HISTORY AND INTRODUCTION *

Overview of Industry *

DEFINITION OF THE PROBLEM *

ANALYSIS OF THE CURRENT PROCESSES *

SWOT ANALYSIS *

SUGGESTED STRATEGY *

References *

In 1885, an investment firm by the name of Burrill and Housman was founded. This firm was then renamed as Merrill Lynch & Company by Mr. Charles E. Merrill, in 1914. Come 1999 and Merrill Lynch is one of the leading brokerage firms in the world. Currently it is lead by Mr. David H. Komansky who is the Chairman of the Board and the Chief Executive Officer. Merrill Lynch has about 15,000 brokers through out the United States alone. Today, it has grown to become one of the world’s leading diversified financial services companies. The basic principle of Merrill Lynch is "The interests of our customers must come first". The company has always set a standard for developing financial consultants in a range of financial disciplines by providing them with on-going training and state-of-the-art systems and technical support.

The following aspects of the company can give us an overview of the size of the mammoth organization:

• Spends 150 million dollars a year on research
• A total client assets of more than $1 trillion
• Employs approximately 63,800 employees, worldwide
• Annual sales of 1997 numbered $31,731 million, with net revenues of $16,256 million.
• Net Earnings in 1998 were $1,259 million
• The mean account at Merrill Lynch is more than $600,000 with a median of $300,000 making 6 trades annually on average (Steffens, 1998).

Considering the above factors, Merrill Lynch is the undisputed leader in planning-based financial advice and management for individuals and small businesses. As an investment bank, it has been the top global underwriter of debt and equity securities eight years running and a leading strategic advisor to corporations, governments, institutions and individuals worldwide. Merrill Lynch is a leading global financial management and advisory company with a presence in 43 countries across six continents. It serves the needs of both individual and institutional clients with a diverse range of financial services.

Merrill Lynch is organized into four business groups. They are the Corporate and Institutional Group, the Asset Management Group, the US Private Client Group and the International Private Client group.

This group accounted for about 40% of net revenue in 1997 (Smith, 1998). Here corporations, large institutions and governments worldwide receive financing, trading and strategic advisory services.

7% of net revenues in 1997, came from the asset management group (Smith, 1998). This group provides one of the widest arrays of ITMs and other investments services available from any company. It is one of the world’s largest investment managers.

This is the largest group, which accounted for 45% of net revenues in 1997 (Smith, 1998), and its consultant in their 700 US offices have relationship with more than 4 million households. The financial consultants provide all sorts of financial related tasks, ranging from planning and cash management to loan and trust accounts. One main goal of the consultants is to guide their client through the information overload that exists in the market.

This group provided for only 6% of net revenues in 1997 (Smith, 1998), but this group is thought to grow heavily in the future. Deregulation and opening of financial markets worldwide represent great opportunities.

The financial brokerage industry ranges from retail brokerage, cash management, investing bank to retail banking, to firm who provide services in merger and acquisition, insurance service and clearing services. Currently, Merrill Lynch ranks number one in the industry in dollar volume and its share of the entire market. According to hoovers.com, the following are the current rankings, based on dollar volume and market shares in the financial services industry:

The Internet has changed how investment professionals work: how they research investments; how they search for information; and how they buy and sell stocks. Today, traditional retail brokerage, which employ thousands of retail brokers and account executives face a strategic dilemma as the Internet transforms the retail investment market. Some believe that the full service brokerage industry will be force to enter a period of "creative destruction" embracing the internet, even though it will mean reduced fees, in order to leverage their brand and their ability to provide advice and accumulated assets. Most big brokerages are planning to offer existing clients Internet trading as part of a package which includes advice, rather than a separate, cheap Internet trading service. The information available on the Internet today for investment professionals is vast and growing by leaps and bounds every day. Some of the brokers offering online trading are:

Investors are increasingly turning to online and internet services to do business. According to Forrester Research about 3.4 million American have active on-line stock trading accounts and their number is expected to grow to more than eight times by the year 2001. Online trading has made investing easy, fast and inexpensive. While a full-service broker might charge $100 for buying 200 shares of a stock, for example, an on-line broker changes only about $20.

A couple of years back, few would have thought that more than five million Americans would have set up their own on-line trading account, making the on-line trading business one of the fastest growing businesses in America. The traditional stock trading procedure used to be exclusive and expensive, a fast paced, high service business targeted at wealthy and educated people. Today, as Internet based brokerages offer low-price access to the stock markets, new segments has emerged, utilizing the opportunity to try their luck on Wall Street. Is this a prime example of a latent demand in inexpensive stock trading, finally matched on the supply side as Internet technology evolved? Or is it perhaps just a short term phenomena, nurtured by general Internet hype and inflated prices on Internet stocks? Several factors suggest the latter might be the case here.

The price of Internet related stocks have grown very rapidly the last few years, not so much due to impressive present earnings, but with an extremely high P/E ratio justified by the expectation of enormous future earnings. To put it bluntly, the financial jargon has been complemented with a new concept, the Internet price model, meaning that if a company is considered an Internet business, and its value should be at least increased tenfold. New and small Internet-based companies emerge continuously, and with their stock prices being highly volatile, the outlook of fast earnings has boosted the interest of risk-taking investors (Tower Group, 1998). The stock market is generally rather unpredictable in its nature, but in a long-term perspective, the Internet stocks of today seem to be highly inflated, and the possibility of a crack, or at least a major negative price adjustment, seem reasonably likely within a five year period. In such a scenario, the effects on the trading volume and risk-evasiveness on the low-end consumers would probably be severe, as more would learn the concept of risk the hard way.

In addition, the concept of on-line trading available to low end consumers is new and fresh, and the brokerages themselves are subject to a lot of press and general Internet hype. Boosted by a battle of volume, aggressive marketing budgets adds to the overall perception of on-line trading as a necessity for the trendy consumer. The element of freshness and "fun-factor" might be significant additions to the popularity of on-line trading and as the business and overall concept matures and evolves, the general interest will naturally decrease.

The online brokerages currently account for about 15-30% of all US stock trades, depending on definitions used. More than 5 million investors trade online, and analysts expect that number to almost double in 1999 (Bicknell, 1998). The number of online-brokers in the US is rapidly increasing and at present the number is more than 120 (Warner 1998; http://www.gomez.com). James Marks a Credit Suisse First Boston analysts has taken an in-depth study of the Charles Scwhabs on-line brokerage business, and he says that most of the online-brokerages’ increased market-share will be stolen from the full-service, full-commission brokers (Weisul, 1997). A Yankee Group Study found that while 40% of bank customer felt loyalty to their bank, only 12% of brokerage customers felt the same way (Penenberg, 1997).

Merrill Lynch’s senior vice president Maddy Weinstein state that ML have no intention of being in the discount online trading business (Marjanovic, 1999). Further, they will not alter the way their brokers conduct business, nor will their fees be restructured, according to a spokeswoman for Merrill Lynch (Penenberg, 1997). Vice Chairman and executive vice president US Private Client Group at Merrill Lynch, believes it’s not in the interest of their clients to jump on the discount online-brokerage bandwagon, the need for human advisers and relations will still be of great importance (Steffens, 1998).

The online-trading will most likely continue to be an alternative to the traditional brokering. The number of online-accounts has reached unexpected highs, and it is believed to grow even further. At the same time it has been shown that the on-line brokers gains market-shares on behalf of the traditional full-commission brokers. In addition there seems to be little loyalty among the customers. All this indicates that traditional brokerage-firms that still do not offer on-line trading should take the threat from this emerging new way of buying stocks, seriously. Merrill Lynch on the other hand has a different view on the on-line trading, being skeptic and very averse to jump on the "hype" as they call it. In this term paper we will take a closer look at the on-line trading from Merrill Lynch’s point of view, and present a strategy of how they should position themselves.

First part of the paper identifies the current situation in the on-line trading industry along with a more thorough introduction of Merrill Lynch and their strategy. The second part of the paper provides an analysis of the identified objects, followed by a strategy proposal for Merrill Lynch.

Investing in existing and new resources is an important aspect of Merrill Lynch’s strategy for growth. They intend to invest in their people, their technology and creating new products and services to meet the demands of their clients (Smith, 1998). Furthermore, Merrill Lynch opt for a long-term view of the securities markets and the global economy, and a similar long-term view in creating close relationship with their customers (Steffens, 1998).

When consulting a client in the investing process, Merrill Lynch follows a well-defined four-step process. First they define a development plan consisting of personal goals, risk assessment and the time horizon. Secondly they do a careful research, being the top rated researcher in the world (Investor Relations Business, 1998). Thirdly a sector selection will be determined, before the final stock selection will takes place. Although Steffens (1998) believe a single investor might manage these steps himself, he claims that Merrill Lynch’s ability to sort through information, engage close interpersonal relationships and provide time and attention will make Merrill Lynch, the better long-term choice.

Although Merrill Lynch has taken a rather conservative approach towards the Internet technology, they are represented through the Merrill Lynch Online site and askmerill.com. Early this year the firm also acquired D. E. Shaw & Co., part of a technologically savvy New York investment company that was hurt by recent downturns on international markets.

Merrill Lynch provides an Internet based service, called Merrill Lynch Online (MLOL) that offers its clients with a wide range of services. Clients might access account information, view statements, pay bills, read Merrill Lynch research, check stock, receive Email of interests, shop at Merrill Lynch’s eCommerce Merchant Center to mention some (Newswire, 1999). MLOL has more than 400.000 clients with total assets exceeding $320 billion. The on-line service is aimed at relative high-end groups, as the asset minimum is $100.000, the cost is significantly higher than most on-line competition.

Merrill Lynch has made its research freely available at http://askmerill.com (Newswire, 1999). Online participants that register can create their own watch list and pull up full research reports made by Merrill Lynch’s global research team. Presentations and discussions with analysts and industry leaders are other possibilities available.

In February this year Merrill Lynch announced an agreement to purchase the assets of D.E. Shaw & Co., a developer of Internet technology for financial institutions. The firm has been a pioneer in making real-time, online trading and sophisticated database applications. Merrill Lynch states this will give added value to their customers now offering the cutting edge technology along with human wisdom. It is not clear whether this will make the company an online-broker.

In the online trading as with the traditional trading there are different kinds of traders, ranging from the very active to the once in a lifetime trader. Using the definitions made by Gomez (Gomez, 1999), we categorize the traders into four groups:

Low cost trading and fast execution along with a simple interface is of most importance for this trader. The trading is so frequent that the trader won’t usually bother to re-enter their password on every order.

This trader makes use of a comprehensive package of financial products like stock trading, mutual funds, credit cards, bill payment and checking. Breadth of offerings and ease of use are most important to this customer.

Trading mutual funds for long-term growth and having tools for financial planning and portfolio optimization at hand are the interests of this trader. A stable financial service provider is more important than fast execution and latest research reports.

This investor is an active trader who wants high-quality information, investment tools, and research. Advice and help in deciding what to buy in combination with an easily accessible place are the main preferences of these investors.

In traditional trading, one gets no insights in the order book, showing what bids are in and at what volume. In online-trading investors are able to look at the order book, place a bid (through the broker’s computer) and see the changes in the order book. An investor gets information directly from the stock-system, and can easily place an order without any personal contact with a broker. This makes it easier to confirm the bids, whether they are executed and under what limitations they are given. Doing a trade over the phone makes all these factors more insecure, and the customer never knows what the broker actually do. In the traditional way of buying, the price is often unknown and the fees exceed the online trading prices fairly. Online trading opens for the customer to adjust his bids according to the actual price (getting real-time prices), making sure his orders are completed. By using a broker one is more secure to get the latest information and in further extend be explained the fluctuations in a certain stock (the broker sits on "inside" information, that’s not reached the market yet). Being online the customer is only able to watch and register the fluctuations in a stock, but he gets no information telling him if there is something special going on. By having a personal relation to a broker, chances for participation in equity expansions are higher, and at the same time the chances for information overload is minimized. Information received from a broker is personalized and more objective and shaded. In addition it is probably easier to execute an order through phone than online, both in to extend of computer accessories and intellectual knowledge required. The list below summarizes the pros and cons in the online versus traditional brokerage trading.

As briefly outlined earlier, we suggest that there are several distinguishable types of customers utilizing online trading systems in their financial transactions. The set of customer definitions applied by Gomez (1999), ranging from short-term hyperactive traders to long-term investors, shows that there are on-line services available for most segments. The growth of on-line trading has been impressive over the last two-three years, and prognosis suggests that the growth will be even higher this year. Finding out just who these customers are, represent an important challenge for vendors in this business.

The typical Merrill Lynch client (private clients division) averages assets of $600.000 and conducts an average of 6 trades a year. In contrast, the average on-line trader’s portfolio is only $30.000 and number of trades are 32 a year (Steffens, 1998). The numbers seem to vary from source to source, but most seem to agree on the average pattern of on-line traders investing less money, but trading more often. Other numbers, such as overall number of account holders and overall assets also support these claims. The on-line traders account for somewhere about 15-30% of the total trades on a daily basis, but on-line trading accounts only represents about 7,5% of all US-based brokerage accounts (Tower Group, 1998). The on-line traders represent a total portfolio of about $450 billion, whereas the Private Client division of Merrill Lynch alone has a portfolio of $1,500 billion (ML Corporate Overview, 1998). In general, on-line portfolios account for only a small part of the total market, but on-line trades account for a major part of total trade volume.

According to some reviews and analysis, the customer base is gradually changing. But even though more "serious" long-term investors are setting up on-line accounts, the main characteristic of an on-line trader is still focus on short term, low assets but high trading frequency.

As previously indicated, the main group of on-line traders aren’t primarily the old full-service customers looking for lower costs. New customer segments seem to be attracted by the concept of low costs and convenient use in on-line trading. Most brokerages tend to be somewhat disclosed when it comes to valuable customer demographics information. However, a 1997 study of the on-line brokerage e.Schwab, a division of the bigger Schwab company, revealed that about half of the customers came from other Schwab accounts, whereas the other half consisted of new customers exclusively (Weisul, 1997).

One might find a fitting analogy in the price reduction that took place in the airline industry some year’s back. As prices were considerably lowered, the regular customers didn’t fly correspondingly more, but rather, new customers emerged, consisting of people who used to take the car/bus/train or just stay home. Back to the on-line brokerage industry, one must remember that with the high trading frequency and relatively low assets of the average on-line trader, savings would be substantial compared to the traditional full-service offers. As a reminder of the costs, a traditional stock trade would be in the range of $100 to $300, whereas the new on-line discount brokers typically charge $6-30 a trade.

The high volume on-line brokerages are mainly competing on price. The prices are constantly being lowered, as it seems growth is the number one priority by many brokerages. Short-term profits are to a certain degree sacrificed in the pursuit of future position, in terms of volume and customer bases. The competition is generally fierce, with over 120 on-line brokerages trying to find the right combination of features, services and costs.

Thus as far as on-line trading goes there are two main groups of customers:

1. New price-sensitive people

• Relatively new to stock trading
• Low assets, high trading frequency
• High hype- and fun-factor
• Preferring low price to full service
• Signs up with discount brokerages

1. Traditional traders

• Willing to pay for premium service
• High assets, and average trading frequency

• Usually with long term perspective on investments

• Signs up with brokerages offering the best mix of service and cost and more so reluctant to change provider (loyalty).
• Either experienced trader or non-interested investor (mutual funds pension plans etc.)

The first group is the most visible in terms of media coverage, and the low price, frequent trader has become somewhat of a public icon of on-line trading. The second group represent the traditional players in the stock market, who utilize on-line systems out of cost and/or convenience, but basically sticks with the conservative investment strategy of yesterday. There are several players acting as Internet enhanced traditional brokerages, including among others Merrill Lynch and Schwab.

This twofold definition of customer segmentation is obviously somewhat simplified, as there are plenty of possible and useful labels to put on customers in-between the two groups. A key component to this point of view is that can isolate the new low-price traders, which seems necessary in order to perform a meaningful customer analysis.

Customers are predicted to move between our two main groups, most strongly so from high service, high price offerings to low cost, low service brokerages. Some also suggest the traditional perception of service level will be challenged, as investment information is becoming cheaper/free on the Internet, meaning the customer will have less incentive to pay for premium analysis. In terms of Merrill Lynch market position, the ABN Amro analyst Scott Appleby (1998) suggested: "Once people are on the Internet and they get information like this and pay a lot less for it, Merrill Lynch is not going to lose every client, but it’s going to lose clients".

The evolution, or rather revolution, of how discount on-line brokerages have changed the offerings in the market, can be illustrated like this:

Strengths

Brand recognition: Merrill Lynch has a very strong national brand recognition, it is higher than most of its competitors.

Resources and size: In 1998 Merrill Lynch had revenues of $36 billion and earnings of $1.3 billion. In regard to Internet trading, compared to a vast majority of Internet brokerage companies, Merrill Lynch can invest much more resources into their web site and build a much more sophisticated e-commerce infrastructure.

Expertise: Being a more than 100 years old financial services company, which now offers an extremely broad variety of services, Merrill Lynch as a company has a lot of expertise built up in most of the financial investment areas. The brokers and financial analysts and advisers are highly trained and have access to vast amounts of research and analysis information.

Established International Presence: Merrill Lynch has presence in 45 countries, and has expertise and experience with international finance.

Low Market Capitalization: Merrill Lynch’s market value is relatively low. It is number 10 after Morgan Stanley Dean Witter, Credit Suisse Group, and Charles Schwab. Merrill’s market capitalization is $33 billion which is $2 billion lower than Schwab’s, even though Schwab has much lower revenues, net income, and capital than Merrill Lynch.

Resistance to Internet Trading: Merrill Lynch has been quite slow in incorporating Internet trading into their strategy fearing that alienation of their army of brokers for whom high commissions represent a very lucrative source of income. The Vice Chairman of the retail brokerage division John (Launny) Steffens has been very disapproving of the Internet trading so far. Since he is a former broker himself, it is apparent that he wants to preserve the interests of his brokers, but the time lost will cost Merrill Lynch some portion of the market share.

Lack of Presence in the Internet-related Stock Offerings: It seems that the technology and Internet related companies are the future of the information economy; Merrill Lynch, however, has not taken advantage of this by leading the securities offerings of such companies. According to Data Securities, Merrill was ranked 11^th in Internet related stock offerings. In the past three years they raised only $50 million as compared to Goldman’s $775 million.

High Commissions for Trading: The commissions Merrill Lynch charges are much higher than majority of its competitors, especially on-line brokers. If Merrill’s client calls his broker, he can pay $400 for 500 shares of $50 stock as compared to $30 dollars by doing it at Charles Schwab’s web site. Even now, when some of the Merrill’s clients can trade on the Merrill Lynch OnLine the prices can be several times higher than the prices of Schwab or E-Trade. This can turn away a large number of price conscious clients who want to trade frequently themselves without much advice.

Being a Follower, not a Leader: Until very recently Merrill Lynch had a reputation of being an innovator and a leader, but in the last couple of years they are turning more into a follower. Charles Merrill brought to life his quite innovative idea of "bringing Wall Street to Main Street." Under Donald Regan, Merrill Lynch first introduced the concept of Cash Management Account, which was followed by other firms in one form or another. The last several years, however, Merrill Lynch has not been performing well in many areas. For example, their equity funds have greatly underperformed S&P 500, and their mutual funds market has gone down from 10% to 4%.

Low Morale and Fears Among Brokers: The low morale among the brokers is caused by two reasons. First, the e-trade shows that the broker is not necessary to perform basic trades, and that will cause brokers loose their high commissions. Second, the Merrill Lynch brokers’ conservative advise has underestimated the booming index funds and Internet stocks, which makes their clients quite unhappy.

Mergers: A deal with Chase Manhattan bank is being investigated. Chase’s market capitalization is $74 billion, which is more than twice Merrill’s $32 billion. The merger would be beneficial to Merrill in many respects, including increasing the market value by more than just the sum of Merrill’s and Chase’s caps, and also getting access to millions of new customers of Chase credit cards, mortgages, and auto loans.

Embracing Internet: Internet has always provided an opportunity for growth and expansion, be it brokering or anything else. Merrill Lynch has recognized this opportunity but has not made the optimal use of the same. Being the largest brokering firm in the world Merrill Lynch should "embrace the internet with open arms". It should leverage its brand image and optimize the use of the Internet in order to expand its business.

Customer Service: Merrill Lynch does provide on-line trading to its customers, but not to the the vast majority of its five million "retail," or small-investors. By using the internet in a proper manner and developing a sound strategy Merrill Lynch can tap these consumers by providing on-line srevices, before losing them to competeitors like E*Trade.

Partnership with MIT: Merrill Lynch and the Massachusetts Institute of Technology (MIT) announced a ive-year agreement to create and run a "financial engineering" curriculum at the university. Merrill Lynch contributed $15 million to fund joint research projects in financial engineering, technology, and management. Merrill Lynch also plans to donate $5 million to establish a new minor in financial technology at the graduate level. Such alliances would help Merrill Lynch to maintain the brand image it has developed and increase the window of opportunity as the customers would relate the organization with the Ivy League schools.

Internet Trading: The explosion of online trading on the Internet is the most serious threat to the Merrill Lynch’s business model. In fact, it is changing the underlying structure of the whole full-service brokerage industry. The success of Merrill Lynch was based on its founder’s idea to "bring Wall Street to Main Street". Now, the Internet is changing this business model by" putting Wall Street into the Pentium laptop of a retiree sitting in his easy chair on Main Street". (Schifrin and Brown 114) In economic sense, it translates into substantial cost savings for the consumers, who now can now execute trades online themselves while paying much lower price for it, rather than pay high commissions to a live broker. In addition to that, Internet opened up a large number of information sources that previously were available only to the full-service firms brokers. Even though the average online trader has lower income than that of an average Merrill Lynch’s customer, the rate of growth of online trading makes it obvious that Merrill Lynch will not be able to sustain its army of 15,000 brokers, if it does not do anything.

Year 2000 Deadline: Companies have to suspend any kind of major internal technological developments in anticipation of January 1^st 2000, because they must allow some time for testing. In general six months should be the minimum safe testing time, which means that if Merrill Lynch doesn’t implement the web site with all the major features, it will have to wait until Spring 2000. Additionally, whatever they implement now must be Year 2000 compliant.

Sex Discrimination Law Suit: On March 2^nd, 940 female Merrill Lynch brokers and ex-brokers filed a sex discrimination law suit. Merrill Lynch has its reputation at stake, especially if they win, as well as possible damages that they might have to pay out.

The above analysis argues that the market of brokerages and investment advising could be conceptualized as an alignment of cost and service level. Merrill Lynch is currently focused on the high-end service level, standing forth as the world’s leading investment information and analysis firm. This is the core competence of Merrill Lynch, and it is profitable. Graphically, ML’s current position in the market could be illustrated like this:

The chart illustrates the different segments of the brokerage market, simplified into a cluster of discount traders at the low cost end, and ML as exclusively dedicated to high quality, high cost services.

As the analysis chapter suggested, the market is gradually changing, as the low cost brokerages are trying to erase the borderline between their limit market fragment and the high-end services. The discount brokerages are trying to conquer market shares from ML’s end of the market, in strive of further growth and profitability. The general market growth is also higher at the low-cost, low service segments, meaning that ML is missing out on a new customers and market segments.

If these conditions are applied to the model, ML’s position no longer appear as firm and prosperous:

The advantages of having substantial market presence in several segments, both high cost and low cost, are obvious. As customers change their preferences of services, it is convenient to be able to offer them differentiated services all over the line, as the alternative would be sending the customer off to a competitor. This is one of the important forces behind the expansion of the on-line brokerages. The advantages are obvious on the brokerage side as well, in accordance with classic principles of scale and effectiveness.

Additionally, as the crucial alignment of costs and services is a dynamic process, one need to be updated and fully functional at all times, or at least, capable of adjusting on very short notice. In a unpredictable and fast evolving market as the Internet, flexibility is a key to long term survival, and ML’s fixed and static position appear rather risky in that respect.

Also, as the on-line brokers move into ML’s core business, high quality advising and analysis, there are no guarantees that ML will prevail in that battle. To what degree ML’s reports really are perceived as superior or not, is difficult to judge, but the on-line brokers have a clear advantage in strong customer-bases consisting of new people. In order to win those customers over to the ML group, ML need not only be the best, but so much better that the customers actually feel obliged to jump the ML bandwagon. Keeping a customer is always easier than getting a new one.

Another disadvantage of staying solely in the high-end market, is the danger of suddenly selling products and services people do not find attractive at the given price. Even though ML currently is a profitable business, new low priced products have been known to stir up the traditional patterns of supply and demand. Analogies can be found in the Encyclopedia Britannica (EB) case, which product lost their market power as Microsoft released the cheaper, but also far lower quality, Encarta Encyclopedia. EB was eventually forced to dramatically lower their prices, and find new channels of distribution. Another example of similar market impact is the Amazon vs. Barnes & Noble story, where B&N is paying a high price for sticking to long with their traditional market concept. The lesson to be learned is clear: do not underestimate changing (price) preferences of customers. Ever. ML is currently lagging on the cost effectiveness aspect.

A quick summary of the above paragraphs suggests that ML is facing several serious threats. Their present strategy of remaining at their domain is risky, as its fundamental assumptions cannot be taken for granted in an Internet age of rapid change. Customers might look specifically for the benefit of dealing with brokers who can offer a wide range of services, from discount trading to high quality analysis. It is in a way guaranteed that ML will be perceived as having notably services, failing to justify the premium price. And finally, customers might prefer low-cost, low quality services to ML’s services. Some, or even most, of the new customers and markets trends, might be fueled by short-term hype, but the current market situation and evolution represents strategic dangers which should not be ignored.

As we would recommend that ML re-position themselves with a larger span of services, we must also consider the costs of such a move. As ML already is a brokerage service, they should have most of the infrastructure in place already. The difference is that unlike the on-line brokerages, ML doesn’t have a direct interface for the customer to reach the ML database and market maker, as they still rely heavily on telephone as the customers only and preferred means of communication. Also, ML does already offer some high-end on-line services, even though the price structure yields everything but discount broker. In summary, the costs should easily feasible for ML – the long-term price of not deploying such a system might break their backs, though.

The main problem with offering on-line, and preferably also reasonably low cost, trading, is that it contradicts and possibly even jeopardized the proud history and brand name of Merrill Lynch. However, there are options that would help preserve the Merrill Lynch name as a high-end analysis provider. Those options are setting up a joint venture, acquiring an on-line brokerage, or build strategic partnerships and alliances. However, these marketing side effects fade in comparison with the seriousness in the strategic threats of the Internet-age.

Merrill Lynch should try to expand its customer base by going on-line for the low-end customers. This would not only enable them to increase its low-end customer-base but also prevent the discount brokers from eating into their market share. Customer differentiation between the high-end customers and low-end customers should be on the basis of the services offered. By this we mean that Merrill Lynch must have a standard price of say $25 per trade for both the high-end and low end customers. This deal should include the basic services that offered by any other discount broker. Then, for the high-end consumers the site should contain services that are priced individually. To draw an analogy, the standard priced package of $25 per trade is like a Toyota that does not have any accessories attached to it. For each additional accessory the consumer is required to pay an additional amount. This is exactly that Merrill Lynch needs to do.

Additionally Merrill Lynch can also come up with some "all you can eat" package deals that would enable them to attract high-end consumers that would pay a one time annual fee and get all the services that they have to offer. However it would be very tricky to come up with a price for an annual membership. The reason being that this would also attract the low-end daily trader who does not have very high volumes but has a very large frequency of trades.

Merrill Lynch should be aggressive in their marketing efforts. There is a number of steps they we suggest they take to promote their Internet services.

1. They should expand their e-commerce initiative by signing up contracts with more merchants. Merrill Lynch is also in a good position to sign up contracts with major airlines, in order to offer their customers airline miles for shopping on Merrill Lynch Online. Such membership incentive programs will help build customer loyalty to their web site.
2. Merrill Lynch should develop alliances with web portals and search engines in order to promote awareness on the Internet of Merrill Lynch Online. Merrill Lynch has a strong reputation among people who need comprehensive financial management, but as our analysis showed, there are new markets opening up that can provide Merrill Lynch with lots of opportunities. Those new markets consist of people who are just starting trading stock and other financial instruments on the Internet. They already have an agreement with msn.com where a link to Merrill Lynch is located right in the middle of Personal Finance page. By signing more exclusive agreements with popular web portals and search engines, Merrill Lynch will gain market share in these markets.
3. Since Merrill Lynch is a global company and has a lot of expertise with international markets, they should definitely use that expertise and explore opportunities in the US ethnic markets by letting their customers view their site in different languages, for example Chinese or Spanish.
4. Merrill Lynch also needs to continue and expand its efforts to attract women investors. In the past, women were not considered valuable clients mostly because of their lower earning power. Now, however, more than 58 million women are working, earning over $1 trillion, so Merrill Lynch needs to adjust their Internet marketing strategy to address this new market.

As it was mentioned before, Merrill Lynch acquired D.E. Shaw Financial Technology, who is a specialist in real-time, online-trading technology. This acquisition cost Merrill Lynch $30 million, and provided them with 30 DESoFT engineers and database specialists. These people will be helping Merrill Lynch expanding and streamlining their Internet based operations. As reported by The Industry Standard magazine, "DESoFT's technology can handle a large volume of trades and can update customer accounts instantaneously, which will help Merrill Lynch offer customers a broad array of online trading options."

To add to this, we suggest they implement strong transaction and back office security. Currently, doing transactions with Merrill Lynch Online requires having a browser that support Secure Sockets Layer (SSL) protocol with 128 bit encryption. Personal account information is encrypted when transmitted over the Internet. Merrill Lynch is also seeking to obtain an export llicense for using 128 bit encryption outside US. Encryption, however, is not used for email.

Merrill Lynch Online currently has the following features:

• Market Commentary
• US Market Data
• Market Quotes
• ML100 Tech index fund
• Company Information
• Latest Research
• Featured Links, including links to Merrill Lynch Online. MLOL itself has site search feature, Merchant Center
• Products and Services
• Family Saving Center
• Tour of MLOL.
• Membership - Currently, one has to have an account with Merrill Lynch in order to enroll, and after one fills out an electronic form, he has to wait 7-10 business days to receive MLOL software and a user id. Password comes in a separate mailing.

We suggest that MLOL should add the following:

• Real time credit check, so that customers can start using their account as soon as they register.
• Instant updates to customer accounts and their buying power.
• Easy access to 24 hours 7 days a week customer service through telephone or email.
• Bill payment feature.
• Monthly statements sent to clients regularly for their record
• A memebership should not be a mandatory requirement for using MLOL as a trading vehicle
• Besides providind company quotes, MLOL should also provide a company capsule which would contain inmporatant information about a particular company. For example summary of financials, profitabilty analysis, future prospects etc.
• A message board would also enable the company to create virtual communities that would provide valuable insights into a particular industry
• Free software downloads related to personal financial planning.

Since Merril Lynch has already been on the Internet they would not have to incurr a substantial cost as far as the hardware and software requirements are concrened. However they would have to buy a few more servers because by entering into the low end customer segment they would have to handle a lot more hits per day. Considering the fact that on line brokering is growing at a very fast pace we assume that the revenues and net income of Merrill Lynch would increase at least by 15% in 1999 if they implemented the suggested strategy. However the classical 80-20 rule would apply here, where most of the revenue would be earned from the high end customers which are lower in number.

Based on the following information about online investors we expect Merrill Lynch’s online venture to highly contribute to Merrill Lynch’s success by a growth rate of 15% in 1999 and a 25% growth rate in 2000. Our proforma finanical statements will take in to consisteration the following:

• Only 17 online stock-trading firms existed at the start of 1997. Today, there are 120.
• Average income of an online investor: $78,300.
• Some 40% of online aficionados intend to use an Internet broker within the next 12 months.
• More people trade securities than purchase books, CDs or any other products online.
• By 2002, more than 20%of American households will invest electronically.
• Online trades accounted for 17% of total retail stock trades in 1997; this figure

will approach 30% in 1998.

• Average online trade commission during the first quarter of 1996: $52.89. Average commission during the last quarter of 1997: $15.95.

• MLOnline would approximately require about 50 employees. 50% will come from ML company.
• Downsize 20% of current ML brokers as it would not need as many brokers as it previously needed
• 80% of ML current low end trading business will be canabilized by ML online

Appleby, Scott, 1998. Referenced in the "Merrill Lynch Gets in the Game"-article in The Industry Standard", written by Warner Bernhard (see own reference).

Bicknell, Craig, 1998 Dec 22. "E-Brokers Enjoy their Run-up," Wired News, http://www.wired.com/news/news/business/story/16992.html

Gomez, 199x, http://www.gomez/finance/brokers/scorecard

Investor Relations Business, 1998 Nov 9, "Merrill Lynch is Tops", "Investor Relations Business".

Marjanovic, Steven, 1999 Feb 22, "Merrill Lynch buying Internet Savvy but says it won’t go discount route", "American Banker

Merrill Lynch Corporate Overview, 1998. http://www.ml.com/woml/ii_over/botover3.htm

Newswire 1999 Feb 19, "Merrill Lynch to purchase the technology of D.E. Shaw Financial Technology, A developer of Internet Systems for financial institutions", "PR Newswire"

Penenberg, Adam L, 1997 mar 4 "Merrill Lynch to Broker Stocks Online, "Wired News, http://www.wired.com/news/news/business/story/2373.html

Smith, Winthrop H jr., 1998 Apr 18, "Welcome to the family of Merrill Lynch", "Recent Executive Commentary", http://www.ml.com/commentary/ws041898.htm

Stefens John L, 1998 Oct 20, "A new investment paradigm for the digital age", "Recent Executive Commentary", http://www.ml.com/commentary/jls102098.htm

Tower Group, 1998. Referenced in the "Merrill Lynch Gets in the Game"-article in The Industry Standard", written by Warner Bernhard (see own reference).

Warner Bernhard, 1998 Feb 14, "Merrill Lynch Gets in the Game", "The industry standard", http://www.thestandard.net

Weisul, Kimberly, 1997 mar 10, "CSFB analysts breaks through Schwab’s secrecy over online growth", "The Investment Dealers’ Digest", Vol. 63 (10).

• Types of investment vehicles they offer. For example, not all brokers offer mutual fund trades online.
• Order execution speed and stability. Some broker's websites are impossible to access when the market is busy.
• Commission schedule. (Robert's Online Commissions Pricer)
• Money market account yields, margin rates.
• Free real-time quotes and/or research.
• Other perks: debit cards, check writing, etc.