Internal Factors Evaluation Matrix

Morgan Stanley Dean Witter

A Strategic Audit

May 6, 1998

EXECUTIVE SUMMARY

Investment Banks are defined as financial intermediaries that focus on the capital raising needs of firms through the use of debt and equity. In this capacity, Investment Banking firms concentrate primarily on underwriting debt and equity issues, as well as provide valuable consulting information for other firms in need of merger and acquisition expertise.

A co-petitive analysis provides the analytical framework for an industry to evaluate its key external relationships relative to the industry’s customer base and supply inputs. Some customer competitors identified are investment banks offerings in the same markets, federal and municipal governments, and Big 6 accounting firms. Examples of supply competitors include commercial banks, private investors, and strategic consulting firms. Customer complementors consist of financial media, institutional investors, and software developers. Lastly, corporations subject to consolidation and higher institutes of learning compose the industry’s supply complementors

In determining "what matters" in the external environment, competitive, social/cultural, legal, economic, political, and technological forces are analyzed. Factors such as pressures for globalization, demographic trends, changing legal policies, and strong economies impact the investment banking industry.

The opportunities and threats identified here are the critical success factors in the external environment that can help position the industry to be profitable. The chief opportunities identified include the favorable economic environment that fosters mergers and acquisitions. Further, investment banks themselves have a unique window of opportunity to merge or acquire other investment banks which in turn promotes globalization. Erosion of the Glass-Steagall Act will provide long range opportunities for investment banks to diversify their offerings and lines of business.

In the short run, however, disappearance of Glass-Steagall poses major threats to investment banks as their long time underwriting monopoly is vanishing as commercial banks are gradually being permitted to provide this same service. The increase in competitiveness among investment banking firms also poses a danger—declining profit margins. To a lesser extent, private placement rules along with the loss of 12b-1 fees will present future difficulties for this industry.

With the use of tools such as the Internal Factor Evaluation Matrix and the Threats-Opportunities-Weaknesses-Strengths (TOWS) Matrix, I was able to analyze and devise one primary strategy and one secondary strategy for Morgan Stanley Dean Witter.

These two strategies were Market Penetration and Market Development. Both of these strategies have annual objectives that are attainable and which involve Morgan Stanley Dean Witter becoming the preeminent Investment Bank in the World.

The Industry

The securities industry spans a wide range of financial services that include: "1) providing a mechanism that links people who have money with those seeking to raise money; 2) delivering a means of valuing and pricing investments; and 3) offering a vehicle that investors can use to liquidate their investments" (Mote, 1995: 838). Investment banking is a sector within the securities industry that focuses on raising capital through debt and equity issues as well as providing advisory services for mergers and acquisitions (M&A). The principal investment banking firms in the United States are Merrill Lynch; Morgan Stanley-Dean Witter, Discover & Co.; Goldman Sachs; Salomon Smith Barney; and Lehman Brothers, Inc. (S&P’s Industry Survey Quarterly, 1997: 7). Foreign firms that have a similarly strong presence include Deutsche Morgan Grenfell (Germany) and Nomura (Japan). These companies operate globally and the majority of their customer base is composed of institutions.

What Matters?

In order to survive and remain profitable in today’s competitive marketplace, Investment Banks need to be able to react and adapt to changes in the external environment and ideally be proactive in impacting these forces. External environment factors can be classified into five general categories: competitive, social/cultural, legal, economic, political, and technological. Current trends that are affecting the investment banking industry include globalization, increasing emphasis on higher education, demographic changes, erosion of the Glass-Steagall Act, heightened merger and acquisition