Management & Corporate Responsibility Patagonia

Patagonia Strategic Management & Corporate Responsibility

Introduction

Patagonia is a subsidiary of Lost Arrow, a privately held firm established in 1973 by climbers and surfers. Patagonia is a purveyor of outdoor clothing and gear and manages its research, design manufacturing, and sale of its products. The firm is driven by developing essential products for outdoor activities rather than profit-motivated production. Patagonia has a competitive advantage due to unique technological innovation in the outdoor gear and wears market, making the firm a leader in the outdoor retail industry (Kirkpatrick et al., 2002). Patagonia prides itself due to its devotion to social and environmental industrial practices. It continues to launch new products in line with the firm’s mission to “Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.” According to MacKinnon (2015), conspicuous consumption and impulsive buying were not predicated on the typical form of bargain hunting; shoppers had begun to seek products that offered enduring value, such as fuel-efficient sources of energy in production end the Great Recession. The vice president of environmental affairs, Rick Ridgeway, stated this insight highlighted a change in the market where durable products were needed during the end of the recession and at any time.

The economic implications of fast fashion demand low capital and high labor demands, where the latter is a critical part of the production. Securing this production asset is expensive in developed countries. As a result, this production function was moved to developing countries where labor laws are more lenient and cheap (Yardley, 2013). The fast-fashion business model workers are among the lowest-paid employees, working in unsafe conditions, job discrimination, and long working hours (Shen, 2014). Fast fashion relies on cheap fabrics and the discussed business model to facilitate a high retail turnover, implying products have a shorter life cycle (Abdulgadir & Abdulgadir, 2007). Contrary to this industry proposition, Patagonia employs a contradicting proposition by considering its business model’s social and environmental impact by selling high-quality outdoor utility products (MacKinnon, 2015). Part of the proposition of Patagonia’s business model is protecting the interests of its customers, which is accomplished by the design of simplistic and efficient products.

Further, like other firms in fashion, it has to outsource production to different companies; before the integration of a company into its value chain, Patagonia conducts a deep audit of the prospective partners down to the farm level in four criteria: environmental impact, quality, social standards, and sourcing. This measure ensures that its suppliers uphold Patagonia’s social responsibility standards beyond partners’ value proposition to its supply chain (“Corporate & Social Responsibility History - Patagonia,” 2022). The product life cycle practices of Patagonia are based on the “4R’s”: recycle, repair, reuse, and reduce limits unnecessary use of materials by offering high-quality products and use of low-impact materials, such as relying on organic cotton or recycled materials rather than high-pesticide conventional cotton (Kelley, 2015; Woodside & Fine, 2019). The value proposition of Patagonia has facilitated its differentiation from its competitors beyond price and quality but creating a strong reputation in the market that appeals to its core customers.

Patagonia’s Ethical Dilemma

A sustainable business strategy aims to positively impact society and the environment while simultaneously benefiting the stakeholders. The tipple bottom line is a business concept that argues that companies should be accountable for measuring their social and environmental impact and financial performance. The triple bottom line is a sustainability-based accounting that focuses on ‘3Ps’ profit, people, and the planet. This accounting framework considers a business’s social and ecological aspects that can be challenging to measure (Caniato et al., 2012). This approach goes beyond solely evaluating profitability or performance concerning the industry’s bottom line. Patagonia employs the three foundations of the tipple bottom line in its value proposition and internal accounting. For example, the company offers 1% of its annual revenue to the environmental restoration programs. Beyond the financial contribution to environmental sustainability, Patagonia contributes to the management of the environmental conservation organization efforts by facilitating collaboration across environmental conservation agencies (Alkuwari, 2021). The tipple bottom line will be applied in this evaluation to establish the ethical dilemma of Patagonia in meeting the performance expectations of its shareholders based on the people, planet, and profit foundations of the model.

Profit

Patagonia has remained profitable despite its sustainable social and environmental business model proposition. By striving to remain sustainable in its production operations, Patagonia relies on 87% production from recycling and the use of 100% virgin cotton. For example, the company relies on recycled spandex, fishnets, polyester, nylon, and natural rubber as its materials (Michel et al., 2019). Unlike typical fashion companies informed by consumption cycles and data-driven production scales, Patagonia production is informed by their research and development that examines the most effective production costs and the environmental impact of their current production processes compared to their prospective production measures.

For example, Patagonia uses wind-driven power in its California facilities, while the Ventura offices relied on solar photovoltaic panels, which collectively achieved 25% savings in electricity expenses. Another profitable business organization area is the Common Threads Initiative, which focuses on its products’ four Rs, reduce, recycle, repair, and reuse. This service was offered at free or minimal cost or free of charge and encouraged customers to minimize purchases, reuse and recycle purchased products (Choi, 2007). The consequence was increased profitability and a decline in the negative environmental effects. For example, in 2013, Patagonia generated $560 million from the sale of outdoor apparel (Kelly, 2005). Patagonia has become a leader in strategy and innovation and has been recognized among the most ethical companies globally with the alignment of its business and operational model.

Planet

Patagonia’s ethical and business model is predicated on environmentally friendly operations and initiatives to contribute to renewable energy sources, regenerative organic agriculture, and raw materials for fabricating and designing their products. These initiatives’ purpose is to create minimal negative impacts on the environment throughout the supply chain from extraction, transportation, and manufacturing of its products (Turker & Altuntas, 2014). The firm reorganized its supply chains using reused materials by 31%, reducing plant-based materials, such as cotton, by 16% and wool by 5% (patagonia.com, 2019). The fast fashion industry relies on greenhouse farming and environmental degrading pharmaceuticals to produce plant and animal materials. Due to the short lifecycle of products, the farming practices employed are high degrading to the soils. They are eventually deposited in water reservoirs destroying the ecosystems of such water catchment areas.

The use of organic cotton reduced carbon emissions by 45% compared to conventional cotton, which is equivalent to eliminating 4,300 metric tons of carbon emissions (Pongtratic, 2007). For example, Patagonia substituted their use of one of its cottons that it found that one of the cottons it was procuring caused irritations on human skin. Patagonia terminated the partnership with these suppliers and began sourcing organic cotton in 1994. Patagonia also found that dying nylons were toxic and switched its supply to Germany, where fewer and less toxic dyes were found. These measures have been a core part of ‘The Footprint Chronicles’ that involves tracking Patagonia’s products’ environmental and social impact. For example, the company patterns with Verité, an international corporation specializing in nonprofit training, social auditing, and capacity-building organization, to train 75 of its employees on Patagonia’s code of conduct.

Further, instead of having a sustainability department, the firm dissolved the department and assigned the employees across different operations in the company that monitors the adherence within the sustainability industry (De Brito et al., 2008; Dossa, 2018). The firm also embraces transparency to keep the stakeholders, especially customers, informed about the company’s carbon footprint (Sarkis, 2003). Such measures keep them informed and encourage customers to address the difficulties emerging from creating a common understanding. Promoting these resources makes it possible for the employees to meet these challenges.

Patagonia’s initiatives target equipping its stakeholders and employees with the critical skills required to achieve the mission and operate in line with its core values. The core values of Patagonia are building the best product, causing no unnecessary harm, not bound by convention, and using business to protect nature (Kelley, 2015). Its business model is predicated on selling and manufacturing high-quality outdoor products across its supply chain and directly on its website to the customers. This is accomplished through a circular economy model that is embraced by leveraging technology to accomplish sustainability (Elven, 2019). According to the Ellen McAurthur Foundation (2013), a circular economy is an industrial system that is restorative and regenerative by design and intention. This approach negates the end-of-life concept with the regenerative and restoration materials, migration to renewable energy, and eliminates the use of toxic pharmaceuticals.

People

Patagonia’s ethical accountability also considers its operations’ current and future impact on humanity. The measures are taken to ensure the organization’s suitability practices consider human consequences. The firm is conscious of its workers’ working conditions and remuneration rates across its production and distribution operations. For example, after discovering that some brands relied on child labor to create a price advantage, the corporation has taken the initiative by working with the Fair Labor Association (FLA). This independent multi-stakeholder verification organization trained and verified the practices of labor conditions and the treatment of workers at its factories since 1996.

This initiative was in line with President Clinton’s “No Sweat Initiative” to ensure the companies did not involve themselves in practices propagating unsafe working conditions, child labor, and poor pay (Zhou, 2019). This initiative also requires Patagonia to audit its practices and train employees in the production cycle on how their actions, or lack thereof, can lead to the suffering of long working hours, generate stress, and a hurry-up pressure state of working.

Patagonia’s CEO, Rose Marcario, advocates for a culture of employees considering their wellness instead of consumers and taking the initiative to ensure the products produced by the organization are durable. As a result, there has been an increased rate of retaining employees through intentional initiatives to lower employee turnover that are typical in this age of the fast-fashion industry (Mautz, 2019). Patagonia has also pledged to support and improve the participation of women in leadership. Patagonia collaborates with prominent industry leaders, such as North Face and REI, and offers grants of up to $1.5 million to support and increase women in leadership (Zhou, 2019; Overfelt, 2020, August 14). This initiative involves the development of programs and services that address the participation of women leaders and creating programs to mentor and serve an advisory role to women who aim to pursue entrepreneurial opportunities. The firm’s approach to recruitment is unconventional. It diversifies its recruitment practices through its environmental internship program and the annual bike-to-work that are industry leaders in the assortment of different ways of employee engagement in the company’s efforts to realize its goals.

The core ethical dilemma for Patagonia is the tradeoff between the company’s financial performance and the company’s corporate social responsibilities. As such, ensuring the CRS responsibility of the company does not undermine the corporation’s financial performance requires establishing a competitive advantage over its competitors to remain competitive beyond accomplishing its environmentally friendly goals (Dobre et al., 2015; Peloza, 2009). Typically, the fast-fashion industry is driven by demand and trends in fashion that are exploitative of the environment or people who provide labor, especially on the materials end of the supply chain (Shen et al., 2017). Patagonia’s business proposition contradicts this low labor and material production value proposition.

Value Chain and Resource-Based View of Competitive Advantage

As established, the company emerged in the 1960s as a manufacturer of outdoor materials used for backpacking and camping that was ongoing then. The company grew continuously, targeting consumers with disposable income, and expanded to gear production in the 1980s. The core competitors are Recreational Equipment Inc. (REI), The North Face, Columbia Sportswear, Marmot Mountain, and Mountain Hardware (Zhou, 2019). This section will evaluate the firm’s competitive advantage using VRIN analysis and value chain analysis. Since the company takes a contrary position compared to manufacturers of clothes and gear in the fast fashion industry, how the firm remains in business and remains competitive will be answered in this section.

Value Chain Analysis

Porter’s value chain analysis is a strategic tool applied to examine organizational activities to get a holistic perspective of the cost drivers and the sources of differentiation for a company to inform change and development. For Patagonia, the activity is subdivided into two categories to help identify the firm’s competitive advantage. The categories are primary and secondary production and supply chain activities. Since Patagonia has a globally recognized supply chain, the primary activities involve inbound and outbound logistic activities. The company is recognized among the most ethical companies globally. It prioritizes the low impact on humans and the environment while shipping materials and products, packaging, warehousing, and managing inventory (Zhou, 2019). For example, Patagonia is proactive in reducing and educating customers on the need to reduce the use of plastic.

Further, the environmental initiatives of the corporation are wedged into its expansion decisions (Ly, 2021). For example, during its expansion into the East Coast, Patagonia constructed its premises in Pennsylvania on reclaimed land, initially a neglected field mine. Such an approach to decision-making benefits the corporation by introducing new cost-cutting strategies that contribute to the company’s profitability.

Patagonia makes an emphasis the reliance on regenerative organic materials while sourcing materials. This approach is informed by the need to reduce the rate of greenhouse emissions and improve the natural resources, such as soil. As a proponent of fair trade, the company is inclined to offer appropriate working conditions to its employees and reliance on innovative technology to minimize the company’s ecological footprint. Sales and marketing rely on technology to market and distribute their products (Grundy, 2006). Further, the company relies on technological platforms, such as social media, to enhance consumer education, communicate its position on core social and environmental matters, and accomplish its transparency efforts (Shen et al., 2017). The reliance on this avenue for sales and marketing increases the brand awareness and profitability of the firm. Due to its 4Rs initiative, its after-sale services are critical to facilitating its customers’ reuse and recycling infrastructure (Ly, 2021). Via interaction with customers on social media, the company has a unique position to address customer consumers’ concerns. This increases brand loyalty and the customer-company relationship.

The secondary activities involve procurement, human resource management, technological innovation, and infrastructure. The procurement activities of Patagonia are predicated on the use of environmental and socially low-impact materials. The firm encourages farmers to rely on low fossil fuel practices that are more sustainable. The company invests not only for current productivity but also nurtures its supply chain for the long term (Duygulu et al., 2016). As established, Patagonia relies on technology to accomplish its sustainability goals, remain competitive in the market, and increase profitability. For example, the Worn and Wear program helped the company recapture fibers that otherwise would have been wasted. The use of innovative designs also facilitates the production of activities that make it possible for the corporation to remain productive.

Figure 1: A circular and adaptive value chain

VRIO Analysis

Resources

Valuable

Rare

Costly to Imitate

Organization

Competitive Consequence

Core Value

Yes

Yes

Yes

Yes

Sustainable competitive advantage

Capability

Yes

Yes

Yes

Yes

The risk of imitation is low, but the high rate of industry disruption is a threat

Innovation

Yes

Yes

Parity

No

AI analytics can be difficult to imitate, making the competitiveness highly sustainable

Corporate Social Responsibility

Yes

Yes

Yes

Yes

Sustained competitive advantage

Customer service

Yes

Yes

No

Yes

Sustainable competitive advantage

Sustainability

Yes

Yes

Yes

Yes

Sustainable competitive advantage

The VRIO analysis results indicate that the core resources at Patagonia’s disposal, such as core values, corporate social responsibility practices, innovation, capabilities, and sustainability practices, are valuable, rare, unique in the industry, and hard to imitate that making the organization’s competitiveness sustainable. To ensure that the products developed are suitable for their consumers, Patagonia offers incentives to their employees to pursue an outdoor activity, such as surfing, to try out and offer recommendations for improving its outdoor gear products. The care for employees also allows them to have enough time for their families and conduct their civic duties (Kruschwitz et al., 2013). For example, the firm closes its factories during elections to allow the customers to participate in the elections. Patagonia also collaborates with the other stakeholders in the fashion industry to develop plans to adopt socially responsible practices. For example, the firm has an alliance with the US Environmental Protection Agency, nongovernmental originations, and academic institutions to develop a social and environmental performance index. Such approaches to corporate strategy have created a competitive advantage that has facilitated the development of a collective sustainable competitive force.

Strategic Proposal

Porter’s Five Forces Analysis of the Industry Environment

Bargaining Power of Buyers

The apparel segment of Patagonia makes goods that are similar to its competitors in the outdoor segment and other clothing manufacturers. However, their products are differentiated by minimal details, such as the style, material, and design. Customers who are yet to develop a brand preference may easily switch under different circumstances to save on a purchase (Zamora, 2016). Notably, consumers are willing to spend highly. They may consider more factors while making their purchase beyond the cost, such as the company’s social and environmental impact or ethicality. Consequently, the bargaining power of customers is high, and the firm needs to continue being a leader in strategy and innovation to improve customer satisfaction and improve on other metrics that motivate its customers.

Threat of Substitutes

Outdoor clothing is typically priced at a relatively higher price than other types and is unlikely to be duplicated across segments in the fashion industry. The ideal features of outdoor clothing are designed to serve safety and easy function while conducting outdoor activities. This places Patagonia at an advantage since the firm has a reputation for quality products that guarantee efficacy and durability, a high value for money proposition to consumers in this segment (Zamora, 2016). While the cost to switch to other brands or apparel is minimal, consumers may not be willing to overlook the functionality and quality of Patagonia’s products and trade for lower prices. As a result, these position makes the threat of substitutes low, although not dismissible.

Bargaining Power of Suppliers

Firms are not limited to the search for suppliers who practice sustainability in their operations due to differences in the products, innovation, ethical standpoint, and the business model adopted by the company (Pongtratic, 2007). Where standards are not accomplished in by one supplier, the firm has an option to switch to different suppliers. Further, Patagonia has made long-term agreements with suppliers who meet its quality standards and offer exceptional terms and conditions of operation that limit the suppliers’ choice of better offers in the market. As such, Patagonia is in a unique position where the firm has a wide range of choices of suppliers who share the same standpoint (MacKinnon, 2015). For example, Patagonia also found that dying nylons were toxic and switched its supply to Germany, where fewer and less toxic dyes were found. Additionally, the company has the choice to switch suppliers whenever they fall short of their quality and standard of material, environmental and social impact standards.

The threat of New Entrants

The threat of new entrants in the apparel and gear industry is relatively low. The challenges associated with entry into the market are mainly in creating brand awareness since the core players in the industry are well established and have been for a long time in the market. Leaders in the green segment established their reputation through sustainability strategies and innovation predicated on extensive research and development requiring substantial financial investment (Lofthouse & Prendeville, 2018). Beyond the finical requirements required to create such brand awareness, the leading brands took decades to build their reputation.

Rivalry among Competitors

Customers are continuously seeking the next better product to increase their comfort. As a result, to remain leading and competitive, companies are forced to innovate new products consistently and have new product designs in innovation. However, Patagonia does not subscribe to this business model since production and innovation are grounded on sustainability and delivery of quality durable products (Peloza, 2009). Further, the 4Rs of the firm differentiates it from its competitors and presents a value proposition that has created brand loyalty among its competitors (Stein, 2019). Despite the intense rivalry among competitors, the company has successfully differentiated itself from its competitors due to its business model’s economic and social accountability and value proposition.

The firm’s strategic position in the industry is a niche, and the competitor’s value proposition differs from Patagonia’s due to its business model’s economic and social value proposition. The core areas of strategic focus include collaborating widely to have a greater social and economic value proposition and impact, sharing best practices to solve some of the overarching industry concerns, and cultivating a new business segment (Husted & Allen, 2011; Kamm & Jonke, 2016). Through Patagonia’s Common Threads initiative, the firm increased its revenue with a modest growth of 2.8% between 2012 and 2017 (Zhou, 2019; Wren, 2022). Expanding the worn and wear segment to new markets internationally is likely to increase the organization’s growth domestically and internationally. Further, leveraging the firm’s value chain and research and development, there is still room for tweaking the business model to create new revenue streams from certified independent gear repair facilities.

The Worn and Wear initiative extends the company value chain upward and downward by collaborating with other industry leaders. Expansion of this segment to serve all brands can also integrate the recycling of fibers from different brands where the products are irreparable. Collaborating with other companies in the green segment can lead to the generation of new revenue and leveraging of the company’s competitive advantage to acquire more customers (Zhou, 2019; Zamora, 2016). For example, the acquisition or partnership of strategically aligned companies can help accomplish more by utilizing the companies’ resources and fiscal strength to propel the patterns or acquired companies to differentiated subsidiaries (Wren, 2022). Sharing best practices could help alleviate some of the pervasive challenges in the industry, being a purveyor of innovation for standards in regenerative organic agriculture.

The human management practices at Patagonia are predicated on the need to advance the wellness of humanity now and in the future. For example, the company offers its employees a minimal living wage, appropriate facilities for women, complies with and advocates for standard human rights, and advances the leadership opportunities for women (United Nations, 2015). Due to the high satisfaction of its employees, the company has a low employee turnover compared to its competitors. The social and economic propositions of the business are critical for the management of the challenges associated with the development of a common understanding