Thursday, January 11, 2007

Comparing Patagonia Ltd. to other environmental companies

The key of Patagonia’s success is the correlation between high quality product and environmental concern. Patagonia concern for the environment has required its product to innovate. Patagonia has been able to recover some of this environmental cost through product differentiation (high quality), private cost savings (better processes), and strategic behavior (low turnover and close suppliers relationships).

A key characteristic of Patagonia is the fact that its shareholders believe in sustainable development. Its shareholders are more worried about not harming the environment that about the financial returns of the company. By choosing not to grow fast, Patagonia has impeded the proliferation of bad management practices that would probably damage the environment in exchange for financial returns. This pre-requisite is necessary for any other company to be able to successfully implement Patagonia’s approach.

Among all the cases studied, there wasn’t anyone that has such a virtuous circle that takes advantage of the benefits of the environmental concerns. Nevertheless, Patagonia’s approach could be extrapolated to other industries in similar spaces. I believe it could not be extrapolated to firms that exploit public goods directly. For example, AES would have some problems adapting Patagonia’s approach. Even though AES could create better dams through innovation, its user wouldn’t pay more because its product cannot be differentiated. Then AES wouldn’t be competitive. Without product differentiation the companies can only recoup the environmental cost through privae cost savings and strategic behavior. On one side profit from strategic behavior is the most difficult approach to recoup environmental cost. On the other side better innovated process are difficult in industries that invest heavily in R&D. In the case of oil or infrastructure related projects unless the company integrates forward to the end-user, it would never commands better prices. In the case of Patagonia, cotton suppliers were able to have a premium because they worked close with Patagonia to create innovative fibers.

Companies that want to pursue Sustainable Development need to recover the environmental cost using the three methods mentioned above. Any company that has only one possibility to recover environmental cost is doomed to fail. Companies need to create synergies between these approaches to be able to maintain their competitive advantage.

It is clear that an industry that can’t create differentiation between the participant’s products is not incline to pursue a sustainable development approach. Companies in that industry would only be able to pursue a sustainable development approach with help of the government or a collaboration between all the members of the industry.