Five forces, Business model and recommendations

1. 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
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2. MGT – 767 Organizational Strategy and Policy
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.
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3. MGT – 767 Organizational Strategy and Policy
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.
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4. MGT – 767 Organizational Strategy and Policy
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.
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5. MGT – 767 Organizational Strategy and Policy
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.
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6. MGT – 767 Organizational Strategy and Policy
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.
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7. MGT – 767 Organizational Strategy and Policy
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.
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8. MGT – 767 Organizational Strategy and Policy
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.
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9. MGT – 767 Organizational Strategy and Policy
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.
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10. MGT – 767 Organizational Strategy and Policy
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.
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11. MGT – 767 Organizational Strategy and Policy
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.
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12. MGT – 767 Organizational Strategy and Policy
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.
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13. MGT – 767 Organizational Strategy and Policy
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.
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