Case Analysis: Patagonia

Team 2: Jerad StahlinskiAneesh Jain

Aidan KanellBrian Long

Elena Pappas

•Patagoniao Back-of-the-car Operation (1957)

Yvon Chouinardo Chouinard Equipment (1966)

Largest supplier of outdoor climbing equipment (1970)

Patagonia (Apparel Line, 1972) Chouinard Equipment was sold (1980’s) Lost Arrow Co. was formed (1984)

Patagonia

• Patagonia Co. (1979)o 1972-1980’s Patagonia grew sales from 20 to 100

milliono Expanded Internationallyo Grossing 200 million in net sales by 2000

• Patagonia Philosophy

o Patagonia strives to build the best product, cause no unnecessary harm, and use business to inspire and implement solutions to the environmental crisis.

Patagonia cont...

•CEO Rapid Turnover in Sr. Mgmt. between 1990’s-

2000 Casey Sheahan took over in 2005

• Long time friend of the Chouinard’s

•Growtho Average 6% growth sales 2000-2010o 2010-2015 Target goal of 10% annual

growth sales

Patagonia cont...

•External Environmental Analysis

•Internal Analysis

•Business-level / Corporate-level

Strategy

•Firms Performance

Strategic Management Process

•Macro Level (PESTEL)

•Industry Environment (Porters Five

Forces)

•Competitive Environment

External Environmental Analysis

● Political● Economic● Sociocultural● Technology● Ecological ● Legal

PESTEL Analysis

● Threat of Entry● Power of Suppliers● Power of Buyers● Threat of Substitutes ● Rivalry Among Existing Competitors● Complements

Porter’s Five Forces

● Many Firms○ The North Face Inc., Marmot Mountain

Ltd., Mountain Hardware, and ARC’TERYX● Differentiated Products

○ High End outdoor apparel ● Obstacles to Entry● Can raise prices for a unique product

Monopolistic Competition

•Resources, Capabilities and

Competencies

•VRIO Analysis

•Value Chain

Internal Analysis

•Goal is to apply environmentally sustainable methods to better use resources

•With these better resources, brings greater appeal, and ultimately more money from consumer

•Including:Conventional & Organic CottonsLess damaging dyes and fabrics

Resources

• “Never be happy playing by the normal rules of business”

•Appeal to the “dirtbags” (core-users)

•Simplicity being the main goal

•Strive to consume less, yet consume better

•Being a private company, money can be distributed however Patagonia pleases

Capabilities

“Build the best product, cause no unnecessary harm, and use business to inspire and implement solutions to the

environmental crisis”

‘5 Pronged Business Initiative’1.Lead examined life2.Clean up own act3.Do our penance4.Support civil democracy5.Influence other companiesBalance between environmental commitment & businessConsume less, but consume better!

Competencies

• Valuable:o ‘Product Life Cycle Initiative’, ‘1% for the Planet’,

Organic Cotton

• Rare:o Donates revenue to environmental org’s worldwideo Pioneer of organic cottons, leading to industry shifto Leader in field of recycling and sustainability

VRIO Analysis

• Imitation costs:o Risked 20% companies stake ($20 million) on organics

o Organics cost triple the price of conventional cotton (500-100%)

o Recycling initiative costs over $60,000 yearly

o Invests $3 million yearly for innovations ( R&D )

• Organized to Capture Value:o Sold 8% more with organic products over competitors comparable products

o Goal is to raise recycling from 65% to 90% for all products

VRIO Analysis cont...

Primary•Raw Materials•Intermediate Goods/Components•Marketing/Sales•Customer ServiceSupport•R&D•H/R•General Management

Value Chain

•Patagonia uses a focused differentiation strategy.

•They focus on a narrow segment of customers, who are willing to pay a premium price.

•They compete in the high end outdoor apparel industry.

•Patagonia’s product line consists of four main product categories: Sports wear (casual clothing including cotton shirts), Technical Outerwear (insulation garments such as technical shells), Technical Knits (baselayers with special fabric treatment), and Hard Goods (packs, luggage, and accessories).

Business Level Strategy

1.Quality

2.Environmental Impact

3.Innovation

•Patagonia believes that these elements allowed it to charge prices roughly 20% higher than those of other outdoor apparel and 50% higher than mass- market brands for comparable products in both performance wear and sportswear

•Chouinard states that, “Our goal is to offer only viable, excellent products that are as multifunctional as possible so a customer can consume less but consume better.”

When developing their products Patagonia focuses on 3 main criteria:

•Patagonia built products for it’s core users, which they define as customers who follow the “dirtbag lifestyle”.

•They meet these customers needs by producing products that are simple, functional, and multifunctional.

• In order to ensure such quality Patagonia spent $100,000 on field testing performed by ambassadors that assessed the quality of their different products.

Quality

• Patagonia makes business decisions based on environmental impact. They are committed to reducing their environmental impact at every level of production.o Common Threads Recycling Program

• An example of this commitment is when In 1996 Patagonia made the expensive switch to organic cotton and remained committed to this decision despite a loss in profit in the first two years.

Environmental Impact

•Patagonia is an industry leader in technological innovation. They invested $3 million annually in research and development, which includes a lab developing and testing new materials.

•They have developed many fabrics that have been adopted across the industry.

•Their most successful patented technologies and designs, include Synchilla (recycled polyester fleece), Capilene (moisture-wicking polyester fabric), and most recently, a wetsuit lined with chlorine-free wool for increased insulation.

Innovation

•Patagonia operates more as a single business company rather than a diversified business.

•They have mostly stuck to the outdoor apparel industry. The diversification Patagonia displays is to their product line and numerous environmental initiatives the company is involved in.

•One example of Patagonia's diversification is their Textile Exchange program, which brings together product brands, retailers, farmers, and key stakeholders to teach about social and environmental benefits of environmentally friendly textiles.

Corporate-Level Strategy

•Patagonia average customer is 38 years old with an average household income $160,000.

•In 2010 Patagonia recorded their highest net sales in the North American Market.

•Their second largest global market by net sales is Japan, which is then followed by European and the somewhat newly established South American market.

•Patagonia serves the international customers by offering online orders available internationally.

International Scope

•Financial Performance•Industry Comparison•What trends are evident over the

past three to five years•Internal/External Stakeholders•Competitive Advantage

Analyze the Firms Performance

Financial Performance

•Consistent growth in net sales

Performance

•Growth inGross Margin

Performance

2010 Comparison

Externalo Triple Bottom Line: Social, Economic,

Ecologicalo Continuous Innovationo Better quality and reduced effect on

earth

Stakeholder Perspective

InternaloEnergy efficient buildingsoOrganic CafeteriaoPaid sabbaticaloSubsidy for purchase of Hybrid vehicleoBail payment for arrested employees of nonviolent activismoMaternity/Paternity leaveoOn site day-care for employees

Stakeholders Perspective cont...

•Higher quality product=higher value added to the customer

•Higher cost to produce along with higher quality allows for higher price of product

Competitive Advantage

•Highest % Net Income growth for industry at 42.5%

•Private Company•Leading Innovator makes

competitors follow and catch-up

Competitive Advantage

•Gross Margin: 50% average between 2002-2010

•Return on assets(ROA): 7.1%•Return on Equity(ROE): 9.6%•Return on revenue(ROR): 8.1%

Financial Ratios

•Resources and Capabilities vs

External Environment

•Competitive Advantage

•Value Chain

•SWAT Analysis

Making the Diagnosis

•Problemso High costso Limited supplierso Expensive raw materialso Costly innovationo Costly mission to be environmentally

friendly

Resources and Capabilities vs External Environment

•Environmental commitment•Sustainability•Innovation

Competitive Advantage

SWOT Analysis

Strengths●Environmental Reputation ●High quality products●Patented Innovative products●Private structure●Low employee turnover ●Strong community relationship

Weaknesses●Political views●Low customer accessibility ●Limited suppliers ●Limited product lines●Environmental focus

Opportunities●International Markets●Going Public●Increase retail stores

Threats●Public Companies

• Problems/Solutionso Political views

o Low customer accessibility

o Limited suppliers

o Limited product lines

o Environmental focus

o Public Companies

Formulation: Proposing A Feasible Solutions

Patagonia Value Chain

Vertical Integration

•Farms

•Factories

•Retail stores/Dealers

•Group Outings

Plan For Implementation

•Very highexpectationsfor sales growth

Patagonia’s Growth

Do not go public!• Environmental Practices and Image• Corporate Structure • What would happen?• Business model applied to other industries