Patagonia

Defining the Organization's Strategic Direction

by: Johannes Mahlich Mara Schneider

Agenda
1. 2. 3. 4. 5. 6. 7. Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Discussion

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Profitability vs. Environmentalism

Basis economic theory:
Environmentalism in companies is likely to divert management attention and capital Not competitive if focus is only on environmental objectives

Lose customers if environmental quality providence goes beyond required law High dependency on consumer who bear the burden of extra cost through environmental investments
Source: Reinhardt (1998)

PROFIT

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Patagonia
Private held company Initial purpose: Financing of founders outdoor hobbies Produces sportswear, technical outerwear / knits, hard goods

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Patagonia Doomed to Fail?

Basic economic theory applied to Patagonia:

Managements attention and capital is diverted by environmentalism

Focus is on environmental objectives

Environmental quality providence goes beyond required law They have extra costs through environmental activities

PROFIT

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Strategy
[] choice of business model through which the firm will compete in the market place.

Source: Casadesus-Masanell & Ricart (2010)

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Strategy
Vision
Environment conservation and restoration

Mission
Strive to build the best product, cause no unnecessary harm, and use business to inspire and implement solutions to the environmental crisis. -

Believes
Quality Integrity Environmentalism Not bound by convention Zen Philosophy

Environmental differentiation strategy

7
Source: Reinhardt (1998)

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Business Model
[...] logic of the firm, the way it operates and how it creates value for its stakeholders.

Source: Casadesus-Masanell & Ricart (2010)

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Business Model
Process Innovation Product & Service Innovation Business Model Innovation

Create Value
Operational Excellence Customer Intimacy Product Leadership Environmental Stewardship

Perceive Value
Customers Excellent Quality & Services Good Feeling Environment

Capture Value
Profits Growth Market Share

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Tactics
[...] residual choices open to a firm by virtue of the business model it chooses to employ.

10

Source: Casadesus-Masanell & Ricart (2010)

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Product Lifecyle Initiative

Virtues of Business Model
Operational Excellence Customer Intimacy Product Leadership Environmental Stewardship

Key Tactics
Product Lifecycle Initiative

Reduce

Repair

Reuse

Recycle

The Product Lifecycle Initiative represents a holistic commitment to lengthen the lifecycle of each product and reduce landfill waste.

11

Source: Reinhardt (1998); Reinhardt & Casadesus-Masanell, Kim (2010)

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Reduce
Key Tactics
Product Lifecycle Initiative
Reduce Repair Reuse Recycle

Description
High Quality Low Footprint Organic & Recycled Materials

Assessment
Big increase in production costs Limited product variety Only small price increase

12

Source: Reinhardt (1998); Reinhardt & Casadesus-Masanell, Kim (2010)

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Repair
Key Tactics
Product Lifecycle Initiative
Reduce Repair Reuse Recycle

Description
Free repairing service Considers repair for other brands

Assessment
Increases trust in quality High costs Miss out potential new sales Not enough capacity

13

Source: Reinhardt (1998); Reinhardt & Casadesus-Masanell, Kim (2010)

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Reuse
Key Tactics
Product Lifecycle Initiative
Reduce Repair Reuse Recycle

Description
Second market for used products Considers opening for other brands

Assessment
Additional revenue stream New less affluent customer segments Cannibalization of sales

14

Source: Reinhardt (1998); Reinhardt & Casadesus-Masanell, Kim (2010)

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Recycle
Key Tactics
Product Lifecycle Initiative
Reduce Repair Reuse Recycle

Description
Take broken products back for free Considers providing servicefor other brands

Assessment
Cheap resources for production High operating costs Capacity constraints

15

Source: Reinhardt (1998); Reinhardt & Casadesus-Masanell, Kim (2010)

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Business Model
Process Innovation Product & Service Innovation Business Model Innovation

Create Value
Operational Excellence

Customer Intimacy

Product Leadership

Environmental Stewardship

Perceive Value
Customers Excellent Quality & Services Good Feeling Environment

p
?

p
?

Capture Value
Profits

Growth

Market Share

16

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Requirements for Success

3
Innovation must be defensible against imitation by competitors

2
1

Establish credible information about environmental attributes of its products

Find or create a willingness among customers to pay for environmental quality

17

Source: Reinhardt (1998)

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

1. Willingness to pay
Perceive Value
Customers Excellent Quality & Services Good Feeling

Environment

Capture Value
Profitability Growth Market Share

Patagonia
Bundling of public and private goods (Environment & Quality) Environmental prestige Altruistic reasons (Donation) Differentiation strategy resonates with customer value

18

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

2. Credibility
Reporting Labeling

Patagonia
Footprint chronicles Retail store lounge - to inform about patagonia and projects
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Environmental impact of 150 different products documented

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

3. Protection Against Imitation

Process Innovation Product & Service Innovation Business Model Innovation

Low transparency Medium protection

Patents, infrastructure Medium / high protection

Highly integrated; strong customer relationship High protection

20

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Requirements for Success

3
Innovation must be defensible against imitation by competitors

2
1

Establish credible information about environmental attributes of its products

Find or create a willingness among customers to pay for environmental quality

p p

21

Source: Reinhardt (1998)

Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Key Takeaways
Dont just rely on basic economic logic! Environmental differentiation strategy can work! Environmental differentiation strategy must provide value to the customer and the firm must be able to capture the value! Company must be credible for their environmental efforts! Environmentalism must be deeply integrated in the business model to be difficult to imitate! Innovation must be managed with respect to capacity & resources

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Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Discussion
Should Patagonia go public?
Investors Expectation Shareholder Profits = main objective ROI decision making Short term focus
-

Profitability

Growth

Patagonia
profits = only means to an end Many environmental activities only capture value as an integral part of business model Long term focus

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Introduction

Strategy

Business Model

Tactics

Requirements for Success

Key Takeaways

Discussion

Discussion
Should Patagonia go public?
Investors Expectation Shareholder Focus on growth
-

Profitability

Growth

Patagonia
Capacity and resource constraints cant handle fast growth without compromising believes

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Thank you for your attention!