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Patek Philippe and the Outsourcing Challenge

Please imagine you are senior manager with the Swiss Haute Horlogerie brand Patek Philippe. Since its creation in 1851 in Geneva, the family-owned brand Patek Philippe has been perpetuating the tradition of Genevan watchmaking and jewelry. Together with brands like A. Lange & Söhne, Vacheron Constantin, and Piaget Patek Philippe builds the high-end segment of the worldwide watch market. Patek Philippe is known to design and manufacture the most complicated watches such as the perpetual calendar with moon phase. All watch components are produced in-house. Also, the Patek Philippe Seal guarantees the enduring quality of Patek Philipe's timepieces, i.e. Patek Philippe commits to lifelong servicing and restoration for all timepieces created by Patek Philippe since 1839 supporting its claim "You never actually own a Patek Philippe. You merely look after it for the next generation."

Please imagine that the management board at Patek Philippe asks you to elaborate on the following: Should Patek Philippe start outsourcing (contracting out internal to processes to third-party partners) parts of the production? Please base your recommendation on a sound analysis of opportunities and potential threats of outsourcing parts of the value chain.

In case you recommend to outsource parts of the production: Which parts of the production would you outsource? In which country should the third-party partner be located? What are the consequences for your marketing mix? Feel free to include additional aspects in your reasoning.

In case you recommend not to outsource parts of the production: What do you alternatively recommend in order to improve profit margin of Patek Philippe's product range? Feel free to include additional aspects in your reasoning

Solution Preview

Outsourcing is the decision to export the production of particular units/products/services to firms that are external to an organization. As such the outsourcing firm has no direct control over the process involved in the manufacture of the product/unit/service. However the firm does receive the finished goods after making a payment usually regarded as a purchase price.

As a policy, outsourcing has its opportunities and problems alike. A particular problem is in the possibility that the outsourcing firm may not be obligated to undertake an outsourcing contract prior to any investment by Patek Philippe. Once the investment has been undertaken any further demands, by Patek Philippe, would be potentially borne unconditionally by the outsourcing firm. Some firms may demand for products/services at a marginal cost. This cost may not be economically viable for the outsourcing firm what with all its investments in capital and labor.

In order to counter such demands some firms might have planned for such outcomes and would attempt to compensate for it prior to the start of the contract. This would involve inserting tricky exit clauses into any agreement or even stipulating that the equipment cost may ...

Solution Summary

The expert examines Patek Phillippe and the outsourcing challenges.

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