Cooperative Business Models

Strategy+business carried a great article on Cooperatives covering such leading companies as Rabobank, Italian retailer Coop and others. The article has some great insights on why the cooperative business model is a powerful alternative. Unfortunately, the article did not include good sub titles to drive the message home better. So i took the liberty to do that (s+b, please pardon my heavy cut/paste). Key takeaways: 1. Coops are major contributors to national economies:

Although co-ops tend to operate with little fanfare and are often unrecognized by the financial press, they account for 83 percent of Dutch agricultural production, 55 percent of agricultural production in Italy, more than 50 percent of banking services in France, and 21 percent of Spanish health care (according to the Commission of the European Communities). In continental Europe, these companies employ approximately 4.8 million people, 20 percent more than the total work force of large corporations in the same region. The largest cooperatives boast sales that rival those of any business. In 2004, sales figures included d9 billion ($11 billion) each for Coop and Coop Norden (consumer cooperatives in Switzerland and Scandinavia), more than d30 billion ($36 billion) each for Edeka and ITM Enterprises (retailer co-ops in Germany and France, respectively) and d40 billion ($48.5 billion) for the German retailer REWE Group.

Right here in India, Amul is India’s largest food company and is one of the most successful cooperatives with 10 million milk producers as members. 2. Coops may be a better model than investor owned companies when it comes to ethical and legal lapses:

Cooperatives are often assumed to be merely local affiliations of small and midsized companies, and therefore limited in scope and reach. But their deep roots in their countries of origin — as well as their surprising pervasiveness and stability — are exactly what puts cooperatives in a strong position in the new global economy. Through their highly participative governance models (involving both members and employees in making decisions), the cooperative system is particularly well suited to combining entrepreneurial and social objectives. Because it encourages internal checks and balances and general transparency, cooperative structure also makes it easier to avoid the ethical and legal lapses that have brought down the management of many investor-owned companies.

3. But can they withstand competition from big-pocketed competitors?

During the last few years, Unicoop Firenze faced unprecedented competition from retailers entering Italy, including several European giants: Carrefour, Panorama, Esselunga, and E. Leclerc. “These entrants triggered a full-blown competition over prices and distribution,” says Maura Latini, channel director of Unicoop Firenze. “Luckily, we had prepared for this over the previous years by competing against each other.” Before this competition set in, COOP’s management had moved to create internal competition between the chain’s supermarkets and “hypermarkets” (larger outlets that combine features of supermarkets, department stores, and specialty stores, introduced in Europe to compete with the influx of Wal-Mart and similar retailers). This helped COOP establish price leadership in products across the board and ensure better food quality. “Management had decided to introduce this mechanism so that our employees would get used to competition before we had to face it directly,” adds Ms. Latini.

Okay, what are the failures?

Success, in Europe or elsewhere, is not assured. Cooperatives have faltered at times. This happened most recently in the 1990s with Great Britain’s famous “building societies,” cooperative banks that had pioneered low-interest mortgages for their working-class members. In a series of publicly criticized moves, the boards of some major cooperatives rewrote the governance rules to make directors less accountable, sold the companies to more conventional businesses (for example, Lloyds Bank took over the Cheltenham & Gloucester Building Society), and allowed a few directors to pocket disproportionately large gains. Observers concluded that cooperatives, like many idealistic experiments, would simply not stand up against conventional business practice; they would need special legal protections to survive.

As the article details further, there are several other advantages and disadvantages like anything else. In countries like India, where large sums of capital are hard to come by, cooperatives can really be a workable alternative by creating a network of micro-entrepreneurs. I recently read a report that a package shipping company (called couriers in India) has formed in South India using a cooperative business model. They want to take on the Fedex, UPS and DHL of the world. Sorry, could not locate a reference on the internet to link to.