rebirth of the swiss watch industry, 1980 1992...

Harvard Business School 9-400-087June 12, 2000

Research Associate Daniel B. Radov prepared this case from published sources under the supervision of Professor Michael LTushman as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrativesituation.

Copyright © 2000 by the President and Fellows of Harvard College. To order copies or request permission toreproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go tohttp://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system,used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,recording, or otherwise—without the permission of Harvard Business School.

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Rebirth of the Swiss Watch Industry, 1980–1992 (A)

“Time is fast running out for the ailing Swiss watch industry.”1

—The Globe and Mail

By the end of 1983, Hayek Engineering, a Swiss consulting firm founded by chairman andCEO Nicolas Hayek, was becoming increasingly involved in solving the mounting problems facingthe Swiss watch industry, which was on the brink of disaster. Hayek Engineering had initially beenrecruited by the creditors of the two largest Swiss watchmakers, ASUAG (Allgemeine SchweizerischeUhrenindustrie AG) and SSIH (Societe Suisse pour L’Industrie Horlogere), to formulate a strategy todeal with changing market conditions in 1981. Since then the firm’s involvement with the industryhad grown steadily. The firm’s influence had also been increasing since earlier that year, when thebanks had agreed with its recommendation that SSIH and ASUAG merge. Although HayekEngineering was acting as a consultant, Nicolas Hayek, its CEO, would come to have a significantrole in supervising the merger and in helping to lead the newly-formed company forward.

With the formalities of the merger completed, in December 1983, the new company and itsconsultants were confronted with a number of new issues. The company faced restructuringchallenges and management shifts. But more importantly, it still faced the foreign competition thathad decimated the Swiss presence in the inexpensive and middle-range watch segments—the Swissno longer accounted for any of the inexpensive segment and continued to lose what remained of theirshare in the mid-range—now less than 10% of the world market.

The consultants’ comeback strategy hinged on two things: first, on a revitalization of flagshipbrands like Omega, which were being used to prop up the Swiss position in the middle-range marketsegment. Second, the Swiss needed to succeed with a new, low-priced plastic watch that had beendeveloped under the direction of Ernst Thomke at ASUAG. The firm would have to decide how thenew product should fit into the overall strategy—a test market of the new watch in the United States,the largest export market for watches, had failed to attract the attention its manufacturers hadexpected.

The challenge for the consultants and for the management of the newly merged organizationwas to find a way to keep the business ticking through 1984 and beyond.

1 “Time running out for Swiss watch industry.” The Globe and Mail. 12 May 1981, B10.

400-087 Rebirth of the Swiss Watch Industry, 1980–1992 (A)

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Crisis: 1980-1983

Swiss watchmakers had dominated the industry for over 100 years, but by the 1970s anumber of factors coalesced to threaten their very existence. The consolidation of the industry intotwo large consortia, which had helped to stave off disaster during the Great Depression, served inlater years to reduce the competition that Swiss watchmakers faced. This did not always stifle newinventions, but it did tend to delay their introduction. Although the Swiss invented the quartzmovement, they did not move quickly to take advantage of the new technology. The lack of anindependent microelectronics industry, which other countries possessed, led the Swiss to overlookthe potential of the inexpensive watch market, as did their conception of the watch as a finely craftedpiece of functional jewelry.

By 1980 Swiss watchmakers had effectively disappeared from the ranks of firms producingthe least expensive watches. Hong Kong had become the center for inexpensive digital quartztimepieces, and the number of units produced there soared. Hong Kong manufacturers had onlyentered the market in 1976, but by 1980 they were putting together 126 million units annually.2 Firmshad sprung up quickly because of low barriers to entry, and prices declined dramatically, puttingpressures on costs. Switzerland could not compete with Hong Kong’s inexpensive labor pool. (SeeExhibit 1 for the decline in Swiss share of the global watch market.)3

The Swiss had also lost much of their share of the mid-priced watch market to Japanesewatchmakers.4 In 1980 Japan was second in the world in number of watches produced, trailing onlyHong Kong. Seiko, Japan’s largest watchmaker, produced 42 million units in a range of pricecategories, focusing primarily on the middle range. Citizen also targeted the middle segment, butlagged behind Seiko. Citizen, along with Casio (which concentrated on lower-end watches)accounted for the bulk of the remaining 25 million units produced in Japan in 1980.5 All threeJapanese firms were vertically integrated, and produced far fewer brands than the Swissmanufacturers, which for historical reasons were still quite fragmented.6

The watchmaking industry in Switzerland included three classes of firms. In the first groupwere privately held companies like Rolex, Patek Philippe, Blancpain, Piaget, and Audemars Piguet.These firms crafted and sold relatively small numbers of high-quality, luxury mechanical watches.They tended to be vertically integrated, both to ensure high quality and to minimize the markupapplied by suppliers and distributors. The luxury appeal of their brands allowed them to prosperduring the rise of the quartz watch because, at least initially, they were not competing for the samemarkets.

The remaining two classes of Swiss watchmakers were much less integrated than thesuccessful luxury firms. In the second group were a large number of small firms that produced watchcomponents—including faces, bracelets, parts, and assembled movements—for assorted Swiss andforeign watchmakers. These firms were the direct descendents of the highly decentralized Swisswatch industry of the 18th and 19th centuries. Through the beginning of the 1980s, the production of awatch in Switzerland often involved the parts and services of up to 30 different companies.7 Thisdecentralization drove up total costs and final prices as each manufacturer sought to extract margins

2 Nye, Susan, Barbara Priovolos, Jean-Pierre Jeannet. “The Swatch Project.” IMEDE Case Study, Lausanne; 1985, 6.3 The United States had largely receded from the watch export market by this time, although firms like Timexand Bulova still maintained some presence within the United States.4 Bumbacher, Urs. “The Swiss Watch Industry.” HBS Case 792-046; 1992, 18.5 Nye et al., 6.6 See HBS Case 385-300: “Hattori-Seiko and the World Watch Industry in 1980.”7 Ullmann, Arich. “The Swatch.” In Strategy: Process, Content, Context. Bob De Wit, ed., 620.

Rebirth of the Swiss Watch Industry, 1980–1992 (A) 400-087

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from its own contribution. Even the larger firms were extremely fragmented, with profits taken byeach unit along the production and sales chain.8 Many of these firms were being forced out ofbusiness by heightened foreign competition. (See Exhibit 2 for the number of firms in the Swissindustry.)

Finally, the bulk of the movements and finished watches made in Switzerland wereproduced by two large consortia, ASUAG and SSIH. The two giants were the result of earlier mergersby many of the smaller Swiss watchmakers during the Great Depression.9 Both firms manufactured awide variety of watches in most price segments, from mid-priced to high-end. Like the independentcomponent makers, ASUAG and SSIH suffered from the fragmentation that was the industry’shistorical legacy, and both were feeling pressure from their Asian competitors, which were able toproduce watches at much lower cost using quartz technology.

In 1980 ASUAG was the largest Swiss watchmaker and the third largest global watchmaker,after Japan’s Seiko and Citizen.10 The group employed 14,500 people in an assortment of differentcompanies, which came largely from German-Swiss watchmaking firms. ASUAG was known for itsquality production, but its marketing was weak. Although Rado and Longines were highly regardedASUAG brands, the company was primarily known as the manufacturer that provided the Swissindustry with the bulk of its movements and components. Over the difficult years of the 1970s,ASUAG had slowly acquired a collection of failing Swiss watch firms that were being pinched by theincreasing competition from the Asian producers. As one top executive characterized it, “ASUAGwas the rich uncle” to which these companies appealed for help. By the end of the decade, ASUAGhad accumulated over 100 companies. At many of these companies, ASUAG left existing managers inplace—often these were members of the old families that had founded the firms. Most of the firmsdid their own marketing and assembly, and many conducted their own R&D.11

Although ASUAG was the largest manufacturer of watches and components in Switzerlandin 1980, SSIH was the country’s largest finished watch producer. SSIH had been formed fromwatchmakers with primarily French-Swiss backgrounds. And whereas ASUAG had a reputation forproduction quality, SSIH was better known for its marketing and for the strength of its brands.Recently, however, the group’s flagship luxury brand, Omega, had started to experience problems.The Swiss had been losing market share in the middle range, and Omega’s management believed thatthey could use the strong demand for their brand to reclaim some of the middle segment. Theyintroduced new, lower-priced models and increased production. They contracted with outsidemanufacturers to produce some of the additional volume for these less expensive models. There weresome indications of declining quality in the new models.12

As the industry continued to suffer, local governments became alarmed at the rise inunemployment in the watchmaking Jura region.13 (Exhibit 2 charts the decline of the watchindustry’s labor force.) Banks in Switzerland that financed watchmakers were also becomingconcerned about the health of the industry as more and more firms recorded losses and went out of

8 Nye et al., 7.9 Bumbacher, 15.10 Nye et al., 2.11 Taylor, William. “Message and Muscle: An Interview with Swatch Titan Nicolas Hayek.” Harvard BusinessReview. March-April 1993, 102.12 Nye et al., 5.13 Ullmann, 622.


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business. SSIH lost around SFr 130 million in 1980.14 In 1981 Swiss banks put together a SFr 300million rescue package to keep the firm afloat.15 ASUAG also suffered losses. The banks wereincreasingly worried, as they were forced to write off old loans and invest new capital, effectivelybuying majority stakes in both companies and taking over their Boards of Directors. The companies,in turn, were under pressure from the banks to reverse the losses, if not by improving sales, then byselling off some of their brands to Japanese competitors.

Among the challenges facing the Swiss was their inability to match the costs of competitors inHong Kong and Japan in the low and mid-price segments. In addition, the watch market had shiftedin the late 1970s so that the production of movements—an area traditionally dominated by theSwiss—no longer added significant value to the product. Instead, value was added in the finalassembly of finished watches and cases, and in the distribution of finished pieces. These were areas atwhich Hong Kong and Japanese firms excelled.16

Despite the difficulties faced by the Swiss firms, there were still some glimmers of hope. TheSwiss still dominated the high-end and luxury markets, where foreign competitors had been unableto make much headway. In addition, the Japanese market for luxury watches looked ready toexpand. Japan had been relatively difficult to penetrate in the past because of tariffs and because ofthe structure of distribution networks in the country. During the 1980s these barriers started to berelaxed, and Swiss luxury watches began to stream into the country.17

Finally, the Swiss still had a healthy research budget, which they had augmented as theyrecognized the threat posed by the new quartz watches. From 1974 to 1980, the Swiss spent aroundSFr 1 billion on investment in new technology. ASUAG accounted for approximately SFr 500 millionof this total. In the late 1970s ASUAG and SSIH began cooperating to standardize component designand cut costs.18 In addition, in 1978, when competition was threatening the existence of the Swissindustry, the Swiss government established a joint research program with a consortium of majorwatchmakers, including ASUAG and SSIH, to explore watch technology. The joint efforts eventuallyproduced 37 patents, including new lithium batteries, LCDs, the development of mass productiontechniques, and facilities for quartz movements and analog systems. These last two involved the useof new computer aided design (CAD), itself an advance over previous design methods.19

Consulting Nicolas Hayek

With no relief in sight for SSIH or ASUAG, the banks funding the two companies called onNicolas Hayek, founder and CEO of the consulting firm Hayek Engineering, to help them assess theailing businesses’ prospects. Hayek was born in Beirut in 1928, the son of a Lebanese mother and anAmerican father. His family moved to Switzerland when Hayek was seven years old. Since foundingHayek Engineering in 1957, Hayek had developed a reputation as a keen strategic thinker who wasable to pull off what many had deemed impossible. Hayek prided himself on the fact that he still had

14 Shuster, William George. “Watches…Those Incredible Years.” Jewelers Circular Keystone, 1 September 1989.Between 1980-1985, the Swiss Franc fell from $0.60 to less than $0.40. After 1985, its value rose to as high as $0.80in 1987, before falling back to around $0.60 by 1990.15 New York Times, 21 May 1981.16 Ullmann, 621.17 Bumbacher, 4.18 Nye et al., 4-5.19 Bumbacher, 18.


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“the fantasy of a six year-old child.” 20 His consulting firm had advised, among others, Philip Morris,Dow Chemical, Volkswagen, the city of Zurich, and the Chinese government.21

Many within the industry still thought that the only way Switzerland could compete withJapan and Hong Kong for the low-end segment would be to shift production out of Switzerland.Hayek, on the other hand, believed that his country’s higher labor costs could be minimized throughautomation. Hayek thought that ASUAG and SSIH had a duty to remain Swiss firms that carried onthe tradition of Swiss watchmaking. In an interview, Hayek observed, “We are all global companiescompeting in global markets. But that does not mean we owe no allegiance to our own societies andcultures.”22

Hayek Engineering found solid strategic justification for Hayek’s commitment toSwitzerland. In 1981, the firm conducted a market study and found that the “Swiss-made” mark on alow to mid-priced watch raised its value 10% above that of an identical watch made in Japan. TheSwiss mark gave a 20% premium over the value of an identical watch made in Hong Kong. Hayekreckoned that if the Swiss firms could reduce labor costs to 10% of their total costs, then they wouldbe able to compete with Japan and Hong Kong, regardless of labor costs.23

The consultants also looked at the positioning of some of the existing Swiss brands in thehigher market segments. SSIH’s Omega, for example, had been struggling as it attempted to expanddown-market. Increasing the supply of the brand had made consumers less interested. As it began tolose its luxury image, revenues dropped.24 Hayek discussed the options for the faltering stalwartwith top managers at SSIH. “Some of the people suggested that we sell Omega to the Japanese, whohad offered to buy it. It was still a powerful brand despite the problems, and it would fetch a lot ofmoney. Of course, that would have been tragic for Switzerland.” In one interview, Hayek describedthe conflicts between the consultants and managers who wanted either to sell the brands or to boostvolumes and revenues by using Omega to compete directly with mid-range Seiko and Citizen. Thedisagreements between the consulting team and the managers were often fierce—Hayek recalled thatat one point the Omega team refused to let the consultants on the Omega premises.25

The overall strategy suggested by Hayek Engineering to revitalize the Swiss watchmakersembraced a number of goals. First, it pushed for technological innovation and lower costs across theentire Swiss industry. As he explained in interviews, Hayek was convinced that forcing his country tocompete with Hong Kong and Japan would ultimately be good for the Swiss, because it would forcecosts to come down. Costs had been rising because the Swiss had given up on the volume productionthat characterized the low-end market. If they did not seek to regain the volume markets, costs wouldcontinue to rise and would bleed into the higher-end segments, even as costs in Japan and HongKong continued to fall.26

A second pillar of the consultants’ strategy was vertical integration. Integration would servetwo interconnected ends: it would further reduce costs, and would give the Swiss strategicindependence from foreign component manufacturers.27 Producing their own low-cost movements,for example, would free the Swiss from dependence on Japanese manufacturers. Hayek’s nightmare

20 Sancton, Thomas A.. “A car, a watch? Swatchmobile!” Time, 28 March 1994.21 Studer, Margaret. “SMH Leads a Revival of Swiss Watchmaking Industry.“ Wall Street Journal. 20 January 1992.22 Taylor, 100.23 Taylor, 100-101.24 Taylor, HBR, 101, 105.25 Taylor, 106; compare Dullforce, William. “Swatch in time may save Swiss.” Houston Chronicle, 4 March 1985.26 Taylor, 102, 107.27 Taylor, 109.


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scenario was one in which the Swiss simply could not compete on cost, and therefore had tooutsource all of their movement production. From Hayek’s perspective, such a situation would trulybe the death-knell for the Swiss industry, which would be forced to make larger and largerconcessions to its foreign suppliers.28 Hayek wanted to increase Swiss shipments of movements toHong Kong, in part to diminish the control that the Japanese firms exercised over the Hong Kongoutfits.29

This vertical integration would extend to the development of a worldwide distributionnetwork. By establishing their own network, the Swiss could both reduce distribution costs and keepin closer contact with market trends.30 Hayek Engineering also advocated an expansion intosemiconductors and integrated circuits. In the 1980s, Japanese firms dominated the market for thechips used in electronic watches. Hayek was wary of the close relationships these firms had withJapanese watchmakers because of potential strategic conflicts, particularly in the event of a chipshortage.31 The production of the necessary microelectronic equipment at the desired cost requiredsubstantial investment—in effect, it required the creation of a Swiss microelectronics industry.ASUAG, SSIH, and other watchmakers collaborated with the Swiss government to establish the SwissCenter for Electronics and Microtechnology. To keep volumes high enough to restrain costs, theembryonic manufacturers sought to produce not only circuits for watches, but also other consumerelectronic goods.32

Finally, Hayek and his firm believed the Swiss should compete in all segments of the watchmarket. The Swiss should aim to market their brands aggressively to carve out niches across theprice-range.33 By cultivating brands across price-categories, Hayek hoped to strengthen the entireSwiss industry. Hayek believed, for example, that focusing on quality control and mass-productionin the low-end segment would improve quality and reduce costs for more expensive watches.34

The hope was that these four strategic goals, would yield a Swiss industry that was leanerthrough consolidation and integration, that rewarded innovation, and that competed in all segmentsto restore Switzerland’s proud horological history. Although the unwieldy organizations that madeup SSIH and ASUAG had a long way to go before they realized this vision, at least one of ASUAG’sunits had already been heading in the direction that Hayek and his team advocated.

Ernst Thomke—Innovation and New Technologies at ETA

The core manufacturing arm of ASUAG was Ebauches S.A. Ebauches was further dividedinto a number of different manufacturing companies, among them ETA. (See Exhibit 5 for anorganization chart.) In 1978 ETA had hired a new managing director, former ETA engineer ErnstThomke, who had returned to the company after a nearly 20-year absence. In the intervening period,Thomke had studied chemistry and medicine and gone on to work at British pharmaceuticalcompany Beecham. Before coming to ETA, he had been managing director of Beecham’s subsidiary inSwitzerland.35

28 Taylor, 107, 109.29 Taylor, 109.30 Bumbacher, 21.31 Taylor, 109.32 Bumbacher, 20; Taylor, 109.33 Bumbacher, 19.34 Taylor, 102.35 Ullmann, 623.


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A “burly 45 year-old polymath” with “a taste for fast cars,”36 Thomke was recruited to helprevive ETA in 1978. Thomke quickly acquired a reputation among his colleagues at ASUAG as atough, iron-willed negotiator.37 At the time, morale at the company mirrored the low morale in theentire Swiss industry. ETA’s primary customer was ASUAG and its subsidiaries, and themanufacturer also sold its components to other Swiss, German, and French watchmakers. As internaland external orders declined, ETA’s profits shrank, and it had been forced to cut personnelsignificantly.38

When Thomke arrived he instituted a series of changes to cut costs. He closed older facilities,centralized production, and reduced the number of different movements that ETA produced by75%—from 1000 to around 250. After implementing these difficult measures, Thomke knew heneeded to give the organization a goal to work towards.39 First, he negotiated with internalcustomers to allow ETA to play more of a role in the strategy and marketing of watches using thecompany’s movements. He then challenged his engineers to design the world’s thinnest analoguequartz movement. The project, known as “Delirium,” was nicknamed “Delirium Tremens” by ETAengineers who doubted that it was possible. Nevertheless, in 1979 the first Delirium watch wasunveiled. Delirium used new assembly techniques that bonded parts to the watch case first, ratherthan building the mechanism first and then assembling it inside the case. It also used a new ultra-thinbattery. The final movement was less than 1.98 millimeters thick. The next year, ETA released theLadies’ Delirium, which measured only 0.98 millimeters, breaking Seiko’s standing record forthinnest movement.40

Delirium was sold in the high-end segment of the market. In its first year, it sold more than5,000 units, at an average price of around SFr 8,000. As Thomke had hoped, it was ETA’s first bigsuccess in years, and morale at the company improved significantly. Delirium’s success encouragedETA to increase production of the new movement, in part because by taking advantage of the lowercosts that accompanied higher volumes, the firm could maintain the technological edge it hadrecently seized. Unfortunately, with the Swiss industry still on the verge of collapse, ETA’s internaland domestic customers could not provide the demand that Thomke needed. Ebauches opted toexpand ETA’s production anyway and sell the movement outside the small circle of Swiss, German,and French customers that ETA had traditionally served.41

Thomke believed that the new design had the potential to help ETA regain some of theground that it had lost to low-cost producers from abroad.42 To compete in these markets, ETAwould have to produce lower-cost movements than the ones they were accustomed to producing. Inthe past, the Swiss had been reluctant to focus on the low-price segment, in part because they fearedthat doing so would damage the Swiss reputation for quality. The Swiss consumer’s preference forhigher quality watches also biased them against the lower-end market segments. Many doubted thatthere was any profit to be made in selling inexpensive watches. Analysts, for example, had beenlauding the Swiss watchmakers’ discipline in staying with the high-end luxury watches, after theirmore medium- and low-priced brands had been eroded. Thus even though Swiss engineers hadpioneered revolutionary electronic technologies, they had not pursued them once they went down-

36 Dullforce.37 Nye et al., 3.38 Ullmann, 623.39 Ullmann, 623.40 Ullmann, 623; Nye et al., 8. See also ETA’s history web-page: www.eta.ch/gesch_e.htm , (13 January 2000).41 Ullmann, 623.42 Ullmann, 624.


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market. According to Thomke, “The Swiss engineers were waiting for definite orders to start theproduction of the electronic watches. But the orders never came.”43

The start of the 1980s presented ETA with a window of opportunity to get back into themarket. Low barriers to entry in the digital watch industry had led to fierce competition, and themarket had been flooded. Now the industry faced a glut of digital watches. Desperate watchmakersfrom Hong Kong and elsewhere were looking for ways to relieve the competitive pressures.44

Thomke and ETA were able to capitalize on these circumstances. Although the demand forquartz digitals had peaked, the demand for quartz analog watches was rising. And analog quartzwatches had enough in common with traditional watches to give established watchmakers like ETAan advantage. Thomke’s strategy was to regain a foothold in the low-end segment by supplyingHong Kong manufacturers looking for ways to pull themselves out of the digital slump.

Thomke gave the order to design the low-cost watch in 1980.45 Ultimately, he aimed to sellthe watch to around 1% of the world’s population—around 40 million people. He wanted a high-quality watch that cost only SFr 15 to manufacture initially, and whose cost, with economies of scale,would fall to SFr 7 per unit. A quick calculation showed that using conventional technologies andprocesses, the cost of the unassembled components alone would be SFr 20.46 Assembly would push thecost up considerably. To produce a low-cost, quartz analogue watch at the necessary level of quality,ETA would need radically new technologies.

To encourage experimentation Thomke instituted a flatter organization structure.47 Takinginspiration—and ideas—from Delirium, ETA engineers spearheaded the design of a low-costmovement. One of the central obstacles to reducing costs was Switzerland’s high prevailing wage,which was much greater than that in either Japan or Hong Kong. One way to cut total labor costs wasto automate the assembly process. With automation as one of its primary goals, the design teamstrove to make the assembly process less complex by reducing the number of parts used in the watch.

Two years and SFr 11 million later, ETA’s engineers had designed a watch that containedonly 51 parts, down from between 90-150 for a conventional analogue quartz watch.48 (See Exhibit 1for a simplified schematic.) The reduction in parts allowed ETA to automate nearly all of theassembly process, using CAD systems to create what Swiss watch manufacturers claimed were someof the most advanced robotic assembly lines in the world. The design used precise injection-moldedplastic technology to create the case. This allowed engineers to extend one of the key innovationsfrom Delirium: traditionally, the case had been built around the watch after the movement wasassembled, but now, engineers could mount movements and other parts directly into the watch case.The plastics innovation facilitated automation by eliminating the need to access both sides of thewatch during assembly. Finally, the design did away with the screws traditionally used to sealwatches. Instead, the engineers opted to seal the case with ultrasonic welding. The welded seal meantthat the new watches could not be opened for repair, and this added a further constraint to thedesign: quality would have to be higher than with conventional watches. Fortunately, the reducednumber of parts made quality control significantly easier.49

43 Bumbacher, 17.44 Nye et al., 4; Shuster.45 Pinson, Christian and Helen Chase Kimball. “Swatch.” INSEAD Case Study, 1987; 5.46 Nye et al., 7-8.47 Ullmann, 624.48 Nye et al., 8-9.49 Ullmann, 625.


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Marketing Choices at ETA

The market analysis done by Hayek Engineering supported ETA’s move into the inexpensivewatch segment. Managers at ETA and Ebauches believed that to be successful the new initiativewould require its own dedicated marketing department. Thomke was reluctant to cede control of thenew project to another ASUAG subsidiary, particularly given the parent company’s continuingmarketing difficulties.50 Accordingly, he began advocating that ETA expand its role in aggressivelymarketing the product.51

At ETA, Thomke put together a group to assess the marketing options and develop a strategyfor the new movement and the watches that would contain it. The group determined that they wouldemphasize the watch’s high quality, which went hand in glove with its Swiss origin. They alsowanted to stress the idea that the new watch was fashionable, innovative, and fun, unlike otherinexpensive watches. The watch would be priced low enough to encourage “spontaneouspurchases,” but would also be kept expensive enough to support aggressive marketing and avoid theperception that it was cheap. It would not be distributed through drug-stores and other mass-retailers, as were Timex or Casio. Instead, the new watch would be sold through jewelers andfashionable department stores.52

In 1981, when the new watch design was still in development, Thomke enlisted the help ofmarketing consultant Franz Sprecher to analyze distribution options for the new watch.53 Sprecherfocused primarily on the United States, which remained the largest export market for watches.American consumers tended to be more sensitive to watch prices than their European and Japanesecounterparts, who favored watches in the mid-range segments. (The Swiss, perhaps unsurprisingly,were among the most discriminating consumers, favoring the higher-end segments.)54

Sprecher made a number of trips to the United States to gauge interest among potentialpartners, beginning with jewelers. Sprecher spoke to the managers of Zales, a large retail jewelrychain, who seemed interested in the new watch but felt it was too early to discuss partnerships. Zalesmanagement believed that the best way to launch the new watch would be an all-out marketing blitz.Another American jewelry wholesaler, Gluck & Co., was less interested in aggressive advertising,and suggested that the watch be priced very cheaply, under SFr 40.55

Sprecher also spoke to a number of independent watch manufacturers to determine if therewas a market for the new ETA movements. Bulova, the American watch company that had pioneeredthe first electronic watch, but which now confined itself to the American market, was impressed withthe concept. Bulova expressed an interest in a joint venture, and suggested that the watch should bemarketed with a large budget as a fashion watch.56 Sprecher also met with executives from Timex,once the undisputed champion of the inexpensive watch, but whose performance had recentlydeclined. Timex boasted a wide distribution network, but the terms they proposed offered the Swissvery little. They also had a bureaucratic, old-fashioned management style that did not fit well with

50 Nye et al., 7.51 Nye et al., 7; Ullmann, 623-624.52 Ullmann, 627.53 Nye et al., 11.54 Bumbacher, 4.55 Nye et al., 11-12.56 Nye et al., 12.


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ETA’s new culture. Moreover, although their distribution network was wide, it was inefficient,involving a number of intermediaries that would have reduced ETA’s profits.57

Finally, Sprecher met with representatives of Duracell, the global battery maker. Duracell’sdistribution dwarfed that of other potential partners, even Timex. Duracell was looking to expand itsproduct line and saw watches as a useful extension of the watch batteries they produced. ETA wouldfunction as a supplier of movements and watches to Duracell, which would then market anddistribute the watches around the world. Duracell seemed interested in ETA’s new product, but wasmoving slowly to research its market potential.58

In addition to partnerships, ETA also investigated the possibility of marketing anddistributing the watch itself. Thomke’s team consulted with advertiser McCann-Erickson to assess thepossibility of distribution via direct mail order.59 On a later trip to the United States, Thomke himselfmet with former Seiko distributor Ben Hammond, who had been recommended to Sprecher by themanagers at Zales.60 Hammond was enthusiastic about ETA’s watch—which had recently beendubbed the “Swatch,” thanks to Sprecher61—and suggested to Thomke that they could expect salesabove a million units as early as the second year. Hammond proposed the establishment of a newsubsidiary to distribute the watch in the US.62

In March 1983, ETA rolled out the first Swatches in Switzerland. Apart from their plasticcases and analogue displays, they did not appear dramatically different from existing watches (seeExhibit 2). The new watch sold adequately, but was not an immediate blockbuster. The ETA teamdecided to conduct a test market in the United States to see which of the distribution options therewould be most successful. The watch was carried at Zales in Dallas and at Macy’s in New York inDecember 1983. Sales from the test markets were flat. According to Max Imgrüth, the SUNY FashionInstitute of Technology graduate in charge of Hammond’s Swiss Watch Distribution Center, theSwatch looked too traditional to succeed in the American market.63

Hayek Takes the Helm

Despite its slow initial start, it was clear that the Swatch had potential. Unfortunately,Thomke and his division were relatively far down in the organization of ASUAG. And ASUAG,along with SSIH, continued to have serious problems. In 1983, Hayek Engineering, which was stillconsulting the industry for the banks, concluded that the best course of action for the Swiss giantswould be a merger. Merging would streamline production and R&D, which were already intertwinedbecause of the collaboration between the two companies. It would also reduce administration costs.Since the banks were still very worried about the two companies, they agreed with the consultants’assessment, and put pressure on the two firms to cooperate. In 1983, as part of an additional SFr 600million bail-out package, SSIH and ASUAG merged to form a new company, provisionally namedASUAG-SSIH. The merger was completed in December 1983.64

57 Nye et al., 13.58 Nye et al., 12-13.59 Nye et al., 14.60 Nye et al., 15.61 Ullmann, 627; Nye et al., 14.62 Nye et al., 15.63 Pinson & Chase Kimball, 6-7.64 Dullforce.


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The banks expected Hayek Engineering to play a significant role planning the restructuringthat would be required following the merger. The firm would have to make sense of the collection ofseparate divisions that made up the two watch organizations and develop an operational andorganizational strategy for making the new company run smoothly. The organization wouldsomehow have to take advantage of the benefits of consolidation while at the same time boldlyinnovating across its brands. The consultants would also have a hand in selecting a new senior teamto make the turnaround real. This team would have to craft a strategy that made the most of existingbrands like Omega, and that developed the new Swatch and associated technologies to reestablishthe Swiss presence across the watch market.

Ultimately, the goal was to create a Swiss watch industry that could compete with strongindependent brands in all price segments—particularly the low end. The consultants knew that timewas of the essence—the question was where to begin.


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Exhibit 1 Swiss Share of Global Watch Production, 1945-1983

Source: Data from Federation of the Swiss Watch Industry

Exhibit 2 Consolidation and Contraction of Swiss Watch Industry, 1950-1983

Source: Data from Federation of the Swiss Watch Industry

0 %

1 0 %

2 0 %

3 0 %

4 0 %

5 0 %

6 0 %

7 0 %

8 0 %

9 0 %

1 0 0 %

1 9 4 5 1 9 5 0 1 9 5 5 1 9 6 0 1 9 6 5 1 9 7 0 1 9 7 5 1 9 8 0

S w iss S h a re o f V a lu e S w iss S h a re o f U n its P ro d u c e d

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1950 1955 1960 1965 1970 1975 1980

Em ployees

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

Firm sEm ployees Firm s


13

Exhibit 3 Schematic Diagram of Swatch Mechanism—Produced at ETA (Grenchen, Switzerland)


14

Exhibit 4 Early Swatch Designs, 1983

Exhibit 5 Partial Organizational Chart at Time of Merger

Sw atch Delir ium M ovem ents

ETAErnst Thom ke

O therM anufacturing

Firms

Ebauches Rado

Longines

etc.

ASUAG

Tissot

etc.

SSIH/O m ega

Nicolas Hayek

rebirth of the swiss watch industry, 1980 1992...

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