Swatch - essay PDF

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Swatch In the words of Nicolas Hayek, CEO of the corporate

holding

company

Société

de

Microélectronique et d'Horlogerie (SMH), which owned Swatch and eight other brands, “… we are not just selling a consumer product, or even a branded product. We are selling an emotional product. You wear a watch on your wrist … for 12 hours maybe 24 hours a day.” Most cases on Swatch focus on the role played by Hayek. This case focuses on the role of Dr Ernst Thomke, also known as “Swatchmaker”, and the problem of being both low cost but differentiated.

The Swatchmaker At the age of 39 in 1978 Dr Ernst Thomke was headhunted from his marketing role in Beecham Pharmaceuticals to be managing director of ETA, the largest firm in the Ebauches SA group, where he had served an apprenticeship in his teens. Ebauche firms made the so-called "raw movements" and supplied them to watch manufacturers as subassemblies for their brands. Established in 1926, Ebauches SA was a holding company for Swiss watch movement manufacturers which became a founding member of Allgemeine Schweizerische Uhrenindustrie AG (ASUAG) in 1931. ETA was best known for its ultra-thin mechanical movements; in all it produced over 1000 variants. Thomke rationalised production, closing nine factories and reducing the number of models to about 250. Layers of management we cut out and a more innovative culture was actively encouraged. To improve morale, Thomke challenged his engineers to make the world’s thinnest quartz analogue watch, a feat claimed earlier by Seiko.

Project Delirium as it

was known – because initially it seemed a crazy idea – bore fruit in 1979. To make it possible, some parts were bonded to the case, a world first, and a very think battery was also commissioned. That year ASUAG sold 5000 Delirium watches at an average price of US$4,700.

Nicolas Hayek & Ernst Thomke in the 1980s

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In 1981 ETA began marketing its movements outside ASUAG and Switzerland including Japan. But it was desperate for new products in the medium to low price range. Thomke decided to avoid the middle ground dominated by Japan, instead setting his team the target of making a quartz watch to retail for no more than SFr50 (then equivalent to US$25). Because the retail and wholesale watch trades expected markups approaching 100%, the target ex-factory price had to be at most a quarter of the retail price. Given that Swiss manufacturing costs were typically 80-85% of ex-factory price, this implied the need to make the watch for SFr10. Thomke’s initial cost ceiling was SFr15, but he stipulated that the production methods must have the potential to halve the unit cost over time. If achieved, the new watch would be uniquely profitable, with factory profit margin more than twice achieved by Far Eastern firms. But Thomke insisted that the watch also be of good quality, water and shock proof, as standardised as possible, with variations limited to the look of the case, dial, hands, and strap; other than battery replacement, it did not have to be repairable. If this was all achieved, Thomke thought ETA could sell 10 million units in three years, the minimum needed to offset declining sales of inexpensive mechanical watches. Two young engineers, Jacque Muller and Elmar Mock, masterminded this low-cost “Daughter of Delirium”. Their design took a much larger team to implement, and a series of radical innovations involving seven patents. The case was a precision plastic moulding onto which component sub-assemblies were mounted. The 51 parts included a new, low-cost miniature stepping motor. Sub-assemblies were held together by ultrasonic welds not screws. The face cover was also welded to the case, sealing the watch for good. The strap was attached via a patented hinge and the battery located in a chamber on the back. Final assembly was automated as far as possible. Because no rectification of faults was possible, high quality of assembly had to be designed in. The initial capital investment to make Swatch was US$12.5 million. Only 800 people were needed to produce 8 million watches in 1985, final assembly requiring just 130. For comparison, 350 were needed to assemble 700,000 Omega watches. By 1986 production costs were reportedly under SFr10 per unit. Thomke believed the US market would be critical for success. ETA still had no marketing department so he asked Franz Sprecher, an independent consultant, for ideas. Working with New York agency McCann-Ericson, Sprecher coined the name Swatch. The team 2

decided to downplay its technical prowess in favour of associating the name with a concept of fun, excitement and fashionability (and perhaps disposability) aimed at people between 18 and 30 who would be encouraged to buy for two or three different occasions. The first test market was organised by the Swiss Watch Distribution Center at Dallas, Texas, department stores in December 1982. There were a dozen fairly conventional designs, each given a name, a practice that has persisted. Results were mixed, but Swatch was launched in Europe in March 1983 and was soon on its way tomeeting its first year target of 70,000 units retailing at SFr40 for the basic watch, SFR45 for a watch with a second hand and SFr for a calendar version (US prices: $25, $30 and $35). A second test market in New York and Dallas organised by a Swiss fashion design graduate, Max Imgruth, who had worked in

Max Imgruth CEO

Swatch USA

America, convinced ETA that the first designs were too staid to create real excitement. Zurich designers Jean Robert and Kathi Durrer were invited to style two collections each year, as for fashion clothes. Imgruth was appointed President of Swatch Watch USA to manage product promotion and distribution. By autumn 1984 a system was in place to pre-test 80-100 new designs to find the best for each new season’s collection. The use of coloured plastics aided rapid style changes. Scented models were also experimented with, and they added a smaller model appealing particularly to women. Swatch watches were sold in shops-in-shops in classy department stores, selected watch and jewellery stores, sports, gift shops and fashion boutiques. Advertising and

promotion activities were intense and flamboyant, especially in the USA where advertising expenditure in 1985 was US$8 million on sales of US$45 million. Endorsement by celebrities was also a leading aspect of publicity. The German launch was accompanied by hanging a giant watch with a 10 metre diameter face from a Frankfurt skyscraper. Supplies were managed to actual demand, to discourage retail discounting. Where Swatches were The Classic 12 Flags 1984

displayed below list price, the US distributor is said to

have spent almost US$1 million buying them back. Retailers were warned about counterfeits, first seen in 1985. US sales of Swatch reached 100,000 in 1983 and by 1985 were 3.5 million.

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A separate subsidiary of ETA, Swatch AG, was created in 1985 to implement a US initiative to create a complementary range of casual clothing and footwear, umbrellas, sunglasses, cigarette lighters, etc. They hoped to generate US$100 million of additional sales in 1986. This proved too ambitious and the accessories line was discontinued in 1988. Still, Swatch itself went from strength to strength: 12.5 million units were sold in 1986, a total of 26 million since launch, then spurting to 31.5 million in 1993. Dr Thomke was promoted to manage the entire SMH watch business which had been sold by the banks to private investors in 1985. Swatch in 1986 accounted for well over 80% of SMH’s total units sales, by far its biggest selling brand and rapidly becoming its most important revenue earner. By the end of 1993 over 154 million units had been sold worldwide. Despite widespread imitation throughout the 1990s, Swatch has stayed by creative advertising, aggressive high profile promotion and continued product innovation. Designs remain eye-catching and sometimes outrageous. ETA introduced the “PopSwatch”, the Maxi Swatch, the Recco Reflector, Flik Flak (a children’s version of Swatch) Swatch wall clocks, telephones and chronographs, scuba watches, and in 1992 watches with radio pagers and an Olympic commemorative collection of nine models retailing at around US$50. There were even mechanical, self-winding Swatches priced 50% above similar electronic styles. Industry commentators are generally agreed that the Swatch brand has created and sustained a substantial, wholly new market niche defined by an original/authentic, classless fun-and-fashion concept with which it is uniquely associated. Flik Flak Adapted from Thomson & Baden-Fuller (2010) Basic Strategy in Context

****** 1. What business-level strategy does ETA adopt with Swatch? Justify your answer. The business-level strategy Eta adopted with Swatch was that Thomke planned to move Swatch to the low price range market as he challenged his engineers to create the world’s thinnest quartz analogue watch. Furthermore, Thomke used another strategy where they teamed up with new designers and used new technology for clothing. Those strategies helped ETA to be expanding their business by increasing promotion of swatch watches and distribution. 4

2. Why was Swatch able to maintain its success over a period of time when many of its competitors went out of business? Swatch was able to maintain its success over a period of time when the competitor went out of business, as Swatch had quality products and a unique design which they wanted to sell to their customers. Furthermore, they had the business to run smoothly and be successful as they knew what marketing strategy they wanted to use to attract customers.

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