234 smh’s autonomous model for swatch In the mid-seventies the Swiss watch industry, which had historically dominated the timepiece sector, found itself in deep crisis. Japanese and Hong Kong watch manu- facturers had dislodged the Swiss from their leadership position with cheap quartz watches designed for the low-end market. The Swiss continued to focus on tradi- tional mechanical watches for the mid- and high-end markets, but all the while Asian competitors threatened to intrude on these segments as well. In the early 1980s competitive pressure intensifi ed to the point that most Swiss manufacturers, with the exception of a handful of luxury brands, were teetering on collapse. Then Nicolas G. Hayek took over the reigns of SMH (later renamed Swatch Group). He completely restructured a newly formed group cobbled together from com- panies with roots in the two biggest ailing Swiss watchmakers. Hayek envisioned a strategy whereby SMH would offer healthy, growing brands in all three market segments: low, mid, and luxury. At the time, Swiss fi rms dominated the luxury watch market with a 97 percent share. But the Swiss owned only 3 percent of the middle market and were non-players in the low end, leaving the entire segment of inexpensive timepieces to Asian rivals. Launching a new brand at the bottom end was provocative and risky, and triggered fears among investors that the move would cannibalize Tissot, SMH’s middle-market brand. From a strategic point of view, Hayek’s vision meant nothing less than combin- ing a high-end luxury business model with a low-cost business model under the same roof, with all the attending confl icts and trade-offs. Nevertheless, Hayek insisted on this three-tiered strategy, which triggered development of the Swatch, a new type of afford- able Swiss watch priced starting at around U.S. $40. The specifi cations for the new watch were demanding: inexpensive enough to compete with Japanese offers yet providing Swiss quality, plus suffi cient margins and the potential to anchor a larger product line. This forced engineers to entirely rethink the very idea of a timepiece and its manufacture; they were essentially deprived of the ability to apply their traditional watchmaking knowledge. The result was a watch made with far fewer components. Manufacturing was highly automated: molding replaced screws, direct labor costs were driven down to less than 10 percent, and the watches were produced in large quantities. Innovative guerrilla marketing concepts were used to bring the watch to market under several different designs. Hayek saw the new product communicating a lifestyle message, rather than just telling time on the cheap. Thus the Swatch was born: high quality at a low price, for a functional, fashionable product. The rest is history. Fifty-fi ve million Swatches were sold in fi ve years, and in 2006 the company celebrated aggregate sales of over 333 million Swatches. SMH’s choice to implement the low end Swatch business model is particularly inter- esting in light of its potential impact on SMH’s higher end brands. Despite a completely different organizational and brand culture, Swatch was launched under SMH and not as a standalone entity. SMH, though, was careful to give Swatch and all its other brands near-complete autonomy regarding product and marketing decisions, while centralizing everything else. Manufacturing, purchasing, and R&D were each regrouped under a single entity serving all of SMH’s brands. Today, SMH maintains a strong vertical integration policy in order to achieve scale and defend itself against Asian competitors. bmgen_final.indd 234 6/15/10 5:45 PM