1. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 2-1: Framework for Diagnosing Market Opportunity Seed Opportunity in Existing or New Value System Uncover Opportunity Nucleus: Identify Unmet and Underserved Needs Uncover Opportunity Nucleus: Identify Unmet and Underserved Needs Identify Target Segments Declare Company’s Resource-Based Opportunity for Advantage Assess Competitive, Technical and Financial Opportunity Attractiveness Make Go / No Go Assessment

2. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Supporting Slide 2-A: Requirements of an Effective SegmentationMeaningfulMeaningful ActionableActionable SubstantialSubstantial MeasurableMeasurable Customers must demonstrate needs, aspirations or behavioral patterns that are similar within a segment and different across segments –A distinction between a price-sensitive and a quality-seeking segment is meaningful, since the two segments demonstrate distinguishable sets of needs A company must be able to reach customers within each segment through effective and targeted marketing programs –A customer segment consisting of customers with blue eyes is not actionable, since it is very hard to identify and reach only customers with blue eyes Segments must be large and profitable enough to make the investment in serving them worthwhile –myCFO.com is targeted towards high net worth individuals, helping them manage their portfolios. Even though the number of those individuals is small, the $ amount managed is sizeable, thus constituting a substantial segment Key characteristics of the segments (e.g., size and spending patterns) must be easy to measure Source: Philip Kotler, Marketing Management, 1997 (Chapter 9, page 269) In order for a customer segmentation to be effective, it must be meaningful, actionable, measurable and substantial

3. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Table 2-1: Segmentation Approaches

4. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Supporting Slide 2-B: Geographic Segmentation — Description Geographic segmentation divides the market into distinct geographical units, such as nations, states or regions In the Internet space, geographic barriers are to a large extent lifted However, there still are many industries where local relationships and distribution channels play a key role, maintaining the need for a local focus –Webvan is currently operating in Atlanta, Chicago, Sacramento and San Francisco; entry into new geographical markets will require the building of the necessary home- delivery infrastructure –Many construction sites have a local or regional focus, since relationships with local or regional contractors and suppliers are of critical importance Country Region Urban vs. Rural Density Climate DescriptionDescription Segmentation Examples Source: Philip Kotler, Marketing Management, 1997 (Chapter 9, page 257)

5. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 2-9: Schwab — Defining Existing or New Value System Release Trapped Value Create New Value

6. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 2-10: Schwab — Unmet and Underserved Needs (1997 Timeframe) Plan Savings Goal Determine Optimal Asset Allocation Receive Ideas and Recommendations Place Order Sell Stock Research Stocks Track Portfolio Performance Receive Dividends Unmet and Underserved Needs Planning tools to simplify goal setting Tax Reporting Aggregation of investment information Place order and track status anytime, anywhere Access real-time account information Place order and track status anytime, anywhere Download to tax software Education on investing Process Steps

7. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Supporting Slide 2-G: Schwab — Opportunity Attractiveness vs. Resource Availability High LowHigh Low Opportunity Attractiveness Resource Availability Note: Opportunity attractiveness based on competition level and opportunity financials Full Management Low Price Quality Advice Customer Service Quality Information

8. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Supporting Slide 2-H: Schwab — Resource Availability Company Capabilities Partner Capabilities Overall Segments Capability highly addressing segment need Capability moderately addressing segment need Capability not addressing segment need

9. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Supporting Slide 2-I: Schwab — Effectiveness of Different Segmentation Methods = Low= High Segmentation Methods Segmentation Criteria

10. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Supporting Slide 2-J: Schwab — Needs-Based Segmentation Source: Jeffrey Veen, Hot Wired Style, Monitor Analysis “Saving for a Goal” Saving for retirement Saving for college Saving for house down payment Saving for retirement Saving for college Saving for house down payment “Traders” Hobby investors Active traders Hobby investors Active traders “Financial Planning” Estate planners Tax planners Trust fund managers Estate planners Tax planners Trust fund managers Schwab’s market segments fall into three categories

11. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Supporting Slide 2-K: Types of Needs and the Tools to Surface Them Standard ToolsNew Tools Manifested Needs Latent Needs Tool highly surfaces need Tool moderately surfaces need Tool does not surface need

12. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 2-11: Schwab — Segmentation (1997 Timeframe) Buy and Hold Current Offline Schwab Customer High Net Worth (<$1M) Married Not Schwab Customer Other White Collar Frequent Trades Single Blue Collar Retiree University Student Children > 30 No Children < 30 Mature ( > 55) High Priority Secondary Priority Tertiary PriorityDe-emphasize CI JK D E A G H F M L N OPB

13. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC High performance levelMedium performance level Low performance level Exhibit 2-12: Schwab — Competitor Map to Segments

14. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 2-13: Schwab.com Overall Opportunity Assessment

15. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 3-1: Components of a Business Model Value Cluster Marketspace Offering Resource System Financial Model

16. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Supporting Slide 3-A: Point-Counterpoint: Single Vs. Cluster of Benefits

17. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 3-2: Shattering Myth That Consumers Care Only About Prices On- line PERCENTAGE OF CUSTOMERS WHO CARE ABOUT ATTRIBUTE ATTRIBUTE Source: JP Morgan Report: etailing and the five Cs

18. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Table 3-1: Consumer Decision Process — Flower Example Disposal Loyalty Satisfaction Purchase Decision Evaluation of Alternatives Information Search Problem - Recognition PRE-PURCHASE PURCHASE POST-PURCHASE

19. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Supporting Slide 3-B: Consumer Decision Process — Flower Example Flowers Disposal Loyalty Satisfaction Purchase Decision Evaluation of Alternatives Information Search Problem - Recognition Pre-Purchase Purchase Post- Purchase Need recognition, potentially triggered by a holiday, anniversary or everyday events Search for ideas and offerings, including: –Available on-line and off-line stores –Gift ideas and recommendations –Advice on selection style and match Evaluation of alternatives along a number of dimensions, such as price, appeal, availability, etc. Purchase decision Message selection (medium and content) Post-sales support –Order tracking –Customer service Education on flowers and decoration Post sales perks

20. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 3-8: Schwab Egg Diagram Schwab Learning Center Live Events Principles of Investing Understanding Market Cycles “Did You Know” Q&A Schwab Signature Services Schwab AdvisorSource Options Service Global Investing Service Online chat with Customer Service Representatives Customer Service via phone Customer Service via email Customer Service at Branch My Watch List Margin Loans Money Transfers Automatic Investing Options Service After Hours Trading Account Protection Bill Payment Overall General Goal Planner Investor Profile Sample Investment Plans Retirement Retirement Planner IRA Analyzer Product Offering On-Line Investment Process Get educated about investing Plan investments Decide on Investment Perform Investment Post Investment Support Perform Research Estate Estate Tax and Probate Calculator Alternatives Comparison College College Planner Tax Tax Strategies IRS Withholding Calculator Overall Quotes and Charts Analyst Center Stocks and Options Stock Analyzer Bonds and Treasuries Schwab BondSource Services CDs and Money Markets SchwabOne Annuities Schwab Select Annuity Life Insurance Insurance Needs Calculator

21. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 3-9: Schwab Resource System Optimize Staff in Branches Lower Prices Train IT Staff 24x7 Access Media General S&P Hoover s Phone Branch Online Charge For Value Added Services Provide Lower Commission for Frequent Traders Provide Lower Commission for Frequent Traders Innovative Products Center of Knowledge and Innovation Investm ent in R&D Cutting Edge Technology Investment in IT System Reliability Multiple Points of Access Hire IT Staff Competitive Commission Rates Streamlined Operations Learnin g Center = Resources = Capabilities = Core Benefits Superior Service Partnerships with Content Providers Invest in CSR Trainin g Align CSR Compensation with Quality of Service Align CSR Compensation with Quality of Service Customer Service Onesource

22. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 3-10: Schwab Resource System = Company needs to outsource or partner = Company can perform in- house Optimize Staff in Branches Lower Prices Train IT Staff Capable IT Staff 24x7 Access Media Genera l S&P Hoover s Phone Branch Online Charge For Value Added Services Provide Lower Commission for Frequent Traders Provide Lower Commission for Frequent Traders Innovativ e Products Center of Knowledge and Innovation Investme nt in R&D Cutting Edge Technology Investment in IT Investment in IT System Reliability Multiple Points of Access Hire IT Staff Competitive Commission Rates Streamlined Operations Learnin g Center Superior Service Partnerships with Content Providers Invest in CSR Trainin g Align CSR Compensation with Quality of Service Align CSR Compensation with Quality of Service Well-Trained CSRs Onesource

23. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Downsized branch staff Downsized branch staff High quality Investment Information High quality Investment Information Innovative products Low price Large, well trained sales force Large, well trained sales force Technology Leadership Supporting Slide 3-K: Schwab Activity System Superior service Investment in IT 24 x 7 Customer service 24 x 7 Customer service Exceptional team of engineers Exceptional team of engineers In-house technology developmen t Large investment in R&D Large investment in R&D System able to handle large volume Increase in trade volume Increase in non-trade revenue Multiple points of access On-line Phone Branch Comprehensive information Comprehensive information Partnership s with content providers Hoover s Online S&P Comstock Media General

24. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Supporting Slide 3-L: Schwab Value Proposition “Use technology to offer innovative products and superior service at lower prices to investors unwilling to pay for investment advice”

25. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Table 3-6: Partners Give/Get Matrix

26. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 3-11: Schwab Revenue Growth Choices New Existing PRODUCTS ExistingNewExistingNew Advanced Software Tools After-hours trading International Expansion ON-LINE MARKETS OFF-LINE MARKETS International Expansion Learning Center In-Branch Seminars New Online Investment Bank

27. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Supporting Slide 3-N : Business Model Choices Must Be Consistent With Sources of Competitive Advantage Content Production eBusiness Interface Content Utilization Content Production eBusiness Interface Content Utilization Content Production eBusiness Interface Content Utilization Content Production eBusiness Interface Content Utilization Content Production Content Utilization Business Model Options (Not Mutually Exclusive) Forward- Integrated Producer Backward- Integrated User Supply Aggregator Demand Aggregator

28. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Traditional Mass Marketing Television (network, cable, local) Print media National and local radio Athletic event sponsorships Table 5-6: Schwab Marketing Communications Broad Individualized Off-lineOn-line Communication Media Audience Focus Direct Targeted direct mail Calls made to investors who demonstrate difficulty (e.g. large periods of inactivity) “Red hot” calls for emergency investment decisions Personalized Personalized web pages (mySchwab.com) General Approaches Banner ads Affiliate sites Sponsorship of sites (e.g. Schwab sponsorship of Mini Center on Babycenter) Leveraging customer base (e.g. investor customer base leveraged for on-line banking) Free information on site Innovative approaches (e.g. on-line commissions donated to Breast Cancer Foundation)

29. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 5-14: Assessment of Key Branding Elements for Schwab and E*Trade = Very Low = Low = Moderate = High = Very High

30. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 5-14: Assessment of Key Branding Elements for Schwab and E*Trade (continued) = Very Low = Low = Moderate = High = Very High

31. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 5-15: Assessment of Key Brand Attributes for Schwab and E*Trade Schwab.cometrade.com = very low= low= moderate= high= very high

32. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Processes Assets Systems People Source:Christensen, Clayton M. 2000. Meeting the Challenge of Disruptive Change. Harvard Business Review 78, no. 2 (March-April). MAPPING THE RESOURCE SYSTEM DELIVERY SYSTEM Supply Chains Supply Chains Exhibit 6-4: The Delivery System Needs to Support and Reinforce the Resource System

33. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 6-13: Schwab IT Infrastructure Source: Tempest, Nicole and Warren McFarlan. 1999. Charles Schwab Corporation (A). Case no. 9-300-024, 9 September. Boston: Harvard Business School Publishing.

34. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 6-14: Timeline for Schwab Innovations Entire trade clearing system brought in-house Equalizer: DOS based product enabling PC users to trade stocks on-line Telebroker: 24x7 quote and order placement by telephone SchwabLink: Service for fee- based financial advisors OneSource: Mutual fund program allowing investors to purchase Schwab and non-Schwab funds free of charge Streetsmart: Windows- based software allowing on-line trading of equities, bonds and mutual funds October 1995 eSchwab: Electronics software package dialing into Schwab system June 1995 Advisor Source: Referral service for fee- based advisors March 1996 Upgraded eSchwab: First major brokerage firm to offer trading via the Internet September 1997 Customized asset allocation tool available on-line October 7, 1997 SchwabLink available on the web October 1, 1997 First speech recognition service for investors January 27, 1998 MoneyLink: Electronic funds transfer service May 14, 1998 First U.S. website enabling order placement in Chinese January15, 1998 Schwab.com launches January 20, 1998 IRA Analyzer launches September 21, 1998 CD ROM Tool for retirement setup and monitoring November 23, 1998 Web tool to track and benchmark investor performance April 16, 1999 New site based on user input April 27, 1999 Retirement Planner on-line August 14, 1999 Velocity software trading system for active investors September 8, 1999 New web tools for investment advisor offering May 24, 1999 MySchwab launch August 19, 1999 Plans for cross- platform wireless trading November 9, 1999 Paperless trading with eConfirms October 20, 1999 After Hours trading November 23, 1999 Velocity 2.0 launch December 1, 1999 Enhanced Analyst Center December 22, 1999 New on-line mutual fund tools February 3, 2000 Learning Center: Interactive education tool for on-line learning March 7, 2000 Schwab and Barclays announce internet- based foreign exchange service March 15, 2000 Schwab expands advice offering with Portfolio consultation March 31, 2000 Schwab and Dow Jones unveil on-line Chinese news and research service May 7, 2000 Stock Analyzer launched, offering third party equity analyst recommendations and earnings projections

35. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 7-10: Charles Schwab -- Customer Acquisition Stage Step 1: Articulate the Business Strategy “Use technology to offer innovative products and superior service at lower prices to investors unwilling to pay for investment advice” Schwab Learning Center Live Events Principles of Investing Understanding Market Cycles “Did You Know” Q&A Schwab Signature Services Schwab AdvisorSource Options Service Global Investing Service Online chat with Customer Service Representatives Customer Service via phone Customer Service via email Customer Service at Branch My Watch List Margin Loans Money Transfers Automatic Investing Options Service After Hours Trading Account Protection Bill Payment Overall General Goal Planner Investor Profile Sample Investment Plans Retirement Retirement Planner IRA Analyzer Product Offering On-Line Investment Process Get educated about investing Plan investments Decide on Investment Perform Investment Post Investment Support Perform Research Estate Estate Tax and Probate Calculator Alternatives Comparison College College Planner Tax Tax Strategies IRS Withholding Calculator Overall Quotes and Charts Analyst Center Stocks and Options Stock Analyzer Bonds and Treasuries Schwab BondSource Services CDs and Money Markets SchwabOne Annuities Schwab Select Annuity Life Insurance Insurance Needs Calculator 1. Value Proposition 2. Marketspace Offering High quality Investment Information High quality Investment Information Innovative products Low price Technology Leadership Superior service 3. Resource System

36. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 7-11: Schwab Desired Outcome Summary MARKET OPPORTUNITY Significant Opportunity Financially Attractive Segment Competitively Attractive Segment BUSINESS MODEL Value Proposition vs. Competition Offer vs. Competition Capabilities vs. Competition Sustainability of Value Proposition CUSTOMER INTERFACE & OUTCOMES Lower Customer Acquisition Costs Transition Customer Base Outperform competition on Interface Perceptions Customer Satisfaction & Loyalty IMPLEMENTATION & BRANDING Brand Associations vs. Competition Best-in-class IT Infrastructure Ability to Deliver Brand Promise FINANCIAL EVALUATION Revenue Profit Cost Balance Sheet Business Model

37. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 7-12: Charles Schwab -- Customer Acquisition Stage Business Model Business Model Implementation & Branding Implementation & Branding Customer Financial Build brand Increase system uptime Train branch staff Improve customer service Improve customer service Increase customer loyalty Increase profit Optimize cost Increase revenue Invest in technolog y Invest in technolog y Increase number of IT staff Increase customer satisfactio n Increase customer satisfactio n Increase usage Acquire new customer s Acquire new customer s Market Opportunity Market Opportunity Avoid crowded markets Play in attractive market Target attractive segments Leverage capabilitie s to deliver offering Provide unique VP Provide attractive offering

38. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Table 7-4: Charles Schwab -- Customer Acquisition Stage Current and Target Levels for Select Metrics *Source: Tempest, Nicole and Warren McFarlan. 1999.Charles Schwab Corporation (B). Case no. 9-300-507, 13 September. Boston: Harvard Business School Publishing.

39. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Exhibit 8-21: The Rise in Schwab’s Market to Sales Ratio

40. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Competitors in the Brokering environment  Full Service (Merril Lynch) $117  Advice & research & Personal  Prof. products  Other services  Bricks (expensive)  Discount (Charles Swab) $ 64  Less advice  No research  Less opulent  No products  On-line E-trade $30 - $9  No advice No research No bricks No services

41. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Two major problems if Charles Schwab wants to move online  Cannibalization – Lower margin channel starts taking away higher margin clients  Channel contamination - Incur cost in one channel, get income from other  ESchwab and Schwab was fundamentally separate

42. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC  Should Charles Schwab merge channels –  Q1: Online growth (95% of millionaires had an online account)

43. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Pros and cons of channel merging  Pros of channel merging  Employees want it  Online grows  Cons of channel merging  Revenues  Cost  Stock (40% employee owned)  Overworked – low morale  Ends up dead

44. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Charles Schwab decision (1997)  Charge $29.95 per trade up to 1000 shares for all customers with an online account  Do not aggressively promote on-line in order to remove focus from price competition  Give PC’s and Web access to all employees  Make customers migration one of the components to compute the bonus of Customer Service Representative

45. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC What happened after Schwab moved online?  500 000 accounts switch to-online in 5 months  Commissions per trade fall significantly  3% fall in profit  Mid term  Trades pick up to $115 000 per day  Average commission fall to $53 in Q4 98  Revenues increase 19% during 1998  Stock price rises 158% from July to Dec 98

46. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC  Income 3Q 1999 $ 1 854  $ 418

47. Last Updated: 01/10/01 Copyright  2000 by Marketspace LLC Competitor map H L H L Price Service ML CS E-trade