McKinsey report finds strength in co-operative business model

Co-operatives grow at an identical rate to companies, and those mutuals in the food and agricultural have surpassed their corporate counter-parts.

This is the message from the Mckinsey on Cooperatives report unveiled at the International Summit of Cooperatives today.

Andrew Grant, Managing Partner of McKinsey & Company, revealed the statistic by studying growth patterns between 2005 and 2010. He said: "We found that the sources of growth of co-ops differ from their peers. While most companies are carried by the momentum of their portfolio of services in market segments rapidly expanding growth of cooperatives is mainly gain market share.

"We observed two characteristics in co-operatives that have successfully met the challenge of growth: 1) they develop and provide a systematic way of products and services that prioritize the interests of their members rather than short-term financial gains and 2) they evaluate the broader needs of their members in complementary markets attractive and adjust their business model accordingly to take advantage of these opportunities."

The study analyzed how 47 co-ops grew and compared those results with results for 54 publicly listed companies in the same industries and geographies. The research covered the four industries where co-operatives have a substantial presence—insurance, banking, retail, and agriculture—spanning Asia, Europe, North America, and emerging markets.

McKinsey found that while overall growth rates are similar in the aggregate, the composition of that growth is different between these two types of organisations. Co-operatives outperformed publicly listed companies on market-share gains, underperformed on portfolio momentum, and were roughly on par in mergers and acquisitions. 

The report said: "It is not surprising that coops enjoy greater market-share gains. Co-ops traditionally focus on the needs of their members, have better proximity to and knowledge of their markets, and generally adhere to a strong set of social values that benefit their members.

"When we looked at performance by sector, we saw that these advantages were strongest in insurance and diversified financials, where the majority of the co-ops’ customers are also their owners. Retail co-ops were on par with public companies with respect to market-share gains, and agricultural co-ops actually fared worse than their public competitors."

McKinsey expressed concern in one area of growth compared to companies. It said portfolio momentum is the most important of the three growth drivers for companies, which accounts for over 55 per cent of total growth, and co-ops under-performed compared to publicly-held organisations on this measure regardless of industry.

It said the reasons for this were co-ops focus more on their members’ current needs than on developing innovative new products or actively searching for new markets to serve. Second, because co-ops tend to have a governance structure that favors consensus over executive decision making, it is more difficult for them to redeploy capital as quickly as public companies can — especially to new market segments where there may not be immediate benefits to the co-op’s current membership base.

Based on the McKinsey analysis it found two primary growth opportunities for co-operatives. First, co-ops should play to their natural strengths and continue to pursue market-share gains by delivering a unique member and customer experience. The other big growth opportunity for co-ops, and probably the one with the most potential, according to McKinsey, is to more actively pursue opportunities in fast-growing adjacent markets (products, customers, or geographies). It noted that most co-ops lagged behind their public-company competition on this measure.

McKinsey said co-operatives provide a unique member and customer experience. The ownership model provides a true competitive advantage for growing market share. Co-operatives that stood out from their peers on this type of growth typically displayed three characteristics. First, they placed the interests of their members ahead of the organisation’s short-term financial interests. Second, they leveraged their proximity to their members to serve them better. Finally, they broke down organisational silos to maximize benefits for their members.

Mr Grant added: "Although co-operatives will not suffer in the short term, the market pressure to expand their business, 96 per cent of executives see growth of co-operatives as a strategic priority for their organization and believe it is essential to maintaining a competitive range of services and the protection of the interests of their members."

• For more, see the full report below.