The Performance Indicator Dilemma Essay Sample
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The Performance Indicator Dilemma Essay Sample
Discussing the inconsistency between the PI value proposition and the lack of adoption There is a clear inconsistency in the claim that Performance Indicator (PI) offers significant profit uplift potential for golf ball manufacturers and the fact that no single manufacturer is yet to adopt the technology. This memo discusses the key arguments on why this is the case. There are several key factors that explain this apparent inconsistency, including: customer preferences and buying behavior; manufacturers’ agendas, concerns and willingness-to-pay; and the reliability of financial forecasts proposed by PI. Overview of Performance Indicator value proposition
PI offers an innovative, patented technology, aimed at golf ball manufacturers, which can clearly identify the degradation of golf balls after exposure to water for prolonged periods. This would effectively eliminate a significant amount of used golf balls from the market, driving increased sales of new balls. Customer Preferences and Buying Behavior
There are several key factors regarding customer preferences and buying patterns that are likely to prevent golf ball manufacturers from widely adopting the technology. Firstly, consumers retain tremendous confidence in their ability to visually assess a ball’s quality. Given the increased durability of ball, consumers don’t perceive there to be a quality issue with most used balls. Furthermore, golfers have tended not to blame balls for poor performance. Accordingly, there appears to be a significant investment in market education required to alert customers to this “inconvenient truth”. On a positive note, customers do appear receptive to the benefits of the technology, once these are sufficiently well explained through PGA Magazine & Golf Digest. Data from Harris Interactive is encouraging in that it demonstrates that 60% of golfers would buy new balls, obviously driving up overall new ball demand.
However, switching to other used brands or potentially even other new brands (driven by the desired brand being out of stock – “the Pro V1 effect”), would likely concern most golf ball manufacturers. While it would theoretically improve their individual performance, it would also limit their access to cheap balls by driving up the price for used balls, requiring them to purchase more new balls and drive an overall increase in their annual golf ball expenditure. Purchase figures show that the vast majority of balls used (171 out of 220 million dozen) are either found or bought used, meaning that the majority of golfers do not buy new balls. Accordingly, this majority would likely view the reduction in access to cheap golf balls and increase costs as an affront. Finally, there still appears to be significant questions regarding customer perception of grey balls of their favored brand and the subsequent impact on their purchasing behavior. Manufacturers’ agendas, concerns and willingness-to-pay
Golf ball manufacturers would be looking to achieve several key strategic goals, such as increased sales, increased market share and / or increased profitability, to adopt and implement PI’s technology. Accordingly, manufacturers are mainly concerned with the cost and implications on manufacturing, competitor reactions (and customer perception), the forecast growth in the new balls market, the share they could capture and the financial details of agreement. Cost and implications on manufacturing
While yet to be proven commercially, the PI process claimed to be easy and cheap to incorporate into the manufacturing process. Golf ball manufacturers would of course be looking to test and verify the performance of the technology before incorporating into their manufacturing process. However, the licensing of the technology, at 6 cents per ball, was modest in comparison to current manufacturer gross profit on balls, especially premium brands. Competitor reactions and implications
Assuming that the technology is not likely to be mandated as standard by the USGA, there are several key implications on the first mover, which cast significant doubt over the overall value proposition of the PI offering. In this case, the downsides of being first mover include aggressive counter-marketing by competitors, for example claiming that their balls are inferior quality because they turn grey. So significant was this threat that Dunlop, Bridgestone, Taylor Made, Wilson, Nike and Callaway all explicitly expressed that they were not interested in pioneering the technology. Furthermore, (as discussed above) in the absence of compelling data regarding customer perception of grey balls, these fears were not likely to be allayed. The impact of likely competitor reactions and uncertainty of customer perception result in the high risk of brand equity damage the first mover, as well as increased (defensive / educational) marketing costs. Given the increasing tendency towards premium brands such as Pro V1 the impact of the brand damage is even more acute.
In addition to the aforementioned concerns, low mind share among manufacturers, timing and circumstance have also played a significant role in delaying adoption of the technology. From Achusnet’s lawsuit with Nitro, to Spalding’s financial troubles, to language problems at Bridgestone, to Dunlop Maxfli’s potential acquisition by Taylor Made – being the first adopter of PI’s technology was low on management’s strategic priority list. Growth in the new ball market, share gain and financial forecasts There is also a significant question regarding the robustness of the presented by PI in terms of market size. For example the data used to derive the 1.7 ratio (Line 1 in Exhibit 5) includes an unverified claim that 50% of used balls suffer performance degradation and that the market of 170m used balls played is not directly comparable with 50m new balls purchased (as one used ball can be played many times over). Accordingly, the 1.7 ratio in reality is expected to be lower.
The data in Exhibit 5 presents an industry average and would need to be tailored to each manufacturer’s specific sales mix of premium versus value balls as well as gross profit to be more relevant. However, more importantly the risk of losing a premium customer ($15.44 gross margin) outweighs the gain of additional gross profit of selling new balls ($13.10), especially if we consider the lifetime value of losing a customer. Another significant drawback is that by eliminating grey balls from the market, those brands without PI’s technology would actually be more prominent in the market and adopting manufacturers would reduce the “free trial” effect that used balls present. Furthermore, growth in new ball market would also bring an uplift to competitors sales volumes (albeit at potentially lower market share) without them having to take the risks / investment of adopting PI’s technology – they would all receive a “free ride”. All these factors appear to have outweighed the potential profit contribution of the PI technology and have thereby adversely affected its adoption in the market.