Time for a change: Here’s how an executive saved the Swiss watchmaking industry from near collapse in the 1980s!

Tuesday: Return Driven Strategy FROM THE DESK OF MILES EVERSON: Welcome to this week’s edition of “Return Driven Strategy (RDS)!” We’re excited to share another insight through the lens of this framework. As someone with over 30 years of experience in the business and consulting industries, one of the things I've found to be a game-changer in managing my team is RDS. If you’re not yet familiar with this, RDS is a pyramid-shaped framework that’s composed of 11 tenets and 3 foundations. When applied properly, these enable businesses to achieve high levels of performance. Today, let's delve deeper into the second tenet of RDS: Target and Dominate Markets. Continue reading to discover why adapting to market trends is necessary to a firm’s survival. CEO, MBO Partners Chairman of the Advisory Board, The I Institute

Time for a change: Here’s how an executive saved the Swiss watchmaking industry from near collapse in the 1980s! If the average person were asked about which country comes to mind when he or she thinks about watches, there is no doubt that Switzerland would be among the answers. After all, household names like Rolex, Omega, Patek Philippe, Audemars Piguet, and Vacheron Constantin all hail from Switzerland. For decades, the Swiss watchmaking industry has continued to dominate the global watch market despite facing stiff competition from other brands like Panerai, Seiko, Citizen, and Casio. However, did you know that in the 1970s and early 1980s, the Swiss watchmaking industry found itself in the midst of an existential crisis? To understand why this happened, we need to dive deeper into the history of watchmaking. Mechanical and Quartz Watches Watches come in a variety of styles, genres, and features. These timepieces also fall into two categories depending on the type of movement inside them: Mechanical and Quartz. [Movement - A mechanism that powers a watch’s functions. It is typically made up of gears, springs, and other components that control the hands or display of a timepiece.] Mechanical watches are subdivided into two basic types: Hand-wound - The user must periodically wind the watch to keep it in operation. Self-winding or automatic - For this type of watch, the movement’s mainspring is perpetually wound by a mechanism thereby eliminating the need for manual winding. While mechanical watches differ in types, both of them must be wound constantly to keep them running and accurate in keeping time. On the other hand, quartz watches eliminate the need for winding entirely as they are operated by a small battery whose electrical charge powers a timepiece through a tuning-fork-shaped crystal made of quartz. Quartz watches have batteries that can operate for an average of 1 to 2 years, making them more accurate in keeping time. The Advent of Quartz Technology In 1969, Seiko shocked consumers with the introduction of the Quartz Astron, a watch equipped with the first quartz wristwatch movement. The novelty of the product piqued the interest of watch enthusiasts, as having a quartz wristwatch at the time became a symbol of wealth and status. While the first quartz wristwatches were expensive (retailing at around USD 1,000 in the 1970s), the technology evolved at a breakneck pace, making it easier for brands to mass produce affordable timepieces for consumers. Japanese brands were able to undercut Swiss manufacturers with inexpensive but accurate timepieces, reducing Switzerland’s global market share to 20%. This led to the near-collapse of the Swiss watchmaking industry as a whole in the 1980s. In fact, some Swiss brands found themselves on the brink of total financial ruin. Simply said, the introduction of quartz technology singlehandedly eliminated the rationale for buying expensive mechanical wristwatches as there were cheaper alternatives to what the Swiss watchmakers were selling. The situation was dire enough that the Swiss government became concerned because a significant portion of Switzerland’s economy was intertwined with its watchmaking industry. In response to the turmoil, a group of banks hired Nicolas Hayek to come up with a strategy to save two of Switzerland’s largest watchmaking groups. At the time, Hayek owned a management consulting firm and an engineering company. He also had a solid reputation among Swiss industrialists and affluent multinationals. Hayek was tasked to assess the problems of Switzerland’s leading Swiss watch manufacturers. He concluded that the main problem was that the companies spent so much of their time in manufacturing processes instead of thinking about what customers wanted. Later on, he drafted a report that recommended the merger of Switzerland’s biggest watchmaking groups. So in 1983, a new entity named Société de microélectronique et d'horlogerie (SMH) was created. This new entity controlled notable brands such as Omega, Longines, Breguet, Blancpain, and Tissot. Hayek's next step involved associating the words “Swiss” or “Swiss Made” to the brands under SMH’s umbrella. This marketing tactic appealed to consumers who were not afraid to spend considerable amounts of money on a timepiece. In line with this, he also doubled the prices of the products made by the luxury brands under SMH’s control. Subsequently, Hayek turned his attention towards the formation of Swatch—a brand under the SMH umbrella that was focused on creating affordable timepieces for the masses. Swatch timepieces were powered by quartz technology and came in a wide variety of colors that can be matched to one’s sense of fashion. This led to a change in consumer behavior since many of them now thought about owning more than just one watch. The two-pronged attack on the watch market helped revitalize every brand under SMH’s umbrella and the Swiss watchmaking industry as a whole. It also catapulted SMH into one of the world’s leading watch groups. Later on, SMH would be renamed to The Swatch Group in 1998, and the company continues to dominate the global watchmaking industry today. The Swiss Watchmaking Industry’s Near Collapse Seen Through the Lens of RDS What happened to the Swiss watchmaking industry in the 1970s up to the 1980s can be explained through RDS’ second tenet: Fulfill Otherwise Unmet Needs. According to Professor Joel Litman and Dr. Mark L. Frigo in the book, “Driven”: “As long as suitable substitutes exist for fulfilling a particular customer need, customers will drive prices down to the costs to produce them. Contrast that with a situation when no substitutes are available and customers freely pay based on the value they receive. The difference in the impact on business performance can be enormous.” Due to the production of cheaper alternatives to the core offerings of the Swiss watchmaking industry, it found itself losing market share and profits. This is because quartz watches were just as good, if not better, at keeping time than its more expensive automatic counterparts. This shift in consumer behavior was something the Swiss watchmaking industry wasn’t able to adapt to, leading to its near collapse. Hayek understood this quite well, so to bring Swiss watchmaking companies back to profitability, he targeted both the luxury and budget segments of the global watch market. This move essentially allowed the brands under Hayek’s control to target and attract buyers from both ends of the market, leading to massive profits. A clever move, indeed! If you’re looking to gain a better understanding of Return Driven Strategy and Career Driven Strategy, we highly recommend checking out “Driven” by Professor Litman and Dr. Frigo. Click here to get your copy and learn how this framework can help you in your business strategies and ultimately, in ethically maximizing wealth for your firm.     Hope you found this week’s insights interesting and helpful. What do you think makes up a successful business? Learn more about the importance of engaging employees in a firm in next week’s article!