Patagonia.

In planning for their company's 1996 fiscal year (ending 30 April), managers of Patagonia, Inc., which designed and marketed high-quality outdoor equipment and clothing, decided to implement a form of "open-book management". The Patagonia system, which was called the Workbook Process, was intended to be a single coordinated process. But more importantly, the Process was designed to make information about all aspects of Patagonia's business available to all employees and to encourage the employees to be an active part of the company's planning, operating review, and decision making processes.

In September 1997, Karyn Barsa, Patagonia's chief financial officer, reflected on the company's first two years' experience with the Process:

We think (the Workbook Process) has worked quite well. Among another things, we think employees understand better what we're trying to accomplish. We think most employees feel more empowered because we really are encouraging them to share their ideas, and we are listening to those ideas. We have created a language common to all departments. And we have created a much better spirit of teamwork within the company.

That is not to say we can't improve the Process. We don't have a good participation from all of our people. Some people don't seem to understand the Process, or they don't bothered by it. And the Process is unquestionably costly in time. We are looking at a number of options for improvement.

THE COMPANY.

Patagonia's products were sold:

1. wholesales to specialty outdoor gear retailers in North America, Europe and Japan;
2. through mail order;
3. through 22 company-owned retail stores in the United States, Japan and Europe; and
4. through distributors in Italy, Argentina, Chile, Australia and Korea.

In year 1997, Patagonia grossed over $158 million in sales and employed over 750 people. Patagonia was founded in 1957 by Yvon Chouinard, an avid and renowned outdoorsman. As a rock climber Yvon was known for having a long list of first ascents, including the North American Wall of Al Capitan in Yosemite National Park. Yvon could not get pitons he liked, so he started producing climbing gear in his own blacksmith shop. Soon that shop grew into a machine shop and then into Chouinard Equipment, Ltd. Yvon reflected the start,

"I never intended for my craft to become a business, but every time I returned from the mountains, my head was spinning with ideas for improving the carabiners, crampons, ice axes, and other tools of climbing...My partner and I seemed to have a gift for good design."

Yvon's piton, for example, were made of hardened steel, not soft iron, so they were more reliable. And because they were intended to be removed and reused on a climb they allowed climbers to carry less gear. Other recognized the superiority of Yvon's designs, and by the late 1960s, Chouinard Equipment had an estimated 80% of the US market for climbing hardware.

In the late 1960s Yvon shifted his attention to the sale of quality outdoor clothes. His company continued grow slowly until 1972 when the clothing business took off. One of the Yvon's early clothing successes stemmed from the sale of rugby shirts and canvas shorts he had brought back from England.

Over the years the clothing business, which was organized under the Patagonia, Inc. named, thrived. Patagonia added the broad range of company-designed-and -produced items, including rain gear, pile jackets, fleece vests, hats and gloves, sweaters, underwear, and children's clothing. The company produced clothing for just about every intense outdoor pursuit, including back country skiing, mountaineering, dog sled racing, whitewater kayaking, surfing, mountain biking, trail running, fly-fishing, and sailing. All items of Patagonia clothing were designed for heavy use and built to last. By the late 1980s Patagonia's clothing products had proliferated into 375 different styles. Fueled by periodic break-throughs that produced revolutionary new fabrics, company sales grew rapidly, as is shown in the revenue figures in Exhibit 1.

In year 1984, Yvon and his wife, Malinda, organized a clothing lines, the mail order business ad a chain of retail stores that had been built up under an umbrella legal entity called Lost Arrow Corporation ( The company's 1997 legal structure is shown in Exhibit 2.) The Chouinards still owned 97% of the company.

COMPANY MISSION AND VALUE.

Patagonia's mission statement and statement of values are shown in Exhibit 3. At a May 1996, Conference of Corperate Citizenship hosted by US President Clinton, Yvon Chouinard paraphrased Patagonia's mission statement as: "Make the best quality product and cause no unnecessary harm."At Patagonia, "quality" was not reflected just by how long the product lasted; the term described a whole way of doing a business. At the conference, Yvon explained:

It's linked: quality product, quality customer service, quality workplace, quality of life for your employees, even quality of life for all living things on this planet. If you miss any one piece there is a good chance you will

miss it all"

Yvon's efforts to reduce environmental damage began early in company's history when in 1971. He noticed the destruction of rock on climbing routes in Yosemite caused by climbers' pitons being pounded into the rock. In response, starting with the company's 1972 catalog, he began to try to convince the US climbing community to switch to "clean climbing" techniques which involved use of chocks and stoppers which were wedged only by hand and then removed after use.

Yvon was also concerned that the company used up unrenewable resources and created some pollution. To attempt to create less damage to the environment, Patagonia maintained and active program of environmental activities, including the promotion of environmental issues, design of environmentally responsible products, and encouragement of employee involvement in community affairs. The company set up grants programs mostly focus in on

small, grassroots groups interested in wilderness, biodiversity, and habitat protection issues. In one program, Patagonia imposed on itself a tax of 1% of sales or 10% of pretax profit, whichever was greater, and used the money to safeguard and restore the natural environment. The establishment of this "Tithing Program" in 1985 changed the company forever because, as one company publication described it:

We could focus on the bottom line with pride - knowing that if we made money, others would as well. Our motivations for business success became more clear -

an essential need in a company culture that resented traditional business regimes - and we were able to recruit from a more diverse pool of applicants.

Through 1998 this program allowed Patagonia to give away more than $13 million to nearly 500 environmental organizations. Patagonia managers also set five-year and one-year environmental goals for each department, tracked environmental performance in considerable detail, and published an annual Environmental Assessment Report.

Rapid growth and maximization of corporate profits were not among Patagonia's goals. Yvon Chouinard explained publicly that the only reason he and Malinda had not sold the company was that they were "pessimistic about the fate of the world and felt a responsibility to do something about it." The Chouinards' bottom-line reason for staying in business was to make money that they could give to environmental causes. They did not want "rampant and senseless growth." They did not want to "exploit the marketplace." They valued "sustainability." Thus they were comfortable with company growth in the 3-5% range.

In 1991 Yvon felt a need to reorient the company more toward "self-sustaining" principles, one of his core values. The Chouinards and key colleagues went on a three-week retreat in the Patagonia region of Argentina to discuss the company's "next 100 years." The group concluded that the company was growing too fast; at current rates of growth it would be a billion-dollar company in 11 years. Yvon said:

Can a company that wants to make the best quality outdoor clothing in the world become the size of Nike? Can a three-star French restaurant with 10 tables retain its three stars and add 50 tables? Can a village in Vermont encourage tourism (but hope tourists go home on Sunday evening), be pro development, woo high-tech "clean" companies (so the local children won't run off to jobs in New York), and still maintain its quality of life? Can you have it all? I don't think so.

When Yvon returned to Ventura, he wrote an essay that was published in the company's Fall 1991 catalog. The essay proclaimed, "We are limiting Patagonia's growth in the United States with the eventual goal of halting growth altogether."

The low-growth constraint became clear to everyone in the company when, after the end of the 1994 fiscal year, Patagonia's president announced the highest levels of growth in sales and profits in the company's history. But Yvon Chouinard changed the mood of the meeting when he announced, morosely, "This is really bad."

WORKPLACE AND ORGANIZATION

Patagonia had a unique culture. The corporation was comprised of many employees "who share (Yvon's) passion for the environment - and his thinly disguised contempt for conventional business." (These employees often refer to themselves as "dirt bags" or "Patagoniacs.") The company's Patagonia, Inc. dress code was ultra casual (mostly Patagonia attire). The cafeteria served only health foods at low prices. The company offered flexible work arrangements, such as flextime, job-sharing, and work-at-home programs. While the employees worked hard, they were allowed to take breaks during the day in order to climb, paddle, or surf. (Good surfing could be found only a few blocks from corporate headquarters, and employees were encouraged to store their surfboards on company grounds.)

Patagonia's relatively flat organization is shown in Exhibit 4. Dave Olsen, the CEO/president, joined Patagonia in June 1996. The top-management team consisted of eight managers. The company's middle management layer consisted of approximately 30 people.

The company culture favored minimium bureaucracy and maximum informality. No one in the company, not even Yvon Chouinard, who was still active in some company affairs, nor senior company officers, had a private office. Because of the lack of private offices many business meetings were held in the cafeteria. Top-level managers had little respect for organizational lines of authority, and they often dealt directly with employees at many organization levels. For example, as one first level supervisor explained:

I can walk right up to the CEO's desk. There are no walls. I can even walk up to the owner's desk anytime and talk to him. I don't need to go through secretaries. We don't have secretaries.

Every two weeks top management held an Open Forum. All employees were invited to attend. Management would provide company updates and answer questions.

Patagonia's headquarters site included a child daycare center that offered a variety of programs for children aged from eight weeks to 10-years old. Patagonia managers observed that most corporations assume the attitude of "That's their problem" when dealing with employees' parental responsibilities. At Patagonia, on the other hand, managers believed that quality childcare is a problem belonging to everyone. Thus, both parents were allowed two months paid leave after a birth. Mothers were encouraged to continue nursing when they were back at work. Parents were encouraged to take breaks and have lunch with their children. Parents were allowed to keep young babies right at their desk. Eligible employees were even allowed to take up to five workdays off during the school year to participate in their child's classroom activities. The company believed that these policies were beneficial to the company, the employees, and the children. It created less anxiety and frustration in the parents and the children and, consequently, increased work satisfaction and productivity.

EMPLOYEE COMPENSATION

Patagonia's system for allocating salary increases was quite typical. Each employee had individual annual MBO-type goals. Immediate superiors evaluated their subordinates' performances and gave them salary increases from a raise pool.

The company's bonus system was quite informal. If the company was performing well all employees were given a $1,000 bonus just before Christmas and another $1,000 at the end of the fiscal year.

In FY 1997, however, Patagonia managers eliminated the Christmas bonus because company sales were lagging behind plan. Dave Olsen thought that he could create a small bonus pool ($80,000) in the last four months of the year, and he recommended that this pool be divided among 25 worthy employees. This idea was discussed at one of the company's quarterly Open Forums, and many employees raised fairness concerns. They asked, for example, "Who will decide how this pool is allocated?" "What criteria will be used to allocate it?" "Shouldn't the allocation criteria be made public so that employees can understand what they must do to earn a portion of it?" Since answers to all of these questions were not immediately forthcoming, the employees decided that nobody should be given a bonus. They turned the $80,000 back to the company!

Company managers did not expect to move toward a more formal individually oriented bonus system anytime in the near future. Karyn Barsa, Patagonia's CFO, explained that, "We have a difficult time quantifying individual contributions. There are a lot of variables that make up individual performance, and we don't have the systems in place to hold employees individually accountable."

Dave Olsen, in one of his first moves after joining Patagonia, did create a formal company-wide profit-sharing plan. This plan became effective in the 1997 fiscal year. A pool of 15% of adjusted corporate profits before tax was allocated to departments proportionately based on base salaries. Department managers decided subjectively how to allocate their portion of the pool to individual employees. Dave wanted the department managers to allocate the pool to employees according to merit, but most chose instead to allocate it in equal percentages of base salaries.

PLANNING AND BUDGETING

Until the 1990s Patagonia did not have a formal planning process. Yvon focused on products, and demand almost always exceeded supply. Money was not scarce, and many expenditures were made on an intuitive basis. For example, Yvon was "notorious for hiring people on impulse - people he met surfing or fishing, people he believed could bring an unfettered, intuitive feel to the company." A former Patagonia CEO was quoted as saying:

Yvon has no respect for banking and accounting people - people who wear coats and ties. It's almost a loathing. But that stuff is part of business. It's almost like hating your left arm.

Largely because of the lack of attention paid to financial affairs and business planning, Patagonia faced its first crisis, in 1991. The economy was in the midst of a recession, and the company was facing more significant competition. Mainstream apparel makers, specialized niche companies, and cataloguers such as L. L. Bean, Eddie Bauer, and Lands End were copying Patagonia's better-selling products, and some were offering their products at lower prices. Sales were flat; Patagonia had to dump inventory into the market below cost; and profits plunged. Patagonia's bank reduced the company's line of credit, forcing the company to look for alternative sources of credit.

The financial problems forced Patagonia managers to take a number of steps. They hired some more professional managers, kept a closer eye on credit, cut the number of clothing styles, and laid off 120 people, 20% of its work force. (The layoff, in particular, demoralized the work force.) They also opened the company's books to employees to show them why expenses needed to be cut.

The problems also forced Patagonia's managers to become more concerned about setting plans and allocating scarce resources effectively. The planning process and thinking was still quite centralized, with only the top management team deeply involved in it. Yvon and Malinda Chouinard, and others, were not pleased with the move toward more formal planning; one manager said, "They hate it." But company performance rebounded nicely: 1993 was a boom year and performance improved steadily from there.

In the summer of 1994 Alison May, Patagonia's then-general manager, conducted a Quality Survey within the company that asked employees, "What do we have to do to make your department 'a perfect 10'?" One of the findings was that nearly everyone in the company was unhappy with the company's budgeting process. Employees felt ignorant of the company's plans and other departments' activities and, generally, not in control of their destiny. The Workbook Process grew out of that discontent.

THE WORKBOOK PROCESS

The Workbook Process involved: (1) making every department's and the corporation's plans visible to all employees; (2) making monthly department and corporate financial and operating reports visible to all employees; (3) investing substantial time and resources to train every employee in financial management so that they would understand the information made available to them; (4) encouraging all employees to become actively involved in the planning and operating review processes.

The Workbook Process actually grew from an idea that was introduced only in the Mail Order Department for planning for FY 1995. The Mail Order experiment was judged to be a success, so the Process was extended company-wide the following year.

Patagonia, Inc. Patagonia managers hoped that the Workbook Process would provide multiple benefits:

1. Employees would better understand how their job fits within the strategy of the company. They would be more likely to think strategically because they would be allowed easy access to the highest levels of planning within the company and would have the knowledge to understand it.
2. Employees would be encouraged to take other groups' resources and objectives into consideration in their planning, both because all departments' goals and activities would be visible and because all departments would share a common language
3. Employees would have an enhanced sense of control of their own destiny because they would be actively involved in the planning processes and could track their department's, and the corporation's, progress.

Many corporate managers resist the open sharing of information with employees. Traditionally they worry that an open book system might result in competitors gaining access to the company's important confidential information or that information highlighting the fact that some individuals and groups have missed their goals might be demoralizing. Sharing information also weakens managers' power base because selective disclosure of information can be used to control and manipulate people. These concerns did not arise at Patagonia, however. Patagonia's top-level managers, at least, embraced the open book system. They thought it was consistent with the company's culture and, particularly, the company's respect for employees and concern for employees' quality of life.

In preparation for FY 1996 planning, managers of each of the 24 workgroups into which the company had been divided were provided Workbook Process training. These managers, who were all middle-level managers or higher, in turn trained the members of their group. In November 1994 a planning manual, called the "Workbook Workbook" was sent to each of the workgroup heads. The 40-page Workbook explained the intent and goals of the Workbook Process and described the 11 steps in the Process.

Here are descriptions of each of the 11 steps, taken from the Workbook Workbook:

Step 1: Create a mission statement

A mission statement addresses your work group's fundamental reason for being and specifies the functional role that the workgroup is going to play within Patagonia and the market as a whole. It should not describe your workgroup as it is, but rather it should present your vision for the workgroup. Among the suggestions for creating a successful mission statement are: (1) involve your workgroup, (2) keep it short, and (3) remember, this is only a first step. (Don't spend an inordinate amount of time creating the mission statement.)

Step 2: Develop FY '96 objectives

The objectives should follow as a natural next step. At the start, assume that your baseline operating expenses for FY '96 will be no greater than FY '95. In developing the objectives, decide what would be necessary to have your workgroup be rated as a perfect "10," identify objectives in each important area, and involve everyone in the workgroup. Finally, prioritize objectives and limit the number of objectives requiring resources above last year's budget to three. (This section of the Workbook provided some information regarding Patagonia's corporate focus for FY '96. Listed were nine specific goals in the areas of product design, distribution, operations, environment, and personnel/training. Three of these goals were: (1) to have no industrially grown cotton in any company products by Spring '96; (2) complete the domestic warehouse relocation and move; and (3) complete development of an Asia distribution strategy. This section also listed preliminary financial objectives for sales, gross profit margin, operating expenses, and net profit.)

Step 3: Identify cross-functional objectives to send to appropriate departments.

Separate your prioritized objectives into two lists: internal workgroup objectives (those requiring no assistance from a department outside your own), and cross-functional workgroup objectives (those requiring some assistance from other departments). Send cross-functional workgroup objectives to each department affected by them.

Step 4: Quantify objectives.

For each internal objective, make your best guess as to the estimated capital expenditure, operating expense, and estimated return. For each cross-functional objective sent to another

department, meet with the senior manager of that workgroup. That senior manager will provide estimates of the cost and required resources (people, equipment, etc.) and the time involved to complete the objective. For each cross-functional objective received, meet with the affected parties and provide estimates of the total cost and time involved for your workgroup. Also let them know the priority your workgroup has assigned to the objective.

Step 5: Prioritize all objectives.

Take the objectives your workgroup developed and reprioritize them with the cross- functional objectives you have received from other workgroups. Communicate back the priorities you have given the cross-functional objectives and the reasons for the priorities.

Step 6: Develop the objectives matrix.

Develop the objectives matrix that is designed to organize the objectives and ensure that every aspect of them is considered. For each objective, show the person responsible, the cost, the financial return or benefit, and the timing. (Exhibit 5 shows some hypothetical objectives matrix examples.)

Step 7: The off-site senior managers' meeting

This meeting is designed to allow the senior managers to meet, discuss outstanding cross functional issues, and allocate additional expense dollars.

Step 8: Modify objectives matrix based on feedback from off-site meeting

Each department should work on finalizing their mission statement and fiscal year objectives for inclusion in the Workbook.

Step 9: Complete budget worksheets.

By now the senior managers group has agreed to budget priorities for FY '96. You are now ready to complete the process of defining your budget and completing the budget worksheets. Assume a baseline operating budget equal to FY '95 and a zero capital expenditure budget unless an increase or a capital expenditure was approved at the senior managers' off-site meeting. Complete the budget worksheets for personnel, monthly expense breakdown, capital expenditures, personal computers or other DP/MIS equipment, information services, travel and entertainment, and outside services (e.g. contract labor, consulting, legal).

Step 10: Develop back sections of the workbook

Consider which aspects of your business you would like to include in the back sections of your Workbook. The nature of these sections will depend entirely on the focus of each workgroup. (For example, Mail Order chose to include the following back sections in its Workbook: (1) marketing plan, (2) advertising plan, (3) customer service, (4) customer comments, (5) catalog comments, (6) product comments, (7) training notes, (8) personal performance notes, (9) team notes. The comments and notes sections provided space for employees to record observations in one centralized, convenient location.)

Step 11: Distribute and implement the workbooks.

Senior managers should distribute copies of the Workbooks to all workgroup members and

briefly describe each section and the purpose it serves. Then give your employees time to read the Workbook. Hold another meeting to allow them to ask specific questions.

The objectives and financial statements should be updated on a monthly basis. You will need to meet as a workgroup on a monthly basis. Go through each objective and have the

responsible person report on its status. If the due date is not appropriate, consider how this will affects others' work and how you will deal with this impact. Update the financial figures. Go through the figures and show employees where there are differences, and discuss their impact. Patagonia, Inc.

Exhibit 6 shows a Gantt chart showing the timing of the Workbook Process for FY 1996.

Each month a reporting package was distributed to all employees. This package included income and cash flow statements compared with objectives. It also included a written commentary explaining trends and reasons for favorable and unfavorable variances. This commentary provided, for example, more detail on sales performance by line of business (e.g. wholesale, mail order, retail) and specific, major sources and uses of cash. Employees who did not understand the information were encouraged to direct questions to their superiors or to accounting staff.

During the year, the workgroups were supposed to hold one meeting each month to review actual financial and operating results and to monitor progress toward the achievement of their specific objectives. Some workgroups actually scheduled two meetings, one focused on the Workbook objectives versus actual results comparison, the other a working session focused on new or different actions that might be taken. Other workgroups met less frequently.

FAVORABLE REACTIONS TO THE PROCESS

Most employees' reactions to the Workbook Process were favorable. Here are some representative reactions.

Sharon McAlexander (Manager of Logistics):

In the 1991 crisis, the company gathered everybody together, and ideas started flowing. The Workbook Process kept the ideas flowing. It causes a backflow of information from the people doing the day-to-day work to the top. People were encouraged to want to share their ideas, and they were given enough training that they could make educated suggestions. This is good because a lot of people at the top don't have a lot of knowledge as to how things work at the bottom...

It's hard to attribute specific actions we took to the Workbook Process. Our group is very savvy. We're right on top of things. But maybe the Process made our people understand their jobs better, and maybe it made them care more...

The main benefits of the Workbook Process are intangible. It created an interest in what was going on. Last year, we achieved all of our objectives. That gave us a great deal of pride.

Julie Ringler (Production Department):

There is benefit to having access to the information. It has allowed me to ask questions, such as why are mail order sales so good or retail sales not so good?...

Every month we talk about it. If sales are down, I want to know why. The Process gives you a reason for asking. If the company is not doing well, maybe it's because I need to order materials earlier.

Megan Montgomery (Manager of Marketing Services):

We were all used to setting goals. But it was neat to be part of a team in setting goals. It's nice to have a plan, and it's nice to have group goals (in addition to individual goals). It's great for teamwork...

We got to see how all the pieces of the company work, to see how many "cooks it takes in the kitchen to get the meal made."...

Twice we discovered that we had the same goal as another department, such as to streamline a process. In both cases, we decided to work on the goal together.

Having a monthly meeting keeps you focused. We ask the question, "How's that goal coming?"...

Before the 1991 crisis, company finances and most company operations were a mystery to me. After the crisis, everybody pitched in. I can now make suggestions, and I can see the effect on the bottom line. I feel good about that.

Everybody here feels empowered because they feel they can make a difference. We don't want to lose that.

CONCERNS FOR THE FUTURE

Senior Patagonia managers were generally pleased with the Workbook Process, but they recognized it could be improved.

Other issues were more complex or more controversial. One concern was that while a majority of employees participated actively and well in the Workbook Process, some employees seemed not to want to participate. Some employees did not want to participate from the start. Most, however, were initially excited about the Process, and that excitement made it worthwhile for them to participate. But for some the excitement faded as time passed. By the end of the year, fewer employees were taking the time to refer to the Workbooks and follow through as they were supposed to. It was hard to schedule meetings and to initiate meaningful discussions when some employees did not make the Process a priority.

Employee participation was particularly poor where department heads did not believe in the Process. Top-level managers estimated that perhaps two thirds of the department heads were committed to the Process, but that one third were not. They held the required meetings, but they were just going through the motions. One manager thought the problem was just that some people, particularly those in more creative positions, are not "numbers oriented" and do not like formal management structures. However, another manager said, "It's not a right brain/left brain issue. It's just an attitude. Some people seem not to understand the benefits. They don't think the Process is worth the time."

Required:

1. a)Perform Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis for Patagonia. (Provide at least THREE (3) points for each category)
2. b)Explain the roles of budgeting in company (Relates your answer with Patagonia company)
3. c)i) Suggest any THREE (3) advantages by implementing open book budgeting system.
4. ii) Do you agree the open book budgeting system implement by Patagonia? Explain your reason.
5. d)i) Explain your understanding about internal control.
6. ii) Explain any THREE (3) internal control procedure implemented in Patagonia.
7. e)" The more objectives are achieved, the better the performance of department/division"
8. In your opinion, should some compensation be linked to the accomplishment of Workbook Process goals?