Study Questions for Callaway Golf
1. What is your assessment of Callaway's situation in 1998? Do they have advantages? If so, what are they? Are they sustainable?
2. Where is Callaway most vulnerable?
3. What advice would you give to someone starting a new club manufacturer?
4. What do we learn from exhibit 3?
5. What is your assessment of their strategy? What would you recommend Callaway do in golf balls?

Callaway Golf, Inc.

At the end of 1997, Ely Cailaway had turned Callaway Golf into perhaps the most successful company in the golf industry. With sales of more than $800 million, Callaway led the industry in sales and was a major factor in each of the main areas of golf clubs: woods, irons, and putters. The company had also received technical acclaim for its clubs. Callaway’s driver were the most frequent choice of golfers on the five major professional tours. Golf Magazine declared Callaway "the most successful golf equipment manufacturer of all time" and that Callaway had "changed the way manufacturers make golf clubs and the way people buy them. Forever."

As 1998 neared a close, however, Callaway’s incredible record was tarnished. The economic turmoil in Asia had severely affected the firm’s sales. In the U.S. the threats to Callaway were of a different nature. The governing body of golf, the United States Golf Association (USGA), was considering implementing more stringent restrictions against "game improvement" technology in golf clubs. Callaway was also facing challenges from both small startups and established equipment companies. New firms such as Adams Golf, Never Compromise, and Liquidmetal were all claiming new breakthrough technologies as was Orlimar, an older niche firm. Some well established competitors such as Titleist and Karsten were also claiming dramatic new technologies. In the face of these challenges, both Callaway’s sales and stock price had dropped (see Exhibit 1). Callaway stock, which had once traded as high as $38.37 in mid 1997, sold for just above $10 a share in early October, 1998. The words of Wally Uihlein, the CEO of Titleist and Footjoy worldwide, seemed apt, "Whatever you did yesterday is history".

Industry

The U.S. golf equipment industry was estimated to be greater than a $4 billion industry in 1998. Golf Pro magazine reported that U.S. manufacturers sold $3.9 billion in equipment in 1996. Clubs accounted for approximately 40% of that amount, apparel 23%, balls 20%, shoes 7%, bags 6%, and gloves 3%. There were an estimated 23.7 million golfers in 1996. The rise in the number of golfers flattened in the mid 1990s and those that did play golf played fewer rounds as well. Golf enjoyed a surge in popularity with the emergence of Tiger Woods as a star, but in 1998 it was still unclear what impact Woods would have on the number who participated as golfers.

A set of golf clubs typically consisted of 14 clubs. Golfers usually carried three woods in their sets. Drivers, the longest club in the set, were used to strike the ball the furthest possible distance. The other woods were termed fairway woods and also were designed primarily for distance. Golfers usually carried 10 irons in a set: 3-9 and 3 wedges. Irons were designed mostly for accuracy. Wedges were irons that were designed to hit high lofted shots from close to the target. Finally, golfers generally carried one putter. Putters were used to roll the ball into target (hole) on finely-cut areas known as greens.

Buyers

Golf clubs were sold mainly through three general channels: pro shops, off-course retailers specializing in golf, and sporting goods or discount department stores. The three channels offered differing levels of service to consumers. Pro shops, which were located at golf courses, offered the highest level of customer service but at a higher price than other channels. Certified golf professionals assisted customers in choosing clubs that fit their particular physical and playing characteristics. Many of these golf professionals received free equipment and other perquisites in return for promoting particular brands. Individual pro shops usually specialized in premium, higher priced clubs, such as Callaway, Taylor Made, Ping, and Cobra.

The second main channel, the off-course retail shop sales accounted for 75% of the golf equipment sold throughout the entire industry in 1998. Off-course shops offered a high level of customer service but less expertise to shoppers. Sales people, however, did specialize in selling golf clubs and were knowledgeable about features of different clubs. Off course stories sold a full range of clubs, extending from top of the line premium clubs to low-priced sets targeted to novices. Prices in off-course shops were generally lower than those in pro shops.

The third channel for golf equipment included more general retailers such as sporting goods and department stores. For golf equipment, these stores offered little or no customer service, carried a narrow selection of clubs, and often did not sell many top-line brands. Traditionally, sporting goods stores had carried less well known brands or lower-priced lines of major equipment makers that were not sold in pro shops. In recent years, however, these stores had more frequently carried the same premium clubs found in pro shops and off-course golf stores. Discount sporting goods stores were often part of larger chains and possessed the potential through centralized buying to purchase clubs in larger quantity than either the pro shops or off-course stores.

Each of the three channels were fragmented to a large degree. Pro shops were small, stand-alone entities. There were some off-course chains such as Nevada Bob’s and Las Vegas Golf, but they accounted for a very small fraction of sales in the industry. Even the more general sporting goods stores were quite fragmented. There were no large national chains that exerted significant purchasing clout in golf equipment. Neither pro shops nor off course retailers typically received volume discounts. Some club manufacturers, such as Callaway, dictated what quantity buyers received and in some cases also decreed how clubs were promoted within stores.

Golfers were often segmented according to player ability: advanced, intermediate, and novice. Typically, more expert golfers were more insensitive to price. However, price sensitivity was a function also of a golfer’s disposable income. Pro-line clubs such as Callaway, Cobra,and Ping appealed most to intermediate and advanced golfers. Golfers were highly influenced by the examples of professional golfers in their club purchases. A frequent tactic of manufacturers was to advertise how many professionals at a particular tournament played their clubs. Professional golfers were surveyed or monitored weekly by independent firms as to their choice of clubs. For example, Cleveland advertised in 1998 that its wedges were used by more professionals than any other. Taylor Made ads claimed that over 50 touring pros used their clubs each week on the PGA tour. A similar tactic was for a firm to advertise the number of tournaments that had been won by golfers using clubs it had manufactured. **ck **. Market share figures were not available for other ability levels. ***% in each category***

Suppliers

Golf clubs are manufactured using a few common elements, such as steel, titanium, graphite, and rubber. The combinations of these elements varied among the different types and styles of clubs that were produced. ***

Entrants into Golf Clubs

There were a number of relatively new entrants into the golf equipment industry. Yet, some in the industry believed that the barriers to competing with incumbent firms were steep. According to Ron Goldblatt, general manager of Spalding’s Top-Flite golf club company, "The industry as a whole is stronger. In the arena for the golf club market in particular, the entry level is steep and the stakes are high. The consumer demands brand-name products. Investment from a marketing standpoint drives people into pro shops, and that’s good for business. And more R&D money is being spent because consumers are demanding quality." Leading competitors in the industry advertised nationally on golf broadcasts. Firms such as Callaway invested considerable resources into research and development. Gaining access to shelf space in pro shops and other golf club outlets was another obstacle for firms without a known brand. Wally Uihlein, CEO of Titleist and FootJoy Worldwide summed up the challenges of smaller firms in the industry, "If you don’t have a certain size in economy of scale you’re going to get run over. If you’re not $100 million [in yearly sales], it’s tough to compete in the two major reas: research and development and advertising and promotion."

Despite these barriers, though, the industry was characterized by a plethora of new firms trying to duplicate the successes of Taylor Made and Callaway a decade earlier. One estimate placed the number of golf equipment manufacturers in 1998 at 509. A large majority of these firms were new startups. Gary Adams, McHenry Metals’ CEO and the founder of Taylor Made which popularized the revolutionary metal wood and later two other clubmakers, suggested that upstarts had an advantage, "Golf is always looking for something new. When a product hits the saturation point, somebody else gets to come to bat with something interesting for the buyer.…Startup companies have a better shot at success than companies already in business. And if you have a quality product and you have a purpose you get a lot of word-of-mouth exposure. I would say we have a better chance of success than the Wilsons and MacGregors because they’ve already established their positions. I look to be very successful in the next few years."

One response to the difficulty of getting shelf space in stores was the use of infomercials by new startups. Infomercials — the 30-minute commercials used to market everything from cosmetics to marriage counseling — exerted a definite impact in the golf industry. Adams Golf, for example, went from $3 million in sales in 1996 to an estimated $30 million in 1997 after initiating an infomercial campaign. So successful were the infomercial campaigns of some startups that at least one established firm had followed their lead. Taylor Made’s infomercial on its Burner bubble irons, shown just following the 1996 Master’s golf tournament, received a 7.6 Nielson rating, the highest ever for an infomercial. Other established equipment makers were considering infomercials in 1998. Not all companies enjoyed the same success in infomercials as Adams Golf and Taylor Made. Some visible startups that had relied on infomercials for marketing such as Alien had filed for bankruptcy. Many others had failed to gain either significant sales or visibility.

Some new firms had entered the golf industry via acquisition. Taylor Made was acquired by Salomon, which was acquired by the large German sports equipment manufacturer, Adidas. Tommy Armour and Ram were both acquired by TearDrop. Masters International bought MacGregor. Nitro acquired Alien which had filed for bankruptcy.

Other new competitors or potential entrants had created a stir in the industry in 1998. TearDrop anticipated over $50 million in sales in 1998, up from from less than $1 million in sales in 1997. TearDrop was started by entrepeneur Rudy Slucker who had made a fortune in businesses ranging from bakeries to health clubs. TearDrop began by making putters with a curved face. After it was acquired by Slucker, it set it sights higher. TearDrop acquired two established golf equipment makers — Tommy Armour and Ram —who had lost money in 1997. TearDrop acquired Tommy Armour for $24.8 million and Ram for $2.7 million and 187,357 shares of TearDrop stock. Slucker intended to bring Ram and Armour "back to the glory days."

Other new entrants were viewed as possible forces in the industry were Never Compromise and Liquidmetal. Never Compromise was started by the three principals who had formed Odyssey putters, the number one putter manufacturer. All three had left Odyssey after it was acquired by Calloway. Never Compromise introduced its first putters in 1998. By the summer of 1998, several high-profile professional and amateur tournaments had been won by golfers using Never Compromise putters. The companies goals were to achieve market leadership in putters then branch out into other clubs. Vikash Sanyal, Never Compromise’s marketing head discussed the key to success for his new firm:

We knew that to succeed we needed a "tech story", and we have that with the weighting. And we needed to have a unique look. We had to have tour play and we had to create a cool brand.

Liquidmetal featured a very advanced material in their clubs from which the company’s name was taken. The metal, which was used for club faces, was so hard that a laser was required to score the lines or grooves into the clubface. The production process was the most expensive in the industry and as a result Liquidmetal clubs were among the most expensive.

Aside from small startup firms, the threat existed that larger sports firms might enter the industry. Rumors in the industry suggested that Nike wanted to expand into golf equipment. Nike had established a position in both golf apparel and shoes. Adidas recent acquisition of Salomon had given it a strong position in the golf industry. Nike’s recent entry into equipment in sports such as soccer, baseball, and football suggested that they might have intentions to enter golf equipment as well. Andrew Mooney, who headed Nike’s sports equipment division, summarized Nike’s ambition in sports equipment, "Within a few years, the equipment division will be Nike’s fastest growing division."

Fitted clubs represented another threat to the most established firms in the industry. Whereas most clubs could be bought "off-the-shelf" in a handful of specifications, fitted clubs were analogous to clothing tailored specifically to an individual. Golfers went to fitting centers for exact measurements on physical aspects such as height and hand-size as well as skill assessments of swing speed. Based on these measurements, clubs were assembled to conform to an individual’s specifications. Some in the industry were concerned that if fitted clubs became popular that economies of scale would be more to achieve.

Competition

The top three club manufactures — Callaway, Taylor Made, and Cobra —accounted for 43% of the market for clubs in 1996. Until the late 1970s, general sporting goods manufacturers such as Spalding, Wilson, and MacGregor had been the leading club manufacturers, but since that time the dominance of specialized golf firms had grown.

Much of the competition in the industry was based on innovations in club designs. Exhibit * shows new product introductions for both Fall 1997 and Fall 1998. Clubmakers sought to differentiate themselves through different design or technological features. For example, Ping’s (made by Karsten) newest club offerings were in the form of three new putters that were named the Ally, the Ally Isopur, and the Darby Isopur. Each featured polymer inserts into the face of the clubhead. In contrast, Taylor Made’s main innovation did not involve the clubhead, but a new type of shaft. The company developed what it called, the Bubble Shaft. The end of the cold war helped fuel the technology battles in the golf industry. Aerospace-grade metals and composites became more readily available and more affordable. Another important benefit for the golf industry of the cold war’s end and the resulting cutbacks in U.S. defense spending was that it freed a great deal of engineering talent to work in other industries such as golf. New products were constantly being introduced into the market; each claiming new technological features that would allow for greater distance, accuracy, and consistency.

Callaway’s three largest competitors in clubs were Taylor Made, Cobra and Karsten, manufacturer of Ping clubs. Taylor Made was Callaway’s largest competitor in clubs. By 1996, Taylor Made had sales of $242 million second only to Callaway in sales. Taylor Made did not have a long history in the industry. In 1979, Taylor Made, a start up company, revolutionized the game of golf with the introduction of the metalwood. ***Salomon purchase*** Taylor Made doubled production facility with a recently built facility.

Fortune Brands was perhaps the most formidable player in the golf industry. Fortune owned Titleist, Cobra, and FootJoy, which for decades had been ranked one or two in market share for golf balls and shoes respectively. Titleist also manufactured clubs, but had not enjoyed a leadership position historically. In the 1980s, Titleist aimed at leadership in clubs as well. It had not yet achieved that goal, but by the late 1990s was showing progress. The Titleist DCI irons were respected in the industry and the 976D driver introduced in 1998 met with considerable success among top players. By mid 1998, the 976D was one of the three most popular drivers on the PGA tour. The 976D was also the driver used by the world’s top ranked player and most charismatic figure, Tiger Woods.

Cobra, acquired by Fortune Brands in 199*, was established in 1973, when an Australian golf club designer, Thomas Crow, sought to capitalize on the tendency of American golfers to buy individual clubs. The company began by producing specialized woods, trademarked as the Baffler. In the mid 1980’s, Cobra developed clubs with lightweight graphite shafts. Cobra focused more on irons throughout its history, while Callaway focused on drivers. For much of the 1990s, Cobra had been the market share leader in irons.

Another competitor with a successful history was Karsten Manufacturing, maker of Ping golf clubs. Karsten’s strategy focused on continuous innovation throughout its life cycle. Ping had a reputation as an established, dependable company. The company began as a garage based operation in Redwood California. The company’s first putter was manufactured in 1959 and featured in Sports Illustrated. Between 1959 and 1965, 15 more putters had been introduced. Karsten viewed itself as an engineering company set on making the best and most forgiving golf clubs possible. Karsten pioneered perimeter-weighted game improvement clubs in the 1970s and was the industry in market share leader for irons through much of the 1980s. While its clubs were still respected, Karsten had been slow to adopt several changes in the industry. Karsten did not introduce a titanium driver until 1998. It was also late in placing inserts in putter heads.

Orlimar was another competitor that was attracting considerable attention in 1998. Orlimar had begun in the 1960s as a maker of custom woods. During most of its history, Orlimar had been but a small niche firm in the industry. The company introduced the Trimetal fairway wood in 1997. The Trimetals technology claim was a face made of alpha maraging steel. By September 1998 Orlimar was able to claim that it was the number one fairway wood on the PGA tour. The company’s ads also reported test results indicating that the Trimetal was both longer and more accurate than its two leading competitors: the Callaway Steelhead Big Bertha and the Adams Tight Lies.

The History of Callaway Golf

Callaway Golf began as Callaway Hickory Stick USA in 1984 when Ely Callaway paid for $400,000 for a small golf club manufacturing company. The company, which had only three workers, specialized in wedges and putters. The clubs were distinguished by a hickory wood wrapping around a steel shaft.

For Ely Callaway, the founder of Callaway Golf, the venture into the golf industry was the third of three very distinct and successful business careers. He was born to a family that was deeply involved in the textile business. While attending Emory College he was the business manager of the school paper and was elected the president of his senior class. He completed his bachelor’s degree in history in 1940 and his family planned to have Ely join the family business, Callaway Mills, after graduation. However, war was imminent so Ely decided to join the Army. He earned a reserve officers commission and was assigned to a Philadelphia procurement facility. Ely had earned a liberal arts degree to avoid working in the textile business, but the Army had other ideas. Due to his family history, Ely was assigned to the procurement of textiles and apparel. After the war started, business at his office grew astronomically so Ely decided to reenlist for a second tour. He performed so well that he was promoted to the rank of Major when he was only twenty-four years old. That made him the youngest person ever to attain that rank in a Quartermaster Corps.

After leaving the Army, Ely took a position with Deering, Milliken, and Company, selling fabrics and apparel. He was tasked with establishing a Southeastern sales office in Atlanta. He was able to exploit the contacts and experience he gained in the military to earn success in the textile industry. He was soon promoted to run the company’s woolen and worsted mills in New York City. Next, he took a vice president position at Textron which was later purchased by Burlington. While at Burlington, Ely was instrumental in developing the first polyester blends. He spent seventeen years at Burlington and served the last six as president and chief operating officer.

After his retirement from Burlington, Ely went to California. . It was there that he started his second career as a wine maker when he bought a 140 acre vineyard in Temecula for $5 million and established the Callaway Vineyard and Winery. The conventional wisdom in the wine industry was that good wine could not be produced in Southern California because of its hot weather. Callaway’s venture, however, contradicted the accepted wisdom of the industry. The vineyard’s wines received both critical praise and commercial success. One of his wines was chosen to be served at a Bicentennial celebration for Queen Elizabeth II. After eight successful years he sold the vineyard in 1981 for a profit of almost $9 million. A few months after selling the vineyard he got started in the golf industry.

Callaway described his personal philosophy: "I like the creative force — to create a new product, where you’re creating jobs and opportunities and products people have never had before. That’s exciting to me, much more than traveling or anything else (one might do in retirement).

Callaway’s first innovation of the company was the S2H2 clubhead in a set of irons that was introduced in 1988. The clubs had a bore-through shaft and a shortened hosel ***exhibit**, which moved weight to the clubs effective hitting area. This allowed golfers to more easily hit the sweet-spot ***define*** of the golf club face. The clubs also employed perimeter weighting which helped golfers keep the clubhead square through impact.

Also in 1988, Ely Callaway recruited the General Electric Pension Fund which was managing $60 billion, to invest $10 million in Callaway. This infusion of capital, allowed Callaway to develop and produce the first set of clubs that would be the stepping stone to his empire. The S2H2 irons and metal woods, would double the company’s sales in two years, and helped Callaway to show signs of profitability for the first time. That same technology was used the following year in the S2H2 metal woods, but with steel or graphite shafts instead of the much heavier hickory shafts. By the end of 1990, the S2H2 driver was number one on the senior PGA tour and had sales of over $54 million. Ely Callaway was eager to push the company towards greater success, however.

Following the introduction of the S2H2 series, Ely Callaway went to Japan to recruit Dick Helmstetter, a designer of cue sticks. After 20 years in Japan the Helmstetter family was not eager to return to the U.S., but Callaway persuaded Helmstetter to join Callaway. Helmstetter said of that meeting, "The first thing I did was write a check to him for $53,000, I though he was hiring me, not looking for an investor. That’s part of his genius. He hardly ever forces you to do anything. But somehow, the thing you become convinced of is the same thing he wanted you to do all along. And, if you’re not convinced, you’re not around very long."

In 1991, Callaway revolutionized the golf industry with the introduction of the Big Bertha driver designed by Helmstetter. The Big Bertha driver combined the S2H2 technology with an oversized clubhead. The impetus for a driver with an oversized head came from Sumitomo, Callaway’s Japanese distributor. Designing a workable club with an oversized head was a formidable technical problem. Many in the industry did not believe that an oversized head could be both light enough to swing and strong enough so that a club’s face would not cave in. The Big Bertha, which was named after a World War I cannon, allowed golfers to hit straighter shots even when the ball was hit off the center of the clubhead. Callaway bet the future of the company on Helmstetter’s new design. It ordered 60,000 clubheads from its foundry at $20 a head before it sold a single club. As a result, both weekend and advanced golfers were able to hit tee shots straighter, longer, and with more consistency. The Big Bertha met with tremendous success. Even though its $250 price was twice that of Taylor Made, the market leader at the time, the company sold approximately 150,000 drivers. At the end of 1992, yearly sales had increased to $132 million from $54.7 million in 1990. Callaway drivers were the most used driver on the Nike, LPGA, and Senior PGA tours.

Other milestones also took place for Callaway Golf in 1992. Callaway Golf went public with stock on the New York Stock Exchange with an initial public offering. *** how much did it raise*** Following the IPO, the company’s stock split three times, and increased in value (adjusted for splits) from $2.22 in 1992 to as much as $36.63 in 1996.

Following the introduction of the original Big Bertha, Callaway introduced progressively more advanced versions of the Big Bertha line. In 1994, they introduced Big Bertha Irons, and Big Bertha Metal Woods with a new sole plate. In 1995, they introduced the Great Big Bertha, which was hailed as the next generation of the Big Bertha line. These new drivers had titanium heads which were both stronger and lighter than the steel heads previously. The Great Big Bertha also had larger heads and longer shafts than the original Big Bertha drivers. These improvements allowed golfers to generate more clubhead speed while also allowing for a greater margin of error, thus resulting in greater distance and consistency. In 1996, Callaway introduced Big Bertha Fairway Woods, Big Bertha Wedges, and Bobby Jones Putters. The 1997 addition to the Big Bertha line was the Biggest Big Bertha Titanium Drivers and the Great Big Bertha Tungsten-Titanium Irons. The Biggest Big Bertha Titanium Drivers were both bigger and longer than the previous generation. The use of tungsten in titanium clubheads allowed Callaway to more strategically distribute the clubhead weight. Callaway further strengthened its position in putters with the acquisition of Odyssey in 1997. Odyssey was number one in the putter sales.

The newest addition to the Big Bertha line was introduced in 1998. These were the Big Bertha X-12 Irons and the Big Bertha Steelhead Woods. Both models featured stainless steel heads rather than the titanium. These clubs were introduced to attract golfers who wanted Callaway quality, but could not afford the higher priced titanium drivers.

Callaway in 1998

Marketing

Callaway had established itself as a major competitor within the golf industry and maintained its reputation for quality at least partly through implementation of its marketing strategies. Advertising efforts focused on combining television commercials and printed advertisements in national magazines. Callaway expected to spend $55 million on advertising and promotion in 1998. That amount was generally believed to be the highest ad budget in the industry by a significant amount and was higher than the sales of most competitors.

Endorsements were another important means of attracting golfers to buy Callaway products. Callaway Golf established relationships with professional golfers in order to make their product more appealing to the consumer. They entered into endorsement arrangements with members of the Senior Professional Golf Association’s Tour, the Professional Golf Association’s Tour, the Ladies Professional Golf Association’s Tour, the European Professional Golf Association’s Tour and Nike Tour. Many professional golfers throughout the world used Callaway clubs, even though they were not contractually bound to do so. Callaway created cash pools to reward such usage. More golfers used Callaway drivers on the five major professional tours than any other, a fact which Callaway emphasized in its advertising.

Some of the company’s competitors were aggressively seeking professional golfers to endorse their products. Establishing relationships with professional golfers who used Callaway clubs in competition provided visibility and stimulated demand as less proficient golfers often sought to emulate leading professional golfers in their golf equipment choices. In essence, leading professional golfers became like free agents in other sports whenever their endorsement contracts expired. Bidding wars often ensued. Callaway typically avoided these bidding wars, but did pay a few highly visible golfers to play their products. Golfers who endorsed Callaway such as Chi Chi Rodriquez and John Daly, for example, were not among the performance leaders on their tours, but both were among the most popular. Callaway’s competitors offered specially designed products and significant cash rewards for professional golfers to use their products. However, Callaway had still been successful in attracting pro golfers with their superior products. Unlike their competitors, Callaway also used celebrity endorsements such as rock star Alice Cooper and Microsoft founder Bill Gates to promote their products.

Callaway also sought to build their reputation with retailers in pro shops and off-course golf stores. This reputation stimulated sales for the company’s clubs since consumers often purchased clubs on the recommendation of sales people in these shops. Callaway targeted golf retailers who sold "pro-line" clubs and provided a level of customer service appropriate for the sales of premium golf clubs. Their reputation also increased from its philosophy on repair return time. For most major golf club makers, a club sent back to the manufacturer for repairs might take weeks or months to be fixed. On the other hand, Callaway customers received a new driver and a sleeve of balls the next.

Callaway’s sales strategy had been to target those golf retailers (both on-course and offcourse) who sell professional quality golf clubs. Within this niche, Callaway had attempted to provide a level of customer service appropriate for the sale of the more expensive, premium golf clubs. Callaway had also avoided concentration on any one particular retailer or retail chain. As a result, no one golf club distributor had accounted for more than 5% of the company’s revenues for the past three years (Callaway 10K, 1998). The level of Callaway’s sales were also somewhat determined by seasonality. The company usually had fewer sales in cold weather months and increasing sales in the warmer periods.

Callaway maintained a staff of full-time regional representatives involved in customer service and golf club and accessory sales. The company divided its sales area into geographic areas for better focus. Each geographic area was serviced by representatives who worked to maintain and create relationships with customers within that geographic area. Callaway believed that by subdividing into geographic areas, it could provide a greater level of expertise and customer service.

International Markets

Foreign sales strategies were also important. Callaway devoted considerable attention to international markets and the firm forecasted at least modest growth in international markets. For the years 1995-1997, foreign sales accounted for over 30% of the company’s total sales. Asia had been a particularly important international market for Callaway. The economic upheaval of 1997-98 experienced in Asia dramatically affected Calloway’s sales. Asian sales dropped 47% in the first quarter of 1998. Another concern with Asia had been the company’s disappointing performance in Japan. Callaway had gained only a 10% share of the Japanese market.

Callaway had distribution agreements in over 40 countries. Prices of golf clubs for sales outside of the United States received an export-pricing discount to compensate international distributors for selling, advertising, and distribution costs. Any change in the company’s relationship with significant distributors could negatively impact the volume of international sales. Callaway’s products in the United Kingdom, Belgium, Denmark, and Sweden were directly distributed by Callaway Golf Europe Ltd., a wholly-owned British subsidiary. The company also acquired a majority interest in its German distributor in 1996. This distributor directly marketed Callaway’ s products to Germany, Austria, the Netherlands, and Switzerland. In 1998, the company also purchased the distribution rights of a Korean distributor to facilitate direct marketing in Korea. Callaway believed that controlling the distribution of its products throughout the world would be a determinant of its future growth and success.

Callaway has established the ERC International Company, which is a Japanese owned corporation. This corporation will assist with distribution of odyssey products and golf clubs and balls throughout the world. In the future Callaway plans to acquire distribution rights in several key countries across Asia and Europe. This focus on international markets will most likely reduce management involvement in the day to day operations of the company. Disruption of distribution in different areas around the world could also occur as a result of Callaway’ s intense interest in international markets.

Callaway Pricing

Callaway’s clubs were typically among the highest priced in the industry. Price sensitivity to Callaway’s clubs was extremely low. For example, in 1998 the "Biggest Big Bertha" retailed for $500, with comparable drivers from Taylor Made and Cobra retailing at $499 and $350 respectively. For a set of irons, Callaway’s X-12 irons sold for $880 or $110 per club, while Taylor Made and Cobra were $728 and $696 respectively. Callaway had differentiated itself within the industry through performance and had subsequently become known for producing the outstanding clubs. A full set of Callaway clubs cost around $2,000 in 1998 compared to approximately $1,700 for Taylor Made. Callaway had introduced its own line of credit, which it anticipated would increase sales and cash flows.

Callaway surprised many in the industry when it sharply reduced prices in 1997 and 1998. When Callaway introduced the "Biggest Big Bertha" in 1997, its suggested retail price was $600, but later that year the price was reduced to $450. These price cuts were attributed to an intent by Callaway to increase market share. Price cuts, however, departed from Callaway’s earlier practices. The move shocked many investors and was, "viewed as a major departure from the way they (Callaway) were doing business." Some also viewed price cuts as unwise because Callaway’s research and development expenses were the highest in the industry.

U.S. Distribution

In the U.S., Callaway golf distributed their products among a selective set of high-end golf retailers. As was the case for the industry as a whole, no single buyer accounted for a large portion of Callaway’s sales. Given the popularity of Callaway clubs, it was extremely important for most pro shops and off-course stores to carry Callaway clubs. This importance allowed Callaway to dictate prices and even sales methods. Few retailers protested Callaway’s demands.

Callaway’s Suppliers

Like most golf club manufacturing companies, Callaway outsourced the three main components of the club, the clubhead, the shaft, and the grip. Callaway used multiple companies for each component. Four companies produced clubheads for Callaway: Cast Alloys Inc., Sturm-Ruger and Company, Coastcast Corporation, and Hitchiner Manufacturing. Shafts were supplied by Aldila, Graphite Design Inc., Unifiber, HST, True Temper, Fujikura, and Suntech-Sunwoo Company Ltd.

The manufacturing process for clubheads was fairly sophisticated because of Callaway’s innovative and multiple designs. The production of clubheads for each model was usually contracted out two companies. For example, Cast Alloys Inc. and Sturm Ruger and Company produced the clubheads used for the Biggest Big Bertha Titanium Driver. Coastcast Corp. and Hitchiner Manufacturing produced the clubheads for the Big Bertha X-12 Irons. The Great Big Bertha Titanium Metal Wood clubhead was made by Coastcast Corp. and Cast Alloy Inc. Callaway relied on dual sourcing so that production problems occurred in one supplier, the other would be able to provide the needed clubheads.

In 1996, Callaway accounted for 46% of Coastcast Corp.’s business. In early 1997 Callaway offered Coastcast a contract to be it’s exclusive supplier of clubheads, but they rejected the offer because they wanted to deal with others in the market. In response, Callaway sought a lower cost supplier and now Coastcast shares clubhead production with Cast Alloys Inc. In 1996 Coastcast earned $25 million. After Callaway shifted some clubhead production to Cast Alloys in 1997, Coastcast’s earnings dropped to $18 million, and only 34% of their business was from Callaway.

One of the exceptions to this is Sturm Ruger and Company. Sturm Ruger’s main business was the design and sale of firearms. However, due to their abilities in metal casting, they began to produce clubheads as well. In 1995, Sturm joined Callaway in a joint venture to build a foundry for the production of clubheads. The two firms each took a 50% interest, but when the foundry was nearly completed in June 1997, Sturm bought Callaway’s 50% of the foundry. In 1998, Sturm produced clubheads for Callaway and Karsten Manufacturing, but had ambitions to produce clubheads for all golf club manufacturers.

Suppliers of golf shafts were in much the same situation as clubhead producers. Today, over 81% of all new woods and over 42% of irons use graphite shafts. Aldila was one of the largest graphite shaft suppliers in the United States. In 1997, 32% of their net sales were from Callaway, and 22% from Taylor Made. Shaft suppliers felt considerable pressure to provide quality products at a competitive price.

Research and Development

Innovation was an important part of Callaway’s overall strategy. Product design at Callaway Golf was a result of the integrated efforts of its product development, manufacturing, and sales departments. All of these departments worked together to generate new ideas for golf equipment. The company had not limited itself to research efforts that duplicated traditional designs but sought to explore new ideas. Callaway’s R&D expenditures were believed to be the highest in the industry. Research and development spending in 1997 was $30.3 million, $16.2 million in 1996, and $8.6 million in 1995. Callaway had no plans to decrease research and development spending in the future.

To assist with innovation and product development, Callaway opened the Richard C. Helmstetter Test Center in 1994. The test center was described as a state of the art facility. It had camera and sensors from every angle and position to analyze the speed of the club, the point of impact and a number of other variables thought to possible influence a golf club’s performance. With the help of the new facility, Callaway produced the next generation of the "Big Bertha".

Located within the Main Testing building, there were several different areas which were utilized to conduct Callaway’s testing and research: the Destructive and Durability Test Room, Clubfitting and Club Specilications Room, and the Dynamics Test Laboratory. The Destructive and Durability Testing Room examined both steel and graphite shafts, to assess whether shafts met minimum thresholds of strength and durability. The Clubfitting Room was designed to maximize club performance by matching wood and iron specifications to an individual’s swing. Additionally, that equipment measured a number of club variables: swing weight, frequency, loft, lie and length. This room was especially valuable in working with professional golfers. The center allowed Callaway to adjust their clubs in minutes and continue testing. Every professional golfer who had come through the Test Center had been pleasantly impressed with the personal attention and and with Callaway’s dedication to serving the Touring Professional.

Callaway was committed to providing accurate and timely component testing because the quality of components was directly related to the quality of the clubs they produced. By providing state-of-the-art test results, both qualitative (player testing) and quantitative (equipment and physical systems testing), the firm believed that the Test Center enabled Callaway Golf to make innovative products that were demonstrably superior and pleasingly different.

In September of 1997 Callaway Golf opened a Casting Technology center. This center was the only one of its kind in the industry. The Casting Technology Center allowed quick prototyping. It cut the time to make a prototype from 3 weeks to 3 days. This speeded research and development even further. Callaway believed that the Casting Technology center would help it shorten lead times.

Callaway’ s focus on rapid new product development also presented other challenges. Some feared that swift innovations could result in closeout sales of existing inventories. Rapid product introductions also posed a problem in forecasting demand, since it was more difficult to accurately forecast the demand of new products than existing ones. The rapid development of new designs also imposed greater pressures on other parts of the company. Callaway’s unique product designs often required sophisticated manufacturing techniques, making it difficult for the company to quickly expand or contract its manufacturing capacity. Finally, such rapid introduction of new products could result in cannibalization of existing products already available upon the markets.

Intellectual Property Rights

A considerable nuisance to the makers of popular golf clubs was imitation by so-called clones. The use of patents and trademarks offered Callaway some protection from the low-priced mimics of its products. Imitation from more established competitors was also a concern to Callaway. In 1998, Callaway had a lawsuit pending against Titleist. Callaway believed "Titleist was copying one of its design features, in fact, accusing Titleist of producing a "knock-off’ and was taking legal action to have the practice stopped." The design feature in dispute was Callaway’s bore-through shaft design. Although the bore-through shaft was not protected by patent or trademark, Callaway argued that it was so recognizable as a component of the Big Bertha club that Titleist had infringed upon "trade dress" rights. Trade dress rights involve, "a product’s form and appearance." While the lawsuit was still pending in 1998, it demonstrated the vigilance with which Callaway was willing to assert intellectual property rights.

While Callaway was an aggressive defender of its property rights, absolute assurance of those rights was another matter. The company had what it describes as, "an active program of enforcing its proprietary rights against companies and individuals whom market and manufacture counterfeits," but the effectiveness of this program was less than complete. Aside from the Titleist suit, Callaway efforts focused on small firms and foreign entities. Callaway planned to focus more efforts against substantial competitors.

On March 1, 1998, Callaway sued Spalding for putting a logo on their ball resembling that of the Callaway Big Bertha. Callaway said this gave the impression that Callaway was endorsing Spalding’s product, which they absolutely were not. Spalding disputed Callaway’s claims.

On April 14, 1998, in Taichung, Taiwan, police and government officials seized large quantities of counterfeit Callaway golf clubs which equaled over $65,000 in real Callaway products.

On April 23, 1998, Callaway announced closure to a successful litigation against Sportz and Golf having an inventory with $25,000 of counterfeit equipment. This company was from Stockholm, Sweden. This owner was on his second offense for selling counterfeit Callaway clubs.

On May 26, 1998 Taiwan officials executed a search warrant on Lin Kou Golf. They seized over 165 counterfeit Callaway golf products.

This illegal counterfeit and trademark activity was allowing these dealers to sell phony Callaway products at a reduced price. This creates a purchase substitute to buying the expensive Callaway golf products and takes a lot of profit form Callaway.

The flip side of the intellectual property rights issues were that competitors have also increasingly begun using patents to protect their own designs and innovations from Callaway.

Strategic Alternatives

Callaway’s CEO, Donald Dye saw two possible paths for the firm to sustain its growth: "one of two things has to happen: One, we have to take more market share, which is going to be harder to do. The closer you get to 100 percent it’s harder to do without reaching the point of diminishing returns. [the other growth factor is expansion and diversification]."

One area of expansion that Callaway had identified was the golf ball market. The firm planned to spend more than $70 million to enter the golf ball industry by 1999. Taylor Made also had plans to enter the golf ball market but had not announced a timetable for entering the market. Both Callaway and Taylor Made were in the testing and prototype stage of development in 1998. Taylor Made’s acquisition of a golf ball manufacturer in the summer of 1998 led some industry observers to suspect that Taylor Made was closer to bringing a ball to market than was Callaway. The two firms faced a daunting task in entering the market for golf balls. No exact figures were available, but Titleist and Spalding were estimated to have combined about a 70 percent share of the U.S. golf ball market. Both had shown the ability to bring new models rapidly to the market and to match new innovations by other manufacturers. Other club makers had attempted entry into golf balls without success. Notably, Karsten had tried to do so without success in the 1980s when it was still the number one club manufacturer.

Spalding’s introduction in 1998 of two balls that were designed to perform better with Callaway and Taylor Made woods respectively was the portent of a new trend. Some believed that balls designed specifically for a brand or model of clubs would be more common. Bill Morgan, vice president at Titleist, stated, "The player-club-ball combination is the biggest thing technology-wise going forward. That’s why the bigger companies that understand clubs, players, and balls will have a competitive advantage in the future."

Another venture of Callaway’s was the Callaway Golf Experience centers. Dye saw great possibilities for the Callaway Golf Experience centers, "Maybe we can even find a substitute for the outdoor experience. If you had a realistic way to test your ability to hit a golf ball on the course even though you’re not really there, it might enhance the experience when you actually go there."

Exhibit 1: Callaway Financial Summary

Exhibit 1a: Callaway Sales by Product Group, 1995-1997

Net Sales $842,927 100% $678,512 100% $553,287 100%

Exhibit 2 Market Share for Club Manufacturers in 1996

*Estimate. Source; Golf Pro magazine.

Exhibit 3: New Golf Club Introductions from Selected Manufacturers : Fall 1997 and 1998

Woods

October 1998 October 1997

Exhibit 4: Comparison of Golf Balls Manufactured in September 1997

Source: Johnson, Ted, Golfweb column, September 18, 1997