- Email: [email protected]
Strategy as making choices: a discussion with John Bachmann, Managing Principal of Edward Jones
European Management Journal Vol. 17, No. 3, pp. 275-281, 1999
~
Pergamon
PIh S0263-2373(99)00006-7
© 1999 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0263-2373/99 $20.00 + 0.00
EXECUTIVE INTERVIEW
Strategy as Making Choices: A Discussion with John Bachmann, Managing Principal of Edward Jones CONSTANTINOS MARKIDES, London Business School
Background to the Interview With 1996 capital of $465 million, the St. Louis, Missouri-based partnership of Edward Jones is only the 34th largest brokerage firm in the USA. But the firm is one of the most profitable in the volatile securities industry and is growing like wildfire. Since 1981, it has expanded its broker force at a 15% annual rate, without making any acquisitions. It now boasts more than 2500 partners - - from a 1981 count of 8. As described by many outside observers including Peter Drucker, the firm is a federation of highly autonomous entrepreneurial units which are bound together by a strong set of values and beliefs. The entrepreneurial units are Edward Jones" brokers, distributed all across America. They operate out of one-person offices located in small communities and they sell selected financial products to people living in their community. They are all bound together by the strong cultural belief that their job is to offer sound long-term financial advice to their customers, even if that does not generate short-term fees for them. The 'customer-first' value is ingrained in every single broker working in the Jones' system. It wasn't always like this. Over the past 50 years, the firm has gone through three evolutionary stages: It was originally set up by Mr Jones Sr. to be a finEuropean ManagementJournal Vol 17 No 3 June 1999
ancial department store - - to satisfy all the financial needs of a customer as a one-stop shopping store. The department store concept slowly evolved in the 1960s into a "delivery-system" for rural America, after Ted Jones (the son of the owner) set up small offices across rural America and grew the firm into a network of 200 offices. This was the first time that brokers were actually based in small towns (as opposed to travelling there every week or two) and the idea was to convert Edward Jones into a distribution network to sell mutual funds in rural America. The third stage in the evolution of Edward Jones took place after the arrival of the firm's managing principal, John Bachmann, in 1970. In what he describes as a 'defining moment' for the firm, he set about to convert Jones into a 'merchant' - - that is, an informed buyer for the end customer. According to Bachmann, the difference between being a distributor and being a merchant is crucial: A distributor is structured around the product and tries to sell only profitable products. A merchant, on the other hand, is structured around the end consumer. He acts as an informed buyer for the investor, selecting only the products that are good for the investor, as opposed to products that generate fees for the brokers. Most investment firms look at brokers as their customers. We don't. For us, the customer is the individual investor that signs the checks... This vision of being a merchant for the individual 275
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investor has guided every move of Edward Jones since 1980. It has also shaped its current successful strategy, the main elements of which are the following: *Unlike its major competitors (e.g. Merrill Lynch, Smith Barney) that sell their own in-house mutual funds, Edward Jones does not manufacture the products it sells. It acts only as a distributor for the products of a few selected manufacturers such as Capital Research, Putnam and Morgan Stanley. *Unlike most other competitors in the industry, the company targets and sells its products only to individual investors, never to institutional investors. *The firm sets up offices in selected areas — usually small communities or specific areas within cities where there is a ‘sense of community.’ In nearly all cases, and contrary to traditional wisdom which emphasizes the exploitation of economies of scale in such offices, the Jones office is a one-person operation. That person has extraordinary autonomy to manage the office as if it is his/her own business. Every branch is a profit center. Brokers are tied to the home office through a satellite communications network that broadcasts homemade TV programming. *The firm sells only selected products — often transparent, long-term products such as large-cap equities and highly-rated bonds. It avoids selling risky initial public offerings, options or commodity futures.
These choices were not easy to make. Yet, choices were made and the company has remained faithful to these choices for more than 20 years. As John Bachmann says: ‘These principles are cast in stone. We don’t debate these things.’ The interview that follows was conducted by EMJ’s Associate Editor, Constantinos Markides on 12 November 1997: EMJ: A recent Fortune article1 called your firm the ‘Wal-Mart of Wall Street’ because, like the retailing giant, Edward Jones originally built its business in rural America rather than in big cities. How did this particular strategy come about? JB: Mr. Jones, Sr. founded what was then Edward D. Jones & Co. as a financial department store located in St. Louis, Mo. By financial department store, I mean a ‘one-stop shop’ designed to satisfy all of an individual’s financial needs. However, Ted Jones, the son of the founder, did not like big cities and wasn’t interested in running a business in St. Louis. Instead, he went to Montgomery City, Mo., and set up shop there. Initially, he travelled from Montgomery City to surrounding towns and cities to sell stock and mutual funds. But throughout the 1960s, he established more than 100 offices for Edward D. Jones & Co. all over the countryside, each served by a dedicated salesman. Whereas his father built a department store for financial products and services, Ted Jones was building a delivery system to reach rural America. The strategy was really new at the time. EMJ: In what way was it new?
*The firm remains a partnership so that people feel and think like owners, not employees. *The glue that ties everything together is Jones’ strong culture — it behaves like a family whose mission is to help ordinary people invest their money wisely. These are the main elements of the successful Jones’ strategy. John Bachmann likes to point out that each one of these elements involved some kind of tradeoff that the company had to make. For example: %we target individual investors not institutional ones. We buy good securities and keep them a long time instead of trying to maximize transaction fees. Rather than have big offices in large cities, our offices are small and are placed in small communities to be convenient to the customer. Our offices are one-person operations not multi-person ones. We do not manufacture our products and we showcase the products of a limited number of leading houses. We do not sell all products — we select transparent and safe products to promote. We remain a partnership rather than try to go public% 276
JB: Ted’s business concept was innovative in two ways. At the time, the standard practice among salesmen serving rural markets was to travel to those towns once a week or so. Our approach, however, was to put someone there on a permanent basis. In addition, our method of serving investors in these towns was different. Each office had just one individual running it, so those who wanted to work for us had to be entrepreneurs. EMJ: How has this concept evolved since then? JB: Given the nature of our market, our customers were very conservative investors. As a result, we sold only mutual funds and stocks of high-quality companies. That was consistent with Ted Jones’ vision. He saw Edward Jones as a distribution network for mutual funds in rural America. From a product standpoint, we had a singular focus — high-quality equity investments. When I left sales to join management in 1970, the stock market was down and so were our revenues. I was asked to diversify our product base to enable the firm to survive the bear market of the time. In April European Management Journal Vol 17 No 3 June 1999
EXECUTIVE INTERVIEW
of 1972, I prepared a memo and sent it to Ted Jones. In retrospect, it was a defining moment for us.
sophy is simple: Buy good securities and keep them for a long time.
In that memo, I argued that our basic formula (operating small offices profitably) worked very well and it was time to codify it. In other words, we needed to look at our business as a going concern, rather than just running it opportunistically. I further argued that the patent we had on the small office would be exploited, either by us or by someone else. At that time, no one in our industry knew more about this type of business. What we needed was not a new strategy, but the planning and administrative machinery required to carry out our proven strategies on a greater scale. In that sense, we could learn more from companies like McDonald’s or Holiday Inn than from Goldman Sachs.
Number four, we put offices in locations convenient to customers. This approach encourages face-to-face relationships and reduces the likelihood of misunderstandings.
At that point, we established our vision. We would expand our network to 1,000 offices and build the best retail securities firm in the U.S. Making such a commitment to the retail market meant that all our actions had to be designed to enhance the retail salesman’s ability to serve only individual investors. We had to develop and install procedures to allow us to effectively manage and control 1,000 offices. We also had to revise our recruitment and hiring policies, our training and compensation policies and our reporting systems. In some sense, we were already doing many of the things I proposed. What I was suggesting was to codify them and structure them as part of a master plan.
Number seven, we are organized so that every office is a separate profit center. If you do the work, you get the rewards.
EMJ: Apart from this emphasis on the retail outlets, what other elements did the ‘master plan’ contain? Did you make any other major decisions at the time? JB: We made a number of clear choices in 1972 — choices that at the time were not easy to make. In retrospect, these were our trade-offs. Initially, there was much debate. Once established, however, we cast these principles in stone and from that point on, there was no debate. EMJ: Can you be a bit more specific? What precise choices did you make? JB: Number one, the individual investor is our customer. We don’t cater to institutional investors and we won’t spend a penny on proprietary trading, institutional research or institutional trading. Number two, we do not manufacture our own products nor do we have ‘house brands’ or proprietary products. We are a distributor for the products of a handful of prestigious suppliers of our choice. Those we have selected include Capital Research, Putnam and Goldman Sachs. Number three, we do not offer every type of product. We eliminate those that history has shown to be poor investments for individuals. Our investment philoEuropean Management Journal Vol 17 No 3 June 1999
Number five, each of our offices is run by one Investment Representative (IR) and one assistant. This approach may sacrifice scale economies, but it attracts high achievers and entrepreneurial people. Number six, we remain a partnership, which allows us to think like owners rather than employees. At some point, this structure could constrain our capital base, but to date, it has not.
Number eight, we will not be a discount broker. And finally, we rent our offices. We don’t invest in brick and mortar, we invest in people and technology. EMJ: You’ve certainly made some clear choices! JB: As I said, we cast these principles in stone. They are not up for debate! EMJ: How well did this concept work? JB: Early on, we made a serious mistake: we thought the brokers were our customers. This was a big mistake. The broker is not the customer — the customer is the individual investor who signs the cheques. If we view the brokers as our customers, we end up selling products that are good for them, rather than selling what is good for the investor. For example, in the 1970s, we sold closed-end mutual funds. In retrospect, I can tell you we should never have offered these investments because they always drop in price. But everyone in the industry was doing it and we were swept along. Today, we don’t sell these products, nor do we sell most preferred stocks or ‘B’ shares. Even today, most investment firms view their brokers as their customers. We view them as our partners in serving the needs of the customers. We learned from our mistake! EMJ: How did you come to realize that the individual investors, not the brokers, are your real customers? After all, as you also said, even today many investment firms consider the brokers as their customers. 277
EXECUTIVE INTERVIEW
JB: My view of the customer evolved from my view of the business. I didn’t see the business as a distribution system the way Ted Jones saw it. Instead, I felt we should act as a merchant — that is, as an informed buyer for the customer. There is a fundamental difference between a distributor and a merchant. A distributor is structured around the product and tries to sell only profitable products. A merchant, on the other hand, is structured around the consumer. In acting as an informed buyer for the investor, the merchant tries to select only the products he believes to be good for the investor, as opposed to products that are easy or fashionable for the brokers to sell. In 1980, when I became managing partner, I realized we were acting as a distributor. Our focus was the distribution of mutual funds. I began asking myself, ‘Why are we structured around the product? What if the product goes out of fashion?’ We had to reposition ourselves so the centre was the relationship with the customer, not the product. In 1987 we asked ourselves, ‘Who is the customer?’ As a result, we redefined who our customer is — not the broker, but the individual investor. EMJ: Isn’t a merchant the same as being a department store? Have you not gone full-circle, back to the original concept of Mr. Jones Sr.? JB: No, there is a big difference between the two. A department store sells everything; a merchant, on the other hand, deliberately selects the products to be made available to the end consumer. The merchant acts as an informed buyer for the end consumer. To that end, we very carefully select the products we offer our customers. For example, a few years back we passed up the opportunity to offer one million shares of GM preferred shares because at the time, we thought GM was risky. EMJ: How do you decide what products to offer and what not to? JB: We have multiple mechanisms in place to screen out what’s not appropriate. For example, our culture helps our marketing people decide what is right for our customers and what is not. We also have an Investment Advisory Committee made up of industry experts outside our company. The role of the committee is to help us review investments we currently offer and those we may be considering. At the end of the day, our brokers are free to select what they offer to their customers, but they must operate within the constraints we have established. Our culture does not attract brokers who are speculators; however, they are human, so we have information systems that alert us if someone should do something silly. Beyond our procedures and systems, however, is a simple fact about our business — the customer walks in and talks to the broker face to face. 278
Our brokers are never far from their customers, even in the urban areas, and two-thirds of our offices are now in the big cities. That’s the best compliance system we have; the fact that every one of our brokers knows the customers well and deals with them faceto-face. You’re not likely to do something silly with the money of people you know that well, are you? As an Edward Jones broker, you know that if the customer is unhappy, he or she will be sitting in the office waiting for you. EMJ: Do you think this is the real reason for your success so far — your closeness to the customer and not what other people think is the fact, that you go after customers in geographically-isolated areas? JB: It is not geography that makes us successful. It is face-to-face contact with the customer. Remember, two-thirds of our offices are now in the big cities. Wherever we go, we look for a sense of community. I am not interested in New York City — I’m interested in Greenwich Village and Gramercy Park. I am not interested in London, but rather in how I can put my arms around it. My interest is in Chelsea or Fulham or any place that is like a village and has its own sense of community. EMJ: This implies that your brokers and the way they deal with customers is very important to your system. JB: Exactly. Our people are high-achievers and entrepreneurs. We encourage this by structuring each branch office as a one-person operation. The moment you put ten people together, they start conspiring against management. We put one person in the branch and we give him or her total freedom. Right away, this person begins behaving like a store owner, asking, ‘What shall I do here to get business?’ Also, we do not put our people in competition with each other. We do not rank our people. We develop targets for each broker based on the market and the individual’s realities. If brokers meet their targets and the firm is profitable, they are rewarded. We treat every branch as a profit center and we assign overhead to each, including our investment in training new brokers. We know each branch’s direct expenses and contribution to head office. We calculate the profitability of each branch and if we make at least 6 percent on sales, bonuses are calculated on a matrix based on the firm’s success and the broker’s success. The bonus is exponential to broker profitability, therefore, everybody has an incentive to help others succeed. All brokers share a common goal — helping the firm reach its profit target. EMJ: Why the 6 percent target? JB: That’s what we need to make to enable our partners to repay the loans they take out to buy stakes in the company. The model assumes capital has a European Management Journal Vol 17 No 3 June 1999
EXECUTIVE INTERVIEW
cost, so true profitability is achieved only after we have recovered our cost of capital. EMJ: How important are the incentives in getting the behavior you want out of your brokers? JB: The incentives are important, but really what makes the difference for us is our culture. We are like a bumblebee — aerodynamically, I can prove that it should not be able to fly; yet it does! We work hard to maintain our culture. We ceaselessly repeat our values, our history and our aspirations to our people. We continuously have meetings to communicate these values. EMJ: Your brokers are spread all over the place. How do you communicate with all of them and how do your brokers sell? JB: We have our own satellite network and our own television studio. We can broadcast TV programs to all the branches, enabling us to train brokers or to educate customers. In 1987, when we went to satellite, we were only the second company to do so, following Federal Express. It cost us $27 million and for an additional $3 million, we put in TV. Because our people are isolated, we need this tool. Now we can talk with all of them as if we’re all in the same room. We can also invite customers into the branches and talk to them directly. We have also made significant investments in developing our own technology systems, which, by the way, we never license. In 1995, we went from mainframe to client/server computer systems and we now have the largest client/server system in the world. We went straight from mainframe to network without the intermediate stage of personal computers. We decided not to support PCs because we view them as isolated islands of technology that would be difficult to connect into a coherent network. We sell like politicians sell — we go around, knocking on people’s doors, calling on them and trying to convince them to invest with us. Our brokers go out in the community and meet people. We work very hard to train our people to do this well. What our brokers really sell is solutions to investors’ financial concerns. We are in the business of providing sound, face-to-face financial advice to individuals. We used to target 45- to 50-year-olds as our primary audience. These people have children who are out of college, so they have lots of money and they are at that stage in life when they’re beginning to think about retirement. Now, however, the government is moving away from its role of providing for retirees, so even young people need to worry about retirement savings. Therefore, we now describe our target market as those who want financial peace of mind. Increasingly, those are not just the people who are 45–50 years old, but young people as well. European Management Journal Vol 17 No 3 June 1999
EMJ: But don’t you think your competitors also target these same people? Why would a consumer buy from you? JB: Our competitors sell symbols and status; we sell simplicity. Their image is polo ponies, ours is grandchildren on pony rides. Of course, the difference goes deeper than that. When doing business with some of our competitors, investors often find themselves in a busy boardroom with the feeling that they are taking time from the broker. It can be intimidating. We put people in a quiet room and we don’t hurry them. We want investors to feel comfortable. In addition, our investment philosophy is buy-and-hold. We encourage investors to buy good securities and keep them for long periods. Our competitors can also pick good securities, but their systems are often based on trading, rather than holding for long periods. A trading strategy holds more potential benefit for the broker than for the investor. Every firm says they put the customer first, but we do it and our marketing research shows that our customers agree. Other strengths are evident when we’re compared directly to competitors. A leading U.S. publication for investors ranked us No. 1 in broker conduct and we have been ranked No. 1 in equity research by The Wall Street Journal. EMJ: How difficult is it for your competitors to copy your formula? JB: Our system is difficult for established players to emulate. Merrill Lynch is trying to copy our strategy in small markets, but there are significant differences. They haven’t copied us culturally and they would never make the trade-offs we have. They wouldn’t want to. I believe we have a sustainable competitive advantage. It doesn’t stem from any single thing we do. Rather, it derives from the system we have built — the numerous things we carry out on a daily basis that reinforce each other and form a mosaic which is recognizably different to our customers. Our competitive advantage stems not from one or two things, but from this mosaic and all the things that reinforce it. EMJ: You also seem to have achieved a remarkable balance on a variety of things. For example, you have struck a delicate balance between local autonomy without losing the benefits of size. You have also achieved local entrepreneurship without losing control. How have you managed such a feat? JB: We allow our people autonomy, but we also make sure we do not lose control. Our culture and our values are the foundation. In addition, we train our people and we give them a clear explanation of 279
EXECUTIVE INTERVIEW
what is expected of them. Our information systems and the operation of each office as a profit centre allow us to monitor how things are going, relative to the guidelines we have established. We also have a tough compliance department! You can think of us as providing the canvas and the paint. These act as boundaries. Within those boundaries, it is possible to create very different paintings. Within limits, one still has freedom of expression. EMJ: How is the industry changing and what do you see as your biggest challenges for the future? JB: The securities market has exploded. From a niche market, it has grown to become a mass market and now everybody buys securities. Edward Jones is coming out of a niche position itself. Our biggest challenge is to build our brand name. Right now, we have virtually no brand recognition. We need to put more emphasis on pull marketing while maintaining human delivery. Where we add value for customers is in offering sound, face-to-face financial advice. We need to communicate that message effectively through the media. That takes size, so continued growth is vital. We also have new competitors who make the same promise to the consumer that we do. These are not our traditional competitors like Merrill Lynch, Dean Witter or Smith Barney. They are the super-regional banks like Bank One, First Union Bank and NationsBank/Bank of America. Not only are they buying securities firms, they have branch networks in the communities we serve. They can go after our customers and offer face-to-face advice as we do. Ten years from now, these will be our competitors. The industry is also undergoing a few other changes: the population is aging and living longer; the industry is consolidating as banks are merging with each other; globalization is accelerating; and technology is changing rapidly. There is also convergence among similar but not identical financial institutions, as in the case of a bank merging with an insurance company. All this will intensify competition and many of today’s value-added financial products will turn out to be commodities. For Edward Jones, all this implies we will need to build our brand name; build our market share both domestically and internationally; enhance our technology to be able to deliver; exploit the internet; intelligently expand our product portfolio; and aggressively cut our cost base. We need to grow and to establish a clearly differentiated image globally, but we cannot forget cost control.
280
EMJ: Don’t you think that the rise of electronic trading and the emergence of low-cost brokers such as E-Trade is a serious threat to the Edward Jones formula? JB: Not really. The past few years have been kind to do-it-yourself investors. But people forget that the market can also go down. Many of these investors will suffer when the market turns sour. Our counsel will be attractive in a down market — in fact, it may be especially so. EMJ: So, you do not think that the Edward Jones formula depends too much on the stock market continuing to grow? JB: To the contrary! Our system will show its true value to the customer in a downturn. Edward Jones serves as a ‘shock-absorber’ for the end consumer. Customers come to us for advice. This advice will be especially useful in bad times. EMJ: As you grow, what major risks will you face? JB: We must stay true to our principles. Twenty years ago, we made certain tradeoffs. They were difficult choices to make, but our success is based on the fact that we stayed true to them. I believe that as we grow, the most important (and most difficult) task I have is to say no. EMJ: Will you ever change the choices and decisions you made twenty years ago? JB: We would re-evaluate them if confronted with strong external indicators of fundamental changes taking place in the market. For example, we now have a mass market. This implies that we cannot have only one broker in each town, because there is simply too much business for one person to look after well. Our job now is to convince our brokers to worry not about territory, but about market share. In other words, to communicate that it is to everyone’s advantage to increase market share and market standing. This is one example of having to rethink our original choices. We remain willing to do so again if necessary, but we have to be careful not to destroy this delicate mosaic we have created in the name of adjusting to changes.
Note 1. Richard Teitelbaum: The Wal-Mart of Wall Street. Fortune, October 13, 1997, pp. 70–72.
European Management Journal Vol 17 No 3 June 1999
EXECUTIVE INTERVIEW
CONSTANTINOS MARKIDES, London Business School, Sussex Place, Regent’s Park, London NW1 4SA.
JOHN W. BACHMANN, Managing Principal, Edward Jones, 12555 Manchester Road, St. Louis, Missouri 63131, USA.
Constantinos Markides is Professor of Strategic Management at London Business School and Associate Editor of the European Management Journal. He has published in the fields of international competitiveness, corporate restructuring, refocusing, and international acquisitions. Current research includes management of diversified firms and the use of innovation and creativity to achieve strategic breakthroughs.
John W. Bachmann is Managing Principal of Edward Jones, one of the most profitable brokerage firms in the USA, and one of the fastest-growing. Since 1980, Bachmann has brought the firm to the forefront of the securities industry in terms of training and technology. He is a past chairman of the Securities Industry Association and a past member of the Board of Governors of the Chicago Stock Exchange. He is also a past and present board member of several philanthropic, academic and civic organizations including the St. Louis Art Museum.
European Management Journal Vol 17 No 3 June 1999
281
~
Pergamon
PIh S0263-2373(99)00006-7
© 1999 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0263-2373/99 $20.00 + 0.00
EXECUTIVE INTERVIEW
Strategy as Making Choices: A Discussion with John Bachmann, Managing Principal of Edward Jones CONSTANTINOS MARKIDES, London Business School
Background to the Interview With 1996 capital of $465 million, the St. Louis, Missouri-based partnership of Edward Jones is only the 34th largest brokerage firm in the USA. But the firm is one of the most profitable in the volatile securities industry and is growing like wildfire. Since 1981, it has expanded its broker force at a 15% annual rate, without making any acquisitions. It now boasts more than 2500 partners - - from a 1981 count of 8. As described by many outside observers including Peter Drucker, the firm is a federation of highly autonomous entrepreneurial units which are bound together by a strong set of values and beliefs. The entrepreneurial units are Edward Jones" brokers, distributed all across America. They operate out of one-person offices located in small communities and they sell selected financial products to people living in their community. They are all bound together by the strong cultural belief that their job is to offer sound long-term financial advice to their customers, even if that does not generate short-term fees for them. The 'customer-first' value is ingrained in every single broker working in the Jones' system. It wasn't always like this. Over the past 50 years, the firm has gone through three evolutionary stages: It was originally set up by Mr Jones Sr. to be a finEuropean ManagementJournal Vol 17 No 3 June 1999
ancial department store - - to satisfy all the financial needs of a customer as a one-stop shopping store. The department store concept slowly evolved in the 1960s into a "delivery-system" for rural America, after Ted Jones (the son of the owner) set up small offices across rural America and grew the firm into a network of 200 offices. This was the first time that brokers were actually based in small towns (as opposed to travelling there every week or two) and the idea was to convert Edward Jones into a distribution network to sell mutual funds in rural America. The third stage in the evolution of Edward Jones took place after the arrival of the firm's managing principal, John Bachmann, in 1970. In what he describes as a 'defining moment' for the firm, he set about to convert Jones into a 'merchant' - - that is, an informed buyer for the end customer. According to Bachmann, the difference between being a distributor and being a merchant is crucial: A distributor is structured around the product and tries to sell only profitable products. A merchant, on the other hand, is structured around the end consumer. He acts as an informed buyer for the investor, selecting only the products that are good for the investor, as opposed to products that generate fees for the brokers. Most investment firms look at brokers as their customers. We don't. For us, the customer is the individual investor that signs the checks... This vision of being a merchant for the individual 275
EXECUTIVE INTERVIEW
investor has guided every move of Edward Jones since 1980. It has also shaped its current successful strategy, the main elements of which are the following: *Unlike its major competitors (e.g. Merrill Lynch, Smith Barney) that sell their own in-house mutual funds, Edward Jones does not manufacture the products it sells. It acts only as a distributor for the products of a few selected manufacturers such as Capital Research, Putnam and Morgan Stanley. *Unlike most other competitors in the industry, the company targets and sells its products only to individual investors, never to institutional investors. *The firm sets up offices in selected areas — usually small communities or specific areas within cities where there is a ‘sense of community.’ In nearly all cases, and contrary to traditional wisdom which emphasizes the exploitation of economies of scale in such offices, the Jones office is a one-person operation. That person has extraordinary autonomy to manage the office as if it is his/her own business. Every branch is a profit center. Brokers are tied to the home office through a satellite communications network that broadcasts homemade TV programming. *The firm sells only selected products — often transparent, long-term products such as large-cap equities and highly-rated bonds. It avoids selling risky initial public offerings, options or commodity futures.
These choices were not easy to make. Yet, choices were made and the company has remained faithful to these choices for more than 20 years. As John Bachmann says: ‘These principles are cast in stone. We don’t debate these things.’ The interview that follows was conducted by EMJ’s Associate Editor, Constantinos Markides on 12 November 1997: EMJ: A recent Fortune article1 called your firm the ‘Wal-Mart of Wall Street’ because, like the retailing giant, Edward Jones originally built its business in rural America rather than in big cities. How did this particular strategy come about? JB: Mr. Jones, Sr. founded what was then Edward D. Jones & Co. as a financial department store located in St. Louis, Mo. By financial department store, I mean a ‘one-stop shop’ designed to satisfy all of an individual’s financial needs. However, Ted Jones, the son of the founder, did not like big cities and wasn’t interested in running a business in St. Louis. Instead, he went to Montgomery City, Mo., and set up shop there. Initially, he travelled from Montgomery City to surrounding towns and cities to sell stock and mutual funds. But throughout the 1960s, he established more than 100 offices for Edward D. Jones & Co. all over the countryside, each served by a dedicated salesman. Whereas his father built a department store for financial products and services, Ted Jones was building a delivery system to reach rural America. The strategy was really new at the time. EMJ: In what way was it new?
*The firm remains a partnership so that people feel and think like owners, not employees. *The glue that ties everything together is Jones’ strong culture — it behaves like a family whose mission is to help ordinary people invest their money wisely. These are the main elements of the successful Jones’ strategy. John Bachmann likes to point out that each one of these elements involved some kind of tradeoff that the company had to make. For example: %we target individual investors not institutional ones. We buy good securities and keep them a long time instead of trying to maximize transaction fees. Rather than have big offices in large cities, our offices are small and are placed in small communities to be convenient to the customer. Our offices are one-person operations not multi-person ones. We do not manufacture our products and we showcase the products of a limited number of leading houses. We do not sell all products — we select transparent and safe products to promote. We remain a partnership rather than try to go public% 276
JB: Ted’s business concept was innovative in two ways. At the time, the standard practice among salesmen serving rural markets was to travel to those towns once a week or so. Our approach, however, was to put someone there on a permanent basis. In addition, our method of serving investors in these towns was different. Each office had just one individual running it, so those who wanted to work for us had to be entrepreneurs. EMJ: How has this concept evolved since then? JB: Given the nature of our market, our customers were very conservative investors. As a result, we sold only mutual funds and stocks of high-quality companies. That was consistent with Ted Jones’ vision. He saw Edward Jones as a distribution network for mutual funds in rural America. From a product standpoint, we had a singular focus — high-quality equity investments. When I left sales to join management in 1970, the stock market was down and so were our revenues. I was asked to diversify our product base to enable the firm to survive the bear market of the time. In April European Management Journal Vol 17 No 3 June 1999
EXECUTIVE INTERVIEW
of 1972, I prepared a memo and sent it to Ted Jones. In retrospect, it was a defining moment for us.
sophy is simple: Buy good securities and keep them for a long time.
In that memo, I argued that our basic formula (operating small offices profitably) worked very well and it was time to codify it. In other words, we needed to look at our business as a going concern, rather than just running it opportunistically. I further argued that the patent we had on the small office would be exploited, either by us or by someone else. At that time, no one in our industry knew more about this type of business. What we needed was not a new strategy, but the planning and administrative machinery required to carry out our proven strategies on a greater scale. In that sense, we could learn more from companies like McDonald’s or Holiday Inn than from Goldman Sachs.
Number four, we put offices in locations convenient to customers. This approach encourages face-to-face relationships and reduces the likelihood of misunderstandings.
At that point, we established our vision. We would expand our network to 1,000 offices and build the best retail securities firm in the U.S. Making such a commitment to the retail market meant that all our actions had to be designed to enhance the retail salesman’s ability to serve only individual investors. We had to develop and install procedures to allow us to effectively manage and control 1,000 offices. We also had to revise our recruitment and hiring policies, our training and compensation policies and our reporting systems. In some sense, we were already doing many of the things I proposed. What I was suggesting was to codify them and structure them as part of a master plan.
Number seven, we are organized so that every office is a separate profit center. If you do the work, you get the rewards.
EMJ: Apart from this emphasis on the retail outlets, what other elements did the ‘master plan’ contain? Did you make any other major decisions at the time? JB: We made a number of clear choices in 1972 — choices that at the time were not easy to make. In retrospect, these were our trade-offs. Initially, there was much debate. Once established, however, we cast these principles in stone and from that point on, there was no debate. EMJ: Can you be a bit more specific? What precise choices did you make? JB: Number one, the individual investor is our customer. We don’t cater to institutional investors and we won’t spend a penny on proprietary trading, institutional research or institutional trading. Number two, we do not manufacture our own products nor do we have ‘house brands’ or proprietary products. We are a distributor for the products of a handful of prestigious suppliers of our choice. Those we have selected include Capital Research, Putnam and Goldman Sachs. Number three, we do not offer every type of product. We eliminate those that history has shown to be poor investments for individuals. Our investment philoEuropean Management Journal Vol 17 No 3 June 1999
Number five, each of our offices is run by one Investment Representative (IR) and one assistant. This approach may sacrifice scale economies, but it attracts high achievers and entrepreneurial people. Number six, we remain a partnership, which allows us to think like owners rather than employees. At some point, this structure could constrain our capital base, but to date, it has not.
Number eight, we will not be a discount broker. And finally, we rent our offices. We don’t invest in brick and mortar, we invest in people and technology. EMJ: You’ve certainly made some clear choices! JB: As I said, we cast these principles in stone. They are not up for debate! EMJ: How well did this concept work? JB: Early on, we made a serious mistake: we thought the brokers were our customers. This was a big mistake. The broker is not the customer — the customer is the individual investor who signs the cheques. If we view the brokers as our customers, we end up selling products that are good for them, rather than selling what is good for the investor. For example, in the 1970s, we sold closed-end mutual funds. In retrospect, I can tell you we should never have offered these investments because they always drop in price. But everyone in the industry was doing it and we were swept along. Today, we don’t sell these products, nor do we sell most preferred stocks or ‘B’ shares. Even today, most investment firms view their brokers as their customers. We view them as our partners in serving the needs of the customers. We learned from our mistake! EMJ: How did you come to realize that the individual investors, not the brokers, are your real customers? After all, as you also said, even today many investment firms consider the brokers as their customers. 277
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JB: My view of the customer evolved from my view of the business. I didn’t see the business as a distribution system the way Ted Jones saw it. Instead, I felt we should act as a merchant — that is, as an informed buyer for the customer. There is a fundamental difference between a distributor and a merchant. A distributor is structured around the product and tries to sell only profitable products. A merchant, on the other hand, is structured around the consumer. In acting as an informed buyer for the investor, the merchant tries to select only the products he believes to be good for the investor, as opposed to products that are easy or fashionable for the brokers to sell. In 1980, when I became managing partner, I realized we were acting as a distributor. Our focus was the distribution of mutual funds. I began asking myself, ‘Why are we structured around the product? What if the product goes out of fashion?’ We had to reposition ourselves so the centre was the relationship with the customer, not the product. In 1987 we asked ourselves, ‘Who is the customer?’ As a result, we redefined who our customer is — not the broker, but the individual investor. EMJ: Isn’t a merchant the same as being a department store? Have you not gone full-circle, back to the original concept of Mr. Jones Sr.? JB: No, there is a big difference between the two. A department store sells everything; a merchant, on the other hand, deliberately selects the products to be made available to the end consumer. The merchant acts as an informed buyer for the end consumer. To that end, we very carefully select the products we offer our customers. For example, a few years back we passed up the opportunity to offer one million shares of GM preferred shares because at the time, we thought GM was risky. EMJ: How do you decide what products to offer and what not to? JB: We have multiple mechanisms in place to screen out what’s not appropriate. For example, our culture helps our marketing people decide what is right for our customers and what is not. We also have an Investment Advisory Committee made up of industry experts outside our company. The role of the committee is to help us review investments we currently offer and those we may be considering. At the end of the day, our brokers are free to select what they offer to their customers, but they must operate within the constraints we have established. Our culture does not attract brokers who are speculators; however, they are human, so we have information systems that alert us if someone should do something silly. Beyond our procedures and systems, however, is a simple fact about our business — the customer walks in and talks to the broker face to face. 278
Our brokers are never far from their customers, even in the urban areas, and two-thirds of our offices are now in the big cities. That’s the best compliance system we have; the fact that every one of our brokers knows the customers well and deals with them faceto-face. You’re not likely to do something silly with the money of people you know that well, are you? As an Edward Jones broker, you know that if the customer is unhappy, he or she will be sitting in the office waiting for you. EMJ: Do you think this is the real reason for your success so far — your closeness to the customer and not what other people think is the fact, that you go after customers in geographically-isolated areas? JB: It is not geography that makes us successful. It is face-to-face contact with the customer. Remember, two-thirds of our offices are now in the big cities. Wherever we go, we look for a sense of community. I am not interested in New York City — I’m interested in Greenwich Village and Gramercy Park. I am not interested in London, but rather in how I can put my arms around it. My interest is in Chelsea or Fulham or any place that is like a village and has its own sense of community. EMJ: This implies that your brokers and the way they deal with customers is very important to your system. JB: Exactly. Our people are high-achievers and entrepreneurs. We encourage this by structuring each branch office as a one-person operation. The moment you put ten people together, they start conspiring against management. We put one person in the branch and we give him or her total freedom. Right away, this person begins behaving like a store owner, asking, ‘What shall I do here to get business?’ Also, we do not put our people in competition with each other. We do not rank our people. We develop targets for each broker based on the market and the individual’s realities. If brokers meet their targets and the firm is profitable, they are rewarded. We treat every branch as a profit center and we assign overhead to each, including our investment in training new brokers. We know each branch’s direct expenses and contribution to head office. We calculate the profitability of each branch and if we make at least 6 percent on sales, bonuses are calculated on a matrix based on the firm’s success and the broker’s success. The bonus is exponential to broker profitability, therefore, everybody has an incentive to help others succeed. All brokers share a common goal — helping the firm reach its profit target. EMJ: Why the 6 percent target? JB: That’s what we need to make to enable our partners to repay the loans they take out to buy stakes in the company. The model assumes capital has a European Management Journal Vol 17 No 3 June 1999
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cost, so true profitability is achieved only after we have recovered our cost of capital. EMJ: How important are the incentives in getting the behavior you want out of your brokers? JB: The incentives are important, but really what makes the difference for us is our culture. We are like a bumblebee — aerodynamically, I can prove that it should not be able to fly; yet it does! We work hard to maintain our culture. We ceaselessly repeat our values, our history and our aspirations to our people. We continuously have meetings to communicate these values. EMJ: Your brokers are spread all over the place. How do you communicate with all of them and how do your brokers sell? JB: We have our own satellite network and our own television studio. We can broadcast TV programs to all the branches, enabling us to train brokers or to educate customers. In 1987, when we went to satellite, we were only the second company to do so, following Federal Express. It cost us $27 million and for an additional $3 million, we put in TV. Because our people are isolated, we need this tool. Now we can talk with all of them as if we’re all in the same room. We can also invite customers into the branches and talk to them directly. We have also made significant investments in developing our own technology systems, which, by the way, we never license. In 1995, we went from mainframe to client/server computer systems and we now have the largest client/server system in the world. We went straight from mainframe to network without the intermediate stage of personal computers. We decided not to support PCs because we view them as isolated islands of technology that would be difficult to connect into a coherent network. We sell like politicians sell — we go around, knocking on people’s doors, calling on them and trying to convince them to invest with us. Our brokers go out in the community and meet people. We work very hard to train our people to do this well. What our brokers really sell is solutions to investors’ financial concerns. We are in the business of providing sound, face-to-face financial advice to individuals. We used to target 45- to 50-year-olds as our primary audience. These people have children who are out of college, so they have lots of money and they are at that stage in life when they’re beginning to think about retirement. Now, however, the government is moving away from its role of providing for retirees, so even young people need to worry about retirement savings. Therefore, we now describe our target market as those who want financial peace of mind. Increasingly, those are not just the people who are 45–50 years old, but young people as well. European Management Journal Vol 17 No 3 June 1999
EMJ: But don’t you think your competitors also target these same people? Why would a consumer buy from you? JB: Our competitors sell symbols and status; we sell simplicity. Their image is polo ponies, ours is grandchildren on pony rides. Of course, the difference goes deeper than that. When doing business with some of our competitors, investors often find themselves in a busy boardroom with the feeling that they are taking time from the broker. It can be intimidating. We put people in a quiet room and we don’t hurry them. We want investors to feel comfortable. In addition, our investment philosophy is buy-and-hold. We encourage investors to buy good securities and keep them for long periods. Our competitors can also pick good securities, but their systems are often based on trading, rather than holding for long periods. A trading strategy holds more potential benefit for the broker than for the investor. Every firm says they put the customer first, but we do it and our marketing research shows that our customers agree. Other strengths are evident when we’re compared directly to competitors. A leading U.S. publication for investors ranked us No. 1 in broker conduct and we have been ranked No. 1 in equity research by The Wall Street Journal. EMJ: How difficult is it for your competitors to copy your formula? JB: Our system is difficult for established players to emulate. Merrill Lynch is trying to copy our strategy in small markets, but there are significant differences. They haven’t copied us culturally and they would never make the trade-offs we have. They wouldn’t want to. I believe we have a sustainable competitive advantage. It doesn’t stem from any single thing we do. Rather, it derives from the system we have built — the numerous things we carry out on a daily basis that reinforce each other and form a mosaic which is recognizably different to our customers. Our competitive advantage stems not from one or two things, but from this mosaic and all the things that reinforce it. EMJ: You also seem to have achieved a remarkable balance on a variety of things. For example, you have struck a delicate balance between local autonomy without losing the benefits of size. You have also achieved local entrepreneurship without losing control. How have you managed such a feat? JB: We allow our people autonomy, but we also make sure we do not lose control. Our culture and our values are the foundation. In addition, we train our people and we give them a clear explanation of 279
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what is expected of them. Our information systems and the operation of each office as a profit centre allow us to monitor how things are going, relative to the guidelines we have established. We also have a tough compliance department! You can think of us as providing the canvas and the paint. These act as boundaries. Within those boundaries, it is possible to create very different paintings. Within limits, one still has freedom of expression. EMJ: How is the industry changing and what do you see as your biggest challenges for the future? JB: The securities market has exploded. From a niche market, it has grown to become a mass market and now everybody buys securities. Edward Jones is coming out of a niche position itself. Our biggest challenge is to build our brand name. Right now, we have virtually no brand recognition. We need to put more emphasis on pull marketing while maintaining human delivery. Where we add value for customers is in offering sound, face-to-face financial advice. We need to communicate that message effectively through the media. That takes size, so continued growth is vital. We also have new competitors who make the same promise to the consumer that we do. These are not our traditional competitors like Merrill Lynch, Dean Witter or Smith Barney. They are the super-regional banks like Bank One, First Union Bank and NationsBank/Bank of America. Not only are they buying securities firms, they have branch networks in the communities we serve. They can go after our customers and offer face-to-face advice as we do. Ten years from now, these will be our competitors. The industry is also undergoing a few other changes: the population is aging and living longer; the industry is consolidating as banks are merging with each other; globalization is accelerating; and technology is changing rapidly. There is also convergence among similar but not identical financial institutions, as in the case of a bank merging with an insurance company. All this will intensify competition and many of today’s value-added financial products will turn out to be commodities. For Edward Jones, all this implies we will need to build our brand name; build our market share both domestically and internationally; enhance our technology to be able to deliver; exploit the internet; intelligently expand our product portfolio; and aggressively cut our cost base. We need to grow and to establish a clearly differentiated image globally, but we cannot forget cost control.
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EMJ: Don’t you think that the rise of electronic trading and the emergence of low-cost brokers such as E-Trade is a serious threat to the Edward Jones formula? JB: Not really. The past few years have been kind to do-it-yourself investors. But people forget that the market can also go down. Many of these investors will suffer when the market turns sour. Our counsel will be attractive in a down market — in fact, it may be especially so. EMJ: So, you do not think that the Edward Jones formula depends too much on the stock market continuing to grow? JB: To the contrary! Our system will show its true value to the customer in a downturn. Edward Jones serves as a ‘shock-absorber’ for the end consumer. Customers come to us for advice. This advice will be especially useful in bad times. EMJ: As you grow, what major risks will you face? JB: We must stay true to our principles. Twenty years ago, we made certain tradeoffs. They were difficult choices to make, but our success is based on the fact that we stayed true to them. I believe that as we grow, the most important (and most difficult) task I have is to say no. EMJ: Will you ever change the choices and decisions you made twenty years ago? JB: We would re-evaluate them if confronted with strong external indicators of fundamental changes taking place in the market. For example, we now have a mass market. This implies that we cannot have only one broker in each town, because there is simply too much business for one person to look after well. Our job now is to convince our brokers to worry not about territory, but about market share. In other words, to communicate that it is to everyone’s advantage to increase market share and market standing. This is one example of having to rethink our original choices. We remain willing to do so again if necessary, but we have to be careful not to destroy this delicate mosaic we have created in the name of adjusting to changes.
Note 1. Richard Teitelbaum: The Wal-Mart of Wall Street. Fortune, October 13, 1997, pp. 70–72.
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CONSTANTINOS MARKIDES, London Business School, Sussex Place, Regent’s Park, London NW1 4SA.
JOHN W. BACHMANN, Managing Principal, Edward Jones, 12555 Manchester Road, St. Louis, Missouri 63131, USA.
Constantinos Markides is Professor of Strategic Management at London Business School and Associate Editor of the European Management Journal. He has published in the fields of international competitiveness, corporate restructuring, refocusing, and international acquisitions. Current research includes management of diversified firms and the use of innovation and creativity to achieve strategic breakthroughs.
John W. Bachmann is Managing Principal of Edward Jones, one of the most profitable brokerage firms in the USA, and one of the fastest-growing. Since 1980, Bachmann has brought the firm to the forefront of the securities industry in terms of training and technology. He is a past chairman of the Securities Industry Association and a past member of the Board of Governors of the Chicago Stock Exchange. He is also a past and present board member of several philanthropic, academic and civic organizations including the St. Louis Art Museum.
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