Dyna Golf
Joe Bell, president and chief executive officer of Dyna Golf, has called a meeting of the executive committee of his board of directors. He is concerned about the price competition and declining sales of his golf wedge line of business. Bell summarizes the current situation by saying,

As you know, we set target prices to maintain a gross margin on sales of 35 percent. On some products, such as our drivers, we have been able to achieve the target price. We have been able to achieve higher prices on our putters than a target 35 percent gross margin would dictate. But our wedges are a totally different story.

Our factory is among the most efficient in the world. I think that some foreign companies are dumping wedges in the U.S. market, driving down prices and unit sales. We’ve been reluctant to further cut our prices for fear of what this will do to our gross margins. Fortunately, we’ve been able to offset the decline in sales of wedges by significantly raising the price of our putters. We were pleasantly surprised when our customers readily accepted the price increases of our putters, and we haven’t experienced much reaction from our competitors on the putter price increases.

Steve Barber, an outside director on the board, asks:

Joe, I don’t pretend to know a lot about the golf club business, but how confident are you in your cost data? If your costs are off, won’t your prices be off as well?

Joe Bell responds:

That’s a good point, Steve, and one I’ve been worried about. We’ve been modernizing our production facilities and I’ve asked our controller, Phil Meyers, to look into it and report back after he has undertaken a thorough analysis. My purpose for calling this meeting was to update you on our current situation and let you know what we are doing.

Background

Dyna Golf has been in business for 15 years. Its one plant manufactures three different types of golf clubs: drivers, wedges, and putters. Dyna does not produce a complete club with a shaft and grip. It makes the metal head that is sold to other companies that assemble and market the complete club. Dyna holds four patents on a unique golf club head design that forges together into one club head three different metals: steel, titanium, and brass. It also has a very distinctive appearance. These three metals weigh different amounts, and by designing a club head with the three metals, Dyna produces a club with unique swing and feel properties. While the Dyna club is unique and covered by patents, other manufacturers have recently introduced similar technology using comparable manufacturing methods.

The Dyna driver is sold to a single distributor that adds the shaft and grip and sells the driver to retail golf shops. Dyna first made its reputation with its driver. It became an “instant hit” with amateurs after a professional golfer won a tournament using the Dyna driver. Based on the name recognition from its driver, Dyna introduced a line of putters and then wedges. The wedges are sold to three different distributors and the putters to six different distributors. Specialty, high-end putters like Dyna’s have a retail price of $120 to $180 and drivers a retail price of $350 to $500. Golfers like to experiment with new equipment, especially when they are playing badly. Therefore, it is not uncommon for golfers to own several putters and switch among them during the year. Putter manufacturers seek to capitalize on this psychology with aggressive advertising campaigns. It is less common for players to switch among wedges as they do with putters. Since it takes several rounds of golf playing with a new wedge to get its feel and distance control, most players don’t experiment as much with wedges as with putters, or even drivers.