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STRATEGY

Kings of the Hill

A new market with big competition may make it hard for this start-up to make its product an industry standard.
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In a new market with big competition, the cofounders of Switch Manufacturing are racing to make their product the industry standard. They'd better win

Erik Anderson and Jeff Sand sat their butts in the cold snow just once too often, and a new business was born.

In December 1991, at the end of another killer snowboard run at California's Squaw Valley, the two friends sat -- yet again -- to remove their boots from the large, bear-trap-like bindings holding them to their boards. As they released their feet from the plastic straps, it occurred to them that there had to be a better way to attach boots to a snowboard. Since between the two of them the pair had more than 30 years of design experience, they knew that if they could devise that better way -- say, a step-in snowboard binding -- there might be a pretty good business in selling it.

The two thirtysomethings couldn't have picked a cooler sport -- or a hotter one. With equipment sales expanding at better than 30% each year, snowboarding is the fastest-growing winter sport in the United States. Total industry sales in 1996 should hit $750 million. And there's plenty of room for more growth. Snowboarding currently represents only 18% of total snow-sport participation. Insiders project it will grow to approximately 40% by 2000, when industry sales should top $2 billion.

Anderson and Sand had met while both were working on the design of a San Francisco retail store. They found that in addition to design they shared an interest in snowboarding. Both had grown up skiing, so they knew that alpine skiers had been using step-in bindings for more than 20 years. But snowboarding was less than 15 years old, and its chief enthusiasts, teenage boys, didn't worry much about ease or convenience. On the other hand, a step-in system might attract more older people and women to snowboarding, especially from the ranks of experienced skiers, thus sending the sport's growth rate even higher.

The numbers were enticing, but before Anderson and Sand could capture their share, they needed a product, some way to make it, and enough cash to finance development, manufacturing, and marketing. They also had to contend with an impending avalanche of competition.

Out of the Starting Gate
In the spring of 1992 the new partners began two years of evening and weekend research and development, funded for the most part by $200,000 in loans from family members and friends. After full days of working on design projects as diverse as flatware, stores, and exhibits for the local zoo, Anderson would meet Sand at the job shop Sand ran in a small warehouse in San Francisco. There the two built computer models and fashioned jury-rigged prototypes. Their goal was to make a product that would eliminate the pesky straps and high-backed plastic frames of conventional bindings, yet provide enough support to preserve control and flexibility. The design they came up with featured a steel rod on either side of the boot to hold it and the rider tight to the board. But because the new binding did away with the high-backed frame, the boots would have to furnish all the support, which meant that Anderson and Sand's newly formed company, Switch Manufacturing, would have to produce not only the Autolock binding but its companion Flexible boot as well.

These two moonlighting designers weren't the only people to spot the step-in opportunity. In early 1995, when Anderson and Sand brought their pioneering product to market, the American ski-manufacturing giant K2, in partnership with the Japanese bicycle powerhouse Shimano, also introduced a step-in system, called the Clicker. At about the same time, two other step-in systems, Device and T-Bone, appeared, and there's more and bigger competition on the way, including systems from snowboard titans Ride, Burton, and Airwalk and from ski-binding overlord Salomon.
So even though the Autolock was early to market, Sand and Anderson have had little time to exploit that advantage, which is why they were quick to bring in Tony Guerrero, a longtime friend of Sand's, to head up Switch Manufacturing's sales effort. Guerrero had been director of sales and marketing at a skateboard-equipment manufacturer. That experience was invaluable, since snowboarders consider their sport to be not so much a variation on skiing as a seasonal extension of surfing and skateboarding.

At first Guerrero came in after work and made sales calls, but he quit his day job after a few months to sell for Switch full-time. Shortly thereafter, Sand and Anderson also made the full-time plunge. None of the founders took a salary until late 1994. Currently, Anderson, Sand, and Guerrero each take out $65,000 a year, and own 33%, 33%, and 17% of Switch's equity, respectively.

Step-ins today represent about 5% of the snowboard-binding market. Anderson expects them to account for 95% within three to four years, but retailers won't stock a dozen different kinds of step-ins, and that many choices would just confuse consumers anyway. It took alpine skiing nearly 20 years to settle on a single binding standard, but Anderson doesn't think it will take that long in snowboarding. Within three to four years, he sees room for three, maybe four systems. So, he says, success for Switch depends upon its being one of the leaders: number five in a four-system market is nowhere.

To be a leader, Switch has to persuade consumers to buy its system and retailers to carry it. The company has tried to reach consumers through ads in snowboarding publications, snowboarding-event sponsorships, sponsorship of a professional snowboarding team, a roaming product-demonstration van, and a Switch page on the World Wide Web. Anderson says that because those marketing components are vital to Switch's success, he's planning to spend 8% to 10% of sales on advertising and promotion -- which is relatively high for the industry. The biggest chunk of money will be spent on print advertising. Switch has plans to run about $300,000 worth of ads for the upcoming season, 90% of them targeted toward consumers and the rest toward retailers. And since consumers often decide what to buy based on the advice they get in stores, Switch has tried to win over salesclerks through instructional videos on how to sell the benefits of a step-in system. The videos have met with only marginal success, Anderson says. "Retail buyers can see the commercial viability of step-ins, but the actual salespeople have been harder to convince." They'll become real believers, he hopes, as Switch's competitors take up the education process as well.

Another way to reach consumers is through the rental market, since neophyte snowboarders usually rent equipment first. Satisfied renters will often buy what they've rented, says Anderson, and rental shops have been receptive to the Autolock because it's easier to adjust than traditional bindings and has a lower profile, so it takes up less storage space.

But with their relatively modest resources, Anderson and Sand aren't going to establish Switch as the standard setter on the strength of their consumer ads and educational videos alone. They need help, and to get it they've focused on other players in the same industry: the companies that make the boots.

High-Speed Lift
Anderson and Sand decided to follow the example set by one of their major competitors. When bicycle-component maker Shimano introduced an integrated shoe-and-pedal clip-in system, in 1990, it licensed the shoe technology to makers of bike shoes around the world. Thus, retailers and consumers got a choice in shoes, but all their choices worked with the Shimano pedal. The Switch founders reasoned they could do the same with their boot-and-binding system.

Switch has already licensed its technology to seven established boot manufacturers, including Vans, a fast riser in the snowboard-boot industry. Switch receives a $5,000 licensing fee, plus a $1 royalty on each pair of boots, but Anderson doesn't see licensing as a big revenue generator. It even cuts into the sales of Switch's own Flexible boot line. But Switch had become a boot maker only out of necessity. "No boot manufacturer would sign on with us when we started," Anderson says. He points again to the Shimano analogy. "By licensing their technology, Shimano lost a lot of shoe sales, but that was offset incredibly by the increase in their pedal sales." The boot manufacturers' reps are "out there talking up our bindings," he says. Furthermore, Switch figures it can piggyback onto the boot makers' print and broadcast ads. Vans, for instance, featured the Autolock binding in one of its TV spots. "And that's just the beginning," crows Anderson.

Not just an add-on, the licensing strategy has become crucial to Switch. If the company doesn't partner with enough boot makers, Anderson reasons, Autolock won't become one of the standards. As a small niche player, Switch wouldn't be able to produce enough bindings to support its licensed partners. "So it's all tied in together," Anderson explains. "Once we achieve the critical mass, everything will work out. Until then, everything is a bit awkward."
Eventually, Anderson says, the choice of boots, not the binding, will drive the consumer's purchasing decision. "Right now, because the technology is new, the binding is driving the sales," he says. "But the same was true at first for Shimano. Now that the pedal is the standard, bike riders choose a shoe first." So Switch is trying to identify existing and upcoming snowboarding niches and sign on boot partners that address them. For example, since freestyle snowboarders take their inspiration from skateboarding, Switch has signed up Duffs, a prominent skateboard-shoe manufacturer that recently expanded into the snowboard-boot market. But the Duffs name means nothing to the veteran skier who crosses over into snowboarding, so Switch is trying to attract familiar names there, too. "If we could sign up a Rossignol or a Nordica, it would mean a lot to the crossovers," says Anderson. So far, he adds, 8 of his top 10 prospective boot partners across the niche spectrum have indicated that they'll work with Switch for the upcoming season.

Step-in bindings may represent the future of snowboarding, but neither shop owners nor veteran 'boarders are jumping into them as quickly as Anderson might like. Many dealers, he complains, are waiting to see what the big names offer before deciding what to stock. And many 'boarders are happy with the traditional strap-ins, which they say offer the right amounts of hold and flexibility. During the Autolock's 1995-1996 inaugural season, many riders touted the enhanced convenience, but some said the boots didn't offer the same support as the strap-ins. Anderson and Sand believe that improved boot design, through the combined efforts of Switch and its licensed partners, will help assuage customers' reluctance.

* * *

Moguls on Moguls
Promoting a new boot-binding system is not entirely a domestic matter. The Switch binding currently sells in 18 countries, including several in Europe as well as New Zealand, Australia, and Japan. It was in Japan, in fact, that the company's first sale took place. In December 1994 Anderson and Guerrero took their prototype boot and binding there. "We knew the importance of that market," Anderson explains. But more important to Switch than the sale itself was the fact that Japanese distributors, eager to sign on with potentially big players, were willing to pay 50% of their order value up front, with the balance on a letter of credit. Anderson and Guerrero landed a $700,000 order for 3,500 units, which Anderson says came close to funding Switch's operation the whole of the following year.

Switch further reduced its working-capital needs by outsourcing the manufacture of its bindings. Outsourcing saved the company from having to purchase capital equipment. In addition, the contract manufacturers buy their own raw materials and provide finished products to Switch on a net-30-day basis. Switch chief financial officer Dan Adams, a Stanford M.B.A. with seven years' experience in production management, joined the company in February 1996. He says the manufacturers that Switch uses aren't necessarily the least expensive. "But terms are more important to Switch right now than price," he says.

The snowboard business comes with inherent cash challenges, most of which are due to the seasonal nature of the sport. That seasonality, says Adams, results in cash spurts that render Switch's balance sheet "almost meaningless." Sand and Anderson are developing cross-seasonal products (the exact nature of which they decline to discuss) to offset some of that seasonality.

Switch has other kinds of revenue bumps to deal with. As many small companies know, a big order can come as both good news and bad. The good news is that you got the order. The bad news is that you have to produce the goods, which takes cash. When boot maker Vans signed on as a partner in the summer of 1995, Switch agreed to produce 6,000 bindings, which cost Switch $50 a pop. The company engineered two three-month loans, totaling $300,000, from a private party -- "a friend of a friend," says Anderson -- who required the owners to put up 10% of their equity as collateral and make principal and interest payments of $75,000 a month. Adams puts the effective interest rate at 4% a month, or 60% a year. "It's easy to say, 'We were robbed," he says, "but we would rather have had that money than no money at all. We couldn't have done the Vans deal without it."

Another cash challenge lies ahead. Currently, most snowboard-equipment sales occur in small specialty shops, which pay Switch C.O.D.; well-established shops get 30-day terms. But as the sport grows, chain stores and large sporting-goods retailers will want to carry the bindings and other equipment for the sport. "They are used to getting pretty crazy terms, like 120 days," says Anderson. "If we can't match that, they'll just look elsewhere."

So, in early 1996, Switch began to market a private placement to sell 25% of the company for $3 million. One of the large established industry players offered to take the whole deal itself, but the founders declined. "We thought it might hurt our licensed-partner relationships," says Anderson. The founders closed the placement prematurely in May, having raised $1.8 million for 17% of the equity, because certain venture capitalists expressed interest in investing, a possibility the founders happily entertain. "They can provide a lot of added value," says Anderson. "Help with distribution, finance, international sales, and all those things we could use help in."

Anderson plans to use some of the money from the placement to produce 100,000 bindings for the 1996-1997 season. He'll also expand Switch's marketing budget to strengthen its advertising presence, produce a biannual customer newsletter, and introduce a fax-on-demand information system for retailers. And he wants to add marketing, administrative, and sales staff with international expertise, raising the number of Switch employee s from 16 full-timers to 20.

* * *

No More Bunny Slope
Switch's Autolock has a strong chance of becoming one of the standards in this new equipment category. Anderson claims his company's sales and market share are neck and neck with K2's. He also claims that in consumer tests -- "on the slopes, in the snow" -- Switch's binding usually prevails. But cofounder Sand sagely adds that "if there is any problem with K2's system, it's only a matter of time before they work it out." Also, both Anderson and Sand acknowledge that the best product doesn't always win. Lots of people thought Betamax was the better video-recorder technology, but VHS won the marketing war.

Litigation has inevitably become an issue. Of the nine lawyers that do work for Switch, six are patent lawyers, and they've already seen some action. There are only so many ways to attach a foot to a snowboard, Anderson says, so whether by a company's design or not, many systems are similar. In April, Preston Binding Co., a division of Ride Inc., sued Switch, alleging patent infringement. Anderson claims Ride's suit is just an attempt to "harass and intimidate a smaller competitor," but even if he's right, the suit is still a potentially costly nuisance that could frighten off licensing partners.

Nonetheless, Switch has graduated from the bunny slope and is headed toward the black-diamond trails. Anderson reports 1995 sales of $1.5 million and projects $9 million in sales for 1996. "I constantly hear about competitors comparing themselves to Switch in some way," says Sand, "and even if what they say is negative, it still shows we're to be reckoned with." Anderson argues that Switch's two-year head start gives the company some advantage in the minds of consumers and retailers. "Burton and Airwalk will come in with an unproved product," he says, "which is not an easy hurdle to overcome." Of course, Burton and others have a lot more resources to spread around than Switch does. "We'll give them a run for their money," Anderson responds. After a pause, he adds, "Still, we have a lot of running to do."


EXECUTIVE SUMMARY

Company: Switch Manufacturing, in San Francisco. Manufactures and distributes the Autolock step-in snowboard binding and its companion Flexible boot line

Concept: Create and produce a step-in snowboard binding; achieve wide distribution through licensing partnerships with boot manufacturers

Projections: Revenues of $19 million in 1997, with a pretax profit of $2.8 million

Competitive advantages: An improved product and a head start

Hurdles: Gaining enough market presence to establish its brand as an industry standard; surviving lawsuits

THE FOUNDERS
Erik Anderson,
president, age 37

Jeff Sand, director of design and manufacturing, age 37

Tony Guerrero, director of sales and marketing, age 33

Family: Sand, married; Anderson and Guerrero, single
Education: Anderson earned a degree in fine arts and industrial design at Rhode Island School of Design in 1982. Sand earned a degree in industrial design at San Francisco State University in 1982. Guerrero has a high school diploma.

FINANCIAL SUMMARY

1995 1996* 1997* 1998*
net sales $1,549,340 $9,068,038 $19,379,805 $27,555,895
Expenses $1,736,867 $8,371,697 $16,626,008 $23,860,979
net income ($187,527) $696,341 $2,753,797 $3,694,916

*Projected


LICENSED TO GROW

By licensing its step-in-binding technology to a large number of boot makers, Switch Manufacturing hopes to establish the Autolock binding as a de facto standard in the exploding snowboard industry. Licensing a technology to establish early market share in an emerging product market is a time-honored strategy that's been executed by a number of well-known companies:

? Licensing arrangements helped the IBM-compatible PC crowd Apple's computers into a small piece of the market.

? Microsoft used licensing to establish MS-DOS as the preeminent computer operating system.

? Adobe Systems developed PostScript, a computer language to transmit pages to a printer, and licensed it to other manufacturers to establish it as the industry standard.


WHAT THE EXPERTS SAY

Observer

Anthony Warren
President of Technology Management & Funding, a technology-commercialization business in Princeton, N.J.

The founders may have erred in not selling 25% of the company to that one industry player. Switch's licensing partners would have stayed with it so long as it was providing a profitable product. In fact, Switch could even have offered the private placement as part of the licensing deal -- say, $50,000 for the license and $50,000 for 1% of the company. Or make the license free but charge $200,000 for 1% of the company. Doing so would solidify the relationships, since partners would see some of the upside potential.

Observer

Michael Treacy
Managing director of Treacy & Co. LLC, a management-consulting firm in Boston

This is going to be a tough uphill fight. Switch should consider licensing the binding technology as well as the boot technology. It's far more important at this phase to win the standards war than to make money. Licensing the binding to one or two strong competitors will give the consumer a choice. Then Switch can beat the guys it's licensing to by continuing to innovate within the standard.

Switch's marketing so far has been pretty standard: snowboard teams, sponsoring events, magazine ads. It needs more of a guerrilla mentality, more selectivity about where it focuses its limited resources. It should go after the highly influential user -- target some Generation X Hollywood types who are heavy-duty snowboarders. Get the binding on MTV or ESPN2. Focus on the dozen or so ski areas that are snowboard meccas. And there's a big opportunity to use K2's and Burton's big names against them. The average snowboarder doesn't like big companies or traditional approaches, and Switch could use its counterculture mentality to its advantage.

Financial analyst

Mark Leslie
Vice-president and research analyst at Dane Bosworth, an investment-banking firm in Minneapolis

Switch has established itself as a technology leader to date, although the technology itself is still in question. The fact that Switch has done so well against K2 without K2's brand name and broad distribution is evidence that it has a successful product. To ensure its continued success, Switch could affiliate with an existing snowboard company to leverage its distribution. The founders could sell equity, perhaps even becoming a part of a larger company or selling out entirely. Or they could create a distribution agreement.

Customer

Steve Klassen
Current world extreme snowboarding champion and owner of Wave Rave, a snowboard retail store in Mammoth Lakes, Calif.

Step-ins are definitely the future of snowboarding. As soon as I find a step-in binding that equals the performance of the strap systems, I'll switch myself. Switch's current design, which has metal bolts hanging off the side of the boot, won't become the standard. But that's not to say that Switch might not come up with the right system in the future. None of the step-ins available last season came as a finished product. With the Autolock, the retailer had to cut holes in the bottom of the boot, and that was a pain. Supposedly that problem is fixed now, so we have ordered Switch again this year.

Last updated: Aug 1, 1996




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