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DLJdirect. internet. business models. text and cases. Donatas Sumyla. Content. Overview of the company; Goals & strategies; Competitors; Primary stakeholders; GBF;. Overview of the Company. DLJdirect is an online brokerage company;

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slide1

DLJdirect

internet

business models

text and cases

Donatas Sumyla

content
Content
  • Overview of the company;
  • Goals & strategies;
  • Competitors;
  • Primary stakeholders;
  • GBF;
overview of the company
Overview of the Company
  • DLJdirect is an online brokerage company;
  • Blake Darcy is the CEO;
  • Trade 4% of online brokerage trades;
  • High profile deals led by DLJ include Fleet’s $16 billion acquisition of BankBoston, Olivetti’s $65 billion hostile takeover of Telecom Italia, TCI’s $69 billion merger with AT&T;
some history
Some history
  • Donaldson, Lufkin & Jenrette, Inc. was founded in 1959;
  • Initially a boutique investment bank known for outstanding institutional equity research;
  • Went public in 1995;
  • At year-end 1998 DLJ was 72% owned by French insurance giant AXA;
goals strategies
Goals & Strategies
  • The goal was to attract affluent, self-directed investors who would value access to DLJ’s equity research and to IPOs underwritten by the parent company’s investment bank.
over company s goals
? Over company’s goals

Such customers were highly profitable, yet Darcy wondered if this target market was too narrow. Was the company forfeiting opportunity by not aggressively pursuing day traders and/or less affluent mainstream investors?

earlier strategies
Earlier Strategies
  • DLJ pursued an aggressive strategy to break into the “bulge bracket” of leading Wall Street firms during 1990s.
  • Also accelerated the expansion of its investment banking ad trading operations into international markets;
  • During the second half of the 1990s, DLJ’s Banking Group continued to serve smaller companies in need of high-margin equity and debt financing and merger advice, but gradually broadened its client base to include larger corporations.
earlier strategies1
Earlier Strategies
  • These strategies resulted in:
    • Significant growth in revenues, profitability, and shareholder value;
    • For fiscal 1998, the company’s net revenues were $4.0 billion and net profits were $370 million;
    • By mid-1999, the market value of the firm’s equity was worth nearly $9 billion;
    • As of June 1999, DLJ was ranked #1 underwriter of U.S. high-yield debt issues.
pershing division
Pershing Division
  • In 1977, DLJ, Inc. diversified into securities clearing business through the acquisition of Pershing & Co.
  • Clearing agents provided a range of trading and “back office” processing services that allowed their clients to complete customers’ transactions;
  • By year-end 1998, Pershing served over 550 correspondents with a total of 2.5 million customers and account balances of $ 279 billion;
  • It was a significant profit generator for DLJ;
entering the online brokerage business
Entering the Online Brokerage Business
  • Prodigy was a mass market online service created during mid-1980s by a joint venture between IBM and Sears;
  • Prodigy’s managers decided to offer an exclusive online discount brokerage service and approached established brokerage companies for help in creating the service;
  • Nobody was interested, except Pershing;
entering the online brokerage business1
Entering the Online Brokerage Business
  • Why Pershing?:
    • It was consistent with its entrepreneurial corporate culture;
    • Every year the division launched a few new businesses to serve the rapidly evolving needs of its correspondents;
    • Pershing had successfully confronted channel conflicts before;
entering the online brokerage business2
Entering the Online Brokerage Business
  • The new venture was named PC Financial Network, avoiding an obvious brand affiliation with either Pershing or DLJ;
  • The management could experiment with business strategy;
  • PCFN offered discounted commission rates;
  • Had minimal marketing and customer acquisition costs;
  • Relied on e-mails to existing Prodigy customers;
entering the online brokerage business3
Entering the Online Brokerage Business
  • Despite PCFN success, the new unit struggled inside Pershing to secure resources to build the data processing systems required to support its growth;
  • Management decided to abandon the Prodigy exclusivity model and pursue a multiple-channel distribution strategy instead (partnership with AOL).
pcfn becomes dljdirect
PCFN becomes DLJdirect
  • PCFN was pressured by competitors’ lower commission rates;
  • Another source of pressure came from its parent company;
  • If PCFN to became DLJdirect, they would have the access to the parent company’s research and to IPOs underwritten by its investment bank;
dljdirect
DLJdirect
  • DLJdirect’s management decided to lower its commission rates to $20;
  • Temporary revenue slippage in 1997, but by 1998 commission revenues increased by 55% over 1997, active accounts grew by 46%, and total transaction volumes rose by 84%;
  • The next challenge:
    • How to respond to its competitors’ marketing campaigns?
    • Darcy felt that DLJdirect had to increase its commitment to marketing and customer acquisition efforts in order to prevent further market share erosion;
dljdirect1
DLJdirect
  • DLJdirect lacked its competitors’ spending power;
  • Options:
    • Sell its online brokerage business, and let someone else fund its growth;
    • It could be separated completely from the parent company through a spin-off or the parent could retain management control and partial equity ownership of the online brokerage through a separately valued tracking stock;
dljdirect2
DLJdirect
  • After weighing all the concerns, DLJ management decided to proceed with a tracking stock IPO, with DLJ, Inc. retaining 84% of DLJdirect’s equity;
  • The tracking stock was issued in May 1999 at $20, valuing the online unit at $2 billion;
online brokerage industry
Online Brokerage Industry
  • Mostly technologically-savvy, aggressive investors;
  • Held multiple accounts with different brokerages;
  • A tremendous growth in the online brokerage business was based on few factors:
    • Falling computer prices;
    • Development of faster modems that made timely online trading possible;
    • Growing acceptance of the Internet as a legitimate channel for retail purchases;
    • Financial services were well suited for the Internet;
customer segmentation
Customer segmentation
  • Retirement by the Book (RBB)
    • Moderate risk tolerance, looking to invest for a comfortable retirement;
    • Interested in reliable trade execution, user-friendly interfaces, and variety of financial offerings;
  • Portfolio Cruise Control (PCC)
    • Average total assets of over $350,000;
    • Most wealthy and oldest customer segment;
    • The most important feature was advice and quality information;
customer segmentation1
Customer segmentation
  • Aggresively Affluent (AA)
    • The most common segment among Internet investors in the late 1990s;
    • High-net worth individuals who traded more than 10 times a year;
    • AAs sought timely execution and low trading commission fees, and typically were willing to pay a modest premium for consistent high-quality service;
  • Get Rich Fast (GFF)
    • “Day traders”;
    • The most visible clients of online brokers;
    • Young individuals with modest net worth;
    • Made frequent, small trades in the hopes of accumulated gains related to minute-by-minute fluctuations in stock prices;
competitors
Competitors
  • Schwab;
  • E*Trade;
  • Fidelity;
  • Merrill Lynch;
  • Datek;
  • Schwab and E*Trade were dominant competitors in the online brokerage industry. Spending heavily on marketing and customer acquisition. Result: strong brands, controlled over 40% of the market between them (1999).
dljdirect s operations
DLJdirect’s Operations
  • Customer focus;
  • Web site and client offerings;
  • Marketing strategy;
  • Clearing and customer service operations;
customer focus
Customer focus
  • Focused on customer acquisition efforts;
  • Targeted self-directed, sophisticated online investors, who on average have higher account balances than other investors;
  • Specifically sought customers in the “Aggressively Affluent” segment; they were more likely to buy large blocks of stock, trade of margin, and own a diverse array of financial investments;
  • Many of them were customers of DLJdirect’s competitors, seeking to move to a higher end online broker;
web site and client offerings
Web site and client offerings
  • Web site contained the full range of information and transactional services that online investors had come to expect from the industry;
  • The site offered free access to news feeds and stock quotes and portfolio tracking services that provided alerts when share prices moved outside of a specified range;
  • The only brokerage firm to offer new customers the ability to apply online and begin trading immediately without forwarding cash to cover initial investment;
  • DLJdirect’s customers who maintained asset balances in excess of $100,000 had access to DLJ research;
  • DLJdirect provided tiered service levels for accounts with high asset balances;
  • DLJdirect was ranked near the top of the industry in terms of speed of execution;
marketing strategy
Marketing strategy
  • Pursued high end customers with a variety of marketing slogans;
  • In 1997 $13 million spent on marketing – 19% of total revenue;
  • 1998 increased marketing budget to $25 million;
  • In 1999 DLJdirect planned to spend $65 million on marketing;
  • 30% of the budget was spent online, including $12.5 million per year for a two year distribution deal with AOL that featured DLJdirect as one of four online brokers within AOL’s proprietary service;
clearing and customer service operations
Clearing and customer service operations
  • DLJdirect had a partnership with Pershing;
  • It was beneficial because it reduced the need to invest in technical support, personnel, and infrastructure;
  • It also benefited from order flow rebates from Pershing;
  • On the other hand this relationship was costly; DLJdirect was the only major online brokerage that didn’t clear its own trades;
  • Customer service was critical to company’s high end customers;
  • Telephone support was provided 24/7, free of charge;
primary stakeholders
Primary Stakeholders
  • Customers;
  • Businesses;
slide28
GBF
  • Network effects
    • Medium to Strong;
    • They were focusing on client exclusivity;
  • Economies of scale
    • Strong;
    • Costs are fixed;
  • Customer retention rates
    • “Stickiness” is important;
    • High CR rates;
success or failure
Success or Failure?
  • A big question mark ?.
  • It depends on many factors:
    • Marketing strategy;
    • Network effects implementation;
    • Customer retention rates;
  • Latest update:
    • DLJdirect as acquired by TD Waterhouse. The web site is no longer available;