The Internationalization of Member-owned Firms (1996)

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    This document has been made available in electronic format
         by the International Co-operative Alliance ICA 
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                         July, 1996

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     (Source: Review of International Co-operation, 
     Vol.89,  No.2/1996, p.53-61)
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          The Internationalization of Member-owned Firms

                       Peter Normark*
          **********************************************


Abstract
--------
Is transnational co-operation a possible way to organize the
internationalized future of member-owned firms? If and how can
the members' decision-making processes be organized in an
enterprise that covers several countries? The large national
co-operatives of today have difficulties in organizing the
corpus of members in adequate structures. These difficulties
will be more articulated in transnational co-operatives. The
concept of transnational co-operation will also raise the
question of member unity. Is it possible to extend this unity
over country borders? How can the profits of transnational
co-operatives be divided between members from different
nations? These are questions that are getting more important
when discussing the internationalization of member-owned
enterprises. This paper analyses strategies for co-operatives
in a more global environment. Special emphasis is focused on
how to manage these profound transformation processes.


Introduction
------------
Enterprises in the food industry are rapidly developing more
international or maybe even global structures. Major
multinational actors such as Nestle, Unilever and Kraft
General Foods have been able to position themselves in even
more dominating roles within interesting and profitable
sectors of the food industry.1 Some farmers' co-operatives
(e.g. Campina/ Melkunie) have also been able to strengthen
their positions internationally. The co-operatives, however,
have to handle specific problems concerning finance and the
development of member organization during extensive
internationalization of their operations. 

For several decades the Swedish food industry was heavily
regulated in structures organized by the state in
collaboration with the co-operatives. The Swedish market was
also heavily protected from foreign competition. Most of the
international operations were aimed at selling "surplus
production"; the volume of the production that could not be
distributed on the domestic market. However, in 1990,
discussions of reforms in agricultural politics resulted in a
domestic market orientation. The internal regulations were
removed between 1990 and 1994. After the Swedish membership in
the European Community in 1995, Swedish co-operatives were
able to compete on equal terms on the European markets whereas
foreign competitors were able to compete on equal terms on the
domestic market.

Swedish co-operatives have been promoting different strategies
of internationalization. Many of the societies have generally
been pursuing a processual orientation trying to gradually
increase their knowledge of the markets. The strategy
processes have been incremental, holistic and gradually
testing in character.2 The alternative to develop more
sophisticated plans has been regarded as less realistic.3 This
is due to the fact that it has been difficult to predict the
changes on the political scene during the period 1990-94.

Some of the co-operatives have been buying out foreign firms.
Several examples of acquisitions have been seen in the
crop-marketing sector (some of them have been successful,
others have almost turned into disasters). Other co-operatives
have primarily been trying to increase their export sales in
foreign markets. Yet other examples of internationalization
are the development of alliances between co-operatives within
the dairy industry. Most of the smaller co-operatives have
been pursuing a focus on differentiation strategies whereas
some of the larger societies have been trying to establish
themselves as major actors on the North European markets. The
discussion below will focus on the latter strategies.

Internationalizing Co-ops
-------------------------
In order to establish themselves as important European actors,
and take advantage of the scale economies, larger
co-operatives may evaluate different alternatives. The
green-field investment is a less interesting choice in a
mature industry like the food industry. Two other
alternatives, that have been analysed more carefully, are the
international acquisition and the strategic alliance. 

The implementation of acquisitions is one of the more complex
areas of international management.4  The issues of members'
risk-bearing capital and member organization are unique for
the co-operatives. Is it possible for co-operatives to finance
major international acquisitions? A member in a co-operative
is both a user and a capital owner.5 The user role is
principally superior to the capital owner role. The incentives
and possibilities for increasing the risk-bearing capital is
therefore limited. Instead, many of the co-operatives have
financed earlier expansion by using profits from the
operations. Profits, however, are generally speaking not
sufficient for huge international acquisitions. Neither are
huge expansions by using external loans a realistic
alternative for the co-operatives.6 This would dramatically
increase the level of financial risk. In sum, there will be
huge problems for the co-operatives to finance international
expansion.

The Capital Dilemma
-------------------
A more realistic source of capital for international expansion
is owner capital from non-members (e.g. investors). This
solution will, however, jeopardize the co-operative form of
organization. As the investors have other goals for their
ownership (maximum return on invested capital), the
co-operative may risk losing its user orientation.7 

The co-operative may risk being in a position to choose
between regressing into a less favourable strategic position,
on the one hand, and on the other hand using non-member
owner-capital and thereby jeopardizing the co-operative form
of organization. Is the strategic alliance} a more interesting
alternative?

The strategic alliances are complex organizational processes.8
Issues of synergy, trust between the alliance partners,
competencies, language barriers and mutual adjustment
processes are all relevant factors when exploring the
possibilities for success. The international strategic
alliance is of special interest for the co-operative since
this alternative may imply a possibility for international
expansion without an enormous need of additional risk-bearing
capital. Instead of acquiring foreign companies, the
co-operative may establish extensive collaboration with
similar co-ops from other countries. The alliance may be
constructed either as an agreement to co-operate within
specific areas (marketing, production and research &
development) or it may be&constructed as mutually owned
enterprise covering all operations within one specific
industry sector.

     Strategic Alliance between Co-operatives
     -----------------------------------------

Members        Members        Members        Members
100%           100%           100%           100%

Co-op   &      Co-op          Co-op          Co-op
Country A      Country B      Country C      Country D

  25%            25%            25%            25%


               Industrial processing firm X


Example of Strategic Alliance Between Co-operatives
---------------------------------------------------
The strategic alliance may be evaluated as a solution for the
domestic co-operatives that have the ambition to develop into
leading actors on the food market. If, and when, the alliance
has developed into a mutually-owned firm, several questions
may be raised. Firstly it is vital to evaluate the goals for
the alliance. Do the owners have the same final goal for the
operations? Is the goal to maximize the return on the invested
capital? Or can the alliance instead be regarded as a tool for
supporting the interests of the users? As member-owned and
investor-owned firms have different goals, there will be a
reduced risk of destructive conflicts on goals if the
co-operatives are searching for alliance partners among other
co-operatives. 

The principal argument for pursuing the process of forming a
strategic alliance is, of course, the existence of synergies.
An important prerequisite for this is not only a mutual trust
between management from the two societies but also a similar
mutual trust among the more influential owners/members. The
development of a strategic alliance, thus, implies
consequences also for the member organization. For a
co-operative, where a major part of the core business is
operated within an alliance, the member organization must be
adapted to handle this situation. Otherwise there is a risk of
managerism.9 The fruitful relations between principals and
agents may be damaged. The members may find themselves in a
position where their influence merely is directed towards the
primary societies and not towards the transnational
mutually-owned alliance organizations. Hence, there
is a need for developing the member organization in harmony
with the business operations.

The adjustment of the member organization may be focused
towards creating different forms of lateral relations.10 The
traditional representative system where members are elected to
represent a certain district may exhibit severe difficulties
in handling larger transnational co-operatives. The
geographical model for representative democracy will be more
difficult to implement under transnational conditions. It is
thus interesting to innovate new models for member
organization. The member organization must be reproduced.11
The possibility to develop a structure that instead considers
e.g. different farming orientations (large scale versus small
scale or other special categories of farmers) may be evaluated
as one solution. Another way of organizing the member
influence would be to find more direct links between the local
business organization and the local members. The demarcation
line between local, national and transnational responsibility
is a key for using this model.12

In summary, one may conclude that member organizations must
develop in harmony with business organizations. Then,
strategic alliances may be used as tools for
internationalizing co-operatives. Strategic alliances are not,
however, developed through sophisticated planning. The
alliance should rather be regarded as a change process where
the partners incrementally strengthen links between each
other. The relations between member and business perspectives
are at stake during these kinds of fundamental transformations
of co-operatives. Below I will elaborate on the issue of the
strategy process in and between co-operatives. The discussion
is based on several studies of mergers between
co-operatives.13  The main argument is that both the contents
and processes of strategy are fundamental for the success of
the internationalization or any other strategic changes.

A Processual View of Change
----------------------------
One conclusion, from different merger and change studies, is
that there exist several bases of rationality that have to be
considered when proposals for strategic change are
evaluated.14 Proposals of change are often evaluated from the
viewpoint of effectiveness within the co-operative. But, the
member-perspective is an additional important basis for
rationality that is often neglected. Is the proposed change
positive not only for the co-operative itself, but also for
its members? Would suggested cost reductions benefit the
members? The answers to these questions are vital for the
members' responses to change proposals. 

Another important point is related to the logic and form of
the change process. Three principal models for
owner-management relations have been developed in earlier
studies of mergers.15 A first model - the owners' monologue -
involves a risk of running into economic inefficiency. The
goals of local development can here overshadow the long-run
economic goals of the enterprise. A second model - the
management monologue -  can increase the short-run efficiency
by reducing the costs of handling membership democracy. But
the members' experiences are not used as inputs for business
development. During critical decision-making the securing of
support from the corpus of members tends to be weak. A third
model - the member-management dialogue - handles the problems
mentioned above. By early initiation of a discussion, the
possibilities of successfully integrating proposals from
members increases and communication regarding change of
proposals within formal decision-making structures improves.
But this dialogue causes costs in the form of heavier demands
on information and there is also a risk of increased
bureaucracy and delayed decision-making.

In conclusion there is instead a need for combining these
three models into an adequate pattern of relationships between
management and members.  An emerging formation of a division
of responsibilities between members and managers is important
for the actors' understanding of their own and other actors'
different roles during the change processes. An ongoing
dialogue about strategic - not operative - issues will result
in an "infrastructure" of relations between management and
members. This organizational "infrastructure" is important in
improving the firm's decision-making capacity. A society with
a developed "infrastructure" is in better shape than other
organizations when proposals for strategic change are
initiated. The different actors have thus developed a
constructive method for analysing new ideas and proposals.
Hence, the actual organizing of the change process may be
crucial for the outcome. 


Finding the Right Balance
-------------------------
Another important aspect concerns the fundamental basis for
the co-operatives. The co-operatives have been formed to
support the users' interests by developing business
operations.16 This may cause tensions between the business
logic and the users' interests17 and therefore, there is a
need for finding a balance between these two poles. There is
also a similar need to find a balance between economic and
idea-related goals. The members want to gain economic
advantages in the short run, but they also want the
co-operative to develop the market in a way that is positive
for them as less powerful actors on the market. If the right
balance is achieved the chances of realizing a change proposal
will increase. The management of co-operatives may be analysed
as a continuous bridge-building between both users' interests
and business logics as well as between economic and
idea-related rationalities.

Change proposals that are successfully created in a way that
they balance both the users' interests with the business
logic, as well as the idea-related rationality, with the
economic rationality are also contributing to the continuous
reproduction of the co-operative. The "infrastructure" of
relations between members and management is created, destroyed
and recreated during a strategic change process. Inability to
handle these bridge-building processes is damaging to the
society. Firstly, important changes are not achieved.
Secondly, either the membership reproduction or the capital
formation processes are weakened. Hence, the society is
gradually losing its membership orientation or is being
weakened economically and financially. To sum up, the actual
organizing of strategic change processes is important for the
long-run development of the co-operative.

This kind of bridge-building is a process that goes beyond the
strategic level. It is not only a question of developing
competitive business operations. Strategic processes, such as
mergers, may initiate even more fundamental processes that
focus on the existence of the co-operative form of
organization. These processes can be labelled
"meta-strategic". The meta-strategic processes concern not
only the development of efficient business strategies, but
also the development of the co-operative form of organization.

In many co-operatives, the member-owned form of organization
is regarded as an axiom by both management and members. During
extensive transformations, such as mergers, this axiom may,
however, be questioned. 

For change agents, it is therefore important to make it
credible that the co-operative form of organization will
remain unchanged during the ongoing transformation process. It
is therefore suggested that it is equivalently important that
the principal co-operative ownership will remain unchanged
also under the development of transnational co-operation
(co-operatives with members from different countries) and
transnational co-operative strategic alliances. In this way it
is possible to avoid some, if not all, destructive political
conflicts that may arise.  

A wise use of the co-operative process within a co-operative
form of organization may thus facilitate the international
business development.

Footnotes
---------
1.   HEC (1995), Grunert, Baadsgard, Hartvig Larsen & Madsen
     (1996).
2.   Compare with Pettigrew (1985), Mintzberg (1978), Quinn
     (1980) and Johnson & Scholes (1993).
3.   Akesson (1996).
4.   See instead Buono & Bowditch (1989) and Larson (1990).
5.   Barton (1989).
6.   Hybholt (1994).
7.   Normark & Swartz (1991) and Normark (1994).
8.   Roos (1989).
9.   Ilmonen (1986).
10.  Galbraith (1973).
11.  Stryjan (1989).
12.  This model is proposed as a way to keep the local
     orientation intact during a major merger between four
     Swedish farm-supply and crop-marketing co-operatives.
13.  See Normark (1994). The study is based on two extensive
     cases. The first case deals with an attempt to reorganize
     the Swedish Farm-supply and Crop-marketing Federation. An
     intended effort to reduce the number of regional
     societies failed, but during the process other ways of
     increasing efficiency and effectiveness were
     accomplished. The second case analyses an attemptive
     merger between four co-operative dairies. After five
     years of negotiations three of the dairies merged whereas
     the fourth remained independent.
14.  Utterstrom (1980), Michelsen (1984), Giroux (1982),
     Normark (1994) and Modell (1994).
15.  Normark (1994).
16.  Barton (1989).
17   For a profound discussion about business recipes, see
     Spender (1989).

References
-----------
Barton, D. (1989); "What is a Co-operative?" in Cobia (ed) 
Co-operatives in Agriculture, Englewood Cliffs, Prentice Hall.

Buono, A. & Bowditch, J. (1989); "The Human Side of Mergers
and Acquisitions", San Francisco, Jossey-Bass.

Book, S.A. (1992); "Co-operative Values in a Changing World",
Geneva, ICA.

Galbraith, J. (1973); "Designing Complex Organizations",
Reading, Addison-Wesley.

Giroux, N. (1992); "Participation and Strategic
Decision-making in a Co-operative", in Annales de l' Economie
Publique Sociale et Cooperative, Vol. 63, p. 5-24.

Grunert, K. G., Baadsgaard, A., Hartvig Larsen, H & Koed
Madsen, T. (1996); "Market Orientation in Food and
Agriculture", Dordrecht, Kluwer.

HEC (1995); "The Dairy Industry of Tomorrow: Strategies for
the Development of Long-term Successful Transformations",
Montreal, HEC, in French only.

Hybholt, F. (1994); "Internationalization and Capital
Structure of  Co-operatives", Esbjerg, South Jutland
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Ilmonen, K. (1986); "The Enigma of Membership", Stockholm,
Co-operative Institute.

Jacobson, R. E. & O'leary, C. (1990); "Dairy Co-op Issues in
Ireland", Cork, University College Cork.

Johnson, G. & Scholes K. (1993); "Exploring Corporate
Strategy", London, Prentice Hall.

Larsson, R. (1990); "Co-ordination of Action in Mergers and
Acquisitions",  Lund, Lund University Press.

Michelsen, J. (1984); "What are the intentions of the
members", 

Esbjerg, South Jutland University, in Danish only.

Mintzberg, H. (1978); "Pattern in Strategy Formation", in
Management Science, Vol. 24, p. 934-948.

Modell, S. (1994); "Co-operation between Co-operatives -
Economic Outcome and Managerial Problems: With Particular
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Cork, University of Cork.

Normark, P. (1991); "Strategic Change Processes in Different
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IAREP/SASE.

Normark, P. (1994); "Member-owned Enterprises. Organizing of
Strategic Changes ", Stockholm, EFI, in Swedish with summary
in English.

Normark, P. & Swartz, E. (1991); "The Formation of Corporate
Entities  within Co-operative Societies", in Stryjan, Y. et al
(eds) The Limits of Co-operatives, Stockholm, Swedish Society
for Co-operative Studies, in Swedish only.

Pettigrew, A. (1985); "The Awakening Giant", Oxford, Basil
Blackwell.

Quinn, J. B. (1980); "Strategies for Change - Logical
Incrementalism", Homewood, Irwin. 

Roos, J. (1989); "Co-operative Venture Formation Processes: 
Characteristics and Impact on Performance", Stockholm, IIB.

Schediwy, R. (1993); "The Crisis of Co-operative Federalism",
in Turner, G. Economic Changes in Eastern Europe: Quo Vadis
Co-operative Movement?, Berlin, Veroffentlichung des instituts
fur Genossenschaftswesen an der Humboldt-Universitat zu
Berlin.

Spender, J. (1989); "Industry Recipes", Worcester, Basil
Blackwell.

Stryjan, Y. (1989); "Impossible Organizations", New York, 
Greenwood Press. 

Utterstrom, C. (1980); "Organizational Visions, Ideologies and
the Cooperative Myth", Uppsala, Swedish Agricultural
University.

Akesson, G. (1996, forthcoming); "The Logic of Simultaneity _
Managing  Strategic Change Processes", Stockholm, EFI, in
Swedish with summary in English.

------------------
*    Mr Normark is Assistant Professor in Management and
     Organization Theory at Stockholm School of Economics
     where he is responsible for the co-operative research
     programme.  He is President of the Swedish Society for
     Co-operative Studies and board member of CIRIEC (Centre
     of Research and Information on the Public and
     Co-operative Economy).