Management lessons from Swatch

2010

The 20th Salon International de la Haute Horlogerie takes place in Geneva from January 18 through January 22. It comes off a year in which the Swiss watch manufacturers, battered by the world recession, are just beginning to recover from a nearly 25% decline in sales worldwide.

While this is a tough situation, the industry does have previous experience in sustaining itself through bumps in the road. The outstanding example of this was the 1980s restructuring of the industry, led by Nicolas G. Hayek, a brilliant and innovative entrepreneur.

In the early 1980s, the Swiss watch industry faced a looming catastrophe by failing to realize the impact of quartz watches, even though the quartz watch had been invented in Switzerland in 1967. The Japanese undercut Swiss manufacturers with a glut of inexpensive, but accurate and reliable watches, reducing Switzerland's global market share to 20%. Industry analysts predicted that labor costs in Switzerland were simply too high to compete.

With Switzerland's two largest watch manufacturers threatened with financial collapse, Swiss bank UBS turned to consultant Nicolas Hayek, who eventually managed to successfully consolidate much of the industry into the Swatch Group through a unique combination of business insight, organization and people management. His strategic approach can serve as an example for leaders in any industry.

Business insight
Hayek quickly realized that no one doubted the quality of Swiss watches, but the industrial landscape was chaotic and it ignored the changing global environment.

Brought in to assess the problems of two leading Swiss watch manufacturers, SSIH (Societé Suisse de l'Industrie Horlogère) and ASUAG (Allgemeine Schweizerische Uhrenindustrie AG ), Hayek concluded that Swiss watch companies had become absorbed in the technology of producing watches rather than thinking comprehensively about the factors that made a customer actually want to buy a watch. In short, the manufacturing process had become detached from a clear understanding of the market.

In the case of Swiss watches, the message counted more than the function

The high price of Swiss watches had been based on a promise of exceptional accuracy and reliability. It was assumed that accuracy required complex, finely tuned engineering that justified a high price, but Hayek realized that the quartz watch had erased that advantage.

He decided that the customer had to be sold on the idea of wearing a watch as a personal statement. If an astronaut wore an Omega watch, an individual could identify with the adventure of walking on the moon by wearing the same watch. In the case of Swiss watches, the message counted more than the function.

Hayek drafted an analysis that was eventually adopted and soon after he was asked to manage the newly formed consolidated company that was to become the Swatch Group, which would control 18 leading brands, including Blancpain, Breguet, Longines, Omega and Rado.

Organization
Hayek realized from the start that turning the industry around required effective control over management. In 1984, he was offered and accepted the possibility to buy a stake in the merger of the two largest Swiss watch companies. After lengthy negotiations he put up a third of his personal fortune and convinced private investors to join him in order to gain a 51% controlling interest.

Hayek intentionally avoided going to banks for financing because he didn't want outside interference from people not directly associated with the business. In 1985 he started as CEO.

Beginning with the Swatch, which was based on a new "slim line" watch that had been developed by AUSAG before the merger, Hayek invested heavily in automation and standardization of parts and tooling. This produced an economy of scale and improved quality. Production was centralized, and parts were designed to be interchangeable.

While the various brands continued to maintain fiercely independent marketing and sales departments, they no longer handled their own manufacturing, which was centralized and directly under Hayek's control. Brands now had to submit competing bids to get their watches produced, and large orders required Hayek's personal signature.

Consolidating the process eliminated production overruns and made it possible to get a clearer picture of what was actually happening. It was soon realized that 80% of Omega's sales came from only 15% of its models. The number of models was subsequently reduced from 2,000 to 130.

In order to control how the Swatch was marketed, Hayek began selling through his own branded Swatch stores. Initial sales for the Swatch had been projected at 5 to 6 million watches a year. As it turned out, 20-25 million Swatches were sold every year from 1983 to 1990.

Hayek considered the flow of information and timely response to it as one of a corporation's most important assets. The company established a powerful IT system for managing over 440 reporting units. Sales figures were available on the 6th of each month, and profit and loss statements became available 10 to 15 days later. Hayek managed to close the gap between manufacturing output and real-time market demand.

Personnel
Hayek's three professed principles were to deliver promptly on promises, to avoid layoffs and to make certain that his employees trusted the quality of leadership coming from management. He believed that management decisions needed to be transparent, clearly understood and decisive.

In order to recapture Switzerland's dominant position, Hayek knew that he had to retain manufacturing know-how and that meant not losing skilled workers through layoffs which would risk demoralizing the whole operation.

Hayek's product that allowed him to keep his factories running while he reoriented the company was the low-cost Swatch. The watch had already been under development as a "slim line" watch when he joined the company, but the plan had been to sell the mechanism to other companies which would then resell it under their own brand.

Instead, Hayek decided to take over sales directly and to brand it as the Swatch. By getting into the mass-market trenches, Hayek argued, the company could reassert control over the lower end of the market. He felt that that was an essential step to maintaining corporate vitality and creativity.

The Swatch helped Hayek train his marketing departments in how to deal with global competition. Hayek also believed strongly in vertical integration in order to maintain autonomy. He wanted to make certain that his own workers maintained a comprehensive knowledge base. So when the Japanese offered to sell him integrated circuits at half price, he refused in order to keep the capacity of developing new circuits alive in his own company.

Hayek was the CEO of Swatch from 1985 – 2003. With the contribution of his visionary management, Switzerland today exports around 26 million watches a year. Now China exports more than a billion. But according to the Federation of the Swiss Watch Industry, the average price for a Chinese watch is around $2.00, while the average price for a Swiss watch is more than $563. So in terms of value, Switzerland still holds 55% of the world's market.

Understanding this context will help Swiss entrepreneurs to push the watch industry to new heights of success. But it also provides a salutary lesson for any entrepreneur facing tough decisions in today's frosty economic climate.

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About The Author

Preston Bottger
Preston Bottger

Preston Bottger is Professor of Leadership and General Management at Swiss business school, IMD. He teaches on the Program for Executive Development as well as the Leading the Global Enterprise and the Orchestrating Winning Performance programs. He also teaches in IMD's Partnership Programs.