Swatch case analysis

Case Analysis: Swatch and the Global Watch Industry The art of watch-making has long been a tradition among the Swiss. As recently as the midtwentieth century, Swiss made watches dominated the world market. However, changes in the global competitive landscape – beginning with the aftermath of World War I and changes in technology and production techniques throughout the industrial revolution – that provided higher levels of production capacity at lower costs eluded the Swiss. By the early 1980s Swiss global market share had dropped from 80% to less than 15% as Swill watch production hit an all time low. The Swatch Group (Swatch) – formerly known as SMH was born from the vision of Nicolas Hayek who believed that he could revive the ailing Swiss watch-making industry by building Swiss quality into mass produced low-end, high-quality watches. Within months of its release, the first Swatch was a smash hit propelling the company and the entire Swiss watch industry back into the spotlight and eventually turning Swatch into the largest watch manufacturer in the world. By the late 1990s Swatch had run into several problems that were beginning to erode its competitive ability on the global stage. Although revenue and profitability continued to increase, the company found itself having difficulty competing with Asian and U.S. watch-makers that had spread their production processes across multiple countries in order to take advantage of cost efficiencies. Swatch had not wanted to sacrifice quality by outsourcing production to other countries and was now feeling the pinch. In 1998 the average price of a Swiss made watch was Sfr235, more than 2 ½ times as expensive as the next most expensive watches from the U.K and 29 times as expensive as watches being made in Hong Kong – where most Swatch competitors were manufacturing their products. The Problems Several problems need to be addressed by Swatch management. Chief among them is the need to focus on moving production to Honk Kong or India in order to lower costs, increase margin, increase price flexibility and allow funding for research and development and marketing to launch an attack on basic and middle segment leaders. Other areas that need to be addressed include; • Lower its cost of production to increase margins in order to attack competitive market leaders in the US successfully. • Focus on its core profit-generating brands • Change the image of the Swatch brand to better compete with up-and-comers who are already targeting the older, original Swatch audience. The Facts The U.S. market comes with stiff competition from Timex, Casio Seiko and Citizen. 19% of Swatch sales come from the U.S., however its market share is weak in all segments. As an example, Swatch U.S. ship share is1.6% while Timex ship share is 30.6%. When we look at Swatch U.S. market share by segment we see; Mass (basic): 9%, Middle Market: 4%, Luxury: 21%. The U.S. market represents 56% of global watch demand. This is a significant reason for Swatch to focus its energy on developing successful competitive strategies in the U.S. Successful strategies in the U.S. market will play a role as major building blocks when entering other global markets. Competition from the likes of Fossil and Guess and the stubborn nature of Swatch not moving production processes to Hong Kong or India have made it difficult to compete on cost basis. In the U.S., the only watch manufacturer operating a plant domestically is Timex.

In an attempt to diversify, Swatch has found itself with so many different product lines that distributors and retailers hesitate and have stopped carrying the Swatch line because carrying a single line doesn’t offer the margin potential that can be achieved by focusing on products from other manufacturers. Many experts are surprised that the Swatch ‘fad’ has lasted this long. Younger buyers are no longer gravitating to the funky nature of the swatch brand and have gravitated to the more sophisticated, yet earthy Fossil brand. Original Swatch fans are older and looking for more expensive and sophisticated watches as their incomes increase – taste has moved rapidly to the likes of Fossil and Guess as well as to Swatch’s own Omega line of more expensive offerings. The Diagnosis Timex has always been know as the ‘blue collar’ watch – the watch that gets the job done for the longest period of time with the least cash outlay. This image has created a behemoth of a company in terms of unit sales, margin, gross revenue and market share in the U.S. It has also created a social stigma for the Timex brand. The Timex brand is not perceived to be sophisticated or of good quality relative to finer products. It is, however a brand considered to be the workhouse of the American working class – a good value for the money. Casio has followed the Timex lead and maintains the second place position in U.S. market share as result of duplicating Timex efforts. The U.S. is the largest watch market in the world as indicated by the fact that 56% of global watch demand originates in the U.S.. It is no coincidence that the U.S. also has one of the highest population density to per-capita income ratios in the world. For Swatch to discover the keys to massive growth in the U.S. would provide a direction for healthy penetration into other foreign markets. Of particular interest is the available market for basic and middle market offerings. Competition in these markets falls directly to Timex and Casio in the basic segment and Seiko and Citizen in the Middle market. In order to justify R&D and marketing expenses to attack these markets in the U.S., Swatch much outsource much of the production process to foreign markets just as all the above-mentioned competitors do. This will allow them to increase margins and therefore flexibility in pricing to distributors/retailers in order to compete, on price alone if need be, with the likes of Timex. With a move to enter competitive battles with the big players in the U.S. market, Swatch must partner with production facilities outside of its home base. Switzerland is the most expensive country in the world to manufacture a product – thereby eroding potential margin and profitability. In order to compete effectively Swatch needs to follow the map laid out by every one of their competitors and outsource many aspects of production. Titan is ripe for developing a partnership with. The company is known for its innovative products, but carries the stigma of poor quality that comes with imported India good to the U.S. This partnership has the potential for perfection as Swatch can outsource its production, thereby increasing its margins, while Titan will get an established and trusted ‘Swiss Made’ brand to move its product in foreign markets outside of Asia. This would also give Swatch a large advantage in moving into developing Asian markets such as China and Titan’s home base of India. Too many items to put on the shelves make retailers wary of poor margins. It becomes confusing to see that a company has diversified in so many directions, even related directions. Considering that 82% of Swatch Group total revenue comes from just three of their 14 brands (Omega, Swatch and Tissot) – Swatch needs to focus on these 3 and either liquidate or consolidate its remaining brand base. The creation of an OEM group to handle the manufacture of products under the Calvin Klein label could act as a springboard for other OEM relationships much in the fashion of relationships between Timex and Disney, Warner Bothers, MGM and Guess. The

other 10 brands under the Swatch umbrella could either be rolled up into the OEM business or liquidated. Attempts at maintaining the Swatch of the 1980s have begun to erode the power of the brand and diminish its international equity. The brand needs a focus that speaks to the more sophisticated nature of today’s youth (youth – the original Swatch audience) and the 30-45 year old original Swatch audience who demand a more expensive, elegant, conservative and hip watch that speaks more about their personality as it is today rather than how it was 20 years ago. Once production has been redistributed, Swatch should allocate funding for research and development to attack up and comers such as Fossil who are already targeting the original Swatch audience with products that fit their lifestyle today. These strategic initiatives will affect the economic well-being of not only Swatch employees and contractors based in Switzerland, but the Swiss watch industry as a whole. In the end, the goal of any business is to maximize shareholder value by creating a profitable enterprise. Throughout the process of maximizing shareholder value on a global scale, people – from the top of the chain to the bottom – become pawns in the game of international business. It is inevitable that Swatch must move to outsource much of its manufacturing in order to continue increasing market share worldwide. The side-effect is that some Swiss will lose jobs while some Indians will gain jobs. On a global scale, this is not a negative effect; it is a fair trade for the ability to maintain the company’s status as a growing player on the global stage. References Bouquet, C., & Morrison, A. (1999). Swatch and the Global Watch Industry (Case Study 9A99M023). Ontario, Canada: The University of Western Ontario, London. Dicken, P. (2003). Global Shift: Reshaping the Global Economic Map in the 21st Century (4th ed.). New York: The Guilford Press. Krishnan, S. (The Hindu Business Line, September 15). Watch Out for Competition. The Hindu Business Line. Retrieved May 13, 2005, from The Hindu Business Line Online Edition Web site: http://www.blonnet.com/iw/2002/09/15/stories/2002091500371300.htm Shenkar, O., & Lou, Y. (2004). International Business. Hoboken, NJ: John Wiley & Sons, Inc. World Bank. (2003). GNI Per Capita 2003, Atlas Method and PPP [World Development Indicators Database]. Available from World Bank, http://www.worldbank.org/data/databytopic/GNIPC.pdf U.S. Census Bureau, & Times Atlas of the World. (2004). [Countries Ranked by Population]. Unpublished raw. Retrieved May 14, 2005, from WorldAtlas.com Web site: http://www.graphicmaps.com/cntypop.htm