One Page Short Paper (single-spaced, 12 pt Times New Roman Font, with 1-inch margins; title, references, and figures do not count as part of the one page): Using only information from Case 4 on Charles Schwab, identify three distinct macroevnironmental forces (PESTLE forces) outlined in the case and explain how each of those macroenvironmental forces influenced/changed Charles Schwab's industry. You should also identify which macroenvironmental force category each of your identified PESTLE forces comes from using sections 2-7a through 2-7f from Chapter 2. See rubric for grading criteria and expectations.

CHARLES SCHWAB This case was prepared by Charles W. L. Hill of the School of Business, University of Washington, Seattle. TC4-1 INTRODUCTION In 1971, Charles Schwab, who was 32 at the time, set up his own stock brokerage concern, First Commander. Later he would change the name to Charles Schwab \& Company, Inc. In 1975, when the Securities and Exchange Commission abolished mandatory fixed commissions on stock trades, Schwab moved rapidly into the discount brokerage business, offering rates that were as much as 60% below those offered by full commission brokers. Over the next 25 years, the company experienced strong growth, fueled by a customer-centric focus, savvy investments in information technology, and a number of product innovations, including a bold move into online trading in 1996. By 2000 , the company was widely regarded as one of the great success stories of the era. Revenues had grown to $7.1 billion and net income to $803 million, up from $1.1 billion and $124 million, respectively, in 1993. Online trading had grown to account for 84% of all stock trades made through Schwab, up from zero in 1995. The company's stock price had appreciated by more than that of Microsoft over the prior 10 years. In 1999, the market value of Schwab eclipsed that of Merrill Lynch, the country's largest fullservice broker, despite Schwab's revenues being over 60% lower. The 2000 s proved to be a more difficult environment for the company. Between March 2000 and mid-2003, share prices in the United States tumbled, with the technology-heavy NASDAQ index losing 80% of its value from peak to trough. The volume of online trading at Schwab slumped from an average of 204,000 trades a day in 2000 to 112,000 trades a day in 2002. In 2003, Schwab's revenues and net income fell sharply, and the stock price tumbled from a high of $51.70 a share in 1999 to a low of $6.30 in early 2003. During this period, Schwab expanded through acquisition into the asset management business for high-net-worth clients with the acquisition of U.S. Trust, a move that potentially put it in competition with independent investment advisors, many of whom used Schwab accounts for their clients. Schwab also entered the investment banking business with the purchase of Soundview Technology Bank. In July 2004, founder and chairman Charles Schwab, who had relinquished the CEO role to David Pottruck in 1998, fired Pottruck and returned as CEO. Before stepping down in 2008, he refocused the company on its discount brokering roots, selling off Soundview and U.S. Trust. At the same time, he pushed for an expansion of Schwab's retail banking business, allowing individual investors to hold investment accounts and traditional bank accounts at Schwab. Schwab remains chairman of the company. In 2007-2009, a serious crisis gripped the financial services industry. Some major financial institutions went bankrupt, including Lehman Brothers and Washington Mutual. The widely watched Dow Industrial Average Index plunged from over 14,000 in October 2007 to 6,600 in March 2007. Widespread financial collapse was only averted when the government stepped in to support the sector with a \$700-billion loan to troubled companies. Almost alone amongst major financial service firms, Schwab was able to navigate through the crisis with relative ease, remaining solidly profitable and having no need to place a call on government funds By 2010-2017. the company was once again on a growth path, fueled by expanded offerings including the establishment of a marketplace for exchange traded funds (EFTs). Schwab's asset base expanded at around 6% per annum during this period, and by early 2018 it was managing almost $3.4 trillion in client assets. In 2017. Schwab reported record net income of \$2.18 billion on record revenues of $8.62 billion. The major strategic question going forward was how to continue to grow profitably in what remained a price-competitive environment for brokerage firms. A security is a financial instrument such as a stock, bond, commodity contract, stock option contract, or foreign exchange contract. The securities brokerage industry is concerned with the issuance and trading of financial securitics, as well as a number of related activities. A broker's clients may be individuals, corporations, or government bodies. Brokers undertake one or more of the following functions: assist corporations to raise capital by offering stocks and bonds; help governments raise capital through bond issues; advise businesses on their foreign currency needs; assist corporations with mergers and acquisitions; help individuals plan their financial future and trade financial securities; and provide detailed investment research to individuals and institutions so that they can make more informed investment decisions. C4-2a Industry Background In 2016, there were 3,816 broker-dealers registered in the United States, down from 9,515 in 1987. The industry is concentrated, with some 200 firms that are members of the New York Stock Exchange (NYSE) accounting for 87% of the assets of all broker-dealers, and 80% of the capital. The 10 largest NYSE firms accounted for around 57% of the gross revenue in the industry in 2016, up from 48% in 1998. The consolidation of the industry has been driven in part by deregulation, which is discussed in more detail below. Broker-dealers make money in a number of ways. They earn commissions (or fees) for executing a customer's order to buy or sell a given security (stocks, bonds, option contracts, etc.). They earn trading income, which is the realized and unrealized gains and losses on securities held and traded by the brokerage firm. They earn money from underwriting fees, which are the fees charged to corporate and government clients for managing an issue of stocks or bonds on their behalf. They earn asset management fees, which represent income from the sale of mutual fund securities, from account supervision fees, or from investment advisory or administrative service fees. They earn margin interest, which is the interest that customers pay to the brokerage when they borrow against the value of their securities to finance purchases. They earn other securities related revenue comes from private placement fees (i.e., fees from private equity deals) subscription fees for research services, charges for advisory work on proposed mergers and acquisitions, fees for options done away from an exchange and so on. Finally, many brokerages earn nonsecurities revenue from other financial services, such as credit card operations or mortgage services. C4-2b Industry Groups Historically, brokerage firms have been segmented into five groups. First, there are national, full-line firms, which are the largest full-service brokers with extensive branch systems. They provide virtually every financial service and product that a brokerage can offer to both households (retail customers) and institutions (corporations, governments, and other nonprofit organizations such as universities). Examples of such firms include Merrill Lynch and Morgan Stanley. Most of these firms are headquartered in New York. For retail customers, national, full-line firms provide access to a personal financial consultant, traditional brokerage services, securities research reports, asset management services, financial planning advice, and a range of other services such as margin loans, mortgage loans, and credit cards. For institutional clients, these firms will also arrange and underwrite the issuance of financial securities, manage their financial assets, provide advice on mergers and acquisitions, and provide more detailed research reports than those normally provided to retail customers, often for a fee. Large investment banks are a second group. This group includes Goldman Sachs. These banks have a limited branch network and focus primarily on institutional clients, although they also may have a retail business focused on high-net-worth individuals (typically individuals with more than $1 million to invest). In 2008, Lehman Brothers went bankrupt, a casualty of bad bets on mortgage-backed securities, while the large bank, J.P. Morgan, acquired Bear Stearns, leaving Goldman Sachs as the sole stand-alone representative in this class. A third group are regional brokers, which are fullservice brokerage operations with a branch network in certain regions of the country. Regional brokers typically focus on retail customers, although some have an institutional presence. Fourth, there are a number of New York City-besed brokers who conduct a broad array of financial services, including brokerage, investment banking, traditional money management, and so on. Finally, there are the discounters, who are primarily involved in the discount brokerage business and focus on executing orders to buy and sell stocks for retail customers Commissions are their main source of business revenue. They charge lower commissions than full-service brokers, but do not offer the same infrastructure, such as personal financial consultants and detailed research reports. The discounters provide trading and execution services at deep discounts online via the Web. Many discounters, such as Ameritrade and E*Trade, do not maintain branch offices. Schwab, which was one of the first discounters and remains the largest, has a network of brick-andmortar offices, as well as a leading online presence. C4-2c Earnings Trends Industry revenues and earnings are volatile, being driven by variations in the volume of trading activity (and commissions), underwriting, and merger and acquisition activity. All of these tend to be highly correlated with changes in the value of interest rates and the stock market. In general, when interest rates fall, the cost of borrowing declines, so corporations and governments tend to issue more securities, which increases underwriting income. Also, low interest rates tend to stimulate economic growth, which leads to higher corporate profits, and thus higher stock values. When interest rates decline, individuals typically move some of their money out of low-interest-bearing cash accounts or low-yielding bonds, and into stocks, in an attempt to earn higher returns. This drives up trading volume and hence commissions. Low interest rates, by reducing the cost of borrowing, can also increase merger and acquisition activity. Moreover, in a rising stock market, corporations often use their stock as currency with which to make acquisitions of other companies. This drives up drives up merger and acquisition activity, and the fees brokerages earn from such activity. The 1990s were characterized by one of the strongest stock market advances in history. This boom was driven by a favorable economic environment, including falling interest rates, new information technology. productivity gains in American industry, and steady economic expansion, all of which translated into growing corporate profits and rising stock prices Also feeding the stock market's advance during the 1990 s were favorable demographic trends During the 1990s, American Baby Boomers started to save for retirement, pumping significant assets into equity funds. The percentage of household liquid assets held in equities and mutual funds increased from 33.8% in 1990 to 66.9% in 1999 , while the number of households that owned equities increased from 32.5 to 50.1% over the same period. Adding fuel to the fire, by the late 1990s, stock market mania had taken hold. Stock prices rose to speculative highs rarely seen before as "irrationally exuberant" retail investors, who seemed to believe that stock prices could only go up, made increasingly risky and speculative "investments" in richly valued equities. 2 The market peaked in late 2000 as the extent of overvaluation became apparent. It fell significantly over the next 2 years as the economy struggled with a recession. This was followed by a recovery in both the economy and the stock market, with the S\&P 500 returning to its old highs by October 2007. However, as the global credit crunch unfolded in 2008, the market crashed, falling precipitously in the second half of 2008 to return to levels not seen since the mid- 1990s. The market has since recovered, and by 2016 almost 60% of the financial