The Swatch comes out in Switzerland to contrast the crisis of the national watch industry blew up in the 70s because of the arrival of hundreds of quartz watches at a low price, coming from Japan and from Hong Kong, and for the decision to adopt not the quartz technology the Swedishes themselves had invented. There were, moreover, strategic, structural and managerial problems too. The success of Swatch took place despite the other branded goods’ equal desperation for growth and the value-conscious consumers’ resistance to price increases in an era of low inflation (Noella, 2002), and are opting for high-quality private label goods instead of brands (Devincentis and Kotcher, 1995).
Thus, Swatch’s innovative evolution had essentially had broaden their consumer base. For Swatch, the recuperation and improvement from their diminished market share due to their high-priced watches and the availability of low-priced brands can be attributed to these three factors. First, the development of their product from the use of classy materials to plastic cased watches and the subsequent cost reduction that they garnered allowed for lower prices.
This enabled them to compete with other brands.
Our strategic analysis gives us the opportunity to learn more about Swatch Group, to point out the factors that lead to its success and to give recommendations in order to improve what seems for us going wrong.
The first aspect we have to point out is the hard competitive environment. In the early 80’s, the world of Swiss watchmaking has undergone a profound change because of the arrival on the market of Asian watches using quartz and also because of other vagaries of economic conditions.
Resizing the branch was unconditional as evidenced by these figures:
The Swatch Company, continuing the innovative technology created by Maurice Grimm changed the watchmaking’s standards. The strategic choices and efforts in marketing and communication undertaken by the brand have enabled a rapid and continuous development over the years since its inception in 1983. Swatch’s strategy is based on an innovative process generalized. More than mere technological, innovation focuses on the work covering the development of branding and marketing approach
First watch to introduce see-through watch and scented watches.
Threat of new entrants is medium to high. High market growth rate, market opportunity, and demand for the watch. Moreover, there is the moderate control over distribution channel by big player, capital requirement, and switching cost which also threatens of new entrants. But these forces are partially offset by high product differentiation, high economies of scale and economic crisis in Swiss.
Consumers and retailers are the main buyers of watch and these groups differ in term of the buyer concentration and the volumes of purchase. The overall bargaining power of buyers is low to medium. Final consumer’ bargaining power is medium. Buyer concentration is high and retail has good information. Then, production differentiation of suppliers is medium but it is partially offset by buyer purchase in small volume. On the other hand, buyers have the high Swiss watch preference. There are limited editions of watch, high demand for watch and buyer concentration that are low. While small purchase size and switching cost are medium, buyer has good information. Moreover, buyers’ ability to integrate backward is medium and price of input, relative to total production cost is low that makes the increased bargaining power of buyer.
The bargaining power of suppliers is moderate. Although the differentiation of product and service suppliers is high, this force is offset by the fact that the customers are very important to the suppliers. Moreover, the buyer switching costs are medium, threat of forward integration is medium, switching costs are medium and threat of forward integration is medium. As the result, overall the bargaining power of suppliers is medium to high.
The overall threat of substitute products is medium since the buyers switching cost is medium.
Rivalry among existing firms is medium to high because the market growth rate is very high, the brand differentiation is low, competitor can access to cheap labor cost, exit barrier is very high, asset specialization is high, switching costs are medium and emotional barriers to exist are medium. As the result, the current rivals in the market are quite high. The overall attractiveness of the watch industry is quite good even though the threat of current rival in the industry is quite high but the opportunity for the entrant is still high that means this industry still has a lot of spaces for the new players to enter a lot of opportunities for the old players to expand the business operation. Moreover, the buyer and supplier’ bargaining power are medium to low that means the company can freely set the attractive price to the customer and also makes more profit for the company. And the medium level of threat of substitute also implies that the customer will buy more watches in the future because there is no substitute product for the watch.
The explicit mission statement has not been announced, Swatch’s mission is likely to be “to offer low cost, high quality, and accurate watch with synthetic material”, targeting to young people who are most likely to buy low-priced watches. According to the low cost objective, the operation has been separately managed in global manner in Switzerland, Brazil, China, and India where the labor cost is low enough to compete with Japan and Hong Kong. Moreover, in order to keep reaching the efficiency and effectiveness, the fully automated assembly line is implemented without the human intervention. In addition, to keep Swatch competing with low cost manufacturers, the capital-investment is applied as a result of decreasing in costs. The lean and flat hierarchies help enhancing the innovativeness and creativity throughout the company. The hybrids of centralization and decentralization management allow Swatch to yield the benefit from the local knowledge while maintaining the control over the distribution and management.
The quantifiable objective has not been stated explicitly, it is obvious that Swatch’s general objective is “to become the creative and innovative leading brand in global market and establish strong brand image in the mind of consumers”. This objective is obvious since the flat hierarchy management style of the company follows this objective in order to enhance the creativity and innovativeness. Furthermore, the company’s culture, the controlled chaos support the creative and innovative thoughts since under this culture, the company believes that the circumstance keeps changing as a result of ever adapting to the environment.
According to mission statement of “to offer low cost, high quality, and accurate watch with synthetic material”, Swatch fails to achieve since the low cost manufacturers such as Japan and Hong Kong are able to construct even lower cost of production than Swatch. Moreover, Swatch fails to take into account for different values in each different country. Furthermore, the country-of-origin has put a great effect on Swatch’s sales that Swatch is unable to cope with. However, Swatch is able to survive in the intense competition since Swatch is able to adapt to ever changing circumstance as it obviously notice from the continue increasing in sales, unlike other Swiss Companies which are unable to adapt to the changing market conditions and are reluctant to emphasize on the innovative and competitive products.
Swatch applies the vertical growth strategies through both backward integration and forward integration. It is obviously seen that the backward integration is implemented through the acquiring the shares of the watch manufacturing company, which were merged during the crisis. Moreover, the global production is implemented by establishing the facilities in low-cost countries such as Brazil, China, and India to yield the low cost of labor as a result of decreasing the cost of production while maintaining the control over the production as well as keeping the operation within the standard to reach the high quality concept. The forward integration is applied since Swatch is initially sold through special stores and department stores. Eventually; Swatch decided to move into regular watch stores in 1980s. Finally, Swatch decides to allow the individual investors and entrepreneurs who serve as distribution channel to open Swatch stores to sell anything that carries Swatch brand name.
Hayek planned to test the market of new watch in United States as a result of the establishment of joint venture with a Texan businessman.
Swatch has developed the joint venture in telecom and car businesses with Siemens and Mercedes-Benz respectively. The diversification into telecom industry can be simply implied that Swatch is pursuing the concentric diversification strategy since the target market would be the new one with the related technology of Swatch, specializing in microcomponents. Diversification to car business with Mercedes-Benz has provided a great opportunity to Swatch to involve with various business transactions and obtain the valuable experience. The diversification has been implemented and targeted to the existing customers who are likely to be young people with the existing knowledge of microelectronics. Due to the differences in operation both with Siemens and Mercedes-Benz as a result of budget overrun as well as lack of decision making power have put the lessons from the cooperation in term of joint venture.
Swatch offers the wide variety of product line under different brand names to meet the customers’ demand in different markets. The luxury brands such as Blancpain, Omega, Rado, and Longines offer wide variety of product to reach high-end market while offering the medium and low-end brands under the brand names of Tissot, Certina, Mido, Pieere Balmain, Calvin Klein, Hamilton, Flik Flak, Lanco, and Endura.
Swatch responds the customers’ demand through the wholesaler organization that is the division within the Swatch group subsidiaries around the world. Swatch is operating under the pattern of product-country matrix where the local division managers have to report to the country managers, who are directly responsible for total profits and losses as well as the brand headquarter in Switzerland.
Historically, the Swiss watch and clock industry has always had a specialized horizontal structure in which suppliers, craftsmen and subcontractors supply movements and external parts to assemblers called “établisseurs”, who put the final product together. However, to a lesser extent, the industry has also developed a vertically integrated structure in which watches and clocks are sometimes made entirely by the same company, in this case called a “manufacture”. During the 1970s and early 1980s, technological upheavals (appearance of the quartz technology) and the difficult economic situation resulted in a reduction in the size of the industry: the number of employees fell from some 90,000 in 1970 to a little over 30,000 in 1984, a figure which has remained stable over the last thirteen years (40,000 employees in 2004) while the number of companies decreased from about 1,600 in 1970 to about 600 now. The average number of employees per company has remained constant, at just under 70 people per company in 2004, as in 1970. The great majority of watch companies are small sized companies (employing less than 100 people) while a very little number (less than 10) are each employing over 500 people.
The company has a very little number of bureaucratic control systems or referents of the headquarters. Instead, beside the apex of Smh there is a Enlarged Group Management Board constituted from 16 members. The executives that make part of this council work in all the parts of the world and are directed responsible of the different units of business of the company. A Restricted Group Management Board composed from 7 members chosen between those of the wider group, constitutes the highest organ of management of Smh.
When these 16 executives gather, as they make once a month (the more narrow group gathers, instead, 2 times a month), they exchange the information related to the key markets of the respective nations, they make to emerge and they level eventual controversies between unit of business and zones in competition, and then they return to the respective organizations with the last “outline of game” of the enterprise. In other words there are minimum time discard between decision and action.
Finally there is the general executive manager who becomes part directly and visibly in all Smh, in particular in the aspects that regard the strategy and the new products. This role has been covered since the beginning from Nicolas G. Hayek who has shown remarkable dowries of leadership. To him are linked the choices against current to produce the clock entirely in Switzerland (country with one of the work costs more elevate in the world) and a strongly integrated organization vertically. Even if these choices to the beginning were opposed from many, they were revealed extremely effective allowing the company remarkable returns.
The enterprise has approximately 200 centers of profit for which are defined very strait budgets , are controlled closely the achieved results turned out with timely statements that concur to react very quickly to unexpected situations. The organization of the job is based on a planning team, a system that renders if the entire team is completely concentrated on the objective to catch up. The final result is a solid company without being heavy: a determined contender and in fast evolution whose remarkable turnabout demonstrates the power of the not conventional principles of management of Smh.
This issue is the critical issue because it affects the overall image of Swatch Group due to the various messages of each Swatch model and their positioning strategy. The major reason of this problem is the different stores that sell the Swatch’s products. Moreover, Swatch comes up with many watch models that are more than the watch market can bear especially in United States. Moreover, Swatch Group has the different messages for each watch model. This means that Swatch Group does not have the consistent messages to communicate with their customers and the messages also do not illustrate the main characteristics of Swatch’s watch model.
In 1998, Swatch had total gross sales for 3,053 millions of CHF and had 408 millions of CHF or 13.4% for their operating profits. This indicated that Swatch might have the problem about managing their costs such as costs of goods sold, variable costs, or fixed costs because this operating profit percentage is somewhat low. In term of assets, their assets had the bad proportion when compared with the liabilities because their assets valued 3,633 millions of CHF while liabilities valued 2,813 millions of CHF. Then, their owner’s equity was equal to 820 millions of CHF. From this table indicated that Swatch borrowed more money from creditors and they faced the risk about the high interest in each year because if Swatch had no enough money to pay them, Swatch might be easily sued from those creditors. Thus, Swatch should decrease the funds resulted from liabilities, while they should increase their funds from the investors instead. So whenever Swatch experienced with losses from operation, the investors would not sue the company because the company is also the investors’ assets. At most, they had just waited for dividends in next year.
In addition to the cost management problem, this exhibit indicated that Swatch had three of five businesses that could not create the high sales and they were composed of Electronic systems, General services, and Adjustment. Exhibit 2D had shown the Swatch’s financial information. This exhibit showed the 5-year income statement (1996-2000) and then their sales increased continually since 1996 for 2,770 millions of CHF to 2000 for 3,705 millions of CHF. Therefore, it could indicate that Swatch had the good strategy in term of corporate-level strategy and business-level strategy. Although, their EBDITA would be decreased by 20 millions of CHF in 1997, Swatch could create the good performance in subsequent years (1998-2000E).
Thus, it meant that Swatch was following the right direction in according to their expectation. Moreover, their operating profits for the latest year (2000) could make the highest operating profits for 64 millions of CHF relative to the other years as well as highest margin percentage for 14.2%. Then, it could indicate that Swatch had ability to manage their cost effectively for both in term of cost of goods sold and operating & administrative expenses. However, although tax rate would be 18% in 2000, net profit and margin percentage can be achieved at 437 millions of CHF and 11.8% respectively and then it was the highest value in term of sales and percentage for the past 5 years.
In addition to the good cost management, Swatch had also the flexible management system to respond the varying environment and finally, it led to the higher dividends to the investors and stockholders. For key ratios, Swatch had the net debt/equity (%) that was equal to -22.5. It meant that Swatch had more cash & temporary investment than total debt. Thus, this ratio was negative. In addition, this ratio indicated the Swatch had the ability to manage cash flows and temporary investment effectively. For ROE (%), Swatch had less ROE ratio in 2000 (13.5) when compared with the ROE ratio in 1996 (25.1). From this ratio, it meant that Swatch provided less returns to the stockholders when compared with their investments. Therefore, Swatch was essential to increase the stockholder’s confidence by making higher ROE ratio with the effective strategy.
Swatch should develop a unique selling proposition of its brand and stick to it. The company should promote only one central benefit of its product to the customer. By selecting only one consistent positioning message, it will be the easier communication to the target market. Moreover, it will result in employees who have clearer understanding about a goal in operation. If Swatch consistently presents at one positioning and delivers on it, the target market will recognize the company’s distinctive offering and image.
This will allows Swatch to select the best positioning message that can describe the overall image of the company. This strategy can eliminate confusion of customer and emphasize on clearer direction in the operation of the company to its employees. Therefore, the customers may still be confused with the image of Swatch. For the implementation, the marketing department will implement this alternative in the beginning of 1999. The marketing team will be responsible for the creation of positioning message and selection of the most effective media to communicate this message to the customer. Cost and market coverage must be considered before choosing any media.
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