STRATEGIC What? · Quality: The pursuit of ever greater

STRATEGIC MANAGEMENT

STRATEGY
(CD02 J SUM17)

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            PATAGONIA CASE

Patagonia Case
Study

Question 1:

Business Model Framework:

The business model of a typical outdoor
sports apparel business is to target industry wide consumers, local and international, by
offering high quality and brand name products for their outdoor sport’s needs.
They do this by focusing on scale and efficiency: national and international presence,
which typically enables economies of scale, cost efficiency and inventory
management, and effective operations. They offer brand names with wide product
variety to ensure their customers are satisfied.

 

Patagonia has chosen to adopt a different business
model, and the table below outlines the key ways in which it deviates from a
typical outdoor sports apparel business.

 

                   Key Differences in Business
Model of Patagonia vs Main Competitors

 

 
Who?

Advocates
of sustainability and the environment
Conscious
buyers
Interested
in green technology
Has
a disposable Income
Maintains
an active lifestyle
Enjoys
nature and being outdoors
Values
quality products
Men
and women ages 18-35

 
What?

 
 
·       Quality:  The pursuit of ever greater
quality in everything they do
·       Integrity: Create and sustain relationships
based on integrity and respect
·       Environmentalism: Serve as a catalyst for personal
and corporate action
·       Innovation: Create unconventional solutions to
help achieve the highest quality and minimize environmental impact
 

 
How?

·      
Curbing customer demand through education and
consumer engagement
 
·      
Innovative technology solutions
·      
Culture which attracts and
retains committed employees

There are, however, a number of
drawbacks with this approach, including:

·      
Growth is
hindered by a selective expansion strategy which advocates a no-growth policy;

·      
Retail
competition is fierce and eating its market share

·      
It does not
reap the benefits of economies of scale;

·      
A high cost
base due to environmental commitment

·       Lack of understanding or penetration to the global markets

 

Five Forces Framework

To discuss the question about the current forces in
the US Outdoor Apparel general industry environments that affect Patagonia’s
ongoing strategy, Porter’s five forces model allows us to see where the
industry might be most vulnerable for Patagonia.

 

Force

Buying power of
suppliers

Buying power of
buyers

Rivalry of
competitors

Threat of new
entrants

Threat of
substitutes

Strength

High

High

 
High

Low

Medium

Drivers

•Many
suppliers refuse to adapt to environmental friendly production
•Limited
awareness of eco-friendly production
 
 

•Specific targeted customer
group/segment
•Spoilt for choices
•High disposable income
•Demand for high quality
products
•Willing to pay for quality

•Highly
competitive market
•Quality
driven segment
•Smaller
companies with strong double-digit growth •Smallest market within Sports
apparel (9%)


Difficulty with brand awareness

Low costs to adapt production (i.e. Nike)

Steady growth 2009 -2014 (+10%)

Attractive and growing market 
 


Other Brands

Crossover appeal vs dedicated apparel
 

 

Performance Impact:

Based on the above analysis, there is opportunity for Patagonia
to reach out to suppliers and buyers who are concerned with conserving the
environment. Patagonia faces the threat of buyers forcing down their
prices by not purchasing their goods. Buyers might feel that their products, although
high-quality, are too pricy to buy. There is also the threat
of competitors in the outdoor apparel industry, such as the North Face,
Marmot, and REI. However, Patagonia has strived to keep its focus on quality,
with innovative raw materials to ensure durability and differentiation in
products (i.e Surfing, fishing, etc), through high investment in research and development.

Value Chain
Framework

In each of the main areas of the value chain, Patagonia
managed to set the activities to achieve superior reputation, innovation and
profitability. On the supply side Patagonia has been able to create value
by creating Integrity in its product
and product’s performance, effective signalling (e.g. through warranty and
replacements), using quality inputs
(e.g. organic cotton), influencing customer
experience (e.g. catalogues), and linking its value chain to that of its
suppliers (e.g. strict standards for quality and social & environmental
responsibility). On the demand side Patagonia has created a social & psychological factor
through advertising that includes educational messages, environmental grants,
donations, campaigns, & green benefits for its employees etc. Internally it has used energy
efficient buildings; organic cafeteria; paid sabbatical; maternity/paternity
leave and onsite day-care for employees.

 

The source of Patagonia’s underlying competitive
advantage lies not just in its ability to offer a distinct value proposition to a unique market segment, but also in
its capacity to build a set of strategic resources and successfully integrate
them into its unique organizational environment as shown in the previous
discussion. To examine how it achieved this, we must first identify those key
strategic resources and then analyse how Patagonia has used them to its
advantage.

VRI Assessment of Resources &
Capabilities

Category           Resource/
Capability                                  Valuable                  Rare           Inimitable

Tangible

Human

Unique
and effective products
Favourable
manufacturing locations
Innovation
production processes

Reputation/brand name
Environmental activism
Internal organizational culture

Product development and manufacturing capabilities
Customer service
Innovation

    
 

    
 

 

•        
 

Intangible

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Applying the resource-based view framework,
Patagonia’s internal resources are both valuable (unique and effective
products, innovative production processes) and rare (Internal organizational culture), but most importantly, they are currently in-imitable: (Environmental
activisms; Reputation; Strategic Innovation).

 

 

 

Question 2:

Value Curve for Patagonia

From
the above discussion Patagonia is clearly differentiated from other outdoor
sports apparels, not only because it aligns environmental activism to its unique
range of organically sourced products, but also because it has built an entire
ecosystem around those products and business processes which resonates well
with the values of its niche. They have also worked with external constituencies, like eBay to establish
a store-front to support and encourage a reuse market for second-hand Patagonia
clothing. Additionally, a repair website in collaboration with iFixit teaches
customers how to repair their gear. Patagonia makes sizeable donations on
environmental causes annually. They spend twice as much as their specialist competitors on
research and design, where they have developed many fabrics that have been adopted across the
industry.

                                  Patagonia vs
US Outdoor Apparels Industry Value Curve

          

      

Other Outdoor Apparels, Patagonia

How are the two
goals linked and how does each of them affect Patagonia’s ability to achieve
the other?

 

There
are two significant almost contradicting goals for Patagonia, sustainability
and being profitable. The most obvious concern in creating a sustainability-based
model is that if the sales cycle is reduced or curtailed (e.g. by offering
a product that lasts longer or forever) then overall market demand must
ultimately shrink. This reduction in repeat-business and expansion
opportunities means that Patagonia needs to continually seek and win new
customers or develop other forms of income (e.g. services). To be successful, Patagonia
created a strong relationship management which distributes its core values
along the whole market chain that includes suppliers, competitors, customers,
employees and external environment.Patagonia selects suppliers who were driven
by the same set of values, and through selectivityPatagonia enables suppliers
create value for various players along the value chain as thisselectivity
ultimately resulted in lower defects for its products. Customers also get a
brand they can trust for product quality and environmental wellbeing.

Question 3:

a)    
The
Initiative represents a holistic commitment to lengthen the lifecycle of each
product and reduce landfill waste. Patagonia encourages its customers to
consume less, facilitate the repair of damaged products, encourage the reuse of
products through swap or resale and recycle a product if it could no longer be
used. This encourages customers to consume less and thus generate less waste
which will support environmental sustainability.

b)    
Patagonia may
in-fact see an increase in sales through increase in number of buyers –
attracted through positive word of mouth publicity, or it could extend the model
in the backward direction of its value chain – working for retailers to recycle
clothing that is too worn to be sold. However,
Patagonia must also develop other solutions to increase earnings while staying
true to its core values and business philosophy. The simplest way to increase
revenue, and meet Company targets is to increase the prices of its products.
Based on statistics regarding the income of Patagonia customers and the
Company’s extremely loyal following, it may be possible to raise prices without
any negative consequence.

c)    
Patagonia also
influenced the external environment positively.
Following Patagonia’s lead, numerous companies in the outdoor apparel sector
now emphasise their ethical credentials and some offer repair or reuse
solutions. Patagonia also provides advice on organic cotton to competitors
such as Nike and Gap, on environmental practices to Levi Strauss etc., and on
strategy to senior executives of large companies such as Walmart. Since
Patagonia has positively influenced various players both in the internal and
external environment, so we can confidently say that it has been able to
achieve its goals.

 

In summary, it is undeniable that Patagonia’s
environmental conservation effort is beneficial to the business. The Initiative
is rooted with core competencies of Patagonia, reaching broader customer base,
through the online network which will also foster sense of community. Patagonia
will maintain position of innovative and industry leading company. However, the
Initiative is siphoning significant amount of resources from the organization.
Therefore, Patagonia’s management should reassess the business priorities
while factoring in market developments and ever-changing customer needs.

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