Executive Summary The Vanguard Group, headquartered in Valley Forge, PA, is the nation's second-largest mutual fund and

a leading provider of company-sponsored retirement plan services. In 2003, Vanguard serviced 17.4 million shareholders accounts and manages approximately $557 billion in US mutual fund assets, of their total AUM $226 billion is in held by institutional investors like employer-sponsored retirement plans. Of Vanguard's 17.4 million shareholders, 4.7 million were retail clients. The cornerstone of the Vanguard brand is the high value-low cost model, with an emphasis on having the lowest expense ratios in the mutual fund industry while at the same time consistently getting investment returns that preform above their peer groups. In order to successfully maintain this brand identity, the fundamental business strategy at Vanguard focuses on continually increasing cost efficiency and relative performance of the funds. The core elements of the brand are extended through the corporate culture at Vanguard, which reinforces the values of low cost, high value through practices such as compensation based on the company's fund's returns, and encouraging employees to find solutions to increase productivity. The company has a relatively flat organizational structure with multifunctional teams working on specific initiatives with comparatively few organizational levels to similar institutions. In addition to empowering employees to generate solutions that increase productivity, Vanguard has also been using technology as a key driver in lowering costs, and increasing efficiency, through implementing a Six Sigma approach, know internally as Vanguard Unmatched Excellence or VUE, which revolves around a focus of examining the data for an improved databased solution and was intended to "institutionalize a drive for perfection". Evaluate their current segmentation, targeting and positioning scheme, vanguards objectives, the nature of the market Dashboards?? It is clear that Vanguard wants to continue growing and retaining assets under management, however the company is struggling with the key issues of identifying the best directional strategy, what segments of clients to target and how to position themselves in the financial services industry going forward. Key Issues: Choosing Directional Strategy In the case, Scott Conking, Corporate Strategy Principal, asked should Vanguard be a product developer and direct marketer of should Vanguard be a full-service financial company that distributes a broad array of products, Vanguard branded and others? This question indicates that from a basic level Vanguard is struggling to choose an overall directional strategy. Essentially they are having a potential crisis of identity and are considering whether they want engage in growth strategies and develop new product lines to better emulate their new emerging competition entering the industry as a result of financial deregulation; or continue with the current brand and a stability strategy making no change to existing strategy which is to apply discipline to increase to cost efficiency and fund performance to their current product line; or after the examination of their customer base use a retrenchment strategy to cut back their current offerings and just strengthen and re-focus their core business. Questioning the underlying business strategy at Vanguard is a central issue, as this determination is essential to

allocating resources and formulating what tactics Vanguard is going to take to compete in the financial services industry. In considering the strategic directional option of growth either through concentration or diversification, there is a tremendous amount of potential along with considerable possible pitfalls. Porter (2008) pointed out that it is a common mistake to assume that fast growing industries are always attractive. In this case the fast growing industry would be the market for the bundled providers or the one-stop financial supermarket and be anchored in a diversification strategy. This type of strategic shift could detract from the core business, and could dilute the message of Vanguards core principals. The other growth option would be for Vanguard to concentrate it's marketing and strategic activities on targeting one market segment. Vangaurd also has the option of "sticking to its knitting" or employing a stability strategy, continuing to focus on increasing returns and keeping advertising spending low. Historically up till 2003 Vanguard has been competing as a cost leader in the mutual fund business and during this time the companies funds have enjoyed being ranked first or second in net cash inflows with redemption rates that are half of industry average. This would indicate that the cost leadership strategy has given the company a defense in down or turbulent markets, and as new firms enter the mutual fund industry this strategy can serve as a potential barrier to entry. In addition, there is some evidence that suggests because of the revenue structure, for an expensive ad campaign to work, it has to bring in significant assets to make it worthwhile. The third option would be a retrenchment strategy, which would reduce the corporations level of activities. In mid-2003 it appeared that the mutual fund sector's boom years were over as growth rates had slowed, and in 2002 the sector experienced net redemptions, something that had not happened since 1998. If Vanguard anticipate that overall the mutual fund market was shrinking, one option would be review it's product lines and determine which have the most value, and eliminating those funds that are underperforming. Once the broad directional strategy has been established, Vanguard can move forward with how it wants to pursue those goals. There are many elements to choosing the broad overall directional strategy including considering the current perception and value of the Vanguard brand and the existing corporate culture. Webster (1994) and Deshpande et al. (1993) found a direct link between organizational sub-culture and business performance while arguing that market orientation was a sub-component of culture. The culture and market orientation at Vanguard has been based in the high value-low cost model with the ethical foundation in the concept of being "owned by the clients". Especially with the current flat organizational structure of the company, making a strategic shift in completely different direction for example such a new focus primarily on high net worth individuals and tailored full-service advice business would require a major re-alignment of corporate values and could possibly decrease business performance. Strategic Growth Options Through Customer Segmentation and Targeting In considering pursuing a concentrated growth strategy, it is critical for Vanguard to identify which group to focus it's marketing and sales resources and then using that information to expand it's market share in those groups, and increase the overall customer lifetime value. In 2003, in response to industry trends and research such as the investor-demand study Vanguard re-organized it's activities into four client service areas - full service institutional, investmentonly institutional, core retail, and high-net-worth retail. The investor demand study broke investors into seven different segments based on their individual investment needs and

motivations. The seven types identified: Players, Managers, Adviser Dependents, Complacent Independents, Strivers, Live for Todayers, and Financial Avoiders. The classifications also include demographic, psychographic and behavioral generalizations. The investor-demand study identified seven labels, but for the purposes of Vanguard there are three distinct groups all centered on different preferred products. The first group is the Managers, Adviser Dependents, and Complacent Individuals as those investors primarily interested in investing in mutual funds, the second group is the Players, Strivers as those interested in individual stocks/cash, and then the third, which includes the Live for Todayers and the Financial Avoiders who are interested just in cash. Vanguard has the choice of focusing on expanding in its natural market of customers interested in mutual funds, or diversifying into the brokerage or cash group. Currently Vanguard's 118 mutual funds account for 10% of the US market fund assets, which while 10% is a significant market share, there is clear room for expansion, and to some would seem the most logical first target for a company just beginning to expand marketing efforts. Historically, Vanguards competitive advantage has been a high valuelow cost differentiation strategy, with its core competency being its proprietary mutual funds. However, there is the consideration that the mutual fund industry as a whole could be declining. Diversifying and increasing their brokerage presence is another option to capture the group that includes the Players and the Strivers, while this would have the potential to bring in clients who also want access to a wider investment market but it also has the potential to bring in a short term style investor, that in the past has not been a fit for the Vanguard brand. The group interested in cash would not be a fit for Vanguard's business. They would have to significantly expand their business model to accommodate the needs of this group therefore for the purposes of this paper, the third group is not a potential client target at this time. The second consideration is the delivery model or the preferred provider of the investor type. Among the first asset types, there is another distinction between those investors that would like to receive advice and support from an advisor or those that prefer to go it alone. In the past the ideal Vanguard customer was "a substantial, cost-conscious investor with a long term investment horizon" and One Vanguard executive highlighted a trend in the industry of providers fleeing the under $1 million marketplace, and framed this as a $6 trillion market of opportunity. Institutional investors Full-service clients who ask Vanguard to manage 401(k)m 403(b)(7) and other defined contribution plan s Investment-only clients, such an universities, foundations, pension funds selected Vanguard for investment management, plan administration, and education services Defined-benefits business Measuring satisfaction In the investment industry it is incredibly difficult to Vanguard managers acknowledged that it is hard to separate market performance from the satisfaction drivers, both on the retail and the institutional side, citing the link between high customer satisfaction when the markets were booming in the 1990's and decreased satisfaction when the market declined in the early 2000's.

Retention of assets, high churn rate in the mutual fund business Vanguard managers acknowledged it was difficult to separate market performance from satisfaction drivers, citing the decline in satisfaction that coincided with the market dip in the early 2000s Performance metrics for marketing campaigns. Recommendations: Vanguard wants to continue to grow assets under management which is facilitated through expanding market share and increasing customer lifetime value. Customer lifetime value can be increased by several different strategies including increasing the retention rate, increasing the customer life, increasing sales to a customer or by increasing the customer referral rate, and most simply by cutting the costs of serving a customer. Overall directional strategy Vanguard should pursue an overall growth strategy with a focusing its efforts where there is the most return. Why not stability? Why not retrenchment? Targeting In order to effectively increase market share in the US markets, the overall strategic focus of Vanguards marketing efforts should be threefold, the first focusing on increasing the presence of Vanguard in the institutional investment space, second to develop relationships with individual investment advisors, and finally to increase . The first is to target institutional investors, particularly targeting them through advisors to institutional investor groups. To do this Vanguard should target sales efforts towards the advisor channel, specifically in the case of advisors and third party administrators for defined benefit and defined contribution plans, as the low cost fee structure and high returns fit well in the retirement plan space, particularly in the small and mid-size plan market where the employer wants a simple low-cost product and is focused on value for their employees. If financially feasible, expand of the admiral shares program into the institutional market Second, in order to capture the retail client high-net-worth individual, focus on advertising and specifically educating individual financial advisors about the Vanguard product. Vanguard estimated that about 25% of people with $1 million or less were adviser dependent, and in the $1 million and above 90% were adviser dependent. Vanguard itself does not need to specialize or go after high-net-worth individuals, rather they need to go after the people who advise them. A Vanguard manager noted, "Our competitors are almost all focused on the high-

net-worth-individuals" However, typically the higher net worth clients are more difficult to serve and they might not be looking for the values the Vanguard provides. By going after the advisors and more specifically targeting those that use a 1% wrap fee for service and advice, Vanguard gets more market penetration among the high-net-worth individuals, without inclurring the additional costs of servicing that market. While the higher income groups that are interested the firm had previously discouraged active traders, and of their 4.7 million retail clients, only about 150,000 clients actively solicited for advice. Therefore, it would be logical to target the investor segment inline with those core principals, before targeting a new type of customer. Additional measures Charge a short term redemption fee, which essentially creates a 30 to 90 day mandatory holding period to the mutual fund shares, this encourages a type of investor who tends to buy and hold, rather than churn their positions. Raise fund minimums in retail accounts, while keeping them low in retirement accounts. Conclusion

References: Porter, Michael E. (2008) "The Five Competitive Forces that Shape Strategy", Harvard Business Review, January, pp. 79-93. Webster, Frederick E. (1994) Market-Driven Management: Using Marketing Concept to Create a Customer-Oriented Company (New York: John Wiley & Sons)