Authors: Brian Henehan, Cornell University, email@example.com, and Bruce Anderson, Cornell University
Reviewers: Gerald White and Brent Gloy, Cornell University
Introduction to New Cooperative Development
The social and economic history of the world records innumerable cases of individuals on all continents utilizing collective action to address common social and economic problems by forming cooperatives. There is an extensive literature on the economic justification of cooperatives, legal foundations, role of cooperatives around the world and the structure and scope of cooperatives. This article focuses on the process of new cooperative development and examines cases of recently formed cooperatives in the United States. Before discussing the process of new cooperative development, it would be useful to present the range of organizational options available for groups considering cooperation.
Collaborative business groups can be organized in a variety of ways, linking companies together in a larger, overarching relationship for a common purpose. These organizations may range from informal information networks to legally incorporated cooperatives.
While such membership organizations are known by a variety of names, in general they may be logically classified as networks, alliances or cooperatives.
- Cooperative Businesses
Motivation to Start a Cooperative
The primary, underlying economic motivation to form a cooperative is basically the same as forming any new business. That is, the owners assess the feasibility and potential returns resulting from starting up a new business and agree that there are adequate returns to offset the risks taken and the costs incurred. However, the motivation of members for starting a cooperative can involve a more complex cost-benefit equation. In an investor-oriented firm (IOF), an individual investor seeks out an investment opportunity yielding the greatest growth potential or highest return on investment possible. These investors are typically taking a proactive approach to seeking out business opportunities to meet their investment objectives; often they will have little or no direct involvement in the business itself, other than as a shareholder. Indeed, the stockholder investment decision can be many steps removed from the decision to start the business or occur following startup. Most stockholders are not involved with starting the business.
In the case of a cooperative, the prospective member-owners are frequently not simply seeking the highest possible return on their investment, but a set of returns associated with becoming a member, which may include services, better prices, user control and access to markets, along with a return on capital invested. Cooperatives may also be formed to fight monopolies, corruption, exploitation and disenfranchisement or to achieve other objectives only possible through group action.
Distinctive features of a cooperative come into play right from the start. A group of potential members is not looking for just any possible business opportunity to provide the greatest return on investment. In fact there is often, but not always, a defensive nature to the reason for starting a cooperative. The group considering the new enterprise is typically responding to an economic problem that has a negative impact on them or to an opportunity requiring more resources or capital than they can individually supply. The problem itself is what catches the group’s attention and motivates them to consider and develop a cooperative solution.
The individuals involved are looking for the best opportunity as a group to own and operate a cooperative enterprise generating the highest total returns aimed at addressing the common economic problem.
Process of Forming a Cooperative
The process of forming a new cooperative requires a step-wise approach to arriving at the group’s ultimate decision to start the business. In the case of a start-up cooperative, all of the initial members have to be identified as part of the formation process. Before the business can start, a critical number of member-owners must agree to move ahead with the decision to participate. Unique financing and control features of cooperatives can make the start-up process a complex one.
The complexity involves developing agreement on the vision, mission and feasibility of the proposed cooperative among a diverse set of stakeholders including: potential members, initial leaders, community members, lenders and suppliers or customers. In addition to the challenges any new business must face, new cooperatives must be built on a high level of trust and confidence in the initial leadership and advisors during the formation stage. Without an adequate level of trust among the potential members in the emerging cooperative organization, it is difficult to secure the needed member commitment required to finance and support the cooperative.
Typically, the process of forming a new cooperative is very time consuming and involves a number of leaders, advisors and professionals, as well as organizational support from other entities. The process usually involves many informational and organizational meetings as well as coordination of the involvement of a mix of individuals and organizations.
- Resources to Support New Cooperative Development
- Role of Advisors and Consultants
- Selecting Advisors
Phases of New Cooperative Development
The phases of forming a cooperative are sequential in nature and occur along a critical path. That is, the activities associated with each phase must be completed before it is advisable to proceed to the next phase. The group needs to select and agree on what criteria constitute a green light at each phase before moving on to the following one or what criteria might constitute a red light meaning it is time to abandon the process and explore other options.
The ultimate goal of starting a cooperative can only be reached when six preliminary objectives are accomplished. The group must: (1) agree that a compelling problem or opportunity exists warranting their attention, (2) agree that by forming a new cooperative they can address the identified problem, (3) reach an adequate level of trust among potential members, (4) secure commitment from members, (5) secure commitment from other key stakeholders and (6) assemble the staff and assets to start up the cooperative enterprise. Attaining each of these objectives typically involves a set of activities common to cooperative formation. However, each group’s journey along the path of forming a cooperative can vary or take longer than another.
Activities associated with these key objectives are discussed to provide insight into the start-up process. There is no hard and fast recipe for forming a cooperative or a list of steps that work for all situations. With that in mind, the six phases common to the formation of new cooperatives are presented.
The following table (Table 1) summarizes the six phases of new cooperative development. Each of the six phases will be discussed in more detail.
Table 1. Six Phases of New Cooperative Development.
I. Identifying an opportunity
II. Building consensus on
potential for cooperative
III. Developing trust among potential members
IV. Securing member commitment
V. Involving other stakeholders
VI. Starting up the cooperative
- Identifying an Opportunity
- Initial Discussion
- What is the problem to be addressed?
- Will a cooperative be able to improve the situation?
- Forming a Steering Committee
- Building Consensus on the Potential for a Cooperative
Developing Trust Among Potential Members
During this phase of cooperative development, the steering committee, having answered the basic questions on whether there is a need for a cooperative and that forming a new cooperative is the most desirable option available, now embarks on building trust among the potential members. This trust will be essential in laying the groundwork for securing member commitment to join and support the cooperative. The whole steering committee becomes the initial champions for the proposed cooperative. It is all the more important at this time that the members of the steering committee exhibit the ability to nurture trust among the prospective members and other stakeholders.
The steering committee may find it necessary to seek seed money to fund activities being carried out on behalf of the group. Funding may be required to: hire a firm to develop a feasibility study, conduct a member survey and pay legal fees or other preliminary costs. Prospective members could be contacted to contribute funds to help finance these types of activities. It should be made clear to the group that as the primary potential beneficiaries of the proposed cooperative, they need to assume the responsibility to fund activities to help determine the potential for the cooperative business. It should also be clear to those contributing funds, that they assume the risk of losing this contribution if the proposed cooperative business is proven to not be feasible or members do not make the necessary commitment to the new cooperative.
- Evaluating Feasibility
- Prospective Member Survey
- Establishing Legal Identity
Securing Member Commitment
The next phase of new cooperative development involves securing enough commitment from potential members to create a viable organization. Usually a number of activities take place to finalize member commitment including: analyzing potential risk, completing a detailed business plan, determining the required level of each member’s investment, defining member’s rights and responsibilities, assessing the need and skills for management/staff and projecting the required level of and sources for financing. A sensitivity analysis should be utilized to determine how changes in key variables, such as availability of supplies, prices, interest rates and government policy, might affect the business plan between the time required to secure member commitment and the actual startup of the cooperative business.
A key step in securing member commitment is describing and analyzing the potential risk associated with starting a new cooperative venture as well as presenting strategies that the proposed organization will utilize to manage those risks. The following example presents a set of risks that would be encountered by a group of producers considering the formation of a new value-added marketing cooperative. The risks can be broken down into seven risk categories: market, technological, construction, operations, organization, financial and government policy. Each of these areas is discussed in more detail.
- Analyzing Potential Risk
- Business Plan
- Equity Drive and Capitalization
Involving Other Stakeholders
Any successful start-up cooperative relies on many stakeholders other than members. Management, employees, lenders, suppliers and customers are some of the non-member stakeholders who must commit their support to the cooperative for it to succeed.
- Manager or Chief Executive Officer
- Role of Lenders
Opening Up for Business
After all of the preliminary phases of the development process have been accomplished, the cooperative can open its doors for business. Several remaining activities occur at this point. An initial annual meeting of members is scheduled where an election of directors occurs, replacing the interim board of directors or steering committee. The board typically selects its own officers and assigns directors to serve on any individual committees that are needed.
The results of the equity drive are announced, and any remaining financial commitment needed from members or lenders is secured. All of the assets needed to run the business are obtained.
- Hiring Staff
- Setting up Books
- Meeting Regulatory Requirements
Achieving Succcessful Startup
What can directors, members and managers of start-up cooperatives do to enhance the chances of success? An effective board of directors teamed up with qualified management are certainly key ingredients. A solid financial footing is essential with significant equity investment from members. Executing effective marketing or purchasing strategies are another key element.
- Potential Obstacles
- Leader’s Involvement
- Member Capital and Risk Through Startup
- Potential Pitfalls
New Cooperative Failure
Limited data are available on the failure rate for new cooperatives, but starting any new business is a high-risk proposition. New cooperatives fail for many of the same reasons other new businesses fail. However, we will discuss some of the unique dynamics that may create additional stress on new cooperative startups and possibly cause new cooperatives to fail.
Ingredients for Success
Let us begin by reviewing the two necessary conditions for the successful establishment of any cooperative organization. First, there must be joint recognition of a common economic problem. Two or more individuals must face a common, real economic problem. The problem could be the lack of sufficient market outlets of firms in an industry, common recognition of inadequate buying muscle in the purchase of supplies or services or financial pressures that force entities to explore the sharing of equipment, personnel or services.
It is extremely important to identify the real economic problem and not just the symptoms of the problem. Also, all parties that will be involved should have a rather uniform understanding of the problem.
The second condition is that the proposed cooperative should be more efficient in performing the service collectively than individuals can. In economic terms, the new organization can achieve economies of scale. Economies of scale can arise through better utilization of personnel, equipment or other resources as well as by the sharing of financing or risk management. It can be difficult and risky for a single producer to finance, organize and operate a business, but collectively it may be accomplished very efficiently.
It is important to identify effective leaders at an early stage, encourage them and reward them for their efforts, even if merely with a few supportive comments. Leaders are the driving force in cooperative endeavors. They achieve compromise among participants. They overcome barriers and obstacles. They see worthwhile efforts through to completion. Consequently, it is imperative that any cooperative effort have the required leadership.
An effective board of directors teamed up with qualified management are certainly key ingredients. A solid financial footing is essential, and effective marketing or purchasing strategies are other key elements.
- Lessons from New Generation Cooperatives
- Use of Knowledgeable Advisors
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