Patagonia Case Study

Ana Martinez Valls 22/10/2012 PATAGONIA 1) Evaluate Patagonia’s business model. How important to Patagonia’s business model is its environmental position? Business models generally have as a primary objective to earn money, however, Patagonia’s is primarily oriented towards “doing things right”. That is why Patagonia’s founder Yves Chouinard considers the company an opportunity to “challenge the conventional wisdom and present a new style of responsible business”.

It’s business model differs substantially from the traditional business’ one. PATAGONIA’S BUSINESS MODEL * Target customer: Patagonia builds products for its “core users”, those who lead the “dirtbag” lifestyle (someone who wanders for temp jobs and long summers”, someone who is passioned about climbing, surfing.. etc) * Product: High quality & useful products, for different occasions that are aimed to “last forever”: Four main product categories: Sportswear (47%), Technical outwear (30%) Technical Knits(12%), Hard Goods (6%). Mission- Core service:  “Build the best product, cause no unnecessary harm and use business to inspire and implement solutions to the environmental crisis”. Value delivered: Manufacture of high quality outdoor and adventure sport clothing -Quality: Best clothes, own quality Lab (patents and technique used by other big corpportaions) -Environmentally impact (organic materials, recyclable products, environmental campaigns) -Innovative products that can “last forever” (more intelligent consumption) -Service to he customer (repair, replace) Acquire and keep customers: during a recession as it is the case nowadays, in a competitive market if two firm s have the same product at a similar price and one of them has a more responsible business, customers are going to choose the responsible business’ product * Differentiation: Organic materials that decrease harm to the environment. Products that last forever. Indeed you don’t have to buy new products you can repair them ! Products tested (proved by professionals) and developed in Patagonia’s lab. Revenue generation: Margin earned from selling through its four channels: wholesale(44%), retail (33%), catalog and internet (23%). As a percentage of sales, the gross margin ranges form 50 to 55%. In their new products they focus on innovation, environmental impact and quality what enabled them to “ charge prices roughly 20% higher than those of other outdoor apparel and 505 higher than mass market brands for comparable products”. * Cost structure: one third of the cost comes from manufacturing and two thirds form raw materials.

Higher costs due to labor costs in North America which are “ estimated to be anywhere from four to ten times those elsewhere” but also by the use of eco friendly materials such as organic cotton which was between 50% and 100% more expensive than normal cotton. * Profit margin: $26 963 000 ($332 862 in net sales) in 2010 2) How fast can Patagonia grow? How fast should it grow? Patagonia could grow faster, from a financial perspective but if it did it so it would not be “The Coolest Company on the Planet” (Fortune cover story, Casey 2007).

Indeed Patagonia endeavors a sustainable growth and it prioritizes a slow growth that enable the corporation to be committed to its mission and values. Patagonia’s growth path is closely related to the values that have being shaping the company since 1957 when Chouinard founded it. Indeed, Chouinard is a reluctant entrepreneur and his primary objective in business is not to earn money but he states that “the reason why [he is] in business is to protect what he likes”. An unsustainable growth goes against his values. Patagonia has found unambiguous ways to couple their products’ function and the brands environmental values.

Their business model raises major sums for environmental causes and their technological innovation reduces the environmental impact of their products- and that is what it is important for Patagonia. A perfect example of the sustainable growth Patagonia wants to pursue is their willingness to use organic cotton. The help provided to other corporation in order to help to establish a whole new organic? cotton industry is also a landmark of how they are committed to a sustainable development of the manufacturing industry.

Indeed, Patagonia is a reference for other business in its path to reduce contamination and some big corporations such as Nike have imitated -in a certain degree -this new organic cotton initiative. Patagonia has a responsibility towards society and the future reduction of pollution and feels that its mission is “to share broad sustainable practices”. Another initiative that in theory slows Patagonia financial growth is its participation in the “1% For The Planet” program- “an alliance of over 1200 business that donate a self imposed environmental tax of 1% of revenues to environmental organizations worldwide.

Also, some of Patagonia’s practices such their Employee Internship Program- through which employees can leave their jobs at Patagonia for up to two months to work full-time for the environmental group of their choice- could also slow their financial growth but increase their positive impact in society In a nut shell, Patagonia is not only focused in economic and financial growth but more on “its path of breaking new ground on reducing environmental harm”. Patagonia wants to be part of the solution to this economic crisis, and not part of the problem.

Even if it could grow faster in financial terms, there is no doubt that Patagonia is growing exponentially in other parameters such as in its position as a beneficial actor in society. 3) Would Patagonia’s business model differ if it were a publicly held company? If Patagonia was a Publicly held company it should in theory pursue other objectives and values that the ones it has currently since it should give priority to shareholder’s value. At a first glance we may think that a faster growth pace will be the solution.

In fact, in the case it is suggested “ the fact that Patagonia was private was a major reason that it could pursue environmental sustainability”. On the one hand, shareholders care about dividends and the value of their stocks and “Patagonia’s sustainable agenda” is said to be “at the expense of its growth”. On the other hand, Patagonia’s environmental committeemen “g[ives] the company its competitive advantage” and helps the company to pursue a sustainable growth.

Maybe it is true that in the short term to have as the main goal Maximizing shareholder wealth by boosting growth could be a good solution. Nevertheless, in the long term it may be unsustainable. In a long term perspective achieving the multi-ends of the firm in accordance with the common good of the society seems to be the good solution-and more now in times in of a global economic crisis where competition is huge and customers have a high bargaining power.

Customers will appreciate that the company is a member of the society, a member that balances short term and long term value and seeks for the common good. Patagonia does so by being environmentally committed and by providing services for other companies by sharing with them their innovative sustainable practices and product innovations. It is interesting to point out that Patagonia has being increasing its profits each year even if they were environmental friendly.

They have always bear in mind that “if [they] wish to lead corporate America by example, [they] have to be profitable”. This kind of rationale will be difficult to implement in a publicly held business where the stockholders may be unsatisfied with the company’s objectives. However in the medium or in the long term stockholders will be happy to earn stock from one of the “100 Best Companies” that is probably carrying on growing.

Patagonia has achieved an exceptional degree of integration between Corporate Social Responsibility values and commercial activity. Its business strategy is extraordinary and instructive. Patagonia WTP * High products * Durable Credible environmental Policy * Moral Wellbeing * Innovation * Multi use Organic cotton: reduce models because they did not found as many providers as they needed Patagonia’s business model : Invest in research and development: quality , innovation, high price, profit Invest in environment: Reduce harm, En4139ry