Lecture notes - Case study - The Birth of Swatch - Strategy Organization and Marketing PDF

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The Birth of Swatch (marketing) “Why can’t we design a strinking , low cost, high quality watch and build it in Switzerland?” In 1993, Swatch was the best-selling watch in the history of the watch industry. The strategy was base on: vertical integration, decentralization marketing, and portfolio management.

Industry Background Before 1950s: watch = jewelry, financial investment. Swiss dominated the watch industry (80% of the worlds total watch production). They were sold primarily through jewelers and upscale department stores, and watch repair was an ongoing source of revenue for these retailers. The Emergence of Low-Cost Competition In 1951: US time introduced a line of disposable watches name TIMEX. The cost decrease thanks to mechanical movements that used hard alloy metals in place of jewels (this mechanism was burn in World War II). Main characteristics: 1. Very simply designed; 2. Cheap exterior materials that gives only a strictly functional appearance; 3. Could not be open so after sales repairs were impossible; 4. Really low price ($6.95-$7.95). Promotion: they use extensive television advertising complains. Distribution channel: drugstores and discount houses. Jewelers were not interested in selling them because too low price and no after sale revenue. By 1970 Timex was selling more watches then any manufactures in the world and 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 QUARTZ technology was introduced; this changed again the nature of competition. Quartz movements used an integrated circuit made up of numerous electronic components (equal accuracy to Swiss made mechanical watches). Advantages: 1. allowed for more sophisticated functionality e.g. provide the date and the day of the week; 2. their costs of production were constantly being driven down by chipmakers. By 1979, Hattori-Seiko was producing 22 million watches annually and had become the world’s largest watches company in terms of revenue. By 1984, more than tree-fourth of the watches sold around the world were based on quartz technology and by 1986 Citizen had become the overall global leader in both movement and finished watch production volumes. The Swiss Watch Industry in Free Fall The quartz technology defines the decline of Swiss watches. Swiss watchmakers had refused to embrace quartz based on the belief that electronic watches we unreliable, unsophisticated, and beneath Swiss quality standards. The Swiss watch industry was dominated by two companies: 1. ASUGAG consisting of 100 separate companies and 2. SSIH private watch company. Both of there companies were losing millions of dollars, and Switzerland’s unit share of the world watch market had fallen to less then 15%. In order to maintain profitability company increased the prices and obtain a farther isolation at the upper segment of the market (figure A). Main competitor Japan and Hong-Kong; they were able to produce watches with really low cost of production.

SMH: Hayek Takes Over

In 1983, both SSIH and ASUAG faced insolvency, and their Swiss creditor banks were considering selling some of their most prestigious watch brands to the Japanese. The two companies merge and took the name of SMH; Hayek becomes the CEO of the new big company. The Swatch Concept The Swatch initiative was controversial for several reasons. Hayek wants vertical integration and the new watch was supposed to be fully made in Swiss and their costs had to decrease drastically. In order to make it possible the watch needed to be made on a fully automated production line, some of the biggest changed were: - Slash the number of individual parts required to build a Swatch from 91 to 51; - The watch would be encased in cheap plastic. Big controversial for this but Hayek said: “if we did not have mass production, if we did not have a strong position in the low end, we could not control quality and costs in the other segments”. - The Swatch team decided that the Swatch would have a unique message. WE WERE SELLING AN EMOTIONAL PRODUCT Prior to the Swatch’s launch, the company tasted several prototypes in US department stores. The tests were conducted without advertising or promotion and the results were not encouraging.

The Swatch Introduction The Swatch was launched in March 1983 in Switzerland, Great Britain, and USA after in all Europe. The Swatch was an immediate success. Many of the customer were young people that had never before shown much interest in the watch category. Designs and Collections From the beginning it was clear Swatch were unlikely any other traditional timekeeping instrument in the market; made out of plastic, used brash and intense colors. The Swatch Design Lab, located in Milan, cranked out two collections a year; each collection consisted of 70 different styles. “…we are looking for an immediate emotional reaction..”. Because the collections were replaced so rapidly and were so widely different from one another, new models hit the market on an ongoing basis (customers usually have more then one Swatch). The designers were created by an assortment of artists, architectures and individual designers. We rotate people through the lab; designers stay at least 6 months but maximum two years. SMH would produce limited editions of their design, always carried out the same sticker prices as the regular collections, they generated significant publicity un the media, not to mention excitement among Swatch lovers. Innovation: see-through watch and scented watch. Swatch’s’ Customers were intensely loyal and always looking for new designs. One of the element that made Swatch so popular among customers was it’s price: $40 (clean price, unchanging for the first ten years) THIS LOW PRICE TAG MADE IT EASY FOR CONSUMERS TO PURCHASE SWATCHES ON IMPULSE. Price becomes a mirror for the other attributes we try to communicate. Controlling the Swatch Message SMH spend roughly 30% of the Swatch’s retail price on advertising by advertising the watch industry below the line (e.g. break-dancing, special events). How did they launch Swatch in Germany? They build a giant Swatch, 500 feet high, weighted 13 tons. And they suspended that Swatch outside the tallest skyscraper in Frankfurt: it was a success. The display communicates the essence of the Swatch message: high quality (Swiss) and low cost. In 1990, the company created a Swatch Collectors Club for it’s most ardent fans. For an annual fee of about $90, member received an exclusive collectors’ Swatch each year instead of a traditional membership card. Within one year the Club count 50,000 members.

Retail shop-to-shop system or miniboutiques that focus only on Swatch. (e.g. the veggie Swatch line was sold in vegetable shops). Swatch also open a number of freestanding monobrand Swatch stores, by 1992 the number was 27 worldwide. The Swatch Success Story In 1992 alone, the company sold 26 million Swatches; the same year Swatch becomes the bestselling watch industry. Hayek explains in this way the success: ”We are offering them a message. High quality. Low cost. Provocative. Joy of life. But the most important element of the Swatch message is the hardest for other to copy. Ultimately, we are not just offering watches. We are offering our personal culture.” Swatch has helped the entire Swiss industry, it restore the credibility.

The SMH Portfolio The Swatch brand was responsible for more then a third of the company’s volume output. The Watch industry consist in tree primary sectors.  Low price sector: Swatch was the undisputed market share leader. But lately he was starting to compete with licensed fashion brands (e.g. Benetton, Guess…) that manufacture in Asia.  Midprice sector ($100 to $350): remain more traditional. Customers in this range prefer watches that looked more expensive that they really were. Customers price sensitivity was highest in this segment, margin tended to be lower that in the other two.  Upper price sector ($350 and above): SMH compete primarily against other Swiss manufactures. All nine of SMH’s global brands had their own organizations and their own management teams; these teams have total authority over product design, marketing and communications for their brands. Instead SMH’s manufacturing organization was ETA; responsible for all electronic and quartz movements.

Looking Forward In 1993, the Swatch brand was still growing strong, although many wondered whether the success of the brand had reached its apex, in articular in US. Swatch brand includes also two new extensions in 1990: - The Scuba line featured diving watches - The Chrono line offered technical watches. Swatch was able to automate almost all the manufacturing process.

“If you combine powerful technology with fantasy, you create something very distinct.”

QUESTIONS FROM ZOTTERI 2014 Which is the reason of Swatch success? How is Swatch different from any other competitor product? Evolution of the Industry: (A) Traditional Mechanical – (B) Quartz – (C) Digital

TRADITIONAL (Watch=Jewelry) - Precious mater - Durable - Reliable - “Hand” made - Social symbol - Reparable (gain after selling) - Bought for important events (university degree, 18th birthday.. ) and passed through generations High Jewelry Newspaper

PRODUCT

PRICE CHANNEL PROMOTION

TIMEX TOOL -

-

Functional; different concept of the product, Watch = instrument New design Disposable Durable Metals All conditions No reparable (no gain after selling)

Low 6.95-7.95$/unit Drug store TV because everybody can afford it

PLATED -

Look like Swiss Metal Plate “design” New technology features. Precise as a mechanical watch.

Low 100-350$/unit Drug Store If you make a copy of a famous product you don’t want to advertise it

P

Traditional (A1)

Timex (A2)

During this period Swatch was burn. It has low cost and the biggest thing that Swatch Plated (B1) changes is the reason why this product was bought: Fashion/ Design. - It is no more an instrument but an accessories Product Functional concept Jewelry Fashion a

-

Plastics, colorful, customable ( a way to express your self) The value is related to the Fashion moment once is not more fashionable his value is loss

Which elements of the launch of the product were critical? Distributive politic? Price strategy? Product strategy? Since some models have really high market demand why they don’t adopt a higher cost? Shouldn’t the price clean the market? The critical elements for success are positioning, trustable by client and completely change the watch concept. Swatch faced these elements in this way: 1. The buying reason (BUY EMOTIONS): - Fashion: the collections change every 6 months. During sales the products are high discounted. The product has value only when it is fashionable. The design office is located in Milan the capital of fashion. 2. Price: - Low: everybody can buy it. - “CLEAN” price ($40 not $39.90) - Fixed/same price. The price between different collection doesn’t change so you can buy a new model without thinking to the price because you know it already. 3. Distribution channels: - Single brand shops - Shop in shop 4. Assortment - 70 varieties for 2 collection per year (the word collection before was referred only to fashion, Swatch is the first one connecting it to watches) 5. Promotion - Commercials - Swatch wants people to speak about them. They organize huge events (watch hanging from a sky line) 6. Choice of the name: - Swiss + watch - Close to Swiss because people like it better the Swiss fashion for watches rather the other e.g. China. BREAK AWAY STRATEGY Swatch redefining a product differentially from the one that already exist. Watch = fashion accessories What change in customer terms?  Change in buying reason (before: durable, now: fast, follow fashion)  Different use of the product (before: big events, now: every time I feel like)  Customers (before: presents because really expensive, now: everybody can buy it young people as well)  Competitors (before: watch producer, now: everybody) Swatch is not a competitor of Rolex but more of a t-shirt because they are interchangeable presents.

Before the launch of the product, which watch were commercialize? How do these product differs: Rolex, Timex and Seiko? Base on which reasons do customers take decision? Before Swatch we can find low price watches (Timex $45-50) middle price watches (Citizen $200300) and high price watches (Rolex >$1000). There is low elasticity in both high and low prices watches. For low prices a small change (eg 10%) bring to a small saving that the customer don’t see; in the case of high prices the price is not he most important matter. Instead for the middle case there is high sensitivity because customer cares about changes in price.

Swatch cannot be compared to the other watches because it is a completely different sector.

Swatch change the customer idea of this product, can you think to any other company that did the same?    

Alessi: a cooking instrument become an object of design Glasses: fashion accessories Phones: tells people who we are Dog gadgets: fashion accessories (Swarovski collar)

From the launch of Swatch, did we face any innovation in this field? Which? We face some technological innovation in product and process:  Reduce the pieces. Less pieces = less possibility to break = lower costs  Automatic production process, lower working costs

Which effect Swatch has on Switzerland watches? Swatch group is a portfolio of different brands. Vertical differentiation: different prices for different products. Having more brands make you have economies of scale in production.

TAKEAWAY 1. 2. 3. 4. 5.

NEW PRODUCT POSITIONING (break away strategy) CONSISTENCY TECHNOLOGY HISTORY SWISS DIFFERENT PRODUCT CATEGORY...