callaway golf

MGT – 767 Organizational Strategy and Policy

A brief analysis of the Macro Environment

General Economic Conditions: The Recession, starting from 2007, made 6.5 million

Americans to lose jobs i.e. 4.7 % of the population and 0.5 million more are losing jobs

every month since then. There is a 6.9% increase in personal savings from zero. This

accounted for rapid falling of markets for games like Golf.

Technology: In the late 1990s, the golf equipment manufacturers brought in

technological advancement in the design of golf equipment at a rapid rate to help make

the game easier for recreational golfers. But lately, there are various restrictions on the

innovations of golf equipment.

Regulations and Legislations: The USGA and R&A are the two bodies controlling and

regulating the golf equipment industry. They brought in rules to protect the traditional

nature of the golf game. So the manufacturers are restricted to make innovations in the

golf equipment. The Coefficient of Restitution (COR) measures the ‘spring-like’ effect

caused by a high-tech driver. The Characteristic Test (CT) required that the golf ball

remain in contact with the face of a driver for a maximum of 257 microseconds. The

USGA also laid regulations against the MOI (Moment of Inertia) used in a golf club. It

also prevented manufacturers from producing wedges with square edges that would cause

great spin.

Population Demographics: In 2008, nearly 25.6 million Americans played golf at least

once per year- which went down by 2 million Americans in 1998. In Asia about 17

million were playing golf and there were about 2 million golfers in Europe. Among this,

one-third of them are core golfers who play at least eight times per year and averaging 37

1 Callaway Golf Company


rounds per year. Industry sales are focused on these key golfers who contribute the 87 %

of the total industry sales.

Societal concerns, Attitudes and Lifestyle: Golf is perceived as a game of high-income

group due to its long history associated with the royals of Scotland. Moreover, the game

itself is expensive due to the equipment cost, golf course fees etc. But recently, there is a

decline in the number of golfers due to the inherent difficulty of the game. Given the

economic conditions, people with responsibilities are reluctant to devote more time in

luxury games like golf, which is both time and money consuming.

Golf Equipment Industry’s Dominant Economic Features

Market size and growth rate Golf equipment industry sales started to pick up in the late

1990s when more than 27 million Americans started to play the game. The total gold

equipment industry sales at on-course and off-course golf shops totaled nearly $2.8

billion in 2008. But the industry was in the midst of it worst-ever crisis in 2009. The

growth in revenues in this industry started to decline after then.

Number of rivals The industry is highly competitive with many companies like

Callaway, Ping, TaylorMade, Nike, Nickent and Titleist.

Scope of competitive rivalry All the major competitors in the golf equipment industries

are American based companies and there are some third party companies located in Asia.

But these companies are relatively small when compared to the size and experience of the

major American companies in the golf industry. Americans, followed by Europeans and

Asians, contribute the largest consumer population.



Number of buyers The primary market demand is shared between the core golfers like

PGA tour players (nearly 81% of total industry sales) and the rest constitutes recreational

players.

Degree of product differentiation Each of the company in the golf industry specializes

in one or two of the equipment. For example, Callaway is famous for their drivers, Taylor

Made started with metal-wood drivers etc.

Product innovation The golf equipment industry is heavily characterized by continuous

product innovation. In fact, the innovations in the golf equipment brought in the

popularity of the game. But recently, the USGA has been restricting on the club head

design innovation. So the R &D of golf equipment companies have to come up with

product design ideas that abide by the rules of USGA as well as have a technology that

differentiates from their rivals’.

Demand-Supply Conditions The number of golfers has been decreased in the recent

times, the lack of interest among golfers and high pricing have lowered the demand for

the golf equipment considerably pushing g the profit margins down.

Vertical Integration Most of the companies in this industry are vertically integrated;

they produce a range of golf equipment like drivers, shoes, putter, golf ball, wedges,

accessories etc. There is a cost advantage for these large companies in terms of R & D,

manufacturing facility, distribution etc.

Economies of Scale Both on-course and off -course sales, outsourcing of manufacturing

for cheaper cost in Asian countries, sales through online golf retailers, advertisements

through tour exposures and brand image all contribute economies of scale.



Learning and experience curve effects The existing golf companies are having huge

advantage from the learning and experience curve with respect to better product

development due to established R & D and experiences with USGA etc.

Key Success Factors

The scope for technological innovations such as boosting MOI, higher launch angle as

allowed by the USGA and R & A keeps the golf equipment industry thriving.

The reason for popularity for the golf game was achieved by the major innovations in

product design. More golfers will be seen when there are more innovative products

coming in.

The competitive rivalry among the golf equipment companies also brings in more product

differentiation, there by achieving success.

Preference for branded golf equipment by the core golfers also drives the major golf

equipment companies.

Value-added services offered by manufacturers such as the option of custom fitting, use

of specialized computer equipment in large off-course pro shops.

Low priced equipment options for amateur golfers from low-end manufacturers also

promote the golf industry.

Brand image building from touring professionals. Brand awareness through golf

magazines and tournaments promotes the brand of the golf equipment companies.

Proprietary rights like patent held by the golf equipment companies’ play a significant

part in protecting the growth of a particular golf equipment manufacturer.



Key driving forces

Declining sales growth rate in the golf industry since 2004. 5.7% decline in 2008 and

2009 sales growth is appeared to decline by 15% to 20% showing the lowering demand

for golf equipment.

Outsourcing casting and assembly operating, sourcing of parts from Asian countries

shows the impact of globalization in the golf equipment industry. This acts as an

advantage to the companies in terms of newer markets, lower operating costs on one hand

and the threat of counterfeit products for relying on third-party on the other hand.

There are online golf retailers like golfsmith.com and TGW.com for the accessibility of

products all at one place in addition to the pro shops and mass merchandisers of golf

equipment. The ubiquitous nature of Internet is definitely helping in promoting the sales

of golf industry.

Restrictions on product innovation as laid by USGA and R &A has a major impact in

driving the overall direction of the golf industry in terms of sales and general

attractiveness towards the game.

Endorsements by touring professionals like Tiger Woods are one of major driving forces

for inspiring more people to take up the game seriously, thereby leading to a greater

demand for golf equipment.

The present lag in the golf equipment industry and the existing race among the major

companies will act as a entry barrier to a new entrant into the industry.

Companies in golf industry are lowering the price of their products to attract more

golfers. The restrictions laid for innovations also contribute to this pricing strategy.



Change in the attitude of people towards to game as more time consuming and

challenging. And also concern to save their discretionary spending income due to

recession affects the golf industry overall.

Regulatory rules imposed by the USGA and R&A in terms of innovations in golf

equipment design has a main impact in lowering the discourages product differentiation

and narrows down scope for improvement in their product leading to lower sales.

Effects

Short term and long term cost Effects: The golf sport is often associated with the

country clubs, which makes the game expensive. The cost of the golf accessories like

clubs, ground fees, proper clothes etc. are high and this made the Golf a rich man’s game.

As an effect, the game has become affordable and accessible only for the wealthy

segments of the population. The short term cost effect is the decline in demand for the

sport and the long term cost effect is the sluggish growth of the industry.

Effect of altering the club design: the innovations in the design of the clubs acted as a

breakthrough for increasing the awareness and the number of players for the sport. This

innovation reduced the complexity in playing the game. As an effect the sales reached $

2.9 billion

Long term effects of governing and interference: the regulations put forth by many

organizations in the innovations taking place in the industry will have a long-term growth

effect on the industry.

The change in the consumer expenditure pattern from spending to saving because of the

economic meltdown declined the growth rate by 1.8 percent and will continue to have

both short and long term effect on the industry.



Other recession impact on the industry are a) decrease in the retail value of drivers and

woods, irons, putters, wedges, golf balls, gloves and golf bags. However the average

selling price of these products except drivers and woods increased from 2007 to 2008.

The effect of rise in gasoline price, unemployment rates, credit and housing industry

issues etc. affected the Industry since these factors impacted the demand and sales of golf

equipment.

More than 6.5 million Americans lost their jobs because of the Economic depression and

even the stimulus package introduced by the President didn’t better the Economic

situation and people started focusing on savings than on expenditures. These factors

greatly reduced the need and the want to play the game

Key issues

Cost factor:

As identified in the industry’s effects, cost is an important factor in the golf industry. The

cost of playing this sport is expensive which a key issue to be addressed is. The cost of

the golf accessories should be brought down further to make the game playable by all.

Recession which declined the industry’s sales

Complexity in making the product under USGA COR regulations. The drivers should be

produced as per the standards approved by USGA though the move of the company was

supported by the PGA Tour player Arnold Palmer.

The sale of counterfeit golf products even by registered websites like E-bay is a key issue

in the industry. Golf equipment that are worth for 2000$ are sold for 150$ to 400$ in

these websites.



The golf industry is also facing ethical issues, as the golf executives themselves are

engaging in questionable activities like sourcing contracts and club molds to China to

manufacture fake products at a very cheap cost.

Industry analysis

Entry Barriers

Golf industry is associated with high costs like in the design of club heads, ground

fees etc. this has actually reduced the demand for the sport. This factor can make

the sport less attractive for new entrants. (many people feel that high golf fees

don’t make them play the game)

The technological innovations on the other hand, which reduced the complexity of

the game, will make the industry more attractive for the entrants.

A potential barrier for the industry is the interference of government in the

innovations taking place, which has forced suppliers to compensate on price. This

will be a barrier for new entrants. (USGA’s coefficient of restitution

measurement)

The recession 2008 which affected the industry makes it less attractive for new

entrants.

The decline in the number of golf players, which is 2 million less than the number

of players in 1998 (which was 27.6 million), is also a potential entry barrier.

The existence of counterfeit products and manufacturing of black clubs are

demotivating entry barriers for entrants.



Rivalry Among existing firms

The number of players in the industry is declining which means the companies in

the industry are competing with less number of consumers. This will increase the

rivalry among the firms.

The differentiation that the firms tried to bring in under the USGA and R&A

standards like adjustable club features, lowering drivers gravity, different launch

angles etc., are evidences of increasing competition in the industry.

The industry competition is so intense that the companies spend around $4 million

in appointing PGA tour professionals as brand ambassadors for their products.

Substitutes

Although there are no direct substitute products for the industry, the presences of

counterfeit products, which are an imitation of the original products, are slowly replacing

the golf original products. This directly impacts the industry. Even registered websites

like E-bay engages in the merchandising of golf counterfeit products like sale of fake

complete sets of Callaway, Nike, and Cobra etc.

Supplier power

The supplier bargaining and buying power is low in the industry as there are large

numbers of companies especially from China who can deliver the products according to

USGA standards. In fact the firms have to be careful in choosing the suppliers because of

the vulnerability to enter the black market. Also, many firms employ strict security

procedures and quality casting inspections among the suppliers. These factors resulted in

poor supplier power.



However, the manufacturing of specially designed shafts by just branded

companies like Aldila, Graphite Designs etc. gives an upper hand to these

manufacturers alone.

The off course and on course pro shops also suffer from poor bargaining

power since the purchases of clubs are not frequent.

The online suppliers are forced to sell their products on retail prices and give

deep discounts on older models indicating low supplier power.

Buyer Power

The buyer power is relatively strong compared to the supplier power since the number of

buyers is declining. The shift in the expenditure and consumption pattern among the

consumers withdrew many golf players from the industry. Also the rivalry in the industry

is intense as the firms strive for better differentiation under the USGA standards in the

manufacturing of shafts and clubs. The numbers of new players in the industry are very

less. These factors contribute to the strong buyer behavior pattern. Many golf equipment

manufacturers and suppliers reduce the retail price; use custom fitting, shaft flex option

etc. in attracting more players. These efforts are a sign of strong buying behavior.

Present Position in the Market:

The company position itself as number two in the Golf Ball market along with

Bridgestone in 2010.

As a strategic move during the downtrend of the share price, Callaway introduces Ultra-

premium RAZR XF irons and hybrids. This product has the integration of material and

design technology which enhances performance.

The company remains Technology driven as a dominant Business model.



Strategies and Recommendations

The government regulations in the industry have limited its growth. The industry has to

strive and prosper with restricted innovations taking place.

The Branded companies like Callaway can influence the USGA to be loose its grip. In order to

safe guard the interest and heritage of the few golf-courses, USGA is restricting innovation.

Actually in past, technological innovations improved the golf game and increased the players.

The decrease in consumer expenditure in playing sports due to the economic crisis is a

key challenge in the industry. Efforts have to be focused on attracting players even in the

midst of crisis.

The 87% of sales come from core golfers. The share of business from amateur players is only

13%. To attract more players in the non-core golfers, the company must focus on a new line of

products aimed at non-profits. The new line must be cheaper and affordable. The company can

encourage players from different sectors by conducting non-profit events to popularize the game.

Example: By offering discounts on their goods to college students.

The threat of counterfeit products in the industry poses a big challenge of the industry.

The products are almost exact copies of the original and they are sold at a very low cost.

This challenge has to be faced by the industry.

The counterfeit industry is able to successfully reach the customers and make away with a

sizable portion of the legitimate business. To mitigate the issue, the company must bring second

line of products at cheaper cost suitable for new entrants. If counterfeiters are able to do, the

established companies too can do the business with some creativity.



Specializing in only one area of the equipment market; Callaway is concentrating only at

drivers and clubs. To become a market leader, Callaway must concentrate at other areas

such as Putters, Balls, Bags, shoes etc.

Expand their operations in other countries especially developing countries like China,

India where the cost of production is cheaper as these countries are highly involved in

cheap labor intensive mode of productivity. It is the appropriate period to invest in these

countries as the standard of living is increasing in these developing countries. There is an

estimated market growth rate of 25% annually for the next 5 years in India and China.

The sales of the company can be increased by establishing more stores in countries like

China, India and Indonesia due to the recent popularity of the Golf games. Also the

participation in Golf sport is increasing at a rate of 15 percent a year in Asian countries

when compared to US participation rate of 2-3% a year.

The better reach of the Callaway products should be done through many channels like

media, newspaper etc., in the developing countries. The best way to capture the market is

through local celebrity endorser specific to their countries. Also they can launch Golf

camps in major cities to create knowledge about the Golf sport.

Since the Golf Industry is a highly fragmented industry to become market leader in this

industry the Callaway Company would have to acquire small competitors like Mizuno.

Consequently this results in the increase of market share in the industry.

The technological innovation should be carried in a cost-effective basis. The prime

success of the Callaway Company is through technologically innovative products but as

the consumer confidence is at a decreased level i.e., people are reluctant to spend money

for Golf games the products should be produced with cost-effectiveness.



By acquiring prestigious quality accreditation like ISO rating will improvise their quality

continuously .This will enhance the market share of the company as a whole.

Research and Development expenses should be decreased or maintain at a constant

percentage to reduce the expenses especially during the slow economic growth.

General and Administrative expenses should be reduced by decreasing the employee

related costs. Instead of downsizing the number of employees in the company, the

employee benefits like perks, bonuses etc can be suspended.

From the segment profitability analysis for the year 2009 & 2010, we infer that the Golf

Balls segment though shows that 85 percent of the growth it results in the net loss. On the

other hand the Golf Clubs shows a net gain before income taxes. Hence the production of

Golf Clubs can be raised to increase the profitability.

Due to the seasonality of the business, the production has to be managed accordingly.

Also through identifying the market demand for the products the inventory can be

controlled. Launching new products should be preplanned to avoid the increase in

inventory of old products.

The company would continue to provide quality and technically innovative products

which would satisfy both the Professional Golfers as well as the Recreational Golfers at a

reasonable price.

The credit terms can be relaxed for the Callaway products. This will increase the number

of buyers and also create value for the aspiring customers.
