The Carlsbad, CA based company

The Carlsbad, CA based company was founded by Ely Callaway in late 1982. Ely Callaway applied his earlier success-concept “providing a product that is demonstrably superior to what’s available in significant ways and, most important, pleasingly different”; to the golf-industry and succeeded.

Callaway, together with its subsidiaries, designs, develops, manufactures, and markets golf clubs (drivers, fairway woods, irons, wedges and putters) and golf balls. The Company also sells golf accessories. Generally Callaway sells its products to golf retailers, directly and through its wholly owned subsidiaries, and to third party distributors.

Mission and Vision

The Company was built on the pillars of its visionary founder Ely Callaway, who projected his own life vision into his venture. Callaway Golf’s vision can be summed up as, demonstrably superior and pleasingly different. This vision is also incorporated into the company’s mission:

Callaway Golf Company is driven to be a world class organization that designs, develops, makes and delivers demonstrably superior and pleasingly different golf products, that incorporate breakthrough technologies, and backs those products with noticeably superior customer service. We share every golfer’s passion for the game, and commit our talents and our technology to increasing the satisfaction and enjoyment all golfers derive from pursuing that passion.1

Callaway’s mission and vision are also incorporated into the individual objectives; the company pursues constantly to be the world’s largest and most successful golf company. The company tries to meet their objectives by referring to Ely Callaway’s maxim: Callaway constantly tries to be the technology leader in the industry. This objective of the company is made visible by analyzing R&D expenditure. Not only does Callaway own and run the large Helmstetter Test facility, but the company constantly outspends competitors in this field.

Financial Performance

Callaway Golf Company had revenues of $816.2 million in 2001, down 2.54% from 2000, but compared to 1999 this is an increase of 12.5%. Over the same time (1999 to 2001) the net income increased by only 5.3%, while it dropped a noticeable 27.9% from 2000 ($58.4 million compared to $58.4 million). Overall did the stock follow the S&P 500 in its downswing, while being outperformed by its most potential competitor Adidas-Salomon (Taylor Made). These figures are of strategic relevance, although that one has to keep in mind that Adidas-Salomon is a multi-sport company in comparison to Callaway’s single sport approach.

Environmental Analysis: External forces

Threats

Callaway Golf faces several challenges within the golf club and apparel markets. Major competitors include Taylor Made, Ping, Adams Golf, Orlimar Golf, and Titleist. All of these companies have comparable product lines, cover the same geographic areas (although some are more international than others), and sell golf clubs at a similar price. These competitors therefore have the potential to compete away Callaway’s currently dominant market share. Taylor Made and Ping are considered to be the strongest threats based on their track records, product innovation, and name-brand recognition. Another major threat lies in Nike’s market entry into the industry with its introduction of clubs.

Competitors such as Wilson, MacGregor, and Spalding, are considered less of a threat because they compete in the broader market, and more on low-cost leadership than on product differentiation. The latter competitors all lost market-share to Callaway and other companies in recent years due to their lack of innovation and poor environmental scanning.

Other factors to consider in the microenvironment include the degree of vertical integration of competitors, different options for manufacturing (cost reduction vs. quality concerns), market price sensitivity, customer perceived value vs. price, and copyright infringement issues. These and other factors are essential elements of Callaway’s microenvironment and must be observed vigorously for changes.

Opportunities

Callaway sells a luxury product that appeals to mostly wealthier people, its existence is largely dependent on the desire of the upper class to spend money. Typical golfers are of middle-age and above average income and to 75% male. Only 6% of all golfers have a handicap of 8 or lower. These figures bear interesting opportunities for Callaway. There is a specialty market for women, seniors, and juniors. Furthermore, is there a huge potential of still non-golfers in Europe, were the sport slowly makes its entrance into the mainstream. One of the most important statistics is that the majority of golfers are rather poor players. These are the ones that will be most willing to purchase equipment that enhances their poor techniques. This of course is a big opportunity for Callaway if it pursues its path of constantly doling out the highest performance clubs.

The health of US and international economies provide opportunities for Callaway. Another factor important factor is the United States Golf Association (USGA), which oversees and controls golf tournaments and the golf industry. Changes in policies and guidelines can be either opportunities or threats to Callaway. Technological innovation is perhaps the most important factor. Callaway is considered to be at the forefront of the industry in terms of technological advancement, and any new developments in technology may be opportunities for Callaway.

Internal forces

Strengths

Some of the key internal forces within the Callaway Golf Company include the rate and scope of new product development, quality control, product line and complementary product development, and relative cost position. All of these factors contribute to another important factor: reputation/image.

Callaway’s strengths include superior product innovation arising from modern, high-tech plant and facilities. Their quality control and customer service is second to none, and their product line is strong and complementary. Callaway’s relative cost position is strong as long as customers are willing to pay a premium for the expensive Callaway products.

Weaknesses

One possible weakness is high investment in R&D and plant facilities, which drives up fixed costs and makes Callaway less flexible to respond to shifts in demand. Another is the relatively unpopular Callaway apparel line. There is little demand beyond venues in pro shops and high-end department stores. Also, too much competition exists from Nike & other established sports apparel brands.

Key success factors

The following elements must be present within the golf club industry in order for a company to survive:

1. Innovation, technological skills- product design

2. Product differentiation

3. Marketing & Advertising

4. Response to consumer preferences- such as switching from steel to graphite shafts

5. Strong brand-name recognition

Callaway’s Strategy

Callaway Golf pursues a differentiation strategy that focuses on high quality at a premium price. Quality is achieved through superior product design using sophisticated technological support, computer-aided design and high-tech workstations & test centers. Callaway manages its value chain though tight controls of suppliers and manufacturers, with quality as a top priority. The forward value chain is managed by selectively distributing products to high-end pro shops where customer service is paramount. All of these factors combine to provide Callaway with a resource-based competitive advantage based on its technological know-how, innovative design, and quality controls.

Problems

Despite its rapid growth and phenomenal success in the early and mid 1990’s, Callaway Golf began to experience problems in 1997. Ely Callaway, Founder and CEO, retired in mid-1996. Donald Dye became CEO, and fell upon troubled times. He attempted to expand Callaway’s operations into golf course management and golf publishing. 1997 brought global market maturity, poor weather conditions, an Asian economic crisis, and increased competition from innovations by rival firms. As Callaway experienced a sales decline in 1998, Donald Dye was blamed for inadequate environmental scanning and loss of focus. The company posted a net loss for that year due to this combination of factors.

Despite the return of Ely Callaway in November 1998 and the company’s subsequent return to profitability, problems continue to exist. Inventories and accounts receivable are rising while selling prices and profit margins are falling. Spectacular earnings growth over the company’s first few years of publicly traded life were great but not likely to be sustained. Now that the company is dominant, there just isn’t much market-share left to take.

Recommendations

Due to worldwide economic slowdown, the overseas markets show no sign of improvement. Callaway is therefore overstocked and should continue to discount clubs, thereby not focusing on increasing market share, but just maintaining it domestically. Environmental scanning is crucial, as the Asian crisis may eventually improve, and a falling U.S. dollar would create high Asian demand in such a scenario. For a company priding itself on its California-based club production, that would be the perfect export opportunity for a return to growth.

Callaway should also reduce inventories. This can be accomplished by liquidating older model golf clubs. It is essential for Callaway to maintain high R&D spending, continue player endorsement marketing, and remain focused on the high-end golf club market. The golf ball division must not be neglected, but the primary source of revenue remains golf clubs and that must therefore be the primary focus of any strategy. Callaway is dependent on a robust economy and should attempt to ride out the current economic slump though administrative costs reduction and perhaps by becoming a flatter organization. The success of the Callaway apparel line is questionable, but can be maintained as long as costs are minimal relative to generated profits.