TD WATERHOUSE DISCOUNT BROKERAGE: A COMPETITIVE STRATEGY by Catherine Dangerfield B.F.A, York University, 1990 PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION In the Faculty of Business Administration © Catherine Dangerfield 2007 SIMON FRASER UNIVERSITY Summer 2007 All rights reserved. This work may not be reproduced in whole or in part, by photocopy or other means, without permission of the author. APPROVAL Name: Catherine Dangerfield Degree: Master of Business Administration Title of Thesis: TD Waterhouse Discount Brokerage: A Competitive Strategy Supervisory Committee: Dr. Mark Wexler Senior Supervisor Professor of Management Studies Segal Graduate School of Business Dr. Neil R. Abramson Second Reader Associate Professor of Strategy Segal Graduate School of Business Date Defended/Approved: £l1;:X.;;2 .O=' ii SIMON FRASER UNIVERSITY LIBRARY Declaration of Partial Copyright Licence The author, whose copyright is declared on the title page of this work, has granted to Simon Fraser University the right to lend this thesis, project or extended essay to users of the Simon Fraser University Library, and to make partial or single copies only for such users or in response to a request from the library of any other university, or other educational institution, on its own behalf or for one of its users. The author has further granted permission to Simon Fraser University to keep or make a digital copy for use in its circulating collection (currently available to the public at the "Institutional Repository" link of the SFU Library website <www.lib.sfu.ca> at: <http://ir.lib.sfu.ca/handle/1892/112>)and,withoutchangingthecontent,to translate the thesis/project or extended essays, if technically possible, to any medium or format for the purpose of preservation of the digital work. The author has further agreed that permission for multiple copying of this work for scholarly purposes may be granted by either the author or the Dean of Graduate Studies. It is understood that copying or publication of this work for financial gain shall not be allowed without the author's written permission. Permission for public performance, or limited permission for private scholarly use, of any multimedia materials forming part of this work, may have been granted by the author. This information may be found on the separately catalogued multimedia material and in the signed Partial Copyright Licence. While licensing SFU to permit the above uses, the author retains copyright in the thesis, project or extended essays, including the right to change the work for subsequent purposes, including editing and publishing the work in whole or in part, and licensing other parties, as the author may desire. The original Partial Copyright Licence attesting to these terms, and signed by this author, may be found in the original bound copy of this work, retained in the Simon Fraser University Archive. Simon Fraser University Library Burnaby, BC, Canada Revised: Summer 2007 SIMON l=nASER UNIVERSITY THINKING OF THE WORLD STATEMENT OF ETHICS APPROVAL The author, whose name appears on the title page of this work, has obtained, for the research described in this work, either: (a) Human research ethics approval from the Simon Fraser University Office of Research Ethics, . or (b) Advance approval of the animal care protocol from the University Animal Care Committee of Simon Fraser University; or has conducted the research (c) as a co-investigator, in a research project approved in advance, or (d) as a member of a course approved in advance for minimal risk human research, by the Office of Research Ethics. A copy of the approval letter has been filed at the Theses Office of the University Library at the time of submission of this thesis or project. The original application for approval and letter of approval are filed with the relevant offices. Inquiries may be directed to those authorities. Bennett Library Simon Fraser University Burnaby, BC,Canada Lest revision: Summer 2007 ABSTRACT This paper provides a strategic analysis of TO Waterhouse (TOW), the discount brokerage provider within TO Bank Financial Group (TOBFG). Discount brokerage in Canada is an increasingly lucrative industry and contributes significantly to the bottom lines of every major financial institution in the country. It is also a rapidly changing and intensely price-competitive industry in which an explicit, educated business strategy is of the utmost importance. TOW currently employs a somewhat ambiguous, "mixed" strategy based on focus and low-cost. The company needs to clarify this approach if it hopes to remain competitive and profitable in the future. There are five clear strategic alternatives available to the firm. These fall into three categories: overall cost leadership, differentiation and focus. Industry and organizational analyses clearly demonstrate that the strategy best-suited to TOW with respect to its values and competitive strengths is one of differentiation through customer service. iii DEDICATION I would like to dedicate this paper to Paul, Amelia and Charlotte. Their unwavering support has taken many forms over the past two years and has inspired me to make them proud. iv ACKNOWLEDGEMENTS There are many people who have provided encouragement and support toward the attainment of my degree and the completion of this program. I would like to particularly thank Human Alghabi and Marvin Daley for their involvement throughout the process, their honest feedback and for providing access to critical information. My former DVP, Mike Pride for his constant interest and encouragement. My former managers, Barb Stangoe and Brenda Lowden, for their on-going advice and support. My current managers, David White and Amin Sunderji for providing a fostering environment to complete this program and their interest in my life outside of work. My colleagues; Jackie Crux, Greg Verret, Stephanie Castle, Lolita Lo, Devan Mitchell, Terry Tan and Julie Nash for picking up the slack whenever necessary and doing so without complaint. Cindy Dunn and Suzanne Poole, for being role models for the value of further education. My classmates and professors who provided an intellectually challenging and thoroughly enriching experience. Perhaps most importantly, my Summit team mates, Ric Arseneau, Jerry Chien and Martin Walker for demonstrating loyalty, mutual support and inspiration every day. v TABLE OF CONTENTS Approval ii Abstract iii Dedication iv Acknowledgements v TABLE OF CONTENTS vi LIST OF FIGURES viii LIS T OF TABLES viii Chapter 1: Introduction 1 Corporate History 3 Corporate Values 4 Customer Service 5 Technology 6 Sustained Growth 6 Corporate Vision 7 Organizational Structure 10 Wealth Management 11 Strategy for Wealth Management.. 12 Discount Brokerage at TD Waterhouse 13 Corporate Summary 14 Chapter 2: industry analysis 15 Financial Services Industry 15 The On-line Discount Brokerage Industry 16 Industry Attractiveness 16 Porter's (1997) Five Forces Analysis 17 Supplier Power 17 Buyer Power 19 Rivalry in the Industry 19 New Entrants 20 Substitutes 21 Summary of Competitive Forces 22 Key Success Factors 22 Price 23 Information Tech nology 24 Brand Recognition 26 Customer Service 27 Networks 27 Competition at Canadian Financial Institutions 29 Wealth Management at Canadian Financial Institutions 30 The Banks' Stated Strategies for the Wealth Segment and the Reality 32 Summary of Bank Wealth Analysis 35 Discount Brokerage Value: TD Waterhouse vs. National Bank 35 Assumptions 37 Commission Revenue 38 Industry Analysis Summary 40 vi Chapter 3: Internal analysis 42 Strategic Alternatives 42 Short and Long Term Risks 44 The Strategy-Resources Linkage 44 Financial Resources 45 Information Technology Resources 45 Human Resources 45 Organizational Resources 46 Management Preferences 48 Summary ofInternal Analysis 50 Chapter 4: the importance of pricing 51 Pricing WafS 51 The 'Virtual' Advantage 53 A Value Proposition 55 Chapter 5: Strategic Alternatives 58 Cost LeadefShip 59 Immediate 'No Fee' Trading 59 Gradual 'No Fee' Pricing 60 Differentiation 61 Leveraging 'Bricks and Mortar' 61 Customer Service 63 Focus 64 Decision Analysis Matrix 66 Chapter 6: STRATEGIC Recommendation 67 Implementing The New Strategy 68 References 71 Appendix 1: Value Matrix completed by Marvin Daley 76 Appendix 2: Value Matrix completed by Human Alghabi. 77 vii LIST OF FIGURES Figure 1: TDBFG Organizational Structure 10 Figure 2: TDBFG Wealth Management Organizational Structure 11 Figure 3: Wealth Management Channels: Spectrum of Brokerage Services 22 Figure 4: Assets Under Management Growth; 1998-2006 25 Figure 5: Commission Revenue: 2004-2007 .40 Figure 6: Organizational Structure of TO Waterhouse Discount Brokerage .47 Figure 7: Voice of the Discount Brokerage Customer .49 Figure 8: Discount Brokerage Value Matrix 56 LIST OF TABLES Table 1: Overall Revenue Derived from Wealth Segment.. 31 Table 2: Revenues from Wealth Management: 2004-2006 37 Table 3: Percentage of Revenue Derived from Discount Brokerage 38 Table 4: Pricing Comparison between Canadian Discount Brokers: Active Trader Segment 53 Table 5: Pricing Comparisons between Canadian Discount Brokers: Long Term Investors 54 viii CHAPTER 1: INTRODUCTION Over the past twenty years there has been unprecedented growth in the number of people investing for themselves and doing so through the Internet. The intermediaries that facilitate this process are called discount brokerage firms. These are distinguished from full-service brokerage