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Patagonia Case Study

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    1) Balancing Commitment to Business with Commitment to Environment A key issue facing management was balancing the company’s desire for environmentalism with its existence as a for-profit business. The idea of running a for-profit business implies operating at the lowest cost, growing as rapidly as financially feasible, and maximizing returns to financial stockholders ( I think it should be stockholder since it is financial return). A commitment to the environment can raise costs and hurt margins because environmentally-friendly policies are not the most financially savvy.

    This issue is important because Patagonia’s entire brand and business is associated with preserving the environment. Externally, this gave Patagonia a competitive advantage because of the brand loyalty it developed. The company had an unusually strong commitment to the environment – so much so that management was willing to internally implement a slow growth policy in order to promote a more environmentally-sustainable business model. Beyond simply slowing growth, the company undertook several energy-efficiency and recycling initiatives for its customer service center and retail stores. ) Attracting Younger Demographic without Alienating Existing Aging Customer Base Patagonia’s existing customer base rose in median age to approximately 44 years old in 2002. Externally, this proved to be a significant strategic issue because competition brands like Columbia and North Face were able to attract younger demographics, which represented a significant source of future income. Internally, the company has been strategically opposed to using its resources for chasing fads and fashion trends – for fear of losing credibility and diluting brand. So far, it focused on “classic” designs, with minimal pursuit of fashion trends.

    In addition, chasing fads creates a tension in the company’s operations because of its very slow turnaround time for product development. Average development of a complete product line took a year and a half – which is double the industry standard. 3) Maintaining Quality while reducing Turnaround Time and Costs Patagonia experienced a tension between achieving high-quality and low-turnaround times. Externally, competitors in the industry were more agile (half the turnaround time) in catering to consumer demand, which represented a significant strategic issue.

    Internally, Patagonia’s inefficient sourcing process (collaborating with only a few suppliers of raw materials) led to lengthy lead times– up to four months. These long lead times contributed to the long overall turnaround time. Some executives believed that high turnaround times were costing the company up to 20% in potential revenue. Patagonia also experienced a tension between maintaining high-quality while lowering procurement costs. Internally, management relied on long-term relationships with a few key fabric manufacturers – usually a single contractor per garment.

    Many of the products required very specialized equipment and were ordered in quantities too small to justify additional suppliers. This contributed its high procurement costs. Recommendations to the Manager Balancing Commitment to Business with Commitment to Environment Patagonia should maintain its strong dedication to the environment while balancing its business interests. Its brand is closely tied to environmentalism, thus contributing to a loyal customer base that can weather industry cycles.

    We recommend several implementation actions: 1)Continue donating the higher of 10% of profit or 1% of revenue to environmental non-profit organizations. As we believe that focusing these funds towards organizations that are directly related to Patagonia’s business – Yosemite National Park rock climbing organizations, skiing organizations for underprivileged children, camping initiatives, boy scouts, girl scout cookies. 2)Continue promoting energy efficiency and recycling measures in its operations.

    Since 1991, Patagonia began a comprehensive Environmental Review Process to examine all the methods and materials used to produce the company’s clothing. This is practice enables Patagonia to make decisions with positive environmental effects. Attracting Younger Demographic without Alienating Existing Aging Customer Base Patagonia has refrained from focusing on attracting the next generation customer for fear of diluting the brand and chasing fashion trends. We recommend that Patagonia explore the opportunity to either: 1)Create a subsidiary and a new brand that tailors specifically the “dirtbag” customer in the ages of 21-30. )Create a new product line that appeals to the previously mentioned demographic. In order to avoid cannibalization of sales, Patagonia should ensure that the new line has that same “dirtbag” ethos but should just appeal to the younger generation. Patagonia should then focus on transitioning the younger generation’s demand into the classic style as they get older.

    – For example, the products should maintain all the functionality of the Patagonia system (Capilene base layer, Synchilla over that and breathable outerwear on top) but there is a perceived style difference between the two product lines. ) Maintaining Quality while reducing Turnaround Time and Costs 1) In order to reduce costs, Patagonia should enter into agreements with more suppliers to allow for more competitive bidding for supplier contracts. 2) In order to cut down on turnaround time, Patagonia can outsource fabric development and reduce time spent collaborating with fabric makers. 3) Patagonia should expand their quality testing facilities in order to maintain quality. Due to the increase of suppliers, the necessity for quality control procedures would increase as well requiring the company to be able to test sample products and provide feedback at quicker rates. ) Evaluate Patagonia’s strategy Patagonia’s strategy is focused on designing, developing, marketing, and selling high-quality outdoors wear at premium prices. Patagonia is known for developing new material and design, and the company’s strategy has been to compete on innovation rather than on cost. The company employs a flat organization structure and creates a working environment of self-management that their employees enjoy being a part of , which effectively promote the culture of innovation . The unifying theme of the company is sustainability, integrity and quality.

    The company does things different than other traditional organization which makes it a successful company. It strives to maintain strong environmental commitments as well as “Ironclad” product quality. Patagonia maintains an image of the outdoorsman, the vagabond and the wilderness over the corporate. It does this by sticking to stringent environmental policies including donating the higher of 1% of revenue or 10% of net profit to over 300 environmental organizations. Patagonia also used its tri-yearly catalog that features world-class outdoor photography to build its brand image. Do we need to add something about the marketing strategy? Unique market strategy to communicate with consumers: At the product level, to communicate specific features and benefits of each of its products; at the brand level, “Committed to the Core”, which is commitment to the soul of the sport, to an uncommon culture, to environmental activism, and to clean design. ) 2) How important to Patagonia’s strategy is its environmental position? Patagonia’s environmental position is the keystone to its overarching strategy.

    Everything the company does centers around maintaining environmentally friendly business policies. Patagonia even maintains a slow business growth because growth, according to the founder, is bad for the environment. The company uses organic materials, relies heavily on recycled materials, and uses energy-efficient lighting, rooftop mirrors to track the sun and other sustainable products in its normal business operations. The company’s unwavering resolve to its environmental position may have even reached the point where it is detrimental to business.

    According to the case, Patagonia executives believed that the company’s internal process changes to increase sustainability have no effect on customers’ willingness to pay for the company’s merchandise. Patagonia’s level of dedication to its environmental position not only adds no additional sales, but inhibits growth as well. 3) How fast can Patagonia grow? How fast should it grow? Founder, Chouinard, believes that Patagonia is akin to a three-star Michelin restaurant. The restaurant has spent the past twenty years working to get that third star.

    It would make no sense to open it up to just about anyone. The quality, price and environmental premium consumers associate with Patagonia is part of what differentiates the brand. If the company grows too fast, it risks diluting its brand. Patagonia should grow at a pace that allows it to keep the heir of exclusivity that surrounds its brand. The company should avoid selling to high end retailers (Macy’s, Nordstroms) like its competitor Northface. Rather to maintain brand purity, Patagonia, should continue distributing to specialty stores, sell through its catalog and website.

    Patagonia should recognize the growing middle class in emerging markets like China and India. These growing constituencies command enough capital to purchase premium priced items. Similar to the Japanese consumer, these other Asian markets idealize the American “California” culture. Patagonia can use this as one of their main differentiation strategies when attempting to penetrate these emerging markets. 4) How would Patagonia’s strategy differ is the company were publicly held? Patagonia would not be able to pursue its current strategy if it were publicly held.

    No manager within the company would be able to implement a slow or no growth strategy. Shareholders would demand strong growth and earnings per share each year. Patagonia could lose much of the exclusivity that has held its growth in check for many years. Patagonia would be pressured to achieve greater operational efficiency. This would include selling its products to retailers and using less expensive fabrics, and open more much more stores instead of only two to four retail stores per year now.

    In order to grow into a new market quickly, the company might compromise its integrity or lower the level of quality. Currently, Patagonia competes against itself, holds its own standard, not looking outside in term of matching competitors. However, if it were public company, it would definitely change its strategy considering compete with other competitors. Relationships with manufacturers would become much more short term, with bidding between vendors on who could supply the best price.

    Shareholders would demand faster turnaround times for product development, possibly lowering the quality of the workmanship or designs. To cater to the younger crowd, the company would be pressured into chasing fads and the latest fashion trends. This would drive short term growth but it remains to be seen how catering to customers beyond the company’s traditional “dirtbags” would affect Patagonia’s long term brand equity. (Also, the company does not have any debt now. It were public company, it would borrow debt to finance its growth and enjoy tax shield benefit. )

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