Mc kinsey – achieving the full potential of cooperative organizations

International Summit

of Cooperatives

Any use of this material without specific permission of McKinsey & Company is strictly prohibitedCopyright © 2012. All rights reserved

October 2012

Improving cooperatives’agility

McKinsey & Company

Copyright © 2012. All rights reserved1|

Executive summary – Improving cooperatives’ agility

The cooperative model is particularly effective in creating organizational alignmentand employee mobilization through a strong sense of ownership and shared values.Analysis of McKinsey’s proprietary employee survey data and interviews with coops

reveals three areas in which they can improve their organizations to gain better agility

▪ Agility in decision making. The cooperative decision-making process is typically slower than in public companies due to its inherent democratic process– Exemplary coops strike a balance between their democratic nature and executive

agility by better distinguishing the respective roles and responsibilities of executive officers and elected officials and creating transparency on performance to enable rapid course correction

▪ Agility in pursuing adjacent opportunities. Cooperatives typically prioritize current members’ needs; the resulting diminished focus on innovation and the external business environment means coops are less agile at pursuing adjacent opportunities and renewing themselves – Exemplary coops expose the cooperative to external perspectives and fuel

innovation through better information sharing and collaboration between various parts of the organization

▪ Agility in developing and sourcing talent. Coops are less agile than public companies at developing and sourcing the talent and skills needed to execute their strategy, meaning they often have difficulty creating competitive advantage over publicly owned competitors– Exemplary coops address their attractiveness deficit among the young generation of

workers and create best-in-class leadership development programs for their high-potential executives

McKinsey & Company


An in-depth review of OHI

Context and methodology

Content

Managerial best practices of cooperatives

McKinsey & Company


We set out to understand the differences between traditional corporations and cooperatives

Shareholders

Clients Members

Members

Corporation Cooperative

▪ How does the difference in structure between coops and traditional corporations affect their agility?

▪ What different processes exist or should exist in coops?▪ How can coops build on their strengths to best serve their members’ interests?

McKinsey & Company


We used McKinsey’s Organizational Health Index to assess and compare the “health” of cooperatives with existing data on more than 4,000 people at 136 similar publicly traded companies

SOURCE: McKinsey Organization Practice

Innova-tion and learning

External orientation

Culture and

climate

Direction

Account-ability

Coordi-nation and

control

Capa-bilities Motivation

Leadership

The organization has a

compelling vision and

well-articulated strategy,

which is supported by its

culture and values

Internal alignment

The organization

demonstrates

executional excellence

against its strategy and in

delivering its services

Quality of execution

The organization

effectively understands,

interacts, responds, and

adapts to its situation and

external environment

Capacity for renewal

McKinsey & Company


We identified best practices for organizational agility from across the cooperative sector to illustrate how leading cooperatives are organized

McKinsey & Company





Content

McKinsey & Company


Coops have a strong ability to align their organization but struggle with their capacity to renew their value proposition and execute rapidly

Percentage of respondents who believe theirinstitution does well on these dimensions

Coops are typically internally focused, less exposed and influenced by their external environment, and are challenged to drive innovation for their members and communities. This may be due to their explicit focus on serving existing members

Cooperatives are just as capable as other organizations of executing against their strategic ambitions but tend to focus on higher motivation and sense of accountability to compensate for looser control mechanisms and performance management processes

Given their democratic nature and processes, cooperatives are very successful at aligning their organization behind a common sense of purpose and direction

Leadership

Direction

Culture and climate

Motivation

Accountability

Coordination and control

Capabilities

External orientation

Innovation and learning

Ali

gn

men

tE

xecu

tio

nR

enew

al

0

100

Cooperatives

Representative

market sample

SOURCE: McKinsey Coop Organizational Health Index survey; interviews with coop leaders

Cooperative quartile

3rd quartile

2nd quartileTop quartile

Bottom quartile

McKinsey & Company


Agility in pursuing new opportunities

Agility in decision making

Agility in developing and sourcing talent

Coops face particular challenges in seven areas related to agility, which fall into three major categories

▪ Leaders in the organization ask the opinions of others before making important decisions

▪ The organization’s systems and processes facilitate cross-functional initiatives

▪ The organization’s financial control systems monitor financial performance deep in its business units

▪ The organization uses job rotation to broaden the experience and capabilities of its talent

▪ The organization outsources functions or activities that can be better done by others

▪ The organization pursues joint performance initiatives with external business partners

-13

-6

-7

-5

-5

-8

5

Businesspartnerships

Outsourcedexpertise

Talentdevelopment

Capturingexternal ideas

Knowledgesharing

Financialmanagement

Consultativeleadership

▪ The organization uses external contacts to maximize the flow of ideas into the organization

Top quartile

2nd quartile

3rd quartile

Bottom quartile

Cooperative quartile

Coops’ spread to market1

OHI practices Sample behaviours

1 Absolute percentage points difference between coops mean and overall mean


McKinsey & Company


Overall, we believe that three managerial best practices can help cooperatives take advantage of their structural strengths

Description

▪ The cooperative decision-making process is typically slow relative to public companies due

to its inherent democratic process. Cooperatives

should therefore challenge themselves to

devise methods for improving decision-making agility while remaining connected to members and their interests and needs

Agility in decision making

Devise clear roles and responsibilities

Create a more efficient process for consulting with members

Improve performance management systems

Best practices

▪ Coops place less emphasis on ensuring the presence of appropriate talent to execute on strategic objectives than public companies

do. They are therefore less agile at developing and sourcing talent, which

negatively impacts their ability to create

competitive advantage

Agility in developing and sourcing talent

Effectively identify top talent and create leadership development curricula

Adopt recruiting and training practices that change how the younger generation of potential employees view coops

▪ Cooperatives typically focus on current members’ needs, sacrificing opportunities to renew themselves. There is therefore a need

for cooperatives to explore external perspectives as the need arises, to devise systems for effective collaboration within the organization, and to ensure that they are

prepared to explore emerging opportunitiesin a timely manner

Expose cooperative to external ideasEncourage collaboration across different parts of the businessProtect growth capital

Organize to grow in attractive adjacent markets

Agility in pursuing adjacent opportunities

1

2

3

1

2

1

2

3

McKinsey & Company


Agility in decision making: cooperative case examples – 1/3

SOURCE: Interviews with coop leaders; annual reports

Devise clear roles and responsibilities for executive officers and

elected officials (e.g., board members)

▪ FrieslandCampina formed a separate operating company with

its own Board. The coop remained a full owner of the new

operating company but, by creating a separate entity in the

cooperative, it created a healthy distance between democratic processes and the day-to-day, rapid operating decisionsrequired in the company to compete effectively in the market

▪ The cooperative members appoint a Board of 9 members, who

are also part of the operating company’s 13 Board members,

giving them continued control over that company by virtue of

their two-thirds majority vote on the Board

▪ However, the roles of the coop Board members and of the Company’s board members are well defined, and the latter in

fact are identical to those of publicly traded companies’ board

members under Dutch law.

Case example: FrieslandCampina

▪ FrieslandCampina is the 5th largest

dairy company in the world

▪ Revenues (2011): EUR 9.6 billion

CoopMembers

Council

Board9 members

BoardCoop board

4 external directors

Executive board

Divisions

Company

The coop owns 100% of the shares

of the company

Examples of best practices


1

Create more efficient processes for consulting with members

2


3

McKinsey & Company


Members are asked where they want to see new food markets▪ The co-operative food was planning to open

300 new food stores over 3 years

▪ The co-operative asked its members to suggest new sites online

▪ The initiative helped determine which locations generate the most interest among members



Members are asked to formulate an ethical investment policy that becomes binding for the whole group ▪ These considerations are deliberated within

the Regional Values and Principles Committee, a forum for members to express their points of view

▪ Based on member input, the co-operative Bank “lives its values” by publishing an ethical investment policy that informs its members about who it will and will not do business with

Create more efficient processes for consulting with members,including using technology to expand reach

Case example: The co-operative

▪ The co-operative is the UK’s largest mutual and its 5th biggest

food retailer

▪ It has diversified offerings from banking to funeral services



1


2


3

McKinsey & Company




▪ With the aim of fostering local leadership while simultaneously fostering

the operational discipline required to optimize member’s service level,

BPCE created a system permitting its regional coop banks to compare their performance and to share best practices

▪ Key indicators included favoured transparency and internal competition, alongside external benchmarks, to ensure the banks

considered external best practices as well

▪ The system offers monthly dashboards, real-time updates, and

benchmarks (internal and external), ranking banks on their

performance compared to peers as well as following the evolution of

performance of individual business units

▪ Member banks are also measured on their contribution to investorrelations and their engagement with the wider French economy

▪ This led to strong, dynamic branches and has partly fuelled annualized

growth of 10.8% over 5 years, 2/3 of which came from market share

gain

Examples of best practices Improve performance management systems to enable rapid

mitigation of sources of underperformance


1


2


3

Case example: BPCE

▪ Groupe BPCE was formed in July 2009

through the alliance of Banque Populaire and Caisse d’Épargne

▪ Groupe BPCE has 80,000 employees

and generates revenues of EUR 23 billion

McKinsey & Company


Agility in pursuing adjacent opportunities: cooperative case examples – 1/3


▪ CBH Group complemented its Board and acquired the necessary expertise by electing external Board directors

▪ The Board elects 3 independent directors based on the

recommendation of the Remuneration and Nomination Board

Committee

▪ These 3 independent directors are chosen to provide expertise and skills that will broaden the overall experience ofthe Board of Directors, such as international business deal

making and corporate affairs

▪ For example, as CBH was investing to reform its grain-rail network

in Western Australia, external board members were able to help evaluate several technical questions and brought

complementary expertise to the cooperative

Expose cooperative to more external perspectives

Case example: CBH Group

▪ CBH is an Australian grain

farmers’ cooperative

▪ It has more than 4,500 members

and annual turnover of

AUD 1.5 billion



1

Encourage collaboration across different parts of the business

2

Protect growth capital3

McKinsey & Company




▪ MONDRAGON has 4 core corporate values that shape its overall

approach

– Cooperation (“owners and protagonists”)

– Participation (“commitment to management”)

– Social responsibility (“distribution of wealth based on solidarity”)

– Innovation (“constant renewal”)

▪ Innovation and cooperation are reflected in a dedicated R&D network that provides new lines of business

– 14 technology R&D centres and R&D units specialized in fields relevant to MONDRAGON, such as lifting systems, packaging

machines, home appliances, and thermoplastics

▪ Innovation poles provide a platform to generate interactions and create opportunities among stakeholders

▪ Innovation is encouraged and stimulated by formal processes at all

levels of the organization

– Cross-functional, cross-business unit innovation– Radical innovation outside the day-to-day environment

– Daily innovation and continuous improvement▪ Today, 21% of sales are from products that are <5 years old

Examples of best practices Encourage collaboration across different parts of the businessthrough company-wide systems and processes supporting cross-

function cooperation and innovation


1


2

Case example: MONDRAGON

▪ Spanish cooperative with EUR 15 billion

in revenues, 83,000 employees, and

281 enterprises and entities


McKinsey & Company




▪ To ensure continued growth and competitiveness over a sustained

period, MONDRAGON established funding mechanisms to ensure the survival and success of new initiatives

▪ 10% of gross profits are placed in a “developmental fund” to finance innovation, research, and international business development

▪ Tactical and frequent investments are made in a range of research and education centres to promote new ideas

Protect growth capital

Case example: MONDRAGON

▪ Spanish cooperative with

EUR 15 billion in revenues,

83,000 employees, and

281 enterprises and entities



1


2


McKinsey & Company


Agility in developing and sourcing talent: cooperative case examples – 1/2


▪ Mouvement Desjardins renewed the mandate for its “Institut

coopératif Desjardins”, expanding its educational missionto include leadership development and technical skill-building programs

▪ The Institute offers its courses to both elected and executive leaders, separately or jointly, depending on the topic. For example,

in the organization’s “leadership and performance” program, the top

400 executive leaders take a series of workshops and field-based

training sessions focused on honing their leadership skills at the personal, team, and organizational levels

▪ Over approximately 2 years, the Institute launched 13 strategic talent-development programs, with many participants having taken

on more senior leadership roles in the organization

▪ Formal feedback indicates that a majority found the Institute to be an invaluable contributor to their career development

Example of best practices Actively identify top talent and create leadership development tracks for these individuals

Actively identify top talent and create leadership-development tracks for these individuals

1

Adopt recruiting and training prac-tices that change how younger po-tential employees view coops

2

Case example: Desjardins

▪ Desjardins is North America’s

largest credit union with assets of

CAD 194 billion, 5.6 million

members and clients, and almost

45,000 employees

McKinsey & Company


Agility in developing and sourcing talent: cooperative case examples – 2/2


▪ Farmers Cooperative (FC) was finding it difficult to attract the young talent that could help it feed its 23% annual growth ratein 2008

▪ FC rolled out a recruiting campaign in collaboration with Iowa State University. Every quarter, the CEO organizes events with

high-potential students and FC offers scholarships to increase its

visibility among college students. The best students are given paid

internships

▪ The organization even moved its headquarters close to the university to help make these programs accessible

▪ The move enabled FC to double its intern pools and improve first-year retention from 47% to 88%

▪ Overall turnover has dropped to 10% from 25%

Example of best practices Recruiting and training practices that change how younger potential employees view coopsActively identify

top talent and create leadership-development tracks for these individuals

1

Adopt recruiting and training prac-tices that change how younger po-tential employees view coops

2

Case example: Farmers Cooperative

▪ Farmers Cooperative is the largest

farmer-owned agricultural coop in Iowa

with more than 5,300 members

McKinsey & Company




Content


McKinsey & Company

Copyright © 2012. All rights reserved19| 19

The OHI is a health diagnostic process that offers a deep understanding of culture that extends beyond employee engagement

The Organizational Health approach to assessment

▪ Focuses on the breadth and depth of organizational health. Identifies current

levels of health (outcomes), methods to deliver health (practices), and the

leadership beliefs and mindsets that limit performance improvement – not

employee satisfaction

▪ Uses multiple data sources (survey, interview, focus groups, employee survey

data) for a broader view

▪ Leverages world-class company benchmarks (sector specific) to help

determine the strength or severity of the survey scores

▪ Assesses the drivers of current outcomes (practices and mindsets) to

disaggregate “root causes” of an organization’s barriers to success

▪ Drills down from outcome to practice to mindset to understand “what do you

do about it”

▪ Leverages analytics and findings from the database of over 1,200 surveys to help prioritize where to focus (based on the healthiest organizations)

McKinsey & Company


Organizational Health is made up of outcomes and underlying management practices

Outcomes Management practices

▪ Outcomes describe the current results that an organization has achieved

▪ Each outcome shows the percentage of respondents who either agreed or strongly agreed with the statements

World Class

Superior

Slightly above average

Below average

▪ Management practices describe the current actions that managers at an organization take to achieve results

▪ A bar chart shows the percentage of respondents who either agreed or strongly agreed with the statement

Innovation

Top-down Innovation

Capturing External Ideas

Bottom-up innovation

Knowledge sharing

74 8668 53

SOURCE: McKinsey Organization Practice

ILLUSTRATIVE

49%

75% 45%

54%64%

64% 49%70%

88%

▪ Example: “The company generates enough high-quality ideas to achieve its business goals”

▪ Example: “The company imports practices from other companies and industries”

McKinsey & Company


Interview quote

-23

-17

-10The organization uses standard operating procedures to influence the way employees do their work

Strong people development process and awareness of important issues but need stronger performance improvement dialogue

Advantage in not being slave to short-term performance, but leaders highlight need for more performance transparency

Gap to the meanPercent1

The organization ensures transparency and rapidly passes negative information up the command chain so senior leaders are aware of important issues as they arise

Managers provide feedback to individuals to ensure that they have an accurate understanding of their strengths, weaknesses and development priorities

The organization’s control systems enable us to minimize unexpected performance results

Business performance reviews in the organization rapidly identify the real causes of problems

People development practices are perceived as a strength, but performance management needs reinforcement

COORDINATION AND CONTROL


20

18

1 Relative difference between coops mean and overall mean (percentage points difference divided by mean)

The fact that we do not have to publish quarterly reports is a real competitive advantage: we have the time to do things right

I sometimes have this impression that the fact that being a cooperative comes with some managerial laxity

A great paradox with cooperatives is that they are not as transparent as many publicly traded companies. This is true internally and externally

Core belief on coordination and control: A top-tier organization aligns goals, targets, and metrics managed through efficient and effective processes, and measures and captures the value from working collaboratively across organizational boundaries

McKinsey & Company


Interview quote

Cooperatives are highly responsive to customers opinions but too inwardly focused relative to business environment

Importance of interacting more directly with competitive and government environments


The organization is highly responsive to customer opinions and needs

The organization actively considers the response of government regulatory bodies when making decisions

The organization effectively responds to competitive market actions

The organization has developed high levels of customer loyalty

Despite their proximity advantage, coops are generally too inwardly focused when it comes to their business environment

EXTERNAL ORIENTATION


6

-3

-23


Many of our leaders believe that because our organization is unique, it is not worth comparing ourselves to the competition

Despite the economical importance of the coops in our country, we barely play a role in national regulation changes because we are not uniting our voices

Core belief on external orientation: A top-tier organization makes creating value for customers its primary objective, while focusing on creating value for all stakeholders

McKinsey & Company


Core belief on innovation and learning: A top-tier organization is able to capture ideas and convert them into value incrementally and through special initiatives, as well as to leverage internal and external networks to maintain a leadership position

The organization’s systems and processes facilitate cross-functional initiatives

Cooperatives are challenged in creating, capturing, and converting new ideas into value

Cooperatives tend to innovate at inception, but fail to reinvent on an ongoing basis


Management encourages different parts of the organization to work together to make improvements

The organization changes/improves at a greater rate than its industry does

Coops’ low capacity to change and innovate is hampering their progress

INNOVATION AND LEARNING

-5

-13

-21


Much of the cooperative movement’s genesis was to find innovative ways to deal with underserved needs. Coops are innovative in their DNA…

However, a root-based organization was built from the bottom up over time; ends up with a silo culture where ideas hardly move from one division to the next, and new ideas don’t see the light of day


Interview quote

McKinsey & Company


Coops feel a competency and capability-building gap remains despite employee training and external hiring

CAPABILITIES

11

11


Capability management gap despite training and external hiring strengths

Coops must overcome a perceived notoriety deficit and becomeemployers of choice


We are often perceived as too local without enough career growth opportunities. This is a major structural disadvantage when trying to attract young talent

Some of our recent recruits left because they were frustrated with the outdated technologies; this is very challenging for us

It is challenging to attract talent to rural locations; we need to be more thoughtful about people rotation and career growth

The organization consistently hires outside talent

In the organization, people receive the training and development they need to be effective in their roles

The organization has the necessary competencies to achieve its strategy

The organization uses job rotation to broaden the experience and capabilities of its talent

The organization outsources functions or activities that can be better done by others

-15

-24

-21


Core belief on capabilities: A top-tier organization builds the institutional skills required to execute its strategy, as well as distinctive capabilities that create a long-term competitive advantage

Interview quote

McKinsey & Company


Coops are effective at aligning the organization around a consensual direction and organizational vision

DIRECTION

Effective managerial practices to drive direction and organizational alignment

Concern with achieving a broader member engagement for an even stronger direction


On paper, our democratic mechanisms are great. The reality is that only a minority of members are engaged

I often wish that our members would be more involved in shaping the [strategic] agenda

Core belief on direction: A top-tier organization crafts and communicates a compelling strategy, as well as providing purpose, engaging people around the vision

Interview quote

9

3

6The organization’s vision is communicated throughout the organization

Management articulates a vision for the future of the organization that resonates with my personal values

The vision for the organization’s future is widely understood by its employees

SOURCE: McKinsey Coop OHI survey; interviews


McKinsey & Company


Leadership style is inclusive and caring, but decision-making is slowLEADERSHIP

Strong inclusive, caring, and coherent leadership but slow decision making

Cooperative leaders appreciate consensus but aspire to more speed and assertiveness in decision making


The great thing about our leadership style is that it is consensus-based; the flip side is that… it is consensus-based, which takes time, a lot of time, to arrive at a decision

Leadership is almost taboo in our world. We will not see a coop leader on the cover of Times magazine anytime soon

I hear a lot of my peers mention that they would like coops to play a larger role in the global economy, but we need more ambitious plans if we are to reach these aspirations

Core belief on leadership: A top-tier organization shows care toward subordinates and sensitivity to their needs (i.e., high support), sets stretch goals, and inspires employees to work at their full potential (i.e., high challenge)

Interview quote

9

10

18

-22

Managers ask the opinions of others before making important decisions

Leaders are steering the organization in the right direction

Leaders role model the values of the organization

Leaders make decisions in a timely manner

SOURCE: McKinsey OHI cooperative survey; interviews


McKinsey & Company


Cooperatives enjoy a positive culture and working climate but struggle with creating a sufficiently performance-focused culture

CULTURE AND CLIMATE

Positive culture and climate but not sufficiently performance-focused

Clear pride in the culture but desire to instila more performance-driven culture


For most of our employees, it is simply unthinkable to work for another type of business than a cooperative. There is something unique about the ambiance that is not replicable elsewhere

We should start by clearly defining ‘performance’ for us, and how to make short-term ROE tradeoffs vs. our long-term priorities

The one element we have to improve is to work as a whole entity. Our culture is really root-based, and we must start thinking about ourselves as a coherent group so our members get the advantage of dealing with a multi-billion dollar business

Core belief on culture and climate: A top-tier organization creates a baseline of trust within and across organizational units and a strong, adaptable organization-wide performance culture

Interview quote

7

6

14

-7

-17

There is a good atmosphere within the organization

The organization’s culture and values are clearly defined

The organization’s culture positively influences the way people behave

Management emphasizes the importance of efficiency and productivity

Managers encourage employees to experiment with new ideas to improve performance

SOURCE: McKinsey OHI survey; interviews


McKinsey & Company


Employees are clear on their roles and objectives but see an opportunity in better individual accountability and performance-based consequences management

ACCOUNTABILITY

Employees feel ownership and have challenging targets but do not see the link between results and consequences

Commitment but limited consequence management


Core belief on accountability: A top-tier organization creates clear roles and responsibilities, links performance and consequences, and encourages an ownership mindset at all levels

Interview quote

The majority of our staff is keen on doing what it takes to satisfy our members

It is very hard to deal with poor performers. It is not part of our culture, and we wait too long

11

16

17

0

-9

-10

Managers create a sense of ownership or belonging to the organization

Employees receive clear explanations of what has to be achieved in their jobs

The organization sets performance goals for individuals that are challenging

The organization has created clear links between performance and consequences

The organizational structure helps create clear accountability

Employees within the organization feel they are accountable for the results they are expected to deliver

SOURCE: McKinsey Coop OHI survey


McKinsey & Company


Motivation is high, but a gap exists with regards to the credit they receive in the community

MOTIVATION

Employees relate to the values and mission of their cooperatives

Challenge in getting broad credit in the community


Core belief on motivation: A top-tier organization motivates through incentives, opportunities, and values, and taps into employees’ sense of meaning and identity to harness extraordinary effort

Interview quote

Our employees get motivated by the impact we have in our community

Our employees see the impact we have in our community, but our community doesn’t see it; we have a notoriety deficit and this threatens long-term motivation

SOURCE: McKinsey Coop OHI survey

23

16

18

The organization’s employees are highly motivated

Leaders in the organization motivate employees to perform by providing encouragement and support

In the organization, employees are generally enthusiastic about their jobs


Documents

Mc kinsey – achieving the full potential of cooperative organizations