The Business of Managing Tensions

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The fundamental tensions which companies must manage well was the primary topic of a panel I spoke on last week. We discussed H2OAudio, a company which makes waterproof cases, waterproof headphones/headsets, and waterproof armbands for iPods and MP3 players.

The panel was part of the MIT Enterprise Forum, a regular gathering of business leaders in which a case study method is used to uncover valuable business insights. Each month a presentation is made by a CEO of an innovative technology company and then panelists discuss the key challenges the company is facing. An audience of nearly 250+ people attended this month’s forum which focused on “re-starting the start-up” H2OAudio.

The discussion ended up focusing a lot on the tensions which most growth companies have to figure out how to manage well. Tensions like:

–    core customers vs. new markets – H2OAudio’s CEO, Tom Kampfer, gave an overview of the company’s current customers and his vision of its future customer base. While it currently targets the “niche” swimming market, he wants to appeal to the much larger fitness and active lifestyle market.

On the one hand, it makes sense – according to the SGMA, there are only 7.3MM active swimmers while there are over 220MM fitness/gym/running/cycling participants. So the larger market offers more growth potential.

But targeting the larger market isn’t a slam dunk:

  • There are a lot more players competing for that market’s business
  • H2OAudio’s sales force, distribution, and marketing budget are all fractions of those competitors’ so it will be difficult to breakthrough in the broader market
  • Those consumers probably place less value on H2OAudio’s advanced performance and are more price-sensitive

Plus, going after the larger, less hard core market is probably not going to be well-received by the company’s current customers. Like many growth-minded sporting goods companies before it, H2OAudio may be charged with “selling out” and watering down their products. A start-up can’t afford to alienate its current customers – it needs every sale it gets.

So H2OAudio may need to manage this tension between securing core customers and expanding into new markets by adjusting its target strategy and pursuing only adjacent markets which are closer to its core, like amateur competitors and serious fitness enthusiasts.

–    distribution vs. marketing – Companies trying to grow small market shares tend to struggle with expanding distribution vs. advertising and PR.

They have a limited amount of working capital and so they can channel it EITHER toward growing the sales force, pursuing new distribution, and paying steep slotting fees, OR it can be used to fund advertising and PR to generate broader awareness and stronger preference among consumers – but not both, or rather, not both very well.

It’s the classic conundrum – you need to make sure people want to buy your product but you also need to ensure your product is readily available in channel so that people who want to buy it can. Also retailers are more likely to pick up your product if you are giving it strong promotional support.

It’s hard to find the right balance between the two and there isn’t one right answer. But in H2OAudio’s case, it seems distribution is probably the better investment. That’s because they can promote their products quite cost-effectively through social media (provided they stick to a narrowly-defined target, per the point I made above) – and because they can use targeted channels to help develop awareness and preference on shelf (again, a more focused target which shops at fewer distribution points makes a difference.)

–    function vs. form – Tension in product development arises between increasing functionality and improving form.

H2OAudio is planning some significant product changes to move from a heavy duty action sports look and feel to a slim, multi-sport use focus. The changes are important in order to broaden the brand’s appeal beyond big male athletes with physiques and style sensibilities like Michael Phelps and Laird Hamilton (two of the company’s celebrity endorsers.)

But Tom also talked about expanding into colors and designs to make the products more fashionable — and that’s where the product development tension arises.

Should product development be focused more on improving the technical functionality of the products (for H2OAudio this might mean wireless headphones which seem to be a real need for swimmers and other athletes dealing with equipment and gear like paddles and surfboards)? OR should energies be channeled to making the products more stylish and fun to wear (H2OAudio is probably looking to follow in the footsteps of iPod and mobile phone skins and cases)?

I’m guessing that making the products more fashionable is a less expensive undertaking than making them more technologically advanced – and changes in form may be more immediately noticeable to the shopper. But H20Audio has built its brand and its business on making purpose-built waterproof products for athletic performance. New products and new features which reinforce performance seem a more effective way to strengthen the company’s differentiation and competitive advantage.

It’s not an either/or decision but a start-up company’s resources are limited and so product development direction needs to be prioritized.

As I reflected on these and other tensions which H2OAudio is working through, it reminded me of something I had seen in the feature Fast Company magazine ran on Nike’s CEO Mark Parker last month. It was an image of a page from Mark’s journal with the word “Balance“ at the top – it listed all the different dimensions of his business which he works on keeping in balance.

The image served as a telling reminder that all business is about managing tensions – these struggles are not the sole purview of start-ups like H2OAudio. And while they might seem like major challenges to H2OAudio’s Tom Kampfer, I’m guessing Mark Parker would forewarn him that it only gets harder as the company grows.

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