Learning from Patagonia’s Yvon Chouinard

When you think about business planning for the future, most CEO’s talk about anything from the next quarter to a five year plan. Its certainly important to think ahead, and successful companies often plan their way forward using these time scales to determine both the growth and profitability goals they wish to achieve, and the strategies and plans for them to get there. Its rare to look much further ahead than these timescales however, and I can’t think of many businesses that do, which is why I was struck by Yvon Chouinard’s oft-quoted reference to the next ‘hundred years’.

Get The Full Warren Buffett Series in PDF

Get the entire 10-part series on Warren Buffett in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q2 2020 hedge fund letters, conferences and more

Yvon Chouinard
Image used with permission from Investment Masters Class

Yvon Chouinard's Brainchild

Patagonia is the brainchild of Yvon Chouinard, who not only wanted to build a business with the highest possible quality products, but also wanted his company to do the right thing by the environment along the way. Profitability was an oblique goal and indeed, was seen as nothing more than a byproduct of success; Chouinard recognised early on that there was no business to be done on a dead planet. That’s a different mindset altogether.

This Tiger Cub Giant Is Betting On Banks And Tech Stocks In The Recovery

D1 CapitalThe first two months of the third quarter were the best months for D1 Capital Partners' public portfolio since inception, that's according to a copy of the firm's August update, which ValueWalk has been able to review. Q2 2020 hedge fund letters, conferences and more According to the update, D1's public portfolio returned 20.1% gross Read More


Patagonia does things differently. Not only does it look well beyond the standard timescales for its business and plan for the next 100 years, in a world of fast fashion, where people will prefer to discard worn clothing rather than retain, Patagonia builds its clothing products for the long term as well. It offers an iron-clad guarantee that provides free repairs; if its worn out, or broken, then return it to the store and Patagonia will repair it at no cost. Forever.

Let My People Go Surfing’ is the extraordinary story of an unlikely businessman and his journey to create the highest quality outdoor products while doing good for the world. It’s one of the most enjoyable business books I’ve ever read. And I’m not alone. His staff view the book as an almost sacred text, and all strive to live by the values contained within. Recently I stepped into a Patagonia store to find that not only had all the employees read the book, but they also mentioned that many customers had studied the text in business management classes. It’s no surprise.

Flip through the pages of a Patagonia catalog and you’ll see why it’s amassed a cult following.

Yvon Chouinard started out with the eponymous climbing gear company, Chouinard Equipment, which made high quality climbing gear for his customers. It wasn’t long afterwards that he identified that his ‘pitons’ were detrimentally affecting the cliff faces, so he abandoned them for a more environmentally friendly alternative. And it didn’t stop there. Since then, Chouinard moved into clothing and has developed his business into one of the most socially responsible corporations on the planet.

“The cumulative effects of Chouinard's original product began to hammer at the company's environmental conscience, the result of numbers of the pitons being left behind in the rock. Consequently, Chouinard became an advocate of "clean" climbing that made use of such products as its Hexentrics and Stoppers nuts. The company introduced the first tubular ice screw in the late 1970s.”

As can be expected with an innovative business such as this, it shares many of its characteristics for success with other great companies. The same recurring themes are highlighted: Family Culture, Innovation, Empowering Staff, Embracing Change, Focus on the Long Term, a Win-Win Mentality, No Compromise on Quality, Maintaining Smallness; just to name a few. Patagonia has established an ecosystem that espouses strong relationships with suppliers and customers alike. And this was purposeful - Yvon Chouinard studied and then extracted these universal characteristics from other great businesses. But he didn’t stop there. He also drew inspiration from other ideologies he embraced; from the environment and the management structures of ant colonies to Darwinian evolution at the edge of chaos.

These are some of the markers I use on my own quest to find great companies. They form the basis of the mental models I search for that when combined, can produce winning corporate DNA.

Below are fascinating excerpts from Chouinard’s sacred text, ‘Let My People Go Surfing.’

Profit is Not Primacy

Financial Philosophy: We are a product-driven company. That means the product comes first and the company exists to create and support our products.”

“At Patagonia, making a profit is not the goal, because the Zen master would say profits happen ‘when you do everything else right.’”

Our mission statement says nothing about making a profit. In fact, our family considers our bottom line to be the amount of good the business has accomplished over the year. However, a company needs to be profitable in order to stay in business and to accomplish all its other goals, and we do consider profit to be a vote of confidence, that our customers approve of what we are doing.”

“Without giving its achievement primacy, we seek to profit on our activities. However, growth and expansion are values not basic to this corporation.”

Borrow Ideas

Borrow ideas from other disciplines. We beg, borrow, and steal ideas from other companies and culture.”

“We should borrow and adapt ideas even from unlikely sources. McDonald’s is as far from Patagonia as you can get in its image and many of its values. No one at McDonald’s ever tells a customer, ‘Sorry, we’re all out of iceberg lettuce today.’ It successfully organises on-time delivery every day of the week, and I think Patagonia could learn a lesson from McDonald’s and the symbiotic relationship it enjoys with its suppliers.”

Empower Employees

[Our] philosophies must be communicated to every one working in every part of the company, so that each of us becomes empowered with the knowledge of the right course to take without having to follow a rigid plan or wait for orders from the boss.”

Simplicity

“I believe the way toward mastery of any endeavour is to work toward simplicity; replace complex technology with knowledge.

“The best performing firms make a narrow range of products very well. The best firms’ products also use up to 50 percent fewer parts than those made by their less successful rivals. Fewer parts means a faster, simpler (and usually cheaper) manufacturing process.”

Unconventional

“I had always avoided thinking of myself as a businessman. I was a climber, a surfer, a kayaker, a skier, and a blacksmith.”

“I knew I would never be happy playing by the normal rules of business. If I had to be a businessman, I was going to do it on my terms.”

I read every book on business, searching for a philosophy that would work for us. I didn’t find any American company we could use as a role model.”

Fun

“One things I did not want to change, even if we got serious: work had to be enjoyable on a daily basis.”

Having fun should be part of the culture at Patagonia.”

Innovation

“We learned an important lesson in business. [Our new innovative] fabric would never have been developed if we had not actively shaped the research and development process. From that point forward, we began to make significant investments in our own research and design departments. Our fabric lab and our fabric development departments became the envy of the industry.”

Testing

You can minimise risk by doing your research and, most of all, by testing. Testing is an integral part of the Patagonia industrial design process, and it needs to be included in every part of the process. It involves testing competitors’ products; ‘quick and dirty’ testing of new ideas to see if they are worth pursuing; fabric testing; ‘living' with a new product to judge how hot the sales may be; testing production samples for function and durability, and so on; and test marketing to see if people will buy it.”

Change

[We] begin with an attitude of embracing change rather than resisting it - not just changing without reflection and weighing the relative merits of the new ideas, but nonetheless assuming that if we only look hard enough, there may be a better way of doing things.”

“The owners and managers of a business that they want to be around for the next hundred years had better love change. The most important mandate for a manager in a dynamic company is to instigate change.”

“Evolution [change] doesn’t happen without stress, and it can happen quickly. Our company has always done its best work whenever we’ve had a crisis. When there is no crisis, the wise leader or CEO will invent one. Not by crying wolf but by challenging the employees with change.”

“Every organisation, business, government, or religion must be adaptive and resilient and constantly embrace new ideas and methods of operation.”

“When I look at my business today I realise one of the biggest challenges I have is combating complacency. I always say we’re running Patagonia as if it’s going to be here a hundred years from now, but that doesn’t mean we have a hundred years to get there! Our success and longevity lie in our ability to change quickly. Continuous change and innovation require maintaining a sense of urgency - a tall order, especially in Patagonia’s seemingly laid back corporate culture. In fact, one of the biggest mandates I have for managers at the company is to instigate change. It’s the only way we’re going to survive in the long run.”

It’s the same in nature. Nature is constantly evolving, and ecosystems support species that adapt either through catastrophic events or through natural selection. A healthy environment operates with the same need for diversity and variety evident in a successful business, and that diversity evolves out of a commitment to constant change.”

Only on the fringes of an ecosystem, those outer rings, do evolution and adaption occur at a furious pace; the inner centre of the system is doomed to failure by maintaining the status quo. Businesses go through the same cycles.”

Only those business operating with a sense of urgency, dancing on the fringe, constantly evolving, open to diversity and new ways of doing things, are going to be here one hundred years from now.

Diversity

“A clothing company of the size of Patagonia, if it is not diversified in its product line and operations, is as much at risk as a farming operation growing a mono-crop. Only the ‘diseases’ are different.”

“At Patagonia, we sell our product at a wholesale level to dealers, sell through our own retail stores, through mail order, and through e-commerce, and do it all worldwide. The diversity of distribution has been a tremendous advantage to us. In a recession, when our wholesale sales are down, our direct sales channels do well because there is no lessened demand for our goods from our loyal customers."

Doing business in Japan, Europe, Asia and Latin America, and Canada also buffers us against downturns in the economy in any one of those areas.”

Few businesses have the confidence to try to master all four business styles, but when you do master them, the four means of distribution work very powerfully in concert. We consider each to be essential to Patagonia’s relationship with the customer.”

Learn By Doing

“There are scientific ways to address a new idea or project. If you take the conservative scientific route, you study the problem in your head or on paper until you are sure there is no chance of failure. However, you have taken so long that the competition has already beaten you to market. The entrepreneurial way is to immediately take a forward step and if that feels good, take another, if not, step back. Learn by doing, it is a faster process.”

First Mover Advantage

You can’t wait until you have all the answers before you act. It’s often a greater risk to phase in products because you lose the advantage of being first with a new idea.”

Being first offers tremendous marketing advantages, not the least of which is you have no competition. Coming in second, even with a superior product, is often no substitute for just plain being first.”

Culture

"In every long-lasting business, the methods of conducting business may constantly change, but the values, the culture, and the philosophies remain constant.”

“Despite our own growth at Patagonia, we were able, in many ways to keep alive our cultural values as we grew.”

“We never had to make a break from the traditional corporate culture that makes businesses hidebound and inhibits creativity.”

“We built a new administration building that had no private offices, even for executives. The architectural arrangement sometimes created distraction but helped keep communication open.”

Family

Not only was the company like an extended family, but for many it was family, because we always hired friends, friends of friends, and their relatives.”

Selling

“My first principle of mail order argues that ‘selling’ ourselves and our philosophy is equally important to selling product. Telling the Patagonia story and educating the Patagonia customer on layering systems, on environmental issues, and on the business itself are as much the catalog’s mission as is selling the product.”

“Over the years we have come upon a balance between the product content and the message - essays, stories, and image photos. Whenever we have edged that content towards increased product presentation, we have actually experienced a decrease in sales.”

“In owning our retail stores, we’ve learned that it is far more profitable to turn that inventory more quickly than to have high margins or raise prices.”

Part of Patagonia’s authenticity lies in not being concerned about having an image in the first place. Without a formula, the only way to sustain an image is to live up to it. Our image is a direct reflection of who we are and what we believe.”

The catalog is our bible for each selling season. Every other medium we use to tell our story - from the website, to hangtags, to retail displays, to press releases to videos.”

“If we come out with a product that is difficult to promote, it’s probably because it’s no different than anyone else’s and we probably shouldn’t be making it.”

“We have three general guidelines for all promotional efforts: 1) Our charter is to inspire and educate rather than to promote, 2) We would rather earn credibility than buy it. The best resources for us are the word-of-mouth recommendation from a friend or favourable comment in the press, 3) We advertise only as a last resort and usually in sport-specific magazines.”

Advertising rates dead last as a credible source of information. Overall, we do far less advertising (usually less than 1 percent of sales) than most outdoor companies, let alone clothing companies.”

Value Employees

We provided a cafeteria that served healthy food where employees could gather throughout the day. And we opened an on-site childcare centre. At the time it was one of only 120 in the country; today there are more than 8,000.”

“If you care about having a company where employees treat work as play and regard themselves as ultimate customers for the products they produce, then you have to be careful whom you hire, treat them right, and train them to treat other people right.”

Our benefits package is generous but strategic. Each benefit makes good business sense for us. We offer comprehensive health insurance, even to part time employees, in order to attract serious athletes to work in our retail stores.”

Patagonia’s internship program allows employees to leave their jobs for up to two months to work for an environmental group and still receive their Patagonia paychecks and benefits.”

Hiring

It’s our first principle of hiring, that as many Patagonia employees as possible also be true Patagonia customers.”

We also seek core Patagonia product users, people who love to spend as much time as possible in the mountains or the wild.”

We’ll often take a risk on an itinerant rock climber that we wouldn’t on a run-of-the-mill MBA.”

Hiring people with diverse backgrounds brings in flexibility of thought and openness to new ways of doing things, as opposed to hiring clones from business schools who have been taught a codified way of doing business. A business that thrives on being different requires different types of people.”

As much as possible we hire from within, to keep the company culture strong. And then we train, and take the time to train, as though our future depended on it.”

We don’t want drones who will simply follow directions. We want the kind of employees who will question the wisdom of something they regard as a bad decision.”

“In a company as complex as ours, no one person has the answer to our problems, but each has a part of the solution.”

Walk The Floor

“In this information age it’s tempting for managers to manage from their desks, staring at their computer screens and sending out instructions, instead of managing by walking about and talking to people. The best managers are never at their desks yet can be easily found and approached by everyone reporting to them.”

Tone at the Top

The best leadership is by example. Malinda’s and my office space and the CEO’s is open to anyone, and we always try to be available. We don’t have special parking spaces for ourselves or any upper management; the best spaces are reserved for fuel efficient cars, no matter who owns them. Malinda and I pay for our own lunches in our cafeteria; otherwise it would send a message to the employees that its’s okay to take from the company.”

Decentralised & Smallness

“Systems in nature appear to us to be chaotic but in reality are very structured, just not in a top down decentralised way. Deborah Gordon, a professor at Stanford University who studies ant colonies, says that there is no specific ant in charge of a colony, no central control. Yet each ant knows what its job is, and ants communicate with one another by way of very simple interactions; altogether they produce a social network. A top down central system like a dictatorship takes an enormous amount of force and work to keep the hierarchy in power. Of course, all top-down systems eventually collapse, leaving the system in chaos.”

“I believe that for the best communication and to avoid bureaucracy, you should ideally have no more than a hundred people working in one location. This is an extension of the fact that a democracy seems to work best in small societies, where people have a sense of personal responsibility.”

“Hundreds of studies in factories and workplaces confirm that workers divided into small groups enjoy lower absenteeism, less sickness, higher productivity, greater social interaction, higher morale - most likely because the conditions allow them to engage what is best in being human, to share the meaning and fruits of their labour.”

Respect Customers

We treat customers with respect, too. We don’t farm out phone calls to a service bureau in Delhi.”

We have an ‘ironclad’ guarantee, and we honour it - even if we have to go to great lengths. We do know that the extra steps we take are worth it. Our catalog re-order rate from customers, season after season, far exceeds the mail-industry standard. In fact, it’s off the charts.”

“We don’t speak to what is perceived as the lowest common denominator. We speak to each customer as we want to be treated, as an engaged, intelligent, trusted individual.”

We recognise that we make most profit by selling to our loyal customers. A loyal customer will buy new products with little sales effort and will tell all his friends. A sale to a loyal customer is worth six to eight times more to our bottom line than a sale to another customer.”

Listen To Customers

“To stay ahead of the competition, our ideas have to come from as close to the source as possible. With technical products, our ‘source’ is the dirtbag core customer. He or she is the one using the products and finding out what works, what doesn’t, and what is needed.”

Win-Win / Ecosystem

In 1986, we committed ourselves to donate 10% of profits each year to small groups working to save or restore natural habitats. We later upped the ante to 1% of sales, or 10% of pretax profits, whichever was greater. We have kept that commitment every year, boom or bust.”

We consider ourselves to be an integral part of communities that also include our employees, the communities in which we live, our suppliers and customers. We recognise our responsibilities to all these relationships and make our decisions with their general benefit in mind.”

Develop long term relationships with suppliers and contractors. Patagonia has never owned a fabric mill or sewing shop. To work on a single endeavour with so many other companies, with no compromise in product quality, requires a mutual commitment much deeper than the traditional business relationship.”

We do as much business as we can with as few suppliers and contractors as possible. The downside is the risk of becoming highly dependent on another company’s performance. But that’s exactly the position we want to be in, because those companies are also dependent on us. Our potential success is linked. We become like friends, family; mutually selfish business partners; what’s good for them, is good for us.”

We put a lot of effort into choosing factories that have healthy relationships with their employees.”

“If you want to get things right the first time, rigorous specs aren’t enough. You have to be a full partner. You have to make sure your supplier and contractors have the necessary knowledge and tools to get the job done to your design standards.”

I think of Patagonia as an ecosystem, with its vendors and customers as an integral part of that system. A problem anywhere in the system eventually affects the whole, and this gives everyone an overriding responsibility to the health of the whole organisation. It also means that anyone, low on the totem pole or high, inside the company or out, can contribute significantly to the health of the company and to the integrity and value of our products.”

“A successful, long-lived, and productive company like Patagonia could be compared, on the most basic level, with a healthy environment, simply in the fact that both are composed of various elements that must function together in some kind of balance in order for the whole system to work.”

Quality

Maximum attention is given to product quality, as defined by durability, minimum use of natural resources, multi-functionalism, non-obsolescence, and the kind of beauty that emerges from absolute suitability to task. Concern over transitory fashion trends is specifically not a corporate value.”

The first part of our mission statement, ‘Make the best product’, is the raison d'être of Patagonia and the cornerstone of our business philosophy.”

“‘Make the best’ is a difficult goal. It doesn’t mean ‘among the best’ or the ‘best at a particular price point.’ It means ‘make the best’ period.”

“The challenge for Patagonia, or for any company serious about making the best product of its kind, is to re-create on an industrial scale the hand knitters devotion to quality. You cannot hand off your pattern or blueprint or model to the lowest-bid contractor and expect to get anything close to what you had in mind.”

“We believe that quality is no longer a luxury. It is sought out by the consumer, and it is expected. For example, the Strategic-Planning Institute has been collecting data for years on the performance of thousands of companies. [Their] report has begun to show quite clearly that quality, not price, has the highest correlation with business success. In fact, the institute has found, overall, companies with high-product and service-quality reputations have on average return-on-investment rates twelve times higher than their low-quality and lower-priced competitors.”

Whenever we are faced with a serious business decision, the answer almost always is to increase quality. When we make a decision because it’s the right thing to do for the planet, it ends up also being good for business.”

Stick to Knitting & Recessions

“You have to know your strengths and limitations and live within your means. The same is true for business. The sooner a company tries to be what it is not, the sooner it tries to ‘have it all’, the sooner it will die.”

We don’t force our growth by stepping out of the specialty outdoor market and trying to be who we aren’t. We let our customers tell us how much we should grow each year. Some years it could be 5% growth or 25%, which happened during the middle of the Great Recession. Consumers become very conservative during recessions. They stop buying fashionable silly things. They will pay more for a product that is practical, multi-functional, and will last a long time. We thrive during recessions.”

Not Fashion

“Our design and product development calendar is usually eighteen months long, too long to be a contender in any new fads. We rarely buy off-the-shelf fabrics or existing prints, so we have to work with artists and design studios in producing original art.”

When you give in to fashion trends, you doom used clothes to the trash heap.”

Long Term

“I did know we had become unsustainable and that we had to look to the Iroquois and their seven-generation planning, and not to corporate America, as models of stewardship and sustainability. As part of their decision process, the Iroquois had a person who represented the seventh generation in the future. If Patagonia could survive this crisis [an earlier sales and cash-flow crisis], we had to begin to make all our decisions as though we would be in business for a hundred years. We would grow only at a rate we could sustain for that long.”

Long-term capital investments in employee training, on-site child care, pollution controls, and pleasant working facilities all are negatives on the short-term ledger. When the company becomes the fatted calf, it’s sold for profit, and its resources and holdings are often ravaged and broken apart, leading to the disruption of family ties and the long-term health of local economies. The notion of businesses as disposable entities carries over to all other elements of society.”

When you get away from the idea that a company is a product to be sold to the highest bidder in the shortest amount of time, all future decisions in the company are affected. The owners and the officers see that since the company will outlive them, they have responsibilities beyond the bottom line. Perhaps they will even see themselves as stewards, protectors of the corporate culture, the assets, and of course the employees.”

Private Ownership

Being a publicly held corporation or even a partnership would put shackles on how we operate, restrict what we do with our profits, and put us on a growth/suicide track. Our intent is to remain a closely held private company, so we can continue to focus on our bottom line: doing good.”

Debt

“We are a privately owned company, and we have no desire to sell the company or to sell stock to outside investors, and we don’t want to be financially leveraged.”

“Not only don’t we want to be financially leveraged, but our goal is to have no debt, which we have achieved.”

A company with little debt or with cash in the kitty can take advantage of opportunities as they come up or invest in a start-up without having to go further in debt or find outside investors.”

Scenario Analysis

A company should always be playing ‘what if’ scenarios, e.g what if all our top management goes down in an airplane crash, our warehouse burns down, our main computer melts down or gets a virus? Or what if there is a 25% downturn in business or sales in Japan suddenly explode beyond our wildest planning?”

Consultants

“When a problem comes up, the effective CEO does not immediately hire a consultant. Outsiders don’t know your business the way you do, and anyway, I’ve found that most consultants come from a failed business.”

Environment

“Repair is a radical act. As individual consumers, the single best thing we can do for the planet is to keep our stuff in use longer. This simple act of extending the life of our garments through proper care and repair reduces the need to buy more over time - thereby avoiding the carbon dioxide emissions, waste output, and water usage required to build new products.”

“We strive to balance the funding of environmental activities with the desire to continue in business for the next hundred years.”

“Patagonia’s environmental efforts began in the 1970s by trying to prevent the destruction of our surf breaks and by trying to stop the physical damage to the rock walls of Yosemite. Later we started looking at minimising the environmental hurt with manufacturing our products.”

“One of the hardest things for a business to do is to investigate the environmental effects of its most successful product and, if it’s bad, to change it or pull it off the shelves.”

When we act positively on solving problems instead of ignoring them or trying to find a way around them, we are further along the path to sustainability. Every time we’ve elected to do the right thing, it turned out to be more profitable.”

“Worldwide we are using the resources of several planets. We can no longer afford to use a natural resource only one time. Today, our Repair Centre in Reno Nevada, is the largest garment repair facility in North America. It employs more than fifty people who complete more than forty thousand repairs per year.”

Each time we tried to do the right thing for the environment, regardless of the cost to us, we ended us saving money.”

Summary

Many of us grow up wanting to climb a mountain and Yvon Chouinard did exactly that. Not only did he achieve that goal, he also established a global business that helps others achieve their vision all while offering environmentally sound business practices along the way. And its the envy of the industry.

Patagonia really does do things differently. From 100-year plans to investing in the planet’s health, the business is once again, another example of how one person’s extraordinary vision has led to not only corporate success, but also to providing a healthy ecosystem that allows suppliers, staff and customers to exist harmoniously. Forever.

Source: ‘Let My People Go Surfing’, Yvon Chouinard, Penguin Books.

Video: ‘Let My People Go Surfing, 10 More Years of Business Unusual, Trailer. Patagonia.

Follow us on Twitter: @mastersinvest