Journal Entry 2

ARE 132: COOPERATIVE BUSINESS ENTERPRISES

Prof. Kiesel

Issues and Discussion

 Much of controversy stems from whether guidelines are considered mandatory principles, strongly recommended policies, or common practices

Discussion questions: Do economists behave differently? (Frank et al, 1993) Why are cooperative principles important? What are the differences between principles, policies, and practices? (Give an example of each). What are the advantages and disadvantages of strictly following a commonly accepted set of principles?

Challenges and Keys to Success

Cooperatives require collective action Social dilemmas occur whenever individuals in interdependent situations face choices in which the maximization of (short-term) self interest yields outcomes leaving all participants worse off than feasible alternatives

 Cooperatives must be well organized, financed, managed, and governed (by a committed membership)

 Promotion and Adherence to principles as unique feature Must also be progressive and innovative to adapt to

changing business climates and be responsive to their members changing needs

 Co-op principles and practices need to continue to evolve if they are to continue as competitive economic institutions (businesses, non-profits, governing agencies)

History of Cooperatives

 Worldwide Development When and why did cooperative business enterprises

develop?

 Developments in the U.S. What where key developments in the U.S.?

 Cooperatives developed as response to social tensions, and unmet consumer and producer needs

Cooperative Approaches in Early Civilizations

Cooperation as old as civilization Simple survival required aggressive pursuit of self

interest and collective action

 Ancient records and archeological discoveries as evidence for cooperative activities  Babylonians developed a way for farmers to cooperate and

farm together Craft and burial societies were common among Egyptians,

Greeks and Romans

Chinese developed sophisticated savings and loan associations not that different from Credit Unions today

 African lending circles (in Confucian texts)

Cooperative Approaches in Early Civilizations (cont.)

 Ancient Jewish Essence communities (resulted in kibbutzim)

 Idea of cooperatives kept alive in monasteries during dark ages

Cooperates rediscovered as an organizational structure as Europe moves into Renaissance Guilds organized in Medieval Europe’s urban

economies Mutual fire insurance

Cooperatives during the Industrial Revolution

 Industrial revolution had profound impact on business organization, operation and ownership

 Cooperatives are largely a response to social upheaval drastically altering the way people worked and lived: Factories developed 6 day work weeks 12 hour days Child labor Penny loans

Cooperatives during the Industrial Revolution (cont.)

 Two directions of concepts evolving in response:

1. Call for destruction of capitalism and alternative market systems which led to socialism as practiced by the Soviet Union, Eastern Europe, China, etc. (Karl Marx, Friedrich Engels)

2. Experimentation with communal colonies (Robert Owen, Charles Fourier, Louis Bland and others)

Policy support to lessen the public burden Friendly Society Act of 1793 Worker Unions

Cooperatives during the Industrial Revolution (cont.)

Robert Owen and Early Developments in Britain

Holyoake chronicled development of Cooperatives (1908) Robert Owen described as first hero of British

Cooperation Self made industrialist (social entrepreneur) Son of a saddler with a 10th grade education Worked his way into management of

Manchester textile mills Married into Wealth (daughter of David Dale)

Robert Owen and Early Developments in Britain (cont.)

Purchased and gained control over mill in New Lenark, Scotland for the: “the most important experiment for the happiness of the human race that has yet been instituted in any part of the world. “

Opened Institute for the Formation of Character

"What ideas individuals may attach to the term "Millennium" I know not; but I know that society may be formed so as to exist without crime, without poverty, with health greatly improved, with little, if any misery, and with intelligence and happiness increased a hundredfold; and no obstacle whatsoever intervenes at this moment except ignorance to prevent such a state of society from becoming universal.”

First infant school in the world Introduced 8 hour work week

Created a model community and approach to management

 Attracted visitors like tsar of Russia  Earliest explicit mention in Economist (August 27th,

1821): “The SECRET IS OUT,” and “it is unrestrained COOPERATION, on the part of ALL the members, for EVERY purpose of life.”

Robert Owen and Early Developments in Britain (cont.)

William King—The Practitioner’s Approach

 Dr. William King (1786-1865) was physician interested in improving the welfare of working people in Brighton, England

 Involved in organizing numerous social and education institutions

 Published the Cooperator  Advocated a more realistic type of cooperatives with reach

to the working class  Biblical scripture as guidance for ethics and operations of

cooperatives

Important deviation from Owen (and Fourier): Start with small operation funded with original capital supplied by its members (rather that large scale funded by investor )

William King—The Practitioner’s Approach (cont.)

 King proposed the following principles for consumer coops:

1. Members should pay cash for all merchandize purchased

2. The Co-op should adopt democratic rules of 3. The Co-op should publicize the cooperative

movement

The Rochdale Pioneers  Most famous site of Holyoake’s discovery was Rochdale

 Members were workers representing various trades

 Formed urban, consumer cooperative in England

 Sold consumer goods & clothing to members unhappy with local merchants

 Inspired by King and influenced by Owen  With the support of British legislation from

Parliament, later became the Cooperative Wholesale Society (several hundred local co-ops across England)

 Industrial and Provident Societies Act of 1852 imposed legal protection and some operating restrictions As extension of Friendly Society Act of

1834 and 1846 Safeguard savings of investors Allowed to pay patronage refunds, but

limited dividends Later versions loosed restrictions and

added limited liability

First Cooperative Law

 The “hungry Forties” (1840s) brought famine and extreme hardship

 F.W. Raiffeisen (mayor of a group of village in Northern Germany) created a cooperative society to alleviate poverty Started by giving bread and potatoes to poor  Then organized loan societies for poor farmers Refined by Schulze to fit needs of artisans and small-

scale industries

Model rapidly spread and foundation of today’s Credit Unions

Cooperative Credit

 Denmark as successful early cooperative farmer model

Cooperative Creamery established in 1875 Significant improvements to butter making

including standardized grading system  Coincided with development of High School

and focus of educating young adults in rural areas (similar to today's Liberal Arts schools Created trained leadership Established trust bonds and willingness to

think, work, and play together

Early Agricultural Marketing and Supply Cooperatives in Europe

Cooperatives around the World

Cooperative movement slowly spread around the world in the 19th century

 Horace Plunkett, Irishman famous for advocating benefits of agricultural cooperatives in Ireland and around beyond; spent 10 years as cattle rancher in US Advocated cooperative movement and

political neutrality  Today in nearly all countries from developing

nations in Africa to industrial countries in Europe and North America

Earliest Recorded Cooperatives in Select Countries

 Largest worker owner cooperative in the world & 10th largest corporation in Spain

 Father Jose Maria Arizmendi & 5 graduates of his parish school founded Mondragon in 1956 to manufacture and market high quality home appliances

Objective was to provide economic opportunities for parishioners after disastrous civil war

 Founders reinvested heavily in expansion to create jobs for oppressed Basques & further opportunities for democratic work

Mondragon Corporation

Mondragon Today  Now owns 261 cooperatives and companies organized

into 3 groups Financial  Industrial and Distribution Research and Training areas

 Employs ~75,000 workers  Operates 15 research centers  Generates over €12 billion in annual revenues  Overall, only about half of the workers are also owners

within its historical core industrial sectors, 84% of workers are owners

Cooperative Movement in the U.S.

“The idea of the co-op was both imported by the colonists from Europe and also independently developed and adapted by settlers of European origin under North American conditions” (Fairbairn)  The driving forces behind the Cooperative movement

in the U.S. include the following: 1. Market failure 2. Economic crisis 3. New technology 4. Farm organizations and cooperative advocates 5. Favorable public policy

The First American Cooperatives  First Co-op in 1752 was a mutual insurance

company (Philadelphia Contributionship of the Insurance of Houses from Loss of Fie Benjamin Franklin has witnessed success

when he lived in England and was one of the supporters of prototypical public libraries and firer departments

 Birth of modern insurance industry from secret societies that were supposed to provide a safety net Cooperative-like mutuals such as New York

Life and Northwestern Mutual developed

The First American Cooperatives (cont.)

One of the first worker strikes in the U.S. (tailors strike in New York in 1768) birthed a cooperative workshop

 1785 Thomas Jefferson crafted tax-relief package to encourage profit sharing among workers (e.g. cod fishers)

Rise of labor unions in the cities (some cross- industrial like Knights of Labor)

The First American Cooperatives (cont.)

 American farmers established the Philadelphia Society for Promotion of Agriculture

 First formal farmer cooperative (dairy cooperative) was founded in 1810 in Goshen, Connecticut

Most of the early agricultural cooperatives were ultimately unsuccessful

Owen’s Experiment in the U.S.

 Owen relocated to the U.S. and purchases 20,000 acres of land in Indiana

 Founded New Harmony Community on 1825, envisioned as community of equality in every respect Members were given work assignments by committee Members received credits for their labor and debits

to their account for goods provided at public store  Balance determined at end of the year One week notice to leave community and have

balance paid “no penalty for idleness and no reward for industry and thus no reward for ambition” (Knapp, 1969, p.17)

The Cooperative Movement in Agriculture

 Politics and cooperative development intertwined  Granges as first farm organizing founded by USDA

employee in 1867 to help restore relationship between farmers in the North an South after the Civil War  Soon refocused on improving farm conditions

 Farmers learned skills from each other and shared their economic hardship

 Grangers organized co-ops for purchasing, processing, credit, and retail

 By 1875, they had 858.000 members in thirty-two states  Adopted Rochdale Principles

The Cooperative Movement in Agriculture

 As Grange declined in influence other Farmers organizations took more prominent role  Farmer’s Alliance  American Society of Equity  American Farm Bureau (established in 1919)  National Farmers Union (grew out of Farmers

Educational Cooperative Union established in 1902)

Examples of Early US Agricultural Co-ops

 1810-Cheese processing in New Jersey  1853-Irrigation in Tulare County  1867-Fruit Marketing in New Jersey  1874-Poultry Marketing in Illinois  1885-Citrus (now Sunkist) in S. California  1921-Rice Growers Association of California

Development of Credit Unions  First US credit union established in 1909 in New

Hampshire  Founded by the Desjardins who started the Canadian credit union movement

in Quebec in 1900

 Federal Credit Union Act on 1934 passed to serve “… the productive and provident credit needs of individuals of modest means”

"not for profit, not for charity, but for service“

Laws that Govern Cooperatives

 First marketing statue enacted in 1865 in Michigan  By 1911 twelve states had enacted special cooperative law  Wisconsin passed first cooperative law in 1887  After 1919 numerous state laws were passed

Mirrored Rochdale Principles 1. Cooperatives could issue shared but number o shares held

by each member was limited 2. Voting rights were tied to membership not investment 3. Each member had one vote 4. Individual cooperatives were able to decide how to

distribute net profits Today all states have uniform Cooperative laws

Peak of Co-ops  Growth in new agricultural cooperatives and cooperative

organizations at peak in 1920-1930 “The Years since Great Depression (1929) have seen the greatest advancement in cooperation the country has ever seen.” (Warbasse, 1936)

 Development of Co-ops in US followed expansion and diffusion circle  Innovation as an experiment phase

 Take-off phase

 Stabilization Phase

 Consolidation Phase

Two American Cooperative Thinkers

 Aaron Sapiro (1884-1959)  Edwin G. Nourse (1883-1974)

Sapiro Story (1884-1959)

 Sought to build market power for California producers

 Co-op organized on a commodity basis

 Long-term, legally binding contracts

 Centralized structure

 Pooling products according to grade

 Price leadership through market share

 Democratic member control

Nourse’s Approach (1883- 1974)

 Coops should operate as a “competitive yardstick”  Establish coops with a bottom-up democratic basis—

organized & controlled locally  Build business efficiency of total economic system  Coops controlled a modest share of commodity, supply or

service market

What is the fundamental difference between Sapiro and Nourse with respect to their views on co-operatives?

A) The optimal size of a co-operative B) The role of co-operatives related to market

power C) The voting structure D) None of the above; their views on cooperatives

were very similar

Final Project: Business Case Analysis

 Guidelines and group assignment  Important deadlines:

 January 22nd: Case study proposal and outline due March 11th: Final case study due

Questions to be Addressed 1. Description of the co-op

a) industry cooperative is operating in

b) products and/or services provided

c) organizational structure(e.g. who is horizontally coordinating and are they vertically integrating?)

2. What is a pressing issue the business is currently facing (It may not necessarily relate to being a co-op)?

3. What economic conditions (production, market, regulatory) are affecting the cooperative (either its formation or its current operations)?

4. What economic rationale supports the cooperative’s existence (More than one rationale may be relevant.)?

Questions to be Addressed (cont.)

4. How are contemporary cooperative principles demonstrated in this case? (At the minimum, address the three principles defined by the USDA, but you might also refer to the seven principles defined by ICA depending on the business.)?

5. Has the firm’s cooperative structure (either the co-op principles or government regulations specifically related to co-ops) had an adverse impact on the cooperative’s business performance? What are specific challenges faced in the context of management, or market strategies?

6. How do our derived keys to success relate to your analyzed business and what specific recommendations and suggestions can you give based on your analysis?

Sample Outlines Executive Summary

The Business Issue

Description of the Co-op and Business History

Application of Contemporary Principles

Economic Rationale and Insights from the Literature

Business Performance and Challenges Faced

Next Steps and Recommended Strategies

References

or (less detailed but similar content) Executive Summary

The Business Issue

Analysis

Recommendations

References

1. Blue Diamond

2. BUCRA (Butte County Rice Growers Association)

3. California Leafy Greens Marketing Agreement (LGMA)

4. California Pears Advisory Board (Marketing order)

5. CoBank

6. Davis Natural Food Co-op

7. E&I Cooperative Services (Purchasing Co-op that UC Davis uses for procurement)

8. Fruit Growers Supply (Cooperative association for farm supplies)

9. Full Belly Farm (CSA, Yolo County)

10. Golden State Power

11. Land O'Lakes

12. LBMX (Purchasing Co-op)

13. Pachamama Coffee (Global Farmer’s Cooperative)

14. Sacramento Natural Food Co-op

15. SunMaid Growers

16. The Cheese Board Collective

17. Three Stone Hearth (Community supported kitchen, Berkeley)

18. Dos Pinos (Housing Co-op, Davis)

Please also see NCB-Co-op-100