Management Control

In 1957, Yvon Chouinard, a well-known outdoorsman, founded Patagonia Inc. , a very unique outdoors clothes manufacturing and selling company. Yvon Chouinard is a rock climber, and he realized that many parts of his equipment were not adequate and perfectly designed, and this was the start of his business, even if it was not part of his intention. He then shifted his attention toward outdoor clothing and apparel in the 1960s. Patagonia Inc. today designs and produces both equipment and clothes for all kinds of outdoor sports, with every item being of great quality and resistance.

The company now has over 750 employees worldwide and sells its products in over eight countries. As presented below, it is evident that Patagonia Inc. has particular values and mission to differentiate itself from competitors in an impressive manner. As of 1997, the Chouinard family still owns almost 100% of the company, and Yvon is extremely involved in the day-to-day operations and decisions.

Even though the firm has experienced harder times during the recession of 1991, important changes were made at Patagonia to ensure that the company does not experience such difficulties again.

The company today designs and markets high outdoor and environmentally friendly equipment and clothing, with sales of 185 million dollars for the 1997 fiscal year. Objectives of the Company Patagonia Inc. first differentiates itself from other clothing and equipment companies from the fact that its main objective is not maximization of profit. Most private and public companies nowadays have profitability and growth as their main focus. Patagonia, on the other hand, mentions in its mission statement that it wants to focus on the necessary, and not on the desirable.

Its main objectives are to: Decrease environmental harm and impact Provide top-quality and environmentally friendly equipment and apparel to be used in outdoor sports At first look, it might seem improbable that a manufacturing private company doesn’t want to grow exponentially and increase profit significantly every year, but we have to understand the founder’s motivation in the creation and the perpetuation of his business. As mentioned in the background information, Yvon Chouinard first decided to create his products in order to improve the existing ones that weren’t of good quality enough for the general public to practice their leisure sports in a safe and optimal way. He already had in mind the desire of life improvement for sports and outdoor people. Another extremely important value of M. Chouinard has always been its love for the environment and a huge desire to decrease harmful impact of human consumption on Earth. It is mentioned in the case that Chouinard’s ultimate reason of keeping his business going is to earn money in order to give it back to environmental causes.

An increase in company revenues of 3 to 5% is enough for the founder and he was concerned when Patagonia’s growth was too quick. As opposed to most businesses which have a long-term vision of only a couple of years, M. Chouinard wants to look at the firm’s upcoming 100 years when planning for the future. To make it clear, he put in place an official low-growth constraint. Strategies & Desired Behaviours The strategies of Patagonia are derived from its values presented in its statement of values (see Appendix A).

There are three main strategies, which include a set of sub strategies. Main strategies are: Product differentiation Consciousness of environmental issues Being a brand that inspires It is noticeable that each of the main strategies targets one of the two objectives of the company in a more particular way. Product differentiation of Patagonia’s equipment and clothing is achieved through more precise strategies, that we will call sub-strategies, such as: A) Innovative designs that meet specialized needs

Styles that stand out by their quality, whether because of quality of their materials or because of their design: As mentioned in the case, “Patagonia clothing were designed for heavy use and built to last”. C) Products that are truly useful, not only convenient and beautiful Consciousness of environmental issues and of the harmful impact of human beings and consumption is achieved through the following sub-strategies: A) Reduce negative environmental impact of its products throughout their life cycle by creating environmentally responsible products B) Redistribute a portion of its revenue to environmental causes and communities; there are many programs in place regarding environment such as the Tithing Program explained further C) Earn sufficient profit to achieve its objectives, but without perpetual growth Patagonia also wants to become a brand that inspires the general public and its employees. Sub-strategies for achieving this strategy are: A) Inspire an active and balanced lifestyle

B) Have a workforce that represents the values of the organization; some employees are hired by the founder without even applying for the job. They are selected for their personality and attitude. C) Participate in social initiatives in communities. With all of these sub-strategies, Patagonia expects certain behaviours from its employees because proper employee behaviour is directly linked with the success of the firm.

Main expectations regarding employee behaviour are the following: Individuals (employees) that are active and have a balanced lifestyle, meaning that they adopt the firm’s values, they are outdoor people and they take advantage of the cultural controls in place inside the company Employees that respect the values derived from the mission statement Employees that adopt a collaborative behaviour among themselves and across different functions they each have Employees that actively participate in meetings, planning, budgeting and operations of Patagonia all year around, especially since the implementation of the new Workbook Process discuss later in this report Yvon Chouinard really believes that all aspects of the company have to be of true quality, and that every piece of the puzzle is necessary for success and for achieving its objectives of environmental consciousness and the development of top-quality products.. The following chart illustrates his thoughts: Management Controls Management controls at Patagonia Inc. are divided into four main categories, which are result controls, personnel controls, cultural controls and action controls. Cultural and personnel controls have always been at the core of Patagonia. In fact, the organization has a very strong culture that makes work a life-learning experience for its employees.

One of the main reasons behind Patagonia’s strong culture is the fact that the founder of the company, Yvon Chouinard, is still present in the company and that the company’s values are at the core of the company’s values. Cultural and personnel controls affect virtually all aspects of Patagonia: Selection of skilled individuals that share Patagonia’s values Flexible work arrangements and a healthy lifestyle are promoted with various opportunities for employees to benefit from, such as working from home, 2 months paid leave for a birth for both mother and father, a daycare in the firm, healthy meals are sold at the cafeteria for very low prices, etc.

Open Forum held by management every 2 weeks opened to everyone Minimum bureaucracy and maximum informality; there are no secretaries and nobody has a closed office – very decentralized Flat organization where employees do not feel that there is a hierarchy Company-wide profit sharing and bonuses Having Yvon and Malinda Chouinard’s values as the core values of the organization and giving the example of how employees should behave Physical layout of the offices No one in the company has a private office, not even the CEO Patagonia has dedicated space on the company facilities to store sports equipment for the employees (surfboards, paddles): way to ensure that the employees had a balanced lifestyle and connect with the environment Tightness for personnel and cultural controls is relatively high: Direction Motivation Personal Limitations

Yvon Chouinard acting as a role model for employees – Profit-sharing plan can encourage employees to pursue a different objective than that of management: profit maximization. However, it is not likely that individual workers would be able to directly influence profit, especially because of the mutual monitoring that exists within the strong culture – Congruence between the organizational and employees’ interests – Quality workplace where employees feel at ease provides an intrinsic sense of motivation – Informality provides a sense of purpose for employees – Patagonia’s culture favors innovation Action and results controls are mainly implemented through the new Workbook Process.

Prior to this system, there was not sufficient budgeting and planning in place to organize the company’s resources, keep everyone aligned with corporate strategy, and prevent from internal and external environmental risk. The Workbook Process has the following characteristics: Was implemented in 1996 Make plans and reports visible to all employees Train all employees in financial management to improve understanding Encourage participation in review processes The Workbook Process has three principal intended benefits: Employees will better understand how their job fits within the strategy Employees will be encouraged to take other groups’ resources and objectives into consideration in their planning Employees will have an enhanced sense of autonomy of their own destiny The Workbook Process has four main components:

Training is an action control, an allows Patagonia to meet the following strategy: Consciousness of environmental issues, through a better understanding of the financial results needed to sustain the company’s growth within the desired range Employee participation is an action control, an allows Patagonia to meet the following strategies: Product differentiation, through increased collaboration and motivation, which in turn have the potential to significantly increase innovation Consciousness of environmental issues, through an increased sense of purpose within the organization Monthly monitoring is a results control, an allows Patagonia to meet the following strategy: Consciousness of environmental issues, through a better understanding of the financial results needed to sustain the company’s growth within the desired range A brand that inspires, through a increase sense of belonging to the organization and coworkers Open-book policy is a results control, an allows Patagonia to meet the following strategy: A brand that inspires, through the sense of trust that management demonstrates to Patagonia’s employees These four components are further explained in the following section: 1. Invest time and resources to train all employees in financial management to improve understanding of the information made available to them (action control) All employees were divided into 24 workgroups Middle and high-level managers were assigned to each group Managers are in charge of providing training to their group The Workbook Workbook user manual defines how the Workbook Process is to be implemented 2.

Encourage employees to participate in planning and operating review processes (action control) Define a mission statement for their own workgroup Each workgroup is to set its annual objectives Both operating and financial Prioritize objectives and separate them between internal and cross-functional objectives Estimate capital expenditures, operating expenses, and estimated return for every objective (including those that are shared with another workgroup) All objectives from all workgroups are to be combined into a matrix The matrix is discussed by senior managers and feedback is provided to individual workgroup Detailed budget worksheets are then completed by each workgroup 3.

Make monthly department and corporate financial and operating reports visible to all (results control) Income and cash flow statements are distributed to all employees every month Budget worksheets are to be compared with actual results every month Objectives are to be monitored and updated every month 4. Make every department and corporation’s plans visible to all employees (results control) Open-book process All financial and operating information is shared with all employees Reinforces the informal management culture Regarding tightness of the Workbook Process as a whole, it can be considered as moderate for the following reasons with respect to direction, motivation and personal limitations:

Direction Motivation Personal Limitations – Breaking down corporate strategy: employees can better understand how their job fits within the strategy – Increased communication with other functions nd departments allows for a better understanding of the business as a whole – Specific objectives and regular feedback provide employees with targets to achieve: benchmarking – No individual performance Assessment or incentive program to reinforce desired behaviours – No performance recognition at the workgroup level related to their performance with the Workbook Process – Employees would have an enhanced sense of autonomy of their own destiny: “Everybody here feels empowered because they feel they can make a difference. ” – Many non-financial employees do not understand financial figures Results control: Salary Increases Annual salary increases based on Assessment of performance by employees’ immediate superiors Such control measure is moderate because employee behaviour must be aligned with the organization’s strategy for them to earn a raise.

However, it is a subjective measure of performance in that there is no specific criteria that has to be met in order to earn a raise. There are also many people that are in charge of carrying the performance Assessments, which can decrease the consistency in the application of the management control. Even with such a monetary incentive, it does not mean that the company wants to grow or increase profit. The objective is to recognize that more experienced workers add more value to the organization, which comes along with an increase in their compensation. It is a very common practice in any organization, and Patagonia has to reward its experienced employees in order to retain them.

As long as it is not the only source of motivation that pushes employees to be alligned with the corporation’s objectives and values, such measure should not encourage employees to pursue a different strategic direction than that of the organization. Employee Behaviour Overall, employees do behave approprietaly regarding the culture, the values and the new process implemented at Patagonia. Most managers embrace the new open-book system, there is good cooperation in training employees of all levels and there are favorable reactions to the process from most employees, but some employees still have no motivation to participate in an active manner, and the overall motivation of the crew is fading after less than a year since the implementation. This decrease in motivation and commitment is due to the fact that employees feel ignorant of the company’s plans, they feel ignorant about other departments’ activities and have the impression that they are not in control of their destiny. Problems Some problems related to employee behaviour have then been identified. There are no direction issues, nor motivation problems because employees are highly motivated because they share the same philosophy and values with respect to the environment. Also, they feel that their work has a positive impact on reducing harmful effects on the environment. The main problems of personnel and cultural controls are related to personal limitations of employees. The company is too cohesive and this might create groupthink; – Groupthink will lead to less creativity and employees getting out of their comfort zones.

– Some people are less willing to voice their opinion if it is different than the company culture. There are also problems with employee behaviour related to action controls: For direction: – Clear objectives are defined and seem to be understood by the majority of employees – Scope of the Workbook Process is not specific enough: ambiguous – Conflict between corporate and employee objectives – Some employees do not understand the benefits of the Workbook Process – The results are not complete enough; employees are confused as to what is performing well in order to achieve the objectives For motivation: – Effort aversion: lack of interest and excitement

– Not all employees see the added value at the end of the Workbook Process because the focus is on what they have to do versus what is being accomplished – Low participation; some are not numbers-oriented and it is costly in time and contains some complexity – Employees do not have an incentive to overachieve because the results control is on the overall company’s performance – Rewards and bonuses are not linked to individual performance; not self-directing, no sense of individual accomplishment and no individual merit/recognition For personal limitations: – Lacking financial expertise and training of current employees with respect to financial budgeting – Nature of the responsibilities does not fit with every employee’s personal capabilities and detailed budgeting and planning – Employees cannot individually influence results; – Decrease in confidence of individual success – Cannot stand out as an employee With respect to result controls, direction problems are that results are not complete enough: employees are confused as to what is performing well in order to achieve the objectives.

Motivation problems are: – Employees do not have an incentive to overachieve because the results control is on the overall company’s performance – Rewards and bonuses are not linked to workgroup performance – Not self-directing – No sense of individual accomplishment – No individual merit/recognition Personal limitations for results controls is that employees cannot influence results as a workgroup. Other more general issues have been identified at Patagonia. First, maintaining the Workbook Process is very expensive and time consuming, and this might cause the costs to outweight benefits of the system. Second, planning horizon is hard to define. It is almost impossible to define how many years in the future Patagonia should be planning ahead. Currently, the Worbook Process has the following benefits: employee empowerment and information sharing.

Its costs incurred for the company are high planning and budgeting time, it decreases employee productivity, it is costly to implement and to maintain, and financial training costs are high. Corrective Measures This is why we recommend the following corrective measures in order to improve the situation, the way the firm works and to increase employee motivation in order for objectives of the company to be fulfilled. Have a basic information system platform in place Reduce the amount of paperwork > reduce risk of losing some paperwork Easier for the workgroup members to share targets and opinions with other workgroups > reduces redundancy and increases efficiency Easier communication within different departments > increases information sharing across the company > more transparency Reduce the number of employees participating in the planning/budgeting Reduce waste of human capital on planning/budgeting > optimize on key employees to plan and budget Less confusion between objectives > less conflict among employees for goal setting > less time planning and budgeting > more efficient for the company Not all employees are financially inclined or want to make decisions > reduce unnecessary training costs > optimize on core competencies of employees > reduce the time of the Workbook Process 3. Semi-annual meeting on the Workbook Process per workgroup Allow all employees to share their opinion about the future of the business > however they do not necessarily set the objectives Open communication > commitment to targets and allows employees to understand the company’s mission for future years Employee contribution is key to challenging but achievable objectives > increase congruence with the company’s vision 4.

Small cross-functional team prepares final plan and budget per workgroup Planning and budgeting should be made by certain employees that have the right skills > reduce time and training costs Performance target setting should be flexible because of the nature of the company Allow for targets to change based on business conditions and not historical numbers > Patagonia’s primary objective is not profitability but decreasing environmental harm 5. Present the budget to the whole team f. Avoid any confusion g. Clear objectives > increase goal congruence by employees All of these measures will lead to different costs and benefits, and this time there will be more benefits than costs. Benefits will be employee empowerment, information sharing, clear objective and vision and increase in goal congruence, and reduction in planning, budgeting and training costs. On the negative side, there will still be costs to implement and maintain the information systems platform, but these cannot be avoided.