Gofl Industry Analysis

Golf Equipment Industry Analysis

I. Competitive Forces: The Five-Forces Model

A. Threats of New Entrants:

1. The threat of new entrants into the market is moderate, indicators point in mixed directions. Companies within the industry can be separated into two parts: golf and sporting goods. To take the largest golf company, Callaway, and to look at its total assets which total $846,000,000. For a company to enter into this market would require significant amounts of investment. One could assume that other sporting goods companies could diversify into golf similar to Adidas and Nike, but there are no large manufactures that are not in the market already.

2. Brand preferences are very important to consumers. Callaway lists brand preferences as one of the top five reasons why consumers buy their clubs in their 2006 annual report along with technology, quality, customer service and price.

3. Capital requirements are low the production of clubs are very labor intensive and very little animation is in the manufacturing process. Ping is a good example of a literal garage based manufacturing process was able to make a club that could compete with larger companies.

4. Regulation is import and has hurt companies substantively as it did with Ping when all but one of its clubs was labeled as illegal during its earlier years but with due care there is little cost of compliance.

5. Access to distribution channels are very important the quality of the club which is largely based on the material of the club are very expensive. To obtain carbon fiber and specific alloys that few manufactures make would be troubling for a small company to maintain and economies of scale in purchasing power would be most evident here.

6. The economies of scale are important but should not be overestimated many of the companies within the last thirty years have been garage or single room operations which were able to succeed with a quality product.

B. Bargaining of Buyers:

1. The power of buyers is low, for the majority of a company's business. In the case of clubs the majority of buyers account for less than three percent of a company's business, compared to golf ball sales which some buyers account for more than five percent of a company's business. Companies have roughly three fourths of their business in clubs and about one fifth in golf balls. These buyers are mostly distribution companies, sporting good stores are specialty golf stores, with a minority of the sales coming from end users which purchase from brick stores or online ordering.

2. The cost of switching products is low is fairly easy for buyers to do. One risk in the industry is forecasting. Overproduction is detrimental, because of short product life cycles and seasonal buying. Overproduction will lead to products on the shelf which will be marked down relatively quickly. Suppliers will also be unlikely to order products if it has competitors products on the shelf; so for an example Taylormade over forecasts even if Cleveland Golf is selling well Dick's Sporting goods won't buy more Cleveland products until it sells its Taylormade. The seasonality of the product exacerbates the problem as well. Callaway sells two thirds of its products in the first two quarters.

3. Buyers are normally very well informed of products which are constantly being compared to each other in periodicals. The industry as also shifted to releasing products in the third or fourth quarter to give buyers more time to judge the demand for the products.

4. Buyers have very little threat of integrating backwards. The business model between the industries has competing priorities in the golf industry innovation is king which is expensive compared to most buyers which focus on maximizing margins in order to increase profits.

5. Buyers also have to deal with the seasonality of the product, which is purchased at the beginning of each golf season, roughly the beginning of spring. The industry list the number of theoretical rounds of golf that could be played during a season as one of the strongest correlations to sale, especially those in the third quarter. If for example global warming makes the majority of the US warmer, and essence increase summer for two weeks then golf sales would increase.

C. Bargaining of Suppliers:

1. The wood, metal, and carbon fiber used as well as the manufactured pieces are not easily available for consumption. Many of the suppliers make specialty parts or alloys many that are also contain intellectual property rights. Many of these companies are medium sized manufacturing companies that do not rely totally on the golf industry. The suppliers of the industry are customized but they are not impossible to get from other sources, the ability for companies to obtain the needed inputs over the long run is more than confident. The risk is short term interruptions, especially with seasonal demand could be costly to companies. The extra costs to switch from suppliers must be considered. The risk of supply chain problems is listed on more than one of the industries 10-k report. Companies should protect their supply chain from unneeded shocks.

D. Substitute Products:

1. Within the industry the threat of substitutes is high with seven major firms in competition internal competition is a paramount risk. An external substitute to the golf industry as a whole is also very high. Golf is a leisure activity is very vulnerable; it competes with other warm weather activities. On the other hand it has a lot of protection from other sports, it is relatively easy to do physically and because of this nature and its expense it is associated to an older player. Golf has also been institutionalized as a way to do business. Callaway has predicted that the industries market growth does not appear like it will grow in the next five years it should be wary of segments of golf being chipped away. It should not be worried about losing its bread and butter market which is middle class men over forty but should be concerned about losing men 20-40 and women golfers who are more willing to accept alternatives.

E. Rivalries:

1. Rivalries are very high in this industry, many indicators point in the same direction in this matter. Marketing is very intense in three forms; print, competition, and endorsement. Printed articles mostly golfing magazines not only feature printed ads but more importantly feature constant comparison of products which are very highly sought after by the industry. Competitions opens and invitations are highly televised and a well advertised tournament is highly