Charles Schwab in 2002

1. How would you grade the leadership of Schwab during the three periods in the company’s history? What were the strengths and weaknesses of the company’s business model during each period?

• Discount Broker Period (1975-1994): At this time, Schwab was the first discount broker to open a branch office and to offer access 24 hours per day and 7 days per week. And also Schwab succeeded to strengthen its online trading business with the introduction of Equalizer and Street Smart. The strength was the full-featured online trading service that ran on the newly launched Microsoft Windows operating system. The weakness was the cost structure of Street Smart because the customer service representatives needed to spend a significant amount of time helping customers install and configure the trading software and modem. The cost was in addition to the cost.

• Multi-Channel Online Broker Period (1995-1999): At the time, Schwab realized the several important trends and great potential of Internet technologies. Schwab formed a special team to develop an internet online trading offering and introduced e.Schwab Internet brokerage service. Strength was the high margin and cost benefit. Once the sufficient volumes had been achieved, the efficiency of the Internet channel resulted in a 29% growth and online transaction cost one-fifth as much as those conducted with Schwab employees in branch offices or via telephone.

• Strategic Transaction Period (2000-present): Schwab defined a new market at the period. Schwab found that customers needed and wanted more advice than could be provide by Schwab’s branch office consultants. Through the acquisition of U.S. Trust, by 2001 Schwab had captured top honors as both a discount and full-service broker. Strength was that Schwab served three major segments of financial services industry - individual investors, institutional investors, and capital markets. The weakness was the unsustainable of financial performance. From 2000 to 2001, Schwab’s revenue had decreased by approximately 25 percent.

2. What is the situation facing David Pottruck and Charles Schwab, co-CEOs of Charles Schwab, in 2002?

Even if Schwab was successful in creating a seamless, integrated multichannel offiering, it would still face massive organization changes to develop the capabilities and culture required to implement its new business model. Many believed that the company had proven itself capable of reinvesting itself and industry. But the shift to its new business model came at a time when Schwab’s core discount brokerage business was in sharp decline, leaving few resources available for innovation.

3. What problems does the new strategy solve? What opportunities does it create? Does the strategy create any new problems for Schwab?

The new strategy was designed to meet the needs of Schwab’s evolving customer base, which now included its traditional discount broker clients along with both emerging affluent and high-net-worth investors with over $500,000 to invest. The services was targeted toward validators, who wished to manage