Environmental Differentiation Strategy of Patagonia
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As producer of outdoor cloth Patagonia considers the environment as their most important stakeholder in their decision-making. Their environmental efforts go far beyond required law and impose extra costs on their customers. As to basic economic logic providing environmental quality beyond required law will put a company in a competitive disadvantage. Patagonia’s vision is environmental conservation and restoration. They consider their purpose of being in building the best product, cause no unnecessary harm, and use business to inspire and implement solutions to the environmental crisis. Patagonia wants to compete in the market by pursuing an environmental differentiation strategy. Patagonia’s key tactics in providing value for their stakeholders are summarized under the so-called ‘Product Lifecycle Initiative’. This initiative is a holistic commitment to lengthen the product lifecycle and reduce landfill waste. Those tactics can be categorized into what Patagonia refers to as: Reduce, repair, reuse and recycle. To reduce their customers consumption Patagonia heavily invests into R&D to produce the most durable garments. In addition, they only use organic and recycled garments to reduce the footprint of their products. Patagonia offers a free repair service for all of their products for the whole product life. Furthermore, they offer a second market where consumers can resell their used products. Patagonia encourages their customers to return Patagonia products instead of throwing them away so that they can recycle them correctly. Patagonia provides a lot of value to the environment. This value needs to be captured via the consumers. Hence, the environmental quality they provide needs to find a willingness to pay among the customers. Some, but few people buy Patagonia products for altruistic reasons because they know that buying Patagonia products will do good to the environment. Patagonia bundles the public good of environmental quality, which is difficult to charge the customer for, with the private good being product quality. They do this by constantly communicating environment friendliness together with quality. Hence, consumer value environmental friendliness for the implicit quality Patagonia offers. Another aspect to buy their products is environmental prestige. Most importantly, however, environmentalism resonates with their customer values as Patagonia’s customers, as buyers of outdoor wear, usually love the nature. The fact that environmentalism is deeply integrated into their business model makes their engagement credible and difficult to imitate by competitors. As the case of Patagonia shows basic economic logic has its limits when it comes to environmental differentiation strategies. A company can serve the environment as main stakeholder as long as it is able to capture those values perceived by the environment by finding willingness at the consumer to pay for those environmental qualities.
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Environmental Differentiation Strategy of Patagonia
- 1. Patagonia Defining the Organization's Strategic Direction by: Johannes Mahlich Mara Schneider
- 2. Agenda 1. 2. 3. 4. 5. 6. 7. 2 Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Discussion
- 3. Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Discussion Profitability vs. Environmentalism Basis economic theory: Environmentalism in companies is likely to divert management attention and capital Not competitive if focus is only on environmental objectives Lose customers if environmental quality providence goes beyond required law High dependency on consumer who bear the burden of extra cost through environmental investments 3 Source: Reinhardt (1998) PROFIT
- 4. Introduction Strategy Business Model Tactics Requirements for Success Patagonia • Privately held company • Initial purpose: Financing of founder’s outdoor hobbies • Produces sportswear, technical outerwear / knits, hard goods 4 Key Takeaways Discussion
- 5. Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Discussion Patagonia Doomed to Fail? Basic economic theory applied to Patagonia: Managements attention and capital is diverted by environmentalism Focus is on environmental objectives Environmental quality providence goes beyond required law They have extra costs through environmental activities 5 ? PROFIT
- 6. Introduction Strategy Business Model Tactics Requirements for Success Strategy “[…] choice of business model through which the firm will compete in the market place.” 6 Source: Casadesus-Masanell & Ricart (2010) Key Takeaways Discussion
- 7. Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Discussion Strategy Vision “Environment conservation and restoration” Mission “Strive to build the best product, cause no unnecessary harm, and use business to inspire and implement solutions to the environmental crisis.” Believes - - Quality Integrity Environmentalism Not bound by convention Zen Philosophy Environmental differentiation strategy 7 Source: Reinhardt (1998)
- 8. Introduction Strategy Business Model Tactics Requirements for Success Business Model „[...] logic of the firm, the way it operates and how it creates value for its stakeholders.“ 8 Source: Casadesus-Masanell & Ricart (2010) Key Takeaways Discussion
- 9. Introduction Strategy Business Model Requirements for Success Tactics Key Takeaways Discussion Business Model Process Innovation Product & Service Innovation Business Model Innovation Create Value Operational Excellence Customer Intimacy Product Leadership Environmental Stewardship Perceive Value Customers Excellent Quality & Services Good Feeling Environment Capture Value Profits 9 Growth Market Share
- 10. Introduction Strategy Business Model Tactics Requirements for Success Tactics „ [...] residual choices open to a firm by virtue of the business model it chooses to employ.“ 10 Source: Casadesus-Masanell & Ricart (2010) Key Takeaways Discussion
- 11. Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Discussion Product Lifecyle Initiative Virtues of Business Model Operational Excellence Customer Intimacy Product Leadership Environmental Stewardship Key Tactics Product Lifecycle Initiative Reduce Repair Reuse Recycle “The Product Lifecycle Initiative represents a holistic commitment to lengthen the lifecycle of each product and reduce landfill waste.” 11 Source: Reinhardt (1998); Reinhardt & Casadesus-Masanell, Kim (2010)
- 12. Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Discussion Reduce Key Tactics Product Lifecycle Initiative Repair Reduce Reuse Recycle Description High Quality Low Footprint Organic & Recycled Materials Assessment Big increase in production costs Limited product variety 12 Source: Reinhardt (1998); Reinhardt & Casadesus-Masanell, Kim (2010) Only small price increase
- 13. Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Discussion Repair Key Tactics Product Lifecycle Initiative Reduce Repair Reuse Recycle Description Free repairing service Considers repair for other brands Assessment Increases trust in quality High costs 13 Miss out on potential new sales Not enough capacity Source: Reinhardt (1998); Reinhardt & Casadesus-Masanell, Kim (2010)
- 14. Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Discussion Reuse Key Tactics Product Lifecycle Initiative Reduce Repair Reuse Recycle Description Second market for used products Considers opening for other brands Assessment Additional revenue stream New less affluent customer segments 14 Source: Reinhardt (1998); Reinhardt & Casadesus-Masanell, Kim (2010) Cannibalization of sales
- 15. Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Discussion Recycle Key Tactics Product Lifecycle Initiative Reduce Repair Reuse Recycle Description Take broken products back for free Considers providing service for other brands Assessment Cheap resources for production High operating costs 15 Source: Reinhardt (1998); Reinhardt & Casadesus-Masanell, Kim (2010) Capacity constraints
- 16. Introduction Strategy Business Model Requirements for Success Tactics Key Takeaways Discussion Business Model Process Innovation Product & Service Innovation Business Model Innovation Create Value Operational Excellence Customer Intimacy p p Product Leadership p Environmental Stewardship p Perceive Value Customers Excellent Quality & Services Good Feeling p Environment p Capture Value Profits 16 ? Growth ? Market Share ?
- 17. Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Requirements for Success 3 2 1 17 Innovation must be defensible against imitation by competitors Establish credible information about environmental attributes of its products Find or create a willingness among customers to pay for environmental quality Source: Reinhardt (1998) Discussion
- 18. Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Discussion 1. Willingness to pay Perceive Value Customers Excellent Quality & Services Good Feeling ? Environment Capture Value Profitability Growth Market Share Patagonia Bundling of public and private goods (Environment & Quality) Environmental prestige 18 Altruistic reasons (Donation) Differentiation strategy resonates with customer value
- 19. Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Discussion 2. Credibility Reporting Labeling Patagonia Footprint chronicles Retail store lounge - to inform about patagonia and projects 19 Environmental impact of 150 different products documented
- 20. Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Discussion 3. Protection Against Imitation Process Innovation Product & Service Innovation Business Model Innovation Low transparency Patents, infrastructure Highly integrated; strong customer relationship Medium protection 20 Medium / high protection High protection
- 21. Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Requirements for Success 3 2 1 21 Innovation must be defensible against imitation by competitors p p Establish credible information about environmental attributes of its products Find or create a willingness among customers to pay for environmental quality Source: Reinhardt (1998) p Discussion
- 22. Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Discussion Key Takeaways Don’t just rely on basic economic logic! Environmental differentiation strategy can work! Environmental differentiation strategy must provide value to the customer and the firm must be able to capture the value! Company must be credible for their environmental efforts! Environmentalism must be deeply integrated in the business model to be difficult to imitate! Innovation must be managed with respect to capacity and resources! 22
- 23. Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Discussion Should Patagonia go public? Investors Expectation Growth Profitability Patagonia Shareholder - 23 Profits = main objective ROI decision making Short term focus - profits = only means to an end Many environmental activities only capture value as an integral part of business model Long term focus Discussion
- 24. Introduction Strategy Business Model Tactics Requirements for Success Key Takeaways Discussion Discussion Should Patagonia go public? Investors Expectation Profitability Growth Patagonia Shareholder - 24 Focus on growth - Capacity and resource constraints can’t handle fast growth without compromising believes
- 25. Thank you for your attention!
Editor's Notes
- Who has heard of Patagonia? (Show hands)Picture shows founder of Patagonia
- - Who thinks Patagonia is a case to fail? (Show hands)
- Answer earlier question: Patagonia is very successful by pursuing an environmental differentiation strategyQuality: Pursuit of ever-greater quality in everything we do. Integrity: Relationships built on integrity and respect. Environmentalism: Serve as a catalyst for personal and corporate action. Not Bound by Convention: Our success—and much of the fun—lies in developing innovative ways to do things.
- Visualization of business modelThrough their innovation in processes, products, services and their business model they achieve operational excellence, customer intimacy, product leadership and environmental stewardshipThis creates value which is perceived by their stakeholders: Those are not only their customers but also very important the environmentHowever, for a sustainable business it is essential that those values are also captured in terms of financials
- One main initiative that summarizes the most important tactics to achieve those virtuesCalled product lifecycle initiative“The Product Lifecycle Initiative represented a holistic commitment to lengthen the lifecycle of each product and reduce landfill waste.”Those tactics under the name of the product lifecycle initiative refer to: “reduce, repair, reuse and recycle”
- Encourage customers to limit consumption to:only essential productsLong lasting high quality productsSmallest possible footprintPatagonia aims to provide those products:Invest heavily in innovation to improve quality and durability of garmentsUse only organic or recycled garmentsZen principle (reduce packaging, simple product design)Reduce energy consumptionProvide footprint chronicles for their productsEffect:Big increase in production costsOnly increased prices a littleNew materials only allowed limited product variety
- Service innovation:Guarantee free repair service for their products for the whole product lifeCustomer even gets refund for postal costsEven consider offering their repair service for competitor brands (shows that environment preservation really is their main goal)High operating costsGuarantee increases trust in qualityHowever, if broken products are repaired miss out potential new salesRepair service already operates at full capacity -> sales people are encouraged to replace products (against philosophy)
- Business model innovation: second market for used productsAgain even considered opening it for other brandsRisk of cannibalization of salesHowever, also address a new less affluent customer segmentAdditional revenue stream
- When products have reached end of lifecycle customer can send them back to PatagoniaEven consider providing service for other brandsAlready recycle all polartech fleece regardless of brandsAgain: High operating costsBut also cheap resources for their productionFurther problem: with existing capacity they can already only recycle half the tons collected
- Visualization of business modelThrough their innovation in processes, products, services and their business model they achieve operational excellence, customer intimacy, product leadership and environmental stewardshipThis creates value which is perceived by their stakeholders: Those are not only their customers but also very important the environmentHowever, for a sustainable business it is essential that those values are also captured in terms of financials
- Perceived value needs to be capturedMost efforts and values created are to please the environmentCan those values be captured? Bundling of private and public goods (organic food = less pollution + healthier) - "the most significant reason for purchasing Patagonia is quality....environmental concerns, either in terms of the company‘s performance or characteristics of the product, were less important to customers ->Patagonia communicates environmental friendliness together with better qualityAltruistic reasons - (People do incur private expenses to provide for public goods) (i.e. donate to charity) - Percentage of Patagonia’s revenues = donatedEnvironmental Prestige - Consumption of products makes a statement to consumers peersDifferentiation strategy needs to resonate with customers values - Outdoor people are likely to be environmentalists - Technical excellence, performance and quality
- What are objectives of shareholders? Shareprice determined by: Profits & Growth expectations (short term thinking)-> Profitability & GrowthTraditionally focus on environment -> profits = only means to an end Danger of seeing profits as an end and not as a meansExample: ROI decision making would reject many environmental investments since return is not directly visible. Most environmental activities just contribute to the companies financial success as an integral part of total business modelFocusing on short term returns would not be sustainable in the long term for Patagonia
- Patagonia is very innovativeInnovation like product lifecycle initiative already puts large pressure on capacityIe. only half of the garments that Patagonia collects for recycling can be processedRepair department is at full capacity as well. Employees are already encouraged to offer replacement when People bring products to the store.Furthermore resources are limited. This does not allow for further growth without compromising their core believesHence, we would suggest for Patagonia to not go public