Co-operative Enterprise: a solution to contemporary economic problems. By Tim Mazzarol

Celebration

Well-designed co-operative business models that maintain a close eye on the creation and delivery of value to their members are among the most resilient of enterprises. Tim Mazzarol argues that with their focus on the economic and social development of their members, and their strong democratic principles, co-operatives offer an attractive solution to the current economic problems facing the world.

Since the Global Financial Crisis (GFC) of 2008-2010 the world’s economies have slowly recovered, but economic growth remains subdued. According to the OECD inequality across much of the world has worsened. For example, in 2010 the average income of the wealthiest 10% in the 34 advanced economies that comprise the OECD was 9.5 times greater than that of the poorest 10%. This is the largest gap in wealth for the past three decades.

Within the developing world the level of income inequality is much worse with only a few countries managing to reverse the widening gap. One example is Brazil, which has seen relative income disparity reduce slightly, but even there the richest top 10% of the population earn over 50 times more than the poorest 10%.

The tragedy of this economic malaise is the impact it is having on young people. In 2013 youth unemployment in the OECD stood at an average of 13%, although it is much higher in some nations. For many people, even those with university qualifications, full-time work is difficult to get. Around 40% of the workforce in many countries is unable to find full-time, stable employment. This has led to growing political unrest and a growing dissatisfaction with the current economic system.

 

Co-operative enterprise as a potential solution

A legacy of the GFC has been an increasing level of interest in alternative economic and business models. This has manifested itself in a growth in social entrepreneurship programs and spurred an emerging academic field of research. However, this growing interest in social enterprise tends to ignore the fact that the field of co-operative economics has been around since the 19th Century.

The modern co-operative movement traces its origins back to the Rochdale Society of Equitable Pioneers, which was established in 1844. Although it was not the first co-operative in the world, it was the ancestor of the business model that continues through to the present. A particular legacy of the Rochdale Society was the foundation of their business on several key principles. These included voluntary and open membership, democratic member control, and economic self-development for members, plus freedom from government or religious affiliations.

Today co-operative enterprises can be found in almost every country around the world and across most industries. In 2012 the United Nations celebrated the International Year of the Co-operative, and the International Co-operative Alliance (ICA) has declared the period to 2020 to be the “Co-operative Decade”. This aims to use co-operative economics to help alleviate the current income inequality sweeping the world, and build a more sustainable and equitable future.

 

The co-operative enterprise business model

Over the past six years I have been leading a research program focusing on understanding the nature of the Co-operative enterprise business model. This has examined the factors that make this type of enterprise unique, plus the forces that influence its resilience and competitiveness. This year we published a Research Handbook on Sustainable Co-operative Enterprise  through Edward Elgar Publishing.

The book draws together a wide-range of authors from around the world who have contributed chapters to the work. It includes many of the world’s leading researchers in the field of co-operative enterprise, and synthesises their work around six themes while addressing five key research questions. These questions relate to the factors that lead to the sustainability of the co-operative and also best practice in relation to governance, financing, marketing, shareholder rights, and innovation.

At the heart of the book is a conceptual framework of the co-operative enterprise business model. This draws on the extant literature relating to business model design, and adapts it to the needs of the co-operative. The model suggests that the co-operative enterprise is a dual purpose business that generates both economic and social capital outputs. This is important because both are vital to its sustainability and the overall strategic purpose of the co-operative should reflect these two outcomes.

The framework also identifies four key external forces that impact on the co-operative enterprise. First, there is the level of social cooperation existent within the community from which the co-operative’s membership base is drawn. If there is a strong foundation of social capital this can provide the necessary ingredients for cooperation. However, without this willingness to collaborate the formation and sustaining of co-operatives is difficult.

A second force is the role of government. Around the world governments serve as critical agents in the growth or decline of co-operatives. Although the co-operative enterprise is independent of government, it is impacted in a positive or negative way by the legislative and regulatory environment created by government policy. Co-operatives are a hybrid type of business, with both social and economic purposes. They can sometimes fit uncomfortably between hard-nosed rational ‘free market’ economic policies, and the more welfare oriented not-for-profit and charitable policies.

Also important is the third force of market competition. All co-operatives exist as businesses within a given market or industry context. They are faced with the same competitive forces that impact all firms in these industries. How they compete with their investor owned business counterparts may determine their success or failure.

Finally, there is a need to consider the impact of the natural environment. For co-operatives in the agricultural or fishing industries the impacts of climate change or the degradation of the natural environment will have significant bearing on their operations. However, all co-operatives, regardless of industry, are strategically challenged by the natural environment and the need to find sustainable practices in their operations.

 

Knowing your purpose is the key

Within this macro-environment context the co-operative enterprise business model is built around seven key elements. Of these perhaps the most important are the organisation’s purpose, governance and share structure, plus how it configures its resources and activities to deliver value to its members. Given the social and economic nature of co-operatives, the purpose for which the business was created remains a critically important building block. This should guide the way the co-operative designs its governance structure, and also how it determines ownership of share capital and the voting and equity redemption rights that accompanying this.

Mainstream ‘investor owned businesses’ operate much like a poker game. Many players start, but few make money and a tiny few carry away most of the money. By contrast co-operatives offer a fair-share model based on active patronage or participation in the business. While the returns to investment in co-operatives may be potentially lower than those in investor owned businesses, the value created is distributed more equitably.

 

Author Tim Mazzarol Dr Tim Mazzarol is Winthrop Professor in entrepreneurship, innovation, small business, strategy and marketing at the University of Western Australia Business School. He is also an Affiliate Professor at the Burgundy School of Business, Groupe ESC Dijon Bourgogne France and President of the Small Enterprise Association of Australia and New Zealand. He is a Qualified Practising Market Researcher (QPMR) with the Australian Market and Social Research Society (AMSRS) and the author/co-author of 27 books, book chapters and monographs, 51 peer reviewed journal articles, over 100 peer reviewed conference papers and numerous industry research reports. His research focuses on strategic marketing and management of services, the marketing of higher education, strategy and innovation within small firms, word of mouth communication in marketing, and the sustainability of the co-operative enterprise business model.

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