Porterian Analysis of Schwab's Business and IS Strategy
2009/// Filed in: Management IS
In this post we analyze how Schwab's strategic use of information technology enabled the firm to address the competitive forces at work. The well-known Porter's competitive forces model (Porter.79) is a useful theoretical framework to start examining the nature of the interactions between Schwab and each of the five forces within the industry environment in which it operates. Briefly, according to Porter's competitive forces model, in order for a firm to succeed in any given industry, it must effectively address five competitive forces: 1) intensity of rivalry among the existing competitors in the industry, 2) threat of potential new entrants, 3) threat of substitutes, 4) bargaining power of suppliers, and 5) bargaining power of customers (Porter.79).
Schwab's E-business strategy was part of a larger multi-channel strategy rooted on the firm's customer-focused corporate philosophy whose objective was to provide the maximum number of channels for customers to interact and transact with the company (i.e. ``to provide customers with the most useful and ethical brokerage services in the US"). The objective was to give customers a wide choice. Given this intrinsic strategic alignment between business and IS strategy (Henderson.93), IS/IT capability enabled Schwab to create competitive advantages by offering new services, improving efficiency, improving decision making, and using information systems to achieve operational effectiveness.
A key element of Schwab's IS strategy was to avoid over investing in complete new IT systems (Carr.03). As Carr points out greater IT expenditures do not necessarily lead to superior financial results. Instead, in 1995 Schwab's research group developed a software to enable the existing servers at Schwab to receive trading orders through a web-browser at a PC, send it to Schwab's operational back-end systems, fulfill the order, and pass on the confirmation to the PC. The system (e.Schwab) was developed by a 30-member team in less than a year. By 1996, e.Schwab was ready with a new internet-based product and the firm had become the first major financial services company to permit web-based trading of listed OTC stocks, mutual funds, bonds, and options. Using Porter's competitive forces framework, this new and transforming product can be considered a substitute product that enabled access to a significant market and help change the nature of the competition to put Schwab in a dominant competitive position. The Internet facilitated the completion of trade transactions at a much lower cost since it reduced the need for personnel at contact centers, and given that it did not require Schwab to make a substantial capital investment on IT infrastructure or manpower (Carr.03), the savings could be passed on to customers by charging less commission per trade.
In terms of the classical Porterian competitive strategies, Schwab was able to effectively use IS/IT in order to 1) offer a differentiated product resulting in overall best product leadership, 2) reduce operational costs resulting in overall operational leadership, and 3) lower product costs resulting in overall low cost leadership. By 1997, one year after the introduction of the transforming IS product, the value of online assets handled by e.Schwab had reached \$81B. In these earlier years of the internet revolution, Schwab critical alignment between business and IS/IT strategy enabled the firm to gain competitive advantage through information~\Porter.85 by 1) lowering costs at all levels in the value chain, 2) enhancing differentiation}by using IS/IT to customize products, 3) changing the competitive scope by using IS/IT to increase the firm's ability to coordinate its activities regionally, nationally, and globally (e.g. reducing workload at local branches); creating interrelationships among previously separated industries (e.g. services such as ``Analyst Center" provided customers access to external research from leading firms such as S\&P and DJ); segment their offerings in ways previously feasible only for focused (niche) companies (e.g. ability to provide customized service offerings depending on need of its customers); and 4) spawning new business by creating derived demand for new products and services (e.g. new Schwab services and programs such as Schwab Alerts, Learning Center, PocketBroker, Personal Choice, Rebalancing Wizard).
In the late 90s, a key element of Schwab's strategy was to use the IS/IT systems to extract data regarding the customer preferences, monitoring the customer accounts, and studying the websites customers visited in oder to segment and target its customers and use this proprietary marketing information to design innovative customized products and manage customer relationships more effectively. Thus, Schwab was effectively using IS/IT at all levels in the value chain as a powerful tool for enhancing operational effectiveness in order to complement the traditional ways of competing (Porter.01).
In summary, as a customer-focused technology firm operating in the financial services sector, Schwab was able to make effective use of their information technology and information systems capability to affect competition in three general ways: 1) changing the industry structure and the rules of competition, 2) creating competitive advantage by enabling the company to create new customized products which were both differentiated and low-cost, and 3) transforming the value chain to enhance operational effectiveness (Porter.79, Porter.85, Porter.01). Furthermore, Schwab was able to implement this aligned business/IS strategy without incurring in major IT infrastructure investments or new IS/IT systems implementation (Carr.03). Instead, Schwab's strategic impact of IT investments came from the cumulative effect of sustained initiatives to innovate business practices in the near term and aimed for differentiation not in the IT itself but in the new customized services and operational practices it enabled to create to meet the customer needs and demands (Brown.03).
Schwab's E-business strategy was part of a larger multi-channel strategy rooted on the firm's customer-focused corporate philosophy whose objective was to provide the maximum number of channels for customers to interact and transact with the company (i.e. ``to provide customers with the most useful and ethical brokerage services in the US"). The objective was to give customers a wide choice. Given this intrinsic strategic alignment between business and IS strategy (Henderson.93), IS/IT capability enabled Schwab to create competitive advantages by offering new services, improving efficiency, improving decision making, and using information systems to achieve operational effectiveness.
A key element of Schwab's IS strategy was to avoid over investing in complete new IT systems (Carr.03). As Carr points out greater IT expenditures do not necessarily lead to superior financial results. Instead, in 1995 Schwab's research group developed a software to enable the existing servers at Schwab to receive trading orders through a web-browser at a PC, send it to Schwab's operational back-end systems, fulfill the order, and pass on the confirmation to the PC. The system (e.Schwab) was developed by a 30-member team in less than a year. By 1996, e.Schwab was ready with a new internet-based product and the firm had become the first major financial services company to permit web-based trading of listed OTC stocks, mutual funds, bonds, and options. Using Porter's competitive forces framework, this new and transforming product can be considered a substitute product that enabled access to a significant market and help change the nature of the competition to put Schwab in a dominant competitive position. The Internet facilitated the completion of trade transactions at a much lower cost since it reduced the need for personnel at contact centers, and given that it did not require Schwab to make a substantial capital investment on IT infrastructure or manpower (Carr.03), the savings could be passed on to customers by charging less commission per trade.
In terms of the classical Porterian competitive strategies, Schwab was able to effectively use IS/IT in order to 1) offer a differentiated product resulting in overall best product leadership, 2) reduce operational costs resulting in overall operational leadership, and 3) lower product costs resulting in overall low cost leadership. By 1997, one year after the introduction of the transforming IS product, the value of online assets handled by e.Schwab had reached \$81B. In these earlier years of the internet revolution, Schwab critical alignment between business and IS/IT strategy enabled the firm to gain competitive advantage through information~\Porter.85 by 1) lowering costs at all levels in the value chain, 2) enhancing differentiation}by using IS/IT to customize products, 3) changing the competitive scope by using IS/IT to increase the firm's ability to coordinate its activities regionally, nationally, and globally (e.g. reducing workload at local branches); creating interrelationships among previously separated industries (e.g. services such as ``Analyst Center" provided customers access to external research from leading firms such as S\&P and DJ); segment their offerings in ways previously feasible only for focused (niche) companies (e.g. ability to provide customized service offerings depending on need of its customers); and 4) spawning new business by creating derived demand for new products and services (e.g. new Schwab services and programs such as Schwab Alerts, Learning Center, PocketBroker, Personal Choice, Rebalancing Wizard).
In the late 90s, a key element of Schwab's strategy was to use the IS/IT systems to extract data regarding the customer preferences, monitoring the customer accounts, and studying the websites customers visited in oder to segment and target its customers and use this proprietary marketing information to design innovative customized products and manage customer relationships more effectively. Thus, Schwab was effectively using IS/IT at all levels in the value chain as a powerful tool for enhancing operational effectiveness in order to complement the traditional ways of competing (Porter.01).
In summary, as a customer-focused technology firm operating in the financial services sector, Schwab was able to make effective use of their information technology and information systems capability to affect competition in three general ways: 1) changing the industry structure and the rules of competition, 2) creating competitive advantage by enabling the company to create new customized products which were both differentiated and low-cost, and 3) transforming the value chain to enhance operational effectiveness (Porter.79, Porter.85, Porter.01). Furthermore, Schwab was able to implement this aligned business/IS strategy without incurring in major IT infrastructure investments or new IS/IT systems implementation (Carr.03). Instead, Schwab's strategic impact of IT investments came from the cumulative effect of sustained initiatives to innovate business practices in the near term and aimed for differentiation not in the IT itself but in the new customized services and operational practices it enabled to create to meet the customer needs and demands (Brown.03).