How the Internet Revolutionized the Stockbrokerage Industry
...ustry to a fragmented one. This change was possible due to the low entry barriers and commodity-type online trading services that were offered by the new firms in the industry. Since the demand was strong, and profits were high, many firms entered the industry, creating excess capacity, which led to a price war. This caused established brokers to change their strategy by offering their clients to trade online as well, replacing their pricing structure, and making cutbacks in personnel. Question #2: The rise of online brokers changed the likely long-term profitability of the stockbrokerage industry by changing the industry’s life cycle. Most chances were, that the stockbrokerage industry would’ve stabilized in the mature stage. (or even in the declining stage, once the value of the stock market declined). This means that in order to survive the slow growth, companies needed to build brand loyalty and minimize their costs. Once they survived, these companies had an opportunity to increase prices and profits, because the industry’s entry barriers became very high. Another cause for high profitability in the mature stage is the consolidation of the industry, which prevents price war and use stable demand to reduce rivalry and increase profitability. The rise of online brokers was an innovation in the stockbrokerage industry, which caused a movement through the industry’s life cycle. This innovation transformed the nature of competition within the industry, by repeating the growth stage and increasing demand. This rapid growth in demand enabled all firms in the industry expand their revenues and profits, particularly the pioneered company and the leading company who earned enormous profits. The main point in this change, in terms of long-term profitability, is that this innovation changed the course of profits to jump. For the stockbrokerage industry, this change brought much more profits than there would’ve been without it. Question #3: The change in the competitive forces in the brokerage industry required a strategy that was based mainly on new price structure. It had to be able to bring the established brokers to compete with the discounted online brokers, which basically meant to lower commissions, and to offer more attractive fee structure. The new pricing structure was directed to all clients as a whole, offering unconditional fee structure, which was certainly a much better offer than the limited high fee structure that was used before. This was a necessity, because otherwise full-service stockbrokers would’ve lost more than 50 percent of their clients to discount brokers. This necessity originated from the rise of online brokers. The effect of the industry analysis, that full-service stockbrokers did, was identifying online trading firms as a higher profits strategic group. (Since the five forces in that group were weak). The industry analysis brought them to use this opportunity and change their positioning approach. The positioning approach of high quality (and ther...