The opening case in our Operations Strategy MBA class is “The Swiss Watch Industry,” (p. 32 in my Operations Strategy textbook, sneaking in some marketing). That case is used to contrast the business strategy of Swiss and Japanese watch manufacturers in the 1980s and to explain the drastic change suggested by then-consulting firm Hayek Engineering.
In a worldwide market and consumer psychology study, Hayek Engineering discovered that the same watch model would sell substantially better if it carried the “Made in Switzerland” label. For a Swiss watch, between 75% and 95% of all European consumers were willing to pay a 7%-10% premium over one made in Japan and 20% over one made in Hong Kong. (The comparable numbers for the U.S., were between 51% and 75%, depending on the region. In Japan, the majority of consumers prefer the Japanese watch.)
The general consensus in Switzerland was that low cost production was impossible in Western Europe, and even if possible, not desirable, because it would hurt sales of high-end watches.
But Hayek was known to say: “We must build where we live. When a country loses the know-how and expertise to manufacture things, it loses its capacity to create wealth—its financial independence. When it loses its financial independence, it starts to lose political sovereignty.”
He came to the conclusion that the low end of the market must be controlled; otherwise there was no hope for survival in the long run. The only way such an ambitious goal could be attained was by completely redesigning the clockwork, drastically reducing and standardizing the number of parts (quartz resonators, stepping motors, etc.) used to build a watch, and revolutionizing manufacturing. Swatch was born, and the rest is history, right?
Well, not really: the story continues and is a perfect illustration of how Swatch’s operations strategy of local, vertically integrated production puts it in an enviable competitive position: According to Business Week:
Since 1971, Swiss law has stipulated that local watchmakers can label their products Swiss-made only if non-Swiss parts equal less than 50 percent of the value of the watch’s movement, or motor. That means the movement in a Swiss watch—the essential component—could be 49 percent Other.
The Federation of the Swiss Watch Industry, which includes Swatch Group and rival Cie. Financiere Richemont, asked the government in 2007 to require even more local content. The government proposed minimum domestic content of 60 percent for an entire watch. Legislation can take a long time to pass in the world of Swiss politics, and the issue has dragged on. A final decision may be made next year, says Jean-Daniel Pasche, head of the watch federation.
Why is Swatch backing this? Obviously for the good of the country, but there also is a self-interest:
The quest to keep Swiss watches Swiss has aroused strong feelings. At Mondaine Group, maker of Official Swiss Railways watches, the future of its $11 million plant in Solothurn and 110 workers would be jeopardized if larger rivals succeed in limiting the number of non-Swiss components, according to co-owner Ronnie Bernheim. Mondaine, which has made watches based on Swiss train station clocks for 25 years, uses imported dials and cases, although Bernheim won’t say from where. “This law would be cutting the industry into two,” he says. “The volume business will be killed, except for the big companies. Our foreign competitors are laughing.”
So Hayek’s strategy would play out perfectly: Thanks to its operations strategy, if required local content is increased, only Swatch could survive in the low-end of the “Swiss Made” watches! Well played!
Oh, I could continue with connecting this to sourcing decisions: this move will also help Swatch with putting other Swiss watch makers for the choice to buy their finished “ebauches” or build their own local assembly line to make their own Swiss-made movements. However, at a CapEx of “at least $22 million” and testing which may take 5 to 10 years, that’s a tough nut to crack. And how long would it take that manufacturer to reach the quality and cost that Swatch has perfected? As I said: a beautiful example of competing through operations, but now I must go and pickup my daughter Kiki from piano…