Swatch - strategic management - Case Study Example

Swatch Strategic Management Case Study School Swatch industry, international and organizational context 1. Market development When first introduced in 1983, the plastic Swatch products are positioned in the mass market, low price segment to counteract the growth of the Far Eastern companies outspread on the European and American markets. By that time Japanese and Hong Kong competitors have taken 80% of the world sales, seriously threatening the traditional Swiss watch industry. The Swatch Company becomes a market leader by creating a niche market of trendy products appealing to a large market segment that was largely underserved - people aged 15-29. The introduction of the Swatch watch is not simply a single-company success; it revolutionizes the whole Swiss watch industry. It is a brand name associated with style and fashion that has sold over 200 million units within a decade obtaining strong presence in all big markets. By 1998 the watch industry is shifting to the mature phase of its life cycle, bringing new challenges to Swatch and the other watch manufacturers. Swatch management team is facing the necessity to reconsider strategy, pressed by several major developments: 1.2. Maturing life cycle stage By 1998 the watch market is reaching its maturity phase. What is typical for the maturity stage in an industry is decreasing sales growth and tougher competition (Thompson, 1996). Persuasive promotion and strong brand identity are key success factors for market leaders and this is one of Swatch's competitive advantages that can be used to counteract competitive pressures. 1.3. Increased competition Increased competition in the maturity stage of the life cycle means more companies adopting the Swatch strategy in terms of pricing and brand positioning, competing on the same market segment. Swatch's major competitors are The Timex Corporation with a number of watch brands positioned differently to cover different market segments; Guess, already part of The Timex Corporation; Fossil, and Casio. There are several factors that influence the intensity of competition (Porter, Competitive Strategy, pp. 17-21). In the watch industry intense rivalry is fuelled by the slow market growth, due to life-cycle maturity stage; and an increasing number of companies competing with equal offers on a market that is limited and decreasing in size. The high volume mass market segment is likely to attract further market entrants - other low cost manufacturers from Far Eastern countries. Additionally, on the low-price mass market segment product and brand switching is very easy, especially for fashion-driven products. According to Figures 3 and 5 in the case study, the players in the watch industry can be put in several categories. Cheap Hong Kong brands - low priced product associated with low prestige and no design exclusivity. Up-market segment dominated by watches like Rolex, Rado in the high prestige, high-priced category. Because of the specific market niche, these watches are sold in smaller quantities and have high profit margins. Medium prestige, medium price category between the two market extremes - dominated by companies like Seiko and Citizen. Swatch's strategy is in the low-price but strongly branded category, competing with brands like Benetton, J. Boxer, Timberland, Kickers etc. 1.4. Changing consumer base The power of customers is one of the five competitive forces, as identified by Porter (Porter Competitive Strategy, 1980). The changes in the consumer base are caused by demographic and fashion developments. The watch market is strongly influenced by changing lifestyle and fashion. Preference to more durable metal watches makes the standard Swatch plastic watch less attractive. To respond to this change, the company has introduced the Irony brand that is in line with new trends. Another pressing factor is changing demographics that will lead to decrease in customer base over the next decade. This means that Swatch will have to compete for fewer customers in the present market segment. Prognostic data shows that the core consumer base - people aged 15 to 29 - that is the Swatch products target - will decrease by more than 20% within a decade in the European Union alone. This highly volatile market means tougher competition and higher risk for long-term strategy, depending on a single, decreasing market segment. Although Swatch may decide to continue to compete in the market niche where their core competencies are, strong future growth copying past success is less probable. Present portfolio and customer analysis also prove this assumption - despite product lines development, new products have only marginal success, as compared to the Swatch Standard brand. 1.5. Technological developments Lifestyle changes such as increased usage of mobile telephones and mobile notebooks to a great extent substitute the basic watch functions. Watch manufacturers have to find a way to counteract the negative impact of new technologies. One possible way is to brand products in the prestige category, where a watch brand does not carry basic functions only but is an equivalent to prosperity, prestige and personal esteem. In the Swatch brand positioning case, if the company continues to sustain the mass-product low price positioning, an alternative approach is to view technological developments as an opportunity, and not a threat, by adding up new functions to Swatch watches, such as internet access, compliance with software programmes, data storage and other functions. 1.6. International context The Swatch brand has developed a clear positioning, by competing with cheaper Asian watch brands on an international market. Unified global positioning means single message to all target groups - people aged 15 - 29, despite geographic region or country. Yet, as consumers differ by demographic characteristics, so do markets differ by geographic, socio-cultural and economic characteristics. International companies may employ a global strategy with a single marketing mix set in all markets, but local differences can develop further opportunities for targeting and positioning that a global strategy may fail to identify. Similarly, the Swatch Company can benefit from adjusting their global positioning strategy to local market specifics. For example, in some markets the Swatch brand may be positioned in the up-market segment both on the prestige and price scales; other markets may allow the development of specific Swatch products, thus responding to unique market needs and usage patterns. 1.7. Compliance and choice Now that these market factors have transformed the industry, the major question is whether Swatch will abide to new industry changes, be re-active and adjust their strategy to compete with the same products and strategy as other competitors, or will use their core competences, be once again pro-active to reshape the industry, as in 1983. Rejuvenating an industry is not an easy undertaking; it involves huge financial resources for R&D and marketing investments; and carries the high risk of failure. New products can turn into failures if consumers do not regard the novelty as a value creator to the basic watch functions or are not willing to pay the price for it. On the other hand successful product innovation can make the Swatch company once again a market niche developer. The Swatch brand can thus benefit from being the first in new market segments with opportunities for premium pricing of the new products. Internal organizational context is barely mentioned in the case study. Still, a fashion-driven strategy based on product development and innovation requires strong R&D and creative teams. 2. The Swatch strategy Examination of the Swatch strategy involves analysis of what the company has been doing on corporate, business and network levels with view to future opportunities for strategic development. 2.1. Corporate level strategy The company core business is finished watches production in the low priced branded products segment. The initially successful portfolio comprises of the Standard Swatch brand that represents fashionable plastic watches targeted at young, fashion-led consumers. Although the Standard product line introducing more than 70 models per season continues to be the most popular one, with the maturity stage in the life cycle the company introduces new product lines to respond to the lifestyle changes in target markets, a strategy identified by Igor Ansoff as "product development" (Thompson et al, 1996). Some of the new products have proven to be successful - such as Scuba and Chrono, targeted at niche customers - but have only managed to extend the product life cycle and have not become significant value creators for the company. In 1990s Swatch initiate a diversification programme. The company launches textiles and clothing branded products. Also a joint venture, initially with Volkswagen, later with Mercedes-Benz, is undertaken with the Smart car. The diversification programme thus represents an entirely new business unit independent of the market development in the core watch industry. The purpose of the diversification programme is to counteract the negative pressures in the watch market, still, the unique design of the Smart car can also add to the differentiation of the Swatch brand and help it position in an up-market segment. 2.2. Business level strategy When first introduced on the market in 1983, the Swatch brand is developed as a counteraction to existing intense competition by Japanese and Hong Kong companies. An "outside-in" approach to brand development and positioning is used to rejuvenate the Swiss watch brands in the low price branded segment of the market. It is a product development stimulated by external market forces. The challenge facing the Swatch management is whether to further implement an "outside-in" business level strategy, by taking advantage of external market developments and exploit internal strengths and core competencies to company's advantage. The core competences of the Swatch brand are superior know-how in the watch industry, access to established distribution channels, clear positioning, distinctive brand recognition and customer loyalty; economies of scale due to large production volumes, creative design, technological advantage and possible synergies with other brands in the SMH's group. Too much focus on internal competencies, though, can be associated with an "inside-out" strategic thinking. The risk of such an approach is that focus on inner strengths and competencies may shift focus on market developments and may distance management from customers and competitive changes (Thompson 1996). The "inside-out" strategy therefore may lead to the development of a strategy that is not applicable to changing customer tastes. 2.3. Network level strategy Network level strategy considers a wider range of industry players, including competitors, suppliers, resellers and retailers that influence the development of the Swatch brand. Up to now, Swatch team have followed a "discrete" network level strategy. The company may continue to use this strategy, focusing on core competences and existing network channels. This involves extension of company operated own-brand outlets. Furthermore, a vertical integration with Swatch component suppliers is possible. Full control over suppliers will add value by reducing production times, full management of production costs and improved logistics that may turn out a strategic advantage for a company competing with low cost Asian watch manufacturers. An alternative strategy for the company is an "embedded" organization by strategic alliances with other companies. One option is to make an alliance with competitive Swiss brands in the prestige watch segment and try to reposition the Swatch brand in the medium-price segment that will allow for greater profit margins. Another option is to make an alliance with companies that will complement to the Swatch core business - technological companies that will help Swatch introduce new watch brands with high-tech inputs - mobile telephone companies or software developers. Further on, Swatch can expand their presence on the retail market by strategic alliances with retailers in related segments or industries. For example, an alliance with IT software and hardware retailers can be considered provided the company chooses to use technological developments as a growth alternative. 3. Swatch strategy formation and strategic change The Swatch Company may decide to gradually adjust their strategy, by introducing slightly changed products. Such a strategy would be reactive to changes, employing gradual adaptation to market preferences. Alternatively, major investment in technological improvements may lead to the introduction of revolutionary new products on the market. Swatch managers have a number of strategic alternatives to respond to pressing market changes: Continue to introduce and develop new product lines to respond to changes in market tastes. This re-active strategy, however, has turned less successful, because none of the new brands copied the success of the Standard. Therefore creativity in product development alone is unlikely to be a major growth driver in the future. Follow a "technology enthusiast strategy" (Moore, 1991) by introducing innovative products with major technological improvements. The strategy gives Swatch the opportunity to utilize a higher-prices strategy, but runs the risk of failure, if new products are not accepted by the targeted market segments. The company can also enter new market segments, presently targeted by other companies. For example, due to the success of the Chrono and Scuba brands, the company may reconsider its positioning strategy on the market and target niche markets with growth potential - the children's market; the sports market; the technology market; the up-market segment of premium products etc. This could be achieved by own company research and development, or by striking strategic alliances with competitors or companies in related industries. Continued product diversification into completely new markets, such as the Smart car experience. The Swatch company can benefit from know-how within the SMH group and explore further diversification opportunities. Such a strategy would serve as a counter-strategy to the pressing competitive and market changes in the watch industry. Sooner or later, any successful Swatch strategy will be again copied by competition. The challenge for Swatch managers is to exercise entrepreneurship and outside-in strategic thinking by closely monitoring present company strategies and identifying market opportunities. The company has once before been a market leader by developing a specific market niche. Previous successful experience makes it more likely that future strategy will also focus on product innovations targeting a market breakthrough. Such a strategy is also more probable to fit into Swatch's corporate culture and business vision as an innovative market leader. References 1. Swatch Case Study: Coping with market changes. 2. Porter, M. (1980) Competitive Strategy: Techniques for Analyzing Industries and Competitors New York: Free Press. Chapter 1 3. Thompson, A. & Strickland, A (1996) Strategic Management: Concepts and Cases Ninth Edition. McGraw-Hill 4. Moore, G. (1991) The Technological Adoption Life Cycle: Crossing the Chasm Published at: http://en.wikipedia.org/wiki/Crossing_the_Chasm. Read More