Lecture 2: Patagonia

Question 1

What’s patagonia’s mission statement?

Answer 1

“Build the best product, cause no unnecessary (environmental) harm, and use business to inspire and implement solutions to the environmental crisis”

Question 2

Patagonia’s strategy choices, late 2000s

Answer 2

Slide 10, Very important summary

A. INPUTS

1. Mission
2. Distinctive input sources
3. Management and philosophy

B. FULFILLMENT

1. Management
2. Environmental goal
3. Innovation
4. HR policy
5. Supply chain
6. Operations
7. Pricing
8. Vertical scope
9. Sales/Distribution
10. Marketing comms

C. SCOPE
Who?
What?
Where?

D. OBJECTIVES
Type of advantage: Differentiation
Other

E. Customer value proposition
High quality with low env. impact

Question 3

How do Patagonia’s choices translate into value creation?

Answer 3

Useful to separate out choices into
– ‘conventional business choices’
– ‘environmental-related choices’

1.  High quality (performance, durability) almost certainly increases CV (via valued brand) and SC
   – However may also reduce SC because of lower defects and return rates
2. Cast-iron guarantee
   – Increases CV but also increases SC
3. Some choices probably help to reduce SC:
   – Simplicity in design
   – Narrow range
   – Limited range of suppliers (e.g. lower supplier management costs) – Longer (2 year) ‘new range’ cycle
4. Important to recognize that choice to be a fairly narrow, high-end producer leads to Patagonia being much smaller than rivals. May well be subject to a ‘low scale’ disadvantage (i.e. higher SC than rivals)

Question 4

How do Patagonia’s choices translate into value creation? Environmental only

Answer 4

1. Use of environmentally friendly materials and processes
   – Probably enhances CV (i.e. materials might perform better; consumers accord value to environmentally responsible brand) but also increases SC (case gives data around higher materials costs; also costs of R&D/innovation)
   – But also examples where use of novel environmental-friendly materials has reduced CV
   (e.g. organic cotton problems with supply and quality)
2. The 1% contribution, in-kind contributions to causes, Footprint Chronicles etc.
   – Again probably enhances CV (consumers place value on the brand) but adds cost
   o Net effect depends on whether increase in CV is more or less than increase in SC

– But examples where these choices actually reduces SC
o Lower need for advertising spend
o Strong staff commitment to environment may translate into enhanced staff efficiency

Question 5

How is Patagonia able to invest in environmentally-related initiatives which hurt profitability?

Answer 5

1. Being a private company

2. Having a portfolio of products

Question 6

How can Patagonia have 20% price premium?

Answer 6

Factors to consider:
1. Customer really values Patagonia’s quality (durability, reliability) and/or multi-
functionality
2. Customer views Patagonia as cool brand
3. Customer is willing to pay more because of Patagonia’s environmental policies and practices

Question 7

What is the possible impact of Patagonia’s scale disadvantage?

Answer 7

A. Patagonia is probably around 1⁄4 the size of typical competitor (cf. North Face)

a) Would lead to higher unit costs if there are economies of scale in this business
b) Economies of scale likely in SG&A
c) How can we estimate Patagonia’s possible disadvantage?

Question 8

How easy/hard has it been for Patagonia to capture value (in this business?)

Answer 8

Need to think about
– Relative bargaining power 
Α) of buyers
Β) of suppliers
– Intensity of rivalry

Question 9

Analyse Patagonia’s bargaining power

Answer 9

A. Bargaining power of buyers is low

1. Patagonia avoids more powerful major retail chains
2. Patagonia’s consumers are probably quite price sensitive

B. Bargaining power of suppliers is probably low

1. Lots of similar suppliers available
2. Huge oversupply of staff wanting to work for Patagonia

Question 10

Factors that influence the intensity of competitive rivalry

Answer 10

1. The number of direct rivals (Depends on ‘barriers to imitation’ …. discuss under ‘sustainability of advantage’)
2. The basis on which competition occurs between rivals (e.g. price, features etc.)
3. Are there ‘structural characteristics’ of the industry which encourage strong rivalry?

Question 11

What’s the intensity of rivalry for Patagonia?

Answer 11

1. Probably fairly low given
– modest number of serious direct competitors
– high product/brand differentiation,
– low price-sensitivity consumers

Question 12

Differentiation strategy key limitation?

Answer 12

Differentiation strategies tend to achieve lower volumes that mainstream competitors. Can result in scale-based cost disadvantage.

Question 13

How sustainable is Patagonia advantage?

Answer 13

1. Copying Patagonia’s choices:
   A) proprietary technology
   B) “Hard to copy patagonia’s pioneering and environmental practices as we are a public company”
2. Matching Patagonia’s competitive position:
   – Probably hard to match some valuable resources
3. Brand,
4. Innovation capability
5. Organizational culture (productivity?)

Question 14

What aspect of Patagonia’s mission is in conflict with profitability?

Answer 14

Patagonia pioneers innovations but then encourage others to copy by sharing Patagonia’s IP

May be short/medium term benefit in that this boosts supply, boosts adoption

Product differentiation falls over time and that means commoditisation…

IMPLICATION: PATAGONIA MUST KEEP INNOVATING TO KEEP SALES UP!

Question 15

What happens when imitators arrive?

Answer 15

– Our value creation advantage (relative to imitators) decreases
– Increasing ‘direct competition’

Question 16

How can we avoid imitation?

Answer 16

Good strategies build ‘barriers’ against imitation. Two lines of defence against imitators:
1. Barriers which discourage would-be imitators from COPYING OUR STRATEGY
(set of strategic choices)
2. Barriers which discourage would-be imitators from MATCHING OUR COMPETITIVE POSITION
(CV and our SC)

Question 17

Barrier’s to copying a pioneer’s strategy choices

Answer 17

Two ways:
A. Make competitor unable to copy our choices:
1. Formal barriers:
Legal + Unique resources 
2. Lack of knowledge: 
Competitor doesn't know how to copy: 
Secrecy + Complexity

B. Make competitor feel its not worth copying our choices
1. Prospect of poor profits:
- Pioneer has pre-empted a market niche
- Pioneer has a very strong brand
2. Organisationally hard cos of conflicts with other businesses:
- Brand + organisation culture
(BA trying to match Ryanair!)

Question 18

Barriers to Matching Pioneer’s Competitive Position

Answer 18

Let’s assume would-be imitator succeeds in copying pioneer’s choices

Pioneer may still enjoy sustainable advantage if it would take a long time for the imitator to match the pioneer’s competitive position (e.g. CV, SC) because:

1. Superior resources that could be hard to match
   (technology, capacity, brand, org culture, etc)
2. Superior volume that is tough to match
   (economies of scale, learning effects, switching costs, network effects)
3. Superior scope of business activity that is impossible to match

Question 19

What is the full set of threats to sustainability?

Answer 19

1. Imitation
   - Competitors copy us
   a) Reduces value creation advantage
   b) Reduces value capture due to rivalry
2. Substitution
   - Competitors come with a superior (better/cheaper) product service
   a) Reduces value creation
3. Change in market context
   - customers change they way they value a service/product
   a) reduces value creation
4. Slack
   - Firm with advantage gets lazy/inefficient, costs increase, perhaps quality drops, advantage gets frittered away
   a) Reduces value creation
5. Hold-up
   - Bargaining power of buyers or suppliers increases over time
   a) Reduces value capture

Question 20

What is the goal of Patagonia’s product lifecycle initiative?

Answer 20

Goal: lengthen the lifecycle of each product and reduce landfill waste

Question 21

What are the aspects that Patagonia’s product lifecycle initiative covers?

Answer 21

Covers 4 aspects: “Reduce (purchases), repair, reuse and recycle”

Question 22

Possible impact of the Product Lifecycle Initiative on patagonia?

Answer 22

1. Reduction in ‘sales/person’ threatens volume and growth
2. Extra costs involved in repair, reuse and recycle could hit profitability

However, PLI could be good for Patagonia’s business performance

1. Patagonia can charge higher, due to higher CV (environmental benefits)
2. Patagonia can gain market share (due to brand strength and env. benefits)

Question 23

Patagonia key takeaways

Answer 23

1.  Successful ‘differentiation’ strategy
2. Pursues a dual mission – profitability and environmental benefit
3. Dual mission also affects the sustainability of Patagonia’s advantage

Question 24

What are the types of company aspirations?

Answer 24

1. Mission
   What is the purpose of the company?
2. Vision
   What is the desired future we seek? What sort of company do we want to be?
3. Values
   What’s important to us in this company?

Question 25

What is prerequisite to strategy?

Answer 25

Mission/Vision

- Without this, whats the point?

Question 26

How can vision and mission aid strategy?

Answer 26

1. Provide motivation for a strategy (a motivating aspiration)
2. Describe what the strategy should be (at some high level) (a strategic aspiration)

Most Mission/Vision aspirations either motivate strategy or define strategy at
high level – They rarely do both – Some do neither

Question 27

To be useful in strategy, aspirations need to be:

Answer 27

1. Meaningful (differentiated)
2. Widely shared by employees
3. Consistent with strategy