What do you think of when you think of Swiss Watches?

You probably think of high-end brands, that have been making well-crafted watches for many years. Brands like Rolex, or Patek Philippe, or George Clooney and his Omega:

Or maybe you think of innovations, like the perpetual calendar, or 24 hour timezone watch, or the tourbillon from Breguet:

For centuries, watchmakers in Switzerland made hand-crafted watches. And the competed on craft – inventing things like tourbillons to improve the accuracy of their watches.

Then quartz watches showed up. And for a fraction of the price, suddenly you could get a watch that was 10 times more accurate than the best, most expensive Swiss watch.

That innovation blew the business model of most of the high-end watch firms out of the water. Many of the top brands actually stopped making mechanical watches completely – Hamilton, which had dominated US manufacturing disappeared. So did Baume et Mercier in Switzerland. Rolex and Omega hung on, but they did it by changing their value proposition from “we make the most accurate watches” to “our brand tells people something about you when you wear our watch.”

The Swiss brands that survived continued to innovate, but only at the high end. Until Swatch came along with a business model innovation. Building on the idea that watches had really become fashion accessories, Swatches value proposition was “we sell fashionable watches that are so cheap, you can have a bunch of different ones for every occasion.”

Swatch was quite successful with this new value proposition, and this led a resurgence in the Swiss watch industry. By 1984, employment in the Swiss watch industry had fallen from a peak of around 100,000 people down to about 33,000. In the years since, it has climbed back up to nearly 50,000.

It’s likely that when you think of Swatch, you still think of flashy looking plastic watches like the ones in the picture. But as they’ve become more successful, they’ve led an astonishing concentration in the industry. They bought up many of the brands that had gone out of business, like Hamilton, Longines, Breguet the inventor of the tourbillon and even Omega. And they started manufacturing mechanical movements in bulk, selling them to smaller watchmakers – often very high-end ones.

Swatch now owns several movement manufacturers – ETA, Frederic Piguet, Lemania, and Nouvelle Lemania. Which means that nearly every major watchmaker in the world now uses movements manufactured by a Swatch company. Some exceptions include Rolex, Zenith, Seiko, Lange and, ummmm, not many others.

One consequence of this is that you can buy high-end mechanical watches that cost from $500 to over $10,000 using the movement in the picture, the ETA2824.

So what’s the value proposition for these brands?

That question just became a whole lot more important, because it turns out that Swatch may now need all of their movements for their own brands. There is a fascinating story about this in the NYTimes.

Swatch is being sued for taking advantage of monopoly power. But this is really a story about building suicidal business models. If you’re making a watch that sells for $10,000 why would you try to cut the price of the movement in half by buying it from Swatch? That’s the choice that was made by all of the watchmakers that are now upset about this latest move.

There is enormous risk involved in outsourcing a key part of the value chain – this is one of the things that you must consider when building a business model.

Olivier Müller, an independent watch consultant who also runs Laurent Ferrier, a boutique watch firm, said he expected Swatch’s arguments to prevail.

“This whole battle is the result of people completely underestimating the risk that at some stage Swatch could cut off rivals, which is a legitimate decision to make in a free market,” said Mr. Müller, who was a Swatch executive until 2001.

Swatch, he added, established “a quasi-monopoly not because of any ambition to control the market,” but because “everybody else was perfectly happy to spend everything on marketing rather than building up their own production.”

One company that realised this was a bad choice is Hublot:

Thanks to Swatch, “there is no other industry with such cheap entry costs,” said Jean-Claude Biver, who spent 12 years on Swatch’s executive committee before becoming chairman of Hublot, which is now part of LVMH Moët Hennessy Louis Vuitton, the world’s largest luxury goods company and one of Swatch’s main rivals.

Hublot has been using Swatch components, but since 2007 it has invested 40 million francs to develop its own manufacturing capacity. It is on track to ensure that 75 percent of its revenue will come from watches made entirely in-house within three years, compared with 37 percent now.

The real problem here though is in the value proposition. If you have built a watch brand based on making watches with parts that are identical to those of 90% of your competitors, what sets you apart? What unique value are you delivering to customers?

There may be a bit of schaudenfreude in seeing this happen to big luxury brands. But those two questions are essential for every organisation to answer. If you can’t answer them, your business model is suicidally fatal.

What sets you apart? What unique value are you delivering to customers?