Swatch Case Study—Commentary

On July 24, 2012, the Swatch Group issued a letter to its shareholders announcing a 16.7% sales increase and profits up by 19.4% for the first six months of the year (Letter to Shareholders, 2012). For 2012, management is confident to achieve record sales of eight billion Swiss francs. At the Annual General Meeting on May 16, 2012, the company agreed to increase dividends by 15%. This excellent performance is reflected in Swatch shares traded between 288 and 400 over the past year reaching an all-time high of 439 Swiss francs in March 2012.

The success of Swatch over the years reflects sound management dedicated to modern designs, innovative marketing, conservative financial practices, vertical manufacturing, a wide geographical distribution network, as well as an international outlook and long-term vision (Swatch Group Annual Report, 2011).

Swatch provides an excellent case study of international business as it includes an analysis of threats from competition, counterfeiting, and negative exchange rates. Furthermore, Swatch as a case study benefits from being known to readers throughout the world as it is well documented and covers a wide range of contemporary marketing and management issues. It also provides a unique opportunity to study how a firm located in a small country with high labor costs became a world leader in the watch industry. The success of Swatch reflects strong leadership, an entrepreneurial spirit, and strategic acquisitions.

The author has identified the key issues that made Swatch a success story. Once Swatch redesigned and reengineered the manufacturing of watches by reducing the number of movements from over 100 to 30, thereby lowering costs, it introduced innovative global marketing strategies. The phenomenal growth was the result of a strategy based on products that met consumer needs and tastes from basic watches to expensive models. Multiple acquisitions of luxury brands allowed Swatch to enter the luxury market segment which is more profitable and prestigious. In terms of production, it applied a vertical integrated manufacturing process thereby benefitting from economies of scale, better control over quality, and supply chain efficiencies. Similarly, by managing its own distribution network, Swatch is closer to its customers and reduces the danger of the gray market while optimizing its promotional campaigns.

Reading the case raises a number of questions, particularly concerning the future of Swatch. For instance, should the Swiss franc continue to be exchanged at current rates or appreciate further in the near future, and will management consider transferring production or subcontracting to lower wage countries? Would such a move affect the quality of the watches and the image of Swatch? In past years, major automobile manufacturers have subcontracted substantial parts of production in order to lower labor costs. However many of these companies had to recall thousands if not millions of cars due to defects. Another factor to be considered is the risk of technology being pirated by competition in countries where the protection of intellectual property rights is not fully enforced. Another threat could come from newcomers wishing to enter this lucrative market. As the demand is expected to grow substantially in emerging markets, particularly in China and India in the next decade, it is possible that entrepreneurs from these low-cost countries could start competing with Swatch, the Richmont Group, LVMH, and other major players. For example in the automobile industry, Tata of India has purchased the Jaguar brand, and a Chinese firm has recently acquired Volvo of Sweden. With these acquisitions, both firms own brand names known worldwide, having access to distribution networks and technology, making them serious competitors in the long term.

As Swatch is facing intense competition from several industry brands as well as counterfeiting, increasing production costs, and lower margins due to negative currency exchange rates, this should force the new management to review its medium- to long-term strategy (The Swatch Group Ltd, 2010). In view of rapid changes in the global economy, Swatch needs to continue investing in research and development (R&D), introduce new products and designs, and strengthen its product portfolio. Furthermore reinforcing its brand image, expanding its distribution network, and increasing its internal production capacity will go a long way in fostering continued success. Importantly, Swatch prefers not to subcontract its production, nor does it borrow from banks to finance expansion. It is known that Swatch dislikes borrowing from banks and instead finances growth with its own funds. So far, the Group has been able to do so and financial reports indicate that it has no outstanding debt. This commitment to internal growth reflects Nicholas Hayek's earlier experience with banks when in the early 1980s banks refused to finance his plan to restructure the industry due to the high risk involved. At the moment, Swatch is in litigation with a large Swiss bank because it has taken undue risks with their investments resulting in losses worth millions of Swiss francs. Another possibility would be for Swatch to consider strategic alliances with other manufacturers to develop new products in the watch industry or in related fields as it did in developing the smart car concept with Mercedes-Benz.

A strength that could become a weakness is Swatch's commitment to its workforce. When the demand dropped due to the recent global recession, Swatch did not lay off any workers because they are considered part of the firm's core competencies. This decision to retain employees in an unfavorable market was financially costly and reduced overall profitability. On March 1, 2011, Swatch Group announced that due to rising sales, 1,000 employees were hired in 2010 and another 2,800 were hired in 2011. Additional factory space will be built in Switzerland, one in Boncourt, in the Jura region, and one in La Chaux-de-Fonds, in the canton of Neuchatel, to meet increased demand. As long as the Swiss franc is at a premium versus other major currencies, production costs in Switzerland will affect overall profits, which otherwise would be invested in R&D. In the near future, management is likely to be faced with the dilemma of whether to outsource production to emerging markets, thereby damaging its reputation and brand image, or to maintain production in Switzerland, where labor costs will have a negative effect on the firm's profitability.

If the firm is to meet its sales forecast of $10 billion in the medium term, the Swatch Group will have to strengthen its position in key markets with a product portfolio that covers all price segments, ranging from inexpensive watches to high-price luxury ones, particularly in key emerging markets like Brazil, China, and India in addition to Central Europe and the Middle East.

Over the past 30 years, Nicholas Hayek restructured and rescued the Swiss watch industry from bankruptcy. Today, the Swatch Group is the world leader despite competition from major firms particularly in the luxury segment which is more profitable. To remain the industry leader in the next decade, Swatch will have to reinvent itself by introducing new products, entering new growth industries, or starting new ventures in areas where they have a comparative advantage such as in precision instruments and related industries.