Case on: Building Customer Satisfaction, Value, and Retention

Over view

Today’s customers face a growing range of choices in the products and services they can buy.
They are making their choice on the basis of their perceptions of quality, service, and value.
Companies need to understand the determinants of customer value and satisfaction. Customer
delivered value is the difference between total customer value and total customer cost.
Customers will normally choose the offer that maximizes the delivered value.

Customer satisfaction is the outcome felt by buyers who have experienced a company
performance that has fulfilled expectations. Customers are satisfied when their expectations are
met and delighted when their expectations are exceeded. Satisfied customers remain loyal longer,
buy more, are less price sensitive, and talk favorably about the company.

A major challenge for high-performance companies is that of building and maintaining viable
businesses in a rapidly changing marketplace. They must recognize the core elements of the
business and how to maintain a viable fit between their stakeholders, processes, resources, and
organization capabilities and culture. Typically, high-performing businesses develop and
emphasize cross-functional skills rather than functional skills (overall project management and
results versus functional strengths (best engineers, and so on.). They also build their resources
into core capabilities that become core competencies, distinctive abilities, and competitive
advantages. This along with a corporate culture of shared experiences, stories, beliefs, and norms
unique to the organization are the keys to their success.

To create customer satisfaction, companies must manage their value chain as well as the whole
value delivery system in a customer-centered way. The company’s goal is not only to get
customers, but even more importantly to retain customers. Customer relationship marketing
provides the key to retaining customers and involves providing financial and social benefits as
well as structural ties to the customers. Companies must decide how much relationship
marketing to invest in different market segments and individual customers, from such levels as
basic, reactive, accountable, proactive, and full partnership. Much depends on estimating
customer lifetime value against the cost stream required to attract and retain these customers.
Total quality marketing is seen today as a major approach to providing customer satisfaction and
company profitability. Companies must understand how their customers perceive quality and
how much quality they expect. Companies must then strive to offer relatively higher quality than
their competitors. This involves total management and employee commitment as well as
measurement and reward systems. Marketers play an especially critical role in their company’s
drive toward higher quality.

Lecture—Creating Customer Relationships that Last

This lecture is intended for use with Chapter 3, “Building Customer Satisfaction, Value, and
Retention.” The focus is on the increasingly powerful role of customers in the marketing process
and the need for marketers to provide value that exceeds customer expectations. The concept of
relationship marketing is also presented for further discussion, providing a link with other areas
of the text.

Objectives

 Help students to better understand the changing role of the customer in today’s
marketplace

 To explain the concepts of product and service quality as they contribute to perceived
value for the customer

 To present specific methods whereby marketers can engage in value-creating activities

Discussion
Introduction

In the contemporary marketplace, it is hard to believe there was ever a time when customers
were not treated as an integral part of the exchange process. Prior chapters consider some of the
many shifts taking place in today’s marketing environment. Competition in the marketplace,
along with advancing technology, affords customers the ability to learn significantly more about
the products they will consider purchasing.
The same factors also have created both the need and the opportunity for marketers to know their
customers on a more personal level. Ever-increasing competition has forced marketers to seek
out the information necessary to provide customers with the products and services they truly
desire. Technology, when used to create a customer database, is one way marketers are
answering to this new trend. Product development will be discussed in a later chapter; for now,
we will focus on building satisfaction through customer relationship development activities.

The concept of perceived value is based on Kotler’s explanation of customer delivered value.
Customers, like marketers, seek to profit from an exchange. Perceived value is aptly named
because it supports the notion that the customer and not the marketer determine value. The
marketer’s responsibility is to create value, in both product and service quality, that lead to
increased satisfaction and encourage a high perceived value.

For example, service excellence is determined by customer perceptions and motivated by

customer needs. Ken Blanchard, author of The One Minute Manager, says that the secret to
competing successfully in today’s environment is to provide customers with service that is so far
above their expectations that it is perceived to be legendary.

Marketers, with both large and small organizations, can engage in activities that exceed
expectations and lead to customer delivered value. Marketers with large organizations have the
ability to tap into a sophisticated database, utilizing past purchase data to customize marketing
programs. These marketers also can become experts at “guerrilla marketing,” or the
implementation of local promotions for the purpose of getting closer to customers. Furthermore,
large organization marketers also have the ability to create Web site and store-specific marketing
programs that create retailer loyalty, build differentiation, and increase sales in desired market
areas.

Small business marketers, however, also have many opportunities to create strong customer
relationships. By placing extra focus on what might generally be considered a commodity
product, these marketers can stimulate demand and compete with large rivals in the same
industry. If a company is small enough, its top executives can serve as the communication link
for the company and various external publics, such as customers and retailers. Even internal
publics, such as the sales staff, should be encouraged to make suggestions to top management.
Finally, database programs are becoming more and more affordable, making direct-mail
programs a viable option even for smaller firms. This leads to a discussion of an evolving
direction for relationship marketing.

Relationship Marketing Expanded

Even though it is becoming increasingly possible, why would any rational customer actually
want a “relationship” with the company that makes his or her razor blades, or dishwasher soap,
or toilet paper? The answer is that the consumer probably would not necessarily desire a
“relationship” with these companies, but the customer will want more spare time. Accordingly,
he or she might like to have routine or repeat purchases for soap, paper towels, grocery staples,
and so forth automated.

What if you could turn on your personal computer or your interactive television set, call up a list
of last week’s grocery purchases, make a few changes, and then simply order them delivered to
your door? And what if, when you did this, the computer reminded you to order certain items
such as toothpaste and paper towels because you might be running low on those items? What if,
to help choose the groceries you wanted for your family, you asked the computer for a week’s
worth of dinner menus, specifying recipes and ingredients?

In many product categories, you don’t really care what brand the computer selects, but in some
product categories you have a list of “approved” brands, as well as brands you never want to see
again. The computer automatically seeks out the least expensive basket of products that meet
these criteria. Once you confirm it, your order is paid for via credit card or direct debit. The
elapsed time for all this shopping was just seven minutes.

Now, from the marketer’s side of the equation, consider the immense business opportunity in
serving your customers more thoroughly. Delivering grocery staples is one thing. But what about
pharmaceuticals? Dry cleaning and laundry? Ready-made meals? FedEx and other pickups and
deliveries? The companies become, in essence, share-of-customer marketers.

A marketer’s primary task in the one-to-one future is not to find customers for the marketer’s
products but rather to find more products and services for its customers. Consider that most retail
chains have not really tried to figure out how to offer such conveniences as home delivery,
because they don’t want to consider this for various internal reasons. They want customers to
need to come in to the store (or into the virtual store) because they like to have customers
walking up and down the aisles (or virtual aisles), making last-minute impulse purchases. For a
large part of their business, today’s retailers depend on inconveniencing customers by requiring
them to drive to their store (or virtual store) location to do their shopping.

However, consider that marketers today jam twice as many products in the average supermarket
as there were just over a decade ago (30,000 products now, compared with 15,000 in 1985).
Furthermore, commercial messages abound for these products, the overwhelming majority of
which do not now appeal to any particular consumer. Instead, we must all fight our way through
the increasing number of advertising messages to pick out the information we need, just as we
must struggle through the proliferating barrage of products in or out of stores just to select the
ones we want to buy. Every shopping trip becomes an increasingly difficult attempt to
accomplish the same basic task, thus adding to the increasing use of the Internet.

Having an ability to buy these products more conveniently doesn’t mean people will completely
stop going into stores, nor does it mean advertising will cease to exist. But if getting your
regularly consumed products could be made nearly as convenient as “pushing a button,”
wouldn’t you go into the store less frequently? Wouldn’t you, for the most part, prefer not having
to shop for routine things? You could always choose to go out if you wanted to—after all,
shopping is often a social experience, as well as a necessity.

As with stores and other enterprises that cater to the interests of the interactive consumer
(including information and entertainment providers), the manufacturer will be able to succeed
competitively only by relying on individual feedback. For the manufacturer, success in the one-
to-one marketing environment will mean soliciting information from consumers, individually,
and then using that feedback to customize an offering to each individual customer, one at a time.
This is the essence of one-to-one marketing.

Marketing Spotlight—Charles Schwab

Charles Schwab founded the discount brokerage named for him in 1974. The company’s no-frills
investment offerings were predicated on Charles Schwab’s distaste for traditional brokers, who
he labeled “hucksters of inside information, always trying to get me to buy this product or
investment.” Until 1993, Schwab’s brokers were instructed not to offer investment advice, but
rather to refer curious customers to publicly available research from Standard & Poor’s or
Morningstar.

Schwab benefited from the online trading boom. Long before any of the traditional brokerage
houses considered an e-commerce move, in 1997 Schwab was one of the first discount
brokerages to offer online trading. It offered online trades at $29.95 for the first 1,000 shares,
compared with the per-trade fees that exceeded $100. Starting at zero in 1995, online trades
accounted for 85 percent of all trades executed by Schwab by 2001. The company’s retail assets
grew threefold to almost $1 trillion during the same time period, putting it in league with the
biggest brokerages in America. Between 1997 and 2000, daily trades rose 183 percent, while
profits increased 112 percent during that time frame.

Schwab’s marketing activities helped the company become a household name synonymous with
online trading. Early ads used real Schwab customers and employees in testimonial
advertisements. In 1999, the company enlisted celebrity spokespersons to advertise its full-
service online investing offerings. The humorous ads featured sports stars such as football player
Shannon Sharpe and tennis star Anna Kournikova in cameo roles as Schwab customers who
surprised competitors with their knowledge of investing principles. The tagline served to
reinforce Schwab’s difference from online-only brokerages: “We’ve created a smarter kind of
investing. We’ve created a smarter kind of investor.” These ads were part of Schwab’s $200
million marketing budget for 1999.

In 2001, as online trading slowed in the wake of the dot-com crash, Schwab sought to expand its
business by providing its customers with a greater number of services. Rather than rely on a high
volume of low-cost trades to drive revenues, Schwab began focusing on providing investment
advice to its clients. In new brokerage offices, Schwab placed financial advisers from whom
clients could seek investment tips and other services for a fee. Schwab also considered offering
proprietary stock research for its customers. Industry experts expected these new services would
recast Schwab in a role more similar to traditional brokerage houses. A former Schwab executive
predicted, “Schwab will be a lot closer to Merrill Lynch than it is to the Schwab of yesterday.”

(Sources: John Gorman, “Charles Schwab, Version 4.0,” Forbes, January 8, 2001, pp. 89–95.
Charles Gasparino and Ken Brown, “Schwab’s Own Stock Suffers from Move into Online
Trading,” Wall Street Journal, June 19, 2001, p. A1. Rebecca Buckman and Kathryn Kranhold,
“Schwab Serves Up Sports-Themed Ads,” Wall Street Journal, August 30, 1999, p. B9.)
Introduction To Case summary
 Marketing researchers have identified that the creation of superior value is the priority of a
research and the development of value for the customers is a source of competitive advantage for
the companies (Ngo & O‘Cass, 2009; Payne & Frow, 2005; Woodruff, 1997). Drucker (1954)
considered that the purpose of business is to create customers. Porter (1985) stated that
competitive advantage grows fundamentally out of the value a firm can create for customers.
Doyle and Stern (2006) proposed that the purpose of a business is to satisfy the needs of its
customers, and businesses that are good at satisfying customer needs have the best opportunities
to grow and prosper. In addition, nowadays market situation has moved from the mass marketing
towards the era of customized marketing, therefore to keep abreast of technological
development, new CRM approach should substitute for the traditional business models
(Karkostas et al., 2004). By the same token, the foundation of the survival of enterprise is to find
some sort of business model to satisfy customer needs, which will also make profits in oneself.
Accordingly, many leading enterprises have made use of CRM approach to expand market shares
and create loyal customers (Verma & Chaudhur, 2009). Clearly, CRM has become the new and
essential model for many business firms to create long-term and profitable relationships with
their customers (Kim et al., 2010). It is obvious that customer is the central element of CRM. The
satisfaction of customers is the most important measurable indicators to reflect whether the
results of firm‘s operating are good or not. Ultimately it is customers who determine the value
created by providers customer-facing capabilities (Madhavaram & Hunt, 2008; Srivastava et al.,
2001). Furthermore, customers have in-depth insight into their providers‘ resources and
capabilities (Tuli et al., 2007). Delivering superior customer services has become an ongoing and
critical focus for many enterprises, because the relationship of service quality to business
performance outcomes (such as lower costs, customer satisfaction, loyalty, and profitability) has
been well established (Daugherty et al., 1998; Cronin & Taylor, 1992; Davis & Mentzer, 2006).
However, many researchers have shown that customer satisfaction will be hardly achieved unless
such firm resources and capabilities could be integrated in terms of customer perspective
(Fletcher & George, 1995; Kulp et al., 2004; Meltzer, 2001). 7 Customer value and value
creation, which depend on the extent to which they create for customers, are the central elements
of business strategy and the success of companies (Mittal & Sheth, 2001; Payne & Holt, 2001).
Creating superior value for the customer is the ultimate goal of companies (Day, 1990). The
existing literature suggests that competing on superior value for customers becomes an essential
precondition for securing a competitive position in the marketplace (Huber et al., 2001; Day,
1990). Nevertheless, a recent study found that some Asia enterprises were adopting CRM
approach to create values for customers in a slower growth rate compared to western countries
(Liu, 2003). Apparently, some detailed investigation in which CRM as a tool to create value for
customers in developing countries are required.

Building Customer Satisfaction

Customer satisfaction was defined as the degree to which a customer believes that the use of
service or possession of a product prompts his or her positive feelings (Rust & Oliver, 2000).
Customer satisfaction is the key strategy to retain customers and sustain competitive advantage,
and the core platform for building CRM, because a satisfied and rational customer in general is
always loyal and profitable (Chahal, 2010). Doyle and Stern (2006) stated that satisfying today‘s
customers who want to continue doing business with the company, the value, and tomorrow‘s
sales and profits will be created. They also stressed that today‘s leading companies have
recognized that satisfied customers are highly valued assets, in contrast, dissatisfied customers
can destroy company performances (Doyle & Stern, 2006).
Customer loyalty
Customer loyalty is generally seen as a desired outcome of successful relationship marketing and
is considered as a measure of overall relationship performance (Reichheld, 1996). Doyle and
Stern (2006) considered that loyal customers are assets, and more profitable. This is because
winning new customers is costly. A company‘s future sales and profits depend on its ability to
create long term customer relationship, which on the basis of customer loyalty. If the company‘s
ability to satisfy customers better than competitors, and deliver higher value, customer
satisfaction will be improved, subsequently, customer loyalty will be built (Doyle & Stern,
2006).

Customer retention
Customer retention reflects the willingness to maintain or invest in the relationship in 18
relationship performance (Gounaris, 2005) and is also viewed as an outcome of affective
commitment (Verhoef, 2003). The long-term customer relationship is more profitable, as
―retaining customers makes gaining market entry or share gain difficult for competitors‖ (Doyle
& Stern, 2006, pp. 49). Therefore, for the ongoing business, retaining customers is more
important than creating the new customers. The sticking point to raising the retention is to create
highly customer satisfaction (Doyle & Stern, 2006). The above can be summarized as customer
satisfaction is the chief purpose of any business and is associated with the business success
(Doyle & Stern, 2006). If customer satisfaction is enhanced, customer loyalty will be built. The
crux of boosting customer retention is the high level of customer satisfaction. When the
customers dissatisfied with the quality of the company‘s products or services, profitability will
diminish, and it will destroy the company‘s performances rapidly. In order to explore the effects
of company capabilities on creating customer values, it is important to test customer satisfaction,
customer loyalty and customer retention, which are linked to company performances (Blocker et
al., 2011). Studies confirm a direct relationship between customer value and customer
satisfaction (Gao et al., 2005; Lam et al., 2004).
Creating values for customers
The company creating values for customers grounds on a succession of actions. Strategic goals,
customer orientation, offering products and/or service supports and/or personal interaction,
company-customer exchange process, customer satisfaction, customer loyalty, and customer
retention all related to customer relationships management. CRM is a tool for the company to
offer superior values for the customers.

Management of customer relationships

Company has some kinds of different measures to manage the relationship with their customers
and they have faith that the measures do work well. Manager emphases a very important topic,
that is the combination of company culture and CRM. He said that even though company culture
does not have the strong restriction to employees as well as the company regulations, but it is no
doubt that it is important as employees common cognition and behavioral habits to run a
company in a right way. It must be an adaptable company culture as support if you want to
approach and use CRM successfully. Then, CRM system will remember the customer‘s
information and send birthday message or festival congratulation sentences by email. These
measures will enhance the relationship between the company and customers. Once the customers
bought the product, the company will send email to customer to get some feedback and
comments to keep contact with their clients.
Customer-company exchange process
As mentioned in company background part, Company A is a professional investment service
company which provide SME‘s and individual investment service, SME‘s and individual loan
guarantee service as well as stock investment service. Company A draft capital production on the
basis of the feedback from their professional consultant team and following five steps are
followed, which is:
1. definition of the policy of investment;
2. investment analysis;
3. establish portfolio;
4. fix establish portfolio
5. Performance evaluation (Investment Henan Group, 2011). It is no doubt that the production is
high quality and has feasible investment return. The largest benefit we gained from customers is
no doubt profit, however, the clients experience and feedback are also as important as profit,
because they are the original motivation to encourage the company creating more production and
service to satisfy their customers and let them holds more competition.
SWOT Analysis Strategies Objective
The central purpose of SWOT analysis is to identify the strategies that an organization can utilize
to exploit external opportunities, counter threats, and build on & protect Charles Schwab
strengths, and eradicate its weaknesses.

Charles Schwab SWOT Analysis

Strengths of Charles Schwab – Internal Strategic Factors

As one of the leading companies in its industry, Charles Schwab has numerous strengths that
help it to thrive in the market place. These strengths not only help it to protect the market share
in existing markets but also help in penetrating new markets.
High level of customer satisfaction – the company with its dedicated customer relationship
management department has able to achieve a high level of customer satisfaction among present
customers and good brand equity among the potential customers.
Highly successful at Go To Market strategies for its products.
Automation of activities brought consistency of quality to Charles Schwab products and has
enabled the company to scale up and scale down based on the demand conditions in the market.
Good Returns on Capital Expenditure – Charles Schwab is relatively successful at execution
of new projects and generated good returns on capital expenditure by building new revenue
streams.

Super Performance in New Markets – Charles Schwab has built expertise at entering new
markets and making success of them. The expansion has helped the organization to build new
revenue stream and diversify the economic cycle risk in the markets it operates in.

Strong Brand Portfolio – Over the years Charles Schwab has invested in building a strong
brand portfolio. The SWOT analysis of Charles Schwab just underlines this fact. This brand
portfolio can be extremely useful if the organization wants to expand into new product
categories.

Strong dealer community – It has built a culture among distributor & dealers where the dealers
not only promote company’s products but also invest in training the sales team to explain to the
customer how he/she can extract the maximum benefits out of the products.
Successful track record of developing new products – product innovation.

Weakness of Charles Schwab Internal Strategic Factors

Weakness are the areas where Charles Schwab can improve upon. Strategy is about making
choices and weakness are the areas where an organization can improve using SWOT analysis
and build on its competitive advantage and strategic positioning.
Organization structure is only compatible with present business model thus limiting expansion in
adjacent product segments.

The marketing of the products left a lot to be desired. Even though the product is a success in
terms of sale but its positioning and unique selling proposition is not clearly defined which can
lead to the attacks in this segment from the competitors.

Need more investment in new technologies. Given the scale of expansion and different
geographies the company is planning to expand into, Charles Schwab needs to put more money
in technology to integrate the processes across the board. Right now the investment in
technologies is not at par with the vision of the company.

Days inventory is high compare to the competitors – making the company raise more capital to
invest in the channel. This can impact the long term growth of Charles Schwab

The company has not being able to tackle the challenges present by the new entrants in the
segment and has lost small market share in the niche categories. Charles Schwab has to build
internal feedback mechanism directly from sales team on ground to counter these challenges.

High attrition rate in work force – compare to other organizations in the industry Charles Schwab
has a higher attrition rate and have to spend a lot more compare to its competitors on training and
development of its employees.

Not highly successful at integrating firms with different work culture. As mentioned earlier even
though Charles Schwab is successful at integrating small companies it has its share of failure to
merge firms that have different work culture.
Opportunities for Charles Schwab – External Strategic Factors

New customers from online channel – Over the past few years the company has invested vast
sum of money into the online platform. This investment has opened new sales channel for
Charles Schwab. In the next few years the company can leverage this opportunity by knowing its
customer better and serving their needs using big data analytics.

The new taxation policy can significantly impact the way of doing business and can open new
opportunity for established players such as Charles Schwab to increase its profitability.

Lower inflation rate – The low inflation rate bring more stability in the market, enable credit at
lower interest rate to the customers of Charles Schwab.

Stable free cash flow provides opportunities to invest in adjacent product segments. With more
cash in bank the company can invest in new technologies as well as in new products segments.
This should open a window of opportunity for Charles Schwab in other product categories.

Opening up of new markets because of government agreement – the adoption of new technology
standard and government free trade agreement has provided Charles Schwab an opportunity to
enter a new emerging market.

Decreasing cost of transportation because of lower shipping prices can also bring down the cost
of Charles Schwab’s products thus providing an opportunity to the company - either to boost its
profitability or pass on the benefits to the customers to gain market share.

Economic uptick and increase in customer spending, after years of recession and slow growth
rate in the industry, is an opportunity for Charles Schwab to capture new customers and increase
its market share.

New trends in the consumer behavior can open up new market for the Charles Schwab. It
provides a great opportunity for the organization to build new revenue streams and diversify into
new product categories too.
Threats Charles Schwab Facing - External Strategic Factors

The company can face lawsuits in various markets given - different laws and continuous
fluctuations regarding product standards in those markets.

Changing consumer buying behavior from online channel could be a threat to the existing
physical infrastructure driven supply chain model.

Shortage of skilled workforce in certain global market represents a threat to steady growth of
profits for Charles Schwab   in those markets.

Rising raw material can pose a threat to the Charles Schwab profitability.

No regular supply of innovative products – Over the years the company has developed numerous
products but those are often response to the development by other players. Secondly the supply
of new products is not regular thus leading to high and low swings in the sales number over
period of time.

Liability laws in different countries are different and Charles Schwab may be exposed to various
liability claims given change in policies in those markets.

Growing strengths of local distributors also presents a threat in some markets as the competition
is paying higher margins to the local distributors.

Intense competition – Stable profitability has increased the number of players in the industry
over last two years which has put downward pressure on not only profitability but also on overall
sales.

Limitations of SWOT Analysis for Charles Schwab

Although the SWOT analysis is widely used as a strategic planning tool, the analysis does have
its share of limitations.

Certain capabilities or factors of an organization can be both a strength and weakness at the same
time. This is one of the major limitations of SWOT analysis . For example changing
environmental regulations can be both a threat to company it can also be an opportunity in a
sense that it will enable the company to be on a level playing field or at advantage to competitors
if it able to develop the products faster than the competitors.

SWOT does not show how to achieve a competitive advantage, so it must not be an end in itself.

The matrix is only a starting point for a discussion on how proposed strategies could be
implemented. It provided an evaluation window but not an implementation plan based on
strategic competitiveness of Charles Schwab

SWOT is a static assessment - analysis of status quo with few prospective changes. As
circumstances, capabilities, threats, and strategies change, the dynamics of a competitive
environment may not be revealed in a single matrix.

SWOT analysis may lead the firm to overemphasize a single internal or external factor in
formulating strategies. There are interrelationships among the key internal and external factors
that SWOT does not reveal that may be important in devising strategies.

Weighted SWOT Analysis of Charles Schwab

In light of the above mentioned limitations of the SWOT analysis, corporate managers decided to
provide weightage to each internal strength and weakness of the firm. This method is called
Weighted SWOT analysis. It is better than doing simplistic SWOT analysis because with
Weighted SWOT Analysis Charles Schwab managers can focus on the most critical factors and
discount the non-important one. It also solves the long list problem where organizations ends up
making a long list but none of the factors deemed too critical.

Limitation of Weighted SWOT analysis of Charles Schwab

This approach also suffers from one major drawback - it focus on individual importance of factor
rather than how they are collectively important and impact the business holistically.
# Answer for Case Questions

Case questions 1:
What changes in the marketing environment does the Schwab marketing effort reflect? How has
Schwab effectively anticipated the needs of the market?

Solutions-Driven Marketing
Navigating the maze of options and providing a link between product customization and
ecommerce.
The Internet and the Web provide an electronic infrastructure that has changed the operational
and strategic dynamics of many businesses. As an electronic medium, the Web facilitates
interactive selling approaches such as auctioning and market-making. The Web also facilitates
personalized marketing whereby information and product offerings can be tailored to individual
customer preferences. Moreover, it allows customers to easily gather, retrieve, and analyze
product information. Ultimately, the Web provides the ideal vehicle for delivering online
analytical tools directly to customers; yet most commercial Web sites do not make use of such
customer decision support systems.
A customer decision support system (CDSS) has industry, where increasingly common
personalized long been viewed as a promising selling tool, but until marketing efforts of Charles
Schwab’s recently, one with limited application. Now, a CDSS “My Schwab”
(www.schwab.com) provide a front end has the ability to offer significant value to the entire for
the custom selling of services. In many ways, an e-customer decision-making process, especially
in commerce strategy is an important enabler of a prod-the Internet era of self-service, configure-
to-order customization strategy
Case questions 2:

Draw on recent economic developments to anticipate where the next changes likely will be for
Schwab. Consider what past and future events might have a substantial impact on the way it
operates in the future.

Answer
As 2020 draws to a close, economic momentum is fading with infection rates on the rise,
governments responding with more lockdowns, and few prospects for any major near-term fiscal
stimulus. However, the global economy has the potential to make a full recovery in 2021,
rebounding from the -4.4% decline in 2020 with growth of +5.2% in 2021, according to current
estimates from the International Monetary Fund (IMF). Next year we expect very easy monetary
and fiscal policy combined with a vaccine rollout beginning in the first half of 2021 to lead to a
strong rise in economic and earnings growth. This 2021 backdrop may see the U.S. pass the
baton of global growth leadership to Europe, favoring international stocks and a broader overall
market advance compared to 2020.
Recession
Revisiting last year’s chart of the OECD composite leading indicator, we can see 2020’s sharp
V-shaped recession and accompanying recovery. In our Outlook last year, we noted how the
global economy had slowed and was on the threshold of a recession, indexed at the 99 level on
the chart. Pre-pandemic, in the fourth quarter of 2019, six of the Group of Seven (G7) economies
(Canada, UK, Japan, Germany, France and Italy) had reported close to zero or negative GDP
growth. 2020 was vulnerable to becoming a year of global recession with even the smallest
catalyst. Of course, the COVID-19 pandemic was a big catalyst, causing a deep global recession
in 2020, and we believe the path of the pandemic will define the recovery in 2021.

Lockdowns return
New COVID-19 cases are on the rise to varying degrees in Asia, the Americas, and Europe. Asia
has not suffered a second round of widespread lockdowns, although targeted restrictions have
been used to respond to localized eruptions of viral infection. In the U.S., selective lockdowns in
some states are being implemented as case counts climb a second time and health care systems
risk becoming overwhelmed. Europe’s secondary outbreak is ahead of the U.S. with some
countries’ economies already experiencing the effect of lockdowns.
Although the term lockdown is being used, compared with the restrictions imposed last spring,
it’s really “lockdown-lite.” For instance, France imposed new restrictions on October 30,
including a curfew and closure of non-essential retailers, but kept schools, churches,
manufacturing businesses and construction sites open. This stands in contrast to the first
lockdown, when all these areas of the economy were closed. While reinstated restrictions are
driving a double-dip in the economic data, they may not be stringent enough to trigger another
recession and bear market.
Current restrictions are mainly targeted at services: travel, restaurants, entertainment—rather
than manufacturing. As a result, consumers have shifted spending toward goods from
experiences, resulting in a boom in manufacturing. However, because it makes up only 17% of
the global economy, manufacturing is not enough to fully offset the weakness in GDP. But there
is a greater impact for stocks; manufacturing businesses make up about 50% of global market
capitalization. As a result, profits and the stock market may rebound much more quickly than
jobs and the overall global economy.  

Recovery
We expect current economic weakness to yield to much stronger growth when lockdowns are
relaxed, the weather gets warmer, and a COVID-19 vaccine becomes widely available. In
addition to the economic and geopolitical risks that accompany any new year, there are
heightened risks tied to COVID-19. It is unclear how quickly vaccines can be produced and
distributed. We don’t know to what degree the second wave of coronavirus cases and the
reinstitution of lockdowns will weigh on the global economy in the near-term. Additionally,
health care systems in some areas may be at risk of being overwhelmed as they respond to an
uptick in cases of the virus.
Key signs that let us know we are on the path to recovery that we are hoping to see in the year
ahead include:
The second wave of lockdowns end this winter, having successfully contained infections with
less economic impact than the first wave in March and April.
Approval of at least one vaccine by early 2021 with mass immunization to begin by spring.
A sharp rebound in economic activity in virus-depressed sectors as immunity builds up over the
summer.
We will be on watch of any deviation from this path since it may mean bad news for the markets.
But if we see these signs, the economy and market may remain on the path to recovery despite
some negative data points. For example, business failures and unemployment may be elevated
for some time, as is often the case early in recoveries. In fact, business failures may surge in
2021. Again, using France as an example, the country has averaged 4,500 bankruptcies per
month in recent years. Due to assistance and rule changes they fell to 1,500 this summer. Zombie
companies that would have failed regardless of COVID-19 have piled up. Now that rules are
flipping back, we may see the spike in failures continue well into 2021.

Risks to the Recovery

Every year the global economy and markets face risks that range from financial crises to natural
disasters. In 2021 there are additional risks that are heightened beyond the path of the pandemic,
including those posed by: debt, politics, and trade.
Debt borrows growth from the future; and we’ve borrowed a lot this year. If rates continue to
rise, the interest burden could become a factor that slows growth.

Passing the baton

After years of economic and earnings growth in the United States exceeding the rest of the
world, this is expected to change in 2021. The blue chart shows the most recent forecast for GDP
for each country from the World Economic Outlook published by the IMF in October 2020.
Below it, the orange chart shows the current consensus earnings per share growth forecast by
Wall Street analysts for companies headquartered in each country. Both charts imply a change
from the last cycle, when the U.S. led global economic and earnings growth, with the start of this
new economic cycle.
 
Faster earnings growth outside the U.S. expected in 2021 
A strong rebound in earnings per share growth can help ease concerns about stock market
valuations, which have climbed this year as stock prices rebounded and earnings suffered. A
strong recovery in earnings growth would mean that price-to-earnings ratios can move lower
even if stocks continue to post solid gains.
Rotation
We believe the strong vaccine-led recovery in global growth aided by accommodative policy
expected for 2021 should favor stocks in general, especially economically sensitive stocks.
Although global equity indices are on track for gains in 2020, these gains have been narrowly
concentrated in a relatively small group of stocks that have benefitted from COVID-19 and
subsequent government restrictions. This disconnect within the stock market is hiding what we
believe could be a long-term shift favoring international stocks. We can look at what the average
stock has done this year by using equal-weighted indexes, instead of using capitalization-
weighted indexes that have been driven by a small number of stocks this year. In 2020, the
average international stock has kept pace with and even slightly outperformed the average U.S
New economic cycles come with new leadership. Market leadership tends to last for many years,
even a decade before reversing at the start of a new cycle. For example, after international stocks
outperformed in the 1980s, the 1990 recession saw a shift to U.S. stock outperformance. The
2001 recession saw a switch back to international outperformance, before the 2008 recession
flipped the switch again to U.S. outperformance. And now, the start of a new cycle may once
again signal a switch to international stocks.

Takeaways
We expect that a near-term economic double-dip for the global economy gives way to a vaccine-
led broad recovery in 2021. Key signs to watch to stay on the path to recovery include: the
second wave of lockdowns ending successfully this winter, mass immunization beginning in the
spring, a sharp rebound in economic activity in virus-depressed sectors unfolding over the
summer. The new cycle may come with new leadership as non-U.S. GDP and EPS growth are
likely to exceed the U.S. for the first time in years supporting relative outperformance by
international stocks.
Last year, we talked about the coming end of the cycle shift in leadership in the 2020 Global
Outlook. As the new cycle gets underway in 2021, rebalancing portfolios, a component of which
rebalances exposures to international stocks relative to U.S. capitalization-weighted benchmarks,
is important to staying on the path to long-term financial goals, regardless of the short-term path
of the market.
At Charles Schwab, we encourage everyone to take ownership of their financial life by asking
questions and demanding transparency.
Performance is no guarantee of future results and the opinions presented cannot be viewed
as an indicator of future performance.
 Investing involves risk including loss of principal. International investments involve additional
risks, which include differences in financial accounting standards, currency fluctuations,
geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets.  Investing
in emerging markets may accentuate these risks.
Forecasts contained herein are for illustrative purposes only, may be based upon proprietary
research and are developed through analysis of historical public data.
Rebalancing a portfolio cannot ensure a profit or protect against a loss in any given market
environment.  Rebalancing may cause investors to incur transaction costs and, when rebalancing
a non-retirement account, taxable events may be created that may affect your tax liability.