How A Luxury Swiss Watchmaker Learned to Embrace the Smart Watch

For centuries, the Swiss have been renowned for their luxury watchmaking industry. It survived two world wars and the flood of quartz watches from the U.S. and Japan. Today, the industry is being disrupted by Apple Watch and other wearables. TAG Heuer faced the challenge by embracing the new technology even though it is not something the Swiss have mastered, making them dependent on Silicon Valley.

The story of how the company overcame technological and cultural hurdles to develop its connected watch, the TAG Heuer Carrera, is encapsulated in a case study by Felipe Monteiro, a Mack Institute senior fellow and professor at INSEAD. He recently sat down for an interview about his study.

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An edited transcript follows.

Knowledge@Wharton: Can you tell me how you came to write this case study of TAG Heuer?

Felipe Monteiro: I have been studying the Swiss watchmaking clusters for many, many years. Switzerland is really the epicenter of the world’s luxury watchmaking industry. A few years back, I started to wonder, what would happen to Swiss watchmaking if a new type of watch emerged? Around eight or 10 years ago, there was an idea of what a connected watch might look like, but nobody really knew. And it was very far from the Apple Watch.

Over the years, I started inviting people from the industry. I invited Jean-Claude Biver, who is the CEO of TAG Heuer and the president of the LVMH watch division, to come to my classes. A couple of years ago, the conversation about the connected watch started to become a very important one because we knew that Apple was going to launch its connected watch, and that would be a game changer.… He very generously opened the doors of the company for us to study it and the launch of the connected watch.

Knowledge@Wharton: Let’s set the historical context first for our listeners who may not be aware of the significance of the Swiss watchmaking industry. Tell us how TAG Heuer came out of that storied history, and what challenges it faced when Apple Watch and other wearables came out.

Monteiro: This is a really fascinating story. If you go back in time, Switzerland has been the epicenter, really the main cluster, for luxury watchmaking for centuries. And when we look at Switzerland, what we can see is that it really has all of the conditions that we want to see in a cluster.… We have very specialized workers; a lot of them in the past were jewelers that really were very good at miniaturizing, so they were very good at working with mechanical watches.

“We knew that Apple was going to launch its connected watch, and that would be a game changer.”

We have very sophisticated demand in Switzerland because historically Switzerland has always been a place where very wealthy individuals went for banking and other reasons. So they were very demanding about what type of watches they wanted. There was a lot of competition among different watchmakers.

Also we have all of the related industries — we have not only the watchmakers but we have the people who are doing the components for the watches. So Switzerland has been this very important cluster for watchmaking for many, many years. The interesting part of that story, too, is that 40 years ago, in the 1970s and 1980s, Switzerland as a cluster was really threatened when the quartz watches came around, from the U.S. and then from Japan. The Swiss dominance in that industry was threatened.

And a lot of people at that time [worried that the] cluster, that location which has been really the main point for that industry, maybe will no longer be. And Switzerland managed really to turn it around.… When people look back they typically say two people were fundamental to that change. One of them is Nicolas Hayek, who was the CEO of Swatch. He introduced Swatch. It redefined watchmaking, making it fashionable, cheap, more provocative. It was not really the classic Swiss watch. So Nicholas Hayek was really important in changing the industry at that time.

The other person is Jean-Claude Biver. At the time, he took a very famous Swiss brand, Blancpain, and he said, you know, Blancpain has existed for 300 years, and it has never done a quartz watch, and it never will. He meant that [at its heart it is] a mechanical watch and Switzerland is about mechanical watches — it’s really about eternity. And that’s what we’re good at. They really reinvented the value of the mechanical watch, and managed to take Switzerland away from the threat of the quartz watches, and maintain it as a center for the watchmaking industry.

So if that has been a success story for the Swiss, a lot of us wondered what was going to happen when a new technology comes in that was as disruptive as the quartz technology in the past. Will the Swiss again find a solution for it? How are they going to cope with it? And this has been a debate for many, many years. But I think since the moment Apple came in with the Apple Watch, [underscoring] the increasing importance of the connected watch, people started asking, what are the Swiss going to do?

That was a challenge for TAG Heuer. TAG Heuer is a luxury watch, but luxury at the entry level. We are not talking about watches of $100,000; we’re talking about watches of a few thousand dollars. And the question is, what will they do when they see the emergence of the connected watch? It’s no longer a specialist, niche type of product for people who are tech lovers. When you have a company as mainstream as Apple launch a connected watch, what should they do? This was an important moment, and that was a main challenge I saw TAG Heuer facing.

Knowledge@Wharton: TAG Heuer is very proud to be Swiss made, and they faced a dilemma of having to adopt technologies that they are not experts in, and that also come from overseas. And that’s a problem for the company. What was the fundamental choice they faced here?

Monteiro: There are at least two important choices. The first one is, do we enter this market or not? One answer could have been that this is a completely different market: “It’s not what we do; we are really in a different segment. We should not care about it. Let the consumer goods companies like Apple take care of it.”

The first choice was, do we enter that market, yes or no? They were pretty sure that they wanted to enter. They said, “Listen, we should be there.… We should embark on that journey. We should board that train and see where it goes. We should be there.” That was the first choice, and I think the decision was, yes, we’re going to board the train. But the question was, “How do we do this? Can we do this by ourselves? Can we really fully develop the watch? The operating system, the microprocessor?” They quickly realized they could not do it by themselves.

“They decided to go with partners … and they ended up choosing Intel and Google.”

A subsequent choice was, “Who are we going to partner with?” … Although Switzerland is the cluster for watchmaking, they soon realized that for this segment — for this conceptualization of watches as connected — the technology, the expertise is not coming from Switzerland anymore. It was critical for them to realize … that the emergence of this new technology does not come from the Swiss cluster but from Silicon Valley. So now, “how do we find partners in Silicon Valley that we could work with, and jointly develop this new connected watch?”

The first choice was, do we enter, yes or no? The answer was yes. The second choice was, do we do this by ourselves or with partners? They decided to go with partners. And then a third one was identifying the right partners — and they ended up choosing Intel and Google.

Knowledge@Wharton: In your case study, you say that both Jean-Claude Biver and one of the other executives at TAG Heuer, Guy Semon, did not do any market research before deciding to develop a smart watch. What do you think about that?

Monteiro: The first reaction was surprise. We’re in the digital age where a lot of decisions are data-driven: How come they decided to launch that watch without any consumer research? … But as we mentioned, Jean-Claude Biver and Guy Semon, without exaggeration, are legends in this industry. These are people who know how the industry works, who are really at the forefront of the industry.

So although they didn’t do any market research per se, they really understood the new trends, what the competitors were doing, what was possible to do and how the industry has evolved over time. They were in a very privileged position to make that call. I would not encourage all companies to go and launch a product without doing market research, but we should appreciate how special these leaders were in the industry they know so well.

Second, and I think this is a critical point about what they decided to do, is that they knew the very traditional luxury watchmaking company has a completely different culture. [By choosing to act fast, they introduced an] almost lean startup-type of project, as if to say “we will not spend years developing this project and see what happens, instead we are going to develop this very quickly, we’re going to work with partners, we’re going to launch. If we need to make changes, we’re going to make them in the second version.” … There is also a real consideration about time to market. They didn’t want to let Apple get all of the success of the connected watch. It was important to [follow] quickly.… They had to be there fast, and they decided to launch.

Knowledge@Wharton: TAG Heuer didn’t let their legacy hamper their future endeavors. So how can other businesses do the same?

Monteiro: This is a very important question, especially if you think about today’s world with all of the digital disruption that is coming. The question is, to what extent do you realize that you have to start a new journey? In this case, you have to start a digital journey. And for that, what’s going to be important is how do you learn and learn fast, rather than how would you continue to build on the same existing capability you had in the past? The realization that to compete … in this digital world, what would be necessary was to learn about it, create an agile structure and a flexible mindset, rather building on the past.

This is critical. If they were just thinking about building on the previous capabilities that they had, just manufacturing mechanical watches, they would never be able to do this. So it really requires a complete change of mindset. And a lot of it really depends on the mindset of the leader.

“It really requires a complete change of mindset. And a lot of it really depends on the mindset of the leader.”

Knowledge@Wharton: I was just going to ask you what you thought about the leadership style of Jean-Claude Biver, because it was really his decision to pivot the company so drastically from mechanical and quartz watches to digital.

Monteiro: As I was saying before, Jean-Claude Biver is really a legend in this industry. And if you Google his name, you’ll see what he has done. There are books written about him. There are two things that got my attention in terms of his leadership style. The first one is, you get the impression — not only when you see him publicly but in private conversations and talking to his team — he is very authentic.

Whatever he is saying is the way he thinks. He is completely passionate about this industry. He says that he wakes up very early in the day and he works non-stop. This is his passion. He’s not doing this to provide results for shareholders only. This is what he really loves. After talking to his team, talking to the people in the organization, I think this authentic passion for whatever he is doing is critical.

The second thing that caught my attention is to see how much you can reinvent yourself as a leader, too, and how you build on the past and build on your experience, but at the same time be ready to learn new things, change and adapt. He has been very good at doing this. He says that part of it is because he has a young son. So, he is kind of connected to the youth, and to this new generation, at home.

But also I think it is in the company, right? If the leader changes the culture and brings in this agile startup mentality, this entrepreneur mentality, it has an impact. There are some very important lessons that we can take from this. The first one is the importance of being open and having a flexible mindset. [Even though TAG Heuer came from a history of success, Biver] and his team, they were open enough and humble enough to say, “I can see a new technology coming. I see we have been very successful in the past, but we really need to partner now, and we need to look in other parts of the world for people who can work with us on something we don’t know.”

This openness, this humility, this flexible mindset is very important. One of the traps that very good companies fall into is the competence trap. You are so competent in doing something that with time you just become better and better at doing that same thing. You are not open to change, you don’t even realize that change is coming.

As a company, TAG Heuer embraced this idea that they will not be subject to this trap of just being competent with the capabilities of the past. They’re going to learn and adopt this entrepreneurial, agile culture and processes and structure. And I think they were quite successful at doing this.

Knowledge@Wharton: So how do you see other luxury brands tackling wearables?

Monteiro: This is probably a billion-dollar question. With all of the innovations — the Internet of Things and all of the changes we’re going to have on wearables — the big question is whether this is going to be a market for the electronic consumer goods companies, the Apples and Samsungs of this world. To what extent will luxury brands [adapt?] Are you are going to have connected bags? Louis Vuitton connected bags?

“Do I believe that Silicon Valley companies and digital companies have something to learn from the luxury world? Yes, definitely.”

Now you have Montblanc coming up with their connected watch, and Louis Vuitton also with a connected watch. It is opening the door for what I see as a very fruitful partnership between the luxury world and the technology world. Because I think in that world, in that partnership, in that dialogue, on that bridge, I think both parties have a lot to learn.

It’s clear that when we think about technology, when we think about digital technology, about platforms and operating systems and apps, most of the action happens in Silicon Valley. When we look Google, Facebook and Intel and all of the companies that are in the Valley, the novelty and the innovation is coming from there. I’m convinced that the luxury companies have a lot to learn from what is happening in Silicon Valley.

On the other hand, do I believe that Silicon Valley companies and digital companies have something to learn from the luxury world? Yes, definitely. Because companies like TAG Heuer and Louis Vuitton and many others, over the decades, they really understood consumer behavior very well. They know how to create this emotional connection with consumers — how status, scarcity and the luxurious experience matter to the point that people will pay thousands and thousands of dollars for a watch.

They pay all of this money not just to get a device that tells you what time it is, but something else. This something else is something I believe the digital companies still have to learn. Maybe TAG Heuer launching this connected watch and partnering with Google and Intel is just the first one that we’re going to see of potentially very fruitful partnerships between these two very impressive clusters: the luxury watchmaking cluster in traditional Europe and Switzerland, and the other cluster of digital technologies, platforms and apps in Silicon Valley.

This post also appears on the K@W website.

Read more about the TAG Heuer case here, and download the case studies here.