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P
rofessor Kenneth A. Merchant wrote this teaching note as an aid to instructors using the Patagonia, Inc. case.
Marshall School of Business
University of Southern California
Patagonia, Inc.
Teaching Note
Purpose of Case
This case was written with several purposes in mind. One was simply to illustrate Patagonia's
management system. Primarily because of the values of its founder, Patagonia is an unusual
company. Consequently, the case can be used to raise issues about corporate objectives (should
maximization of value really be the primary objective?), management style, and organizational
OBM involves:
2. Training, so that employees understand both what that information means and how they can
contribute to company profits (value creation).
4. If necessary, a change away from a top-down culture to ensure that employee ideas are both
encouraged and considered fairly.
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
233
What Patagonia calls its Workbook Process embodies all four of these OBM elements.
Because the core elements of the Workbook Process involve planning and budgeting, the case
Suggested Assignment Questions
If the class focus is on cultural control, the following assignment questions are appropriate:
1. The objective of Patagonia, Inc. seems not to be to maximize shareholder value. What is
Patagonias primary objective? Is this appropriate?
2. Patagonia has a strong culture. Does this culture ensure that Patagonia employees will work
hard and act consistently in the corporations best interest? If not, what must Patagonia
managers do to shore up the companys control system?
1. Evaluate Patagonias Workbook Process. Would you recommend to Patagonias
management that they continue the process? Why or why not?
2. If you recommend continuing the process, what changes would you suggest, if any?
3. If you recommend discontinuing the process, what would you substitute instead?
Case Analysis
Whether the class focus is on cultural control or on OBM and the Workbook Process, it is useful
to have the students identify some of the factors that are unusual at Patagonia. These include:
1. Mission and values. The corporate mission and values are shown in Exhibit 3 of the case.
2. High quality, long-lasting products. But Patagonia managers hate a term that critics
sometimes used to describe their products, which are not low priced: Patagucci.
4. Flat organization.
234
5. Low bureaucracy/informal operating style.
7. Distrust of bonuses, perhaps because the company does not have a good measurement
system.
9. Scars left by the 1991 crisis/layoff.
If the focus is on cultural control, the instructor can pose the second question in the cultural
control assignment and the discussion should flow easily. If the students are critical of
Pros:
1. The goals of an OBM system are to create
a. Better communication of the corporate goals throughout the rank and file;
b. Better understanding as to how each employees actions affects the corporations
At least to some extent, Patagonias system seems to have achieved each of these goals.
2. The OBM system provides a way to motivate employees to serve corporate interests even in
the absence of good measurement systems (which the CFO admits they dont have).
3. Many employees expressed dissatisfaction with their lack of knowledge of the companys
5. The OBM process is consistent with important aspects of the corporate culturerespect for
employees and concern for employees quality of life.
6. Most employees have favorable reactions to the process (see the quotes toward the end of
the case).
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
235
Cons:
2. Some employees do not participate. Just because the company says it has a highly
participative system does not mean that it is getting participation. Some employees do not
yet seem to understand what the financial figures mean or how to write good objectives.
This could perhaps be solved through more and better training. But more importantly, some
employees seem not to want to participate. Can you have a good OBM system if one-third
of the department heads (and perhaps more of the lower level employees) are indifferent or
hostile? Should you exclude or ignore the nonparticipants? How can you exclude a
department head?
3. Significant costs in time and paperwork. The bureaucracy associated with the system is
4. Do group rewards really motivate employees? In Patagonia's system there is almost zero
5. A lot of the enthusiasm is dampened because the actuals come out 2 months late.
6. The enthusiasm for the process seems to be decreasing over time. Might it be said that the
costs are linear, but the benefits are declining?
8. The OBM process is quite short-term oriented. Are longer term considerations captured in
this system?
9. Where is the strategic planning at Patagonia? They dont seem to do much of it. In fact, it is
questionable as to whether Patagonia has what one would call a well-defined business
strategy.
Other Questions
After the students evaluate the Workbook Process, I look to them for a judgment as to whether
Patagonia managers should attempt to fix the problems or dump the system. I think that good
students can take either stance. Students should identify some alternatives and then choose one,
with a persuasive, well-organized justification of their choice.
If students argue in favor of keeping the OBM system, then they need to address each of the
cons listed above. Which ones can be fixed, and how? Which ones should merely be tolerated
in exchange for the benefits the system provides?
If the students argue in favor of discontinuing the Workbook Process, then what should the
company do? How can the company replicate the pros of the OBM system using a different
system? For example, can Patagonia create a process or culture that leads to a natural sharing of
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
236
information and some motivation to achieve good results without the structure that some find
onerous?
What Happened Subsequently?
If instructors desire, toward the end of class they can provide students with an update on
Patagonia that will surprise most of the students.
Not long after the time of the case, Patagonia abandoned the Workbook Process. The process
did not make its third year.
Karyn Barsa (CFO) explained:
There is no question but that there was tremendous enthusiasm from a lot of people the first
year. People were curious about the financial statements. They liked the brain food classes.
In the second year (for FY 1998), people gamed the system. Many units set objectives that were
easy to accomplish, such as turn the compost heap.
Karyns conclusion was:
A collaborative process works well when a company is small. It is tougher when the company is
complex.
Shortly after the time the case was written, a new CEO, Dave Olsen, was hired. Dave was an
outsider who had a business background. He did not think that the Workbook Process was
Yvon Chouinard was sympathetic to Daves concerns. Problems at Apple Computer, in
particular, scared Yvon. Yvon viewed Apple as a product-focused company that was in many
ways similar to Patagonia.
However, the two-thirds of Patagonia's employees that bought into the Workbook Process were
very disappointed. Dave had to give them something else. He started by trying to change the
culture. In particular, he wanted to try to find a better way to make the whining productive and
to help employees understand that what people do really matters. To that end, he hired some
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
237
In this period, Dave Olsen set-up seven separate entrepreneurial product development teams
(e.g., paddle sports, alpine). These teams were asking questions like Do we need tights for
every purpose? But management of these teams was quite complex. Each must carry
Patagonia's message. Coordinating the efforts of these teams requires more leadership.
In 1999, Patagonia still did not have an incentive system. As Karyn Barsa explained, Money is
Pedagogy
The structuring and timing of the discussion of this case depends on the instructors purpose(s)
for the class, the position of the case in the course syllabus, and the students backgrounds.
Many useful contrasts can be drawn between other companies practices and Patagonias.
