The Swatch Group

Nicholas Hayek and Ernst Thomke formed the Swatch Group (the Group) in 1983 by merging two bankrupt watch-making groups. The merger gave the Group ownership of many of the Switzerland’s dominant watch brands. Swatch, their first product initiative, was so successful that it helped pull the squandering Swiss watch industry out of a slump. In June 1999, with its 14 brands, the Group was the world’s largest watch manufacturer (in value terms). However, the global industry had changed and would continue to change dramatically in the new millennium.

The Swatch Group was at a strategic crossroad and had to analyze the industry’s past and future in order to determine its next move. What proceeds is an in-depth analysis of the Swatch Group’s competitive position the global watch industry. We will identify a problem and offer several alternative actions to address this problem. Finally, we will discuss how to implement and evaluate these suggestions.

Industry Snapshot: 1999Historically, the watch industry had been fragmented and protected by the national governments of many countries. In the 1980s and 1990s, however, the competitive environment began to change. First and foremost, newly formed companies began to mass-produce low-cost, technologically advanced watches.

The emergence of these products dramatically changed the way people bought and sold watches. Another dominant factor for change was consolidation. As companies merged, they improved their competitive positions through improved distribution, R&D, marketing, and economies of scale. These conglomerates slowly became major global players against which many watch manufactures could not compete.

Initially, Swiss watch manufactures chose not to respond to many of these changes. They valued the inherent art of watch making and as such refused to succumb to the competitive pressures of large multinationals such as Seiko and Citizen. As a result, the industry took a dive in the late 1970s and early 1980s. Many companies and groups went bankrupt. Included were the two major groups that Hayek, together with a group of investors, bought back from Swiss creditors.

In just a few years, they lifted the merged company (the Swatch Group) out of financial turmoil. Through strategic initiatives, they streamlined and rejuvenated many of the brands. These moves, as well as launching the Swatch brand, helped bring the Swiss industry back into the global game. Let us look at several key figures relating to the Group and its industry at the time the case was written:

¡In 1999, the Swiss watch industry produced over 34 million units. Over 90% of these watches were exported to markets outside of Switzerland. ¡Although they were responsible for only 7% of the world’s production, Swiss watches generated 51% of the global value. ¡The Swatch group, with its 14 brands, was the world’s largest manufacturer (also in value terms). ¡Nearly 90% of the Group’s profits were generated by four brands:

Omega, Swatch, Tissot, and Rado. These brands competed in the following segments: luxury, basic, middle, and high range (respectively). ¡The Group’s prestige, luxury, and top ranged brands were third in global market share at 14% (behind Rolex at 28% and Vendome at 20%). ¡The Group’s gross sales and net profits had increased by 7.1% and 7.5% respectively in 1998. ¡The Group’s US market share was under 3% in 1998.

We can draw several conclusions based on these and other figures presented in the case. First, it is clear that the Group’s financial performance was strong. They managed to derive the most value from the fewest units of production, a luxury attributed to the high prices the Group charged for its products. As such, they had an advantage over other manufacturers whose low price points generated lower returns.

Next, it is clear that exports were important for the Group as well as the Swiss industry. With the appreciation of the FrS, cross-border sales would continue to be threatened. Finally, only four brands generated significant profits, and the breadth of the Group’s portfolio was under investigation. Did the group stand to gain a better competitive position it streamlined its portfolio?

With the US being the largest market for watches (consumption was 1 unit per capita), the group was clearly at a competitive disadvantage when compared to Timex, Casio, and Seiko who boasted 31%, 8% and 7% market share respectively. The groups 2.1% share of the US market was significantly under par.

Upon further inspection of the industry in 1999, one would conclude that competition was intense. They key to gaining market share differed in each segment of the industry. Increasingly, creative marketing and effective distribution helped companies push their products down the chain and into the hands of customers.

Another key factor was cost reduction. Companies for whom “Swiss Made” was not an issue easily shifted part or all of their production and assembly to low-wage countries in Asia. This is where the Group was at a disadvantage. Its brands could not maintain the “Swiss Made” label while producing the movements or straps or any part of the watch in another country.

Finally, the Group does not seem to be taking advantage of the growing popularity of mid-ranged watches. Although it offers products in each segment, Many of its competitors have gained an advantage by marketing heavily in this segment.

Problem StatementIn reviewing the company’s position in its industry, no immediate problems present themselves. Yet, if one were to forecast the direction of the global industry, one could argue that the Group’s position would be threatened if it did not prepare a forward-looking competitive strategy that would allow it to maintain and grow its current market share.

Once fragmented and highly skilled, the global watch industry had consolidated to the level at which only a few major players determined the definition of success. The Swatch group stood to gain from these competitive advantages only if it agreed to examine the way it manufactured, distributed, and marketed its products. More specifically, Swatch Group’s management had to decide how to alter its product mix (including manufacturing and assembly) in order to effectively compete against the growing presence of multinational watch manufacturers.

AlternativesUpon reviewing the Swatch Group’s opportunities in the market, several distinct strategic moves could help the company compete against global players. These are:

¡A1: Streamline product portfolio by determining which brands are key profit drivers for the group. Drop product lines with low market share/low profit margins in markets where key competitors possess significant cost saving advantages. ¡A2: Maintain Swiss Made status of high-end/luxury product lines only. Shift manufacturing and/or assembly of mid to low-end product lines to Asia.

¡A3: Through a joint venture with Titan Industries (and others, as needed), develop a product line to fill the gap in the mid-range segment. ¡A4: Acquire a mid-ranged watch company with an established market presence in Europe and North America. ¡A5: Invest heavily in R&D in order to develop niche products (high value/low volume strategy) for untapped, lucrative markets. ¡A6: Through vertical integration (forward integration), establish direct distribution and/or retail channels.

Evaluation/RecommendationEach of the recommendations presented above would in fact help the Group position itself against the growing threat of multinationals. The following metrics will help us decide which alternative would best accomplish this goal. The results are weighted and presented in the table below. Weights are: 0-3 with zero being least favorable and 3 being most favorable.

¡How well does the alternative address the issue of increased competition in the global marketplace? ¡How well does the alternative address the issue of the appreciation of the FrS and the resulting price increase of Swiss imports? ¡How well does the alternative address the issue of a Swiss home base/Swiss manufacturing? ¡How well does the alternative address the Group’s difficulty in gaining US market share? ¡How visionary is the alternative?

¡Does the alternative strengthen the Group’s competitive and brand image?

Alt.1Alt. 2Alt. 3Alt. 4Alt. 5Alt. 6Competition233333Exchange rate012023Manufacture033200Visionary223133US Mkt. Share222322Brand Img.300233Average1.

Based on the table above, alternative six would be most favorable. The third and fifth alternative tied at a close second. However, in order to most effectively compete against global manufacturers, the Swatch group should implement a hybrid strategy of alternatives 5 (invest heavily in R&D) and 5 (forward integration).

These two strategies would enable the Group to continue manufacturing Swiss Made watches, but it would position it in such a way that it could appeal to a greater number of consumers. With the increasing popularity of Swatch stores across the globe, the Group could benefit from creating other retail establishments in which it could sell its other brands. It could also display the niche products as a way to entice consumers and improve brand image. Both strategies would help increase market share in a high-margin/low-volume segment. Let us now discuss how to best implement these suggestions.

ImplementationThe key to successful implementation would be proper planning. The Group may have to restructure the way it’s units are organized so as to better determine which brands would be most viable in each geographic area. Under this plan, the Group would open new retail shops in which it would sell its own brands and any complimentary items that consumers would associate with watches.

First and foremost, the Group should establish high tech, JIT-ready distribution centers in the geographic areas in which it plans on opening new retail shops. This would ensure that the shops stay replenished, but not cluttered with too much merchandise.

The Swatch group would also need to expand its research and development staff. It would need to hire younger, creative people who know what is going on the world of technology, sports, and the arts. As such, they would be in touch with the needs of these markets. Only then could the Group determine what innovative products to develop and market.