What Patagonia has that a rival cannot buy
Sessions 3 and 4 looked outward, at industries and the players in them. That view explains why some industries earn more than others. It cannot explain why firms facing the same industry earn different returns. For that you have to open the firm and take stock of what it owns, what it can do, and which of those things a rival could not simply buy or copy.
The case is Patagonia, the privately held outdoor-apparel company that used a Black Friday newspaper ad in 2011 to tell customers not to buy its fleece jacket. This session reads that ad as evidence: of an intangible resource built over decades, deployed through a particular value chain, and tested with VRIO and SWOT.
What this session answers
Come to class with one Patagonia resource you think is not rare, and your reason. Agreeing that everything Patagonia does is special is not analysis.
Carried forward · Sessions 2 to 4
Session 2 put analysis third in Kaplan, Norton and Barrows’s sequence, under one question: what are the key issues our strategy must address? That step had three parts: external analysis, internal analysis and SWOT. Session 3 and Session 4 did the external part. This session does the internal part and then joins the two in a SWOT.
Session 3 · five forces
The forces explain why some industries are more profitable than others on average. They are silent on why two firms facing the same five forces earn different returns. Hold that gap open; it is today’s subject.
Session 4 · beyond the forces
Ecosystems, business models and game theory treated competitors as actors who make moves. A move only works if the firm has something to move with. That something is a bundle of resources and capabilities.
Session 1 · Porter (1996)
Fit among activities made a position hard to copy. Today gives you the tool that lists those activities one by one, the value chain, and a test for the resources behind them, VRIO.
The number that sets up the session
Rothaermel reports that firm-specific effects explain up to 55% of the differences in performance between firms (Rothaermel, 2024, p. 131). If the industry decided everything, firms in it would earn the same. They do not, so some of the explanation has to sit inside the firm. Internal analysis is the search for it.
Internal analysis of the company · Rothaermel (2024), ch. 4
Internal analysis uses four nested terms. Get them straight first, because most weak SWOTs come from mixing them up: a building is listed next to a reputation and a skill as if they were the same kind of thing.
1 · Resources
Any asset the firm can use to form and carry out a strategy. Tangible resources have physical form: labour, capital, land, buildings, plant, equipment. Intangible ones do not: culture, knowledge, brand equity, reputation, intellectual property.
2 · Capabilities
The organisational and managerial skills needed to orchestrate resources and deploy them. Capabilities are intangible by nature and show up in the firm’s structure, routines and culture.
3 · Core competencies
Unique strengths embedded deep in the firm that let it offer more value than rivals, or comparable value at lower cost. They come from the interplay of resources and capabilities.
4 · Activities
Distinct, fine-grained processes such as taking orders, delivering products or invoicing. Competencies are deployed through activities, which is why the value chain comes later in this session.
How the pieces connect · redrawn from Rothaermel (2024), Exhibit 4.4
Resources + capabilities
resources reinforce, capabilities orchestrate
Core competencies
the few that really differ
Activities
competencies leveraged
Competitive advantage
superior performance
← Profits are reinvested to hone and upgrade the resources and capabilities, or the competencies decay.
Heterogeneity: resource bundles differ across firms, even within one strategic group. Immobility: resources are “sticky” and do not move easily between firms, so the differences last. Rothaermel’s example: Continental and Delta tried to copy Southwest with Continental Lite and Song, and neither reproduced the bundle. Under perfect competition both assumptions fail, and so does any lasting advantage.
Anyone with cash can buy buildings or servers on the open market. A brand or a reputation has to be built, usually over a long period. Rothaermel concludes that competitive advantage is more likely to come from intangible resources than tangible ones (Rothaermel, 2024, p. 139). Keep that in mind when you score Patagonia: its most important assets do not appear on a balance sheet.
An intangible resource is a stock, like water in a bathtub. Investments are the flows from the taps, and leakage through turnover or forgetting drains it. You cannot fill the tub faster by opening every tap at once on the last day; it fills over time (Rothaermel, 2024, pp. 152–153, after Dierickx & Cool, 1989). The Patagonia case is a record of flows.
“Core competencies that are not continuously nourished will lose their ability to yield a competitive advantage.” Rothaermel (2024, p. 138)
Activity · sort Patagonia’s inventory
Eight items from the case. Classify each one. The test for a capability: is it something the firm does, by coordinating several resources, rather than something it has?
Resource-based view of the firm · VRIO
A list of resources is not yet an argument. The VRIO framework, which Rothaermel takes from Jay Barney, asks whether a resource, capability or competency is Valuable, Rare and costly to Imitate, and whether the firm is Organised to capture its value. It is a decision tree, not a scorecard: the first “no” ends the test, and only four “yes” answers support a sustained advantage (Rothaermel, 2024, pp. 141–145).
NOT VALUABLE
Competitive disadvantage
It neither exploits an opportunity nor offsets a threat.
V, NOT RARE
Competitive parity
Needed to play; rivals have it too.
V + R, EASY TO COPY
Temporary advantage
A head start that imitation or substitution erodes.
V + R + I, NOT ORGANISED
Temporary at best
Xerox PARC invented the GUI and the mouse; Apple and Microsoft captured the value.
V + R + I + O
Sustained advantage
For as long as the environment and substitutes allow.
Valuable
A resource is valuable if it helps the firm exploit an external opportunity or offset an external threat. That is the hinge to Sessions 3 and 4: value is judged against the environment, never in isolation. Session 6 takes the economics of value creation further.
Costly to imitate
Rivals attack an advantage by direct imitation or by substitution. Copying is costly when the resource depends on history (path dependence), when nobody can say exactly what causes the result (causal ambiguity), or when it lives in many interacting systems (social complexity). The sustaining-advantage extension develops these as isolating mechanisms; Session 7 applies commitments and capabilities to positioning.
Organised
The firm needs a structure, processes and systems that let it use the resource. Xerox’s headquarters was focused on copiers, on the other side of the country from PARC, and did not organise to exploit what PARC built. A resource the firm cannot use earns nothing.
Grant (2019, pp. 120–122) asks three questions of a resource: can it establish an advantage, can it sustain one, and can the firm appropriate the returns? His criteria line up with VRIO, with one addition.
| Grant | VRIO | How they compare |
|---|---|---|
| Relevance | Valuable | Both ask whether it creates value for customers |
| Scarcity | Rare | The same test |
| Durability | — | No VRIO equivalent: how long the resource lasts |
| Transferability, replicability | Costly to imitate | Rivals either buy the resource or build it |
| Appropriability | Organised | Who keeps the returns: the firm, or its employees, partners or customers |
Assigned reading · bring this to class
Read the article from the course pack before class, with three tasks:
Activity · VRIO assessor
Pick a resource, read the case evidence, and answer the four questions in order. The test stops at your first “no”. Then compare your verdict with a defensible reading. Disagreeing with that reading is allowed, but you must point to evidence.
Case evidence
| Resource | Your verdict | A defensible reading |
|---|
Value chain analysis · Porter (1987)
VRIO tests what the firm has. The value chain shows where it is used. Porter treats every business unit as a collection of discrete value activities, from sales to accounting, and locates advantage there: “It is at this level, not in the company as a whole, that the unit achieves competitive advantage” (Porter, 1987). He groups the activities into nine categories.
Five primary activities
Inbound logistics, operations, outbound logistics, marketing and sales, and service. They create the product, deliver and market it, and provide after-sale support.
Four support activities
Firm infrastructure, human resource management, technology development and procurement. Rothaermel’s textbook relabels some of them (supply chain management, distribution, R&D, information systems, accounting and finance), but the logic is Porter’s.
The question to ask
Every activity adds some value and some cost. Value chain analysis asks which activities generate the firm’s differentiation and which drive its costs (Rothaermel, 2024, p. 154). Which of the two Patagonia should compete on is Session 7’s question.
Porter (1987) introduces the value chain to judge diversified firms: a corporate parent can add value through mechanisms such as transferring skills between similar value chains or by sharing activities, such as a common sales force or logistics network. Session 9 returns to that corporate-strategy use. Today the tool is applied to a single business, which is how it starts in the article: advantage is built activity by activity, inside one unit.
Activity · why the system is the moat
Rothaermel’s arithmetic: if a rival copies each of 25 interlocking activities with 90% accuracy, it reproduces the whole system with only about 7% accuracy, because the probabilities multiply (Rothaermel, 2024, p. 157). Move the sliders.
Accuracy on the whole system
Activity · map Patagonia’s value chain
Ten activities from the case. For each, choose the value chain category and decide whether it makes Patagonia different from a typical apparel rival or is simply what any firm of its size has to do. Your tags fill the map as you go. Check when you have placed all ten.
SWOT analysis · joining the inside to the outside
SWOT is where internal and external analysis meet. Strengths and weaknesses are internal: they concern resources, capabilities and competencies, and VRIO decides which is which. A resource that is not valuable is a weakness; one that is valuable, rare, costly to imitate and organised is a strength and a core competency. Opportunities and threats are external and come from PESTEL and the five forces (Rothaermel, 2024, p. 160). Ask of every strength on a list: if a rival’s SWOT shows the same item, was it ever a strength?
The SWOT matrix as four questions · after Rothaermel (2024), Exhibit 4.11
Strengths × Opportunities
How can internal strengths exploit external opportunities? The “offensive” options; start here.
Strengths × Threats
How can strengths reduce the likelihood and impact of external threats?
Weaknesses × Opportunities
Which weaknesses stop the firm taking an opportunity, and how can it shore them up?
Weaknesses × Threats
Which weaknesses would turn a threat into reality? The “defensive” options.
The caveat that matters most
A strength can also be a weakness, and an opportunity can also be a threat. Rothaermel’s examples: Alphabet’s Silicon Valley location brings talent and venture capital, and also high costs and earthquake risk; climate change threatens carmakers through fuel taxes and opens demand for low-emission cars. SWOT is only as good as the external and internal analysis done before it (Rothaermel, 2024, pp. 161–162).
Activity · SWOT builder
First ask: is this fact about Patagonia (S or W) or about its environment (O or T)? Then ask which way it cuts. Three of the facts can defensibly go in two boxes; the explanation says which.
Strengths · internal
Weaknesses · internal
Opportunities · external
Threats · external
From SWOT to options · from the professor’s 2025 Patagonia deck
These options were proposed in class last year. They are arguments, not case facts. Test each one against the resource it relies on: does it use Patagonia’s credibility in a way that builds more of it, or spend it?
SO · OFFENSIVE
ST
WO
WT · DEFENSIVE
Case · Patagonia: “Earth Is Now Our Only Shareholder” (HBS 9-323-057)
In November 2011 Patagonia ran a full-page Black Friday ad in The New York Times: a picture of its fleece jacket above the words “DON’T BUY THIS JACKET”. Black Friday traditionally opens the US holiday shopping season. The ad launched the Common Threads Initiative, which asked customers to reduce, repair, reuse, recycle and reimagine Patagonia products (Trelstad et al., 2023, p. 5). By 2022 Patagonia held the largest share of the US outdoor apparel industry, nearly 10% (p. 2).
The puzzle
For almost any retailer, an ad against its own product on the busiest shopping day of the year is incoherent. It is coherent only if the firm is selling something other than the jacket: a reason to believe the jacket is worth keeping, repairing and passing on.
The RBV reading
The ad is one deployment of an intangible resource, environmental credibility, built by decades of flows. A rival could run the same words tomorrow. Without the history, customers would read it as a stunt. That is the difference between an activity anyone can copy and the resource that makes it work.
What the case does not tell you
Patagonia is private and does not publish financial data; the roughly $1 billion of revenue and $100 million of net income for 2022 are media estimates (p. 2). The case gives no figure for the ad’s effect on sales. Before calling it a success, say what evidence you would want.
Activity · the flows behind the stock
Every dot is a decision recorded in the case. Switch the four kinds on and off, then step through them. Ask of each one: is it a flow into the credibility stock, a flow into another resource, or a withdrawal?
| Year | Kind | Decision | Case page |
|---|
Source: Trelstad, Hsieh, Norris & Pinckney (2023). Where the case gives a decade rather than a year, the table says so.
Because Patagonia does X in its value chain, it holds Y, which a rival cannot simply acquire. This is the professor’s value-chain-to-RBV table, rebuilt with evidence from the case.
| Value chain activity | What Patagonia does (case) | Resource it builds | Why it is costly to copy |
|---|---|---|---|
| Procurement | Moved all 166 cotton products to organic within 18 months after a 1994 assessment, risking sportswear, then 30% of the business; sales recovered within two years (p. 4) | Supplier relationships and the capability to reconfigure a supply base on principle | Path dependence: the capability was proved under risk, once, and cannot be demonstrated by a newcomer without the same bet |
| Service | Free repairs at the Reno facility, about 100,000 items a year; buyback for store credit, then repair and resale or recycling (p. 4) | Customer trust that durability claims are real | The facility can be built; the belief that the offer is not a sales tactic cannot be bought |
| Marketing & sales | A catalogue explaining chocks in the early 1970s, after which the US market shifted within months (p. 2); “Don’t Buy This Jacket” (2011); every Black Friday dollar, $10 million, given away in 2016 (p. 5) | Reputation for environmental credibility | Causal ambiguity: nobody, Patagonia included, can say which of five decades of acts made the message believable |
| Human resource management | One of the first onsite corporate daycare centres, paid parental leave before it was common, training in Yosemite; growth capped after 1991 to keep work stable (p. 3) | A mission-aligned culture | Social complexity: each practice can be copied; the pattern of daily behaviour they produce cannot |
| Firm infrastructure | 10% of profits from 1985; the greater of 1% of sales or 10% of profit from 1986 (p. 3); a 2011 benefit-corporation charter that can change only by unanimous shareholder vote (p. 5) | Governance that binds the firm to its purpose | Hard to reverse, which is what makes it credible |
Kris Tompkins, recalling the 1980s: “Because if you’re not successful financially, the experiment’s over” (Trelstad et al., 2023, p. 3). Chouinard goes further and claims that every decision best for the planet has made the company money (p. 3). Treat that as a hypothesis. The RBV can explain why credibility earns returns; it cannot show that every green decision paid.
In September 2022 the Chouinard family moved all of Patagonia’s voting stock into a purpose trust and all of its non-voting stock into a nonprofit, the Holdfast Collective (p. 11). Session 6 distinguishes shared value from the distribution of profits. Session 7 asks which competitive position these activities support. The sustaining-advantage extension examines imitation.
Go deeper · interactive decks
Each was built for an earlier version of the course. Use them after class, to practise the tools on other firms.
For class
01
If you were CEO Ryan Gellert, which single Patagonia resource would you protect first, and which of the company’s own activities is most likely to erode it?
02
The case gives no sales figure for “Don’t Buy This Jacket”. What evidence would convince you that it created value rather than attention, and who would you need to hear from?
03
Chouinard says every decision best for the planet has made the company money. Is that a causal claim, or survivorship? What would a counter-example look like, and would the case report it?
04
In the cotton switch, was the advantage the organic cotton, or the organisation that could move 166 products in 18 months? Which of the two could a rival buy?
05
By 2020, 1% for the Planet had more than 5,000 business members, and B Lab’s co-founder says thousands of companies followed Patagonia in making themselves legally accountable to stakeholders. When a practice you pioneered becomes common, what happens to its VRIO score, and where must your advantage move?
06
A customer post the professor shared (r/BuyItForLife) describes free repairs and, when a jacket could not be fixed, store credit for its full original value. Is that a cost, a marketing expense, or an investment in a resource? How would you show which?
Apply · challenge · revise
The prompts below are hypothetical resource claims for analysis. They are not reported facts about Patagonia. Select the test most directly threatened, then apply the method to a cited case fact.
A celebrated designer can leave and take customers with them. The company owns the office and logo, but not the relationship.
A venture’s only claimed competence is “our best-selling jacket.”
Bring the evidence into the room
Choose one Patagonia activity from the value-chain exercise below. Explain which resource it builds, which core-competence hypothesis it supports, and which of the five resource tests remains unproven.
Your partner is a capable rival. They may copy the visible product but must explain the cost, time and coordination needed to reproduce the underlying routines. Then consider substitution: can customers get the benefit differently?
Retrieve · explain · retry
Retrieve the reading lenses before you use them in the case. These are concept checks, not a model case answer.
Knowledge check
Answer before you look. Each answer explains itself, and the explanation matters more than the score.
Preparation
All readings are in the course pack. They are copyrighted and are not posted on this site.
Required · V0.2 core-competence reading
Prahalad, C. K., & Hamel, G. (1990). The Core Competence of the Corporation. Harvard Business Review. Publisher record ↗
Bring a capability hypothesis, a customer benefit, a plausible second application and one reason the transfer could fail.
Required · the case
Trelstad, B., Hsieh, N.-h., Norris, M., & Pinckney, S. (2023). Patagonia: “Earth is now our only shareholder” (HBS No. 9-323-057). Harvard Business School Publishing.
For this session read pages 1–6 and Exhibits 2, 5 and 9 closely: the history, not the ownership decision. Connect ownership and operating choices to shared value in Session 6, then competitive positioning in Session 7.
Required · the resource-based view
Collis, D. J., & Montgomery, C. A. (1995). Competing on resources: Strategy in the 1990s. Harvard Business Review, 73(4), 119–128.
Bring their tests for a valuable resource and compare them with VRIO.
Supplementary · the value chain
Porter, M. E. (1987). From competitive advantage to corporate strategy. Harvard Business Review, 65(3), 43–59.
For today, the section on the value chain and the nine categories of value activities. The rest of the article returns with corporate strategy.
Supplementary · textbook
Rothaermel, F. T. (2024). Strategic management (6th ed.). McGraw Hill. Chapter 4, Internal analysis: Resources, capabilities, and core competencies.
Sections 4.2–4.6: resources and capabilities, VRIO, the value chain and SWOT.
Further
Grant, R. M. (2019). Contemporary strategy analysis (10th ed.). Wiley. Chapter 5, Analyzing resources and capabilities.
The appraisal criteria used in the VRIO section, including durability.
Carried forward
Porter, M. E. (1996). What is strategy? Harvard Business Review, 74(6), 61–78.
Fit among activities, the idea behind the “system is the moat” calculator.