CCMB Strategic

Consulting Agency

Strategic Consulting Analysis of Fossil Inc.











Letter to Fossil Inc.s Management and Board of Directors

CCMB Strategic Consulting Agency is thrilled at the opportunity to analyze Fossil Inc.
and work with the established watch manufacturer and retailer. CCMB is positive it is the right
company for the job. We have experience in the watch industry and know that with our strategic
solutions, we can make Fossil a stronger company. The Consulting Agency would like to extend
its gratitude to Fossil for its choice of the firm. We here at CCMB are excited and thankful to get
the opportunity to work with Fossil. Fossil will not regret its decision to allow CCMB to
recommend strategic actions based on the companys strengths, weaknesses, opportunities and
threats.
CCMBs analysis will contain the following portions: an external analysis of the watch
industry, an internal analysis of Fossil, and recommended actions based on the Companys
position. CCMBs expertise lies in analyzing underling conditions like economic indicators and
existing operations. If CCMBs recommended actions are implemented, Fossil will secure a
competitive advantage relative to its competitors. These actions will also serve to increase the
Companys market share across the globe. Fossil can solidify its position in the watch industry
by following the advice of CCMB Strategic Consulting Agency.







Executive Summary
This report gives an extensive look at the external environment of the watch industry as a
whole. It includes a brief history of the industry, its structure, driving forces and the competitive
forces influencing the industry. We then summarized the opportunities and threats that the
watch industry faces. Following this section, we provide an internal analysis giving a detailed
outline of Fossil Inc. including company history, evaluation of current strategy, valuation of
departmental operations benchmarked to a competing firm, and the strengths and weaknesses
that Fossil faces.
Based on the research conducted from the internal and external analysis, CCMB then
created a comprehensive SWOT matrix with sixteen options that Fossil can utilize to better
perform in the industry. We then selected and expanded thoroughly on two options that we felt
would best fit Fossil in the short-term, as well as two options that would set Fossil up for
sustainable success in the long-term.
The two short-term recommendations are to set aside reserves of cash for the potential
switch from LIFO to FIFO, and to reduce current inventory levels. The two long-term
recommendations are to expand its creative product development department, and to expand into
emerging, profitable Asian markets.
We are confident in our strategic solutions based not off intuition but on extensive
research conducted both inside and outside Fossil Inc. We believe that if these recommendations
are implemented, Fossil will be better positioned in the current market and well prepared for the
future of the industry.



!"#$% '( )'*+%*+,
I. Brief Historical Review of the Watch Industry....................................................................... 1
II. Industry Structure................................................................................................................. 1
A. Define the Industry........................................................................................................... 1
B. Structural Features............................................................................................................ 3
1. Strategic Groups............................................................................................................... 3
2. Product Characteristics..................................................................................................... 3
3. Market Size ...................................................................................................................... 4
4. Market Growth................................................................................................................. 4
5. Number of Companies in the Industry............................................................................. 5
6. Concentration Ratio.......................................................................................................... 5
7. Stage & Life-Cycle........................................................................................................... 5
8. Scope of Competitive Rivalry.......................................................................................... 6
9. Customers......................................................................................................................... 7
10. Degree of Vertical Integration...................................................................................... 9
III. Driving Forces ................................................................................................................... 10
A. Economy......................................................................................................................... 10
1. General Economic Indicators......................................................................................... 10
2. Consumer Economic Indicators ..................................................................................... 13
3. Manufacturing Economic Indicators.............................................................................. 15
B. Demographics................................................................................................................. 19
C. Governmental Regulations............................................................................................. 25
1. Environmental Protection Agency ................................................................................. 25
2. Food and Drug Administration ...................................................................................... 27
3. U.S. Fish and Wildlife Service....................................................................................... 28
4. Internal Revenue Service ............................................................................................... 28
5. Federal Minimum Wage................................................................................................. 29
D. Product Innovations........................................................................................................ 30
E. Process Innovations ........................................................................................................... 31
F. Global Issues...................................................................................................................... 32



G. Social Issues ................................................................................................................... 32
H. Entry and Exit of Firms.................................................................................................. 33
I. Diffusion of Proprietary Knowledge ................................................................................. 35
J. Changes in Who Buys the Product .................................................................................... 35
K. Climatic Issues ............................................................................................................... 36
IV. Competitive Forces ............................................................................................................ 37
A. Potential Threat of Entry................................................................................................ 37
1. Deterrents ....................................................................................................................... 37
2. Barriers........................................................................................................................... 38
B. Potential Threat of Substitutes ....................................................................................... 39
C. Bargaining Power of Buyers .......................................................................................... 39
D. Bargaining Power of Suppliers ...................................................................................... 40
E. Intensity of Rivalry ............................................................................................................ 41
V. Strategic Issues and Problems for the Industry (Opportunities &Threats) ........................ 42
VI. Fossil Inc. - A Brief Historical Review ............................................................................. 45
VII. Evaluation of Current Strategy .......................................................................................... 46
A. Mission........................................................................................................................... 46
B. Vision ............................................................................................................................. 47
C. Performance Indicators .................................................................................................. 48
1. Stock Price...................................................................................................................... 48
2. Market Share .................................................................................................................. 49
3. Sales Growth .................................................................................................................. 50
4. Net Profit Margin ........................................................................................................... 51
5. Return on Assets (ROA)/Return on Equity (ROE) ........................................................ 51
6. Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) ............... 53
VIII. Evaluation of Companys Position Relative to Competitors ......................................... 54
A. Administrative Systems.................................................................................................. 54
1. Human Resources........................................................................................................... 54
2. Culture............................................................................................................................ 56
3. Information systems ....................................................................................................... 56
B. Marketing ....................................................................................................................... 57



1. Market Position (Identification of the companys customers) ....................................... 57
2. Product (Tangible).......................................................................................................... 63
3. Price................................................................................................................................ 68
4. Promotion....................................................................................................................... 70
5. Place ............................................................................................................................... 72
C. Finance ........................................................................................................................... 73
1. Profitability Ratios ......................................................................................................... 74
2. Liquidity Ratios.............................................................................................................. 76
3. Leverage Ratios.............................................................................................................. 78
4. Activity Ratios................................................................................................................ 80
5. Other Ratios.................................................................................................................... 82
D. Research and Development ............................................................................................ 84
E. Production/Operations ....................................................................................................... 85
IX. Strategic Issues and Problems for the Firm (Strengths & Weaknesses)............................ 88
X. Recommendation ............................................................................................................... 92
A. All Options Matrix ......................................................................................................... 92
1. Strength/Opportunity Options:....................................................................................... 92
2. Strength/Threat Options: ................................................................................................ 93
3. Weakness/Opportunity Options: .................................................................................... 94
4. Weakness/Threat Options: ............................................................................................. 95
B. Recommendation: Short and Long-Term Options to Implement................................... 96








1

I. Brief Historical Review of the Watch Industry
Fossil, Incorporated (Company) is primarily a member of the watch industry, as
approximately 70 percent of its sales are generated from watches. The other 30 percent of
Fossils sales arise mainly from sales of fashion accessories; accordingly, this industry
discussion will be weighted towards the watch industry with additional discussion of fashion
accessories. Telling time has been a valuable tool in the history of mankind, and in recent history
watches have become fashionable devices as well as tools.
The first regulated mechanical time device was a clock developed by monks. These
clocks would eventually be downsized enough to become bulky versions of watches. The British
were the first to dominate manufacturing of watches because of railroad precise time demands.
In more modern history, Switzerland has dominated the watch industry in high and medium
value watches. Swiss watches have conquered the industry in recent years due quality, precision,
a centralized location in Europe, and a solid reputation. Wrist watches were not preferred over
pocket watches for men until after WWI, when it became evident that wrist watches were much
more practical. Recent developments in watches include electric watches (battery powered) and
more accurate time telling. The Japanese and Chinese have become market leaders in low to
medium value watches because of their low cost labor and extreme efficiency.
According to census.gov, Jewelry Stores sales (the NAICS Code watches fall under) were
expected to be nearly 30,000 million dollars in 2011 (Industry Statistics Sampler). Sales for
watches have increased recently in part due to a change in fashion: consumers have begun
purchasing multiple watches for different activities and/or outfits. The growing market and sales
numbers have also increased competition. Today the watch industry has a large disparity

2

between prices for high end and low end watches. This results in more intense competition
between companies with similar price, quality, and target markets.





















1

II. Industry Structure
The following section will attempt to define the watch industry using NAICS and SIC codes
as well as other distinguishing features. The industrys structure will be described in greater
detail by discussing strategic groups, product characteristics, market size, customers, and more.
A. Define the Industry
Fossil, Incorporated (Ticker: FOSL) sells its products in two main NAICS codes: 448310
and 448150, Jewelry and Clothing Accessories, respectively. The corresponding SIC codes for
the Company are 7631 and 5699. In the past three fiscal years, sales from watches have
accounted for approximately 74.9%, 71.8% and 69.9% (Fossil 10k, Page: 10). Sales from
fashion accessories for the same three years have accounted for approximately 22.9%, 26.0%
and 27.4% (Fossil 10k, Page: 13). These two segments account for around 98% of FOSLs
annual sales in recent history. The Company sells watches to many different target markets while
attempting to avoid cannibalization of their own sales.
FOSL believes that the current watch market can be divided into four segments. These
segments are found in Table 1 on the following page.





2


As evidenced by the preceding chart, Fossil has attempted to diversify its sales across the
watch markets customers. Fossil produces inexpensive watches for Target while simultaneously
selling some watches for thousands of dollars through its Burberry and Michele brands. The
Company sells watches across the world, with a large market presence in North America,
Europe, and online.
Fossil also sells fashion accessories such as leather goods, handbags, belts, gloves, hats,
and socks. The Company competes in [m]oderately priced fashion accessories [that] are
typically marketed in department stores (Fossil 10k, Page: 9). The Companys main
competitors in fashion accessories include Coach, Guess?, Nine West, and Kenneth Cole. The
industry competes on price, quality, and brand name. Fossil is exposed to stronger competition in
the fashion accessories industry because of established brand name domination of the market.
Watch Industry Segments
Segment: Fine Watches
Premium
Watches
Fashion
Watches Digital/Analog Watches
Price: $4,000 - $20,000 $495 - $5,000 $60 - $795 $7 - $60
Burberry Burberry Fossil Private for Wal-Mart
Fossil brands: Michele
Emporio
Armani Skagen Private for Target
Michele Relic
Skagen
Zodiac
Competing Rolex Gucci Anne Klein II Armitron
brands: Piaget Movado Guess? Casio
Omega Seiko Kenneth Cole Timex
Cartier Tissot Swatch

3

There is a high amount of brand loyalty in fashion accessories, which the Company has
attempted to utilize in order to increase sales of all products.

B. Structural Features
1. Strategic Groups


2. Product Characteristics
Fossil offers a wide number of branded watches under their proprietary brands and
license agreements with some of the most prestigious brands in the world. Fossil designs,
markets, and manufactures private labels for certain retailers and owned brand watches. They
perform production, design functions and management of those functions if outsourced. The
Dealers Mass Merchandisers Private Label
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Strategic Groups
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4

private label watches allow Fossil to take advantage of economies of scale by reducing costs and
increasing their relationship with manufacturers.
3. Market Size
Market size can be difficult to determine with a globalized economy where the retail
industry is expanding to new markets that have not been exploited before. Companies in the
industry actively trade worldwide in an attempt to access all potential markets. For example,
American spending accounts for nearly 25% of the overall market (reportlinker.com).
The retail industry is a major portion of GDP and is a leading economic indicator of the
overall health of the economy. The global clothing and accessories market reached $1.2 trillion
worldwide in 2012 (reportliner.com).

4. Market Growth
In the last year the clothing and accessories market grew 3.5%, and the market overall
percentage is anticipated to grow for the next four years. Economists anticipate consumer
spending to increase into the future which would effectively grow the market. The current
market growth rate is indicative of the mature market of the retail industry (reportlinker.com).





5

5. Number of Companies in the Industry
Rolex, Gucci, Anne Klein II, Piaget, Movado, Guess?, Omega, Sieko, Kenneth Cole,
Cartier, Tissot, Swatch, Amitron, Swiss Army, Amitron, Casio, and Timex. These are just some
of the numerous amounts of companies that compose the industry of watch manufacturers.

6. Concentration Ratio
Fossils NAICS code includes a large number of jewelry stores that would alter a
concentration ratio based on watch competition. Fossils competition also includes private
companies that do not release financial data to the public. Therefore, it is impossible to
determine an accurate concentration ratio. It is, however, safe to assume that no company holds
over 10% of the total watch market since there are countless watch brands.

7. Stage & Life-Cycle
The industry is in a mature age of its life cycle. Clocks have been around for a long time,
dating back to when the British would give them to the Chinese as gifts for trading products such
as porcelain. They have come a long way since then, as we began placing them in a pocket and
around the wrist.
The watch grew itself into a large industry that has spawned many companies to compete
for different parts of the market. This growth stage of the industry created intense competition
among firms, with brands coming into the market and others being cannibalized.
After years of growth, the industry has now reached its maturity stage. The watch
industry still fulfills the needs of consumers, generating copious amounts of revenue each year.

6

Many of the companies in this field have secured economies-of-scale, satisfying consumers in
their respective segments.
The watch industry is a fad that has an ever-expanding bell curve, but has yet to enter a
declining stage of its life. It will continue to thrive as long as consumers are able and interested
in the product. We predict it will stay in the period of maturity for a foreseeable amount of time
into the future.

8. Scope of Competitive Rivalry
Fossils scope of competitive rivalry is international. The company is currently present in
fourteen countries across the globe. Its international markets are broken down into four
categories: Americas, Europe, Africa, and Asia Pacific. Americas include the countries of The
United States, Canada, and Mexico. Europe represents the largest international market, with a
presence in Austria, France, Germany, Italy, The United Kingdom, and The Netherlands.
Africas market is limited to South Africa. Finally, Asia Pacific is represented by Australia,
China, Japan, and Korea.






7

Countries by International Market with Fossil Presence
Americas Europe Africa Asia Pacific
Countries
United States
Canada
Mexico
Austria
France
Germany
Italy
United
Kingdom
Netherlands
South Africa Australia
China
Japan
Korea

The company has three reporting segments based on geography. North American
Wholesale represents the largest geographically based segment, with 37.9% of sales. Next is
European Wholesale with 24.4% of sales. Finally, Asia Pacific Wholesale represents the
smallest geographically based segment with 12.7% of sales. These wholesale sales add up to
75% of sales. The remaining 25% of sales is trough ale directly to the customer.

9. Customers
Watches are considered luxury goods, meaning that they are not essential to own for
consumers. Watches on todays market go beyond just telling time, consumers purchase watches
for a large variety of purposes.
Europe has the largest customer base for watches. Consumer confidence has been high in
the past couple of years since the economic downturn in 2009. In 2009 this downturn caused

8

consumers to forego the purchase of new watches. The watch industry suffered most in the
mature markets of Europe and the United States, but since then consumer confidence has
increased and watch sales are beginning to recover. Although Europe has proven to have the
largest customer base, Asian markets have seen the highest growth in people purchasing
watches. It is projected that the market will have the fastest growth of 3.6% through 2017
(prwe.com).
Large retailers buy watches directly from companies to sell in their stores; these retailers
include companies such as Macys, Younkers, Lord and Taylors. These retailers provide a major
outlet for the distribution of products. They are the main channel between the watch producers
and the final consumer (Fossil 10k, pg. 24).
There is a watch market for nearly every person. The watch industry encompasses
virtually all market segments including children, young adults, men, and women. Niche markets
exist within the larger segments. Many firms in the industry will target individual market
segments such as Nike producing watches designed to fit the needs of runners (nike.com).
One of the main reasons why people buy watches is for accessory purposes.
Watchmakers creatively design their products to appeal to people who wish to wear them as an
accessory to match their clothing. Designers focus on fashion trends that are popular, and they
craft their watches to meet consumer demand. This market is anticipated to grow as fast as 3.6%.
Fashion trends drive the watchmaking industry, and having an attractive watch design is highly
sought after (prweb.com).
As mentioned above, some watches are designed to help athletes in their training.
Watches can be used to measure heart rates, track GPS for runners, and even measure calories

9

burned. Runners and other athletes purchase these specialized watches to track their progress and
performance in a workout.
Hikers can also purchase watches with features that help when scaling mountains.
Watches that are specifically designed for hikers include compasses, barometers, altimeters, and
thermometers (hikingwatches.net). These features integrated into the watch face allow hikers to
reduce the amount of gear required on trips.
Waterproofing and water resistant technology has allowed watches utilized by the scuba
diving industry. Divers can monitor their dive times while keeping track of the amount of air left
in their tanks. Watches remain water resistant depending on the quality of the watch. The finer
quality watches remain water resistant up to 300 meters (diversdirect.com).

10. Degree of Vertical Integration
Watch companies today use forward vertical integration to control their operational
chain. Companies also use forward vertical integration in their internal operation. This
integration assists in minimizing costs associated with filling the roles outside of the firm. The
production of watches is also utilizing forward vertical integration. In 2012, over 61% of non-
Swiss made watch production was assembled in majority-held and fully held factories (Fossil
10k, Page: 18). This helped to increase the speed of assembly, communication, quality, and save
financial resources.



10

III. Driving Forces
This section will describe the driving forces behind the watch industry that Fossil Inc.
operates within. Driving forces are those conditions that have a large effect on industry success,
neutrality, or failure. Some of the driving forces that will be covered include the economy,
demographics, government regulations, innovations, global issues, climatic issues and more.

A. Economy
The overall direction of the economy will be analyzed in the following discussion of
economic indicators. General, consumer, and producer trends will be analyzed from the
standpoint of the overall economy in order to determine its performance in the future.

1. General Economic Indicators
a. Gross Domestic Product (GDP) and Interest Rates
The overall economy will be a major driving factor for Fossils sales. Fossil currently has
sales in emerging and developing markets, but eventually these markets will mature and likely
grow in line with the overall economy. Since 1990, U.S. GDP has averaged a real growth of 2.6
percent per year. The chart on the following page shows the real growth rate for U.S. GDP since
1990:

11


As can be seen from the chart above, it is unrealistic to assume Fossil can achieve sales
growth of over 3 4% for the long term. Recently, interest rates on U.S. Treasuries have been
artificially decreased by Federal Reserve spending. As a result the current 10 year U.S. Treasury
rate is 1.85% (4/3/2013); this is well below its long-term and more realistic average of 4 5%.
Although this artificially low rate is meant to encourage borrowing (and in turn buying), it has
had little to no effect in increasing economic growth thus far.

b. Housing Starts and Unemployment
U.S. economy housing starts for February were up 0.77% from January and up 27.72%
from a year ago (US Housing Starts). These starts indicate a recovering economy from the 2008
crash. The U.S. unemployment rate was 7.7% percent for February 2013, down almost two and a
half percent from the spike in 2009. This more recent signal in employment and housing indicate
that consumers may have more disposable income in the future.
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1990 1993 2000 2003 2010 2013
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12

c. Trade Balance and Currency Exchange Rates
The United States trade deficit has decreased slightly since the 2008 recession. It has
improved nearly $20 billion reaching close to a deficit of $40 billion in 2013, signaling a
rebound of U.S. manufacturing exports that may lead to increased disposable income in the
United States. Recent currency exchange rates have revealed that the market has little confidence
in the European economy and its recovery. However, currency exchange rates in Asia and South
America have been more encouraging.

d. Leading Economic Indicator (LEI) and Wage Rates
The index of U.S. leading indicators rose more than forecast in February, indicating the
worlds largest economy is strengthening. (Chandra) These indicators and a survey of
economists indicated an increase of 0.4 percent for the economy. Some of the leading economic
indicators that contributed to this increase in projections were declining jobless claims, increased
hiring, rising stock prices, and more building permits. The United States is climbing steadily out
of its long recession, which may be a sign for the global economys steady recovery. Recently in
the United States, there has been a push for increased minimum wage rates. Currently the federal
minimum wage in the United States is $7.25 per hour. However, there has been discussion in the
government for a potential increase to $9 - $10 per hour. Although higher wage rates increase
labor expenses for corporations, they are often associated with increases in worker morale and
productivity. An increase in minimum wage could signal increased consumer spending, and in
turn higher economic growth. Although these developments are significant, minimum wage
when adjusted for inflation is lower today than it was in 1968.

13

The real value of the minimum wage from 1968-2012 can be seen in the chart below
(Rebuilding an Economy):


2. Consumer Economic Indicators
a. Consumer Price Index and Retail Sales
Over the past twelve months the Consumer Price Index (CPI) has increased 2.0 percent
for all items. This increase was largely driven by medical care, gasoline and other fuel prices
over the past year. The increase in the CPI indicates that there may be lower consumer spending
if prices continue to rise at relatively high rates. However, if it is only one year with a 2 percent
increase consumers are likely to continue their normal purchasing routines. The Consumer
Sentiment Index has also showed negative signs recently. From March to April of 2013, the

14

index fell 5.1 percent. In the prior two months the index had risen 9.9 percent. Volatility in the
index indicates that consumers are still not confident in the global economy. Total United States
retail and food service sales were up 4.5 percent from a year ago. This large increase in retail
sales also hints at an economic recovery.

b. Personal Income, Disposable Income, and Consumer Debt
Personal income increased 1.1 percent in February 2013 compared to a decrease of 3.7
percent in January 2013. Disposable income also increased 1.1 percent in February 2013
compared to a large decrease of 4.0 percent in January 2013. Without a steady trend in these
levels of income, it is difficult to determine increases in spending, retail, and GDP. Until the
fourth quarter of 2012, household debt levels in the United States had been falling. During the
fourth quarter, debt levels increased slightly. Consumers have been holding large amounts of
debt since the 2008 crash, and these debt levels can be expected to decline as the economy
recovers.
Overall the economy can be expected to grow between 2-5 percent in the next few years
and 2-4 percent in perpetuity. The range in the near future is higher due to recent economic
indications that the economy is recovering from the recession. These indicators include housing
starts, stock prices, unemployment, and wage rates. These estimations may be high if consumers
continue to show decreased confidence, high debt levels, and low levels of personal income.



15

3. Manufacturing Economic Indicators
a. Producer Price Index
According to the Bureau of Labor Statistics, the producer price index measures the
percentage change in prices that domestic producers receive for goods and services. The prices
included in the producer price index are from the first commercial transaction. The producer
price index measures the increase or decrease in prices of purchasing of materials used in
production (bls.gov). The producer price index is very volatile month to month. Overall the
producer price index has shown growth over the past decade. Currently the producer price index
is low compared to the previous years, and should grow to a more comparable number to
previous years.








16

b. Purchasing Managers Index
The purchasing manager index is a measure of economic health based on five indicators:
new orders, inventory levels, production, supplier deliveries and the employment environment.
Growth in the purchasing managers index indicates growth in the manufacturing sector of the
economy. After a decline in 2012, the purchasing managers index has slowly been increasing
from June 2012 to March 2013 (bls.gov). The purchasing managers index has shown a cyclical
pattern in the past, therefore potential declines may be in the future. In particular, the seasonality
fluctuations of the retail industry could cause lower production levels in the upcoming months.

c. Commodity Price Index
Production of watches is directly affected by the future price of commodities. The prices
of base metals can affect profit margins by increasing product costs in the watch segment of the
company. Since this segment of the business records the largest sales it is important to pay close
attention to the commodity price index.

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
2013 53.1 54.2
2012 53.7 51.9 53.3 54.1 52.5 50.2 50.5 50.7 51.6 51.7 49.9 50.2
2011 59.2 59.6 59.3 59.4 53.5 55.8 52.3 53.2 53.2 51.5 52.3 52.9
2010 56.6 55.7 59.3 58.9 57.8 56.1 56.4 57.8 56.5 57.3 58.2 57.3

17


Along with base metals, the livestock portion of commodity price index is very important
in relation to product costs. Many companies that sell watches also retail products including
wallets and handbags. Many watch straps are produced with leather from cattle. The commodity
price index has seen a relatively stable increase over the past seven months, and will continue to
see a stable increase that will affect the cost associated in producing watches and other products
(indexmundi.com).

d. Productivity
Productivity is a major contributor to the growth of the economy, and is measured by the
number of outputs per input units. Increases in productivity can be attributed to the industrys
investment in capital, improvement in processes, technological advancements, and even an
increase in laborer education.

18

The labor productivity index, output per hour, has been volatile over the past four years.
Fluctuations have occurred in the past four years, and there has not been two consecutive years
of growth from 2008 to 2011 (bls.gov). Since the economy is improving slightly overall,
companies may find themselves in better positions to make investments to improve productivity.
Based on these assertions, labor productivity index will increase slightly in 2013.


e. Inventories

Inventories carried by the retail industry are at its highest point since 2000
(econmagic.com). The anticipation of future sales is high as the retail industry is optimistic about

19

future periods. This is very important looking forward into the future because there is
opportunity to capitalize on projected future demand. The figure above shows a promising
outlook in the increase in demand in consumer goods. The exhibit above is seasonally adjusted to
show the true amount of inventory carried by companies throughout the year. The retail industry
is highly dependent on the increase in sales over the holiday season. High inventory levels can
have negative consequences such as having too much cash tied up in inventories and the risk of
inventory becoming outdated. Inventories will fluctuate with seasonality, but the high levels of
inventories will drop as the spring season product line is sold.

B. Demographics

Fall 2011 Product: Apparel/Accessories
Watches - Brands
Any watch Bought/last 12 months
Adults


Index
Total 100
Men 89
Women 110
Educ: Graduated college plus 121
Educ: Attended college 99
Educ: Graduated high school 88

20

Educ: Did not graduate HS 76
Educ: Post graduate 119
Educ: No college 85
Age: 18-24 90
Age: 25-34 100
Age: 35-44 87
Age: 45-54 103
Age: 55-64 120
Age: 65+ 99
Adults 18-34 96
Adults 18-49 95
Adults 25-54 97
Men 18-34 89
Men 18-49 87
Men 25-54 88
Women 18-34 103
Women 18-49 103
Women 25-54 106
Occupation: Professional and Related Occupations 123
Occupation: Management, Business and
Financial Operations 112
Occupation: Sales and Office Occupations 104
Occupation: Natural Resources, Construction and
Maintenance Occupations 83
Occupation: Other employed 107
HHI: 150,000+ 126
HHI: $75,000-$149,999 114

21

HHI: $60,000-$74,999 95
HHI: $50,000-$59,999 116
HHI: $40,000-$49,999 102
HHI: $30,000-$39,999 93
HHI: $20,000-$29,999 71
HHI: <$20,000 72
Census Region: North East 98
Census Region: South 113
Census Region: Midwest 99
Census Region: West 81
MediaMarkets: Top 5 96
MediaMarkets: Next 5 112
County Size: A 99
County Size: B 109
County Size: C 98
County Size: D 84
Marital Status: Never Married 97
Marital Status: Now Married 104
Marital Status: Engaged 84
Marital Status: Widowed*/Divorced*/Separated (legally)* 94
Child Age: <12 months 59
Child age: 12-23 months 84
Child age: <2 years 71
Child age: <6 Years 82
Child age: 2 - 5 Years 85
Child age: 6 - 11 Years 96
Child age: 12 - 17 Years 99

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Years At Present Address: <1 year 96
Years At Present Address: 1-4 Years 94
Years At Present Address: 5+ Years 104
Home: Owned 105
Home Value: $500,000+ Dollars 105
Home Value $200,000-$499,999 104
Value of Owned Home: $100,000-$199,999 106
Value of Owned Home: $50,000-$99,999 109
Value of Owned Home: <$50,000 98
Race: White 100
Race: Black/African American 106
Race: American Indian or Alaska Native * 108
Race: Asian 114
Race: Other 90
Race: White only 100
Race: Black/African American only 106
Race: Other Race/Multiple Classifications 96
Spanish spoken in home (most often or other) 88
Quintile Magazines I (Heavy) 116
Quintile Magazines II 101
Quintile Magazines III 99
Quintile Magazines IV 94
Quintile Magazines V (Light) 91
Quintile Newspaper I (Heavy) 113
Quintile Newspaper II 106
Quintile Newspaper III 95
Quintile Newspaper IV 93

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Quintile Newspaper V (Light) 93
Quintile Radio I (Heavy) 99
Quintile Radio II 107
Quintile Radio III 103
Quintile Radio IV 98
Quintile Radio V (Light) 93
Quintile TV (total) I (Heavy) 98
Quintile TV (total) II 106
Quintile TV (total) III 101
Quintile TV (total) IV 102
Quintile TV (total) V (Light) 93
Quintile Internet I (Heavy) 102
Quintile Internet II 116
Quintile Internet III 99
Quintile Internet IV 93
Quintile Internet V (Light) 91
Quintile Outdoor I (Heavy) 119
Quintile Outdoor II 100
Quintile Outdoor III 107
Quintile Outdoor IV 94
Quintile Outdoor V (Light) 79
Quintile TV (Prime time) I (Heavy) 110
Quintile TV (Prime time) II 95
Quintile TV (Prime time) III 99
Quintile TV (Prime time) IV 108
Quintile TV (Prime time) V (Light) 89
Tercile TV (Day time) I (Heavy) 93

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Based off of information taken from MRI+, we have created a demographic map of target
consumers in the industry and what they are like. The sections that are highlighted are of
importance due to their relatively large index number. This index number means that they are
more likely to consume the product or media in the category. With this information, we can
begin to build a target market for the industry and see who purchases products from the industry.
This information is from 2011 and takes into account adults who have bought any brand of watch
within the last 12 months.
Our ideal consumer is a female, age 45-64 with a college education or more. Her
occupation is in a professional field, or a field that is in some sort way connected to
business/management/operations. She is making $150,000+ per year and typically resides in the
South.
Using a quintile analysis we can see that she is largely affected by outdoor advertising,
with an index of 119 for heavy usage and an index of 79 for light usage. This means that she
does not not respond to this advertising. Another area is Prime-time television. This
information can be extremely useful to us in the future, as we will build our budget around which
media to purchase and develop.


Tercile TV (Day time) II 102
Tercile TV (Day time) III (Light) 101

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C. Governmental Regulations
Many products in the retail industry are produced overseas and then imported into other
countries for resale to the final consumer. Multinational corporations face many legal issues
including labor, advertising, consumer protection, real estate, product safety, e-commerce,
promotions, intellectual property, tax, import and export, anti-corruption, foreign exchange
controls and cash repatriation, data privacy, anti-competition, environmental, and health and
safety issues (Fossil 10k, pg. 32). All of these issues should be closely monitored. Understanding
and complying with all of the regulations is very costly to corporations and can be very difficult
because of the variation from jurisdiction to jurisdiction. Foreign regulation poses a major risk in
the current market. In general, foreign legislation can negatively affect product sales and supply
chain management.

1. Environmental Protection Agency
The Environmental Protection Agency has many regulatory obligations to reduce the
environmental impact of the retail industrys operations in the United States. These regulatory
obligations must be followed by Fossil to avoid sanctions from the EPA. The regulatory
obligations are categorized into sections including new buildings and infrastructure, facilities
management, transportation logistics and supply chain, merchandising: products and packaging,
and customer programs and services (epa.gov).
The new buildings and infrastructures section lists in detail, specific compliance sections.
The EPA provides resources for proper asbestos removal from current structures. When
constructing and demolishing infrastructure, proper precautions need to be taken when disposing
of calk containing polychlorinated biphenyl. Storm water or the disposal of water waste needs to

26

be researched on a case by case basis based on what state the construction is occurring. It is
necessary to review all EPA documents regarding infrastructure and new building to insure the
safety of employees on the work sites. Improper disposal of hazardous waste could bear
additional expenses for companies in the retail sector.
The facilities management section has instituted changes that will be put in to place this
year. New boiler compliance rules changes have been put into place as of February 1, 2013. The
new regulations required to submit a notification that the facilities boilers are in compliance with
the changes to the Clean Air Act. There should be no material effect in this change. It is
estimated that 99% of current boilers meet the revised sanctions (epa.gov).
Lighting recycling is a necessary compliance regulation by the EPA, and can be easily
implemented by facilities using the EPAs ten step process:
Step 1: Assess Your Facility
Step 2: Become Knowledgeable About State and Federal Requirements for Managing
Fluorescent Lamps
Step 3: Select a Recycler
Step 4: Establish a Process for Managing Used Fluorescent Lamps
Step 5: Safely Handle and Store Used Fluorescent Lamps
Step 6: Properly Manage Broken Lamps
Step 7: Procedures for Getting Lamps to the Recycler
Step 8: Educate Employees
Step 9: Record and Track Data
Step 10: Include Recycling Costs in Your Annual Budget

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As you can see in the title of step ten, additional costs are going to be incurred by the safe
disposal of lighting materials. The purpose of the recycling program is to cut down on cost.
Supply chain and transportation logistics is a vital sector and is closely monitored by the
EPA because of the drastic impact that transportation has on the environment. The EPA regulates
the disposal of waste, gasoline dispensing, and fuel pump labeling. Disposal regulations could
have an effect on costs of transportation of freight which is an estimate made by the EPA to be
20 percent of all energy consumed by the transportation sector.
The EPA is highly focused on sustainability resources in the merchandising: products and
packaging section of the industry. There are far less compliance regulations placed on consumer
goods with the exception of chemical based products such as fuels, insect repellants, ozone
depleting products, and lithium batteries. There are no compliance regulations that directly affect
Fossil, Inc.
Customer programs and services compliance resources cover automotive service &
repair, food service, healthcare service, home renovations, in-store take back programs
(recycling services for fluorescent bulbs, batteries, electronic waste, refrigerators), photo
development, refrigerant reclamation and recovery, food waste management tools & resources.
The customer programs and services compliance resources do not have an immediate effect on
Fossil, Inc.

2. Food and Drug Administration
The retail industry is subject to regulations from the U.S. Food and Drug Administration.
Product information is required to be submitted to the FDA before importation of the product.

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All imports are subject to inspection by the Bureau of Customs and Border Protection (Fossil
10K pg. 35). There have been no updates to the importing process since the 2000s. There should
be no major changes for upcoming years.

3. U.S. Fish and Wildlife Service
Certain watch straps and watch dials are subject to regulation by the U.S. Fish and
Wildlife Service. The U.S. Fish and Wildlife Service monitor the illegal trade of animals across
United States borders. The illegal trade of animals has steadily increased from 1975 to 2000
(fws.gov). There will be more regulations passed in the future to prevent the illegal sale of
animals. This could lead to companies in the industry having to release more information about
their suppliers.

4. Internal Revenue Service
In the near future the United States Generally Accepted Accounting Principles is merging
standards with International Financial Reporting Standards. IFRS does not allow for inventory to
be accounted for using LIFO. Using LIFO saves companies hundreds of millions of dollars in
income taxes (Bloom 2009). LIFO allows companies to record higher costs of goods sold
resulting in lower net income and a lower income tax liability. When GAAP converges with
IFRS, LIFO will not be allowed creating millions of dollars in tax liabilities (Bloom 2009). The
IRS may collect the prior years back taxes over a five year period. It may be difficult for
corporations to fulfill their tax obligations.

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The switch from LIFO to FIFO or weighted average inventory systems will have a
significant impact on corporations. The merger of GAAP and IFRS has been delayed several
times, and it is unknown when the transition will occur (Bloom 2009). It is anticipated to be
within the next five years, but there have been many delays and disagreements on several
accounting issues.



5. Federal Minimum Wage



The current administration is pursuing an increase in the federal minimum wage. As of
now, the current minimum wage is $7.25 while the new proposed wage is $9.00 (Lowry 2013).
Nearly 15 million workers would receive the pay increase. President Obama would like to see
the changes happen by 2015. The minimum wage increase would drastically increase labor costs

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throughout the retail industry. The increased costs could result in lower profit margins (Lowry
2013).
The minimum wage increase may have some positive effects. Worker productivity and
lower turnover rates may occur as a result. With more cash on hand consumers may spend more
money on retail goods.


D. Product Innovations
According to Oliver Chen, analyst at Citigroup Inc., The global watch industry will
generate more than sixty billion dollars of sales in the year 2013. (Bloomberg) With a market
full of rapid technological developments, the watch industry is being forced to stay on top of
current trends. While calculator watches may have been hip in the seventies and eighties,
advancement of mobile technology has opened up a whole new market for watches. The current
trend is a smart watch which serves as a mini-computer for the wrist. Though several failed
attempts in the early 2000s, several companies today are working hard to develop their own
versions of the smart watch. Apple is working to develop the iWatch, a watch which is rumored
to feature several of Apples signature features such as the beloved Siri. Google and Motorola,
two of Apples largest competitors, are also working hard to develop their own smart watch
(Android and Me).
In todays market, people want products that are tailored to their tastes. Another
innovation in the watch market is the creation of tailor-made watches, watches which are built by
the consumer to fit their wants and needs. Several companies have started to offer these services.
The American Watch Company is one of these companies. With this company, you can pick

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your watch face, select the band you want, and even put a picture of your children or loved one
right on the face, or even the dials. This example fits right into the concept of having it your
way.

E. Process Innovations
Historically, when someone wanted to buy a watch, they had to go watch shopping at a
watch store. However, with the rise of ecommerce and Internet sales, watch companies can
eliminate having to leave your home to buy a watch. To make the deal better, you can even
customize your watch right from the companys website. This elimination of stores and sales
force is helping to save the customer money, and allow for faster inventory turnover by the
watch companies. It is a win-win for all parties involved.
While many companies are cutting out the middle man, some companies are keeping
their stores present, but adding services offered. Dakota Watch Company, which started
operations in 1945 under the name of Coopers Fixery, offers a number of services such as watch
repair, band replacement, battery replacement, and can even ensure the future health of your
watch (Locations & Service). These services are helping companies like Dakota survive the
move to ecommerce by offering services you cannot receive from the comfort of your own
home.





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F. Global Issues
Obtaining the raw materials to produce the products in the industry is influenced now more
than ever caused by globalization. Many of the firms rely on supplies that come from around the
world, and protecting these supply chains can be at risk if countries are not in sync. The majority
of the materials used in watch components are acquired from foreign countries such as China,
India, Italy, Japan, South Korea, Switzerland, and Thailand.
Another global issue is political unrest between countries. Issues arising in any of the
aforementioned countries could disrupt the manufacturing process for firms, leading to a rise in
costs and a decline in overall profits for the industry.
Regulations differ from country to country posing potential threats, as well as opportunities.
Foreign laws may not protect intellectual property which can be a headache for firms that wish
not to disclose how they produce their watches. Labor costs can be significantly reduced,
leading to higher profits for the industry as a whole.
When dealing with global issues, many consumers have the potential to view the industry
in a negative light for using or exploiting cheap labor laws. This is both a global and a social
issue that can be damaging for the watch industry.

G. Social Issues
A large social issue that the watch industry faces is the use of leather for its watchstraps.
Made from a number of different materials; from exotic animal skin to recycled tires, the
material used for the strap is a pressing social issue. The main issue is when it comes to what
animal the material was taken from. Many organizations speak out heavily against the raising

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and killing of animals for the use of their skins in retail products. This is a problem the industry
faces, and may companies see a fork in the road: use an alternative material or continue to meet
demand.
Another pressing social issue is the industrys energy consumption. Manufacturers burn
large amounts of fossil fuels into the atmosphere, contributing to the growing climate change
issue. Companies need to make a noticeable attempt to curb emissions to adhere to the limit, and
much beyond that limit. Not only will this reflect positively on the industry and all companies
within, but also it will help this planet live a longer and healthier life.

H. Entry and Exit of Firms
As the world becomes more dependent on technology, the current market evolves to meet
the needs of consumers. The current trend in entry into the watch retail industry is technology,
new firms entering the market by producing smart watches. Smart watches will have the
capabilities and features of many smartphones that are currently on the market. Apple, Samsung,
and LG plan on producing smart watches in the next 5 years (Marshall 2013).
Apple Inc. has now begun developing its latest product, the iWatch. Apple is known for
its loyal client base and major product releases. The exact release date of the iWatch has not been
set, but new technology in curved gorilla glass indicates that the release could be relatively soon.
Some sources have indicated that the launch date will be in 2013 (Marshall 2013). Apple will be
a serious competitor in the watch market overall.
LG is also developing its own version of the smart watch. LG is another large firm that
produces smartphones, and has a relatively large market share of the smartphone industry. LG

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should compete more directly with the consumers who plan on purchasing the Apple iWatch
(Marshall 2013).
Samsungs executive VP Lee Young Hee has also confirmed their intentions to enter the
watch market by saying, We've been preparing the watch product for so long. We are preparing
products for the future, and the watch is definitely one of them. Samsung may prove to be
Apples number one competitor in creating the smart watch.
Google has been rumored to be in the process of developing its own version of the smart
watch. There has been no confirmation of these rumors. Google definitely has the capabilities of
producing a successful smart watch, and is a potential competitor (Marshall 2013).
The development of the smart watch may revolutionize watch making and the strategy of
traditional firms into the future. The technological advances may pressure current firms into
developing new products that will rival the smart watches that are under development. It will be
important to track consumer trends into the future to see if there is a switch from the purchasing
of traditional watches to the more technological advanced products.
There have been no major recent exits of firms from the market. There have been
multiple acquisitions of smaller firms by larger firms as of recently. This is common in the
mature market as the large firms increase market position by acquiring well established brands
for attractive prices.




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I. Diffusion of Proprietary Knowledge
Watch industry competitors carry little to no proprietary knowledge. This is due to
competition being based on brand name, style, and design. Another reason is because watch
design and development are relatively standardized. However, some companies do have some
specific operations that are strategic advantages. These operations can include information
systems and distribution systems. There are automated, reliable, and scalable information
systems used to maintain competitive positions. These systems include inventory control,
Enterprise Resource Planning (ERP), and data security technologies. If these information
systems are released to other competitors, strategic advantages in inventory control, data
security, and supplier relationships could be lost.
Some watch competitors use a wide variety of distribution channels. These channels
include internet sales, catalog sales, company-owned stores, and wholesale sales. On top of a
large number of channels, many companies sell watches within wide price ranges like $7 -
$10,000. The combination of channels and products allows companies to reach a wide variety of
consumers across the globe. Competitors with large amounts of liquid resources could mimic
these strategies and reduce other companies market shares. Overall, there should be little
diffusion of proprietary knowledge in the watch industry as there is not a large amount of
differentiation in operations between companies.

J. Changes in Who Buys the Product
Since the watch industry is a mature market, there are no drastic changes in who buys the
product. As stated in the customers section, new features make watches more appealing to new

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niche markets. The biggest changes in who buys the products occur in the Asian markets. As
more countries become industrialized and consumers have more discretionary spending, new
markets will open up. Looking ahead at the future, new markets such as Africa have the potential
for watchmakers to target.

K. Climatic Issues
Severe and unprecedented natural disasters can have a significant effect on the industry.
Things such as hurricanes, tornadoes and earthquakes can altogether halt production and
distribution of products, hindering market growth and dulling the profits that the industry could
potentially generate. On top of this, consumer spending will be at a decline in the affected areas
further damaging profits in the industry.
As we have seen in the recent years, severe drought has become a concern in areas across the
United States and internationally. This lack of water drives the prices of inputs, such as leather,
that are used to make watches. This directly effects the industry, because it will dry up profits by
increasing material costs overall in the industry.








37

IV. Competitive Forces
Competitive forces are the forces that control the intensity, or lack of intensity, of
competition between companies in a specific industry. This section will attempt to analyze five
indicators of the competition in the watch industry as a whole. These indicators include threat of
potential entry of new firms, bargaining power of suppliers, bargaining power of buyers, threat
of substitutes and the overall intensity of rivalry.

A. Potential Threat of Entry
1. Deterrents
Deterrents are factors that would discourage a company from entering an industry.
However, deterrents do not set limits for a company to enter an industry. The watch industry has
significant deterrents that discourage entry of smaller corporations as well as many other larger
corporations. The main deterrent is established brand names. As previously mentioned, Fossil
competes on brand name. It would be extremely difficult for a newcomer to produce a brand
name to rival Fossil, Rolex, Timex, and the other watch competitors. It would also cost the
newcomer a large amount of capital to be spent on marketing. The watch market is relatively
saturated, with numerous amounts of well-established companies. Many consumers are already
loyal to one of the many brands of watches currently produced. The market for watches has
existed for over a hundred years, which has spawned a large amount of potential competitors.
Another deterrent is location, as high quality watches are produced almost exclusively in Europe,
and more specifically in Switzerland.


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2. Barriers
The first barrier to enter the watch industry is the high capital requirements involved with
designing, manufacturing, and selling watches while remaining competitive in the industry. In
addition to the high capital requirements a firm would need to establish and build distribution
lines to move products from manufacturer to customer in a timely manner. It can also be
difficult to get your product into a retail position if there are exclusive agreements with either
distributors or retailers.
Another barrier to entering the industry is the already dominated nature of the market.
The large producers continually grow typically buying out smaller competitors while the small
competitors disappear.
Customer loyalty is another barrier to entry. In general, consumers continue to buy
products that they know are dependable and good quality. Major brands in the watchmaking
industry attract repeat customers regularly.
Product differentiation to fit consumers needs can be difficult when entering into the
watchmaking industry. There are high costs associated with developing products for different
customers. Additional research needs to be done and resources need to be allocated to develop
effective products in a marketplace with many large competitors capable of differentiating
numerous products.
For new firms in the industry, gaining access to distribution channels is perhaps one of
the largest barriers. Many firms are well established and have well established relationships with
their distribution channels. These relationships are an important tool in operating in the current
business market, and can make or break a new company entering the market.


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B. Potential Threat of Substitutes
The largest potential substitute for a watch is a mobile phone. Most of our target market
carries a mobile phone, and a smart one at that. This being the case, all phones come with a
built-in clock that can be switched from analog to digital with a click of a button or the touch of a
finger. Many have features which allow the user to customize the homepage, including the
clock.
This substitute is a threat to the industry because it eliminates the need for a watch as a
device to tell time. People look to their phone display for the time of day as a substitute to their
wristwatch, which drives away revenue from the industry.
Another potential threat is the substitute of smart watches. Google and Apple have
both explored interest into the field, which could be detrimental to sales. Although this may be
viewed in the same industry, it should be looked at as a potential substitute as well because it
will change the face of the watch industry forever.

C. Bargaining Power of Buyers
Price sensitivity is an extremely important factor for bargaining power in this industry. A
lot of companies in the fashion and accessories industry depend on large department stores and
specialty retail stores such as Dillards, Kohls, Nordstrom, and Macys to buy their merchandise
and sell it in their stores. This gives these buyers a tremendous amount of bargaining power. If
any one company charges them too much for their merchandise, or if it is not up to the high
standards of quality that these stores expect from their suppliers, then they will not want to buy

40

from them again. It would be relatively simple, and not very costly for them to switch to another
competitor to buy from who sells the same undifferentiated products that they do.
The stores are not the only ones with bargaining power; the consumers also have a lot of
influence on prices. If the consumers do not like the merchandise that any company is putting
out, or if it is too expensive compared to other brands, they will not buy it. There are many
companies in this industry that have very similar products, so it would not be difficult for
consumers to start buying from another company if they raised their prices or failed to
differentiate their products.

D. Bargaining Power of Suppliers
There are many competitors in the watch production and retailing industry. A few firms
in the industry may use certain materials such as gold and other expensive precious metals.
Certain firms that produce higher end products that include expensive materials could see more
bargaining power from the suppliers.
A large number of firms do not hold long-term contracts with suppliers to increase
flexibility while holding close relationships with the suppliers to reduce costs. Many companies
have several suppliers that they purchase large volumes of products from. Buyers in the industry
hold close relationships to dictate costs. Proprietary knowledge and process innovations are
shared with the suppliers. These close relationships and diffusion of knowledge may be
indicative of high costs of switching suppliers.
Suppliers do not pose a credible threat of forward integration. It is more common for
purchasers to vertically integrate their supply chain to further reduce costs.

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E. Intensity of Rivalry
Companies in the watch industry face certain high exit barriers. First off, watch
companies have highly specialized assets in terms of parts used to create watches. No other
product on the market will use a watch face for its product. Also, a watchband can only serve
the purpose of a watchband. As with any industry, a company can also face emotional barriers.
This is especially true in companies that have a long history. CEOs often will be pressured to
keep a company rolling if it has had an impact on society.
Due to the limitations on innovation in the watch industry, companies have to work
extremely hard to stay on top of technology. For instance, Motorola, Apple, and Google are all
working to develop a smart watch. These companies will be releasing a whole new concept of a
watch, so the one which comes out best will, in essence, be setting the definition of a smart
watch.
The watch industry is full of diverse competitors. Within the watch industry, prices range
so drastically that each price range will face its own competition. For instance, a company that
produces watches with a Disney Channel face will not be considered competition to Rolex. Each
company tailors its products to a different age group. They also tailor watches to different
income brackets.




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V. Strategic Issues and Problems for the Industry (Opportunities
&Threats)
There are many opportunities and threats in the watch industry. In this section we will
discuss the opportunities and threats that exist in the current business environment as well as
possible opportunities and threats that will exist in the future.
Based on our research of the current economy we should see a gradual rebound. One of
the most important aspects of the economy that we anticipate growth in deals with disposable
income. The increase in disposable income will show a strong positive correlation towards the
purchasing of luxury goods such as watches.
As stated in the customers section, there are enormous opportunities in the fast growing
Asian markets. Asian markets have the highest potential for growth in the future. Most watch
retailers have already inserted themselves into the market to capitalize on this opportunity.
Extensive amounts of resources need to be expended in order to find where the best target
markets are in the future.
The watch industry is heavily dependent on trends and consumer preferences. This can
cause major changes in products and requires constant product development. Products can
become outdated quickly and cause the value of inventory to drop quickly.
Currently the producer price index is low relative to previous years. The inventory levels
are also currently high, meaning that most watch producers do not have a major need to take
advantage of the low price of components. An increase in raw materials inventory will take full
advantage of the low cost of materials. The PPI is anticipated to grow into the future to regular

43

levels resulting in higher product costs. Also, the high price of gold makes expensive products
less attractive to produce. A future increase in gold will cut profit margins on high end products.
The watch industry is in a very interesting position with the announcement of Google,
LG, and Apple entering the market with a product that could revolutionize the watch industry.
The new computing power of the smart watch could draw significant market share of the watch
industry. It may be too early to tell how fast consumers will adopt a smart watch.
As stated in the Stage & Life Cycle section, the watch industry is in a mature state in its
life cycle. The features of a mature market apply to the watch industry. A few large firms are
acquiring many smaller firms, creating an intensely competitive environment. The large firms
dominate the industry overall which benefits the large firms that have a well-established market
presence. Operating in a mature market also has some significant downsides. There is limited
potential market growth and few opportunities to reach new customer bases.
Two governmental regulations in the United States will have an impact on the operations
of companies in the United States. The United States accounting policies are going to merge with
international accounting policies in the future. This would require a change in the accounting for
inventory. Currently, the majority of retailers use a LIFO (last in first out) inventory system to
save on taxes each year. The rapid switch from LIFO to FIFO will cause a significant tax
liability. The payment of these back taxes will most likely be spread out over a 5 year period, but
the back taxes will have a major impact on cash flows. The federal minimum wage is likely to
increase in the near future. This will cause increased labor costs in the domestic operations of
companies operating in the United States.

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Social issues also surround the watch industry. Activist groups that speak out against the
inhumane treatment of animals have raised concerns with the production of leather watchstraps.
Consumers may avoid the purchase of certain watches based on what materials are used. This
social issue should be closely monitored into the future to see if the sales of watches containing
leather decline.


















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VI. Fossil Inc. - A Brief Historical Review
Founded in 1984, Fossil Inc. is a producer of watches and designer of clothing and
accessories. Tom Kartsosis founded the company in Richardson, Texas. After witnessing the
success of Swatch, Kartsosis and his brother created the company. He invested $200,000 to start
the company. At the time he created the company, the watch industry was booming, gaining
speed, and production costs were low as production was out-sourced to Asia. The main
objective of the company was to produce watches with a retro style (Harris 1984).
Between 1987 and 1989, sales of Fossil watches grew from $2 million to $20 million
(Retail Market, 2010). In an effort to distinguish the companys watches, Fossil started to sell its
products in elaborate containers made from tin, as well as ornate wooden boxes. After seeing the
success of the company, they decided to break in to the leather-goods industry and began
producing clothing accessories.
In 1993, the company completed its initial public offering of stock. Twenty-percent of
the company was now held by investors (Funding Universe). At the time, the company was
producing upwards of four million watches per year. By 1994, sales had reached 161.1 million
dollars, an increase of fifty million dollars from the previous year. Around this year, the
company introduced another line, sunglasses.
Today, the companys success has been built around the acquisition of competing watch
lines. Recently, the company announced that it would be acquiring Skagen Designs, Ltd. for
$225 million dollars. This is a huge acquisition for Fossil as the company reaches seventy-five
global markets and many retailed stores (Fossil Inc., 2012). With the current position of the
company, future acquisitions will help to strengthen the company in years to come

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VII. Evaluation of Current Strategy
Fossil Inc. has a broad differentiation strategy for its operations. The Company is known
globally, and it has a focus on increasing international expansion. Therefore, the Company must
adopt a strategy that is broad enough to generate sales in multiple nations. Fossil has focused on
differentiation of both brands of watches as well as types of fashion accessories. The Company
must use this type of differentiation strategy because its sales are partially based on recent
fashion trends. Fossils mission and vision statement both further reveal the broad differentiation
strategy. Fossil has also increased its recent performance since the 2008 2009 recession.
Fossils performance indicators show that the Company has almost fully recovered from the
recession. Fossils performance can expect to remain steady with the economy in the near future.

A. Mission
Fossils mission statement is to accessorize the globe. While this mission statement is
extremely short, it is also very revealing. Fossil also has a focus on building sales internationally,
hence the globe. The Company understands that to continue to increase its sales it has to
expand into foreign countries and new markets. Fossils mission statement reveals the following
information:
The Company understands that their products are accessories; these products are
likely bought on disposable income
The Company plans on expanding even more internationally

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Fossil has a simple mission statement that is straightforward and understandable for
employees; this will allow Fossil to achieve its goals much easier than with a
complicated mission statement

B. Vision
Fossils vision is to foster creativity and deliver the best design through its two core
businesses: Fossil brand (fashion accessories) and a multi-brand watch business. (Fossil, Inc.)
Fossils vision hints that it focuses on differentiation based on creativity and design for its
products. Since the watch industry is relatively mature and has a saturated market, it is difficult
to distinguish watches based purely on price. As watches are a fashion industry, the company
must focus on creating unique items for consumers that have consistently changing fashion
trends. Fossil must also design watches for different uses like sports, business, casual, and
diving. Fossils vision statement reveals the following information:
The Company understands that it must create an environment to foster creativity;
Fossil is well aware of the environment necessary for success and how it must
design that environment
The Company also understands that it not only must it create successful products,
but that it must convey these superior products to distributors, the market, and
consumers
The Company does not lump all of its operations together; Fossil understands that
watches are extremely different from the majority of fashion accessories
Fossil owns a variety of watch brands that they intend to market to a wide variety of
customers

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C. Performance Indicators
All performance indicators discussed below indicate that Fossil has rebounded from the
recent recession tremendously. On average, all of the indicators have grown by around 15
percent. Fossil had a higher sales growth and net profit margin in 2012 than in 2009. Stock price
has reflected these increases in indicators. Fossils high growth rates in these items should be
expected to fall back to slightly lower, more reasonable rates.

1. Stock Price
The following is a chart of Fossils stock price over the last five years (Yahoo! Finance):

As can be seen from the chart above, Fossil was hit hard during the recent recession that
began in 2008. The Companys stock price reached nearly $11 per share before rebounding. As
of 5/1/2013 Fossils current stock price was $94.79 (Yahoo! Finance). Historically, the
Companys performance has been highly correlated to the market with more volatility as
evidenced by Fossils beta of 1.89 (Yahoo! Finance). In the past 5 years, Fossil has outperformed

49

the S&P 500. The chart on the following page shows Fossils performance compared to that of
the S&P 500 over the past five years (Yahoo! Finance):

Fossil has managed to outperform the S&P 500 in every year but 2009. Furthermore,
Fossil outperformed the S&P 500 by over 100 percent in 2011 and 2012.

2. Market Share
As previously discussed with the industrys concentration ratio, it is very difficult to
retrieve data on the watch industry. Therefore, Fossils market share is not easily determined
compared to its countless competitors abroad. It is also difficult to determine competitors similar
to Fossil as the company has operations in such a broad spectrum of products. This section will
attempt to discuss Fossils market share relative to specific competitors.
Fossils most applicable competitor is Swatch. Swatch is a Swiss company that sells
watches internationally like Fossil. Swatch controls more of the international market because of
its quality and reputation as a Swiss watch manufacturer. Fossil competes with Anne Klein and

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Guess? in both watches and fashion accessories. Fossil has an advantage in watch sales over
these competitors, but they control the fashion accessories market. Fossil also competes against
Kenneth Cole Productions (KCP); luckily for Fossil, KCP generates around 97 percent of its
sales from the U.S. Fossil has advantages in the U.S. watch market and lower-end foreign
markets. Fossil has a hard time competing for market share in fashion accessories internationally
as well as high-end watch sales internationally.

3. Sales Growth
In recent years Fossil has achieved extremely high sales growth as the result of rebounds
in the economy from the recent recession. The 2009 negative sales growth is a direct result of the
economic downturn. Fossils sales growth has also been increased by international sales. Fossils
sales growth has averaged over 16 percent from 2009 to 2012. Recently Fossils sales growth has
trended down towards a more realistic average of 5 10 percent. The following is a chart of the
Companys sales growth over the past four years:

-3.00
0.00
3.00
10.00
13.00
20.00
23.00
30.00
33.00
2009 2010 2011 2012
Fossil's Sales Growth

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4. Net Profit Margin
Fossils net profit margin remained relatively steady during the recession averaging about
8.8% between 2009 and 2010. The increased sales growth led to an increase in net profit margin
to a high of 12.57% percent in 2011. Fossils net profit margin can be expected to fall back to
reasonable levels of 10 - 11 percent in the near future with the expected steadying of sales at a
normal growth rate. The following chart shows Fossils net profit margin over the past four
years:


5. Return on Assets (ROA)/Return on Equity (ROE)
Fossils ROA & ROE have remained above 10 percent over the past four years. ROA &
ROE were lower in 2010 than 2009 due to larger increases in assets and equity than net income.
During the past two years ROA has rebounded to an average of 17.66 percent while ROE has
rebounded to 25.33 percent. Fossils ROA can be expected to remain somewhere in the range of
17 18 percent in the near future.
6.00
7.00
8.00
9.00
10.00
11.00
12.00
13.00
2009 2010 2011 2012
Fossil's Net Profit Margin

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The following is a chart of Fossils ROA over the past four years:


Fossils ROE can be expected to remain somewhere between 24 28 percent depending
on sales growth and increases in equity like stock issuances. The following is a chart of Fossils
ROE over the past four years:

6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
2009 2010 2011 2012
Fossil's Return on Assets (ROA)
3.00
10.00
13.00
20.00
23.00
30.00
2009 2010 2011 2012
Fossil's Return on Equity (ROE)

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6. Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
Fossils EBITDA as a percentage of sales have increased steadily over the period with the
exception of 2012. EBITDA as a percent of sales in 2009 was 13.00 percent and rose to 18.54
percent by 2011. EBITDA as a percent of sales fell a minimum amount back to 18.38 percent in
2012. Fossils EBITDA as a percent of sales can be expected to return to a reasonable level of
about 16 18 percent. The following is a chart of Fossils EBITDA as a percentage of sales:







8.00
10.00
12.00
14.00
16.00
18.00
20.00
2009 2010 2011 2012
Fossil's EBITDA (as a % of sales)

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VIII. Evaluation of Companys Position Relative to Competitors
A. Administrative Systems
1. Human Resources
At year-end 2012, Fossil had approximately 14,000 personnel domestically with another
7,200 employees in foreign subsidiaries. None of Fossils employees, foreign or domestic, are
represented by a union, although some European employees are represented by work councils
that include selected employees to represent all the employees that in turn will negotiate with
management. Fossil considers their running relationship with its work councils and employees
to be in good standing, and has never had a work stoppage (Fossil 10k, Page: 26).

a. Selection position & requirements
The main career positions in Fossil are human resources managers, brand representatives,
project managers, merchandisers, design recruiters, store management, and IT. One key factor in
prospective employee selection is the element of creativity and fun in that prospective employee.
They are happy to train candidates with little experience, and readily promote promising
employees. Fossil endeavors to make fashionable goods accessible to a wide number of
customers, and pushes their employees to assist customers with high satisfaction in order to
achieve their goals.




55

b. Training types of skills trained in position
Fossil offers internships to recent graduates looking for experience in several areas such
as design. Manufacturers are trained to abide by Fossils Manufacturer Code, simply stated they
will not use children, forced labor, and comply with valid environmental regulations. Due to the
training in manufacturing, the excellent relationship between Fossil and its manufacturers helps
to keep employee turnover low.

c. Retention (wages, salaries, & benefits)
Fossils average salary is $58,272 and their salaries range from $28,000 to $135,000.
The lower end would be for positions such as graphic designer or project managers and the
higher end for Director of Supply Chain and even computer programmers (Fossil Salary).The
Executive salaries range from $231,000 to $681,000.
Fossil offers several benefits to employees including stock-based compensation, deferred
compensation, savings plans, and long-term incentive plan. Fossil offers stock options and
restricted stock for international employees, as well as restricted stock for its US employees.
Fossil has a defined contribution savings plan (401K) for mostly all of its fulltime employees of
the US with common stock in the company as one of several investment options. A Roth 401(k)
is another option for employees who have one year of service (1000 hours minimum); Fossil will
match 50% of employee contributions up to 6% of their paycheck. The Long-Term Incentive
Plan allows selected employees to collect stock options, stock appreciation rights, restricted
stock units, restricted or non-restricted stock awards, cash awards, or a combination of the

56

previously stated.(10K pg. 97) Other employee benefits include employee discount on
merchandise, low-cost healthcare plan, insurance, and retirement planning.

2. Culture
The culture at Fossil is fun, upbeat, and trendy. The employees of this major fashion
player typically enjoy working at up to date locations and are fashion-conscious. Fossil
encourages their employees to create their own exclusive style (Company Profile). This will help
create positive working relationships with customers and suppliers.

3. Information systems
Fossil operates and manages a global company that necessitates dependable and refined
information systems to assist in order processing, accounting, planning, and production and
distribution. Fossil believes that reliable and scalable systems, automation, rapid movement of
communication and precise reporting are essential for staying competitive. Fossil operates a
SAP Enterprise Resource Planning system (ERP) within the US and their international
subsidiaries. For the other subsidiaries they use Microsofts Dynamics Navision Enterprise
Resource Planning System (Navision) system. Fossils e-commerce platform operates on IBM
Web-sphere Commerce platform, and they continually invest in improving their e-commerce
infrastructure. They use SAPs IS Retail platform and SP point-of-sale system in order to
increase the manageability of the growing global company. Fossil continually invests in
improving their information technology systems that include the following; human resources,
financial, distribution, planning, merchandising, point of sale, and supply chain. The protection

57

of data is critical in business especially with computerized systems where personal information is
stored. Fossil believes this is of critical importance because if there is a breach of data, it could
attract unwanted and negative media attention, damaging their reputation and relationships with
customers. They annually review their data security risks as well as purchase insurance to cover
liability for breaches of privacy or security.

B. Marketing
The company we will be benchmarking against is Swatch, a competitor with Fossil in the
industry.

1. Market Position (Identification of the companys customers)
Apparel/Accessories
Watches Fall 2011 Product
Fossil Brand
Adults: Owns Product


Index
Total 100
Men 104
Women 97
Educ: Graduated college plus 119
Educ: Attended college 99
Educ: Graduated high school 92
Educ: Did not graduate HS * 71
Educ: Post graduate 122

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Educ: No college 86
Age: 18-24 141
Age: 25-34 151
Age: 35-44 94
Age: 45-54 95
Age: 55-64 75
Age: 65+ 48
Adults 18-34 147
Adults 18-49 120
Adults 25-54 113
Men 18-34 179
Men 18-49 137
Men 25-54 117
Women 18-34 115
Women 18-49 103
Women 25-54 110
Occupation: Professional and Related Occupations 139
Occupation: Management, Business and Financial Operations 142
Occupation: Sales and Office Occupations 128
Occupation: Natural Resources, Construction and Maintenance
Occupations * 79
Occupation: Other employed 110
HHI: 150,000+ 134
HHI: $75,000-$149,999 137
HHI: $60,000-$74,999 109
HHI: $50,000-$59,999 111
HHI: $40,000-$49,999 79
HHI: $30,000-$39,999 75

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HHI: $20,000-$29,999 * 44
HHI: <$20,000 58
Census Region: North East 72
Census Region: South 126
Census Region: Midwest 87
Census Region: West 93
MediaMarkets: Top 5 84
MediaMarkets: Next 5 118
County Size: A 99
County Size: B 116
County Size: C 85
County Size: D 85
Marital Status: Never Married 113
Marital Status: Now Married 102
Marital Status: Engaged * 116
Marital Status: Widowed*/Divorced*/Separated (legally)* 74
Child Age: <12 months * 115
Child age: 12-23 months * 136
Child age: <2 years 127
Child age: <6 Years 125
Child age: 2 - 5 Years 122
Child age: 6 - 11 Years 101
Child age: 12 - 17 Years 104
Years At Present Address: <1 year 131
Years At Present Address: 1-4 Years 107
Years At Present Address: 5+ Years 87
Home: Owned 100

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Home Value: $500,000+ Dollars 88
Home Value $200,000-$499,999 111
Value of Owned Home: $100,000-$199,999 102
Value of Owned Home: $50,000-$99,999 76
Value of Owned Home: <$50,000 * 91
Race: White 100
Race: Black/African American 116
Race: American Indian or Alaska Native * 155
Race: Asian * 82
Race: Other 93
Race: White only 99
Race: Black/African American only 117
Race: Other Race/Multiple Classifications 92
Spanish spoken in home (most often or other) 113
Quintile Magazines I (Heavy) 124
Quintile Magazines II 110
Quintile Magazines III 100
Quintile Magazines IV 89
Quintile Magazines V (Light) 77
Quintile Newspaper I (Heavy) 88
Quintile Newspaper II 103
Quintile Newspaper III 117
Quintile Newspaper IV 108
Quintile Newspaper V (Light) 85
Quintile Radio I (Heavy) 109
Quintile Radio II 108
Quintile Radio III 99

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Quintile Radio IV 97
Quintile Radio V (Light) 87
Quintile TV (total) I (Heavy) 83
Quintile TV (total) II 97
Quintile TV (total) III 105
Quintile TV (total) IV 101
Quintile TV (total) V (Light) 113
Quintile Internet I (Heavy) 123
Quintile Internet II 114
Quintile Internet III 107
Quintile Internet IV 91
Quintile Internet V (Light) 65
Quintile Outdoor I (Heavy) 118
Quintile Outdoor II 116
Quintile Outdoor III 105
Quintile Outdoor IV 98
Quintile Outdoor V (Light) 63
Quintile TV (Prime time) I (Heavy) 96
Quintile TV (Prime time) II 100
Quintile TV (Prime time) III 94
Quintile TV (Prime time) IV 110
Quintile TV (Prime time) V (Light) 100
Tercile TV (Day time) I (Heavy) 70
Tercile TV (Day time) II 94
Tercile TV (Day time) III (Light) 97
*Info taken from www.mriplus.com


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A Fossil customer has been defined using components of data from MRI Reporter. A
large index number (100>) is an indicator of who is consuming our product and allows us to
build a demographic picture of who they are and where they reside.
Our customers are both men and women ages 18-34 who have achieved a college
education, and even more likely, poses a post-graduate education. Men are seen to have a larger
index number, which is noteworthy for advertising purposes. Our target customer has an
occupation relating to management, business and financial operations currently making an
income of $75,000-149,999. They are likely to be engaged and living in the southern region of
the United States.
They consume large amounts of magazine advertisement and engage with the Internet
frequently but avoid TV as a whole. They are also more attuned to outdoor advertising. This
information gives us insight into how our customers think and act.
A Swatch customer differs slightly, with their main base being females between the ages
of 18-49. Based off of 2011 database research from MRI Reporter we see that they have
achieved a post-graduate education with careers in sales and office occupations earning an
income of $150,000+. This jump in income is what sets the consumers apart from Fossil.
Swatch is a more prestigious brand, drawing in more affluent customers. They reside in large
metropolitan areas, most densely in the northeast region of the United States.





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2. Product (Tangible)
a. Quality & Style
The perceived quality of a Swatch watch differs than that of a Fossil watch in a variety of
ways. A Swatch watch is viewed as a more modern style of watch, blending creativity with
innovation and offering the consumer a more new-age style of watches. They are seen to be a
very high-quality manufacturer, and over the years have gained a prestigious perception.
At Fossil, their watches are viewed with a certain status that comes from being a long-
standing company. They are able to cover a large area of perceived quality through the use of
multiple brands that they own. Fossil brand prides itself on producing dependable and stylish
watches to their customers. Their product lines have a more classic look, and differ greatly from
Swatch in terms of product features. They market themselves as trendy yet classy.

b. Features
The styles between the brands are polar opposites. Being that Swatch markets itself as a
progressive watchmaker, this shows in the features that are offered in their products. They can
be identified through their original use of bright colors and unique patterns. Many of their watch
faces have original artwork that is obscure and trendy. They are proud to be different, while still
offering a dependable product. They once fulfilled a niche segment that has since grown into a
large following among a part of the market. Swatch now offers products that satisfy utility,
fashion, luxury and status with different watch lines that work for scuba diving and others that
are opulent.


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Fossil offers products that are seen as bold, and traditional. The color scheme is
composed of earthy tones made up of browns, reds, and dark greens. Their style is much more
conventional, giving it a long established look that consumers trust. Their bands arent bursting
with color, but rather are more down-to-earth than Swatch. The watch faces have a classic look
to them, satisfying what their target market actively seeks. They have adopted a vintage
personality and capitalize on their brand perception.
We conducted a one-word definition test among 5 voluntary participants. Each
participant, ages varying between 19-23, was informed about what the survey pertained to and
were then asked to define Swatch and Fossil brands in one word only. When asked about
Swatch watches two participants said colorful, one said high quality, one said unique and the
other said fun. When asked to describe Fossil, the five participants answers were: rustic, brown,
rugged, classic and gritty.

c. Packaging
Swatch packages their products in a way that is congruent with their brand image.
Swatch watches come in a transparent white tube that is the length of the watch. They also
package them in transparent rectangular boxes as well. One can distinguish a Swatch watch
because of this unique packaging. The image below is one of the ways Swatch packages their
products.

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*http://www.behance.net/gallery/SWATCH/94596

Fossil packages their products in a much different way. All fossil watches come in tin
boxes that contain a graphic or text. Their packaging is congruent with their brand image. The
tin boxes are typically composed of darker colors and have an older, vintage look to it. Below is
a picture of Fossil tins.


66



*http://4.bp.blogspot.com/-A9KqW9Aec0c/UPfcPkao-UI/AAAAAAAAADI/V7Lqldbk-cc/s1600/Fossil_Packaging.PNG


d. Warranties, Services & Returns
Swatch offers a 24-month (2 year) limited warranty for their watches. This warranty
extends to any manufacturing defects at the time of delivery, but does not cover wear-and-tear or
battery damage (Guarantee and Direction for Use).
Swatch currently has service centers in over 90 countries worldwide. These service
centers are for customers who are experiencing trouble with their product. They are able to call

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in and get advice on what steps they should take. The United States branch is located in New
Jersey (Swatch US).
All Swatch watches are laser sealed, which consequently means they cannot be repaired,
only replaced. Any unworn, undamaged products can be returned for a full refund within 30
days of purchase. A watch may also be exchanged for another watch, with the exception that it
is the same price (Guarantee and Direction for Use).
The warranty process for Fossil is different in that only the dial, hands and watch
components are covered. If it is determined that under normal use the watch does not function,
the watch must be shipped to Fossils Metro Service Center to be repaired (Watches).
Shipping and handling charges are the responsibility of the sender.
Fossil has an online customer care form that allows and encourages their customers to
submit any questions to have answered. Along with this, they have service centers that can be
called to have questions answered over the phone. Their main service center is the metro service
center located in Dallas, Texas (Fossil.com).
The return policy for Fossil is a bit more lenient than its competitor Swatch. Fossil
allows customers to return unworn and unwashed products within 90 days of purchase for a full
refund. This can be done either in-store or through the mail (Fossil).





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3. Price
a. List
Some of Swatchs watches are set at a reasonable price, others are extremely expensive.
Looking at a price list that dates back to 1983, the company offers their products between the
range of $45.00-$120.00 (swatchandbeyon.com). This is for its reasonably priced watch
selections. Occasionally there will be an outlier, but that watch will have a feature that other
watches do not possess or is part of their luxurious line of watches. On their website, there is no
option to search by price though there is a tab for product selections for watches costing below
$100.00 (Swatch.com).
Fossil allows you to search through their selection of watches by price on their website.
The price range varies between $25.00-$200.00+. The price range with the most amount of
watch selections is $125.00-$150.00 with 76 products being offered (Fossil.com). This price list
gives the consumer the option to browse through their products, tailoring their search by an
amount, which correlates with their price range.

b. Discounts
Like many retailers, Swatch will offer a sale on products that it cannot turn over quickly.
They also have a section of watches that are all under $100.00. This is the extent of any
discounts offered by the company. Many second-hand retailers will offer Swatch products at a
discounted price through their company, but this is not under the jurisdiction of Swatch itself.
This is also true for Fossil. Many online retailers such as overstock.com will offer
discounted Fossil products, but this is not directly issued through Fossil. On their website, Fossil

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does have a category dedicated to sales. This lists numerous items that are sold at a discounted
price. This allows price sensitive customers the ability to buy direct from Fossil at a lower price,
while still receiving product warranty (Fossil.com).

c. Payment periods
Both Fossil and Swatch do not allow a period for multiple installments on their products.
When purchasing, the consumer must pay the full amount in one payment to acquire the watch
(Aubrey, telephone communication. May 4 2013).

d. Credit Terms
Swatch accepts PayPal, MasterCard, Visa and American Express credit cards over the
phone, online or in-store. According to their FAQ section, Swatch will check the card and get it
approved, only then will the card be charged when the item has shipped. (Swatch.com)
Fossil accepts American Express, Visa, MasterCard and Discover both online and in-
store, according to their store manager. Like Swatch, Fossil will charge the credit card when the
purchase has shipped (Fossil.com).







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4. Promotion
a. Sales force
Swatch employs a vast sales force to help the consumer through the process of
purchasing a watch. This sales force varies from in-store associates to online support. Swatch
has a knowledgeable staff that guides customers to their final decisions. When calling their
support center, a friendly voice answers ready to direct the caller in any way needed. Having a
trust-worthy sales force helps maintain Swatchs brand image, and builds long lasting
relationships with their customers.
Similarly, Fossil has a network of skilled staff. Upon entering the store, an employee
greeted me and answered all questions that I was able to generate. Fossil has call centers filled
with informed employees that promote positive customer relationships. Both in-store and online
sales force are responsive to customers questions and do their best to make the experience at
Fossil a positive one. Employing this strategy retains customers and builds loyalty.

b. Advertising
Swatch advertises in a variety of media. Looking to their demographics taken from MRI
Reporter we see that it would be valuable to place print advertising in magazines. This has been
true in the past: creating ads that are simplistic utilizing white space. Swatch prides itself on its
simplicity, and it really shines through with their advertising. Swatch also uses television as a
medium to target its audience. This allows a much broader reach, but is used differently than
their magazine ads. Depending on the product being shown, Swatch has tailored its TV spots to

71

different markets. Swatch effectively uses different media to connote its message to its
consumers.
Fossil is invested in multiple media source for advertising. Their advertisement
correlates with their brand image. They utilize earthy colors and fill their print advertising with
people sporting their watches. This use of print ad is harmonious with their strong index
numbers from the quintile analysis taken from the MRI+ data (MRI Reporter). Fossil also
invests in Internet advertising by buying banner ads from different companies. They place these
on potential or past-consumers of their product based off of data taken from the users cookies.

c. Push Vs. Pull
Both Swatch and Fossil use a Push-Pull strategy in their departments. We see that they
push their products through the line based on demand and ultimately satisfy a need they feel their
market has. They offer different lines of products within the category and the customer learns
about these products through advertising efforts. At the same time, they use a pull strategy
because customers are able to interact with employees online, over the phone and in-store. They
are able to be heard, and take their suggestions into consideration. This shapes their product line,
pulling different products through the line to please the customer. This process isnt forecasted,
but instead is based off listening to their customers.





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d. Philanthropy
Swatch held an auction, cleverly titled Wristory to auction off rare Swatch watches.
The effort raised over $800,000 for a charity that helps people deal with AIDS (Professional
Jeweler Archive). This event was the primary philanthropic event held by Swatch.
Fossil is currently building the Fossil Foundation and is seeking someone to fill the
position as managing director who will oversee the companys philanthropic activities
(Foundation Center). This foundation works in cooperation with Global Giving, a non-profit
organization that gives back to communities.

5. Place
a. Distribution & Coverage
Swatch has an extensive global distribution channel that it uses to deliver its products to a
number of different trusted companies. Swatch has its own retail stores around the globe,
offering products directly to its consumer. This allows it to manage their customer relationships
and maintain its high quality brand image. Swatch also distributes its products through high-end
retailers, mainly using boutiques. This ensures the prestige follows its product, selling its
luxurious line of watches next to other high quality watches (Swatch Group, Distribution).
Swatch is also distributing their products at select airports through its company Tech-Airport.
This channel also uses boutiques that are found in 40 airports across Europe and Asia.
Fossil uses widespread global distribution channels as well, attempting to effectively
reach its large consumer base. It has department stores, specialty retail locations, factory outlet
stores, mass-market stores, a catalog and the Internet. In the United States, Fossil uses

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wholesalers to deliver its products; among these wholesalers are JCPenney, Kohls, Dillards,
Saks Fifth Avenue and many others. Globally, Fossil sells its products to specialty retailers in
130 countries. It maintains 185 Fossil retail stores and 62 outlet stores around the globe
(Reuters).
b. Inventory & Transportation
After extensive research, both companies have chosen not to release their inventory
holding strategies and transportation of products information. This withholding of transportation
strategy is beneficial so as not to be copied by other competing companies in the industry.

C. Finance
Fossil has increased its performance over the past four years as the Company has
rebounded from the most recent recession. Over this time period, Fossil has improved its margins
and turnover. The Company has also decreased its liquidity and leverage, but not to a worrisome
level. Overall, Fossil has increased earnings, stock price, and cash flow per share. The Company
increased its cash flows from operating activities from over $100 million in 2009 to over $250
million in 2012. However, this increase in cash flow from operating activities has been offset by
expenditures on investing and financing activities. The following sections will analyze how
Fossil manages its funds using different types of ratios including profitability, liquidity, leverage,
activity, and more.




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1. Profitability Ratios
Fossils profitability has soared in the past four years since the recession. Fossil has
improved its Gross Profit Margin by over 2 percent in four years. The Company has also
increased its Return on Sales by almost 3 percent. Furthermore, Fossils Earnings per Share have
more than doubled over this time period. The increases in these measures of profitability are
mostly due to increases in sales over the period. These increases can be understood as pent-up
demand from the sales declines of the recession. Margins and sales can be expected to have
minimal, realistic increases in the future. The following chart depicts Fossils Gross Profit
Margin over the past four years:





32.00
32.30
33.00
33.30
34.00
34.30
33.00
33.30
36.00
36.30
37.00
37.30
2009 2010 2011 2012
Gross Profit Margin

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The following chart shows Fossils Return on Sales for the past four years:


The following chart displays Fossils Earnings per Share over the past four years:



6.00
7.00
8.00
9.00
10.00
11.00
12.00
13.00
2009 2010 2011 2012
Return on Sales
0.00
0.30
1.00
1.30
2.00
2.30
3.00
3.30
4.00
4.30
3.00
2009 2010 2011 2012
Earnings per Share

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2. Liquidity Ratios
Fossils liquidity has fallen over the past four years, but it has not fallen enough for
creditors to be wary. Fossils Current Ratio has fallen about half a point to a reasonable 3.16 in
2012. Fossils Quick Ratio has also fallen from 2.28 in 2009 to 1.91 in 2012. These decreases are
likely due to increased spending with a better economy. Fossil still holds a large amount of liquid
assets in comparison to its upcoming debts. Fossils Inventory to Net Working Capital fell from
2009 to 2010, but has since risen to almost 58 percent in 2012. Fossils inventory is currently
tying up almost 60 percent of its net working capital. Hopefully Fossil can minimize inventory
costs in the future to reduce this amount. The following chart depicts Fossils Current Ratio from
2009 2012:




3.00
3.10
3.20
3.30
3.40
3.30
3.60
3.70
3.80
3.90
4.00
2009 2010 2011 2012
Current Ratio

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The following chart displays Fossils Quick Ratio over the past for years:


The following chart shows Inventory to Net Working Capital from 2009 2012:



1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40
2.60
2.80
3.00
2009 2010 2011 2012
Quick Ratio
20.00
23.00
30.00
33.00
40.00
43.00
30.00
33.00
60.00
2009 2010 2011 2012
Inventory to Net Working Capital

78

3. Leverage Ratios
Fossil has increased its debt relative to assets and equity over the previous four years.
However, this difference in capital structure from 2009 to 2012 is minimal. Debt-to-Assets Ratio
increased from about 26 percent to about 32 percent over the period. Debt-to-Equity Ratio
increased from 0.35 to 0.47 over the past four years. Times-Interest-Earned Ratio has decreased
over the past four years as a result of increased debt and subsequent interest expense. Although
Times-Interest-Earned Ratio decreased, it fell from a ridiculous 361.63 in 2009 to a more
reasonable 142.04 in 2012. Fossils creditors are unlikely to increase the Companys debt ratings
and interest rates as a result of this increase in debt. The following chart displays Fossils Debt-
to-Assets Ratio over the past four years:




13.00
17.00
19.00
21.00
23.00
23.00
27.00
29.00
31.00
33.00
2009 2010 2011 2012
Debt-to-Assets Ratio

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The following chart shows Fossils Debt-to-Equity Ratio from 2009 2012:


The following bar chart depicts Fossils Times-Interest-Earned over the past four years:



0.20
0.23
0.30
0.33
0.40
0.43
0.30
2009 2010 2011 2012
Debt-to-Equity Ratio
0.00
100.00
200.00
300.00
400.00
300.00
600.00
2009 2010 2011 2012
Times-Interest-Earned

80

4. Activity Ratios
Fossil has increased its activity and turnover in multiple areas over the past four years.
Fossils Inventory Turnover has increased by 0.33 since 2009. The Companys Fixed Asset
Turnover has also increased from 4.35 in 2009 to 5.14 in 2012. Fossils Accounts Receivable
Turnover has also increased by 0.8 over the four year period. This resulted in a decrease in
Fossils Average Collection Period from 48 days in 2009 to 43 days in 2012. Fossil has shown
efficiency recently in its activity operations. The following chart shows Fossils Inventory
Turnover over the period:






0.00
1.00
2.00
3.00
4.00
3.00
6.00
7.00
8.00
9.00
2009 2010 2011 2012
Inventory Turnover

81

The following chart displays Fossils Fixed Asset Turnover from 2009 to 2012:


The following chart shows Fossils Accounts Receivable Turnover over the past four
years:


0.00
1.00
2.00
3.00
4.00
3.00
6.00
2009 2010 2011 2012
Fixed Asset Turnover
6.80
7.00
7.20
7.40
7.60
7.80
8.00
8.20
8.40
8.60
2009 2010 2011 2012
Accounts Receivable Turnover

82

The following chart depicts the Companys Average Collection Period from 2009 2012:


5. Other Ratios
As a result of Fossils recent performance, its stock price has risen significantly since its
fall during the recession. This has resulted in an increased Price to Earnings Ratio over the time
period. Using historical prices from finance.yahoo.com, Fossils Price to Earnings Ratio rose
from a meager 5.56 in 2009 to a healthy 20.05 in 2012. Fossils operations have also generated
significant amounts of cash in the past four years. Cash Flow per Share increased from $2.64 in
2009 to $5.58 in 2012. Fossil has not, however, used any of this increased cash flow to pay out
dividends. The Company has not paid any dividends in the past four years. It is unlikely Fossil
will pay dividends unless operations generate even higher levels of cash. The chart on the
following page shows Fossils Price to Earnings Ratio over the past four years:
38.00
40.00
42.00
44.00
46.00
48.00
30.00
2009 2010 2011 2012
D
a
y
s
Average Collection Period

83



The following is a chart of Fossils Cash Flow per Share from 2009 to 2012:




0.00
3.00
10.00
13.00
20.00
23.00
2009 2010 2011 2012
Price to Earnings Ratio
$-
$1.00
$2.00
$3.00
$4.00
$3.00
$6.00
2009 2010 2011 2012
Cash Flow per Share

84

D. Research and Development
While Fossil does not readily provide information about the companys research and
development costs, it can be assumed that the amount spent is significant. This company is in a
highly competitive market which is growing through the improvement of technology. The
company also can be assumed to focus on product over process, as the company has a stable
process system in place.
Currently, the company focuses its efforts on new lines to reflect the innovation of
technology. Fossil is constantly working on creative and innovative ideas to incorporate into its
products. In 2003, at the height of the new technology craze, Fossil released a revolutionary
smart watch called the Fossil Watch PDA. It was a computer on a watch supported by Palm OS.
The watch was available for $250 between the years of 2003 and 2005. It was the first watch of
its kind, and now companies such as Apple are working to create a new smart watch. This was
truly a product that was ahead of its time. The company later went on to create the Wrist Net
smart watch, which used MSN Direct technology to display headlines, weather reports, and
other information using FM radio transmissions (Fossil Introduces Three New Smart Watches).
In todays market where consumers are constantly seeking products that are tailored to
their tastes, Fossil has created a line of customizable watches online at the Watch Bar. Here,
customers can choose a watch face (the style and color), and a strap (the style and color) and
build a watch to fit their unique taste. Fossil has also created watches with faces of current
celebrities for customers who are fans. All of this is keeping Fossil ahead of the game, and
keeping sales and innovation at a maximum.

85

While the company does focus on product development, it also recognizes that process
development is important s well. Fossils unique use of vertical integration has helped innovate
the companys processes. Its licenses, holdings, and other assets have helped increase
productivity, output, and efficiency while reducing costs, production times, and risks. This
company has made this integration work for it in a way that many companies have not. They are
minimizing the threat of additional industries entering the market by slowly expanding into these
industries first.
Expenditures for Fossil in the year 2011 totaled $109.9 million. In 2012 expenditures
totaled $112.4 million, and in 2013 are expected to be between $115 million and $125 million.
(Hardy).

E. Production/Operations
The majority of Fossil watches are produced overseas by two majority owned entities.
Approximately 60% of Fossils total watches are produced in these vertically integrated factories
located in the Far East (meaning China, specifically the Hong Kong area). The vertically
intergraded factories are key strengths in the operations of Fossil (Fossil 10k, pg. 82). The
closely held factories allow for better protection of proprietary knowledge. The majority owned
entities allow Fossil to exert large amounts of power, and control large portions of the
manufacturing process.
The outsourcing of operations could also be a negative aspect of the business. There is
less control of the operations in China and subsequently more risk. If the production in China
comes to a halt, the companies supply chain could be drastically affected. Another major risk of

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manufacturing in China is the lack of safeguarding its proprietary knowledge. China is notorious
for leaking product and process innovations held exclusively by companies.
Fossil is very reliant on its component manufactures, and it has experienced problems
with the foreign manufactures. In 2011, the tsunami in Japan affected manufacturing and
shipping (Fossil 10k, pg. 86). If Fossil was to lose one of the large manufacturers in China,
production would significantly suffer. Recently labor costs have increased in the operations in
China due to wage increases throughout the country. Looking to the future, labor costs will
continue to climb as the people of China gain more rights.
A small segment of Fossil watches are produced in Switzerland. This segment is the more
expensive line of products that require more intensive labor. This is common in the watchmaking
industry to have the more expensive products manufactured by Swiss watchmakers. Swiss
watchmakers are world renowned for their quality of work. The watches assembled in
Switzerland are more labor intensive than the cheaper products made in China. There is more
advanced technology used in the Switzerland operations including precision cutting lasers. The
higher capital expenditures are necessary to provide higher quality products (Fossil 10k, pg. 80).
A diminutive segment of inventory is assembled in 48 smaller unrelated factories in
Hong Kong and throughout China. The 48 factories are responsible for assembly of the lower
end digital and electronic watches. These factories are capable of producing large quantities of
the lower quality watches.
As stated above, the intensity of labor and intensity of automation used depends on the
quality of the products. All employees of Fossil are non-union, but the European employees use
work councils to negotiate contracts. Fossils foreign subsidiaries employ 7,400 people.

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The primary inputs used in producing watches are cases, crystals, dials, movements,
hands, bracelets, and straps. The vast majority of these inputs are provided by seven suppliers
located in Hong Kong, India, Italy, Japan, South Korea, Switzerland, Taiwan and Thailand
(Fossil 10k, pg. 84). The largest supplier was responsible for contributing 30% of the inputs.
These suppliers do not have long-term contracts, but instead are managed through long-term
relationships. The long-term relationships allow Fossil to be flexible and competitive in
negotiations with all suppliers.
The quality of the watch components vary based on the quality of the watch that is being
produced. Precious metals and high quality leather are used for the more expensive watches
assembled in Switzerland. Cheaper plastics and rubber are used in the cheaper, more affordable
product lines that Fossil offers.
Inventory levels are sensitive based on projected consumer demand and projected sales.
If the inventory is too high then there is risk of the inventory becoming out of season and
obsolete. If inventory is to low then Fossil would be unable to meet consumer demand causing
backlogs. For the fiscal year end of 2011, the inventories were up 31.1% from the prior year. The
current dollar value of the inventory carried by fossil is $489.0 million (Fossil 10k, pg. 86).
The competitors of Fossil structure their own production similarly to Fossil. A majority
of production is done overseas with the cheaper products made in places where the cost of labor
is low. Competitors are investing more capital and research in manufacturing process
innovations to create better quality and lower cost. The higher costs have caused a reduction in
net income in the short-run, but the investment into the future will pay off. The improvement of
the processes has become a major priority, whereas Fossil has shown little investment.

88

IX. Strategic Issues and Problems for the Firm (Strengths & Weaknesses)
Fossil Inc. has placed itself in a strong competitive position with its internal operations.
The Company has a variety of strengths and weaknesses, but it is evident that the current
operations have many more strengths than weaknesses. Fossil has established strategies,
procedures, and processes to ensure its success in the watch industry. The following discussion
will detail a number of the Companys most important strengths and weaknesses in order to
determine where the Companys current operations can improve and will highlight its
outstanding performance thus far.
Fossil has ensured its livelihood in the watch industry by establishing the following
internal strengths. The Company has a variety of distribution channels that include direct sales to
customers, wholesale sales to domestic and foreign nations, and online sales. These distribution
channels allow Fossil to access many customers in a variety of markets across the globe. Another
strength for the Company is its quality of relationships with its suppliers and distributors. Fossil
maintains good relations with organizations up and down its value chain. By doing this, Fossil
ensures cooperation and efficiency in its operations. The Company is also able to exercise
control over many of its suppliers. These closely held suppliers are subject to short-term
contracts with the Company. Fossil is a bulk purchaser when it comes to many supplies, which
provide the Company with purchasing leverage over its suppliers.
Fossil has also focused on internal technology to increase its competitiveness. The
Company invests in data protection and Enterprise Resource Planner technology. This
investment ensures the Company stays in the highest competitive position for technology relative
to competitors. This information technology is also extremely valuable for Fossils vertical
integration. Fossils vertical integration allows operations to be much more profitable, as there is

89

not multiple sales price increases on supplies for watches. Additionally, the Company owns
certain distributors that allow it to realize even higher profits on final sales.
Fossils biggest strength is likely its broad differentiation strategy to reach a variety of
global consumers. The Company understands that to be an international watch competitor it must
differentiate its products based on current fashion trends. These trends often differ from region to
region, allowing Fossils differentiation strategy to reach many more customers than any other
strategy. This differentiation strategy has allowed Fossil to gain an additional strength:
international presence. Fossil is a well-known brand name in many parts of the world. It is likely
to sustain profitability because of this international presence that helps to diversify sales across
many different regions of the globe. Fossil has used all the strengths mentioned above to create a
financially sound watch company. Fossils past results have allowed the company access large
amounts of potential capital and helped to solidify its brand name. Fossil has likely been able to
achieve these strengths because of a focus on employees. Fossil prides itself on a diverse and
positive employee culture. Fossil understands that in order to please customers you must first
please your employees. Fossil has empowered its employees in order to realize many of the
strengths discussed above.
Not all the Companys operations have generated positive results. Fossil still has multiple
weaknesses arising from internal operations that it can work to correct. Perhaps the Companys
biggest weakness is its lack of watch manufacturing knowledge compared to competitors. Many
of Fossils biggest competitors are located in Switzerland the highest quality watch
manufacturing nation in the world. Fossil has a disadvantage compared to these competitors with
a history of watch manufacturing. The Company also spends low amounts of capital on
manufacturing. This leaves Fossil at a disadvantage compared to competitors with existing

90

manufacturing operations. Fossil is unable to realize the same amount of profits as these
competitors because of its lack of manufacturing capabilities.
Although Fossil has solid financial statements, they have recently eroded slightly. Fossil
has recently increased its debt levels. This has also led to an increase in interest expense. Fossil
needs to limit these debt levels in order to control interest expense and stay within debt
covenants. Additionally, the Company currently has high inventory levels subject to write-offs.
These inventory levels are extremely risky, especially with a potential switch from LIFO to
FIFO. Fossil may have to write-off a large amount of existing inventory which would erode its
net income and stock price. The Company should try and keep inventory levels low to avoid high
expenses from overhead, storage, and write-offs.
Being a global competitor also increases some risks for Fossil. The Company has
political exposures in foreign countries. One example of a country with political exposure is
China. By having existing operations around the world, Fossil exposes itself to volatile
governmental rules and regulations. It is a perpetual possibility that operations in any of these
countries could be shut down and cost Fossil massive losses. The last weakness for the Company
could potentially eliminate its well-known brand name. Fossil has poor social responsibility
outside of its commitment to employees. The Company has little to no expenditures to aid local
communities, for charitable organizations, or to benefit the environment. In order to ensure a
well-respected brand name, Fossil must begin to increase its social responsibility around the
world.
Fossil has generated a variety of strengths and weaknesses through its past operations,
and has positioned itself as a top competitor in the watch industry. In the future, the Company

91

must focus on its strengths relative to competitors. Fossil must also work to eliminate or reduce
the exposure on its weaknesses to ensure a competitive position in the industry in the future.
Fossil should continue to focus on its successful broad differentiation strategy, while
simultaneously increasing manufacturing and social responsibility expenditures.















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X. Recommendation
A. All Options Matrix


1. Strength/Opportunity Options:
Fossil should expand into the Asian markets, and concentrate more resources on
producing higher sales figures. The Asian market is the highest growing market in the world
currently. The high growth rate in the market would provide new channels to sell Fossil products
in the mature watch industry. Although Fossil currently operates in Asia, this market segment
should be further expanded to reach a broader customer base.

93

Fossil should use its international presence, as well as its knowledge of increasing
disposable income, to increase sales per customer. The Company should focus on distinguishing
the purposes of their watches in hopes that customers begin buying multiple watches, thus
increasing sales per customer.
Fossil should build raw materials inventory using its strong financial position. The
producer price index is currently low relative to past years. Fossil should take advantage of the
short-term low producer price index before it climbs to normal levels. At the scale that Fossil
produces watches, this could potential save money in product costs in the short-run. This should
be relatively easy for Fossil considering their close relationship with the suppliers.
Fossils sales should increase as the economy improves and consumers have more
disposable income to spend on luxury goods. Fossil should push their products down their
multiple distribution channels to improve visibility and brand awareness amongst potential
customers.

2. Strength/Threat Options:
Fossil should adapt product lines that include gold products to better control product
costs. The high price of gold is raising product costs and cutting into gross profit. Fossil should
focus their expert creative product department on creating watches containing quality products
containing less expensive components.
Fossil should utilize its advanced product development process as a defensive strategy
against the immerging smart watch industry. This expansion will boost their competitive
advantage in producing fashion watches, rather than technologically advanced watches that will

94

hit the market soon. Competing based on style rather than function is the best strategy when
facing new entries into the market instead of entering the high cost and untested market.
The product development market should be expanded on to mitigate the risk associated
with an industry that is driven by fashion trends. Fossil takes pride in having well designed
products that have had success in the past, but further expansion on product development will
improve its market position.
The switch from LIFO to FIFO will negatively impact cash flows. The tax implication
will cause enormous tax liabilities that will be difficult to pay even with a five year grace period
that has been suggested. Fossil should build up cash reserves specifically for paying the tax
liability. Future planning for the switch in inventory systems will be beneficial so when the
switch is made, Fossil will not be handcuffed by the enormous tax liability.

3. Weakness/Opportunity Options:
Current high finished goods inventory levels could pay off with the anticipated bounce
back of the economy, but with the 30% increase from last year production needs to be slowed to
meet the market demand. The high finished goods inventory is at risk of becoming obsolete as
fashion trends change. Fossil may have to discount large portions of their products to attract
buyers.
Fossil should increase its social initiatives to improve the companys image. Consumers
today will not invest in products produced by a company with weak values. If the company is
doing positive initiatives for the community, consumers will proudly wear Fossil watches.

95

Use increases in profits that result from a rebounding economy to increase the
Companys social responsibility. Fossil could spend cash to benefit local communities it operates
in, help sustain the environment, and begin donating cash to charitable organizations. Any of
these actions would bolster the Companys brand name and ensure its sustainability in a new,
green world. With this, the company could potentially benefit from positive public relations.
Fossil should begin a joint venture or strategic alliance with another big brand name
watch competitor in order to increase the Companys manufacturing knowledge of watches.
Fossil could provide a variety of distribution chains in order to lure the other big brand name into
the joint venture or strategic alliance. The companies would mutually benefit each other with
their knowledge.

4. Weakness/Threat Options:
Competitors have made large investments in their own production facilities to improve
their supply chains. Fossil needs further investment to create synergy amongst their production
portion of their supply chain. Fossil is lagging in their manufacturing process, even though Fossil
has vertically integrated this manufacturing process. Fossil has the capability of better
controlling their production process.
Fossil needs to partner or acquire companies with better knowledge of watch production.
As a leader in the watch industry, it is crucial for Fossil to work with companies that have a
strong presence in the market with a reputation for quality watches. If the company does not
know the product its producing, Fossil will have to invest to reorganize the line.

96

Fossil could eliminate the purchasing and use of animal based products like leather in
their watches. Fossil has already begun to use synthetic materials to replace leather, but the
Company would benefit from the widespread elimination of leather usage. Fossils reputation
would be benefited by the elimination of these products, especially when it comes to animal
rights activists.

B. Recommendation: Short and Long-Term Options to Implement
Based on CCMBs thorough analysis of the watch industry and in-depth research of
Fossil itself, we recommend the Company focus on two short-term options and two long-term
options. We believe these options will benefit the company by taking advantage of strengths and
opportunities while simultaneously eliminating weaknesses and threats. If successfully
implemented, these options will further Fossils brand name and reputation as a quality watch
manufacturer. Fossil should begin pursuing the goals of these options immediately.
The first short-term option we believe is beneficial for the Company is to set aside
reserves of cash for the potential switch from LIFO to FIFO. This switch would cause a large
decrease in cost of goods sold for the Company, and subsequently an increase in taxes. By
building cash reserves, the Company assures its ability to pay creditors and taxes, as well as
boost investor confidence. Fossil must begin implementing this option immediately, as the
switch of inventory valuation methods has been confirmed for the near future. The second short-
term option we believe is most beneficial for Fossil is to reduce current inventory levels. Fossils
production is well beyond the current market demand, and must be slowed in order to ensure
minimal warehousing, overhead, and storage costs. The Company is unnecessarily increasing

97

costs because of its inability to match production with demand. It is unwise to hold large levels
of inventory when sales are driven by constantly changing fashion trends. Fossil should
immediately slow production in order to reduce its expenses arising from inventory and
production. The Company would be benefited by increased profits and efficiency ratios.
The first long-term option CCMB recommends is for the Company is to expand its
creative product development department. This is because the department is a core competency
that mitigates the risk of operation in an industry where fashion trends drive the market. In order
to remain profitable and gain market share, the Company must have a focus on the changing
fashion trends. If Fossil can become a leader in first-response to these trends, the Company will
earn more customers, revenues, and profits. The second long-term option CCMB recommends is
for Fossil to expand into the emerging, profitable Asian markets. Fossil has a variety of
distribution channels and sales knowledge that it can utilize to push its products into markets
with increasing demand for watches. These markets could provide large growth rates for the
Companys sales at an attractive price. CCMB believes the Company can correctly mitigate
governmental regulation risks by working with the local governments and companies. Fossil can
use existing operations in Asia to help develop these markets. Fossil should attempt to access this
market as soon as possible because these high growth rates will not last forever. In order to build
shareholder value, the Company should quickly utilize its resources to enter more Asian markets.
CCMB believes that if Fossil correctly implements these options it will be profitable for
years to come. The Company can ensure its survival by implementing the previously mentioned
combination of options. These options will further advance Fossils competitive advantages
relative to its competitors. Fossils awareness of its strengths and opportunities can be used to
increase market share. The Companys awareness of its weaknesses and threats can help the

98

company to eliminate these items. Fossil is bound to be a watch market leader in the future with
a focus on CCMBs recommended options.

















99

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