I attended the Social Enterprise panel at the HBS conference. The highlight of the panel for me was the opportunity to delve deeper into a case I had just completed at Mason. The panel was made up of very unique individuals from niche businesses.

Panelists:

Tetsuya O’Hara, Director of Advanced Research and Development, Patagonia
Monique Péan, Founder, MONIQUE PÉAN
Tim Riley, Director of Online Experience, Warby Parker
Albe Zakes, Global VP, Media at TerraCycle, Inc.

The opening comments from Patagonia may have sounded counterintuitive, but  you could tell that Mr. O’Hara meant it when he said that his company’s guiding principle is to make the best products first, then worry about the customer. It wasn’t surprising to me considering that I had just completed a case on Patagonia in Prof. Ganeshan’s Operations class at Mason. Though Professor Ganeshan’s class taught us about supply chains, it also had an environmental sustainability bent that made it a very meaningful experience.

Each company present had a special theme that set the context for the audience to understand their simple – sometimes controversial – but sincere answers to the questions asked. Tim Riley from Warby Parker let the group know that his company’s mission is to disrupt the overall eyewear industry. Monique Pean, formerly an investment banker, started her sustainable jewelry business in 2006, in which she works with local artisnas around the world; and supports water sustainability efforts. It was equally inspiring to hear from Albe Zakes, who started out as an unpaid intern at TerraCycle (founded by a Princeton dropout and currently operates globally in 14 countries), and worked his way up to become the Global VP, Media.

Challenges

In today’s world where businesses compete either on price or differentiation, its even harder for businesses with a socially relevant theme to make their mark.  In discussing their major challenges, the panelists had similar answers. Top of the list was the challenge of educating today’s consumer about their products. For Patagonia, its a never-ending challenge as they try to execute on their mission to influence not only consumers, but other companies to do what is right for the environment. Albe Zakes told the audience that TerraCycle’s biggest challenge lay in consumer conception that they make dirty and nasty products out of garbage.

In the world of sustainable jewelry, materials sourcing is a major issue, which becomes more difficult when bigger orders force you to consider assembly line manufacturing capabilities. Monique Pean has been addressing this problem by standardizing her company’s products, but it has been very difficult because their products are hand made. Consequently they have to “bake in” these challenges in serving the customer, sometimes at a higher price than substitute products.

Sustainability may not be mainstream today, but it certainly is getting the attention of more and more customers. Patagonia is addressing the issue of growth in their business in a way that doesn’t follow the conventional thought on Wall Street (of course they are not owned by Wall Street). Mr. O’Hara from said that his company was satisfied with 5-7% growth per year. They actually do not want to grow too fast. Can you imagine that? Though they are an outlier in the way they manage their business, Patagonia’s products are becoming more mainstream. So much so that they launched a new product lifecycle initiative to stop their products from becoming a fashion fad. When you go to buy a Patagonia product, clerks try to convince you not to buy the product if you can’t prove that you actually need it. Patagonia accepts that it contributes to waste and is using its business to address environmental concerns. It also recycles your old and worn out products free of charge. That is truly amazing and refreshing for this MBA.

Keeping the Company Culture

Building a company like Warby Parker has not been easy. This eyewear industry disruptor was started by four MBAs from Wharton – their main goal was to remain friends and strive on being forces for good. Tim Riley told us that though they have roughly 26 employees, growing the company (which aims to become the first carbon neutral company) has been a challenge esepcially in terms of human capital.  They have received lots of applications from people who want to be part of their company and so they now have to take their time to match their employees with the company’s culture. Most important of all, they need people that they can trust to implement. His comments remind me of the dilemma startups face in their early stages – to hire the first warm body, or someone who can really help the company grow.

The TerraCycle that we know today as a manufacturer of recycled consumer products may not have been if the founders had accepted the $1M they won from venture capitalists (VCs) in their early days. VCs had wanted to transform the company into a fertilizer business. The founders stuck to their mission of “eliminating the idea of waste” and rejected the prize (it is very hard to fix a reputation once its been tarnished). TerraCycle takes its mission very seriously and has continuously found ways to reprocess their materials for other uses because they want to eliminiate their impact on the environment.

Another method to retain your company’s culture is to be honest with your customers. Albe Zakes said that being honest about the flaws in their business model has helped TerraCycle have the impacts it does today. At Warby Parker, sustainability is not another marketing gimmick – it is part of their business DNA. Great companies like Patagonia acknowledge that they themselves pollute the environment. Since 1985 they have donated 1% of their top line revenue to environmental causes. This not only means that they acknowledge their impact, but are also taking action. Tetsuya O’Hara said it was part of their principle to be authentic and engage the world. Monique Pean goes as far as using PR, and social media to stay in touch with customers to let them know which jewelry options are more or less sustainable.

Advantages of Being a Sustainable Company

Top on the list is that you hardly have to pay for advertising. As Albe Zakes noted, TerraCycle has never had to pay for advertising. Warby Parker and its vintage eyewear have also received a lot of attention especially from magazines like GQ. It is also evident that sustainable companies have a message that resonates deeply with their target customers because people want to be associated with products they feel good about.

With limited or no advertising budget, Monique Pean has been fortunate to win a CFDA award. That in addition to mentoring from Tiffany’s CEO has given her company exposure. At Patagonia, marketing expense is less than 1%. The growth rate in the last 15 years has been 6%, but in the recent financial crisis, consumer demand for high quality environmental products has helped th business grow by about 10%.

I’ll end this entry with something that some of you may not know: sustainable businesses can do well, even in recessions. In 2007, Patagonia had more than 1000 styles in inventory. They reduced the line variety by more than 50% in 19 months and sales increased as a result. The recession reminded them of who they are. Recently they have grown by 10% and are now focusing on selling simple products. As Mr O’Hara said, their strategy is Zen like – the more you know, the less you need. Constraints can really spur innovation.