What Rolex Teaches Us About Disruption

The common narrative around innovative disruption delivers a harsh verdict regarding companies that do not adapt to the new tech-enabled business models used by upstart competition. And in most cases that is correct. Walmart is finally following Amazon’s footsteps, to good effect. Disney and other media companies are swimming in Netflix’s wake now as well. Meanwhile Barnes & Noble is a $5 stock and the last Blockbuster stores (in Alaska, of all places) just closed their doors this summer.

For proof that there is actually another way, however, just look at the wrists of many finance professionals or high-level corporate managers. Chances are good (and excellent in NYC, I find) that you will see a mechanical watch. If disruption really were a one-way street, they simply wouldn’t be there. To understand why, a short history lesson…

Mechanical watches were, until the 1970s, the most common way to tell time portably anywhere in the world. They had disrupted the pocket watch during World War I, when men finally saw the merit of keeping your hands free and stopped thinking of wristwatches as ladies’ accessories. The Swiss watch industry took the global lead here, but America, Great Britain and other western countries all had vibrant centers of watch production as well.

Then, in the 1970s, quartz watches became affordable and reliable enough to compete with mechanical timepieces. And, by any objective measure, their electronic movements were better than a bunch of gears and springs. They never had to be wound. They kept better time. With Asian (primarily Japanese) production bases, they were cheaper. And by the early 1980s, they were destroying the Swiss watch industry. From 1,600 producers in 1970, Switzerland had only 600 watchmakers in 1983.

The remaining Swiss watch companies knew they could not compete on price or “quality” (accuracy), so they changed existential nature of what they were selling. A mechanical watch in polished steel or precious metals (with a sprinkling of diamonds, perhaps) became a portable and visible symbol of wealth and achievement. The marketing became aspirational, highlighting the myriad of famous, successful people who wore these timepieces.

The timing for this shift from utilitarian item to status-signaler was pitch-perfect. The bull market of the 1980s delivered a new base of customers with the money and interest in this “new” product. Gordon Gecko didn’t wear a quartz watch; he rocked a gold Cartier Santos.

This basic recipe continues to work like a charm today. Thanks to rising affluence around the world, companies like Rolex, Patek Philippe and Audemars Piguet are sold out worldwide for many of their most popular models. Most of those go for $10,000, and often much more. All for watches which are nowhere near as reliable, accurate or robust as a $200 Casio.

Simply put, if innovative disruption were really an un-appealable death sentence to mature industries, mechanical watches wouldn’t exist today, let along thrive. Yes, Swiss watchmakers got lucky in the 1980s by selling status just as consumers wanted and could afford luxury. But they show that strategic shifts are possible, even in the face of tremendous disruption.

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