Case Study: Making the Cut

How Swiss Army used its sharpest tool-brand extension-to carve a new niche.

When it comes to military service, a stint in the Swiss Army isn't exactly hardship duty. The last time the famously neutral country fought off invaders, Napoleon led the enemy forces. So Switzerland's soldiers tend to worry less about firepower than about the finer things: uncorking wine, slicing rich cheeses, and tightening ski bindings before a schuss through the Alps. For these tasks, they're well equipped.

In 1891, Swiss knife maker Karl Elsener produced the first version of the Swiss Army knife, a pocketknife with red handles (to keep it from getting lost in the snow) that over the years has sprouted a wide assortment of tools. Every Swiss soldier still carries one, produced by Elsener's company (later named Victorinox) or its sole competitor, Wenger, which began production in 1908. Today, Switzerland accounts for only a tiny fraction of either company's sales. Both sell most of their goods in America, and-in a move that's been the key to their growth-both have introduced new products.

It may seem an obvious play in hindsight, but to expand beyond knives, Victorinox's American cousin (a company now known as Swiss Army Brands) had to break one of the most fundamental rules of business: Don't mess with an icon. This lesson is at the heart of some of business history's most studied chapters. Remember New Coke? If a new Swiss Army product turned out to be a mechanical lemon, or an object redolent of girly-man fragility, it would undercut the brand's image of rugged reliability.

These jack-of-all-knives first be-came popular in the U.S. after GIs brought them home from World War II. Since then, they've gotten astronauts out of jams on the space shuttle, served explorers climbing Mount Everest, and saved an airline passenger choking on his dinner (a doctor used one to perform a tracheotomy at 35,000 feet). One Swiss Army knife even sits in New York City's Museum of Modern Art as a model of stylish design. But despite the sort of following that inspires fan clubs (Swiss Army has two), the knife didn't always produce sharp returns for the Forschner Group, the Connecticut-based company that has served as Victorinox's American distributor for six decades. In 1975, the same year a young U.S. Army veteran named James Kennedy joined the company as a telemarketer, Forschner sold less than $700,000 worth of Swiss Army knives.

Kennedy, one of a team of aggressive young managers, was determined to change that. He and his colleagues spent the next few years trying to persuade Forschner to take advantage of the brand's full potential. In the '70s, the only place buyers could find Victorinox Swiss Army knives was in specialty cutlery stores in a handful of big cities. This narrow distribution strategy was aimed at maintaining the brand's upscale image. Trouble was, hikers and fishermen were prime customers, and they didn't patronize fancy knife stores. "The knives had a great reputation, but no distribution," Kennedy says today. So his team moved their product into mass-merchandise channels like Kmart, Wal-Mart, and Target. By 1979, sales had jumped nearly tenfold, to $6 million. The company expanded again, launching a line of knives for corporate buyers. Customized with company logos, the small knives trumped the time-honored golf balls and pens that sales reps had typically used to grease prospects' palms. By 1983, Kennedy was the company's sales chief, and Forschner sold $20 million worth of Swiss Army knives.

At about that time, managers began to debate whether the company renowned for pocketknives could sell anything else. Given the risks involved in tampering with a century-old business, it's tempting to imagine smoke-filled boardrooms and sweaty brows, an old guard resisting the change as younger managers bet their careers on a radical new course. The truth is less cinematic: The initiative evolved slowly, supporters gathered lots of evidence to suggest that their plan would work, and opponents had time to get used to the idea.

The kernel of the brand-extension strategy first emerged in 1984, when the Swiss watch company Swatch ordered 600,000 Victorinox knives embossed with the Swatch logo, which it packaged with their watches in a two-for-one deal. Customers liked the pairing so much that some mistakenly called Forschner's offices and asked where they could get more of these "Swiss Army watches." By 1987, Forschner was serious enough to spend $500,000 on a market research study to ascertain whether the company could execute a brand extension into watches. The results looked positive. Overall recognition of the Swiss Army brand among men topped 90 percent, a consumer-awareness level that rivals Coca-Cola's or Disney's. And the bulk of the respondents said they'd consider buying a Swiss Army watch. By 1989, the company's directors had given the green light.

Still, no matter how good the market research looked, the move wasn't a slam dunk. In the hierarchy of brand strategies, the safest bet is a line extension: adding new flavors, sizes, or other variations of existing products. Line extensions require comparatively small investments (Gatorade doesn't need much R&D to figure out how to make grape or raspberry flavors) and usually don't harm the original brand if they flop. That lower risk makes many companies wild about line extensions. But Swiss Army had already milked the strategy for all it was worth, creating dozens of different versions of its knife. A jump into watches-a full-fledged brand extension-would be a far more aggressive play.

For a brand extension to work, a new product should share enough attributes with the original to seem similar. Bayer, a name U.S. consumers indelibly associate with the word aspirin, recently drew criticism after launching Bayer-brand pesticides. Not a great match. But even a brilliant brand extension diverts capital and management attention, and if a new product bombs, it can tarnish the original.

Swiss Army's watch strategy began ticking just as James Kennedy, the one-time telemarketer, reached the CEO's office. Forschner spent $200,000 researching a design for its watch, and settled on one featuring the distinctive red plastic in its bezel and the familiar cross on its faceplate. Within four months of the watch's launch in October 1989, retailers had sold Forschner's entire 50,000-watch production run.

The company saw it had a hit on its hands, so it quickly increased its bet, creating an Officer Series of watches that sold for $200 and up. Forschner also launched an advertising campaign, a necessity for winning shelf space at upscale retailers like Macy's and Bloomingdale's. By 1992, watch sales topped $30 million, constituting 50 percent of total sales. Four years later, the trusty knives that built the company were no longer its dominant product, so the company adopted a name more suited to its widening universe: Swiss Army Brands.

By that time, CEO Kennedy was history. He left in 1995 when directors set a goal of increasing sales to $300 million. Kennedy says the target was unrealistic because a company dedicated to marketing rugged Swiss products can extend in only so many directions. Today Swiss Army Brands is led by J. Merrick Taggart, and it's a different company than the one that took a gamble a decade ago. The iconic pocketknives now come in more than 70 variations, complemented by tools designed for fixing computers, cars, and golf equipment. One thing remains the same-brand extensions are a key strategy. Taggart explains the process: "When considering a new product, we ask several questions: What is the size of the market? What are the price points? What are the distribution channels, and what dollar volume does each consume? Who are the competitors, what are their core competencies, and what's their positioning? We go through a tight funneling process to determine whether there's an opportunity for us."

Swiss Army Brands found its latest opportunity in luggage. Launched last fall, the move is looking every bit as successful as the original foray into watches, says Jeff Turner, senior vice president of marketing. Swiss Army Brands' team continues plotting new brand extensions, drawing heavily from a 1998 market research study that consisted of nearly 1,700 one-on-one consumer interviews and close to a dozen focus groups. Some customers will be disappointed: Management rejected customers' ideas about going into bicycles (too capital intensive) as well as sleeping bags, tents, and coolers (which have too little in common with knives). The company won't divulge details of future products, but CEO Taggart does allow that "a serious exploration of apparel is now under way," with a focus on high-tech outerwear. He says he could also see Swiss Army selling electronic gizmos, perhaps similar to the PalmPilot, which is fast becoming the Swiss Army knife of the wired world.

And what about James Kennedy, the boss who led the march into watches? Last spring, after five years at his own firm, he took a new job-as chief executive of Wenger North America, the U.S. distributor for the other Swiss Army knife. Kennedy jokes that it's like jumping from Coke to Pepsi. He has his work cut out for him: Victorinox outsells Wenger in knives by four to one. But Wenger has staked out creative niches of its own; it even sells Swiss Army cologne. In his first weeks on the job, Kennedy declined to predict what brand extensions might lie in Wenger's future. But the folks back at Swiss Army Brands will be watching carefully, hoping that the manager who helped reinvent their company won't work the same magic for the competition.
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