Can a better outcome for society also strengthen the economics of the firm?
Firms in the same industry earn very different returns. Ghemawat and Rivkin trace the difference to one measure: the wedge a firm drives between what buyers are willing to pay and what its suppliers and staff must be paid to take part, compared with the wedge its rivals manage. This session asks how that wedge is created, which of its sources lie outside the firm and which inside, and when solving a problem for society widens the wedge instead of merely spending it.
Session 5 opened Patagonia up and took stock: its resources and capabilities tested with VRIO, its value chain, and Collis and Montgomery’s tests of what makes a resource valuable. Today puts a number on those things. A culture, a repair service or an organic-cotton supply chain is a source of advantage only if it moves willingness to pay or cost by more than a rival can. Patagonia, which in 2022 handed its ownership to a trust and a nonprofit to fight the environmental crisis, is a hard test of whether doing good and doing well are the same wedge.
The three questions
Each question belongs to one reading. Ghemawat and Rivkin answer the first with the value stick and added value. The textbook’s shared-value chapter (Rothaermel, ch. 5, after Porter and Kramer), read with Grant’s model of change, answers the second. Prahalad and Hamel answer the third. The Patagonia case is where all three get argued out loud.
Your goals for Session 6
By the end of the session, students should be able to:
The three questions guide the analysis; the activities help you practise each outcome. Browser checks provide practice feedback; formal assessment follows the course outline and instructor guidance.
Recall → connect → carry forward · Sessions 1–5
We began with a position, gave it purpose and a measurable ambition, tested the industry and wider game, and examined the resources needed to act. The remaining test is economic: which linked choices create more value, who captures it, and what evidence would support a social benefit? The fictional Indian Nila Foods story now adds a reusable-container proposal to its focused meal service.
One continuing classroom story. Nila Foods is a fictional Indian meal-service for working adults. Follow its choices from Session 1; later expansion ideas are proposals to test.
Operational effectiveness improves similar activities; strategy requires positioning, trade-offs and fit. State objective, scope and advantage, then compare intended plans with emergent action using evidence.
Nila Foods: Nila proposes preordered weekday meals on clustered routes, declines instant citywide delivery and studies actual customer behaviour.
Purpose and values guide what endures, while a quantified ambition opens a same-date gap from the baseline; closing that gap requires external and internal evidence.
Nila Foods: Nila separated easing meal burdens and honest food-safety disclosure from its growth target, then compared that target with its projected baseline.
Industry boundaries, PESTEL and five forces connect external change to price, cost and investment; complements and possible responses then raise questions about the wider game.
Nila Foods: Nila traced ingredient-price pressure, supplier bargaining, lunch substitutes and easy entry before asking whether a neighbouring seller could also help it.
Value nets and PARTS show how co-opetition changes added value, while uncertainty shapes commitments; credible moves therefore require examining internal strengths.
Nila Foods: Nila considered sharing a collection point with a rival and testing the rules through a limited pilot while demand remained uncertain.
Resources and capabilities support advantage when they improve buyer benefits or relative costs and pass tests against rivals and substitutes; value-chain analysis then checks their economic contribution.
Nila Foods: Nila examined kitchen routines, route know-how and trust, asking which linked activities rivals could imitate and whether it could retain their benefits.
Nila’s routines and trust are candidate sources of advantage, not proof of it. A reusable-container proposal must show how willingness to pay, costs and supplier or staff opportunity costs change relative to an alternative; a price change alone can redistribute value. Session 6 uses the value stick and separate business and social ledgers to ask whether reducing packaging waste could also strengthen Nila’s economics.
Why would a reusable-container scheme that fits Nila’s story still need a value-creation and shared-value test?
Fit with the activity system (Session 1), purpose and target gap (Session 2), industry conditions (Session 3), partner incentives and uncertainty (Session 4), and internal capabilities (Session 5) makes the proposal coherent. It does not prove a larger value wedge or less waste. Compare willingness to pay, costs and opportunity costs with a rival or alternative, then test the business result and the social result separately. Washing, returns and actual reuse could change either conclusion.
Question 01 · Ghemawat & Rivkin (1998)
Ghemawat and Rivkin open with two firms. Over 1984–2002 the drug maker Schering-Plough produced more than $10 billion of economic profit, its accounting profit beyond the cost of its equity; U.S. Steel produced an economic loss of nearly $500 million (1998, p. 1). Part of the gap is industry: patents, differentiated products and growing demand mute rivalry in drugs, while excess capacity and powerful unions squeeze steel. But Schering-Plough was not a typical drug maker, nor U.S. Steel a typical steel firm. Research they cite finds that industry accounts for 10–20% of the variation in business profitability and stable differences within industries for 30–45% (p. 1).
Sessions 3 and 4 explained the first slice. This session explains the second. Ghemawat and Rivkin give it a precise form: a firm has a competitive advantage when it drives a wider wedge than its rivals between the willingness to pay it generates among buyers and its costs. They add two themes. To create an advantage, a firm must do something unique and valuable, so that if it disappeared someone in its network of suppliers, customers and complementors would miss it and nobody could replace it perfectly. And the advantage usually comes from the full range of its activities acting in harmony, not from one of them (p. 3).
“A firm is said to have a competitive advantage over its rivals if it has driven a wide wedge between the willingness to pay it generates among buyers and the costs it incurs—indeed, a wider wedge than its competitors have achieved.”
The note keeps creating advantage apart from sustaining it, while admitting the two are married: Intuit’s telephone support for Quicken both created willingness to pay and was hard for Microsoft to match (pp. 3–4). Sustaining is Session 7’s reading.
Ghemawat and Rivkin’s worked example is Harnischfeger’s portal crane, which lifted whole logs off railcars in a woodyard. Each crane replaced a forklift fleet costing about $1.0 million and saved $6.5 million of operating costs over its life, and cost Harnischfeger $2.5 million to build and install (pp. 4–5). Read the stick from the top down.
TOP · $7.5M
Willingness to pay
The most a buyer would part with. International Paper would pay up to $1.0M + $6.5M; beyond that the forklifts are cheaper (p. 5).
SECOND · ?
Price
Bargained anywhere between cost and willingness to pay. The theory says nothing about where; the tougher bargainer pulls it their way (p. 5).
THIRD · $2.5M
Cost
What Harnischfeger actually paid its suppliers and staff to deliver one crane.
BOTTOM · $2.0M
Supplier opportunity cost
The least suppliers would accept, set by their next-best use of the resources. The authors’ own guess for the example (p. 5).
Value created = willingness to pay − supplier opportunity cost: $7.5M − $2.0M = $5.5M per crane. Suppliers keep cost minus opportunity cost ($0.5M), Harnischfeger keeps price minus cost, and International Paper keeps willingness to pay minus price (p. 5). The textbook writes the same idea as V − C, folding suppliers into cost: consumer surplus (V − P) plus the firm’s profit (P − C) (Rothaermel, 2024, pp. 186–190). In practice, managers analyse actual costs because the data exist, assuming the two track each other (Ghemawat & Rivkin, p. 7).
Activity · step through the reading’s example
By the late 1980s Harnischfeger was making little profit on portal cranes despite the huge gap between benefit and cost (p. 5). Step through what changed. Before each step, write down Harnischfeger’s added value: the value created with it in the game minus the value that could be created without it (p. 6).
| Crane | Willingness to pay | Supplier opp. cost | Value created |
|---|
All figures are Ghemawat and Rivkin’s (pp. 4–7), in $ millions per crane; the supplier opportunity costs are their own illustrative guesses.
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 stick it moves, against which rival, and what it cost to move it. And a high price is not a measure of willingness to pay, nor a fat margin proof that customers or suppliers received nothing.
Raise buyers’ willingness to pay without a commensurate rise in supplier opportunity cost, or cut supplier opportunity cost without giving up commensurate willingness to pay (Ghemawat & Rivkin, p. 7). Toyota costs more to build than Hyundai, and earns more because the extra willingness to pay exceeds the extra cost (pp. 7–8). The first route they call differentiation, the second low cost; a few firms, such as Japanese makers cutting defect rates, manage both at once (p. 8). Session 7 turns both into generic strategies.
A differentiated firm has raised the price buyers are willing to pay for its output. Hyundai is different from Toyota but not differentiated with respect to it, and charging a lower price is not differentiation either: a firm’s price does not usually change what customers are intrinsically willing to pay (p. 8). Keep this in mind when someone calls Patagonia “differentiated by purpose”: the claim needs a willingness-to-pay number behind it.
Price only moves value between buyer and firm; it does not lengthen the stick. What a firm can claim is capped by its added value, and added value comes from scarcity: being unique in some valuable way and not readily replaced (pp. 6–7). The textbook puts it as two tasks, creating economic value and capturing as much of it as possible; Amazon, it says, creates a great deal for customers and has chosen to capture little (Rothaermel, 2024, p. 189).
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.
Rumelt surveyed the strategy literature and found one common theme, value creation, with little agreement on value to whom and when (2003, p. 1). Three definitions recur: by the profits advantage produces, by the profits it could produce, and by the value it creates. They are compatible, and the third is the one you can work with, because it says where the profits come from.
By outcome
“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; against rivals. In the 1998 note’s steel chart, Nucor is one of only five producers that earned more than their cost of equity over 1984–2002; U.S. Steel did not (Figure 2b).
By potential · Grant
Grant says potential because a firm may spend its advantage on share, technology or 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 created for buyers beyond the cost of creating it (1985/2004, p. 3). The textbook: a firm has a competitive advantage when it creates more economic value than rivals (Rothaermel, 2024, p. 186). Porter’s own slide puts the order plainly: shareholder value is the result of creating real economic value (Porter, 2017, slide 4).
Three yardsticks, three blind spots. Accounting ratios are backward-looking and miss intangibles; in 1975 more than 80% of the average S&P 500 firm’s value was book value, by 2020 about 10% (Rothaermel, 2024, pp. 182–183). Total return to shareholders looks forward but is noisy, moved by macroeconomics and mood (pp. 184–186). Economic value is the cleanest idea and the hardest to measure: willingness to pay must be inferred, and it shifts with income, taste and time (pp. 191–192). For Patagonia, a private firm that does not share its financial data (case, p. 2), only the third is even partly available.
Question 02 · Grant (2019) and Porter & Kramer (2011)
Porter’s own summary splits a business unit’s performance in two: the structure of its industry and its positioning within that industry (Porter, 2017, slide 6). Grant adds time. Competitive advantage, he says, is a disequilibrium phenomenon: it is created by change, and once it exists it sets off the competition that wears it down (2019, p. 157). An external source is a change the firm did not make that shifts the wedge differently for different firms. The figure redraws Grant’s model.
External sources of change
Which firms win?
Those whose different resources and positions mean the change helps them more, and those faster and better 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 rivals’ advantages. Question 3.
Adapted from Grant (2019), Figure 7.1, “The emergence of competitive advantage”, p. 157. Regulation is our addition, supported by Grant’s tax-bill example.
The differential effect
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, with similar resources in a stable market, earn much the same; toy companies, a mixed group facing fickle tastes, do not (Grant, 2019, pp. 157–158).
Responsiveness
Every change goes to whoever exploits it best. IBM renewed its advantage by seeing major shifts in computing coming, where Hewlett-Packard was less adept; 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 (Grant, 2019, p. 158). The course’s teaching plan frames the same capacity as sensing an opportunity, seizing it and reconfiguring the firm’s resources around it.
Industry still matters · Ghemawat & Rivkin
Firms that build advantage usually design strategies that neutralise their industry’s unattractive features and exploit its attractive ones. Industry conditions also decide whether advantage is possible at all: computer leasing “strait-jackets” firms, prepackaged software lets the best pull far ahead. And a leader such as Alcoa must weigh what new capacity does to the whole industry, not just to its own wedge (1998, p. 4).
Where to look for outside opportunities · Ghemawat & Rivkin (1998), p. 17
Draw your customers’ and suppliers’ value chains. Apparel makers that shipped clothes on the right hangers and in the right containers cut the time and labour department stores spent getting them from dock to floor.
Watch the bleeding edge. Exacting customers foreshadow the market; Yahoo! released test versions to sophisticated users to sense what the wider market would want.
Look for the under- and over-served. Circus Circus saw that Las Vegas offered little to families; Southwest saw travellers paying for frills they did not value.
Porter and Kramer argue that managers have looked at the industry and missed the wider environment: society’s unmet needs, the harms that raise costs inside the value chain, and the weaknesses of the places where firms operate (2011, pp. 6–7). Those are external conditions. Shared value is the claim that a firm can turn them into advantage in three ways, which reinforce one another (pp. 7, 16): reconceiving products and markets, redefining productivity in the value chain, and enabling local cluster development.
Activity · sort
Ten examples from Porter and Kramer (2011) and the textbook (Rothaermel, 2024). One sits on two levers at once; the feedback says which.
Patagonia’s external sources, as the course deck framed them
Two cautions
A trend helps everyone it touches. Rising concern for the environment is an advantage for Patagonia only if it raises willingness to pay for Patagonia more than for rivals, which takes something rivals lack. That something is an internal source: question 3.
A “moral moat” is a hypothesis. The course’s teaching plan suggests that by shifting buyers towards sustainability Patagonia raised ethical barriers that rivals competing on price alone struggle to cross. That reads Session 3’s entry barriers through shared value; test it before you use it. Good regulation can help: Porter and Kramer argue for rules that set measurable goals and leave the method to firms (2011, p. 14).
Change and readiness · five episodes from the case
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. Grant’s model says you need both: a change outside the firm, and something inside it that let this firm, not its rivals, take the gain. The wrong options are plausible on purpose: several describe advantages a firm might have, but not ones the case gives Patagonia.
How to use it
Answer both parts of an episode before you read the outcome. Each episode cites the case page; the wrong options’ feedback says where the case is silent.
Activity · choose an episode
Done0 of 5 episodes worked through.
Patagonia’s internal moves were mostly responses to external facts: damaged rock, the footprint of conventional cotton, rising textile waste, a new legal form. External change opened the door; an internal choice walked through it. That pairing is what question 3 takes apart.
Question 03 · Prahalad & Hamel (1990)
An internal source is something the firm made: a product, a process, a policy, a way of working, a competence. Prahalad and Hamel put the time scales apart. In the short run, competitiveness comes from the price and performance of today’s products; in the long run, from building, faster and more cheaply than rivals, the core competencies that spawn products nobody has yet imagined (1990, p. 81).
Grant’s internal source is innovation, and he stresses strategic innovation over technology alone: 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). Ghemawat and Rivkin add the warning that matters most for Patagonia: advantage usually comes from the full range of activities acting in harmony, so no single practice explains it (1998, p. 3).
The course deck’s three internal sources
Session 5 tested these with VRIO. Today’s question is narrower: which of them moves the stick, and which pass Prahalad and Hamel’s three tests?
| Candidate competence | Evidence in the case | Our reading of the three tests |
|---|---|---|
| Designing gear that works where it is used | Chocks that left rock intact; a fleece as warm as wool, lighter and more weather-resistant (pp. 2–3); about 1,400 products from fleece to wetsuits and packs (p. 2) | Access: hardware to apparel to wetsuits. Benefit: high. Imitation: rivals can hire designers; the bundle with users is harder. |
| Repair and reuse at scale | Worn Wear: free repairs, buyback for credit, resale or recycling; 100,000 items a year at Reno (p. 4) | Benefit: longer life, resale value. Access: any durable product. Imitation: the case does not say what it costs or whether rivals try. |
| Sensing environmental harm in its own products | The 1994 independent assessment that found cotton’s footprint; all 166 cotton products switched within 18 months (pp. 3–4) | Arguably the deepest: a routine for finding and acting on harm, reused from chocks to cotton to repair. Hard to show from outside. |
| A people system | Onsite daycare, paid parental leave, surf forecasts, Yosemite training (p. 3); a supportive workplace written into the charter in 2011 (p. 5) | Works at the bottom of the stick, on what it takes for people to join and stay. Not a competence by itself; it carries one. |
The third column is analysis, not case fact. Argue with it. Prahalad and Hamel expect a firm to lead in five or six competencies at most (p. 83); a list of four is already long.
Activity · classify
Prahalad and Hamel give three tests (p. 83). A core competence (1) gives potential access to a wide variety of markets, (2) makes a significant contribution to the benefits customers perceive in the end product, and (3) is difficult for competitors to imitate, because it is a complex harmonisation of technologies and production skills. Test 2 is willingness to pay by another name.
The course’s teaching plan reads Patagonia as a story of continuous innovation: chocks replacing pitons, fleece replacing wool, repair extending product life, giving moving from a share of profit to a share of sales (case, pp. 2–4). Each step was small; together they are a pattern rivals would have to copy in full. That is Ghemawat and Rivkin’s rugged landscape again: one firm’s peak is a bundle of choices, not a feature (1998, pp. 18–19).
This page defines external as a change in the environment that the firm did not create, as Grant does. The course’s teaching plan once classed brand reputation and partnerships such as 1% for the Planet as external sources. They face outward, but Patagonia built them, so here they count as internal. The sort below includes two items that can be argued either way.
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, an alliance it founded. Two items can be argued either way; the feedback says which.
0 of 11 sorted.
The case · Patagonia: “Earth Is Now Our Only Shareholder” (2023)
The case ends with the 2022 ownership change. Keep two things apart: the operating practices that may have created value over nearly fifty years, and the 2022 decision about who receives the value Patagonia captures. 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).
Note on the case. “Patagonia: ‘Earth Is Now Our Only Shareholder’” (Trelstad, Hsieh, Norris & Pinckney, 2023) is a Harvard Business School case and is not reproduced here: obtain it through the course pack. The prompts and analysis below are original to this session; full references are listed at the end.
Draw Patagonia’s stick against a named rival. Which of the four points does the case let you observe, which can you estimate, and which is missing? State the condition under which the 1994 cotton switch widened the wedge, in Ghemawat and Rivkin’s terms, and what evidence would confirm it.
Name the external changes in the case: fast fashion, rising emissions, the 2011 benefit-corporation law. Which of them helped Patagonia more than a fast-fashion retailer, and why? Which of Porter and Kramer’s three levers did Patagonia pull, and which did it leave alone?
Pick the one competence you would defend as core and run it through Prahalad and Hamel’s three tests. Then say what Patagonia’s “core product” would be: the thing that embodies the competence and could, in principle, be sold to others.
$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 · staff 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) | Warmer for its weight 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 buyers 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) | Staff 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 |
| Ownership to trust and nonprofit (2022) | Votes to the Purpose Trust, 98% of the value and dividends to the Holdfast Collective (pp. 11–12) | No new value by itself: it changes who receives the firm’s slice. Indirectly, perhaps credibility | Any effect on buyers, staff or cost after 2022 |
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 stick this claims that each move raised willingness to pay, or lowered opportunity cost, by more than it raised cost: shared value in Porter and Kramer’s sense. 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 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.
On 14 September 2022 Chouinard told an all-staff meeting in Ventura that he was no longer Patagonia’s owner (case, p. 1). In Ghemawat and Rivkin’s terms the 2022 structure changes who receives the firm’s slice of the stick; in Porter and Kramer’s terms that is distribution, not creation. Follow the votes and the money.
Activity · follow the flows
Perpetual purpose trust
Patagonia Purpose Trust
Owns 100% of the voting stock, equal to 2% of all shares. Elects the board, approves material transactions, oversees the company’s philosophy (p. 11).
Receives 2% of dividends, usable only to protect the purpose; no personal use (p. 12).
votes: 100% of voting stock
board elected by the trust
money: 2% of dividends
For-profit company
Patagonia
Board and management stay in their roles; the business runs as before (p. 11).
Leadership recommends a dividend from profit left after reinvesting; the board approves it. Patagonia estimated $100 million or more a year (pp. 11–12).
money: 98% of dividends
votes: none
501(c)(4) nonprofit
Holdfast Collective
Owns all non-voting stock, 98% of shares and most of the financial value; spends its dividends on the root causes of climate change (pp. 11–12).
No voting control (p. 12). Its board includes the four Chouinards (p. 11).
Drawn from the case text, pp. 10–12; the case’s own diagram (Exhibit 7) is not reproduced.
2% / 98%
Voting stock to the trust, non-voting stock to Holdfast (p. 11)
$17.5M
One-time gift tax on the voting shares, paid by the family (p. 12)
$100M+
Patagonia’s own estimate of annual dividends: an estimate, not a result (p. 12)
$2–8B
Estimated value of a company that did not share its financial data (p. 2)
“While this doesn’t release a large chunk of money up front, just the free cash flow from the dividends over time, it is a better solution than releasing a lot more through a sale of stock or assets and, as a result, selling your soul.” Charles Conn, board chair (case, p. 12)
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 point on the stick each item would measure.
Did Patagonia’s purpose create its wedge, or did its wedge pay for its purpose? On the first reading, each environmental choice raised willingness to pay or lowered what it took to attract staff by more than it cost: shared value, as Chouinard claims. On the second, a firm with a strong product and a loyal niche earned a margin wide enough to afford giving, repairs and a growth cap: responsibility funded by advantage. Both readings fit the case’s numbers, and they imply opposite things for a rival that copies the purpose without the product.
Take a side before class, and name the evidence that would change your mind.
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 Ghemawat and Rivkin’s test of added value: if Patagonia disappeared tomorrow, what would its customers, staff and suppliers lose that no other brand could replace? And if a large rival matched organic cotton, free repairs and 1% giving next year, how much of the wedge would survive? Keep that answer for Session 7.
06
Is “Earth is now our only shareholder” shared value, or redistribution of value already created? Use Porter and Kramer’s fair-trade contrast to argue it either way.
07
The Tompkinses sold their companies and put the proceeds into land conservation; Chouinard kept the company and funds the cause from its dividends. “Doug and I argued about this” (case, p. 7). Which path creates more value, and for whom?
08
The Holdfast Collective may fund political causes (case, p. 11). Critics of ESG activism say such questions belong to the democratic process (Rothaermel, 2024, p. 179). Does political spending from Patagonia’s profits strengthen or weaken its shared-value claim?
The exhibit workshop · 20 minutes
DoneIt is late 2021. You sit on the Project Chacabuco team. The family wants three things from whoever holds the 98% of Patagonia’s value that carries no vote: no forced sale of Patagonia shares to meet a tax bill or a payout rule, the value kept together rather than broken up, and the freedom to keep funding environmental advocacy, as Patagonia had done since 2016–17 (case, pp. 5, 7, 11). Decide which vehicle should hold it.
Exhibit A is the case’s Exhibit 8 and Exhibit C its Exhibit 1, redrawn. Exhibit B combines Exhibit 8’s payout rule with the case’s own estimates of value and dividends (pp. 2, 12). Work each task before you reveal it.
| Vehicle | Donations tax-deductible | Mandatory payout | May lobby or fund politics | Excess-holding limits |
|---|---|---|---|---|
| 501(c)(3) | Yes | No | No | No |
| 501(c)(4) | No | No | Yes | No |
| Donor-advised fund | Yes, up to 50% of income | No | No | Yes |
| Charitable foundation | Yes, up to 30% of income | Yes, 5% a year | Yes | Yes |
Exhibit 8’s notes: a private foundation or donor-advised fund may hold up to 20% of a company’s voting stock (third-party controllers up to 35%); the limits apply to holdings above 2% of voting stock or 2% of stock value. Foundations must distribute at least 5% of their non-charitable assets a year.
Task 1. Strike out each vehicle that fails one of the family’s three conditions. Which survives, and what does choosing it cost?
| If a foundation held Patagonia, valued at | Required payout at 5% | Patagonia’s dividend estimate |
|---|---|---|
| $2 billion (low end, p. 2) | ? | $100 million or more |
| $5 billion (midpoint, ours) | ? | $100 million or more |
| $8 billion (high end, p. 2) | ? | $100 million or more |
Task 2. Fill in the payout. Where would it exceed the expected dividend, and how would the foundation close the gap?
| Model | Examples | What defines it |
|---|---|---|
| Trust-owned | Hershey | A trust owns part of a listed company’s stock and keeps voting control |
| US foundation-owned | Newman’s Own | A foundation owns 100% and gives all profits to children’s charities; 5% payout and board independence required |
| European foundation-owned | IKEA, Rolex, Heineken, Carlsberg | Fewer restrictions than in the US |
| Co-operative · ESOP | REI · Publix, King Arthur Flour | Owned by members · by employees through a plan |
Task 3. Which existing model is closest to what Patagonia built, and what did Patagonia add that none of them has?
| Path | Value now | Mission 50+ years | Family burden lifted | Tax bill limited | Family involved | A model others can use |
|---|---|---|---|---|---|---|
| Pass to the children | No | Partly | No | No | Yes | No |
| Go public | Yes | No | Partly | No | Partly | Partly |
| Sell to private equity | Yes | No | Yes | No | No | No |
| Sell to employees (ESOP) | No | Partly | Yes | Yes | Partly | No |
| Charitable foundation | Partly | No | Yes | Yes | Not stated | No |
| Copy Newman’s Own | Partly | Partly | Yes | Not stated | No | No |
| Purpose trust + 501(c)(4) | Partly | Yes | Yes | Yes | Yes | Yes |
Goals 1–3 and the new model are the team’s (case, pp. 7, 11); tax and family involvement are the constraints the case describes (p. 7). The scores are our reading of pp. 8–12. No path meets every goal; the chosen one gives up money now.
The exhibits settle the vehicle: only a 501(c)(4) can hold the value without a payout rule, a holding limit or a ban on advocacy. They do not settle whether the structure creates value. On Ghemawat and Rivkin’s stick it changes who receives the firm’s slice; on Porter and Kramer’s test that is distribution, not shared value. It creates value only if it changes the stick itself: if buyers pay more because the promises are now credible, or staff accept a job on terms they would refuse elsewhere.
Name the slice
Which party’s share of the stick does the structure move?
Name who pays
The family gave up a sale worth billions now (p. 8). Who else bears a cost?
Give the number
What figure, after 2022, would show the stick got longer?
In the room
Two decisions with the outcome revealed, and a branching simulation of the ownership debate from the course’s Patagonia deck. The workshops use case and textbook facts where they are cited; every outcome and every step of the simulation is a stylised scenario written for this session, not a report of what happened, except where a step says what Patagonia actually did.
In the room
Choose one Patagonia practice from the case: organic cotton, Worn Wear, 1% of sales, the daycare and leave policies, or the benefit-corporation charter. Build three separate claims about it: the social or environmental outcome, the value created (which point on the stick it moves, and which way) and the value captured (by customers, Patagonia, or staff and suppliers). Cite the case page for each, and mark plainly what the case does not show. Keep the 2022 ownership decision out of it: that is a claim about distribution, not operations.
What to hand in
Three lines, one per claim, each with a page reference, and the one missing number that would prove or kill the shared-value claim.
Late 2021. Roles: Charles Conn (chairs; summarises the options and their costs, pp. 8–10), Yvon Chouinard (the family’s goals: money for the climate now, the mission for fifty years, no forced sale, staying involved, p. 7), Kris Tompkins (argues to sell and give the proceeds, as she and Doug did, pp. 6–7) and Ryan Gellert (must run a business profitable enough to fund the mission and asks how dividends will be balanced against reinvestment and pay, p. 13). Recommend one path. Then change the weakest assumption until your recommendation changes.
What to hand in
The path, the goal it sacrifices, and the switching point: which input would change the decision, and what it would cost to learn it.
The last 12 minutes of every class are a graded quiz, taken individually. Today’s covers the three questions and the case: Ghemawat and Rivkin’s value stick, added value and activity analysis; external sources of advantage and Porter and Kramer’s three ways to create shared value; Prahalad and Hamel’s core competencies and their three tests; and their application to Patagonia, including the 2022 structure. To prepare, make sure you can compute value created and added value from four numbers, sort a source as external or internal with a reason, and say whether a Patagonia practice moves the stick or only who gets what. The final quiz and concept check below are practice; the graded questions are not on this page.
Before Session 7: bring the advantage mechanism you will use to judge differentiation, cost leadership and blue-ocean choices, stated as a move on the stick.
Knowledge check
Test your grip on the session’s core ideas, including the workshops and simulations above. Each answer explains itself.
Concept check
Answer first; the reasoning appears immediately. A wrong answer here is cheaper than a wrong answer in the exam.
Preparation
Read Ghemawat and Rivkin first, then Prahalad and Hamel, then the textbook chapter, and reread the case last: it is the material you argue with, and the readings are the tools. Readings and cases are obtained through the course pack; none is reproduced or linked here.
Trelstad, B., Hsieh, N.-H., Norris, M., & Pinckney, S. (2023). Patagonia: “Earth is now our only shareholder” (HBS Case No. 9-323-057, rev. September 21, 2023). Harvard Business School.
Carried over from Session 5 and used again in Session 7. Read pp. 1–6 and Exhibit 2 for the value stick, and pp. 6–12 with Exhibits 1 and 8 for the exhibit workshop and the simulation.
Ghemawat, P., & Rivkin, J. W. (1998). Creating competitive advantage (HBS Background Note No. 9-798-062, rev. February 25, 2006). Harvard Business School.
Willingness to pay, supplier opportunity cost and added value; activity analysis of cost and willingness to pay; the whole versus the parts. Page numbers on this page follow the note’s own pagination.
Prahalad, C. K., & Hamel, G. (1990, May–June). The core competence of the corporation. Harvard Business Review, 79–90. (Reprint 90311)
Bring a capability hypothesis for Patagonia, the customer benefit it produces, a plausible second application, and one reason the transfer could fail. Shared with Session 5, which used it for internal analysis.
Rothaermel, F. T. (2024). Strategic management (6th ed., ch. 5, “Shared value and competitive advantage”, pp. 168–205). McGraw Hill.
From CSR to creating shared value; accounting, shareholder and economic value as measures of advantage; the triple bottom line; a Patagonia chapter case. Where its Patagonia facts differ from the HBS case, use the case.
Porter, M. E., & Kramer, M. R. (2011, January–February). Creating shared value. Harvard Business Review. (Reprint R1101C)
The source of the textbook’s framework: the three ways to create shared value, and why it is not redistribution. Page numbers on this page follow the reprint’s own pagination.
Grant, R. M. (2019). Contemporary strategy analysis (10th ed., ch. 7, pp. 156–161). Wiley.
How advantage emerges from external and internal change, used in questions 2 and 3.
Rumelt, R. P. (2003). What in the world is competitive advantage? (Policy Working Paper 2003-105). The Anderson School at UCLA.
Five pages and a short test. Take the test before you read the definitions.
Porter, M. E. (2017, May 24). Strategy: Creating and sustaining competitive advantage [Presentation slides]. Mumbai.
Industry structure and positioning, the value chain, and zero-sum against positive-sum competition, with IKEA and PACCAR as examples. Porter (1985/2004), Competitive advantage, ch. 1, is the classic statement.
Their content is merged into this page. Several were built for other course numberings, so the session numbers in their own titles differ from this page’s.
APA 7th edition. Cited in the text by author and date.
Patagonia does not publish its accounts. Its revenue (about $1 billion) and net income (about $100 million) are media estimates reported in the case (p. 2); the $2–8 billion value is an estimated range; the $100 million-plus dividend was Patagonia’s own estimate at the time of the transfer (p. 12). The value-stick and repair-lab numbers are illustrative. Nothing here reports Patagonia’s performance after 2022, because the course material holds no source for it.