Conduct a VRIN analysis. Identify Top 3 strengths amd weaknesses for the firm. What is the firm's sustainable competative advantage, if any?

MORGAN STANLEY DEAN WITTER DISCOVER & Co. Morgan Stanley Dean Witter Discover (MSDW) was the product of the 1997 merger of the white shoe Morgan Stanley and its scrappier competitor, Dean Witter Discover. The latter was itself the product of a merger between broker Dean Witter and Discover, the financial services company that offered the Discover credit card. By late 1999, MSDW was offering financial services and products ranging from traditional brokerage and asset management to mortgage loans and insurance. (Exhibit 13 shows the firm's income statement). Dean Witter was an early mover in online brokerage. In 1996, it acquired Lombard Brokerage, Inc., a San Francisco-based Internet securities transaction firm. Lombard was founded in 1992 as a discount brokerage that offered trading over the phone. In August 1995, Lombard enabled its customers to place orders over the Internet through its own website. By the time of its acquisition by Dean Witter, Lombard had $30 million in annual revenue and 45,000 accounts. It charged $14.95 for electronic trading. The company won Barron's "Best Online Broker" awards in 1996 and 1997. Dean Witter kept Lombard at arms-length from its full-service brokerage. In June 1997, soon after the merger of Morgan Stanley and Dean Witter, MSDW renamed Lombard "Discover Brokerage Direct" (DBD). Sibling Rivalry Dean Witter kept its Internet brokerage operation separate from its core business. Dean Witter's 9,000 retail brokers were concerned about the Lombard acquisition, but the firm's executives insisted that its brokers had nothing to fear from the new entity, which would be totally separate Broker.com EC-13 2.15 and distinct" from Dean Witter's brokerage business. "Lombard reaches customers we don't reach in our traditional securities business," said Philip Purcell, Dean Witter's chairman and CEO. The company said that according to its extensive research, self-directed customers who used the Internet for securities transactions comprised a separate market segment, distinct from the full-service brokerage clientele. Full-service brokers hoped that new techno-savvy investors would turn to traditional brokerage once their asset levels increased. Until 1999, the brokerage had done little to publicize its online trading unit and had no plans to link MSDW's full-service accounts with Discount Brokerage Direct. DBD did not use the Morgan Stanley or Dean Witter names, because management believed online brokerages appealed to a demographic group that had more in common with Discover cardholders than with full-service brokerage customers. "Using the Morgan Stanley Dean Witter name for the discount service could be viewed as diminishing the value of your brokers and of that brand." explained Scott Appleby, who followed online brokers for ABN Amro Inc. "It's much more difficult if I'm a broker and I'm providing this value-added service, and I turn around and my client can get a trade for $16" from the same company. The TV commercials of online brokerages like E*Trade, Ameritrade and Datek played to their clientele's attitudes and often ridiculed traditional brokers. In contrast, DBD's TV campaigns focused on the ability of the man on the street to make quick profits, without alluding to the contrast between traditional and online brokerage. "I don't think we would ever do that, for obvious reasons," said John Yost, a founding partner of Black Rocket, the San Francisco ad agency that Discover used. After the acquisition, DBD began to lose ground to E*Trade, despite Lombard's reputation for having a more reliable Website and trading engine. Industry experts said that DBD's uneasy coexistence in the same organization with an army of full-service brokers who made their living charging hundreds of dollars per trade had constrained its growth. This uneasiness was reflected in the way DBD customers received access to two of MSDW's most prized possessions, Morgan Stanley research reports and IPOs. Morgan Stanley was a recognized Internet economy leader, its analysts, including Mary Meeker, were influential in the online world, and it was a lead underwriter in many of the Internet's top IPOs such as Netscape. Priceline, and Akamai Technologies. DBD began offering its clients stock research in summer 1998 in response to competition from other online brokerage firms. But DBD charged clients an extra $4.95 a month for information on one company and $34.95 a month for 40 companies (full- service clients got the reports free). The DBD research reports were edited versions called "Discover Brokerage Equity Research;" only footnotes revealed that Morgan Stanley analysts had prepared the reports. Moreover, the DBD website section on research said only that the reports came from a leading research institution." Thomas O'Connell, President and CEO of DBD, explained that the firm did not want to upset the Dean Witter brokers by making their research seem like a cheap commodity. "We don't want to do something to make life hard for them." As an underwriter of IPOs, Morgan Stanley had curried favor with the Internet community, which had produced some of the most impressive stock debuts in recent years. Morgan Stanley handed over IPO shares of Ziff-Davis and Priceline.com for resale to online underwriters E*Trade and Wit Capital Group Inc. while denying those same shares to its own online Broker.com EC-13 customers at DBD. In late April 1999, with E*Trade and Wit having their own IPO programs, Morgan Stanley finally announced plans to give DBD customers with at least 100.000 in assets limited access to IPOs Transition and Future By July 1999, MSDW decided to change its approach. DBD's O'Connell explained: We learned that customers of online brokerages are the same people as the customers of full-service firms. We also leamed that the concept of online brokerage as a distinct business from broker-based business really isn't true. It's just a different perspective. The Internet allows the customer to control the data... the broker's value is in the advice, not handling the transaction or the data. Company officials conceded the sibling forms were competing for the same business. On October 20, 1999, MSDW unveiled its new service platform, iChoice, including a fee-based account and a self-directed account with online-trading in addition to the traditional full service account (Exhibit 11). DBD was rechristened Morgan Stanley Dean Witter Online, offering $29.95 online-trading. DBD customers were given a grace period on their lower fee ($14.95 for market orders up to 5,000 shares) before they had to switch to the new, more expensive platform. The fee-based account, Enhanced Choice, offered advice and unlimited trading with a minimum annual fee of $1,000. The fees varied depending on size of assets, type of investments, and level of service required. While the posted fees were higher than at other brokerages (30bp to 2.25%). brokers negotiated the actual fees with individual clients. As one broker put it, "Here they give you flexibility to price the client where you were pricing them before." Morgan Stanley Dean Witter Online was up and running one day after its announcement. MSDW's stock surged 16% on the news, compared to the 14% price plunge after Merrill announced its cyber-trading plan in June 1999. MSDW's management was pleased with the asset and customer growth in the Choice accounts. MSDW had a record quarter after it implemented iChoice, with 70-80% of new asset flows into iChoice coming from relationships new to the firm. Moreover, existing clients who switched to the fee-based Enhanced Choice account became more profitable for MSDW than they had been under the commission-based structure. MSDW's Broker Force By the end of 1999, MSDW had a broker force of over 12,000, second only to Merrill Lynch. MSDW brokers generated an average of $325,000 in commissions, with assets per broker of 543 million. When MSDW rolled out iChoice, the average traditional Dean Witter commission was about $175. When it rolled out the iChoice program in October 1999, MSDW was sensitive to its brokers concerns. Fees on the "Enhanced Choice" account were higher than those Merrill charged, so MSDW brokers might not lose as much income. Also, MSDW brokers received a $3 cut of each $29.95 online trade if they opened the account or if the customer let them monitor it. Brokers had input into the development of the iChoice strategy, and most of them understood that MSDW had to adapt to the competitive environment. As the Internet came to be seen as a mainstream medium for investing rather than a discount outlet, brokers became more willing to offer online trading as part of their full-service menu. MSDW officials said brokers wanted to add more Internet services and weren't antagonistic about the new online program. When company president John Mack first toured Dean Witter branch offices in 1997, he observed, "There (were) real questions, fear, anger about the Internet. "Now, when I go into the branches, the question is, when are we going to be online?" In the late 1990's, MSDW expanded its army of US brokers more than twice as fast as Merrill Lynch. The number of MSDW brokers jumped 28% between 1995 and 1999, and was expected to reach 18,000 by 2005.31 James Higgins, President of MSDW's brokerage operation, considered the notion that the "broker is obsolete" hogwash. When customers' assets hit about $100,000, "over 80% of them look for some guidance in terms of financial advice." Higgins also stated, "we are not targeting any one competitor... but we are not going to take a back seat to any of our peer competitors, or the e-brokers or the discounters.":32