The Swatch Group: Competing in an Increasingly Global Market for Watches

Maryam Tahririha

GSB576 L. Grant

Swatch and the Global Watch Industry

Case Analysis

July 13, 2005

THE SWATCH GROUP: COMPETING IN AN INCREASINGLY GLOBAL MARKET FOR WATCHES

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: 1999

Historically, 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:

Ў In 1999, the Swiss watch industry produced over 34 million units. Over 90% of these watches were exported to markets outside of Switzerland.

Ў Although they were responsible for only 7% of the world’s production, Swiss watches generated 51% of the global value.

Ў The Swatch group, with its 14 brands, was the world’s largest manufacturer (also in value terms).

Ў 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).

Ў 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%).

Ў The Group’s gross sales and net profits had increased by 7.1% and 7.5% respectively in 1998.

Ў 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