The Challenge Case describes how Yvon Chouinard turned his ideas for climbing equipment and apparel into a well-respected, socially responsible business. The story of Patagonia provides an example of how entrepreneurship can fundamentally change an industry as well as the way people think about running a business responsibly. Chouinard saw the way rock climbing was carried out and thought of better ways to perform it. This kind of thinking led him to an opportunity that other climbers valued. Satisfying the resulting demand then turned out to be profitable. Accurate identification of an opportunity is not a guarantee of success, however, because research suggests that most new businesses fail.

According to Schumpeter’s classic formulation of opportunities, Patagonia has thrived because it seizes on opportunities arising from new raw materials and methods of production that use new synthetic fabrics, organic cotton, and eco-friendly facilities and processes. The company’s reputation for excellent quality and commitment to the environment has driven demand for Patagonia’s goods despite their premium prices.

In starting Patagonia, Chouinard proceeded through the three steps of the entrepreneurial process. He identified an opportunity when he realized that climbing gear was wasteful because the original pitons could be used only once. Next, he evaluated the opportunity after he realized that he could teach himself to make a superior product and later saw that he could sell that product profitably to other climbers. A full evaluation likely included figuring out whether the idea was practical, gathering information on what others in the industry were doing, and deciding whether his hardware could compete with the products already available. Finally, he exploited the opportunity by setting up a small workshop, selling his products out of his car, taking on a partner, and publishing a catalog as his business expanded.

As Chouinard proceeded through these undertakings, he needed to understand the entrepreneurial risk associated with adding each new product line. If customers had not bought the pitons, the rugby shirts, or the innovative, company-designed apparel, the time and money he had already invested in the business would have been wasted. The potential loss for Chouinard would have been dramatically different from that of starting a new company to compete with Lowe’s and Home Depot, for example. If a new company wanted to compete with those home improvement retailers, it would need to purchase or lease buildings throughout the world to sell its products. In addition, it would need to purchase all the necessary inventory to stock the shelves in those stores. Patagonia, in contrast, started with one product line and added lines one at a time. It also expanded distribution gradually, from the informal arrangement in the back of Chouinard’s truck to a catalog, to physical stores, and to today’s online retailing.

Even with these modest beginnings, Chouinard needed financing. As the company grew, it turned to bank loans to pay for the company’s expansion. Later, when sales declined, Chouinard came face-to-face with the risks of borrowing. He had to enact significant layoffs and struggled to avoid losing control of the company by selling it or bringing in investors. Chouinard wanted to maintain control as the owner of the business so that he could continue to pursue sustainability along with profits. Therefore, he decided that loans were not an acceptable means of financing that he would seek.

Because of Chouinard’s commitment to sustainability, Patagonia remains a paragon of social entrepreneurship. The company’s values indicate that it intends to continue recognizing, evaluating, and exploiting opportunities that create social value rather than wealth. This commitment means that although profits are necessary to keep the company operating, they are not the only measure of success. Concern for social measures of success will make it harder for Patagonia to attract investors, but the owner’s goals do not include attracting outside investment. Rather, Chouinard is interested in whether people will be able to continue enjoying the beauty of the natural world for generations to come, just as he did when he was a teenage rock climber in California.