Read the case study below and answer the questions that follow. Case 1: Nau: The Ups and Downs of a Start-up In 2005, several individuals with experience in the outdoor clothing industry met at Portlands Urban Grinds coffee shop to sketch out their new retailing concept. Their idea was to combine

the eco-friendly and mountain-climbing style of Patagonia Clothing Company with the fashion- forward urban cool of Prada Designs. Not only would their clothes be practical on the trail, but

they would look sleek and trendy in the city as well. The firm to be named Nau (pronounced now), would design its own fabrics with new sorts of eco-friendly materials. Even Naus retail outletsthe business plan called for 150 of themwould be constructed from recycled wood and plastic. The team also decided to donate 5 percent of sales to worthy non-profit organisations that buyers would choose. The clothes would be pricey, but shoppers would feel good knowing that by buying a $40 T-shirt or a $350 jacket, they would also be supporting a charitable cause.

Chris would be the firms CEO and Ian would become its marketing chief. Formerly, Chris and Ian had worked as marketing executives at Patagonia and Nike, respectively. Mark, recently a top Patagonia designer, would be the lead designer for Nau. The founders timing was impeccable, or so it appeared. The green movement was in full swing, and a booming economy was giving rise to a sort of mass philanthropic movement. But Nau also had its eye on running a successful business. Stores would be about half the size of typical specialty apparel stores, with tiny inventories, representing a huge cost saving. To make these small stores work, Nau would offer shoppers a 10 percent discount at the register in exchange for Naus shipping clothes from its warehouse directly to their homes. Customers went wild when the first three stores were opened in March 2007 in Portland, Oregon; Chicago, Illinois; and Boulder, Colorado. The founders intended for Nau to be more than merely another clothing companythey wanted to make meaning (make a difference) Were a small group of people committed to using the power of business as a force for change...seeking to balance the triple bottom line: people, planet and profit. We believe that doing good and doing good business is one and the same thing. We only deserve to exist if our products and our practices are capable of contributing to positive, lasting and substantive change. Our goal: To demonstrate the highest levels of citizenship in everything we do: product creation, production, labour practices, the way we treat each other, environmental practices and philanthropy. We believe that companies have a broader responsibility than simply generating profit. Thats one reason were blending profitability and philanthropy, what we believe is the new measure of success. As an example of Naus uniqueness, company bylaws prohibited any Nau executive from earning more than 12 times what the lowest-paid U.S. worker earned. In planning for a successful venture, Naus management believed that a key factor would be its design philosophy: We believe great design has enormous power and were trying to use it to change the world, one sustainable fabric at a time. Our design philosophy is built on the balance of three criteria: beauty, performance and sustainability. Far from mutually exclusive, the integration of these concepts defines a new standard for apparel. Many people make exceptional clothing that embraces one of those criteria. A select few manage to combine two of the three, at the most exacting levels. As far as we know, no one has made a dedicated effort to integrate all three with unflagging commitment to each. The Nau team wasted no time ramping up. Among its moves: investing in an IT infrastructure powerful enough to handle $250 million in annual revenue and striking deals with fabric makers in the United States, Hong Kong and elsewhere in Asia. By the end of 2007, Nau had opened an additional five stores and had started construction of another four. To finance the companys growth, the management raised an amazing $35 million from private investors.

While the company was experiencing phenomenal growth, troubles soon began surfacing. On May 2, 2008, with little, if any warning, a statement on the companys website announced that the company would be shut down. The announcement read: Good bye for Nau, blaming a highly risk-averse capital market for the shutdown. We simply could not raise the necessary funds to continue to move forward, the statement read. We believe this is not so much a reflection of the viability of our business, but the result of an unfortunate confluence of events. All the stores were closed, and the firms 95 employees were dismissed. Naus leadership had assumed that additional financing would be available for future growth. Then the credit crunch hit. With no recourse to bank financing, the team implored its biggest investors for additional funding. But the investors who had been so generous just a few months earlier were no longer interested in investing more money in the business. Everyone on the board understood we had gone in too far to turn around and pare this thing down, said Gomez, then board chairman of Nau. The money was gone. The board voted to close down Naus stores and suspend all business. Naus management was stunned. The day after the closure, Ian and Mark contemplated life without Nau and felt a deep emptiness. We had poured everything into this, said Ian. I just could not believe it would endand end so quickly. Mark looked over his designs and wondered how well they would have sold. We had only one season to get traction, he said. If we had just one more season, we would have been OK. After the board put Nau into liquidation, Chris organised a buyout effort to acquire the Nau brand and its website. His plan was to relaunch Nau. Ian and Mark, like Chris, also remained committed to seeing the Nau brand and what it represented continue. We recognised there was incredible value in the product and in the brand, said Ian. In addition to Chris, efforts, Ian and Mark set out to find a buyer who would keep the business going. They first went about preserving business relationships. We called up factories, said Mark. They agreed to hang on for a period of time to see if something could be resurrected. To attract a buyer, they decided they would need to overhaul Naus business plan, which they realised had been too idealistic and ambitious. Rather than attempt to ramp up a huge number of stores, they decided that Nau should grow slowly and organically. They also blamed themselves for how they had run the company. They could have gone into wholesaling. The website could have been stronger. Perhaps they had overextended themselves by offering too many styles. No aspect of the business was left unexamined. After dozens of inquiries, Ian and Mark got the attention of Gordon, the CEO of Horny Toad, a large casual clothing line in Santa Barbara, California. They felt Horny Toads outdoor image could be a good fit for Nau. They also liked linking the Nau brand to the back office support and infrastructure of a successful apparel maker. Gordons initial reaction was lukewarm: I still wasnt clear about how we could help. However, after visiting Naus headquarters, Gordon liked what he saw. He offered to purchase Nau, trumping Chris bid and several other bids. Gordon also agreed to hire Ian and Mark, who would continue in the same positions.

QUESTION ONE a) What were Naus founders primary motivations for founding Nau? [6 Marks] b) What is your opinion of managements decision to give a percentage of the firms sales to charity? Describe the pros and cons of such a decision [6 marks] c) Describe Naus competitive advantage. Do you think it is sustainable? [6 Marks] d) What mistakes do you believe Naus management made in executing their strategy?[4 marks] e) There are a number of factors that Nau considered before deciding what kind of financing to go for. Identify and describe 4 such factors relevant to the business model [4 Marks] f) Do you believe it was a wise decision for Nau to partner with Horny Toad? Give reasons for your answer. [4 Marks]