1996: 9.4% 1998: 22.4% Investing is becoming a larger part of our culture: CNBC – “The Street” / “Bull” Threats Income inequality is increasing, which decreases consumer base - In 1970 the bottom 20% of Americans made $19,820; whereas, the top 5% made $94,240. This number has since increased to $20,586 and $142,400, respectively, in 1997. Social-Cultural Environment

  17. Opportunities Number of people connected to the internet globally is increasing The continuance of online trading, which has increased from 1.5 million accounts in 1996 to 6.4 million accounts in 1998 Decrease in average price of home computers allows more people to use the internet New technologies capable of reaching the Internet, such as pagers and cell phones Threats Failure of computer systems due to volume of trades, problems with servers or general software Security risks due to the lack of adequate encryption technology and vulnerability of account information Problems attributable to failure in complying with Year 2000 computer system updates The Internet is making inroads into the brokerage business. Technological Environment

  18. Opportunities Increased information protection and regulation by the government and organizations such as the NASD Threats Issues related to Online Trade and the regulation of those transactions - 30,000 potential taxing jurisdictions Unexpected changes in foreign regulatory requirements-tariffs and other trade barriers Political/Legal Environment

  19. Opportunities Penetration of foreign markets Lack of discount brokers in foreign markets Interest of foreign investments under unified Euro currency reduces exchange rate risk Threats Less developed technological infrastructures, resulting in lower customer acceptance of, or access to electronic channels Fluctuations in currency exchange rates Reduced protection for intellectual property rights Global Environment

  20. Competitive EnvironmentStrategic Group Analysis PRICE NUMBER OF SERVICES

  21. Economic StructureSegment – Online Brokerage • The on-line discount brokerage industry is a tight oligopoly with the top 3 players controlling 51%

  22. Life Cycle StageSegment – Online Brokerage • The on-line brokerage industry is in early growth • E*Trade was the first company to stake a claim in online trading (1992) • 1994: 19,000 accounts -1998: 544,000 accounts

  23. Porter Five ForcesThreat of New Entrant • The online brokerage services industry is so new that the threat of new entry is high requiring only some capital and the technology

  24. Porter Five ForcesPower of Buyers • Who they are? • Level of power – High • Low switching costs • Price Wars

  25. Porter Five ForcesPower of Suppliers • Who are they? • Market Makers • ISP’s • Analysts • Level of Power - High

  26. Porter Five ForcesPower of Substitutes • Who are they? • Mutual fund companies • Commercial banks • Insurance companies • ISP’s & Portals • Power - High

  27. Porter Five ForcesRivalry – HIGH • Due to the early growth stage of the industry and low barriers to entry the rivalry within the online brokerage industry is high

  28. Key Success Factors

  29. Competitor AnalysisCharles Schwab • Goals – Long-term revenue growth / ROE objectives are 20% and to compete in the global market place in the years ahead. On going pursuit of technological advancement • Assumptions – Industry barriers across seas are breaking down and the internet will fuel investing by individuals around the world • Capabilities – Serving customers with a wide variety of needs for large investors to active traders through face-to-face, telephone and internet services • Strategies – To move into foreign markets and increase their technological capabilities

  30. Competitor AnalysisCharles Schwab • Are they satisfied? NO • Are they vulnerable? NO • Next likely move – further global expansion • What would provoke retaliation? • Full-service brokers lowering commission costs to compete with discounters • Online brokers establishing physical locations

  31. Competitor AnalysisDatek • Goals – to increase customer base, market share while remaining a low cost provider • Assumptions – Transactions will continue to increase • Capabilities – Offers fast transactions, free real-time quotes for lowest costs • Strategies – To attract and retain active tradersthrough a low cost strategy

  32. Competitor AnalysisDatek • Are they satisfied? NO • Are they vulnerable? YES • Next likely move – Target new markets • What would provoke retaliation? • Other online brokers lowering costs

  33. E*Trade’s Response • E*trades ability survive the early growth stage will depend on: • Continuous innovation using technology • Continue to improve upon brand awareness to create brand equity • Maintain the ability to create long-term profitable growth

  34. Internal Assessment

  35. Leadership • Former Fed Express Executive • Named E*Trade CEO 1996 • Active accounts increase 500% in Christos’ first 2 years Christos M. Cotsakos, President & CEO

  36. Leadership • Named CIO July 1997 • Named “Chief of the Year” by Informationweek • Developed E*Trades “Stateless Architecture” • Her management style helped reduce system errors 75% in her first quarter Debra Chrapaty, Chief Information Officer The Internet is shifting from claiming virtual space to defending and capturing it.

  37. Organizational Structure:Functional Structure Differentiation Strategy Christos M. Cotsakos, President & CEO Jerry Gramaglia CMO Debra Chrapaty, CIO Steve Richards VP R&D Brigitte VanBaelen VP CMO Kathy Levinson COO Jerry Dark HR Leonard Purkis CFO

  38. Financial Analysis

  39. Financial Analysis

  40. Stock Risk E*Trade BETA = 2.7

  41. Strengths: S1-Stateless Architecture S2-Destination E*Trade S3-E*Trade Game S4-Celebrity Challenge S5-High Customer Retention S6-S.A. w/ Yahoo! S7-S.A. w/ AOL S8-Successful Campaign Adds S9-Innovative products/services Weaknesses W1-Majority of rev from transactions W2-Computer failures W3-Capacity W4-Employee retention Infrastructure S9 W1 S9 S3, S4 S5 HR W4 Technology S2 S1 W2, W3 S1 S3, S4 S5 W2, W3 Procurement S7 S6 S8 Inbound Logistics Operations Outbound Logistics Sales & Marketing Services Value Chain Analysis

  42. Competitive Advantage • Uniqueness • E*Trade continually sets the standards for online brokers • Has this created Above-Average Returns for E*Trade?

  43. Strategic Competitiveness • Solve customer’s problems with goods or services • Continuously innovate • Use your core competencies in ways competitors cannot • design strategies to satisfy customer’s needs

  44. S.W.O.T

  45. E*Trade’s Strengths • Technology - Patent-pending stateless architecture • Leadership - Debra Chrapaty CIO of the year • CustomerService - 95% customer retention rate • Marketing - E*Trade The Game, Celebrity Challenge, Creative Campaign Adds

  46. E*Trade’s Strengths • Global Expansion - Few firms are pursing the international marketplace as aggressively or successfully as E*Trade • Innovation - First to offer mutual funds over the internet • KeyAlliances: AOL, MSN, Yahoo!, SinaNet, MSNBC, Morningstar

  47. E*Trade’s Weaknesses • Revenuedependency - 68% stems from transaction revenue • Technology - Failed computer systems • Capacity - Unable to handle new business • Employee Retention - Difficult to hold onto upper-management and Tech personnel

  48. E*Trade’s Opportunities • Online Trading - By 2002 online accounts are expected to reach between 10 - 24 Million! • Price of Technology - Price of personal computers is continually falling • New Technology - Hand-held devices with wireless internet access • Institutional Investing-Corporate services

  49. E*Trade’s Opportunities • GlobalExpansion - Global spread of the internet and personal investment service • DayTrading - The new technology [Internet] has spawned a new breed of investors who trade at high volume for quick profits. • Economy - low inflation, low unemployment, high consumer confidence

  50. E*Trade’s Threats • Technology - Hackers! • ISP’s - busy signals • Tight Labor Market - High competition for tech personnel and senior managers • Economy - Cyclicality • Competition within the Industry - Full-service brokers, discount brokers, “Zero-cost” brokers

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