9-504-096 REV: NOVEMBER 22, 2004 YOUNGME MOON The Birth of the Swatch Ten years ago, the people on the original Swatch team asked a crazy question: Why can’t we design a striking, low-cost, high-quality watch and build it in Switzerland? The bankers were skeptical. A few suppliers refused to sell us parts. They said we would ruin the industry with this crazy product. But the team overcame the resistance and got the job done. — Nicolas Hayek1 In 1993, Swatch was the best-selling watch in the history of the watch industry. In 1992 alone, it sold 27 million units, while cumulative sales surpassed 100 million units (see Exhibit 1). In addition, it was widely acknowledged that the entire Swiss watch industry had been on the brink of disaster when the Swatch had been introduced 10 years ago; the phenomenal success of the Swatch was considered by many to have been a key factor in its resurgence. At the management level, much of the credit for the turnaround had been directed toward Nicolas Hayek, CEO of the Societe Suisse de Microelectronique et d’Horlogerie (SMH), which controlled nine global Swiss brands including Swatch. Over the past 10 years, Hayek had led the way for the success of the Swatch by committing SMH to a business strategy that in many ways defied industry wisdom about how global watch companies should be run. This strategy was based on a strict commitment to vertical integration (the company assembled all of the watches it sold and built most of the components for the watches it assembled), decentralized marketing (each of SMH’s nine brands had total authority over product designs and marketing), and portfolio management (SMH’s goal was to have a competitive brand in every price segment in the market). Industry Background Prior to the 1950s, watchmaking was a craft that required the skills of a master jewelry maker combined with the expertise of a micromechanical engineer. A watch typically consisted of a meticulously crafted mechanical movement2 with more than 100 separate components that had been 1 All quotations in this case are reprinted by permission of Harvard Business Review from “Message and Muscle: An Interview with Swatch Titan Nicolas Hayek,” by William Taylor, March–April 1993, pp. 99–110. Copyright © 1993 by the Harvard Business School Publishing Corporation; all rights reserved. 2 A “movement” is the set of components that comprises the “guts” of a watch. Movements can either be mechanical or electronic. ________________________________________________________________________________________________________________ Professor Youngme Moon developed this case from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2004 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 504-096 The Birth of the Swatch assembled with great care and precision. The better the watch, the more jewels it contained; these jewels—usually synthetic rubies, sapphires, or other hard stones—enabled the watch to withstand years of mechanical wear. Watches were often considered to be financial investments; as with fine heirlooms, it was not uncommon for them to be handed down from one generation to the next. They were typically enclosed in beautifully constructed casings made from precious metals and were sold primarily through jewelers and upscale department stores; in fact, watch repair was an ongoing source of revenue for these retailers. The Swiss dominated the watch industry, in large part because of their centuries-long history of jewelry-making expertise. Watchmaking was a source of national pride, and the “Made in Switzerland” label was a global seal of quality, status, and prestige. Around the world, the general public consensus was that the only “good” watches were Swiss watches. By 1945, there were close to 2,500 Swiss watchmaking firms, 90% of which employed fewer than 50 people. Some of the most well-respected Swiss watch brands included Beaume & Mercier (established in 1830), Longines (1832), Omega (1848), Piaget (1874), Movado (1881), and Rolex (1908). Altogether, the Swiss accounted for 80% of the world’s total watch production and 99% of all U.S. imports. The Emergence of Low-Cost Competition In 1951, a company called U.S. Time introduced a line of disposable watches bearing the Timex brand name. During World War II, the company’s wartime efforts had resulted in the development of a way to produce low-cost mechanical movements that used hard alloy metals in place of jewels. These new alloy bearings not only lowered the cost of goods, they made automated production easier, further lowering costs. Timex watches were very simply designed and used cheap exterior materials that gave the devices a strictly functional appearance. The watches could not be opened, so after-sales repairs were impossible; however, because Timex watches were priced so low (between $6.95 and $7.95), the company was able to market them as being disposable. An extensive television advertising campaign was launched in support of the product’s introduction. The ads—which used the now-classic tagline, “It takes a lickin’ and keeps on tickin’”—used a series of “torture tests” involving often absurd stunts (e.g., a Timex being spun for seven days in a vacuum cleaner, a Timex taped to a giant lobster’s claw)3 to communicate the durability of Timex watches despite their low price point. Traditional jewelers had no interest in carrying Timex watches. They were priced too low, they lacked the precious metal exteriors of Swiss watches, and because they eliminated the need for repair, they generated no after-sales revenues. Timex was thus forced to look elsewhere for distribution, ultimately selling its watches through a variety of low-priced outlets such as drugstores and discount houses. By the end of the 1950s, one out of every three watches bought in the United States was a Timex, and by 1970, Timex (having changed its name from U.S. Time) was selling more watches (in terms of units) than any other manufacturer in the world. At about the same time, several Japanese 3 Other examples of these torture tests included a Timex strapped to Mickey Mantle’s baseball bat, a Timex frozen in an ice cube tray, a Timex wrapped around a turtle in a tank, a Timex taped to the propeller of an outboard motor, a Timex tumbling over the Grand Coulee Dam, and a Timex being held fist first by a diver leaping 87 feet from the Acapulco cliffs. Many of the ads starred John Cameron Swayze, one of the most popular television news personalities of the 1950s. 2 The Birth of the Swatch 504-096 companies—including Hattori-Seiko and Citizen—had taken over the Japanese market. After successfully expanding into other parts of Asia, these Japanese watch manufacturers were now pushing into Europe and North America as well. The result was that, even as worldwide demand for watches grew, the Swiss share of the global market declined, from 80% in 1946 to just 42% in 1970. The Introduction of Quartz Technology In 1970, the introduction of quartz technology changed the nature of competition in the watch industry once again. Unlike mechanical movements, quartz movements used an integrated circuit made up of numerous electronic components, resulting in a watch that was comparable in accuracy to Swiss-made mechanical watches (accurate to less than one second per day). Quartz watches had a couple of other advantages over mechanical watches. First, because they were based on electronics, they generally allowed for more sophisticated functionality than their mechanical counterparts—for example, in addition to providing the time, they could easily provide the date and day of the week. Second, they were not only significantly cheaper to manufacture, their costs of production were constantly being driven down by chipmakers such as National Semiconductor and Texas Instruments. Some quartz watches incorporated a digital display; however, the most popular were analog watches that used gold or silver plating to mimic the traditional appearance of their more expensive, Swiss-made mechanical counterparts. Leading the production of quartz watches were Japanese manufacturers, in particular, Hattori-Seiko and Citizen, both of which had made huge investments in building fully automated, high-volume facilities around the world (e.g., in Hong Kong, Korea, Brazil, and Mexico) for the manufacture and assembly of quartz watches. They were soon joined by Casio, which specialized in producing low-priced, multifunctional, plastic digital watches that incorporated features such as timers and calculators. As Hayek recalled: Throughout the 1970s, as companies in Hong Kong assembled hundreds of millions of cheap watches, Japan made investments to supply them with movements. They built big factories and slashed prices. A movement used to cost, on average, between $8 and $20. Today it costs between $2 and $5. The Swiss couldn’t play that game. We were uncompetitive on cost. We just didn’t have the volume. By 1979, Hattori-Seiko was producing 22 million watches annually and had become the world’s largest watch company in terms of revenues. In the under-$50 category, Timex was still the world leader (although it had lost tremendous ground in the above-$50 category to Seiko), followed by Casio.