Case Analysis: Cooperatives & How to Manage Them

Cheryl Rickert

Case Analysis: Cooperatives

November 13, 2012

Since the Mid-1700s, Cooperatives have been formed to offer products and services within the framework of a business or organization owned by and operated for the benefit of those using its services. Profits and earnings generated by the cooperative are distributed among the members, also known as user-owners. Cooperatives have a legal structure and typically incorporate as a legal entity for governance and operation. Strategically, the cooperative must offer products and services at competitive rates and quality within a framework through which the customer is also the owner.  How does a conventional business manager transition from an investor-oriented business to a member-user oriented cooperative? The purpose of this case analysis is to evaluate the pros and cons of cooperatives while defining which managerial skills and perspectives could impact this unique business structure to ensure delivery of added value to members.

Benefits of Co-Ops

The creation of cooperatives provides a sense of community among members which stems into a number of benefits.  As demonstrated in the case of Ixtlan de Juarez, the creation of community partnerships help support the development of local business while reinforcing its sustainability (Malkin, 2010).  Since every member’s performance impacts the success of the overall cooperative, there is more incentive for members to support and push one another to succeed.  This peer support and, and in some cases pressure, enables member businesses to strive for their highest performance. The creation of community builds a stronger bond than what can typically be formed through other mechanisms.  While still individual businesses, members of cooperatives become part of one team striving for similar causes and outcomes creating a collaborative network as opposed to the competitive structure often found in traditional corporations.

As community-based enterprises, cooperatives help create growth of local organizations and ensure wealth is kept within the community.  Due to being member-owned and controlled organizations, cooperatives have a broader ownership base that inherently provides a greater degree of local economic control and stability in a community. Cooperative profits remain in the community, because they are proportionately distributed to members, not investors, on the basis of their patronage. This model allows local businesses to gain access to supplies, capabilities and networks needed to fill gaps in their processes, while creating an environment where their business can thrive locally.  By doing so, local economies are supported in a much more sustainable manner than can be achieved from large TINA businesses discussed in the Small-Mart Revolution case (Shuman, 2005).  Through the support and strength of small businesses, the local economies become more stable and less likely for unexpected disruption.  This support further enhances the circulation of money in the local economy, stimulating growth while still providing a competitive market in order to deliver the best quality and costs to consumers.

Disadvantages of Cooperatives

It is evident that cooperatives provide a number of advantages, however to ensure their continued growth and development, leaders and members may face divergent challenges related to adapting within a 21st Century Global market context.  This transition will require managers to hone skills in managing returns, corporate growth, research, executive development, financing outside industry relationships, and, most critically, members. To evaluate what managerial skills and perspectives from conventional business, and what additional skills, may be required of a successful cooperative manager it is important to understand the strategic, structural and managerial issues faced by modern day cooperatives.

Strategic & Structural Issues

As cooperatives have gained strength and awareness around the value provided, membership has increased and the scope and size of their efforts have grown.  This supports the theory of stronger bargaining power in larger numbers, but it also poses the risk of diversification beyond control. The Mondragon Corporation serves members that range from supermarkets, finance, and white goods to automotive (Munoz, 2009).  While similarities could be identified across different businesses and industries, the needs and demands of a supermarket, for example, may prove to be significantly different than those of an automotive business and hence diverse strategies might be more effective. Yet, within all cooperatives, the structure allows every member a vote, leading to potential for conflict on a range of issues resulting in solutions that may be inadequate for some members. In a traditional for-profit, public corporation, stockholders hold voting rights with different weights based on their share of ownership.  This allows large investors in the organization greater influence in decision making. Conversely, in a cooperative, one member equals one vote.  For larger members, who not only utilize a larger portion of the co-ops services, but also deliver a greater return, frustration may increase as their needs and decisions do not carry any more weight than that of their smaller counterparts. These risks are highlighted in the case of Irizar’s departure from a cooperative and the collapse of United Airlines (Munoz, 2009).  Diverse interests and opinions caused such an irreparable split in the members resulting in a disintegration of the business.  In the case of Irizar their strong performance was being hindered by the poor performance of other members. To prevent frustration and departure of larger, strong performing members, it is important that cooperatives continue to demonstrate value to key members.  One means of doing this is segmenting the cooperative to group members by size, focus and needs.  This will ensure that synergies can be recognized across similar areas while preventing the risk of differences creating a rift in the organization.

The other issues discussed above can be addressed in a number of ways.  While the mission of cooperatives is to provide fair opportunity to all members, it is intrinsically a small business.  When a company looks to hire a new employee they fully evaluate their experience, capabilities and the value they can deliver to the organization.  This should be no different for a cooperative looking to add new members.  Therefore, creating a rigid evaluation process, before accepting new members, will ensure that member interests are aligned to a point that will prevent too broad of needs to manage in one organization.  It will also ensure that member selection is consistent over time, putting current members at ease knowing what they can expect from new membership.  This will help in preventing the acquisition of potentially poor performing members that will be detrimental to the overall sustainability and performance of the cooperative.

Managerial Issues

Both the Cooperative Home Care Associates and Green Business articles demonstrate that the structure and model of cooperatives provide an opportunity for individuals and small businesses to create a foundation for growth (Maruyama & Scneider, 2010).  By doing so, it is inevitable, if the mission of the cooperative succeeds, that members will progress up the hierarchy of needs.  As their business begins to grow and evolve, their demands will do the same.  To their benefit, the governance by the members for the members ensures that this evolution is considered through the voting of key decisions by the members and board.  However, as discussed earlier if there is a significant gap in stages or interests of members, this can create more of a challenge then a benefit.  This further reinforces the need for the strategy and structure of the cooperative to be aligned and focused on this target customer group.

Potential conflicts are bound to arise due to the fact that worker-owners manage other workers, yet in a cooperative scenario all members are equal and receive equivalent voting rights.  This makes the role of management much more challenging to create a sense of authority and leadership while still achieving the goal of equality.  To overcome these issues, it is important that a culture is created in which teamwork, worker autonomy, and input from all levels is supported.  While management may sometimes provide guidance or make certain decisions, every member’s voice needs to be integrated beyond just voting and put into action throughout the entire organization.  This involves effective two-way communication and information from management to members and from members to management.

Worker-owners are likely to have a much more heterogeneous set of preferences, which become more problematic as the size of the group grows. These differences prevent the growth of cooperatives in industries characterized by complex production processes necessitating different skill sets. Instead, worker-owned firms are more likely to succeed in industries characterized by little division of labor and a relatively small number of employees in a given firm (US Department of Agriculture).

One could argue that the skills and perspectives required of a successful manager of a conventional business are the same as for a cooperative; however, their objectives are different. A cooperative manager’s mission is by definition what is best for the cooperative, so what motivates the cooperative manager is distinctive.  Therefore, the prospective cooperative manager must evaluate whether his/her management style and personal goals are compatible with the cooperative vision of shared rewards.

Conclusion

In conventional business settings, corporations have an obligation to deliver returns to financial investors and ensure that this duty above all others is prioritized.  In a cooperative setting, the financial investors are the members who are empowered to influence their own destiny.   To create a sustainable structure, it is essential that the cooperative evolve with the needs and growth of their members by continually evaluating their business in the context of the industry, competitors and their own development. Addressing the imbalance between the influence of large, profitable members and smaller, less profitable members will be crucial.  If managed to address the changing needs of their customer base, cooperatives will be able grow and evolve while achieving their social mission of enhancing the competitiveness and existence of small LOIS players.

References

Alter, Lloyd. “Cage Match: TINA vs. LOIS.” Treehugger 15 July 2006. Web. 29 Oct. 2012.

Center for Cooperatives (n.d.).  University of Madison-Wisconsin.  Retrieved November 11, 2012, from http://www.uwcc.wisc.edu/whatisacoop/BusinessStructureComparison/.

Frederick, Donald A.  Co-Ops 101: An Introduction to Cooperatives. Cooperative Information Report 55.  April, 1997.

Malkin, Elisabeth. (2010, November 23). Growing a Forest, and Harvesting Jobs. New York Times.

Maruyama, Shigeki.  (1991) Seikatsu: Japanese Housewives Organize. Green Business: Hope or Hoax? Gabriola Island, B.C.: New Society Publishers. pp. 80-87

Munoz, Claudio. (2009, March 26).  All in This Together: How is the Cooperative Model Coping with the Recession? The Economist.

Schneider, Stu (2010). Cooperative Home Care Associates: Participation with 1600 Employees, Grassroots Economic Organizing (GEO) Newsletter, Volume II, Issue 5, http://www.geo.coop/node/443.

Shuman, Michael H. “The Small-Mart Revolution.”  San Francisco: Berret-Koehler Press, 2005.

United States Department of Agriculture (n.d). Cooperative Management. Cooperative Information Report 1 Section 8, from http://www.rurdev.usda.gov/rbs/pub/cir1sec8/cir1sec8.pdf.

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2 thoughts on “Case Analysis: Cooperatives & How to Manage Them

  1. tlhill2012 November 23, 2012 at 7:36 PM Reply

    Thanks for this well-written and thoughtful analysis.

    I’d like to think that cooperatives lead to an increased sense of community, accountability and motivation. And I think that they can – when intentionally managed in this way. But they need not, or more accurately, the cooperative structure is not enough; in my experience as both a member of and a consultant to various cooperatives, it takes consistent energy to build and maintain the sense of community that yields the most productive sort of cooperative.

    The point about cooperatives recycling profits is important, though again the cooperative structure per se is not enough; it depends on the membership – is it bounded and local (LOIS) or national (REI, Rabobank)(TINA).

    Excellent points about management. Scale is clearly a huge issue, as is managing the inevitable politics. On the other hand, one could argue that coops make explicit the kind of politics that are always involved in organizational life, but usually in a more subterranean way. Be careful, though, with examples. United was never a real coop; in fact, not even a democratic ESOP. It just provided a very dispersed piece of ownership with no power or responsibility to the membership – a far cry from a structure like Mondragon with its elaborate participatory structures, checks and balances, etc. Mondragon’s success and struggles are quite telling: Look what’s possible! And how hard it is to keep the system together as size dilutes culture (supermarkets) and challenges checks and balances (Irizar).

    While not a cooperative, the WH Gore company (Gore-tex) provides an interesting example. It is radically decentralized and democratic in almost everything except certain decisions about capital investments. For example, new hires do not have a boss, but are instead given a list of 10 people and told to meet them and see if there are projects on which they’d like to work. In any case, among the reasons for its success are its control of scale – no work space with more than 200 workers – and culture. In my own experience, we found that it was useful to have new members serve as apprentices, with limited decision rights, for a few years (typically 3), until they had learned about the business and absorbed the culture.

    In the end, it is, as you point out, about whom one serves: Cooperators (worker owners, customer owners, etc) or shareholders. It makes a difference. But how does this difference tie back to social entrepreneurship?

  2. tud34838 November 26, 2012 at 9:30 PM Reply

    I thought that the comparisons and contrasts conveyed the varying dynamics between conventional businesses and cooperatives. I particularly thought the cooperative structures to be very interesting. I truly feel that they are the most detrimental aspects of the coop’s success. Yet they are often very localized, and informal. The success of coops in utilizing peer pressure, as in your example, is a very impressive feature of these organizations. Similarly, the collaborative nature, rather than competitive, is just as impressive. It seems overly idealistic that an organization can operate, and succeed under such unconventional methods. However, Coops like Mondragon are such great examples of how these ideal business practices are, in fact, very effective.

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