Competitive rivalry will probably decrease when the first manufacturers withdraw themselves from the market because of a no profitable activity. In for the costumer worst case the development could lead to an oligopoly.
Callaway Golf s position in the industry is very strong and with it s expansion to the Golf ball market it enters the market of consumer goods. If it will gain a certain market share and recognition on that segment this may result in a stable supplementary income. However the segment is nearly dominated by one company Callaway s innovative strategy may have success.
Callaway acts on a market very much linked to people s lifestyle. Significant changes in the lifestyle, for example a decreasing attractiveness of golf as a sport could lead to significant cuts in sales.
With the Helmstetter test center and Callaway s capabilities in research and development the company matches perfectly one of the factors of critical importance to success in the industry. Another important factor is, that Callaway Golf with three wholly owned sales Companies in the key market distributes it s products under it s own label and will better be able to control service quality in distribution.
Besides there will not appear costs to contract a third company for distribution as it was the case earlier with sumitomi .
The continued participation of the company in the golf equipment market already created a very good image in customers perception, and would possibly help to entry in other industries, at least in sports equipment business.
4 Callaway Golf Company Resources and Competitive Capabilities
4.1. THE PRESENT STRATEGY
Since 1993 Callaway is stably the number one seller in all major golf markets in the world. The 1999 net sales with USD 714,471,000 reached an all time high. This represents roughly as much net sales as Callaway Golf s competitors in 1999 made together. Gross profits were about USD 338,066,000. In spite of a startup loss of USD 38,425,000 remained USD 55,322,000 net profit. Therefore the board s goal to return the company to reasonable growth was so far achieved. As well we have to mention that the company s net profit always was increasing, except in 1998 when the company firstly had to report a loss, which was because of the creation of a golf ball business from the scratch, coinciding with a decrease of net sales by 18 % caused by companies heavy attacking Callaway with knockoff imitations. The Figure 4 shows the development of Callaway s pretax and net incomes as percentage of sales.
We can see the 1998 loss and the recovery 1999. This is a positive trend and the company s restructuring goes on. However, some major markets in 1999 suffered a decrease in net sales. In Japan we noted a decrease by 5.5 % and in the United States by 5%. In Europe sales remained constant at USD 115,700,000 and in the rest of Asia and the rest of the world we noted a strong increase by 114% respectively 16%. The enormous growth rate in the rest of Asia is mainly due to economic recovery in Korea and is not supposed to hold on in the next period. In working capital Callaway nearly touched once again the 1997 level with USD 205,198,000. Total assets were reduced by nearly USD 40,000,000, to USD 616,783,000. Long term liabilities as well were reduced by USD 7,000,000 down to USD 11,575,000. This as well is a positive trend. The high amount of Cash and Cash equivalent Callaway possessed in 1999 led to an increase of interest income to USD 9,2 million. It is held to eventually buy back shares, because on of the weak points of the company is the stock price. However, since it seems to be a global phenomenon that excellent companies worldwide have lost a notable percentage of their stock price this is not caused by bad management or mistakes in the strategy. The problem solely is that there is no guaranty for an increase of the stock price in case of buying back stocks.
Callaway has an excellent reputation with it s costumers and is considered to manufacture products of very high quality. Besides Callaway during the nineties was always seen as technology leader in the market, since it came out with the oversized Big Bertha Clubs.
As a conclusion we can mention that Callaway s actual strategy is doing quite good and that there is no need for radical changes in its strategy. The restructuring Callaway started will contribute to further increased cost efficiency and better distribution systems of the company. The final important point is that Callaway already and with more than one year anticipation launched a plan for leadership succession which will contribute to the trust stakeholder have in the company.
4.2. THE COMPANY S STRENGTHS AND WEAKNESSES
As strength we can consider the following characteristics Callaway has:
technological know-how
R&D capacity and skilled human resources
good reputation it has for its products
presence at all big tournaments and endorsements of skilled players
a system of wholly owned distribution facilities
a couple of strong brand names
position as market and technology leader
clear defined leadership succession
relatively short development time
Weaknesses are the following:
relatively low stock prices, which facilitates takeovers
high warranty expenditures because the Big Bertha extra long graphite shafts experience shaft breakage at a rate higher than other metal woods
negative impact of the newly built up golf ball business on cash flows
As core competence and distinctive competence is the experience and the skill of Richard Helmstetter and his engineers in the Helmstetter Test Center which is as well equipped with the necessary funds to perform their work (Callaway is number 1 in R&D expenses).
4.3. EXTERNAL OPPORTUNITIES AND THREATS
The main threats are the following:
golf is to be seen as seasonal and might be affected by unusual weather conditions
subjective preferences of golf club purchasers may be subject to rapid and unanticipated changes
Generally there is no guaranty that a return on company s R&D investments will be realized, threat of consumer rejection
Insecurity if markets allow the company to achieve cost advantages because of economies of scale
Failure to successful distribute in Japan because of cultural differences
Company is affected to the impact of foreign currency fluctuations (monetary differences may result in less competitive markets)
Dependencies on raw material prices
As main opportunities we can define the following:
very good standing because of consideration of market and technology leader
good reputation and possibility to expand in other sport goods markets
if subjective preferences of club purchaser will not be subject to significant changes Callaway implied changes in its structure will lead to advantages in production and distribution.
The golf ball business could turn very profitable because of the characteristics of the golf ball and Callaway s good reputation
If market further increases Callaway would draw benefits from economics of scale
4.4. THE COMPANY S PRICES AND COSTS
In 1999, the company achieved a gross margin of 47%, which indicates that the company is profitable. With the restructuring program implied in 1999 the company will produce even more efficient. Especially the decrease of general and administrative expenditures by 13% will have positive effects.
4.4.1 ANALYSIS OF THE COMPANIES COMPETITIVE POSITION
Value chain analysis
The value chain analysis describes the activities within and around an organization, and relates them to an analysis of the competitive strength of an organization.
The primary activities are the following:
Inbound logistics
Callaway is dependent on a limited number of suppliers, but believes that it would be possible to find alternative suppliers in case. However, many of the materials are customized for Callaway and there is a certain dependency on suppliers and in case of interruptions this would lead to negative consequences. The same is valid for raw materials. There is no tendency to backward integrate suppliers notable, the company tends to concentrate itself on its core competences.
Operations
At Callaway Golf the manufacturing area run by Ron Drapeau. During the phase of restructuring he made in possible to increase efficiency and increase output while maintaining the determined level of quality.
Outbound logistics
Callaway Golf restructured as well its distribution channels and actually possesses wholly owned distribution companies. Callaway Golf still believes that on a long term basis controlling the distribution of their products in the worlds major markets will be an key element for future success. However, in Japan for example, may occur problems because of cultural differences therefore it is not probable that the sales there will notably increase.
The company mainly uses United Parcel Service for ground shipments to its costumers. Part of the restructuring of the company was the identification of alternatives to reduce its reliance on UPS.
Marketing and sales
The company reduced its selling expenses by 3 % (as a percentage of net sales), which was attributable to reductions in advertising, pro tour and other promotional expenses. In 1999 USD 131,9 million were spent for selling, which includes USD 55 million for advertising and promotion.
Callaway introduced a remarkable product introduction policy which will increase the level of pre and after purchase service. Additionally it should have positive effects on retailer support.
As well there is a program, which supports sales of non-current product through price reductions etc.
Professionals, who are not contracted by the company, but use Callaway Equipment, can be rewarded for that through Cash Pools .
Service
In Service the company grants a written two-year warranty to its costumers, as well it provides testing facilities for endorsed pros.
Each of these groups has to be seen connected with support activities like
Procurement
Actually Callaway relies on a limited number sources, but the company is observing the market to find alternatives and to be in condition to react faster in case of delivery interruptions etc.
Technology development
Callaway s technology development section run by R.Helmstetter is the source for its enormous innovative capacity which made it possible to improve the offered product in very short development periods (full product pipeline) and to maintain the position as technology leader.
Human resources management
Callaway s Human resource management does very well, provides the long term leadership succession plan and finally provided the company with a number of talented people recruited through different channels.
Infrastructure
By delivering the necessary data for restructuring the primary activities of the company the systems of planning, finance etc. as well demonstrated that they function well
The combination of all these factors in the case of Callaway Golf led to a quite good gross margin of 47%.
The internal linkages at Callaway function very well (see above), external we have seen the reconfiguration of the value chain by deleting activities outside the core business (Callaway Golf Media Ventures etc.) and the acquisition, restructering and integration of Odyssey to complete the product scope..
Comparative analysis and benchmarking
The historical analysis I did integrate in chapter 4.1. The Present Strategy . Because of the lack of industry norms I am not able to execute an industry norm analysis at this point. The same is valid for Benchmarking.
4.4.2. ANALYSIS OF STAKEHOLDER EXPECTATIONS
Stakeholders are individuals or groups who depend on the organization to fulfill their own goals. We categorize them after their level of Interest and Power.
* Group A has low Interest and low Power, it cost the company a minimal effort
Group B has high interest and low power, mostly it is sufficient to keep them informed
Group C has low interest but high power, the company should keep them satisfied
Group D is with high interest and high power of critical importance
In the case of Callaway Golf we can identify the following groups of stakeholders. Every of these groups we can divide up in some more groups, for example not every shareholder is of the same importance for the company, not every subcontractor has the same extend of power, not every administration has neutral attitude to the companies strategy etc. I will limit myself on detecting the different groups of stakeholders, because to identify and to categorize more profound we need more particular information.
Shareholders
They are mainly interested in the payment of dividends and in a raising stock price, this could cause problems for Callaway because the Stock price is very low. However, Callaway paid a stable dividend of USD 0.28 per share during the last 3 years. For example the shareholder interests could force Callaway Golf to launch a program to buy its own shares back, just to stabilize the share price. The shareholders are key players in the stakeholder analysis because of their possibility to directly influence the policy of the company. Most important appear the institutional ones who are quite powerful.
Employees
For employees the stock price is not that important, it is more in their interest to keep there jobs, to be contempt with their job and to earn money. Basically we can say that the success of the company is their most vital interest. As well we can consider them as key players, they affect very much productivity and success of a company. In case of Callaway they are very supportive.
Consumers
The consumers orientate themselves in service and quality of the product, they like to be able to gain support from the company as well after purchase and to get informed about products etc.
As reputation and image of the company is very important for further success we can consider them as well as key players. The Consumers seem to be mostly contempt with Callaway s product pipeline and service, because statistically they stick to the company.
Government
It is in the interest of the government that the Company earns money and pays taxes. The government influences the company directly, but because of the general character government decisions inherit the significance of the government is secondary to medium.
Administrations
Administrations can be of high importance, but as well can be very neutral. We can say the same as for governments
Subcontractors
Importance depends on their power, in case of Callaway they are relatively important because they are delivering customized goods.
Banks
Generally have a high grade of importance because there decisions can directly influence a company s strategy
Labor Unions
It s usually sufficient to satisfy them
5 SWOT Analysis
Environmental Issues
Strengths &
weaknesses
Regulatory Influences Internationality of the market Competitive Markets Market potential Market Size Linked to lifestyle
(insecurity)
Main strengths
Capacity for innovation
(Core Competence) 0 + ++ ++ + +
Strong and wholly controlled distribution system 0 ++ + + 0 0
Good Reputation
(Core Competence) + + ++ ++ + +
Good internal linkage
0 + + 0 0 0
Technological leadership
+ ++ ++ ++ ++ +
Weaknesses
Dependency on suppliers (Insufficient Integration) 0 – — – 0 0
Stock price
0 – — 0 0 0
2/0 7/2 8/4 7/1 4/0 3/0
6 Sources of Reference
5th semester Business Strategy, Course documentation, Kaefer, 2001
Exploring Corporate Strategy, 5th Edition, Johnson / Scholes, 1999
www.golf-research.com, 2001