Innovation Through Collaboration

As aging populations put a strain on cash-strapped governments, chronic illness and rare disease prevention is taking centre stage in healthcare. To meet new levels of demand, the sector is ramping up its innovative capacity through collaborations. But harnessing the disruptive potential of these partnerships is still very much a work in progress, according to participants of the INSEAD Healthcare Alumni Summit in Zurich in October this year.

By using Top Flite as a platform for lower priced clubs our client would be able to market them to large big box retailers such as Wal-Mart and Target. Almost certainly Top Flite clubs would eagerly be offered prominent shelf space in big box specialty retailers such as The Sports Authority, Oshman's Sporting Goods, Big 5 Sporting Goods, and Dick's Sporting Goods. A move into these kinds of stores would attract a new lower income market segment of golfers and would mean that Callaway produced clubs would be available seamlessly to multiple income-level segments. The use of the Top Flite branded clubs would connect with the demographics those companies appeal to, while protecting the Callaway's brand reputation as a producer of premium golf.

Company Background
Callaway Golf was founded in 1982 by Ely Callaway, an entrepreneur with a personal interest in the game of golf. Before entering the golf industry, Callaway had a successful career as president of a textile company. He also owned a California vineyard and winery, which he sold in 1981. Callaway reinvested the following year in Hickory Stick USA, a company specializing in golf wedges and putters with a steel-core and hickory shaft. With half of the company holdings, Calloway became President and CEO in 1983, and renamed the company to Callaway Hickory Stick USA. He became the full owner of Callaway Hickory Stick USA in 1984 for an additional $400,000 investment v . In 1985, the company moved from Cathedral City, California to its current location in Carlsbad, California. Ely Callaway's company adopted its current name, Callaway Golf Company, in 1988.
Callaway Golf has maintained a reputation as a leading innovator in the golf industry over its 26-year history. The company moved into more technologically based designs in the late 1980s.
Callaway hired former billiard cue designer Richard C. Helmstetter as their chief club designer in 1986. The same year, Callaway Golf became the first among its competitors to use computercontrolled milling machines to manufacture putters, a process which guaranteed uniform flatness of each putter face. In 1988, Callaway Golf introduced its Core S2H2 design for Irons, which led the field in club design. Company sales climbed from $4.8 million in 1988 to $10.4 million in 1989 vi . The S2H2 Drivers became the most prominent driver on the Senior PGA Tour within a year. In 1990, Callaway Golf began producing a women's line of S2H2 clubs.
Callaway released the Big Bertha Driver in 1991, a pivotal new line for the company and the industry as a whole. The club's innovative design made it the first wide body, stainless steel driver. By the following year, the Big Bertha was the most prominent driver on the Senior Tour, LPGA Tour, and Hogan Tour. Sales in 1992 hit $133 million, a figure more than twice the $54.5 million in sales during the previous year.
Callaway Golf went public in 1992 under  Products in the accessories category include golf bags, footwear, gloves, headwear, towels, umbrellas and other accessories, as well as the sale of pre-owned products through Callaway Golf Interactive. Revenues in this segment are also derived from royalties from the Company's trademarks.

Internal Rivalry
The participation of "core golfers" and rounds of golf played yearly drive the golf equipment sales. Core golfers are adult golfers who play eight or more rounds of golf per year and account for 87% of total domestic participation and 87% of total golf expenditures. The majority of core golfers are located in the Atlantic (35% of core golfers) and Northeastern (24% of golfers) regions of the United States, with a strong presence of core golfers on the Pacific Coast (13% of core golfers). On average, core golfers have an annual household income of $86,000. Another driver of golf industry growth is the number of 18-hole rounds of golf played within a year.
With respect to core golfers, 47% of golfers played 8-24 rounds of golf in 2006, in contrast to only 2% of golfers who played more than 200 rounds during that same period. Individuals 70+ years of age playing on average 48 rounds of golf.
The golf equipment industry is quite mature and saturated in the United States, and the largest impact on industry growth could be expected from a demographic shift in the core participant group, namely, the retirement of baby boomers, which is starting to happen now. As this generation gets older, they will form a large fraction of the core golfers group, and provide a strong customer base for Callaway and its competitors.
There is also a growth opportunity in the international market. As people in the developing countries accumulate wealth and are able to devote more time to leisure, golf becomes more popular. China Golf Association projects the total number of golfers to reach 3.7 million by 2010, and if the penetration rate of golfers in China reaches at least one quarter of that in Japan, the number would rise to 27 million. One threat in this market is the presence of counterfeiters, who compete for customers that care more about the price as opposed to the quality and performance of the equipment. Ostensibly, this is a threat that Callaway can mitigate by offering its older models at steep discounts, such that they can successfully compete for that market. However, it should not present a real threat to the high-end customers that Callaway caters to. So far, Callaway was able to sustain leadership internationally; building principal market shares in most of its segments in Europe and Asia.
The golf equipment industry lies on a spectrum of low-end to high-end manufacturers. The low-end manufacturers include Spalding, MacGregor, and Dunlop that mainly sell equipment for amateur players. The high-end manufacturers include Callaway, TaylorMade, Ping, Nike, and Titleist. These manufacturers sell professional equipment, usually at specialty golf-shops.
Catering towards more seasoned players, who mostly fall into the "core" participant group, these companies are able to extract higher margins on their sales. One could argue that Callaway's customer is less concerned with price, and more so with the quality of his purchase, and perhaps, the image/sense of prestige that comes along with the purchase. Therefore, the strongest decision-drivers in this segment are quality of the products and their marketing.
Companies compete on the quality/performance as well as overall image of their equipment by investing heavily in research and development (R&D) and marketing campaigns. Nike, for instance, offered a $100 mm 5-year endorsement to Tiger Woods and Callaway has spent $32 mm on R&D in 2007 (one-third of their operating income) ix . In fact, this industry has become so technologically driven that most "new" golf clubs do not stay on the shelves for longer than two years, at which point the companies are forced to match their competitors' "new, improved models" by offering their own new equipment. Industry rivals have a tendency to copy each others' innovation: Ping Golf pioneered the idea of custom fitting an iron to individual golfers, but other high-end manufacturers were quick to adopt that service.
Such intense rivalry is justified by the fact that the golf equipment industry is not expected to grow dramatically. Therefore, for the main companies to continue to grow, they have to compete for market share more so than players of a fast-growing industry. However, price wars are unlikely in the high-end segment of the industry, since the consumers do not exhibit strong price sensitivity and are more concerned with qualitative factors such as performance, brand name, and customer service.
In the market for high-end golf clubs, Callaway is one of the clear leaders, however, it derives almost 36% of its revenues (2007)  The accessories segment is hard to break down because Callaway does not itemize the revenues by each type of accessory (bags, footwear, apparel, etc). However, it certainly is not the leader in the footwear market. A specialized golf footwear producer FootJoy enjoys almost a 50% market share according to Golfweek.com, with Ecco, Nike, and Adidas trailing behind.
Below is a list of the top competitors to Callaway broken down by what they produce. It is worthwhile to know that most start ups that succeed only engage in putters and wedges because they are art mixed with science, rather than the pure engineering that goes into drivers, woods, & irons: into golf are the most viable entrants, but Adidas and Nike are already in the market, and there seem to be no large sporting goods producers that are not in the market already.

Drivers Fairways & Hybrids Iron Sets Putters Wedges
However, the lack of any real barriers to entry in this market makes it possible for any custom golf club maker to start-up their own company. Although we do not believe that these companies pose a large threat to Callaway, it stands to be noted that every small entrant takes away some level of market share from Callaway, or the other larger firms. One example of this is the putter market, where less start-up costs are required. Yes! Putters have done a phenomenal job at creating a putter that lets the ball start rolling sooner, rather than hopping or skidding like most putters on the market. Although success stories like this are rare, Yes! has definitely taken away market share from Odyssey by offering a $300 completely customized product.

Substitutes & Complements
Substitution is a strong competitive factor within the high-end segment for golf clubs, and brand loyalty is not a strong defense against competition above a certain price threshold. A "core" golf player would probably view Callaway and TaylorMade drivers as very close substitutes.
A different kind of a threat may come from the older models of golf clubs, which can be regarded as close substitutes for the newer ones by a lot of core and non-core players. Callaway is mitigating this threat through its Callaway Pre-Owned & Outlet online store, where older models are sold at high discounts.
In addition to that, however, there exist external threats to the golf industry. The last spike in golf popularity came with Tiger Woods, and if another strong personality appears in a "country club" sport, such as tennis, we may see a shift in the number of players away from golf into the new popular sport. And just as Tiger's appearance affected primarily the younger generations of golfers, this threat would probably also affect men and women between 18 and 35, rather than the older golf players.
Also, by being a leisure activity, golf has many substitutes in the same segment, and not necessarily sport-related activities. Vacations, ship cruises, and any other outdoor leisure activity may be regarded as a substitute to golf.

Buyer & Supplier Power
High-end golf equipment manufacturers sell through on-course golf-shops, off-course golfshops, and online venues. Since most of these distributors are not large, and usually do not account for more than 3% of a manufacturer's sales, they have rather low buyer power. This would have been very different, had the high-end manufacturers chosen to use the same channels as low-end ones: large department stores a la Walmart that would exert much greater power over producers by increasing the size of the orders.
End users, or "core" golfers in this case, have some buyer power because they usually have the information about the features of the products they're buying. Many golf magazines feature comparisons of various golf clubs and their performance characteristics, and this information is easy to find, making golf equipment, essentially, a "search good". Also, end users have relatively low switching costs between rival products, adding to their power.
On the supplier side, the essential aspect is the labor force employed in R&D and selling and marketing campaigns that a golf equipment manufacturer undertakes. The market for star golfers is a very limited one, which leaves very little power to golf equipment manufacturers.
There are little outsourcing opportunities in design because almost all pieces of an iron are technologically advanced (aside from the grips that can be outsourced rather easily), and this gives more power to the labor suppliers in R&D.
Manufacturing of the golf clubs is usually subcontracted to casting houses, which creates a symbiotic relationship between the manufacturing facility and the ultimate golf club producer.
Companies are very particular about the manufacturing quality level, and once they find a subcontractor that fits their standards, they tend to continue a working relationship with them, because finding a new high-quality manufacturer can be costly. On the other hand, the subcontractor's production line is very specialized towards its client's needs, which makes it hard and risky for them to switch to a different customer. Regardless of technology, the golf club market is still a market not just for functionality but also for cosmetic appeal (customer satisfaction is derived from stylistic appeal of products)

SWOT Analysis Strengths
Regulations for official golf tournaments have created problems with non-PGA conforming clubs in the past

Must invest heavily in growth in the international market
Possible price cap at $500 (Consumers likely will not pay more than this) Decreasing volumes of purchases recently (all but Irons)

Opportunities
Internationally, especially in Asia, golf will take off in next 10 years ( List in competitive analysis section of numerous competitors (Page 9/10) Declining US economy discourages spending on leisure products

Financial Analysis
Callaway has remained a force in the golf industry over the years, and this is not changing in the present. Callaway has maintained its dominance in the industry with a strong portfolio of Woods, Irons, Putters, and Accessories. Along with their strong portfolio of current products comes the promise of equally superb pipeline products. There are always a few worries involved in the leisure market, and especially golfing equipment. The two that would seemingly affect Callaway the most would be the rational behavior of consumers and the acceptance of new designs/styles.

2-Year Callaway Stock Performance Comparison with Fortune Brands, Adidas & Nike xxi
This is an underdeveloped picture of the golfing market as there are a few other major players like Ping and Cleveland Golf (Japanese), which are both private companies. What this picture does show us is that the diversified sporting goods providers are doing much better than the ones that focus solely on golf. Adidas and Nike are two of the largest sporting goods providers for all athletic needs. Thus, they are not as effected by a decrease in golfing membership as a Callaway or Fortune Brands would be because it is not the sole focus.

Strategic Issues & Recommendations
The main issues featuring Callaway are a dwindling market and the lack of performance by acquisitions. The generation born from 1930-1946 has fueled the consumption of golf over the past 10-15 years, but their demographic has shrunk and the baby-boomers are choosing to spend their leisure dollar on less active pursuits. The weekend golfer has shifted to spending more time with his family, rather than disappearing on the golf course for the day. This is coupled with the increased popularity of travel, shopping, cooking, and other more social activities. With all of these factors in mind it becomes quite evident that in order to survive, Callaway must increase its market share.
Our main recommendation to the Callaway Golf Company is to utilize the Top Flite line as a way of recycling older models of clubs. Currently, the only available way that Callaway can sell to those individuals who do not want to pay $1,000 for a set of irons or $500 for a driver is through Callaway's used clubs website. Unfortunately, this is in direct competition with Ebay, which has better prices on the clubs in many situations. We do not view the online pre-owned business that Callaway has started as a likely long-term success because of the presence of Ebay and other online auctioneers.
Top Flite has been given some respect in the Golf world because of the recent success of the D2 golf ball line. By releasing clubs with the same or a similar name, we could capitalize on this recent recognition and bolster the brand further. We also want to ensure that the consumers know that Top Flite is associated with Callaway, thus, we would recommend that some notation were given which indicated this. A possibility would be, "D2 Drivers by Top Flite, powered by Callaway Technology." This would separate the brands, protecting Callaway if the venture failed, while also ensuring the consumer that the product is of the highest quality.
We would recommend that the production of older models of clubs re-branded under Top Flite would begin with last year's models. We would not recommend delving any further back because of the recent switches to an automated assembly method. This would not have an adverse effect on operating margins because of the shifts in production techniques. By using the same manufacturing processes with a different label, Callaway would also minimize costs of creating brand new factories. This would also limit the need to invest heavily in research & development at Top Flite while creating a substantial product line instantly. More shelf space could also be created in stores that currently carry Callaway and Top Flite products such as the big box specialty stores like Big 5 Sporting Goods and Chick's Sporting Goods. We believe that the wide-range of customers that these stores serve would be the perfect location to sell our entire range of products. By offering clubs of all technology levels, we could sell to a Beverly Hills resident and a starving college student at the same time. When this establishes the Top Flite brand at those stores, the golf balls could be pushed onto the shelves with Ben Hogan golf balls and products as well. We foresee the proliferation of the Top Flite brand occurring the most in these specialty stores because people are still willing to head to a sports store and enjoy their experience, rather than rushing through it to save time.
Discounting these clubs would also not be a huge burden on Callaway's profit margins as research & development costs have not skyrocketed in any of the past five years. This is the possibly because of the larger indicator that technology can only bring the game of golf so far.
Eventually, golf clubs technology will plateau, as it is extremely unlikely that a senior citizen will be able to drive the ball 350 yards regardless of the club they wield. If this hypothesis