External Analysis: Written By: Bre Osborn. Section 03

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1 External Analysis: Written By: Bre Osborn Section February,

2 Executive Summary: The purpose of this report is to perform an external analysis of an industries environment in order to evaluate the competitive advantage of a single firm within that industry. Porter s Five Competitive Forces will be examined in order to provide thorough recommendations into how the firm, Patagonia, can maintain a sustainable competitive advantage in the high quality outdoor apparel industry. Threat of New Entrants The threat of new entrants in the high quality outdoor apparel industry is relatively low. Established brands in this industry have strong brand recognition and loyalty along with high profit margins creating an economy of scales advantage over companies attempting to move into this market. (See Appendix 2 for more info) Threat of Substitutes The threat of substitutes is very high in this industry. Patagonia caters to a very select target market that focuses on quality over price. However, there is a large consumer population that is willing to sacrifice quality for value and will therefore look to brands that offer a lower priced, lower quality product. These brands are more likely to attract the millennials generation by providing more fashionable options that are equally as functional as what Patagonia can provide. (See Appendix 3 for more info) Intensity of Rivals Rivalry is very strong in the outdoor apparel industry. Because innovation is a core value to the target market, companies are forced to constantly be introducing new technology, added comfort or increased durability to their products in order to stay relevant and competitive in the market. In this market, if you are first, you re last. Brand loyalty does exist in this market and can greatly affect consumer buying decisions but often times consumers are looking to see which brand is coming out with the best products for the best prices. (See Appendix 4 for more info) Bargaining Power of Buyers Buyers in this market have an incredible amount of power over companies. Products in this industry do not vary greatly depending on brand and there are many companies to choose from as a consumer therefore, brands and continuously finding ways to attract and retain customers with marketing tactics and price promotions. (See Appendix 5 for more info) Bargaining Power of Suppliers Suppliers in this industry have a lot of power over the price of their inputs. However, the firms in this industry have control over supplier s methods when it comes to their sustainability and ethical practices. (See Appendix 6 for more info) 2

3 Recommendations In order for Patagonia to maintain its competitive advantage, it should abide by the following recommendations: (See Appedix 7 for more info) 1. Maintain their corporate social responsibility practices and mission to protect the planet. 2. Create a product line that appeals to new trends in fashionable outdoor apparel 3

4 Appendix 1 Industry Overview The outdoor apparel industry consists of retailers that sell various clothing items targeted towards an active, outdoorsy consumer. For the purposes of this external analysis I will be focusing on the high end sector of this industry, including large brands specializing in high quality, technical clothing for an array of outdoor activities such as, skiing, biking, hiking and running. There are over 3,150 brands in this industry that cumulatively generate over $161 million in profits annually (Alvarez). The outdoor apparel industry is a rapidly growing trend in Americans lives. From 2010 to 2015 there was a 1.5% annual growth rate with an expected 2% growth rate from 2015 to 2020 (Alvarez). In 2015 the industry generated $4.1 billion in revenues with REI leading in market share at 47.1%. As Americans continue to embrace an active outdoor lifestyle, we see companies in this industry face increased competition. Many of the front runners of this industry such as Patagonia, The NorthFace and Marmot have been successful mostly due to their strong brand recognition and loyalty. The outdoor apparel industry is strife with savvy, yet loyal, consumers that can make it difficult for new brands to emerge and compete with veteran brands. However, as fashion trends have started to include outdoor clothing as an everyday wearable, we have begun to see brands from outside of the industry expanding their product ranges to include high quality outdoor apparel. This will, ultimately, give the consumer more buying power and increase competition among the brands to gain and retain their customers. 4

5 Appendix 2 - Threat of New Entrants Topic/Question Yes (Low Threat) No (High Threat) Is there a cost advantage to existing companies? Would economies of scale effect new entrants? Do existing companies have strong customer loyalty? Is there a large capital requirement to entering this industry? Does the customer incur a large switching cost in this industry? Are there any government policies or regulations in this industry? Would new entrants find it difficult to navigate/gain access to the distribution channels? Although many smaller companies try to gain reputation in the high end outdoor apparel industry, they do not pose a threat to Patagonia. Patagonia s outstanding brand recognition and customer loyalty would be nearly impossible, or at the very least very timely, to overcome. At the level Patagonia is at in its industry there is very little threat from new entrants. Although Patagonia does not have the largest profits in the outdoor apparel industry, their $600 million revenue in 2013 would still be very hard to compete with for a new entrant (Baer). Especially, if the new brand wanted to follow in Patagonia s footsteps in regards to their charitable giving to environmental causes. Since 1985, Patagonia has donated 1% of all of their profits to community-based groups working to create positive change for the planet in their own backyards totaling over $70 million at the end of 2015 (Environmental Grants and Support). 5

6 Appendix 3 - Threat of Substitutes Question Yes (Low Threat) No (High Threat) Available substitutes have limitations? Does the customer incur a large switching cost in this industry? There really aren t any substitutes in the industry? If we define the substitutes to the high quality outdoor apparel industry as low quality outdoor apparel then we see there is a significant threat of substitution. Many price savvy consumers will choose a substitute product over Patagonia simply due to price differentials. However, consumers that are more concerned with quality and are willing to pay a little extra for it may be more inclined to purchase from Patagonia. (However, they may also choose to buy from a similarly priced, rival brand.) Because Patagonia prides themselves on high quality products, it is not very likely they will adjust their product line to try to attract price savvy consumers and therefore, will most likely miss out on this population of consumers. Patagonia s average customer is 38 years old with a household income of $160,000, these are people who can afford to splurge a little on a high quality garment without breaking the bank (Roberts). Trying to change their target market to include their substitutes target market of a lower tax bracket could damage their brand. Therefore, even though the threat of substitute brands is high and Patagonia is bound to lose some of their business to them, I don t think they should strive to convert these consumers into customers because they are of a completely different target market. However, one target market Patagonia may need to consider are millennials and people who, in general, want quality products but may not be looking for all of the technical features Patagonia includes in their products. More and more so we are seeing a trend towards outdoor gear that can withstand any outdoor activity but is also stylish and can be worn while doing errands around town. Substitute brands such as Lululemon, Nike and Adidas are progressively moving towards serving this market and could prove to be a significant threat to Patagonia (Lieber). 6

7 Appendix 4 - Intensity of Rivals Question Yes (Low Threat) No (High Threat) Does the customer incur a large switching cost in this industry? Are there few similar brands in this industry? Is the industry growing rapidly? The high quality outdoor apparel industry is rapidly growing in both size and innovation. Consumers of this industry are constantly looking for the next best product to meet their comfort, style and technical needs. Therefore, the top companies in this industry, including Patagonia, are constantly competing to have the most high tech, innovative gear to offer their customers. In most cases, the competition will not be far behind in new technological advancements towards comfort, quality or durability and each brand must stay alert and active in the race to attract both new and existing customers. Although there is an intense rivalry between brands in the high end outdoor apparel industry, brand loyalty still exists amongst the target audience. Therefore, as long as Patagonia can maintain their current loyal consumers, the threat from rivals will remain manageable. Although, I would not argue Patagonia faces strong competition from brands such as The North Face, Columbia, Marmot and Arcteryx, I would argue that Patagonia strives for more than profits in their measures of success. Patagonia is a company dedicated to protecting the planet and inspiring consumers to make earth-friendly purchasing decisions while, of course, being profitable. This was made very apparent in their 2011 Black Friday campaign that included Don t Buy This Jacket tags placed in all of their winter coats (Ryan). This campaign was meant to make consumers stop and ask themselves do I really need a new jacket or does my old one still work just fine? As it turned out, Patagonia saw a 30% increase in their revenues from 2010 Black Friday sales and also received large amounts of publicity (Ryan). This was a bold move for the company and could have backfired heavily but it goes to show that Patagonia is willing to sacrifice sales in order to support their greater mission to protect the planet. This is one tactic competitors have not tried to emulate and thus proves to be a competitive advantage in attracting consumers that are exceptionally environmentally concerned. 7

8 Appendix 5 - Bargaining Power of Buyers Question? Yes (Low Threat) No (High Threat) Does the customer incur a large switching cost in this industry? Is the customer very price sensitive? Are the products very unique depending on the brand? Is the customer very brand loyal? Are there only a few companies offering similar products? Buyers in this industry are very powerful. Due to the fact there are many companies that all offer a fairly similar product, the buyer has many options when making a purchasing decision. Because there are so many brands that have similar products of a similar quality, the consumer is left to make their decision solely based on price or brand loyalty. This can lead companies to drop prices or invest more in marketing or corporate social responsibility programs in order to attract customers to their brand over their competitors. Patagonia excels in the fact they have many loyal customers that are willing to pay high prices for a Patagonia product they know they can trust to be high quality and long lasting. They also have an advantage when it comes to their highly technical products because they invest heavily in their R&D budget to assure their customers are receiving the best product on the market. Despite their brand loyalty and high quality products, Patagonia still needs to be wearying of the buying power the consumers in their industry have. If they fail to adapt to their markets needs they will quickly lose their loyal customers and their competition will quickly take over. For example, customers of Patagonia highly value the philanthropic work Patagonia does and takes their corporate social responsibility into consideration when making their purchasing decisions. Their earth friendly mentality is a very attractive quality to their customers, as it was for loyal Volkswagen customers before their most recent development decisions. This is a clear example of how ignoring your customers values and needs can be devastating to a brand name and a quick way to lose customers. 8

9 Appendix 6 - Bargaining Power of Suppliers Question Yes (Low Threat) No (High Threat) Companies can switch suppliers easily and at little cost? There are many suppliers in this industry? Materials needed by companies are standard? Do the companies not rely heavily on the goods and services the suppliers provide? Companies in the high quality outdoor apparel industry have a very specific set of needs when it comes to their supply chain. They are looking for supplier to source the highest quality materials while being sustainable and ethical in their practices. Consequently, there are few options for these companies to obtain their necessary inputs. This gives the suppliers that do match all of their needs a huge amount of power, but only if they maintain the high standards that are asked of them by the companies. If a supplier strays from their ethical or sustainable practices a company in this industry will most likely take their business elsewhere even though the process of switching suppliers is very costly and difficult in this industry. Patagonia s founder, Yvon Chouinard, decided on day one that Patagonia was going to be an earth-friendly, ethical company and to this day they stand by that mentality. All of Patagonia s products are made with organic, fair trade materials that come from farms, textile mills and factories that treat their employees ethically and assure them a livable wage (Patagonia Footprint Chronicles). Ultimately, this type of supply chain is much more costly than using less ethical textile mills and factories or farms that use pesticides but it allows Patagonia to cater to a unique target market of consumers that are willing to pay higher prices to feel as if they are contributing to the betterment of the planet. Patagonia would not be the brand it is today if it weren t for its unique supply chain. 9

10 Appendix 7 Recommendations Founded in 1973 by Yvon Chouinard, Patagonia has become a household name in many mid to upper class Americans. Their dedication to providing high quality, long lasting products that have minimal negative effects to the planet has appealed to many consumers throughout the decades and the name continues to present a sustainable, earth-friendly image in people s minds. This has created a community of loyal customers and given the brand a huge advantage over their competition. There are a couple of recommendations Patagonia can follow in order to maintain this competitive advantage. 1. Maintain their corporate social responsibility practices and mission to protect the planet. In order to retain their loyal customers it is essential that Patagonia continues to actively participate in corporate giving to projects that help protect the planet and raise awareness of social justice. More and more so consumers are wielding their power to support companies that support their values. If Patagonia were to abandon their environmentally conscious political stance at this point in consumerism history they would run the risk of losing a substantial amount of their customers. Through their supply chain to their participation in the 1% for the Planet program, Patagonia lives and breathes their mission to build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis (Environmental Grants and Support) which has lead them to become one of the most respected brands in the outdoor apparel industry. 2. Create a product line that appeals to new trends in fashionable outdoor apparel Patagonia s typical customer is a 38 year old with a household income of $160,000 per year (Roberts). This market is completely willing and able to spend a couple of hundred dollars on a new ski jacket. However, as millennials grow up and become a large segment of the consumer population it is important to design products to fit their needs and desires. Millennials are increasingly buying outdoor gear that is both functional and stylish, that can be worn on the trail or in the super market. Therefore, as the American culture as so avidly engrained in them, millennials are feeling as if they need multiple yoga pants, zip up hoodies, sneakers and work out tanks to assure themselves they are being fashionable and not an outfit repeater. However, this consumer segment is still young and most likely isn t making $160,000 a year so they look to brands other than Patagonia for their high quality outdoor apparel. This market and the trends they are creating are only going to become more powerful in the years to come. Therefore, it would be a wise decision for Patagonia to create a product line that better fit their style needs at a lower price point. The price may not even have to drop significantly if they just started marketing their brand to a younger population. For example, instead of having a mid 30 s male ice climbing or doing a backflip while skiing, they could picture a group of 20- somethings on a hike at sunset with a beautiful view of the town below them and 10

11 then cut to the same group enjoying a casual dinner downtown still wearing their Patagonia yoga pants and t-shirts. Patagonia has a very distinct brand but as millennials are gaining buying power they don t want to spend their money on the crunchy granola brand their parents used for their summit of Mt. Rainer in the 80 s, they want to buy what their friends are wearing. 11

12 Works Cited Alvarez, A. (2015). Industry Report. IBISWorld. Retrieved February 23, Baer, D. (2014, February 28). How Patagonia's New CEO Is Increasing Profits While Trying To Save The World. Retrieved February 21, 2016, from Environmental Grants and Support. (n.d.). Retrieved February 22, 2016, from Lieber, C. (2015, May 07). Selling the Great Outdoors: The Billion-Dollar Brand Battle for the Casual Camper. Retrieved February 23, 2016, from Patagonia Footprint Chronicles: Our Supply Chain. (n.d.). Retrieved February 25, 2016, from "Patagonia Inc." Notable Corporate Chronologies. Gale, Business Insights: Essentials. Web. 21 Feb Roberts, M. (2015, July 30). The Outdoor Industry Has a Millennial Problem. Retrieved February 22, 2016, from Ryan, K. (2014, July 31). The Bottom Line: Patagonia, North Face, and the Myth of Green Consumerism. Retrieved February 21, 2016, from Sacks, D. (2015). Any Fight Worth Fighting- That's the Attitude We Take. Fast Company, (192), Retrieved February 22,