Patagonia: A Different Way of Defining Value
Patagonia aligns its business and operating models to “do good for the world” as opposed to generating profit.
Patagonia is a great example of effectively aligning their business model with their operating model. Patagonia has crafted both its business and operating models around a unique mission statement.
Mission Statement: “Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.”1
Business Model: Patgonia’s business model is ostensibly to design, create, and sell the best quality outdoor gear. From this explanation their business model is not unlike other retail companies but they are different in that their mission statement does not mention profit. According to the founder and former CEO, the bottom line is the “amount of good that the business has accomplished over the year.” 1 This is interesting because it changes the “value” the firm is attempting to create and capture from money to “good.” Taking this into account Patagonia’s business model shifts to creating value by utilizing sustainable business practices in addition to selling the best product, and capturing value by investing their profits and time to develop solutions to the environmental crisis.
Operating Model: The operating model is set up to support the business model in every step of the process from design to distribution, and even to disposal.
• Build the best product: Designers are given a checklist of criteria. The products must be holistically designed to be functional (and if possible multifunctional), durable, easy to care for, authentic, do no harm to the environment, and provide added value to the core user. 1
• Production: The designers work with the producers to ensure they are working as a team. Oftentimes the producers are able to provide input to the designers to create a superior product or reduce waste. All production is done in a manner to “do no harm,” even if it costs more.1
• Distribution: Patagonia employs a diversity of distribution strategies in order to reach the maximum number of customers. They utilize mail order sales, direct internet sales, wholesales to dealers, and retail stores. Each distribution channel is available worldwide.
• Employees: The employees that manage the processes to create value are bought into the mission. One of the companies hiring standards is that employees must “like to use the clothes we design, have made, and sell…”1 Employees are also given additional time off and financial support to work on causes that support sustainability.
• Disposal: Patagonia excepts all used clothing for recycling via mail or drop off at a store. They also have a partnership with Yerdle, a unique company that accepts used goods for resale and pays you back in Yerdle Dollars to buy other used goods. This last step in their operating model, perfectly aligns with their mission and allows them to both create and capture additional value by reducing waste and obtaining raw materials at no cost. 2
Conclusion: Patagonia is a unique company. Their business and operating models are designed to support their mission that is based on doing good instead of generating profit. However, the models are designed such that by creating the best quality products and promoting sustainable practices they are also creating a competitive advantage for themselves and maintaining profitability.
Sources:
1: “let my people go surfing,” Yvon Chouinard
2: www.patagonia.com
Great analysis! One thing I wonder about with B corp / benefit corp models such as these is how companies like Patagonia manage to balance the obligation to shareholders and/or investors for delivering good as a value vs. good as monetary profits. Are they protected in any way from being sued by shareholders who don’t think the company is making the *maximum* amount of profit it can? Is there a “right” balance between creating/sustaining financial value and creating social value?
Thanks for the breakdown, Pete! I wonder, it seems that through increasing discounts, increasing competition, and the presence of online budget marketplaces like steepandcheap.com, Patagonia may not be able to maintain its price premiums and focus on sustainable manufacturing methods in the future. It seems that their mission statements and relative high quality have been successful up to now. How do you see Patagonia reacting to the rapidly evolving outdoor apparel space?