Posted: May 25th, 2022

Consumer Behavior Case Study

Calloway

Callaway Golf Case Study

Discuss Callaway’s strategy from 1988-1997 with regard to a) research and design; b) advertising; c) distribution; and d) pricing. You must answer this question using bullet points.

S2H2 (short straight hollow hosel) club design illustrates how diligently R&D worked to re-distribute club weight for maximum impact on the ball.

Leadership through innovation nurtured by the “RCH Tough Questions” Teams based on Mr. Helmstetter’s 400 difficult questions of how to improve the golf game of amateurs and pros alike.

Heavy investment in the physics of the wood, as evidenced by weight re-distribution of Big Bertha, in addition to experimentation with new shaft materials and technologies.

A corporate culture that believes strongly in the power of innovation to expand existing markets and fuel the growth of new ones, specifically focusing on making average golfers play exceptionally with better clubs.

Rapid pace of new product introductions is one of Callaway’s most potent competitive advantages during this period, often distancing competitors by as much as two years in terms of product design.

Advertising gradual investment in advertising, yet initially only aimed at increasing word of mouth. As a result, Callaway deliberately kept this expense relatively low, spending $18M in 1996 and $20M in 1997.

During this period Callaway also spent on print advertising, with three consumer print ads and three ads in trade magazines.

The company believed that the end consumer was more influenced by word of mouth and the strength of the Callaway brand and would “pull” products through the distribution channels.

Customers, or dealers and distributors, were advertised to in trade publications only sporadically, yet given intensive trading and also provided “demo days” by Callaway outside sales reps as part of marketing and sales support.

Distribution

Callaway relies primarily on off-course and on-course golf retailers, with the majority of sales (65%) generated from off-course shops.

Callaway concentrates on channel support strategies and channel marketing and sales coordination to build its channel during this time period, often hosting “demo days,” in-retailer seminars for their sales representatives, and the production of training videos and materials.

On-course retailers were becoming less productive from a sales standpoint due to the many other conflicting requirements on their time, including running the course, giving golf lessons and selling supplies.

Callaway devised a strategy of having sales representatives call on retailers using an “A,” “B” and “C” strategy where the retailer was visited weekly, once a month or four times a year; this strategy was used to ensure the highest performing retailers were continually aware of new products and selling ideas from the company.

Pricing

Callaway practiced a premium pricing strategy during this period, pricing the Big Bertha at the high end of the wood pricing range.

Wholesale prices to customers were rarely modified, and it was therefore common to see the same wholesale pricing across the entire span of a product lifecycle.

Pricing moves were made only when an improved product was about to be introduced and the customers needed to have a price break to move the aging inventory.

Contrary to competitors during this period, Callaway refused to search out price elasticity by dropping prices, or looking for volume in low price.

Pricing strategies during this time further supported the premium branding position the company had worked very hard to attain during this period.

Why was Callaway’s strategy successful from 1988-1997? Answer in bullet point format.

Successful development and new product introduction of the Big Bertha wood in 1991 was a key contributor to the company growing to $449M in 1994.

R&D continues to bring innovative club and shaft designs to the Callaway product strategy, leading to a product line proliferation that begins to swamp distribution channels with new products.

Having established itself as a premium brand in the previous periods of its history, Callaway was perfectly positioned to take advantage of exponential growth in golf spending increased to $15B in 1988.

By 1991 due to pervasive word-of-mouth recommendations in the golf industry, 65% of pro-golfers were using Callaway golf clubs, golf balls and accessories.

What changed in 1998-1999 with regard to a) competition; b) demand; c) price; d) PLC; e) consumer behavior; and f) distribution channels (suggestion: make use of the exhibits for parts of this question). Use bullet points to answer this question.

Competition

Consolidation brings greater financial resources to key competitors including Taylor Made Golf, which was acquired by Adidas-Solomon, who rapidly introduces the Bubble Shaft in 1984.

Titlelist and Cobra are acquired by Fortune Brands, which also increases the financial strength of these two competitors and gives need resources for R&D and marketing strategies. Titlelist concentrates on celebrity endorsements and Cobra concentrates on the amateur segment with the infusion of funds from being acquired.

Ping becomes more focused on R&D and attempts to replicate Callaway’s success with heel-to and perimeter weighting, looking to capitalize on lessons learned within the industry from Big Bertha.

Price competition becomes more pervasive as the off-course retailers begin resorting to using Callaway clubs as their pricing strategy reference points or anchors, with competitors undercutting the market leader.

Demand

As of 1998, golfers spent $15B in the U.S. alone, averaging to $1,152 per golfer that year, showing demand to be strong.

Contrary to the high spending figures, the sport is not attracting as many new participants as in previous years which is leading to a lower sales level for off-course retailers.

Asian economic crises and the proliferation of new premium woods is leading to a reduced sales rate in the premium market.

The majority of sales in 1998 are in the U.S. (63%) followed by Japan (9%), United Kingdom (9%) and the 48 other nations Callaway sells to (19%).

Price

Callaway continues to stay on a fixed price model despite competitors becoming more aggressive with discounts to customers in an effort to gain distribution.

Callaway continues with tight credit terms for all customers, stating they will only offer 2% 30 net 60 which translates into only 2% discount if paid in 30 days, and the full amount due in 60 days.

Product Lifecycle

Big Bertha X-12 irons launched in 1998 and quickly become the industry’s best-selling brands.

Big Bertha Steelhead Metal Woods introduced and the kid’s product line of Little Bertha golf clubs.

Callaway continues to spend heavily on R&D, with 1998 seeing the company spending $37M for the development of their next generation of golf clubs.

Proliferation of new product introductions leaves retailers feeling overwhelmed and complaining about how rapidly manufacturers’ transition products.

Consumer Behavior

Callaway sold 6 million units in 1998; demand continues to be robust and growing despite Asian economic crises and a slow-down in the high-end of their business.

The Callaway brand becomes synonymous with the highest quality of golf products and continues to drive sales to the customer, as end consumers demand Callaway products over all others.

New golfers tend to spend significantly less on their initial set of clubs, often settling for starter sets with $400 price points while more experienced golfers replace their golf clubs on average of every two years and spend $700 or more.

In 1998 there are between 1.5M and 3.0M beginning golfers every year joining the sport, partially driven by the forgiving nature of the Big Bertha woods and irons; Callaway has helped to expand the market through their use of innovation.

Distribution

Of the 2,000 off-course shops, Callaway sold through 1,500 of them in 1999 and has a commanding market share in this distribution segment due to heavy pull-based demand for their products.

During this time period one-third of off-course shops sold two-thirds of all products and two-thirds of all on-course ships sold only a third of all products. Callaway reasoned that despite the smaller number of off-course shops, through marketing, selling support and merchandising they could increase in-store sales.

International sales driven by foreign subsidiaries and international golf club distributors throughout the 50 countries the company sells into during this time period.

Lack of inventory management through the Callaway distribution channels forces the company’s sales reps to do physical inventory counts while completing product training in stores.

Using the income statement 1995-1998 and showing me what you calculated (you may also use the text, if needed), answer the question: does Callaway Golf Company need a new strategy? Then, in 1-2 concise sentences, define the fundamental problem for Callaway Golf Company.

Callaway Golf Co. Income Statement

Net sales

Cost of sales

Gross profit

Selling expenses

General & administrative expenses

Research & development expenses

Restructuring costs

Sumitomo transition costs

Litigation settlement

Total operating expenses

Income (loss) from operations

Interest & other income, net

Interest expense

Income (loss) before income taxes-United States

Income (loss) before income taxes-foreign

Income (loss) before income taxes

Current tax provision (benefit) – federal

Current tax provision (benefit) – state

Current tax provision (benefit) – foreign

Deferred tax expense (benefit) – federal

Deferred tax expense (benefit) – state

Deferred tax expense (benefit) – foreign

Provision for (benefit from) income taxes

Income (loss) before cumulative effect of accounting change

Net income (loss)

Callaway Golf Co. Ratio Analysis

Profitability Ratios

ROA % (Net)

ROE % (Net)

ROI % (Operating)

EBITDA Margin %

Calculated Tax Rate %

EBT<n
Liquidity Indicators

Quick Ratio

Current Ratio

Net Current Assets % TA

Debt Management

Total Debt to Equity

Interest Coverage

Asset Management

Total Asset Turnover

Receivables Turnover

Inventory Turnover

Accounts Payable Turnover

Accrued Expenses Turnover

Property Plant & Equip Turnover

Cash & Equivalents Turnover

Callaway has invested aggressively into their customers’ satisfaction levels while at the same time concentrating on the end consumers’ brand loyalty and the ability to get them to “pull their golf clubs through distribution channels. The combined effects of heavy R&D spending and very rapid product lifecycles in conjunction with having the lowest gross margin generated through distribution channels has left Callaway in 1998 with a Net Loss of $26M.

What is your solution to the problem that was defined in question #4 above? Your solution/explanation must focus on a) Product development & Commercialization issues and b) on distribution channel issues.

Callaway is still operating like a start-up despite the fact they are nearly a $700M company during the period of time this case study covers. As a result, their approach to product development and commercialization is to overwhelm both the competition and their customers by concentrating on speed of product lifecycles combined with unique solutions to common golfer or “duffer” problems. This approach to new product development and commercialization is highly effective for starting a company yet can become quite expensive and chaotic in more established ones, as Callaway is expiring within the timeframes of this case study. What is needed is a more systematic approach to product development that takes into account the specifics of how the market for golfing equipment is changing over time. In addition, R&D appears to be disjointed from the remainder of the company, forcing other functional areas to overcompensate to keep up with the pace of product introductions over time.

Just as evident of a continual start-up mentality in the company is their approach to defining and executing distribution strategies. Fortunate to have a strong “pull” based product that have end consumers requesting their golf clubs and accessories from customers or distribution channel members, Callaway has yet to create a more strategically-based distribution channel strategy. Instead of having unique objectives by each channel or even the synchronization of strategies across multiple channels, Callaway is going all-out on the off-course retailer yet does not appear to have a strategy for balancing this with the on-course retailer. The international market is completely untapped and it appears in the context of the case study that Callaway is allowing their brand to carry them in selected geographies. With a more concerted multichannel management strategy, the company could be much more effective and profitable. Lastly, the many support and service programs the company has actually significantly drop their gross margins through distribution, and like product development, this could also be significantly improved.

Consider the text’s chapter 8 Product Development & Commercialization strategic and operational process steps. In your opinion, which strategic and operational process steps in chapter 8 would Callaway Golf Company benefited most from using in the year 2000? Be specific (i.e. support your answers using PAGE NUMBERS and QUOTATIONS FROM the TEXT) and concise in your answers.

Despite the insistence of Ely Callaway and others that innovation, not market orientation or market planning should dominate the company’s direction, they are in fact racing into a more mature market and do need to stay attuned to market demands. The first phase of the product development and commercialization process states that “corporate and marketing strategies should influence idea generation for products.” (pg. 135) This is counter to the heavily innovation-based approach that Callaway has engrained into its culture. Second, Callaway tends to have their R&D function running independently of all other strategies and functional areas. As a result, by 1999, the company has earned the reputation of flooding the market with new product introductions, a strategy competitors can easily follow through product line extensions. The focal point of the product line race going on are the trade shows in Las Vegas and Florida where dealers evaluate new clubs to consider carrying. This proliferation of new products is meant as a strategy of outdistancing the competition yet is leading to confusion within the distribution channels as customers’ salespeople grapple with how to sell existing golf club lines, often not having time to study and effectively sell the new ones. As the books states on page 136 “A proliferation of products and product variations might cause complications with little or no payoff.”

R&D as a function needs to also be defined through guidelines established through cross-functional product development team leadership as well. Within the context of the case study Callaway is not actively involving Customer Relationship Management and Supply Chain Management, two critical areas that can help R&D appreciate the constraints of the broader market and also provide greater insights into how R&D can make greater contributions to the value chain of the company. As is stated in the book, “The involvement of the process team from customer relationship management and supplier relationship management is central to managing the relationships across the supply chain (pg. 137).” Lastly Callaway needs to concentrate on having better focus on the strategic objectives behind each new product development effort, instead of just launching new products for the sake of speeding new product introductions through the industry. As the books states on page 140 “…better management of the product development and commercialization process can lead to sales increase as a result of rolling out successful new products, improving product availability, retaining existing customers and also attracting new customers.” Taken together these are critical objectives for the company to base each specific product development project on, and selectively choose those that will lead to the greatest potential increase in profitability.

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