Can a better outcome for society also strengthen the economics of the firm?
Session 5 identified resources and capabilities. Now connect them to willingness to pay, costs and value capture. Use Patagonia to examine both competitive advantage and shared value: identify the business mechanism, measure the social outcome, and state what the case cannot prove.
What this session answers
Bring one number the case does not give you that you would need to prove Patagonia’s advantage, and say which point on the value stick it measures.
Carried forward · Sessions 3 and 5
Session 3 sized the industry. Session 5 took stock of Patagonia’s resources, value chain and VRIO profile. This session puts a value on them, so revisit Session 5 first if those tools are hazy.
Five forces · Session 3
Porter’s forces are a theory of value capture. Powerful buyers keep more of the value an industry creates, powerful suppliers take more of it, rivalry and entry compete it away, and substitutes cap what buyers will pay (Porter, 1985/2004, p. 9). Today the question moves inside the industry: why does one firm open a wider wedge than its neighbours?
Resources · Session 5
A culture, a brand or a supplier relationship is a source of advantage only if it raises customers’ willingness to pay, or lowers what it costs to serve them, by more than rivals manage. Session 5 asked whether Patagonia’s resources are rare and hard to copy. This session asks what they do to the wedge.
Value chain · Session 5
Willingness to pay and cost are both outputs of activities. As you read the case, trace each Patagonia choice to the activity it changed: procurement (organic cotton), service (free repairs), human resources (daycare and parental leave), firm infrastructure (the benefit-corporation charter).
The trap this session sets
Listing virtues is not analysis. “Patagonia has a strong brand and cares about the planet” says nothing until you say which point on the value stick it moves, against which rival, and what it cost to move it.
Identifying competitive advantage · the value stick
Strategy writers define competitive advantage in three ways: by the profits it produces, by the profits it could produce, and by the value it creates. The three are compatible. The third is the one you can work with, because it tells you where the profits come from.
By outcome · Ghemawat & Rivkin
“A firm such as Nucor that earns superior financial returns within its industry (or its strategic group) over the long run is said to enjoy a competitive advantage over its rivals.”
Ghemawat & Rivkin (1999, p. 49), as quoted in Rumelt (2003, p. 2)
Note the qualifiers: within the industry, not against the economy; over the long run, not in one good year; and against rivals.
By potential · Grant
Grant defines it as a firm’s potential to earn a higher rate of profit than its direct competitors. He says potential because a firm may spend its advantage on market share, technology or customer loyalty instead of reporting it: Amazon made a net loss over 1998–2007 despite an obvious advantage in online retailing (Grant, 2019, p. 157).
By value created · Porter, Rothaermel
Porter roots advantage in value a firm creates for buyers that exceeds the cost of creating it, where value is what buyers are willing to pay (Porter, 1985/2004, p. 3). The course textbook compresses it to one line: a firm has a competitive advantage when it creates more economic value than its rivals do (Rothaermel, 2024, p. 186).
Hold a single jacket up against four numbers, from the top down. The distance from the top to the bottom is the value the transaction creates. Every party to it takes a slice.
TOP
Willingness to pay
The most a customer would pay for it. Rothaermel calls it the reservation price, set by the benefits the buyer perceives.
SECOND
Price
What the customer actually pays. It sits between cost and willingness to pay, or the sale does not happen.
THIRD
Cost
What the firm pays its suppliers and employees to make and sell the jacket.
BOTTOM
Supplier opportunity cost
The least those suppliers and employees would accept, given what else they could do with their materials, capacity and time.
Value created = willingness to pay − supplier opportunity cost. It splits three ways: customers keep willingness to pay minus price, the firm keeps price minus cost, and suppliers and employees keep cost minus their opportunity cost. A firm has a competitive advantage when its stick is longer than its rivals’. Rothaermel’s textbook version folds suppliers into cost and writes the same idea as value created = V − C, split into consumer surplus (V − P) and the firm’s profit (P − C) (2023, pp. 186–190).
Activity · slider model · illustrative numbers
The case gives no prices or unit costs for any product, so every number here is illustrative: a jacket from Patagonia against a comparable jacket from an unnamed rival, in dollars. The rival’s stick is fixed. Move Patagonia’s four points, or try one of the moves below, and watch which slices change. Each move starts from the baseline.
| Point or slice | Patagonia | Rival |
|---|
Illustrative dollars per jacket. Not from the case.
What would disappear if the firm ceased to exist? Casadesus-Masanell, following Brandenburger and Nalebuff, suggests reading the newspaper a year after your death to see how the world has managed without you (2022, p. 9). A firm that customers, suppliers and complementors could replace easily has little added value, however large its sales. Brandenburger and Stuart (1996) show that what a firm can capture is limited by that added value (as summarised by Rumelt, 2003, p. 2).
Raise willingness to pay by more than you raise cost, or lower cost by more than you lower willingness to pay. Grant states the first condition plainly: the price premium a customer will pay must exceed the extra cost of being different (2019, p. 166). Session 7 develops both routes as generic strategies. Here you need only see that they are moves on the same stick.
A firm can create a great deal of value and keep little of it. The key to capture is scarcity, and imitation and substitution erode scarcity (Casadesus-Masanell, 2022, p. 5). Price only moves value between customer and firm; it does not make the stick longer. Whether Patagonia can keep its slice once rivals notice is the question in the sustaining-advantage extension and Session 7’s commitments-and-capabilities reading.
External and internal sources · Grant (2019), ch. 7
Grant calls competitive advantage a disequilibrium phenomenon. It is created by change, and once it exists it sets off the competition that will wear it down (2019, p. 157). The change can start outside the firm or inside it. The figure below redraws his model of how advantage emerges.
External sources of change
Which firms win?
Those whose different resources and positions mean the change helps them more, and those faster and more effective at exploiting it.
Outcome
Competitive advantage emerges
until imitation or the next change erodes it
Internal sources of change
Which firms win?
Those capable of strategic innovation, which creates advantage for the innovator while undermining the advantages rivals had built.
Adapted from Grant (2019), Figure 7.1, “The emergence of competitive advantage”, p. 157.
External · the differential effect
External change matters because firms differ. Grant’s example: by cutting subsidies for renewable energy, the US tax bill of December 2017 favoured fossil-fuel generators such as Duke Energy over wind and solar producers. The bigger the change and the more firms differ, the wider the spread of profits. The leading brewers face a stable market with similar resources, and their profits differ little. Toy companies are a mixed group facing unpredictable tastes, and their profits differ widely (2019, pp. 157–158).
External · responsiveness
Every change creates an opportunity that goes to whoever exploits it best. Grant names two capabilities. Anticipation: IBM renewed its advantage by seeing major shifts in computing coming, where Hewlett-Packard was less adept. Agility: Zara’s integrated supply chain takes a garment from design to store in under three weeks, against an industry norm of three to six months (2019, p. 158).
Internal · innovation
Grant stresses strategic innovation over technology alone. He cites an IBM study’s three types of business model innovation: new industry models such as Dell’s direct sales, new revenue models such as Rolls-Royce’s “Power by the Hour” engine contracts, and new enterprise models such as the iPhone’s outsourced manufacture and network of app developers (2019, pp. 158–159).
Activity · classify
External means a change in the environment that Patagonia did not create: demand, input markets, technology, regulation. Internal means something Patagonia created: a product, a process, a policy, a way of working. One item can be argued either way; the feedback says which.
0 of 10 sorted.
Patagonia’s internal moves were mostly responses to external facts: damaged rock, the footprint of conventional cotton, rising textile waste. External change opened the door; an internal choice walked through it. That pairing is what the next activity asks you to trace.
Activity · change and readiness
Five episodes from the case, from the early 1970s to 2011. For each, decide which change created the opportunity, then what made Patagonia (or Chouinard Equipment before it) ready to exploit it. The wrong options are plausible on purpose: several describe advantages a firm might have, but not ones the case gives Patagonia.
Choose an episode
Done0 of 5 episodes worked through.
The case · Patagonia: “Earth Is Now Our Only Shareholder”
The case ends with the 2022 ownership change. Distinguish that allocation of profits from the operating practices that create shared value. The value-wedge analysis starts with nearly fifty years of choices, each of which moved Patagonia’s value stick. Every figure below is from the case. Patagonia is private and did not publish its financial data, so most of them are estimates (Trelstad et al., 2023, p. 2).
$20m → $100m
Estimated annual sales, start and end of the 1980s (p. 3)
30–50%
Average compound annual growth in that period (p. 3)
~$200m
Estimated annual net sales by 2005 (p. 4)
~$1bn
Annual revenue in media estimates, with about $100m net income, 2022 (p. 2)
~10%
Share of US outdoor apparel, the largest of any firm (p. 2)
151.4
B Corp impact score by fall 2020, against 80 needed to certify (p. 6)
Top of the stick · customers
Middle of the stick · Patagonia
Bottom of the stick · employees and suppliers
The third column is analysis, not case fact. Argue with it.
| Choice | Evidence in the case | Where it plausibly lands | What the case does not tell you |
|---|---|---|---|
| Pile fleece (1977) | As warm as wool, lighter and more weather-resistant than the wool sweater it replaced, which got heavy when wet; became iconic (p. 3) | Willingness to pay up: a better answer to the same need | Its price against wool sweaters |
| Organic cotton (from 1994) | 166 products in eighteen months; sportswear 30% of the business; sales recovered within two years (p. 4) | Supplier opportunity cost and cost up; willingness to pay up for buyers who care how cotton is grown | The change in unit cost, and whether prices rose |
| Worn Wear repairs and buyback | Free repairs, 100,000 items a year at Reno; buyback for store credit (p. 4) | Willingness to pay up (longer life, resale value); cost up (a repair operation) | What the programme costs or earns |
| Giving (from 1985) | 10% of profits from 1985; the greater of 1% of sales or 10% of profit from 1986; nearly $200m by 2020 (pp. 3, 6) | A cost on every sale; willingness to pay up only for customers who value it | Whether buyers pay more because of it |
| Family- and outdoor-friendly workplace | Daycare, paid parental leave, surf forecasts, Yosemite training (p. 3) | Employees’ opportunity cost down; perhaps cost down through retention | Pay and staff turnover against rivals |
| Benefit corporation (2011) | First in California; commitments in the charter, changeable only by unanimous shareholder vote (p. 5) | Willingness to pay up if it makes the promises credible; some freedom of action given up | Any measured effect on sales |
Founder’s claim
“I know it sounds crazy, but every time I have made a decision that’s best for the planet, [Patagonia has] made money.” Yvon Chouinard, quoted in Trelstad et al. (2023, p. 3)
On the value stick this is a claim that each move raised willingness to pay, or lowered opportunity cost, by more than it raised cost. It is a founder’s summary, not a test. Ask which decisions it leaves out.
The other half of the bargain
“Because if you’re not successful financially, the experiment’s over.” Kris Tompkins, CEO from 1979, quoted in Trelstad et al. (2023, p. 3)
Creating value was never enough. Patagonia also had to capture a slice large enough to fund the giving, the repairs and the growth caps, which is why price and margin still matter in a purpose-led firm.
There are no prices, unit costs, rival margins or turnover figures in the case. What it offers is a pattern: choices that looked costly, followed by growth from about $20 million in sales to about $1 billion and the largest share of its US market. A pattern is not proof that the wedge widened. Decide what data would convince a sceptic, and which part of the stick each item would measure.
Go deeper
Two earlier decks use Patagonia for the same questions. Both were built for other course numberings, so their session numbers differ from this page’s.
For class
Come with a written answer to the first two. The others are for the room.
01
In 1994 Chouinard put sportswear, 30% of the business, at risk to move to organic cotton. State, on the value stick, the condition under which the switch created advantage. What in the case suggests the condition was met, and what would you need to confirm it?
02
Grant says external change creates advantage only when it hits firms differently. Which of Patagonia’s resources made the shift towards sustainability help it more than it helped a fast-fashion retailer?
03
“Every time I have made a decision that’s best for the planet, [Patagonia has] made money.” Is that evidence of a wider wedge, or of survivorship? What observation would falsify it?
04
Does Patagonia’s workplace lower the opportunity cost of working there, or raise the cost of employing people? If both, who captures the difference: the employee or the firm?
05
Apply the obituary test. If Patagonia disappeared tomorrow, what would its customers, employees and suppliers lose that another brand could not replace?
06
If a large rival matched organic cotton, free repairs and 1% giving next year, how much of Patagonia’s wedge would survive? Write your answer down and keep it for Session 7.
Apply · challenge · revise
A fictional outdoor brand is considering a repair service. Explore two separate ledgers. These classroom assumptions are not Patagonia figures, a forecast or a lifecycle assessment.
The service charges ₹500. Set its service cost and the expected additional contribution from future retained purchases. The latter is incremental contribution after future product costs, not revenue.
Assume each repair adds 2 kg CO₂e. A genuinely displaced new purchase avoids 10 kg CO₂e. Set the percentage of repairs that displaces a purchase; the remaining repairs add service emissions without an avoided purchase.
The model excludes transport variation, rebound consumption, timing and disposal effects. Add those before making a real impact claim.
Bring the evidence into the room
Choose a Patagonia practice from the case. Build three distinct claims: social outcome, business value created and business value captured. Cite evidence for each; mark missing evidence explicitly. Keep the ownership decision separate from operating effects.
Recommend scale, pilot, redesign or stop for the fictional repair service at your selected inputs. Change the weakest assumption until your recommendation changes. That threshold is more useful than a single optimistic outcome.
Before Session 7: bring the advantage mechanism you will use to assess differentiation, cost leadership and blue-ocean choices.
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
The reading and the case are in the course pack. They are copyrighted, so they are not linked or hosted here.
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 reading
Ghemawat, P., & Rivkin, J. W. (1998). Creating competitive advantage (Harvard Business School Note No. 798-062). Harvard Business School Publishing.
The outline’s reading for this session. Read it with the value stick in mind.
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, rev. September 21, 2023). Harvard Business School Publishing.
For this session read pp. 1–6 and Exhibit 2 closely. Use the ownership discussion to distinguish distribution of profits from shared value created through operations.
Further · external and internal sources
Grant, R. M. (2019). Contemporary strategy analysis (10th ed.). Wiley. Chapter 7, “The sources and dimensions of competitive advantage”, pp. 156–161.
Further · course textbook
Rothaermel, F. T. (2024). Strategic management (6th ed.). McGraw Hill. Chapter 5, “Economic value creation”, pp. 186–191.
Further · the classic statement
Porter, M. E. (2004). Competitive advantage: Creating and sustaining superior performance (Free Press export ed.). Free Press. (Original work published 1985). Chapter 1.
Further · added value and capture
Casadesus-Masanell, R. (2022). Competitive and cooperative dynamics (Core Reading No. 8131, rev. June 30, 2022). Harvard Business Publishing.
Rumelt, R. P. (2003). What in the world is competitive advantage? (Policy Working Paper 2003-105). The Anderson School at UCLA.