Corporate Strategy: Merrill Lynch Pt. 1

Executive Summary (JC)

Why would Merrill Lynch risk damaging its key unique resource to restructure its customer interface?

Internet Business to Business (B2B) commerce was nearly non-existent before 1995.  Total sales of B2B commerce grew dramatically between 1995 to 1999 to over $110 Billion in 1999.  It was estimated that by 2003 over 90% of US Businesses would make purchases on the Internet and that the B2B would several fold larger than the Business to consumer (B2C) market (BW 2000).

Firms who embraced strategic online ventures in the early years were able to realize substantial economic gains. An example is strategic move is portrayed by Charles Schwab in 1997, who offered a flat fee of $ 29.95 per trade (see Exhibit).  This bold move gave a rapid growth for Schwab and allowed them to surpass the market capitalization of Merrill Lynch by 1998 (see Exhibit), despite having a much lower value of total assets (1.5 Trillion versus 500Billion).

Throughout the mid 1990’s, Merrill Lynch did not behave as if the internet market would be a large potential growth for their business strategy.  It may well be Merrill Lynch did not believe clients would leave their full service approach for an internet-only trading firm.  The Chairman of Merrill Lynch “did not see Merrill Lynch competing with online traders and discount broker (David Komasky).”  Their rather conspicuous absence from this initial period suggests they either grossly underestimated the magnitude of the internet market or that they had additional considerations.

In order to better understand Merrill Lynch’s apparent reluctance, it is important to understand their unique resources and how fragile they are to change.halden zimmermannhalden zimmermann

The catalyst which initiated the Merrill Lynch team to review changing their strategy for customer interfaces was directly related to the changing industry environment.  The explosive growth of the NYSE and NASDAQ gave rise to notion that even the most novice of investors could profit in trading without costly advice or service.  Perhaps even more important, there was increased competition for the more profitable affluent customer base (i.e., “trade up to Schwab” campaign) traditionally coveted by Merrill Lynch.  These customers also possess the highest opportunity costs given their “affluent” financial status and, thus may be inherently attracted to the availability of time saving online options.  The Porter 5 forces chart (Exhibit 1) details further the threats to Merrill Lynch’s market position.

It follows then that Merrill Lynch would be willing to take a risk in restructuring its customer base given the combination of their unique resources and threats they are faced. Given the importance of the affluent customer base to Merrill Lynch’s success, one could easily conclude that failure to initiate an online strategy would have eventually risked damaging its key unique resources more than implementing such a strategy would have.

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