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Executive Summary

ComSec is a Strategic Business Unit of the Commonwealth Bank of Australia (CBA) and are currently the largest stock trading broker operating in the Australian discount market.

However, their high market share is under attack from CBAs three major competitors and estimates suggest that without any action, ComSec¡¦s market share will drop from 4% to around 0% in the next three years.

If ComSec is to retain their high market share they need to differentiate themselves from their main competitors and discourage any overseas players that are considering entering the Australian market.

Write your Marketing - ComSec research paper

The current business position of ComSec and the rapidly expanding market size suggests that ComSec use aggressive external marketing strategies to preserve their high market share.

Suggestions of strategies include ComSec buying out a leading ¡¥full service¡¦ Australian brokerage and also forming strategic partnerships with European and Japanese traders.

This will enable ComSec to offer a full global service to Australia and overseas customers by creating access channels to and from all major global share markets and also gaining the capabilities and skills needed to operate in all segments of the stock trading market and not just the discount segment.

The new and higher quality services could then be offered to ComSec customers on a tiered fee paying basis as and when needed whilst still retaining the no frills discount trades.

Internally, ComSec have a need to promote the use of the on-line trading facility ahead of the telephone facility, so increasing the profit margins of the discount market.

Situation Analysis

Where are we now?

Commonwealth Securities Limited (ComSec) is a subsidiary of the CBA of Australia. They provide access to the investment markets of Australia, North America and Hong Kong by offering no frill discounted brokerage service to over 600,000 registered clients of which 150,000 use on-line services and 50,000 use telephone services.

Following the installation of ¡§straight through software¡¦ ComSec¡¦s internet trading is now a high quality service that should enable growth within this sector resulting in lower operating costs for ComSec.

Their market share is currently around 6.6% of all AXA share transactions and 4% of all ¡¥on-line¡¦ share transactions making them the No. 1 broker in terms of volume of transactions. However, their total dollar value of transactions is someway behind their full brokerage service competitors who tend to target high investment customers.

Since operations commenced in 15, ComSec have successfully segmented to market using a behavioural strategy to create a niche ¡¥discount brokerage market¡¦ aimed at lower value transactions that are typical of the many new customers entering the market today.

Most of these new customers are middle-income earners, holding relatively small amounts of stock, looking for long-term returns. This is in contrast to the share market drivers who tend to be looking for short-term returns with high volume multi trading and generally use the more expensive ¡¥full service¡¦ brokers.

It is the new and existing customers who use the discount brokers ComSec are currently targeting.

The market size can be measure in terms of Australian share ownership, which has increased from 7% of the population to 5% of the population over the last 10 years, or can be segmented into categories such as total sales in dollars via the internet, which is estimated to grow from 1 billion to billion dollars over the next ten years.

By applying the BCG matrix to the above information, it could be argued that ComSec is currently a ¡¥Star¡¦ for the CBA, as it enjoys high market share in a high industry growth market.

STAR ???

CASH COW DOG

In an attempt to generate more business from existing customers, ComSec are advising a safety strategy for investors of ¡¥diversification¡¦. Customers that follow this advice will split their existing stock holdings up amongst various industry shares so creating an increase in trades at ComSec.

Where are we headed?

Whilst diversification of share portfolio may lead to an initial business increase for ComSec, the strategy could backfire on them if the diversified portfolio under performs in relation to ComSec¡¦s competitor customer base portfolio¡¦s, which would result in a loss of credibility.

The increasing number of competitors entering the market is eating into ComSec¡¦s market share, which has dropped 7% in the last 1 months.

In an attempt to discourage new entrants to the market from overseas, ComSec instigated a price war aimed at making the market less attractive by lowering the profit margins. As a result of this price war, trade fees at ComSec have dropped from $50 per transaction in 15 to as low as $.5 today.

The advantage ComSec enjoy from such a strategy is that they are not reliant on profit alone for performance measurements. This is because ComSec¡¦s business strategy is aligned with the CBA¡¦s corporate strategy of growing their ¡¥on-line¡¦ banking and financial service businesses.

If ComSec can convince their customers to bank on-line with the CBA or take advantage of the banks other financial services then ComSec could be classed as a loss leader strategy for the CBA. Discouraging discount brokerage competitors from overseas will help ComSec to protect their market share giving exposure of CBA¡¦s other financial services to ComSec customers.

Whilst the price are was a strategy to discourage overseas brokers entering the Australian market, the main threat to ComSec¡¦s market share comes from Australia¡¦s other three major banks, Westpac, ANZ and NAB. All three belatedly set up a discount trading arm of the bank but are now providing an alternative to ComSec fro their own existing bank customers trading needs.

Some analysts have estimated that in a couple of years each of the big four Australia Banks will enjoy around 0% of on-line market share each. This would present a halving of ComSec¡¦s current market share.

Where should we be headed?

ComSec should be heading to retain a market share of around 40% in the next five years. This will not be possible unless they are able to attract new trading customers from three ¡¥other¡¦ Australia bank customer bases.

Since the average customer prefers to have all their financial activities placed under the one umbrella, the performance of the CBA in general will have a major influence on ComSec¡¦s ability to attract trading customers away from Westpac, NAB and ANZ banks. If the CBA can increase their customer¡¦s numbers, then ComSec should be in a position to benefit from these new customers trading needs.

This strategy can also work vice versa, where the ComSec business unit performs so well that it attracts customers from other bank to the CBA. It is therefore vital that the ComSec strategic plan becomes totally integrated with the CBA¡¦s corporate plan.

A possible re-organisation of the structure of the SBU¡¦s at the Commonwealth may be required to achieve such integration so that each SBU can more easily benefit from the services and capabilities of other SBU¡¦s. It is assumed that presently, ComSec performance measures are not related to other Commonwealth investment departments and as a result would not cross promote the other investment departments ahead of ComSec.

The superior performance that is needed to differentiate from competitors will only be achieved through such integration of investment options. This is something that ComSec should address with the senior executives of the CBA in the near future.

However, it is also clear that the ComSec brokerage needs to differentiate itself from other discount brokerages in order to achieve the wanted market share in the future.

This may include offering the present ¡¥no frill¡¦s trading choice, plus the option of other financial investment services such as financial reports and similar, right through to fully detailed company analysis that are currently provided by the top end brokerage organisations. Miller and Layton (000) class such a strategy as market segmentation by behavioural needs and this would result in ComSec offering investment and share market services to all investors and not just the discount trading market. This would be beneficial to ComSec if any customers became very successful and started trading large value quantities of stock and who normally move away from the discount broker to the more expensive ones such as Jancom or ITS Holdings.

Since ComSec have access to the Asian and North American markets, if should consider becoming a total global player and gain access to European and Japanese share markets. By providing access to these markets and also offering various levels of service, ComSec will be positioned to meet the needs of all stock market investors in Australia.

As the CBA has done, ComSec could then look at gaining access to customers in other countries such as America, Europe and the Asian markets and offer these clients a wider range of stock market services, so becoming a true global brokerage.

By following the above vision ComSec would be entering into new markets with old products, which according to Ansoff¡¦s matrix would need some market development strategies. This theory is supported by the GE model that identifies strong to medium market attractiveness couple with strong to average business positions should use investment strategies to grow the business.

SWOT ANALYSIS

STRENGHTS WEAKNESSES

„h High market share

„h Large financial backing from CB

„h ComSec brand name

„h ¡¥Straight through¡¦ software

„h ¡¥Voice broker¡¦ and WAP software

„h Low transaction fees

„h Not totally reliant on profits

„h Good innovator of new products and services

„h Offer access to diversified range of CBA products

„h The value of the Australian dollar for investing overseas „h Global market with access only to Australia customers

„h Lack of ¡¥in-depth¡¦ market analysis data available to clients

„h Customers expect the low trading prices

„h Low profit margins

„h Don¡¦t offer brokerage services to the non discount market

„h The value of the Australian dollar for overseas investors

„h No exposure or experience with overseas investors

OPPORTUNITIES THREATS

„h Rapid growth in market size through the increasing number of shareholders per capita

„h Move into European and Japanese share market trading

„h Increase the ration of on-line trading to telephone trading

„h Offer full range of financial services with the integration of other CBA SBU¡¦s

„h Target other segments of trading industry market

„h Increase profit margins

„h Increase Managed Fund trading businesses „h ¡¥Non share¡¦ investments

„h Downturn in economic climate

„h Increasing number of new entrants to the market

„h Decreasing market share

„h Decrease in profit margins

„h Stock market collapse

„h Existing customers moving to their own banks trading arm

„h Charles Schwab

„h The ¡¥other¡¦ big banks

„h Extremely successful customers likely to detract to full service stock market broker

Business Definition

ComSec is presently in the trading business but have identified a need to diversify and expand the business boundaries. To develop a business definition, let us examine

1. Customer needs

„h A accessible and quick way of trading

„h Financial analyst information

„h Access to overseas markets

„h A reliable technology service

„h Fund managed investments

„h Low trading prices

„h Various levels of service

. Customer Segments

„h Geographic Australian States / Overseas Countries

„h Behavioural Volume of Trades / Value of Trades

„h Demographically Financial standing / information required

. Value adding activities

„h Access to other financial services

„h Discounts based on trade volumes

„h Share tips / managed funds

„h Loans for share buying

From the above we can now formulate the

ComSec Mission Statement

We offer our customers easy and affordable access to global stock trading markets whilst giving them the option of long term secure investments and an ability to financially grow with the Company.

Problem Definition

Principle Problem

With forecast¡¦s suggesting a rapid growth in market size so attracting more entrants into the market, how do ComSec increase their customer numbers in order to maintain their current level of 40% market share?

Sub Problems

The sub-problems have been grouped as having either an internal or external focus.

INTERNAL EXTERNAL

„h How do ComSec increase the profit margin for discount trading?

„h How does ComSec persuade more customers to use ¡¥on-line¡¦ share dealing?

„h To what extent do ComSec further segment the stock market trading industry?

„h How does ComSec ensure that they and their customers benefit from all of the capabilities of the CBA and vice versa?

„h Can ComSec insure their business against a stock market collapse?

„h To what extent do ComSec diversify their product range that they offer or promote? „h How do ComSec meet the increased needs of current and potential customers?

„h How do ComSec differentiate themselves and attract customers from other financial institutions?

„h How do ComSec gain access to the European and Japanese trading markets?

„h How do ComSec gain access to potential customers outside of Australia?

„h How does ComSec gain the skills needed to serve `top end¡¦ share dealers?

Analysis and evaluation of Alternatives

Possible Options

1. Concentrate on retaining their existing customers ¡V this option would seem to be the most conservative available to ComSec. It would ensure that the business as it is today would have an opportunity to strengthen it¡¦s appeal to it¡¦s existing customer base and allow ComSec to concentrate on fund management and on-line trading so increasing their profit margins. However, it would also see a reduction in the current 4% market share that ComSec enjoy, allowing their competitors to gain market share and use this position to attack ComSec at a later date.

. Buy out an existing ¡¥high end¡¦ stock market brokerage company ¡V this would enable ComSec to gain access to ¡¥high end¡¦ traders, which may benefit the CBA by attracting these traders to use their services. It would also allow ComSec to gain the knowledge and capabilities of a high end trading brokerage, which would be beneficial in offering an alternative to no frills trading to present customers. This would help ComSec retain customers that may become high volume / value and successful market traders and who normally require more than a discount broker when dealing in the stock market. However, not only would this be an expensive strategy for ComSec, it would also put them at risk of losing touch with their core customers that operate at the discount end and would require careful and detailed organisational structures to be formulated.

. Set up strategic alliances with overseas brokerages ¡V if ComSec were to become truly global they not only need access to all overseas markets but they need to be accessible to overseas customers. ComSec could either buy into overseas global players or set up some strategic alliances with these same players. The second option would allow ComSec customers access to global markets and also enable overseas traders access into the Australia market through ComSec without the risk and cost involved in ¡¥buying¡¦ into a new market segment. There is a risk with this strategy in that ComSec¡¦s existing customers may prefer to deal in the European or Asian markets through these strategic partners so reducing trade volume with ComSec. The value of the Australia dollar would also have effect on whether customers dealt in the Australia or overseas markets.

4. Sell the ComSec business to an overseas discount brokerage ¡V this would enable the CBA to use the finances from the sale to boost other business operations. However, it would result in ComSec customers not having any affiliation with the CBA leading to a potential lack of customers.

5. Persuade CBA to restructure SBU¡¦s into cross functional business units allowing ComSec to offer fully diversified investment options ¡V this would allow ComSec to offer their customers alternatives to share trading investments. However, ComSec¡¦s core business is in share trading and the risk of such a strategy would be the loss of ComSec¡¦s core competence. It would be less risky and less complex if the CBA restructured their performance measures of various SBU¡¦s enabling ComSec¡¦s success to also be measured by the success of other investment units of the bank. This would allow the financial investment SBU¡¦s of the CBA to confidently cross promote the products and services of each other whilst still retaining their individual core competencies and business focus.

Recommendations

The recommendations are based upon evidence of the above information, which suggest that ComSec is a ¡¥Star¡¦ of the CBA in relation to the BCG matrix and therefore should consider using aggressive marketing strategies. This would then support the GE matrix theory, which indicates that ComSec should be using investment and growth strategies for their business.

Short term within a year

Target Market

Existing ComSec and CBA customers.

Marketing mix

Product ¡V more detailed stock market information. Stronger investment options linked to the share market such as ¡¥managed funds¡¦ and ¡¥share options¡¦.

Price ¡V create a ¡¥value¡¦ aspect of trading prices by adding benefits and services that discount traders may want to use for a fee.

Distribution ¡V invest in the technology that will enable a fail-safe way of ComSec customers to trade on line.

Promotion ¡V Campaign to gain customer confidence in on line trading and also the value component of the product aimed at existing customers. Strengthen the ComSec brand name by promoting Australia wide.

Actions

„h Buy out existing top end stock brokerage that would enable ComSec to have an alternative to discount trading possible offered with a tiered pricing strategy.

This would allow ComSec to segment the trading market so increasing its ability to serve customers operating in the various segments. Following this strategy will enable ComSec to retain customers who move up to a new market segment that they would lose if ComSec stayed in the discount market only.

It would also allow ComSec to differentiate themselves from existing discount traders who do not offer a facility to financially grow within the brokerage. Since financial growth is the aim of all stack traders, ComSec could use this in their advertising campaign, helping ComSec attract new customers that are entering the market and also persuading customers to switch from their existing discount brokerage to ComSec.

„h Continue with the differential pricing strategy that persuades customers to use on line trading instead of telephone trading. As well as on line traders receiving a cheaper price ComSec could also offer some free financial services or data to on line customers that help promote the ¡¥value¡¦ concept of pricing ahead of the ¡¥discount¡¦ concept. This would enable ComSec to increase their profit margins because of the expense difference between on line and telephone trading.

Medium term ¡V one to three years

Target Market

Competitors customers and any potential Australian financial investors.

Marketing Mix

Product ¡V continue to strengthen the relationship between the various market segments that ComSec have now entered. Innovate new products and services that are related to stock market trading. Offer advice and access to CBA¡¦s other investment units and vice versa.

Price ¡V ensure that the no frills discount price stays competitive so persuading overseas players not to enter the Australian market. However, fully develop the fee-paying services available to all ComSec customers so offering a wide range of options.

Distribution - ensure that the on line trading continues to be developed without losing focus that some customers still want to use the telephone facility.

Promotion ¡V continue to promote the ComSec brand name throughout Australia and existing overseas markets.

Actions

„h Work closely with CBA¡¦s executive and other SBU¡¦s to find a workable solution that enables all players to have confidence in cross promotion of products and services. This will require strong leadership from the executive aimed at a restructure of the SBU¡¦s reporting channels and performance measurements.

„h Further develop the ComSec web site and on line trading centre that will enable the discount brokers to access further information for a fee. ComSec could even consider creating a grouping system such as the airline industry were traders are classed as economy, business or first class customers and reward each with a loyalty program or similar.

„h Develop the telephone trading into a more personal service that is available at a fee. This would ensure that ComSec do not lose customers to competitors that offer a telephone trading service and could even result in winning customers from their competitors whose telephone trading has been neglected because of the low profit margins.

Long term ¡V five years

Target Market

Global markets for Australian customers and global clients for Australian markets.

Marketing Mix

Product ¡V access to all major stock trading markets including Europe and Japan.

Price ¡V ComSec customers will be offered a pricing schedule that reflects the full range of services and information available. Value will be promoted ahead of discount.

Distribution - banking and access facilities will be needed in all markets that ComSec trade in.

Promotion ¡V ComSec will promote themselves as fully diversified and true global players of stock trading.

Actions

„h Set up strategic alliances with European and Japanese operators enabling ComSec customers to trade in all major overseas markets and allow access to overseas customers of the strategic partners to access the Australian markets.

„h Develop the close relationships with CBA¡¦s money trading unit. This will allow CBA to benefit from any overseas trading transactions between ComSec customers and their strategic partners. This will also act as a small insurance against a stock market collapse.

Conclusion

It is clear that ComSec need to differentiate themselves from the ANZ, NAB and Westpac trading units if they are to preserve their current percentage market share. Using the above or similar offensive strategies will help ComSec to protect their current market share.

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