This article summarizes a new staff paper by Brent Hueth, Associate Professor and Director of the UW Center for Cooperatives.
Organizations are created to realize a purpose that no single person can accomplish individually. To function successfully over time, however, organizations must adapt to changing circumstances both inside and outside the organization. Some of these adaptations are common across business organizations, and organizational scholars have identified them as characteristic of a business "life cycle".
While cooperatives share many of these life-cycle stages, a cooperative life cycle includes adaptations to challenges that are specific to the cooperative business model. Cooperatives use distinct financial and governance structures to meet their purpose of providing benefit to their patron owners.
All organizations are faced with the challenge of managing the specific projects and activities that contribute to their larger purpose. For most business organizations, whether cooperative or otherwise, there are no simple managerial recipes. The life stages of an organization are reflected in this evolution of an operational framework, a process that is part design and part trial and error.
The beginning or entrepreneurial phase of an organization is creative. It is typically followed by collectivity and formalization phases, as the organization achieves focus and develops coherent operating rules. Successful organizations need to continually maintain an elaboration phase. Fundamental operational procedures are systematically reevaluated for potential problems and opportunities, and managers can act promptly to identify effective solutions and subsequent organizational adaptations.
Cooperative organizations share these life-cycle characteristics. However, they also are subject to life-cycle and managerial challenges that grow out of their unique role as a response to the “market failure”2 , a broad term used by economists to describe the reality of imperfect competition that exists in most markets. Producers and consumers must conduct their transactions without full knowledge about demand, supply, costs, alternatives, and how contractual promises made today will translate into realities tomorrow.
Cooperatives respond to market failure by operating on behalf of some class of patrons that did not receive satisfactory service from conventional business organizations. However, in order to operate strictly in the interest of patrons, cooperatives must impose on themselves operational constraints that sometimes can limit their ability to compete with investor-oriented companies. In particular, cooperatives acquire most of their equity capital from patrons, and limit the returns paid on any outside equity to some maximum amount. This constraint severely limits the liquidity and risk-bearing services that are normally provided by capital markets, and arguably raises the cost of capital for cooperatives.
It is this patron focus that gives cooperatives their distinctive role in the economy, but also what presents a unique set of life-cycle challenges for managers and patron owners3 : communicating value to patron owners, managing economic diversity among members, and managing capital structures.
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