Strategic Management Analysis of Rolex
Analysis of Rolex
This paper presents a strategic management analysis of Rolex, a privately owned Swiss watchmaking company. Some of its competitors include Omega, Tag Heuer and Cartier among others. A strategic management analysis entails researching into an entities' environment. The following analysis covers both internal and external environment of a company. However, when considering a company that operates globally, it is important to analyze its external environment, including an industry and a country. This analysis is achieved through various strategic analysis tools or frameworks, including the PESTEL analysis, the Porters Five Forces, and the Dunnings OLI Framework. The PESTEL analysis focuses on the environmental forces influencing business operations. The five environments analyzed by the PESTEL framework include, political, economic, social, technological, environmental and legal. The Porters Five Forces model analyses an industrys competitiveness by focusing on the threat of substitutes and new entrants, the bargaining power of the suppliers and the buyers, as well as the degree of rivalry. To understand the factors that motivates Rolexs cross-border trade, Dunnings OLI paradigm is used to explain the advantages linked to the ownership, location and internalization aspect of the Dunnings model. Research shows that Rolex is strategically positioned as a differentiator regarding quality and technical content. The companys success is also attributed to its adoption of the most effective practices in strategic management. As a conservative company, its strong organisation culture ensures that its products are luxurious and of high quality. Additionally, the companys knowhow, patents, R&D and other intangibles assets position it as a leader in the Swiss watchmaking industry.
Strategic management constitutes the analysis, formulation and implementation of business strategies meant to create and sustain competitive advantages. Strategies are directions and scope of an entity over a significant duration, which enables the entity to achieve competitive advantages in a dynamic environment through the configuration of competencies and resources. As the foremost component of the strategic management process, analysis involves researching into an entitys external environment. The market of luxurious watches is one of the most competitive global industries. Following the quartz boom in the 1960-s and the early 1970-s, most Swiss watchmakers disappeared. The fallout of most companies was attributed to the failure to adopt to the electrical revolution and intense competition from Japanese watches. The introduction of cheap Japanese watches is an apt example of the effect of the substitutes threats in a competitive business environment. To sustain competitive advantages, Swiss companies have to exploit their core competencies and scan their environment regularly. In other words, these companies frequently perform strategic management analyses to ensure that the assessed, formulated and implemented strategies create new advantages or sustain the existing competitive ones. Modern business entities are currently operating in a dynamic and more globalised business environment than that in the past. Therefore, it is important to analyse the implications of the market dynamics and develop effective responses to the changes. For instance, Rolex, Omega and Cartier strive to ensure that their competitive advantages in the Swiss watchmaking industry are sustained by analyzing and implementing effective strategies. The success of Rolex is much likely to be attributed to its adaptive nature in the current competitive and globalized business environment. This paper presents a detailed strategic management analysis of Rolex.
Company History and Profile
Rolex is one of the most influential and valuable brands in the world. The Swiss company founded in 1905 by Hans Wilsdorf has managed to stay among the top 100 valuable companies globally. At the time of its birth, Swiss watchmaking companies were specialising in making pocket watches. Additionally, there was no technology to support the manufacture of smaller watch parts that could be integrated in a wristwatch. By 1910, the company had obtained a chronometer certification for a wristwatch. The companys first achievement was registered alongside the introduction of Oyster, the companys water-resistant watch. The popularity of Oyster was amplified through testimonials, which served as a marketing approach. The use of newspapers was the main channels of Rolexs testimonial advertisement campaigns that is still evident in its current integrated communication strategy. Following the death of Wilsdorf in 1960, his wife initiated a trust managed by the board of directors to ensure that the company was not sold. Despite the quartz boom in the decade that ensued, the company managed to survive. The survival was attributed to the companys adaptive nature. As of May 2016, Rolex was ranked at position 64 among the top 100 most valuable brands. The brand value was at $USD 8.8 Billion. Rolexs brand is visible in the sports realm with endorsements in motor sports, golf, yachting and tennis. Some of the global athletes serving as a testimonial of Rolex watches, include Rodger Federer, Tiger Woods, Lindsey Vonn, and Phil Mickelson.
Rolex continues to be part of the Wilsdorf Trust; hence, it cannot be sold. In line with the trust's management strategies, Rolexs success is linked to its long-term development strategy. As a pioneer in the wristwatch production industry, the company attributes its success as the brain behind the innovation in the business of watchmaking, including the continuous rotor self-winding mechanism and the first waterproof, dustproof and airtight wristwatch. With the watches as its core business, the company makes wristwatches for men and women. Additionally, it makes clocks, pocket watches and stopwatches. Some of its popular brands include GMT-Master II, Yacht Master, Explores, and Day-Date among others. Rolex develops almost all of its components in house. This is attributed to it vertical backward integration strategy, which enables the company to secure most of the supply lines. The company designs, manufactures and tests its watches in its Swiss facilities. This has enabled the company to stick with two popular taglines: Rolex made in Switzerland and The Rolex Wayx. The company dedicates its operations and processes to perfection by centralizing its four sites in Switzerland. According to Rolex, the companys success is also attributed to the commitment and know-how of over 6,000 employees at the companys four sites. Rolexs global headquarters is located at, Geneva. The headquarters server as the centre of the companys design, management, sales and after-sale services, R&D and communication activities. Additionally, the final assembly of all watches is done in Geneva. The other three sites deliver components for assembly. Most importantly, the assembly of Rolex watches is done at the headquarters to ensure that all products are of high quality. Bracelets and cases are developed and produced at the Plan-les-Ouates site. This includes gold casting and polishing of the finished cases and bracelets. Movements are produced at the Bienne site, which holds over, 2,000 highly qualified employees. These employees are engaged in the production and assembly of various movement components. Typically, the movement components are tiny and characteristically complex in geometry. Rolex prefers local production over foreign one because of the complexity and precision required to develop high-quality products. Additionally, the assembly of the Rolex movements is done by hand, which requires highly skilled watchmakers and operators. Lastly, the dials and gem-setting are performed at the Chene-Bourg site in Geneva. At this sites, the faces of the company watches take shape.
The PESTEL framework breakdown the macro-environmental forces into six groups: Political, Economic, Social, Technological, Environmental and Legal. The framework is used to evaluate how the six forces affect an entity. Additionally, it supports marketing managers efforts in selecting some attractive markets and the effective market entry mode. Therefore, companies within an industry are often compared and contrasted along the perspectives that are highlighted in the PESTEL framework prior to the evaluation of the industry-specific conditions. For the companies operating beyond their national borders, it is important to have a good understanding of the main drivers of change in a macro-environment and their respective impact on a company, market, and industry. According to Ansoff, the main drivers of change are intricately different with respect to industries. Additionally, the key driver of change in any macro-environment varies from country to country. For this reason, the PESTEL framework is vital in analyzing the present and future impacts of the identified environmental factors. This assertion is in line with the fact that the current and future impacts may significantly vary from the past influences. Furthermore, in an industry marked by the high levels of uncertainty regarding future transformations, evaluating different scenarios is a strategic approach. To note, some forces overlap, thus making it challenging to highlight the exact category a force resides. For this reason, an emphasis is placed on the forces that are likely to be the key drivers of change and have a critical impact on Rolexs external environment. Figure 1 is a depiction of the forces that influence Rolexs external environment.
Figure 1. PESTEL Framework
The political environment in which Rolex operates has a major effect on its activities and profitability, and is primarily influenced by the political forces in a country or an industry. In this context, political forces refer to governmental interventions and policies, political trends and political risks. The governmental regulations and policies on foreign trade and taxation affect Rolex by offering the incentives for foreign investments. On the other hand, the policies and regulations can limit engagement in foreign production through disincentives. Most government-based interventions in an industry have a high probability of occurring in the areas that influence certain politicized agendas, including regional development, improving employment, cultural diversification and improved access to national resources. The type of government and political stability are also political forces that determine the attractiveness of a market. Therefore, Rolexs market entry strategy relies on whether a new market is capitalistic or socialistic in nature. The social and political events that can have an effect on the profitability and security of Rolex are viewed as political risks. Therefore, it is important for Rolex to be aware of the probability and severity of the political risk in a foreign market before its entry. One type of political risks takes the form of security risks associated with economic sanctions, civil unrests, wars, trade treaties, diplomatic relations, as well as crime and violence. The second type of political risk that might affect Rolexs operations and profitability take the form of international risks associated with the development in the political economy within the global village. Further, the company can be affected by inconsistent policies and legislation, thereby resulting in corruption, as well as financial and contractual difficulties for Rolexs operations. The sovereign risks that emerge from the decisions and policies of host governments, such as regulations on foreign trade, restrictions on the employment of expatriates, and changes in the tax laws also have a great impact on Rolex.
The economic environment, both at the global and local levels, has a considerable effect on Rolexs operations in the marketplace and on the potential share of the existing market. For instance, such economic forces as inflation rates, the price of raw materials, currency rates and interest rates have a significant impact on a company. An apt example is the recent Britains exit from the European Union that has had a significant impact on the exchange rates in Europe. Observably, the fluctuation of a countrys currency, inflation and interest rates can significantly affect an entitys revenue. Furthermore, gross domestic product (GDP) figures, labour costs, business cycles, unemployment rates and stock market values are apt examples of the economic forces that have a considerable impact on Rolexs revenues. The GDP of a country is an important factor in the evaluation of the potential size of a market. Additionally, the GDP influences the strategies for entering a new market, in the sense that a large market favors the entry modes that demand high sales volume. Furthermore, a large market demands significant strategic control. On the other hand, a small market demands the low levels of control and sales volumes for Rolex to break-even. This case applies in the scenarios where Rolex is targeting a specific population segment in a country it is already operational. Another important economic factor that Rolex must consider is the disposable income in a population because it influences Rolexs strategic decisions regarding the purchasing power of the potential customers. In fact, for Rolex to effectively compete locally, the company must establish amicable relationships with the local suppliers, as well as distribution channels. These relationships are important, especially in the scenarios where sales are extremely low to call for a separate distribution channel. Other important considerations for Rolex as it rolls out it distribution channels beyond Europe are transportation cost and time, adjustment of product prices to meet local demands, and hiring of local sales people in the foreign markets.
According to David, social forces are the ways in which companies are impacted by different changes in a society. Therefore, social factors can also fall under economic or political forces, but largely, they are linked to cultural forces of a macro-environment. At the centre of the social forces influencing Rolex is the cultural distance between the Switzerland and the countries hosting its foreign operations. It should be noted that Rolex operates in the foreign countries through authorized outlets. Culturally, the Swiss value perfection in their handwork. For this reason, they strive to ensure that their customers receive quality products by preventing the sale of counterfeits. Cultural distance also includes differences in values, religion, language, and norms. Social factors affect whether an entity will enter a new market, as well as the mode of entry. It is important for Rolex to consider cultural differences in its global outlets to ensure that its corporate image and brand position are not eroded because of socio-cultural misunderstanding. Other important examples of social forces include changes in lifestyles, demographic changes, and variation in the levels of education. For example, changes in the income and consumer lifestyles across the target countries might force Role to adapt its products, services and marketing strategies accordingly.
One of the most important technological factors influencing business operations in an entitys external environment is the level of infrastructural development. Infrastructure is a key metric used in the evaluation of the attractiveness of a market. In this context, the term "infrastructure" refers to the availability of good electricity, roads, telecommunication, water supply, and railroads. For instance, the availability of a good transport networks influences the choice of an entry mode because transportation costs limit the competition between the exports and the local products. Transportation cost is a serious concern for exporting entities with immense geographical distances between the country hosting a production facility and the targeted country. Normally, the infrastructure is chiefly funded by a government, however, with the growing public-private corporation, there is a growing trend of public-private partnership (PPP) in the development of a critical infrastructure. Switzerland is one of the most developed countries in Europe. The highly-developed infrastructure in Geneva makes it ideal for the location of its headquarters as the infrastructure facilitates the movement and communication of employees. The availability of good telecommunication systems also enhances outward communication, especially online marketing. Rolex is largely concentrated in the developed countries as opposed to the developing economies not only due to its luxury market segment, but also due to a better-developed infrastructure in the developed economies, such as the United States, Norway, Germany, and the UK. In other words, national markets with superior infrastructure are more attractive for Rolex. Furthermore, the availability of vital local sources, including technology and skilled labour, are important factors in making a decision concerning the markets to pursue and the entry modes to employ. Besides being a core competency, the availability of new technology also depends on the industry and the governments investment in R&D.
Environmental factors are matters linked to environmental protection laws, greenhouse gas (GHG) emissions, energy consumption, and waste disposal. Environmental governance is increasingly gaining popularity in both developed and developing countries. In the same context, both public and private entities are increasingly allocating numerous resources in the fight against environmental degradation. Governments are developing and implementing various programs to ensure the environment is managed effectively. On the other hand, business entities are capitalizing on the environmental responsibility as competitive advantage. It should be noted that companies are adapting environmentally responsible practices and try to act in a sustainable manner. However, this is common among large manufacturers. Furthermore, customers, employees and investors are demanding that the entities employ environmentally friendly practices as part of their green supply chain management and logistics. In addition, companies are also required by the stakeholders to invest in energy conservations through energy audits and other energy conservation measures. As of consequence, it is essential for Rolex to take into account the governmental regulations touching environmental issues before venturing in a new market.
In the legal environment of Rolex, legal forces include certain government-based policies and regulations that affect the entry of foreign entities. Some of the legal forces in the companys external environment include Switzerlands restrictive import policies, such as quotas, tariffs, and trade barriers. Tariffs are imposed by the governments to protect a domestic market from foreign entities, thus making imported products more expensive than the locally manufactured ones. On the other hand, the purpose of quotas is to restrict the quantities of specific products meant for export. Consequentially, quotas limit the volume of products that an entity can export to the foreign markets. Observably, these legal forces are very important in a companys formulation and implementation of strategic decisions regarding local production and exportation. Before Rolex enters a foreign market, it must take into account the local employment laws, health and safety restrictions, competition laws, environmental laws, as well as consumer protection laws. Local competition laws serve as restrictions to monopolistic companies entering a market. Additionally, competition laws protect the local market from unhealthy competitive behavior. Furthermore, employment laws in most countries favor the hiring of local worker, while consumer protection laws tend to influence companies decision regarding localization and standardization.
Porters Five Forces Analysis
After having analyzed the effect of external forces on Rolexs business environment, the next important step entails a detailed analysis of the luxury watchmaking environment, which constitutes Rolexs relationships with its competitors, suppliers, and customers. According to Lynch (2008), the essence of an industry analysis is to establish the attractiveness and competitive intensity of a market in which an entity operates. In this case, the analysis will focus on the Swiss watchmaking industry within the context of the global luxury watchmaking market. The globalized entities that optimally exploit their core competencies and implement distinctive business strategies are much likely to have a better performance than its competitors in the industry. In other words, entities must be aware of various forces that influence their operations and competitiveness in their industry.To determine the profitability potential and the competitive structure of the luxury watchmaking industry, the Porters Five Forces framework is used because of its popularity and efficiency. The Porters Five Forces Framework provides a means used to analyze an entity within a specific industry. As per the model, the competitive structure of any industry is modelled by the interplay of 5 forces: degree of rivalry, threat of substitutes, threat of new entrants, bargaining power of suppliers, and bargaining power of buyers. Figure 2 is a depiction of the Porters Five Forces Framework.
Figure 2. Porter's Five Forces
The degree of rivalry among competing companies is the strongest of the Porters forces because the companies producing similar products compete from various fronts. The degree of rivalry varies from country to country, as well as from industry to industry. To sustain competitive advantages against the rivals, luxury watchmakers compete along price and product differentiation strategies. Since watchmakers are mutually dependent, the actions undertaken or strategies implemented by one company are likely to have an effect on other participants in the same market, resulting in competitive retaliation. For example, if Omega
According to Hitt, Ireland and Hoskinsson, one of the structural metric of the intensities of competition is the size and number of competitors in an industry. The higher the number of companies with almost equal sizes is, the higher the pressure to offer low prices will be. Equally, if a marketplace is dominated by a monopolistic entity of a few number of leading companies, the degree of rivalry is often low due to the restrained price wars. The other determinant of the intensity of rivalry in an industry is its growth potential. The industries with high growth potential are marked by continuous investment to expand market reach, rather than concentrating on the efforts to steal customers from rival companies. However, some relatively slow growing industries encourage companies to engage in the price wars to sustain their market shares. Furthermore, rivalry in an industry is increased by high fixed production and operational costs. Hitt, Ireland and Hoskinsson point that high exit barriers subject to employee protection laws and large capital investment may force the companies to stay within an industry, irrespective of the incurred losses. Furthermore, competition intensifies when there are low switching costs and a low level of product differentiation. Finally, the degree of rivalry is also affected by the diversity of rival companies because participants with diversified objectives tend to compete aggressively to sustain their competitive advantages.
Threat of New Entrants
The ease and ability of new firms to enter an industry is a risk to the existing companies. Typically, new companies are motivated to venture in an attractive industry where they expect to have a significant return on the capital. Financially, new entrants are motivated to enter an industry since the return on investment (ROI) is projected to surpass the invested capital within the shortest time possible. New entrants become threats to the existing companies, especially if their entry induces unhealthy price wars. Normally, new entrants force a reduction in prices, hence, inducing pressure on profits. The pressure on profits is also attributed to the fact that new entrants often bring new production capacities and put pressure on the market share. The assessment of the threat brought by new entrants in the Swiss watch industry entails determining the barriers to entry and the projected competitive responses from the existing industry participants. According to Porter (1998), barriers to entry are the costs and necessities needed before an entity to enter a new market. The authors stress that these costs and requirement are designed to protect the incumbent enterprises. Additionally, the established companies may respond to the entry of new entrants with strategies, such as mergers and price wars, to prevent entry of new firms. Entry barriers take various forms because they are unique to each industry or country. One of the most popular entry barriers concerns the level to which the existing companies enjoy the economies of scale. In the context, the economies of scale refer to the low unit costs due to the high levels of production. In an industry where the incumbent companies enjoy the economies of scale, the threat of new entrants is relatively low because they find it challenging to match the prices offered by the incumbents.
The wristwatch making industry is also capital intensive in the sense that a company needs huge sums of initial capital to buy or rent the facilities located in specific strategic places. A new entrant must also have state-of-the-art production equipment, which deters an entry of small-scale competitors. Furthermore, the fact that industry participants have well established global brand names and the capability to compete on a differentiation strategy increases their customer loyalty. As of consequence, new entrants face difficulties in capturing a market share. Additionally, the fact that customers mobility or switching brands are low makes it challenging for new entrants either to offer lower prices for products or high-quality products to compete for the existing customers. The other important entry barrier is the presence of patents protecting Rolexs processes and technology. Similarly, the technology in developing innovative products is ingrained knowledge that Rolex has accumulated for the past century and is difficult for new entrants to duplicate or imitate. Likewise, incumbent companies enjoy the favorable access to supplies and distribution channels, which are often difficult for the entrants to acquire.
Threat of Substitutes
By definition, substitutes are goods and services that can serve the similar needs or fulfil a function delivered by the goods and services existing in the industry. As of consequences, the size of the threat of substitutes plays a critical role in establishing the extent of rivalry in the luxury watchmaking industry. In agreement with Lynch, the presence of substitute products in an industry tends to lower its profitability and attractiveness. This observation is complemented by the fact that the presence of substitutes makes it difficult for the incumbents to increase their prices. One of the determinants of the degree of the threat of substitutes is the superiority of the quality and functionality of the alternative products. The Swiss luxury watch industry is highly competitive and marked with high-quality substitute products. The other determinant of the severity of this threat is the ability of customers to switch products due to rapid shifts in prices of the similar products. The fact that the incumbents have the ability to compete on prices flexibly makes the price wars more severe. Consequently, customers can switch their products or brand loyalty with ease. However, some loyal customers are reluctant to switch from Rolex to other brands because they are accustomed to the quality and the functionalities of Rolex products. To recap, this threat makes it necessary for Rolex to assess the external environment beyond the focal industry. For this reason, Rolex needs to enhance customer loyalty and value by offering the products and services of superior cost and at an affordable price to lessen the attractiveness of substitutes.
Bargaining Power of the Suppliers
In the luxury watch industry, suppliers are entities that provide raw material, labor, financial services, equipment and transportation to manufacturers in the industry. Expectedly, the cost of inputs has a significant impact on Rolexs profitability. Typically, suppliers exploit their bargaining power over the luxury watch makers by reducing the quality of services and goods. Additionally, they use this power by increasing the prices of the supplies. Therefore, powerful suppliers can affect the profitability of Rolex and the attractiveness of the industry, especially where participants find difficulties in recovering production and operational costs. This implies that the stronger the suppliers bargaining power is, the higher the intensity of competition in the luxury watchmaking industry can be. Contrastingly, the weaker the suppliers bargaining power is, the better the companys position to negotiate economical deals can be. Normally, an industry is characterized by powerful suppliers if there are few large supplies and many buyers. In other words, suppliers can use the high demand and scarcity of inputs to their advantage. Moreover, if the suppliers in the industry provide differentiated, unique and highly valued inputs, they can put pressure on the buyers. Additionally, suppliers can amplify their bargaining power if they raise switching cost of the inputs. Suppliers' bargaining power is a risk to Rolex if the company vertically integrates forward and becomes a competitor in the industry, besides being a
Bargaining Power of the Buyers
To note, buyers are the existing and potential customers in an industry. Customers influence the demand for Rolexs products; hence, they have a potential to influence the prices of the company's products. The prices of products in all industries are largely shaped by the interaction between the buyers and the sellers. It follows that the ability of a buyer or a seller to capture the maximum value depends on their ability to bargain. In other words, the ability of Rolexs customers to put downward pressure on Rolexs products depends on the customers bargaining power. Therefore, if customers have a strong bargaining power, Rolex will experience increased rivalry in the industry. On the other hand, if customers have a weaker bargaining power relative to Rolex, the company will be well positioned to negotiate desirable terms and deals. Normally, the buyers bargaining power is amplified if there is a presence of few dominant buyers and numerous suppliers. In the same context, the dominant buyers must be able to purchase a large portion of the products supplied in the market. Consequentially, suppliers rely on these few dominant buyers to sustain their businesses. Furthermore, buyers can also amplify their bargaining power where products are highly undifferentiated and standardized or have insignificant added value. These factors increase their bargaining power because it motivates them to switch the products easily. Rolex is known to offer differentiated products and high-quality watches, making the company more competitive from a product differentiation perspective.
With the growing accessibility to the internet through the handheld devices and social networking sites, buyers are more informed that before. For instance, they can make product comparisons along prices and functionality lines. For this reason, the buyers bargaining power is increasing. Normally, buyers use this information to their advantage (Peng, 2006). Therefore, Rolex must continue to ensure that it offers high-quality and differentiated products to lessen the buyers bargaining power because the failure to curtail this power may lead to customers integrating vertically backwards into the luxury watch industry. By anticipating the competition for various watch components, Rolex should continue employing the backward vertical integration strategy to safeguard its independence from powerful suppliers and competitors. This can be improved through the takeover of suppliers where necessary.
The Porters Five Forces framework was used to determine the power balance and competition structure in the Swiss watchmaking industry. The industry is marked by a strong bargaining power of buyers, and average bargaining power of suppliers, as well as a low threat of entrants and a high threat of substitutes. This demonstrates that intense competition in the global watchmaking industry and the rivalry are much likely to increase in the near future due to the proliferation of electronic wristwatches and the growing powers of suppliers. This competitive situation calls for increased diversification and innovativeness. By moving from the protected Swiss market, Rolex must consider formulating flexible strategies to deal with the intense competition in the global industry, as well as how the entity can compete to optimize it profitability. Learning from the business shock induced by the quartz boom in the 1960s, the company should strive to adapt to the current market changes, hence sustaining its survival. The section that follows explores whether or not Rolex has the appropriate conditions to internationalize.
Dunnings OLI Paradigm
The central theory under this paradigm relates to the analysis of multinational corporations (MNCs) or multinational enterprises (MNE). The OLI paradigm, proposed by John Dunning, is a conceptual framework used to explain the pattern and extent of foreign investment. The paradigm combines various international production theories that are useful in understanding the strategic management and operation of multinational corporations. The term eclectic paradigm was later adopted by Dunning who proposed that the constituent theories were only partial substantiation of the internal production from a narrow perspective. On the other hand, the Dunnings OLI paradigm seeks to explain international production from a broader perspective. That is to say, the OLI paradigm extrapolates the factors that motivate international production and explains a strategic location of foreign production facilities. Additionally, the paradigm explains why and how multinational entities, like Rolex, can optimize it profits relative to national producers. In line with the OLI paradigm, Swiss watchmakers, including Rolex and Omega operate from other markets that are away from their native countries due to three driving conditions: ownership (O), location (L), and internalization (I). These elements are discussed in detail in the subsections that follow. Figure 3 illustrates the three conditions that influence foreign direct investment in line with the Dunnings OLI framework.
Figure 3. Dunning's OLI Paradigm
In discussing the ownership aspect of the paradigm, it is evident that multinational enterprises, such as Omega and Rolex, have both tangible and intangible assets that enable them to compete with national companies in the foreign markets. In addition, the companys patents and technologies support its competitive responses in a foreign market. In essence, Rolex is able to compete beyond Switzerland, subject to that fact that it owns technologies and assets that not only facilitates its foreign market entry, but also enables it to sustain its competitive advantages abroad. Despite the fact that national companies in the host countries tend to have advantages on national experience and knowledge, Rolex can achieve competitive advantages concerning ownership through revenue generating intangible assets, including trade secrets, patents, and trademarks. Furthermore, Rolex can gain competitive advantages over national enterprises through close administration and control of its foreign business. As it will be discussed in the section that highlights the importance of Rolexs management practices to its success, the close administration of independent and interconnected activities is pivotal in its foreign investment. By operating as a multinational enterprise, Rolex can transfer its watchmaking technology to new locations and exploit the available knowledge regarding competitors and markets. As of consequences, Rolex can improve its position in Switzerland by competing effectively with foreign multinationals having business outlets in Switzerland.
In accordance with the Dunnings OLI paradigm, the location of Rolex and its competitors operations beyond Switzerland are selected strategically for the enterprises to optimize profits, particularly in the places where it is more profitable to operate than operating locally. Given that resources are often distributed, factors, such as proximity to markets and infrastructure, are very influential in the formulation of the location-based strategies. Theoretically, Rolex can build relevant infrastructure to support its centralized facilities in Geneva, but the subject of ethics and profitability must be taken into account. For this reason, Rolex has chosen to locate its facilities closed to developed the clusters of customers, suppliers and distributors in the Swiss watchmaking industry. Additionally, the location near the company headquarters is an advantage for the ease of transportation of components and the mobility of employees. This implies that Rolex can only be motivated to move its local operations abroad to territories with good infrastructure and availability of highly skilled watchmakers. As highly skilled watchmaker and operators are concentrated in Geneva, moving developing economies may prove to be difficult because the company will have to employ expatriates. Additionally, Rolex may lack relevant knowledge and experience of operating in the foreign economies that are both geographically and culturally distant.
The internalization theory is pivotal in choosing whether a company should use leading or licencing approaches for the sale and transfer of intangible assets and technologies overseas or to produce its products in the foreign economies through foreign direct investment. In other words, the internalisation theory focuses on the factors that drive the preference for foreign direct investment (FDI) over the centralisation of manufacturing activities, the native economy, and the export of the finished products. One of the key dilemmas in the global watchmaking industry entails what a company should buy or internalise. As watchmakers continue to be vertically integrated along the supply and value chains, they end up performing an array of tasks from the supply of components to the distribution of the watches. However, the activities a company chooses to internalize vary among the companies. For example, Rolex vertically integrates into the supply of component for its watches, but chooses to use registered retailers in the foreign countries to sale its products. If the markets exist, Rolex might choose to outsource the distribution of its products to concentrate on its competencies of watchmaking. Unlike its competitors, Rolex does not in-source its technology development, due to the companys tradition of in-house development and the need to sustain its uniqueness.
As evident from the strategic analysis of Rolex, relative to the global opportunities, the company has limited conditions to undertake foreign direct investments. Furthermore, due to the structure of the watchmaking industry and the availability of good infrastructure and supplies to operate in Switzerland, the global watchmaking industry is unsuitable for Rolex to operate as a foreign direct investor. However, Rolex can use its technological capabilities and experiences accumulated in the Swiss operations as an ownership advantage to expand to new regional locations within the European Union. The European Union is ideal for the expansion of the company due to its strategic location and stable financial environment. To note, Rolex designs, develops, tests and produces in-house all the major components of its products, from metal casting, machining, crafting and assembly and finishing of the gears, bracelets, dials, and cases. Furthermore, the companys accuracy criteria are based on the requirements set by the Swiss Official Chronometer Testing Institute (COSC). It is worth mentioning that the complexity in geometry and the precision of the components require high-skilled watchmakers and operators. For these reasons, it is much attractive to produce Rolex watches locally, than transferring their production to the foreign countries.
The Effective Framework for Rolexs Strategic Management Analysis
The PESTEL framework is a valuable tool for analyzing the external environment of an entity and highlight how the forces influence the strategic decision and the performance of the company. However, due to the array and number of external forces, and the speed which these forces change, it is very unlikely for a company to get a complete picture of its external environment. Even when Rolex is placed under a systematic strategic management analysis tool, like the PESTEL framework, such a comprehensive environmental analysis of the company is likely to be time consuming and highly costly. For this reason, it is also necessary to evaluate Rolexs environment from an industry-based perspective. Such a perspective is essential because it gives a company a more realistic and accurate view of its external environment.
Collectively, the strengths of the Porters Five Forces influence the profitability of the luxury watch industry and in turn determine its attractiveness. As of consequences, stronger forces are linked to a more challenging or restrictive business environment. This framework is vital in the analysis of Rolexs position as it identifies relevant opportunities and threats. In that regard, it enables Rolex to match the opportunities and threats with the available capabilities and resources, thus creating or sustaining competitive advantage. It is worth noting that the strength of each of the Porters Five Forces is determined by the array of variables within a competitive market. Despite its popularity in industry analysis, the framework is hurdled by its static nature because it perceives an industry as unchanging and externally shaped. In other words, the model assumes that the intensity of competition in an industry is shaped by the industry structure and the firms are constrained by the industry structure. However, in reality, competition in the luxury watchmaking industry is a dynamic process, and companies continue to reshape the industry structure through new technologies and the creation of substitutes. Additionally, companies restructure their respective industries by developing new distribution channels and engaging in the collusive activities.
In contrast to the other frameworks, the OLI paradigm is the most comprehensive model for explaining Rolexs foreign direct investment. Therefore, the framework is effective in highlighting the pattern and degree of inward FDI (IFDI) and outward FDI (OFDI). As noted by Rugman, for Rolex to be engaged in the cross-border transactions, it must create and exploit its ownership advantages, including patents, trademarks and effective marketing systems. Ownership advantages also determine the entry modes. The level of FDI is largely influenced by the strategic advantages specific to the location of its offices and production facilities.
The Porters Five Forces framework is the most effective strategic management analysis tool for Rolex because the analysis focuses on the Swiss watchmaking industry, which is the focal of the global watchmaking industry. The framework is also well suited for the line-of-business level, which entails applying a set of the related products that serve the interests of a particular buyer. The Porters Five Forces model is also easy to use as compared to the PESTEL one, which requires immense resources to cover the external environment of an entity with a diversified set of products. Rolex has two major product lines, making the Five Forces model the most appropriate tool of strategic analysis. Despite having various models along the two product lines, Rolex uses an umbrella brand. Therefore, both product lines are affected almost equally by the five forces. Additionally, the umbrella brand strategy eliminates the need to carry out a separate strategic analysis for the two product lines, because an analysis of a single product will give a generalized understanding of what Rolex should do to be successful. The Porters Five Forces framework can also help Rolex to make a detailed qualitative assessment of its strategic position and the beginning of the development process. Moreover, the framework is suited to helping Rolex identify business opportunities, particularly if the company is considering venturing into a new market segment, or the company is pursuing effective approaches to differentiate its brand from its rivals. In fact, this technique is a more practical and credible alternative for the SWOT analysis.
Rolex is strategically positioned as a differentiator and noble brand that focuses on the quality of products and the sustainability of its expansion through the reinvestment of profits. As highlighted in the companys tag line, The Rolex Way, the company does things in a unique manner. In line with the companys culture, Rolexs products stand out due to their high quality. Despite being a private entity, Rolex has successfully positioned its operations globally, with effective distribution channels. As part of its advertisement strategy, the company continues to produce effective advertisements, largely linked to celebrities. Rolex products are positioned as high-quality and status products. The company competes with BVLGARI in almost the same level.
Figure 4. Luxury watch brands and their market positioning.
Figure 4 illustrate the most popular brands in the global watch industry. According to Gaustschi, the brands are categorized in fives profiles drawn from consumers perceptual map: fashion, sports, specialists, jewelery, and lifestyle. In reference to these groups, Rolex falls in between the lifestyle and jewellery category. Compared to Omega, Hublot and Zenith, Rolex is more expensive and luxurious. Regarding the price, the brand is positioned as an exclusive luxury. In addition, Rolex falls between the mechanical or complications movement. Furthermore, the brand is positioned as technical content products in the technology grade. Omega as the primary competitor is positioned as a lifestyle and specialist watch. On the other hand, Cartier and TAG Heuer are positioned as jewellery and sport watches respectively.
Strategic Management as a Success Factor
Rolexs success is attributed to its adoption of the best practices and adaptive strategies in the management of the entity. As part of the Wilsdorf Trust, the company does not heed to pressure from its stakeholders, who often demand short-term benefits. In that regard, the company maintains its course along long-term strategies. It should be noted that the company has the opportunity to plough back its profits to improve distribution and consumer satisfaction. Additionally, the company reinvests its profits in research and development (R&D) programs, hence sustaining its competitive advantage as a leader in innovations. The other unique aspect of the company is that it is hermetic as Oyster, its primary model. In fact, based on its organizational structure, Rolex does not publish its financial reports, and the top management team is discrete. It should be stressed that the company does not pursue the multi-brand strategy employed by its competitors, such as Gucci and Armani. In other words, its umbrella branding strategy makes it linked to wristwatches only. Consequentially, Rolex is extremely secretive; thus, the figures highlighted hereafter are estimations from various secondary sources. It is worth noting that Rolex has a strong organizational culture, illustrated by its conservatism and tradition of the same product and communication strategy. Rolexs unique communication strategy has enabled the company to sustain competitive advantage since its inception. As one of the most valuable global brands, the company continues to embody achievement and keeps fostering the culture through effective celebrity endorsement.
The other strategic management practices that have made Rolex a successful entity include market segmentation and total quality management (TQM). Through TQM, Rolex continuously improves its performance at all levels of operation and in all functional areas of the company through the integration of the systems and the employees. This entails creating a healthy working environment based on developing workers competencies and the managements commitment to the success of the company. Rolex ensures that there is a strict adherence to the predefined standards by ensuring that its workers use appropriate techniques, tools and processes from the design to the assembly of the watches.
This strategic analysis supports the hypothesis that the success of Rolex is the highly competitive luxury watchmaking industry is attributed to the companys adaptive nature. From the analysis of the luxury watchmaking industry environment (Porters Five Forces framework) to the analysis of Rolexs macro-environment (PESTEL analysis), this paper has highlighted the most influential competitive forces and the key drivers in the industry. The PESTEL framework shows that Switzerland is highly attractive, and also substantiates Rolex decision to centralize its design, development, communication and management activities in Geneva. Switzerland is a politically stable country with minimal economic and political risks. With regards to the infrastructure, Geneva is highly developed. Socially, the company is Swiss in nature; hence, it faces minimal social-cultural barriers. In line with the Porters Five Forces technique, some of the factors affecting the watchmaking industry rivalry include the concentration of firms, high fixed costs, slow market growth, high storage costs, high exit barriers, low switching costs, and low level of product and service differentiation. The higher the concentration of firms is, the higher the intensity of competition can be because companies will aggressively compete for the existing customers. Rolex can overcome rivalry by altering its pricing policies, improving service levels, seeking innovative ways to optimize the output of distribution channels, as well as improving product differentiation and its relationships with key suppliers. Barriers to entry come from various sources, including asset septicity, barriers to exit, government-based barriers, and internal economies of scale. The threat of substitutes implies that there is an availability of alternative products that a consumer can purchase beside the focal industrys product. The watchmaking industry becomes more competitive than before due to the availability of close substitute products. Additionally, this threat influences an entitys ability to improve profitability because it restructures the industry. The supplier bargaining power amplifies where: the input is highly differentiated; switching costs are high; buyers are more than suppliers; and there is no substitute supply. Conversely, the bargaining power of suppliers is down where for the opposite of the highlighted scenarios. The buyers bargaining power is high where: customers are price sensitive; customer are highly informed about the products; the concentration of customers is higher than that of the sellers; the risk of backward integration is high; and product differentiation is low. Despite having the location and ownership advantages, the company is well positioned to develop its products locally than through foreign direct investment. Rolex has adapted some of the best practices in strategic management to suit its operations locally and internationally. These include long-range planning, total quality management, human resources development, and investment in research and development programs. Despite these moves, the company needs to improve on its product differentiations to survive the ever-growing competition and threats from different substitutes.