The cooperative business model is unique as it is based on the belief that members of a given enterprise must participate in its ownership and governance. Even though it may not be as popular as other business models, it has existed since the 19th century. It differs from the corporate business model that focuses more on maximizing shareholder value and less on bettering societies.
To fully operate, such businesses may have to blend in with for-profit entities, but their purpose remains different. This model ensures that businesses are accountable to those who use it daily. Now that you have a clue about the corporative business model, let’s learn more about its values, principles, types, and other pertinent information.
Types Of Cooperatives
The International Cooperative Alliance defines a cooperative as an autonomous association of people united voluntarily through a jointly-owned and democratic enterprise to meet their social, economic, and cultural needs. Such businesses are also known as a co-op. All the members must have a common need before partnering. There are three main types of cooperative businesses that can exist in any industry. However, most are found in healthcare, housing, education, agriculture, financial services, grocery, and insurance. They include:
1. Producer Co-ops
Producer cooperatives are generally owned by farmers, small businesses, and suppliers who leverage their purchasing power to get discounts on production supplies. Such parties obtain economies of scale that reduce production costs, helping them compete fairly with large corporations. These are the parties that produce the final product.
2. Consumer co-ops
These are made up of customers who come together to purchase goods and services at discounted prices by combining their purchasing powers. They, therefore, obtain goods directly from suppliers saving them from middle-men fees and other related markups.
3. Hybrid Co-ops
As the name suggests, a hybrid co-op combines the above cooperatives. They are generally owned by employees and customers. The latter comes together to create and maintain high demand so that entities can produce high volumes of products, empowering them to obtain group discounts on equipment and supplies.
Values Of The Cooperative Business Model
The cooperative business model differs from the corporate business model based on its operation and values. It is more interested in meeting the needs of parties and society and not purely on profits. The model is based on the following values:
Even though society is unequal, cooperatives treat everyone fairly and help them meet their needs. These entities, therefore, champion diversity and inclusivity.
In this business model, helping others equates to helping oneself, which explains these entities’ commitment to building resilient, self-regulating, reliant, and sustainable communities.
Every member or owner of a cooperative enterprise has a voice in how the entity is run and managed. There must be democratic structures where members can raise their opinions and agree on policies and strategies before they are passed.
In the cooperative business model, every member has rights and must be accorded the dignity and respect that others enjoy. These entities appreciate that everyone has something special that they bring to the company, which strengthens it as a result.
Self-responsibility means that every member must be committed to making the entity successful. They must take ownership of their actions and hold others accountable to help the enterprise succeed.
The cooperative business model operates on solidarity, meaning that all the members must work together, support one another, and advocate for collective improvement.
7. Ethical Values
All cooperative members should be ready to operate by the following ethical values- social responsibility, openness, honesty, and caring for one another.
Principles Of The Cooperative Business Model
Principles allow entities to exercise the above values. They include:
1. Voluntary and Open Membership
Anybody can join a cooperative society or enterprise provided they have a common need that needs to be met. In promoting equity and equality, these entities champion inclusive participation from people of different races, gender, religion, or economic status.
2. Education, Training, and Information
Co-ops offer education and training to their members, employees, managers, and elected representatives to contribute to their development and that of the society in which they operate. This also extends to the general public, which is kept informed about the nature and benefits of the enterprises.
3. Autonomy & Independence
Co-ops are usually autonomous associations whose operations are controlled by members. These entities can negotiate contracts with other organizations and raise capital from external sources. However, such activities must promote their autonomy and reflect the democratic will of members.
4. Cooperation among Cooperatives
Cooperatives generally work with local, national, regional, and international structures to strengthen their movement and meet the needs of their members. They recognize the strength that comes with uniting.
5. Community Concern
Cooperatives are usually concerned about the communities around them and, therefore, champion their sustainable development through democratically approved policies.
6. Democratic Member Control
One of the main values of the cooperative business model is a democracy, which is achieved through democratic member control. Members participate in all policy and decision-making. Every elected leader is usually accountable to the members and can’t negotiate a contract that goes against their will or fails to respect the business’s autonomy.
Members of primary cooperatives also have equal voting rights, i.e., one member, one vote. Even though this may not be the case for other higher cooperatives, they still recognize democracy and have the right structures.
7. Economic Participation of Members
Every member must equitably contribute to the entity and participate in its capital management, where a percentage of the capital is considered the company’s common property. Limited compensation is usually provided on any capital offered as a condition of membership. Under this business model, surpluses can be used to develop the cooperative by setting up reserves and supporting member-approved activities.
How Does The Cooperative Business Model Work?
1. Cooperative Businesses and the Community
The cooperative business model exists to serve its members and the community in which it operates. Most of the profit earned is channeled towards meeting the social, cultural, and economic needs of members and the community around it. Unlike with corporations, excellent performance means more benefits for the community, which explains why these businesses enjoy support from the government and the public.
These businesses are exclusively controlled by those who use them regularly, which breeds a sense of communal ownership and operation, motivating members to hold each other accountable. Successful businesses offer investment opportunities, employment, wealth distribution, and collaborative growth.
2. Ownership and Control
Under the cooperative business model, ownership and control are different. This is unlike traditional businesses where control and ownership are directly linked, meaning that the entity/ person with the highest shares exercises controls over the company.
Upon joining a cooperative business, new members are required to contribute a given amount of equity. These contributions mostly depend on the number of goods or services members are willing to buy, which means that ownership depends on the amount of equity the person contributes.
One has to be a given cooperative entity’s customer to invest in it, which differs from the traditional business model, where an outsider can own shares without necessarily using or believing in the company’s product. In fact, most cooperative societies only sell their goods and services to members. Those open to outsiders still have great discounts for members.
The type of control co-op members enjoy is different from the traditional business model, where each share equals one vote. In cooperative societies, one member equals one vote, meaning that even though ownership depends on the amount of equity contribution, control doesn’t. As seen in the traditional business model, members can’t pump up their equity contribution to gain a majority and control company decisions.
Advantages Of The Cooperative Business Model
The cooperative business model focuses on community, members, and employee empowerment. Here is a complete list of the advantages;
1. Limited Liability
Cooperative enterprises are limited liability entities, meaning members are only liable for their equity contributions or investments. Any debts or liabilities incurred by the company cannot be transferred to them unless in negligent or fraudulent cases. Even though they don’t pay the enterprise’s debts when it fails, they have to forfeit their investments in most cases.
2. Open Membership
Everyone can join any cooperative enterprise provided they have a common need that needs to be met or benefits from its products and services. These entities do not discriminate on age, gender, race, class, or religion. Contribution is also welcome in the form of capital or labor. Lastly, there is no cap on their membership, which enhances growth.
One of the biggest advantages of the cooperative business model is equal membership, i.e., every member has equal power regardless of their equity contribution. Ownership doesn’t equate to control, meaning that the person/ entity with the largest amount of equity cannot solely influence decisions and policies. Also, every member is entitled to a percentage of their investment whenever there is a surplus.
4. Access to Products and Services
The cooperative business model prioritizes access and not profit. It allows members or communities to access goods and services they couldn’t easily obtain in normal conditions. Some offer new products and services that are still not as popular. The profit generated by the company is invested back to maintain such access and better the members and the community and not given to a few shareholders as in the case of traditional businesses.
5. Social Benefit
Cooperative enterprises empower the communities in which they exist. They promote good business and easy access to goods and services. They also promote equitable wealth distribution as people can freely invest, participate and support them. The community benefits from the education and instruction given to these enterprises’ employees, members, and representatives.
The cooperative business model is more sustainable as compared to others. Its structure advocates for co-ownership and equal control, saving it from common blunders that push entities out of business. Chances of impulsive decision-making that can negatively harm the company are reduced since decision-making is shared.
Co-op members are also part of the community in which the business operates, meaning that the decisions made have to be in the community’s interest, which promotes sustainability. Additionally, cooperative businesses do not depend on consistent cash flow and investments as traditional businesses, meaning that their operations are not heavily affected if a key member leaves.
Lastly, cooperative enterprises are separate business entities, meaning that their operations are not affected by the death of any of their members, as seen in the traditional business model when a significant shareholder dies.
7. Tax Exemptions and Concessions
Cooperative enterprises are not exclusively interested in profits and therefore enjoy tax exemptions and concessions from authorities. This differs from the corporate business model, where the business’s net earnings, shareholders’ incomes, and dividends are taxed.
8. Relaxed Formation
Cooperative enterprises are easier to form as compared to traditional enterprises. It only requires ten people with a common need to form a steering committee and attend to the formation requirements. This committee recruits members creates the business plan and secures financing. It must also ensure that the cooperative is incorporated under the right statute. A traditional business will require more than the steering committee and incorporation under the right statute.
9. State Involvement
The cooperative business model exists to benefit members and the general community. Since they contribute to socioeconomic development, the state is usually prepared to offer financial assistance through loans and grants. They also enjoy assistance from other foundations through funding and education initiatives. Such assistance helps these entities to advance their mission, which is to impact communities positively.
10. Economic Operations
The cooperative business model does away with intermediaries, which contributes to economic operations. Such businesses do not incur go-betweens’ fees or markups to which most organizations are subjected. If intermediaries’ services are necessary, they are usually offered by members for free or at a minimal cost.
11. Surplus is Shared by Members
Cooperative societies and enterprises look out for their members. They first sell goods and services to them at reduced prices before considering outsiders, who definitely have to pay more. The profit obtained from sales covers the day-to-day administration costs of the enterprise. However, a portion of the profit is shared with members as interest on their deposits or dividends. The enterprise must also keep some of it as a reserve.
It is also important to mention that in some jurisdictions, such as the United States, cooperatives are allowed to offer different membership options, i.e., non-equity and ownership, thus offering flexibility. Non-equity membership means that those interested in the enterprise can use proprietary leases and agreements to secure their rights, while for ownership, members enjoy rights to an outcome. Whichever the case, the unique needs of members are met.
Disadvantages Of The Cooperative Business Model
Even with the above advantages, cooperatives still have their fair share of challenges and disadvantages. They include:
1. Less funding/ resources
Cooperative enterprises do not rely on consistent funding from shareholders like traditional businesses. Their operations are funded by member capital contributions and profits, which are also limited. They may therefore face difficulties in supporting large-scale business operations. An easier way out of this predicament is increasing the cooperative’s membership, but the problem is that as members increase, there is a high possibility that returns will decrease.
2. Lack of Confidentiality
The cooperative business model does not enjoy secrecy because members discuss all affairs in public meetings. Also, every decision must be brought before owners to decide on collectively. Unlike this business model, traditional businesses leverage secrecy to compete effectively with their counterparts.
3. Less Motivation
The decision-making process in the cooperative business model is often slow and bureaucratic, a concrete reason for members to be unmotivated. Laws governing cooperative entities also restrict when to invest, which can kill members’ morale.
4. Possible Management Issues
Under the cooperative business model, management is vested in members who may not have the right managerial skills and expertise, unlike in traditional businesses where managers have to be exceptional.
5. Regular Differences and Disputes
Cooperative enterprises offer voluntary and open membership, which means anybody from any economic, social, and academic background can join them. Even though this is a good thing, it can act as a breeding ground for differences on important issues, thus failing to advance societal interest due to delayed decision-making. Regular differences and disputes may also lead to management paralysis.
6. Difficulty in Establishing a Unique Brand
One of the biggest challenges that cooperative enterprises and societies face is establishing a unique brand. It is easier for them to lose sight of their branding owing to their voluntary and open membership guarantee that brings in diverse members. They may not be able to stand out as unique since they have to balance between becoming part of every individual and sticking to their brand.
Other problems these entities face include legal restrictions, less profitability, and slow decision-making, which can be highly demotivating.
Even with its flaws, the cooperative business model still stands out. It is focused on the betterment of participants and society in general, which explains why it enjoys overwhelming government and public support. It should therefore be embraced more.