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Patagonia Case Analysis from a Strategic Management & Corporate

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 Title: Patagonia Case Analysis from a Strategic Management &
Corporate Responsibility Perspective

Module: Strategic Management & Corporate Responsibility – SM0382

Student Name: Reema Kamis Al-Kuwari

Student ID: 20046359

Word count: 3763

Date of Submission: 17th of May, 2021

 Abstract

This essay aims to analyse Patagonia clothing business, and their current
situation in the fashion industry, to provide three proposals that addresses their
challenges. First, the essay will audit Patagonia’s current business activities using
academic theories such as TOWS and VRIO. Then, it will examine the clothing
industry from different perspectives including academic theories such as Porter’s
forces and PESTLE. Then, it will focus on investigating Patagonia clothing company,
and figuring the weak spots in their supply chain. After, the essay will study the two
proposals suggested by the board of directors regarding addressing Patagonia
profitability concerns from different perspectives. Afterwards, the author will suggest
another proposal that addresses Patagonia concerns and support their mission.

Key words: Patagonia, strategic management, corporate social responsibility,

competitive advantage, supply chain, apparel industry
 Table of Contents

Abstract ...................................................................................................................... 2

1 Introduction .......................................................................................................... 6

2 Ethicality Dilemmas ............................................................................................. 8

3 Board of Directors Proposals ............................................................................. 21

3.1 First Proposal: reduce product quality by reducing the quality of inputs ...... 21

3.2 Second proposal: maintain product quality while reducing CSR initiatives . 23

4 Author Proposal: Sustainable Supply chain through vertical integration ............ 28

5 Conclusion ......................................................................................................... 31

6 References ........................................................................................................ 32
 List of Tables

Table 1: Circular-economy worldwide agenda ......................................................... 10

Table 2: Patagonia sourced materials in 2017. Retrieved from: (Patagonia, 2017) . 21
 List of Figures

Figure 1: The Pyramid of CSR. Retrieved from: (Carroll, 1991) ................................. 6

Figure 2: BoD Proposals ............................................................................................ 7
Figure 3: Negative environmental impact of fashion industry on the environment.
Retrieved from: (Mati, 2020) ....................................................................................... 8
Figure 4: Patagonia brand concepts. Retrieved from: (Patagonia, 2021) ................... 9
Figure 5: CSR initiatives. Retrieved from: (Patagonia, 2021). .................................. 11
Figure 6: Patagonia resources, capabilities, and competencies. Retrieved from:
(Starck, 2021) ........................................................................................................... 11
Figure 7: Patagonia Supply-chain and Value-chain. Retrieved from: (Pongtratic,
2007; Patagonia, 2021; Bosco, 2017) ...................................................................... 12
Figure 8: Brand positioning perception map. Retrieved from: (Qiviut & co, 2018) .... 13
Figure 9: Porter's Five Forces for Apparel Industry. Retrieved from: (Pratap, 2017;
Porter, 1979) ............................................................................................................ 14
Figure 10: Circular fashion economy model illustration. Retrieved from: (Lissaman,
2019) ........................................................................................................................ 15
Figure 11: Patagonia PESTLE Analysis. .................................................................. 16
Figure 12: VRIO analysis. Retrieved from: (Edwards, 2018). ................................... 17
Figure 13: TOWS analysis. Retrieved from: (Parker, 2020) ..................................... 18
Figure 16: Porter generic competitive strategies. Retrieved from: (Ormanidhi &
Stringa, 2008) ........................................................................................................... 19
Figure 17: Risk-assessment matrix first-proposal .................................................... 22
Figure 18: Risk-assessment-matrix first-proposal. Retrieved from: (Dunk, 2007; Cruz,
2015; Das, 2008) ...................................................................................................... 23
Figure 19: CRV Approaches. Retrieved from: (Menghwar & Daood, 2021). ............ 24
Figure 20: CSR-outcomes analysis .......................................................................... 26
Figure 21: Risk-assessment matrix second-proposal ............................................... 26
Figure 22: Risk-assessment-matrix second-proposal. Retrieved from: (Dunk, 2007;
Cruz, 2015; Das, 2008) ............................................................................................ 27
Figure 23: Risk-assessment matrix author-proposal ................................................ 30
Figure 24: Risk-assessment-matrix author-proposal. Retrieved from: (Dunk, 2007;
Cruz, 2015; Das, 2008) ............................................................................................ 30
 1 Introduction

Imagine a rubbish-truck full of clothes on landfill site every second. This is

what our world is suffering from today. A gargantuan waste is produced by the
clothing industry that are threatening our valuable environment. The current fashion
industry is draining our valuable resources. Dr. Chetna Prajapati (2019), literature in
textiles at Loughborough University, said: “This system puts pressure on valuable
resources such as water, pollutes the environment and degrades ecosystems in
addition to creating societal impacts on a global scale”.

Patagonia is an outdoor clothing retailer based in the U.S. it started as a

supplier of expedition and climbing gear, then shifted to the produce apparel and
fashion. They have been competing in the retail industry for forty-plus years. Since
1986, they have been members in “One Percent for the Planet” organization. Thus,
they are committed to donate at least 1% of their revenue toward the environmental
cause (Patagonia, 2021). In 2012, Patagonia became a “Certified B Corporation”
which is awarded for non-profit companies showing extraordinary social and
environmental performance (Cave, 2015). Patagonia is known to be truthful to their
mission of using business to inspire, adapting to eco-friendly solutions that are
sustainable, and causing no unnecessary harm. It could be said that a great sense of
corporate social responsibility, and ethicality is what made the brand Patagonia and
differentiated it from other rivals. According to the Pyramid of Corporate
Responsibility, Patagonia is struggling with the base of the pyramid, economic
responsibility, which is the foundation upon which others rest as shown in figure-1.

Figure 1: The Pyramid of CSR. Retrieved from: (Carroll, 1991)

Philanthropic Responsibility

Ethical Responsibility

Legal Responsibility

Economic Responsibility
 Although the great impact from their philanthropic and ethical responsibilities
which are illustrated in their social initiatives to make our world better, it is draining
their finances. Patagonia is facing troubles in costs and finances regarding these
initiatives, it turned out that their social corporate responsibility is not aligned with
Patagonia’s economic responsibility for being profitable. They are stuck between
profitability and their values. An analysis of Patagonia’s current position and future
threats are needed to propose a proper plan followed with proposed actions to save
Patagonia from bankruptcy. The board of directors (BoD) are considering two
proposals to address their profitability issue as shown below.

Figure 2: BoD Proposals

First proposal: reduce

product quality by reducing
the quality of inputs Second proposal: maintain product
quality while reducing CSR
initiatives

Both are hurtful to Patagonia’s brand image, vision, mission, and values.
However, a trade-off is essential at this point to overcome the current challenges
faced by the fashion industry.
 2 Ethicality Dilemmas

Fashion industry is known to be a first-class contributor for damaging the

planet. Thus, recently fashion consumers and fashion industry realised that this
pattern of consuming finite resources is problematic, thus, fashion ethics has come
into focus. The main concerns regarding fashion industry negative impact are
concerning environmental harm and unfair humans and animals’ conditions during
production process.

Regarding the environmental harm, there are three major negative impacts
from fashion industry: water pollution, water consumption, and carbon footprint.
Figure-3 displays the negative harm caused by fashion industry.

Figure 3: Negative environmental impact of fashion industry on the environment.

Retrieved from: (Mati, 2020)

Water Pollution Water Consumption Carbon Footprint

• 85% of all textiles are • Second largest water • Fashion production

thrown causing water consumer produce 10% of total
pollution • Consume 700 gallons global carbon
• Washing clothes to produce one cotton emission
release 500,000 tons shirt • The production
of microfibers to the require large amount
ocean yearly of petroleum

Regarding unfair working conditions, almost 75% of world’s cloth

manufacturing are made in developing countries under unsafe and unfair conditions
(Ethical Fashion Forum, 2014). An unfortunate example of inhumane working
conditions would be the collapse of Rana Plaza in 2013, which resulted in killing over
1000 garment workers in Bangladesh (Yardley, 2013).

Given the recent focus on social and environment, large companies invested
to be socially responsible brand. The most recent sustainability trend in the fashion
industry is “Circularity”. This type of system is reshaping the behaviour of consuming
finite resources, to designing creative ways to re-consume wastes. However, this
model is new in the clothing industries. Circularity approach aims to have sustainable
environment. But, how could we have sustainable product when the company model
isn’t sustainable?
 Individuals are not sure if circularity is a buzzword or a trend. Ed Rogers,
senior director of Global Sustainability at UPS, believe that circularity is not just a
trend, it is shaping the future of fashion industry (Burton, 2021). However, this seems
far from the reality since fashion brands signatories of the 2020 Circular Fashion
System Commitment didn’t meet 71% of their circularity targets for 2020 (Elven,
2019). This uncovers the reality of challenging process of circularity. Although it aims
to sustains the environment, it is not ensuring the sustainability of the business
model itself.

Recently, Patagonia changed their mission from a product/purpose driven, to

a purpose driven mission “we’re in business to save our home planet”. This rebrands
Patagonia from a “product with a purpose”, to a “purpose with product”. The
successful rebranding witnessed a huge public impress. Thus, brand trust is not a
concern (Sonsev, 2019). Moreover, Patagonia mission and vision successfully
articulate the company’s goals and values as displayed in figure-4.

Figure 4: Patagonia brand concepts. Retrieved from: (Patagonia, 2021)

Mission

• We're In Business To Save Our Home Planet

Values

• Build the best product

• Cause no unnecessary harm
• Use business to protect nature
• Not bound by convention

Patagonia business model is manufacturing and selling high-quality outdoor

clothing goods through distributors and directly to customers on their website.
Patagonia adapted to the “circular economy” technological trend in their processes
as a move toward sustainability. Ellen McAurthur Foundation (2013) explained that:

“A circular economy is an industrial system that is restorative or regenerative

by intention and design. It replaces the ‘end-of-life’ concept with restoration,
shifts towards the use of renewable energy, eliminates the use of toxic
chemicals”
 The importance of this system has led to its inclusion in worldwide agenda,
and several policies were forced to promote circular economy as exemplified in
table-1.

Table 1: Circular-economy worldwide agenda

Name of the
Organizer Explanation References
activity
The 2030 Agenda Seeks to promote countries
(United
for Sustainable commitment toward
United Nations Nations,
Development sustainable future through
2015)
circular economy
The Bioeconomy to Aims to create an international
(OECD,
OECD 2030. Designing a cooperation in circular
2019)
policy agenda economy
A strategy to address the
Innovating for
European ecological, environment, food (Euorpean
sustainable growth
Union supplies, energy, and natural Union, 2012)
resources
President
National
Obama Seeks to drive the (The White
Bioeconomy
Administration bioeconomy-economic activity House, 2012)
Blueprint
- USA
Seeks to facilitate circular
economy, increase resources (Government
Circular Economy
China utilization, protect the of China,
Promotion Law
environment, and have a 2008)
sustainable development

Federal (Federal
Aims to combine economy and
Ministry of National Ministry of
ecology to ensure a
Education and Bioeconomy Education
sustainable use of natural
Research - Strategy andResearch,
resources
Germany 2020)
 Regarding Corporate Social Responsibility “CSR”, Patagonia is known as the
pioneer in “CRS”, under social and environment dimensions through hosting
programs that deliver social and environmental value as shown in figure-5.

Figure 5: CSR initiatives. Retrieved from: (Patagonia, 2021).

Regenerative
Fair Labor Orgainc Migrant
Fair Trade Living Wage
Association Certified Pilot Workers
Programs

Being a leader in their industry, Patagonia has strong resources, capabilities,

and competencies to support their business model explained in figure-6.

Figure 6: Patagonia resources, capabilities, and competencies. Retrieved from:

(Starck, 2021)

Resources

•applying environmentally sustainable methods to better use resources

•Organic cottons
•Less toxic dyes
•Less damaging fabrics

Capabilities

•Private company which entails greater freedom and less money restriction
•Capture value in changing market context
•Innovative product development

Competencies

•Easily integrate new materials into their supply chain

•Delivering innovative materials in the fashion industry

Furthermore, Patagonia’s supply-chain and value-chain are demonstrated in

figure-7
Figure 7: Patagonia Supply-chain and Value-chain. Retrieved from: (Pongtratic, 2007; Patagonia, 2021; Bosco, 2017)
General Management
Support Activities

Human Resources

Technology Development

Research and Development

Marketing Service:
Raw Materials:
Primarily Activities

Operations:
& Sales: Common Threads
Organic Eco-friendly, Initiative to reduce,
sustainable energy, First company to print
Non-toxic repair, recycle, and
eco-friendly dying catalogue on recycled
reuse Patagonia’s
High quality technologies papers, promoted eco-
products
friendly programs

INDUSTRY VALUE CHAIN

Raw material Patagonia

Garment Factory Patagonia Distribution Customers
supplier warehouse channels
 Patagonia’s competitors are in the high-end apparel industry including
North Face, Mountain hardware, ARCTERYX, and Columbia sport wares
(DeFrancesco, 2019).

Figure 8: Brand positioning perception map. Retrieved from: (Qiviut & co,
2018) High Quality

Low Price High Price

Low Quality

Regarding market value, the outdoor apparel industry in the US is valued at

$12.7-billion, and forecasts shows a steady growth to reach a value of $19.6-billion
by 2026 (M. Shahbandeh, 2020). Whereas the global market is expected to grow
from $34.7-billion to $43-billion in the same period (Yahoo Finance, 2021).

Porters (1979) stated that competition in any industry depends on five basic
forces that determines the ultimate profit potential for an industry. The weaker the
forces, the greater the business opportunity. Porter’s five forces theory is applied on
clothing industry as shown in Figure-9 to further analyse the industry.
Figure 9: Porter's Five Forces for Apparel Industry. Retrieved from: (Pratap, 2017;
Porter, 1979)

Bargaining High
Power of
Demand for high quality
Supplier
Demand for sustainability
Demand for ethical standpoints
Bargaining Moderate
Power of
Low switching cost
Buyers
Low price sensitivity
Availability of subsitute product
Competitve Very High
Rivalry
Product repetition
Lack of uniqness
Intensive promotional campaigns
Threat of New Low
entry
High entry cost ( capital, recruitment )
Building brand identity is difficult
Difficulty in controlling quality
Threat from High
Subsitututes
Availability of neoumrous options
Diversity of subsitute
High strength of firms offering subsitute

Moreover, the clothing industry is evolving toward ethical fashion that adapts
a circular economy model as shown in figure-10. Fashion industry specialists believe
that fashion’s circular economy is a fast-growing movement and would reach $5-
trillion (Vogue Business, 2020). Group of high-profile industry brands are already on
board in circular economy such as Nike, North Face, Puma, and Adidas (Mazzoni,
2020).
 Figure 10: Circular fashion economy model illustration. Retrieved from:
(Lissaman, 2019)

Therefore, apparel industry has highly competitive rivalry force due to the
intense competition within fashion brands and the product reptations. However, it
has attractive potentials for optimistic growth, and it is transforming from the first
enemy to the planet toward a sustainable environmentally-friendly industry.
It is important to analyse the environment for the firm to assess the key opportunities
and threats. Figure-11 illustrate a PESTLE analysis. While figure-12 illustrate VRIO
analysis which is a complement to PESTLE in assessing macro-environment.

Figure 11: Patagonia PESTLE Analysis.

Timefram
Area Factor Implication Importance Reference
e
US declining Threat Low Present – (The Global
political 10 years Economy,
stability 2019)
Political
Trump trade Threat Medium Present – (York,
war Increased 3 years 2020)
tariffs
US GDP is Opportunity High Present – (The World
growing 10 years Bank, 2021)
Economic
Unemployment Threat Medium Present-5 (Trading
rate turbulence years Economics,
2021)
Increased Opportunity High Present- (Ellsmoor,
awareness 10 years 2019)
about
Social sustainability
Increased Threat Low 3-10 years (Census,
aging 2020)
population
Advancement Opportunity Medium Present- (Massy-
in sustainable 10 years Beresford,
technologies 2020)
Technological
Low entry Threat Medium Present- (Phan,
barrier for 10 years 2021)
online stores
 Social trends Opportunity High Present-5 (Martin,
on eco-friendly years 2020)
solutions
US Opportunity Medium Present-5 (EPA,
Environmental environmental years 2021)
laws such as:
Clean Air Act,
and Clean
Water Act
US health and Threat Low Present- (Chavan,
safety law 10 years 2018)
Import and Threat High Present – (U.S.
Legal export 10 years Customs
restrictions and Border
Protection,
2021)

Figure 12: VRIO analysis. Retrieved from: (Edwards, 2018).

Valuable: Rare:
1% for the planet pioneer in sustainability and recycling
Product life-cycle initiative Leading to industry shift
Organic cotton Donates revenue worldwide

VRIO Analysis

Imitation Costs:
Organised to Capture Value:
Risk 20% companies stake on organic products
Goal to enhance recycling
organic cost three multiples of conventional
Selling 8% more organice products than
Invest $3 miilion for innovation
compititors
Spend $60,000 for recycling cost yearly
 Patagonia does not make their products due to the high cost of circularity
process. Consequently, their business model heavily relies on other companies to
produce the materials, cut the patterns, and combine the garments. Thus, they are
gambling on 70 companies to embody the same commitment and veracity.

To better address Patagonia’s current implications, a proper analysis for

Patagonia’s strength, weaknesses, opportunities, and threats “TOWS” is applied and
explained in figure-13.

Figure 13: TOWS analysis. Retrieved from: (Parker, 2020)

Strengths Weakness
- Existing brand - Less fashionable
- Existing customer base apparels than rivals
- High-quality products - High price
- Low employee turnover - Reliance on suppliers
- Excellent reputation - Weak e-commerce
- Private firm - Low market presence
- Availability of capital
-
Opportunities SO Strategy WO Strategy
- Expand globally
- Exploit e-commerce
channels Growth strategy Vertical Integration
- Extend product line
- Strengthen market
presence

Threats ST Strategy WT Strategy

- Losing suppliers
Invest in R&D and
- Climate change Increase market
marketing to compete
- Increased competition
globally presence
- Global pandemic

The main weakness in Patagonia’s model is their dependency on outsiders to

deliver their core product. Patagonia outsource for raw materials and for
manufacturing. This could be the reason why several challenges occur in their
business model. First, their products are over-priced and doesn’t provide sufficient
profit to stop their financial concerns. Secondly, they face negative publicity due to
suppliers mis-treatment of animals and unhealthy working conditions. Thirdly, their
low market presence could be because of the fact that outsourcing is time-
consuming, thus, products take longer time in production, causing delays in the
supply chain. This raises the concern regarding the influence of the supplier power,
as discussed in figure-9, on controlling the company’s ability to compete and survive
in the fashion industry.

However, circularity is not the panacea for the fashion industry. Fashion firms
are still facing several challenges and obstacles that tighten their capabilities toward
corporate social responsibility and sustainability. The main concerns as explained by
Patagonia BOD are regarding the trade-off between financial returns, and corporate
social responsibility “CSR”.

This leads us to the importance of having a competitive advantage to

distinguish the brand, Patagonia, from other rivals. Porter also explained that
competitive advantage is the factor that determines whether a firm’s profitability is
above or below the industry average. Competitive advantage can be possessed
either by cost or differentiation (Ormanidhi & Stringa, 2008). The figure below
illustrates the cost and differentiation strategy aligned with the scope of activities.

Figure 14: Porter generic competitive strategies. Retrieved from: (Ormanidhi &
Stringa, 2008)

Lower Cost Differentiation

Cost Leadership: Differentiation:

Broad

Lowest cost in the market Unique, recognised, high quality

Competitive Scope

Porter Generic
Competitive
Strategies
Narrow

Cost Focus:
Differentiation Focus:
Lowest cost in particular product or
Unique product or niche market
niche market
 Linking this to our case, Patagonia premium, organic, and sustainable outdoor
apparel is competing in a “blue ocean”. In such market, a firm must differentiate
themselves through having a competitive edge that distinguish them from others
(Kim & Mauborgne, 2021). It is clear that Patagonia follows differentiation focus on a
narrow segment of customers, calling them “dirtbags”, people who appreciate
athletic endeavour and willing to pay premium price. Environmental impact, quality,
and innovation helped Patagonia to charge 20% higher price than competitors
(Casadesus-Masanell, Crooke, Reinhardt, & Vasishth, 2009). However, these old-
dated strategies assume normal competitive environment where demand and profits
are normal. But what if the venture faced troubles such as shift in consumers
demands? Pretorius (2008) explained that Porter’s generic strategy is inadequate for
distressed firms.

Covid-19 outbreak is a great example for why these strategies are not
sufficient nowadays. Patagonia was not secured from this global pandemic. In March
2020, Patagonia stopped operations, closed stores, and stopped taking orders even
through websites. However, this outbreak didn’t change Patagonia’s CSR toward
paying their employees (Peterson, 2020). Being ethical caused Patagonia massive
financial losses due to the immediate shut-down of operations and the continuance
of paying their employees with zero return. While large fashion companies are
accused for unfairly cancelling orders worth over $16 billion. As a result, garment
workers lost over $1.5 billion in wages (Dean, 2020).

Despite leaving suppliers and works suffering, retailers such as Kohl’s paid
out $109m in dividend shortly after cancelling large orders (McNamara, 2020). This
outrageous act resounded over the world, awakening the consumers’ conscience
regarding ethical fashion which assure a greater social integrity and social justice.
Accordingly, “conscious customer” became one of the top 10 consumer trends for
2019 (Angus & Westbrook, 2019). As a result, conscious customers responded with
campaigns, initiatives, and blogs to support sustainable fashion and called to avoid
unsustainable brands (Huynh, 2020).
 3 Board of Directors Proposals

This section will critically evaluate Patagonia’s BoD proposals using market
data, theoretical frameworks, historical evidence, and expert’s opinion

3.1 First Proposal: reduce product quality by reducing the

quality of inputs
Actually, Patagonia did approach this solution previously. In 2015, Patagonia
faced issues with their wool suppliers for animal mistreatment. Patagonia responded
with a new “Patagonia Wool Standard” and sourced a cheaper wool provider. Shortly
later in 2017, an investigation showed that Patagonia’s new supplied wool does not
meet their standards. Now, Patagonia stopped disclosing their suppliers to the
public. This raised a public questioning regarding Patagonia’s transparency and
whether they are acting ethically or hiding something (PETA, 2018; Bain, 2015).

This incident sharply shrank the percentage of wool used in Patagonia’s

apparels to reach 1% of total materials sourced in 2017 as shown in the table below.

Table 2: Patagonia sourced materials in 2017. Retrieved from: (Patagonia, 2017)

Material Source 2015 2016 2017

Virgin petroleum-
based products 58% 54% 51%
(POLYESTER/NYLON)

Recycled materials 24% 26% 29%

Cotton and other

15% 18% 19%
plant-based materials

Wool and other

3% 2% 1%
animal products

In addition to that, reducing product value will demolish Patagonia’s

competitive advantage. Consumers pay premium prices for Patagonia’s product
demanding for high-quality. Patagonia mentioned in their annual report that they are
facing challenges regarding balancing their performance and social responsibility, in
addition to challenges regarding transparency.

On the other side, there are several advantages for reducing product quality.
First, lower quality means reducing cost of goods sold (COGS). Patagonia risks their
profitability for premium quality inputs which usually cost up to 50% more than
normal quality input. The shift to lower-quality inputs will increase the gross profit
significantly (Palmer, 2017). Another advantage will be having more available fund
for social responsibility programs, which are the core values of Patagonia.

However, the negative impact of this proposal can be mitigated through

endorsing higher return to the environment. Patagonia can increase the percentage
of revenue to the planet from 1% to 10%. This will relief the stress and mitigate the
social criticism of lowering the quality. Even with increasing their contribution to the
planet, they are generating higher profit due to greater profit margin.

In a consequentialism perspective, this proposal is considered beneficial

because the end result will match Patagonia’s values. But in a Deontology
perspective, the act of reducing quality is against the morality of Patagonia because
they value quality over financial returns.

Therefore, this proposal can be assessed in evaluation matrix depending on

the main four aspects that the firm is concerned about; quality, financial, social
impact, environmental impact as shown in the figure below.

Figure 15: Risk-assessment matrix first-proposal

Factor Ranking (1-5) Explanation

Using conventional raw material
Quality 2
other than organic
Financial 4 Reducing COGS
Social impact 2 Will incur social criticism
Availability of funds to increase the
Environmental impact 4
support for the environment
Total 12
 Furthermore, the risks of this proposal are assessed in the risk assessment
matrix depending on their probability and impact as shown in figure-17.
Figure 16: Risk-assessment-matrix first-proposal. Retrieved from: (Dunk, 2007;
Cruz, 2015; Das, 2008)

Reduced Losing
customer competitive
satisfaction advantage
PROBABILITY

Decline in Social Losing

sales criticism market share

IMPACT

3.2 Second proposal: maintain product quality while reducing

CSR initiatives
The stakeholder capitalism is revolutionised in the 21st century. Today,
businesses must focus on creating both social and shareholder value. Thus, if
Patagonia reduced CRS, the social shareholder value will decrease. The question is,
does reducing shareholder value is enough to address the financial concerns?

The analysis of Patagonia shows that CRS programs are draining Patagonia’s
financial resources. Even though product quality is one of Patagonia’s competitive
advantage, CRS represent the identity of the corporate. Thus, reducing CSR will
require several sacrifices.

To address the concerns of profitability and product quality, Patagonia must

re-engineer their strategy. The new strategy must be sustainable and serve the four
corporate responsibilities especially the economic responsibility which is the base of
any business. Thus, re-strategizing Patagonia’s strategy would entail reducing the
current CSR programs and enhancing Creating Shared Value (CSV).
 The current CSR model is consuming Patagonia’s financial resource to deliver
a social and environmental benefit to the society. In other words, Patagonia are
spending money on some CSR programs without a tangible return or profit neither
driving sales. This jeopardises Patagonia’s financial stability and expose the
company to liquidity risk. A modernised way of delivering the same goal is by
adapting a CSV strategy. CSV is policies and operative practices that a company
adapts to enhance its competitiveness while simultaneously creating a value that
develop the economy and the social conditions in the community (Porter & Kramer,
2011). In another words, it is creating economic value “profit” in a way that also
creates social value. There are three ways to create shared value as shown in the
figure below.

Figure 17: CRV Approaches. Retrieved from: (Menghwar & Daood, 2021).

Reconceiving
products and markets

Redifining productivity
CSV
in the value chain

enabling local cluster

development

Thus, Patagonia can reduce CSR initiatives that does not achieve any of the
above results. This will enable Patagonia to create shared value endorsed within
their core business model. CRV is not a philanthropy, it is the core of the business
strategy. Patagonia are already following this methodology in some of their
programs. For example, Patagonia created shared value through Common Threads,
Worn-Wear, and recently The Responsible economy. These programs are re-
shaping Patagonia’s model from a CSR perspective toward a CSV dimension
(Dossa, 2018). Yet, other business activities are still raising costs and their value
chain and supply chain isn’t yet 100% sustainable.
 A major fall-down in Patagonia CSV activities was within Worn-Wear program.
The firm paid customers $20 to $30 to send them a used fleece, then recycled it and
resell it for $70 to $90. Even though this program received a positive publicity and
the significant margin is healthy for the company in addition to creating a value, it
decreased the incentive for customers to buy used goods given that new fleeces are
on sale within the same price range on the website (Kortum, 2018).

It can be concluded that having a CSV activity as a supplementary activity is

not working. CSV must be the core of the business. The first step toward CSV is to
analyse the firm activities and analyse their outcomes. According to Green (2020),
an initiative is creating value if it delivers at least one of the following:

• Revenue-related outcomes:
o growth opportunities
o competitive positioning
o brand equity
• Cost-related outcomes:
o cost of labour
o operation efficiency
o cost of capital
o risk management

Thus, the table below analyse the outcomes of the CSR outcomes.
 Figure 18: CSR-outcomes analysis

Revenue-
Cost-related
CSR Initiative related Decision
outcomes
outcome
Fair Trade Yes No Keep the initiative
Fair Labor Keep the initiative and
Yes Yes
Association invest to grow
Regenerative
Organic Keep the initiative and
Yes Yes
Certified Pilot invest to grow
Programs
Yes – indirect Keep it, but reduce the
Living Wage No
outcome spending on the initiative
Migrant Workers No No Stop the initiative

Figure 19: Risk-assessment matrix second-proposal

Ranking
Factor Explanation
(1-5)
Keeping premium input
Quality 4
quality
Financial 3 CSR are still expensive
Less individuals will benefit
Social impact 2
from the CSR initiative
Environmental Environmental programs
5
impact will not change
Total 14
 Figure 20: Risk-assessment-matrix second-proposal. Retrieved from:
(Dunk, 2007; Cruz, 2015; Das, 2008)

Less social
impact
PROBABILITY

Decline is
sales

Rivals become
leaders in
social impact

IMPACT

To sum up, the analysis of both proposals assessed the positive and negative
impacts on the firm’s business strategy. The result shows that the second proposal
or reducing CSR initiatives is a better proposal from different aspects. First, it
sustains Patagonia’s competitive advantage as company with high-quality products.
Secondly, it is more affordable to apply and encounter fewer financial risks. Thirdly, it
has a better ranking depending on the factors that Patagonia cares most about.
Finally, it encounters less risk probabilities and impact.
 4 Author Proposal: Sustainable Supply chain through vertical
integration

Patagonia has almost a sustainable value-chain. They design the products

inhouse, then outsource production, then sell it through their distribution channels.
However, main issues were raised from a gap in the value-chain for outsourcing
production.

Outsourcing production in apparel industry is not an ideal approach. Apparel

manufacturers are limited, these limited manufactures are then filtered to find the
ones who aligns with Patagonia’s suppliers code of conduct.

Outsourcing manufacturing process makes the supply chain longer. The

longer the supply chain, the more expensive is the process, and more exposure to
risks such as quality and delays. This is not healthy to the company bottom line. It is
true that outsourcing save direct labour expense, but it increases managerial cost for
dealing with overseas operations and travelling costs (Arrigo, 2020).

Vertical integration is a strategic structure that involves the company’s

ownership of the supply chain of its product, it depends on the decision whether the
company should provide certain goods or services in-house or from outsiders
(Harrigan, 1985). Thus, a move toward backward vertical integration will not only
addresses Patagonia’s current concerns, it will also add to their competitive edge
and position them ahead of competitors such as North Face, Arcteryx, and Columbia
who are still not standing where Patagonia does with the vertical integration
(Melquiond, 2019).

Currently, Patagonia has it hands in every step of the value chain except raw
materials supply and manufacturing. They manage R&D, designing, merchandising,
and sales of outdoor clothing. A proper way of assessing this proposal is to identify
its pros and cons on the corporate strategy.
 There are a number of pros for vertical integration. First, it will solve the issue
of high independence on suppliers, as discussed previously in the TOWS analysis,
through smoothen the supply chain by having less intermediaries and enforce higher
control on the process. Enhanced control on the supply chain will give the firm
greater quality control. Secondly, this strategy will increase entry barriers for new
entrants through gaining a competitive edge ahead of rivals. Another advantage
would be the compliance with sustainability goals in all supply chain phases
(Sraders, 2018). This will solidate Patagonia’s mission of producing product will less
harm. A strong example of successful vertical integration would be Zara. They
created a competitive edge through controlling their supply chain which resulted in
creating ultra-quick production and distribution, whilst competitors like The Gap and
H&M are still outsourcing their clothes (Dumbrill & Wang, 2021). Thirdly,
manufacturing in-house reduces the cost of goods sold (COGS) through achieving
economy of scale that fits with the firm’s production capacity. Fourthly, it will allow
the firm to react quickly to market demands. Having the production facilities will
enhance the process of product development and prototype testing (Gaille B. ,
2015). Patagonia will be able not only to donate to the planet, but also to supply
future sustainability demand.
On the other side, the burden of this strategy is that it needs a capital
investment to acquire the land, machinery, equipment’s, and other assets to build the
manufacturing plant. This investment will restrain their financial resources and limits
their contribution toward the planet for a significant time until they recoup the
investment cost (Rathnayake, Malsha, Dissanayake, & Gunathilaka, 2020).

Other than capital, having a manufacturing facility will lower the flexibility of
production. Hence, lot size is less flexible, the ability to change the volume of
production of raw materials may incur a loss of goods, and the large surge in order
position can cause production constraints. Another significant barrier would be that
hosting manufacturing facility will make adapting to new market trends much harder
and expensive. In addition to the fact that the firm lacks of knowledge and
experience in manufacturing process (Gaille L. , 2017).
Figure 21: Risk-assessment matrix author-proposal

Ranking
Factor Explanation
(1-5)
Quality 5 Improved quality control
Financial 1 Expensive capital
Applying social initiatives and
Social impact 5 fair working conditions throughout
the supply chain
Adapting eco-friendly and
Environmental
5 sustainable models throughout the
impact
supply chain
Total 16

Figure 22: Risk-assessment-matrix author-proposal. Retrieved from: (Dunk,

2007; Cruz, 2015; Das, 2008)
PROBABILITY

Low ROI Bankruptcy

New
Slow growth
technology

IMPACT
 5 Conclusion

To conclude, the audit of Patagonia revealed a weakness in supply chain

raisin from the firm reliance on outsourcing for business core activities. Then, BoD
proposals and the author proposal were analysed from different perspectives. The
author’s proposal achieved better results in terms of future growth opportunity,
maximised profit, fully address the concerns and weaknesses of the business model,
better alliance with Patagonia’s most important key factors, and comprehend less
risk events.
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