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Introduction
The European dairy industry is undergoing majorchanges. Numerous mergers as well asacquisitions have resulted in fewer and largerdairy processors. These structural changes arelinked to the dairy processors’ market strategies.Dairy processors see a need to adapt theirstrategies when their markets are undergoingchanges. Moreover changes in the agriculturalpolicies imply that the markets for dairy productsare becoming more competitive.
This study deals with the changes of the dairyprocessors’ market strategies and organisationalstructures. The aim is to identify the implicationsthat the dairy co-operatives’ growth has for themembers’ possibilities to control the operationsand to finance them.
The point of departure for the discussion isFigure 1. It expresses a contingency approachto organisational design (Miles and Snow, 1978).The top three boxes state that when marketconditions change, firms have to adapt theirstrategies accordingly (Nilsson and Ohlsson,2007). For these market strategies to beimplemented well, the firms have to modify theirorganisational attributes. This sequence isnecessary in the long run; therefore, thedownward-pointing arrows are fat. In the shortrun, ie before the adaptations have beenconducted, it is necessary to use existingresources to create best possible marketstrategies and to try to influence the market –see the thin upward-pointing arrows.
The bottom box of Figure 1 states that alsomember conditions exert an influence when theco-operatives are conducting market adaptationmeasures. Members may find that some marketadaptations imply that the co-operatives nolonger operate in their interest, and thusinvolvement, trust, solidarity and loyalty are
Strategies and Structures in the European DairyCo-operative IndustryJerker Nilsson and Petri Ollila
Dairy processing seems to have substantial economies of scale. Moreover a development towardsdifferentiated business gives advantages to large dairy processors. Given these trends, it is hypothesisedthat dairy co-operatives are gradually losing their raison-d’être as co-operative firms. On the basis of someprior studies, this study discusses the implications that the co-operatives’ growth have for the members. Itshows that the trend towards differentiation, large scale operations and internationalisation is so strong thatmembers have difficulties governing and financing the co-operatives. Reorganisational measures may occuramong the traditionally organised dairy co-operatives.
fading. Further, the members may not be ableto control the business operations of theco-operative, or not have incentives to investtime and effort in assessing the business, orwant to free-ride by hoping that others willconduct the necessary control, etc. Finally,members may not have enough capital tofinance the expansion of their co-operative, orthey may not be willing to allow external investorsto invest sufficient amounts, or if they allowexternal investors, they may not be willing toremunerate these investors enough to attractsufficient capital.
The figure indicates that problems mayaccrue when the two arrows, pointing at the“co-operative organisational model” box implyopposing signals. Therefore the co-operativehas to adapt in different directions, and so itbecomes poorly adapted to both the market andthe members.
The article is structured in accordance withFigure 1. The next section discusses the marketstrategies that dairy processors are choosingto be competitive. In the subsequent section, theco-operatives’ choice of organisationalstructures is presented. Then follows an accountthat presents farmer-members’ preferences andopinions in terms of control of the co-operativesand financial obligations. The article ends withsome conclusions.
Strategies
The most recognised classification of marketstrategies is the one presented by Porter (1980).It comprises three main classes, namely costleadership, differentiation, and focus strategies.All these three are common in the dairy industry,and all of them are used by dairy co-operatives.
Both the cost leadership strategy and thedifferentiation strategy are best pursued if the
Journal of Co-operative Studies, 42.2, August 2009: 14-23 ISSN 0961 5784©
15
processing firms enjoy economies of scale.Large-scale operations are important for mostdairy processors. There are different ways ofattaining growth. Table 1 presents six growthstrategies as well as the firms’ motive for thechoice of strategy, the strategic fit between thepartnering firms and the resource needs that areneeded for the strategies. These concepts arerooted in the Resource-Based Theory (see forexample Wernerfelt, 1984; Das and Teng, 2000).
An observation is that one expansion strategydoes not exclude another one. Arla Foods, forexample, is found in all the six categories of Table2. At the same time it must be recognised thatthe alliance types are interrelated. If Arla Foodswere not so large it would be less interesting asa partner in a collaborative agreement and wouldhave fewer financial resources for acquiringother firms. A large size stimulates even moregrowth, and small processors have smallchances to expand in other ways than bymerging with or being bought by large firms.
The six growth strategies are notsubstitutable, ie, they fulfil different purposes.The ones that produce the most strength aremergers and acquisitions, as the result is asingle firm with good integration between allbusiness activities. Joint ventures may be risky,eg, the partner may become acquired byanother firm; the share owners may assumeother interests than those they had when theshares were bought; collaborative agreementscan easily be broken; licensing does not givemuch power.
Different types of dairy processors tend to
use different types of alliances. Co-operativesare more prone to merge, while IOF (Investor-Owned Firm) dairy processors tend to buy otherfirms, as is indicated in Table 2. During the five-year period covered by the table, the threeco-operatives (Arla Foods, Friesland andCampina) have conducted many mergers andjoint ventures but relatively few acquisitions. Theonly IOF in the table, Danone, has not mergedeven once but has acquired ownership in manyother firms – five complete acquisitions andbought shares in other f irms on twelveoccasions. The three co-operatives have boughtshares in other firms only to a limited extent.
A hypothesis is that the capital structure ofthe firm has a strong influence on the dairyprocessors’ choice of growth strategy. IOFs caneasily expand their capital base, whileco-operatives have difficulties doing so. ArlaFoods is almost completely f inanced byunallocated equity capital, and the membershave no incentive to invest in the co-operative.The two Dutch co-operatives have a largeramount of individualised capital and themembers have incentives to invest. Frieslandalso has external financiers. This may be areason why Friesland and Campina have mademore acquisitions than Arla Foods and why ArlaFoods has had to compensate its capitalconstraints by involving itself in more jointventures.
One way to obtain large scale isinternationalisation, ie, expansion to othermarkets. Guillouzo and Ruffio (2005) analysed33 EU dairy co-operatives’ internationalisation.
Market conditions • Market changes (retailing, manufacturing, market size, consumption trends, etc. • Poli tical changes
Strategies
Co-operative organisational model; Organisational attributes
Member attributes in terms of governance and financial capacities • Demand for member benefits • Member control • Member financing
Figure 1: Influences on co-operative organisational models
Journal of Co-operative Studies, 42.2, August 2009: 14-23 ISSN 0961 5784©
Alli
ance
ty
pe
Mot
ive
Stra
tegi
c fit
R
esou
rce
Mer
ger
O
btai
n sc
ale
adva
ntag
es, u
tilis
e ph
ysic
al re
sour
ces,
cre
ate
syne
rgie
s, s
hare
risk
, sha
re c
ost,
crea
te b
igge
r cap
ital b
ases
, and
st
reng
then
pos
ition
tow
ard
cust
omer
s an
d co
mpe
titor
s.
Arla
– M
D F
oods
200
0 Fr
iesl
and
– C
ober
co 1
997
Cam
pina
– M
KW 2
000
Tota
l int
egra
tion
requ
ires
good
fit
. Bot
h pa
rts in
con
trol.
Com
patib
le c
ultu
res
esse
ntia
l, lik
e or
gani
satio
n m
odel
s an
d co
mpa
tible
goa
ls.
Bra
nd p
ositi
on– e
xpor
t co
mpe
tenc
e.
Fina
nces
– m
oder
n st
ruct
ure.
B
rand
pos
– O
pera
tiona
l ac
tiviti
es a
nd c
apita
l.
Mar
ket p
ositi
on, s
trong
br
ands
, goo
d fin
ance
s et
c.
Com
patib
le
com
pete
nces
and
re
sour
ces.
Mer
gers
hav
e be
en
appl
ied
by a
ll th
ree
co-o
pera
tives
, but
not
by
Dan
one.
Fin
anci
al
mea
ns n
ot n
eces
saril
y a
key
reso
urce
. A
cqui
sitio
n O
btai
n sc
ale
adva
ntag
es, u
tilis
e ph
ysic
al re
sour
ces,
sha
re ri
sk,
shar
e co
st, a
nd c
reat
e bi
gger
ca
pita
l bas
es. I
nter
natio
nal
expa
nsio
n, h
ome
mar
ket
expa
nsio
n, a
nd ta
ke c
ontro
l ove
r co
mpe
titor
s.
Arla
Foo
ds –
S
kåne
mej
erie
r 200
0 D
anon
e – S
hape
/Uni
q P
lc
2002
Fr
iesl
and
Cob
erco
– N
utric
ia
Dai
ry &
Drin
ks 2
001
Cam
pina
– S
uper
life
2002
Tota
l int
egra
tion
requ
ires
good
fit
. Acq
uire
r in
cont
rol.
A
cqui
res
obje
cts
with
con
cept
s th
at fi
t the
firm
stra
tegy
.
Fina
nces
– M
arke
t pos
ition
. Fi
nanc
es– M
arke
t pos
ition
. Fi
nanc
es– M
arke
t pos
ition
, st
rong
bra
nds.
Fi
nanc
es– M
arke
t pos
ition
, st
rong
bra
nds.
Fina
ncia
l cap
ital,
abilit
y to
take
som
e ris
k.
Dan
one,
Cam
pina
&
Frie
slan
d C
ober
co
have
don
e se
vera
l ac
quis
ition
s. T
hey
all
have
cap
acity
to ra
ise
nece
ssar
y fin
anci
al
mea
ns.
Join
t Ven
ture
O
btai
n sc
ale
effe
cts
and
inte
rnat
iona
l exp
ansi
on, c
reat
e sy
nerg
ies,
and
stre
ngth
en p
ositi
on
tow
ard
cust
omer
s an
d co
mpe
titor
s.
Arla
Foo
ds –
Fon
terra
20
01
Dan
one
– R
achi
d 20
01
Cam
pina
– T
uffi
Emze
tt 20
00
Stra
tegi
c fit
for t
he re
sour
ces
invo
lved
in J
V is
cru
cial
. S
epar
ate
lega
l ent
ity.
Med
ium
inte
grat
ion.
Con
trol
allo
cate
d af
ter c
ontra
ct a
nd
equi
ty s
hare
. P
aren
t firm
s sh
ould
not
be
com
petit
ors.
Syn
ergi
es in
dis
tribu
tion,
m
arke
ting
& sa
les.
S
trong
bra
nds-
mar
ket
posi
tion.
C
ompl
emen
ting
mar
kets
.
Pro
cess
ing
site
s, g
ood
mar
ket p
ositi
on,
stro
ng b
rand
s, g
ood
man
agem
ent s
kills
et
c.
Arla
Foo
ds d
omin
ates
th
is c
ateg
ory.
Arla
Fo
ods
has
capi
talis
ed
on it
s m
arke
t pos
ition
an
d co
mpe
tenc
e to
su
cces
sful
ly e
xpan
d th
roug
h jo
int v
entu
res.
Sha
re
A s
tep
tow
ard
a co
mpl
ete
take
-ov
er, i
nflu
ence
in d
ecis
ions
and
th
ere
by a
ffect one’s
ow
n m
ark
et
situ
atio
n.
Arla
Foo
ds– K
ronO
st 2
000
Dan
one–
Sto
nyfie
ld F
arm
s 20
01
Frie
slan
d C
ober
co –
N
apol
act 2
002
Cam
pina
– E
mze
tt 19
99
Impo
rtant
if th
e pu
rcha
sing
fir
m b
uys
a si
gnifi
cant
sh
are.
Can
be
a st
ep
tow
ards
full
take
ove
r. Le
vel
of in
tegr
atio
n is
low
, (d
epen
ding
of v
olum
e of
sh
ares
). C
ontro
l if >
50%
.
Fina
nces
– C
ompe
tenc
e Fi
nanc
es– M
arke
t pos
ition
&
stro
ng b
rand
s Fi
nanc
es– M
arke
t pos
ition
Fi
nanc
es– M
arke
t pos
ition
.
Fina
ncia
l cap
ital,
abilit
y to
take
som
e ris
k.
Dan
one
stro
ngly
do
min
ates
the
appl
ianc
e of
sha
res.
D
anon
e ha
s th
e m
ost
favo
urab
le fi
nanc
ial
stru
ctur
e to
rais
e ca
pita
l to
buy
shar
es.
Col
labo
rativ
e ag
reem
ent
Stre
ngth
en m
arke
t pos
ition
, in
tern
atio
nal e
xpan
sion
, sal
e an
d sy
nerg
y ef
fect
s.
Arla
Foo
ds –
S
kåne
mej
erie
r 200
2 D
anon
e – S
hang
hai B
right
D
airy
200
0 C
ampi
na –
Agr
imar
k 20
01
Stra
tegi
c fit
is n
ot o
f gre
at
impo
rtanc
e bu
t for
the
purp
ose
of th
e al
lianc
e th
at
is q
uite
nar
row
. Le
vel o
f int
egra
tion
is lo
w.
Stro
ng e
xpor
t mar
ket
posi
tion
– P
roce
ssin
g ca
paci
ty. S
yner
gies
P
roce
ssin
g ca
paci
ty.
Pro
cess
ing
capa
city
, m
arke
t pos
ition
with
gr
owth
pot
entia
l etc
.
Non
e of
the
four
firm
s ap
ply
co-o
pera
tive
agre
emen
ts v
ery
ofte
n.
Her
e a
good
mat
ch is
m
ore
impo
rtant
. Li
cens
ing
Nar
row
pur
pose
. Ach
ieve
st
anda
rdis
atio
n of
a p
aten
ted
prod
uct,
utilis
e in
nova
tive
prod
uct
optim
ally
or o
verc
ome
wea
knes
ses
with
out h
avin
g to
de
velo
p th
e so
lutio
n.
Val
io
Leve
l of i
nteg
ratio
n is
low
.
Attr
activ
e pr
oduc
t –
Pro
cess
ing
poss
ibilit
ies
&
mar
ket.
Attr
activ
e pa
tent
ed
prod
uct,
mar
ket
posi
tion,
spa
red
capa
city
etc
.
Req
uire
s a
genu
ine
attra
ctiv
e pr
oduc
t tha
t ca
n be
pat
ente
d.
Tabl
e 1:
Exp
lana
tions
for t
he c
hoic
e of
stra
tegi
c al
lianc
e ty
pes
with
Arla
Foo
ds, C
ampi
na, F
riesl
and
Cob
erco
and
Dan
one
as e
mpi
rical
illu
stra
tions
(199
8-20
02) (
Sour
ce: H
edbe
rg, 2
003,
p39
)
16 Journal of Co-operative Studies, 42.2, August 2009: 14-23 ISSN 0961 5784©
17
The authors identify six main strategiesalthough three of them can be divided into twotypes. All these strategies aim at attaining largersize but in different ways and for differentpurposes.
• The co-operatives, pursuing a Raw milkprocurement strategy, are doing sobecause they need larger volumes forserving their customers appropriately.
• The Market diversification strategy hasthe purpose of expanding the operationsby selling existing products to foreignmarkets.
• The Commercial asset strategyexpresses economies of scale in theproduct development activities, ie gainingrevenues from the sales of licenses.
• Activity oriented leadership implies thata firm, working in a well-defined marketwith specialty products tries to expand themarket size, thereby acquiring economiesof scale.
• European expansion of nationalmarkets involves exports of products,most often but not necessarily toneighbouring countries.
• Multinationalism means that theco-operative sells large volumes of low-processed products in the world market,in spite of this market being extremelycompetitive.
Guillouzo and Ruffio (2005) also specify someorganisational attributes that are necessary fora co-operative to succeed with the chosenstrategy. The general impression is that thesefirms must be quite advanced in terms ofproduct quality, financial assets and humanresources. Certainly not all co-operativescould have success with these strategies.Especial ly the most ambit ious growthstrategies – European expansion of nationalmarkets, and Multinationalisation – are highlydemanding. The resource types that are ofspecial importance seem to be productportfolio, product quality, financial resources,brands, and technical knowledge. All theseresource types are mainly found in the co-operatives, which are already large and havegood financial strength.
In a study of the expansion strategies ofthe 15 largest dairy processors in theEuropean Union, van der Krogt, Nilsson andHøst (2007) identify some patterns. Seven of
the processors are co-operatives while eightare investor-owned firms. The expansionstrategies were:
1) Mergers2) Acquisitions3) Strategic share holdings4) Joint ventures5) Licensing6) General collaboration agreements.
During a five-year period (1998-2002) the 15dairy processors conducted 198 expansionactivities.
Distinctive differences between the two typesof organisation were found, and thesedifferences were shown to be due to twoattributes, inherent in the organisationalstructures. Co-operatives are by nature risk-averse, the reason being that the farmer-members consider the co-operative to be theirdefence against problematic markets, and sothey do not want their co-operative to follow anoffensive strategy. Further, members are neitherable, nor willing, to invest sufficiently largeamounts of capital in the co-operatives, andthus, there is a capital constraint, preventingthe co-operatives from conducting costly growthstrategies.
Co-operative f irms prefer mergers,collaboration agreements, joint ventures, andlicensing. All of these are low in terms of risks,and they demand limited amounts of equitycapital. Investor-owned firms focus on take-overstrategies – acquisitions and share holdings,both of which involve large investments.
A conclusion from the studies presentedabove is that the large dairy processing firmswant to expand, seemingly without any limits.The co-operatives have, however, a more limitedrepertory of action than the IOF competitorshave.
Co-operative organisational models
Dairy co-operatives’ growth as a response tochanging markets has resulted in a strong needfor capital. As many scholars have pointed out,acquiring capital is not the most salientcharacteristic of the co-operative business form.Members are often not willing to increase theirself-f inancing to the extent required forexpansion needs. According to Vitaliano (1983),among reasons for members’ low willingnessto invest in their co-operatives are free rider,
Journal of Co-operative Studies, 42.2, August 2009: 14-23 ISSN 0961 5784©
18
horizon and portfolio problems because of non-transferable ownership restricted to members,and that the residual is distributed according topatronage rather than the amount of investment.Even if members were willing to self-finance,Albæk and Schultz (1997) argue that thefinancing of an investment by retained patronagerefunds would lead to efficiency distortion unlessthe financing rule is according to members’ “size”independent of the voting rule.
The need of larger operations and marketpower includes a controversial interest ofmaintaining membership control. In theircategorisation of co-operative models Chaddadand Cook (2004) make a distinction between theownership rights (residual claim) and the controlrights. Members’ interests may be a hindranceto market adaptation. This is especially relevantin co-operatives that have a sizeable amount ofunallocated capital.
Hendrikse and Veerman (2001) argue that inaddition to capital needs, new organisationalforms are also developed to take better care oftransaction specific assets. In order to managethe problem of capital needs for growth,co-operatives have introduced severalorganisational solutions. Van Bekkum andBijman (2006) have categorised co-operatives,which have a need for larger amounts of equitycapital:
1. Internally tradable shares: In addition toretained patronage refunds, manyco-operatives have introduced another
possibility for members to finance theirco-operatives. Even though this way offinancing the co-operative to some extentrestricts the principle of paying the farmersaccording to their patronage, the membershipretains full control. Examples of such dairyco-operatives are Campina in theNetherlands and Dairygold in Ireland. Nilssonand Bärnheim (2000) report about a similarkind of arrangement in the Swedish dairyco-operative Skånemejerier. In manyco-operatives such internally tradable sharesare connected with delivery rights. If so, thecontrol right is indirectly affected in the longrun.
2. Externally tradable bonds: Externalsubordinate bonds are external investmentsthat have a lower rank as capital than theretained patronage refund. Such bonds area way of gaining external capital withoutaffecting members’ control right. A problemwith such bonds is that they often classify asdebt rather than equity. Arla Foods hasfinanced the acquisition of its UK operationsby using such bonds with fixed dividend.
3. External corporate investors: Externalinvestor as special members or shareholdersis a model applied in some co-operatives. Awell performing co-operative with innovativeproduct ideas may provide a low-risk andprofitable business for investment. However,this organisational model includes twosources of potential conflicts. First, whodecides how much will be paid to members
Firm Number of alliances by type Mergers Acquisi-
tions Joint
ventures Shares Collaborative
agreements Licensing Sum
Arla Foods (DK & SE)1
3 1 8 3 2 2 19
Friesland (NL)2 2 7 - 3 - - 12 Campina (NL)3 2 7 1 2 1 - 13 Danone (FR)4, 5 - 5 1 12 (1) - 19 Sum 7 19 10 20 4 2 63
Table 2: Number of alliances by type made by four firms in the European dairy industry1998-2002 (Source: Hedberg, 2003, p33)
1 Arla Foods is the largest dairy processor in Denmark and Sweden. It is a co-operative.2 Friesland Coberco was the largest dairy processor in the Netherlands. It merged in early 2009
with Campina, whereby the world’s largest dairy co-operative was formed.3 Campina was the second largest dairy processor in the Netherlands. It merged in early 2009
with Friesland Coberco, whereby the world’s largest dairy co-operative was formed.4 Danone is the largest dairy processor in France. It is a limited liability company, listed at the
Stock Exchange in Paris.5 The brackets express that Danone’s collaborative agreement is only minor.
Journal of Co-operative Studies, 42.2, August 2009: 14-23 ISSN 0961 5784©
19
according to use, compared with the amountpaid to investors as interest? Second, ifmember interests conflict with profitabilityrequirements, who decides what is themeaning of member sovereignty with respectto control rights? Despite potential conflicts,some dairy co-operatives like Sodiaal inFrance have applied such a model.
4. Public listing with preferential shares: Away of coping with the conflict of memberand investor governance is to have severalsets of shares having different decision-making power. In this way member controlcan, to a large extent, be maintained and stillsuch external capital can be regarded asequity. However, the conflict about how todivide the surplus remains. This conflict mayhamper the external investors’ willingness tobuy shares. Van Bekkum and Bijman (2006)report that Dairy Farmers of America haveapplied such a model. The Finnish meatprocessing co-operative LSO has formed aseparate company for meat processing thatis financially 37 per cent owned by theco-operative but has about 85 per cent ofvoting rights. The rest of the ownership istraded in the Helsinki Stock Exchange. Thus,LSO has kept the most importantco-operative-ruled function – the meatdeliveries – in its own hands and has becomea kind of holding company for the processingfunction together with external investors.
5. Conversion into farmer-owned IOFs:Chaddad and Cook (2004) regard IOFs asthe other polar end to the traditionalco-operative model. At a quick glance, onemay believe that there are no differencesbetween a co-operative and an IOF ownedby the suppliers. However, there arefundamental differences. Firstly, in an IOF thesurplus is divided according to capitalinvested whereas a co-operative divides itaccording to patronage. Secondly, thedecision-making power is divided accordingto the number of shares instead of the oftenapplied “one member one vote” principle. Inan IOF also the principle of free entry may berestricted. An advantage is that in an IOFthere is an objective way of measuring theperformance, which is not possible in aco-operative. The Finnish Dairy co-operativeValio has moved towards a share companystructure as it is owned by local and regionaldairy co-operatives. This development maybe interpreted as logical as the relative
advantage of the co-operative formdiminishes after milk collecting and deliveryto the processing phase (Ollila 1989, p260).At the same time the processes becomeincreasingly complex and, thus, more difficultfor members to control the performance inthe co-operative form “hierarchicaldecomposition” (Williamson 1981).
6. Entire or partial public listing: Completepublic listing has been exercised a few timesin situations where a co-operative has beenin serious financial trouble. Even suchattempts have been temporary as in the caseof Australian Dairy Vale Foods, which wassoon bought by another company. Despitelatent conf l ict between co-operat ivemembers and investors through stockexchange, partial public listing has beensuccessfully applied in a few co-operatives,as mentioned above.
Increased capital needs for growing operationshas been the most important reason for thevarious co-operative organisational modelsdescribed above. The explanation for the varietyof organisational models is membership’sdesire to maintain co-operative features,especially the control rights. If either the controlrights or the ownership rights have been at stake,the control right has been regarded as moreimportant. However, those two sets of rights areto such an extent inseparable that their completeseparation seems to be difficult to avoid.Because the ownership means residualclaimants, this is always a function of thecontrol right.
The growth of dairy co-operatives also meansincreasing heterogeneity in the memberships.This may become a growing hindrance formember governance. Even more problems mayarise when co-operatives become transnational(Nilsson and Madsen, 2007). Danish-Swedishdairy co-operative Arla Foods has indicateddifficulties in uniting memberships in twocountries.
Member attributes in terms ofgovernance and financial capacities
The preceding sections argue that agriculturalco-operatives tend to become ever larger andget ever more complex structures andstrategies. The memberships becomeextremely large and heterogeneous. Thissection proceeds to discuss the members’
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reactions to increased size and increasedcomplexity.
Based on observations of the changesamong many of the major U.S. agriculturalco-operatives during the last decade, Hogeland(2006) suggests a diagnosis. She claims that,in order to gain strength relative to the competingIOFs, the co-operatives are striving for large sizeand diversif ied operations, whereby themembers do no longer feel affiliated to theirco-operatives. In the eyes of the members,co-operatives have adopted almost all the traitsof the IOF competitors. Thus, the traditionalco-operative culture has vanished. Thisobservation is in line with several otherobservations (Cook, 1995; Fulton, 1995; Bager,1996; Harte, 1997; Nilsson, 1998; Holmström,1999). Lang (2006) provides a detailed accountof the process that resulted in the collapse ofone traditionally organised co-operative,Saskatchewan Wheat Pool.
Nilsson, Kihlén and Norell (in press) presentan empirical test of these propositions, basedon a survey among members of a large andcomplex Swedish co-operative, Lantmännen.The authors find that the members do notunderstand the business operations of theco-operative very well. The members are littleinvolved in the co-operative and they have limitedtrust in the board of directors and in themanagement. Finally, the authors investigatewhether it is possible for the co-operative toconduct remodelling measures such that themembers again would be involved and havetrust, but they find that this is not the case.Hence, the findings support what Hogeland(2006) suggests.
It is often said that members of a co-operativefirst and foremost appreciate good prices andother economic conditions, which contribute toprofitability in their farm operations (Fulton andAdamowicz, 1993; Gray and Kraenzle, 1998;Karantininis and Zago, 2001; Lind and Åkesson,2005; Berlin and Erikson, 2007). Severalempirical studies do, however, indicate that thisis not the whole truth (Bravo-Ureta and Lee,1988; Cain, Toensmeyer and Ramsey, 1989;Jensen, 1990). Of course the farmers musthave revenues, which more than cover theircosts, but this does not necessary mean profitmaximisation. At the same time the membersappreciate good service, closeness, socialrelations and many other so-called soft factorseven higher (Fulton and Giannakas, 2001;Borgen, 2001; Bhuyan, 2007). Such factors
foster member commitment to the co-operative.This is of utmost importance as without such,there is a risk that member supplies will decline,and this is disastrous for everybody (Staatz,1989; Fulton, 1999; Anderson and Henehan,2005; Zeuli and Betancor, 2005). Bremmers andZuurbier (1999) argue that in the global businessenvironment the entire member reward systemmust be renewed.
Österberg and Nilsson (2009) found that thesingle most important explanation to members’satisfaction with their co-operative is not theproduct price levels but the members’ perceptionof their participation in the governance. It is notnecessary that they actually control theco-operative, but at least they should feel thattheir opinions are taken seriously by the board.The study is based on a sample of 1,170Swedish farmers who are members ofco-operatives in a variety of industries.
A related issue is that the Chief ExecutiveOfficer (CEO) gets increased power in the verylarge co-operatives as members have difficultyin understanding many business operations(Cook and Iliopoulos, 2000; Hendrikse, 2007).Hence, not only member control is beingweakened but also the directors’ control.
Laursen (2005) investigated whethermembers’ satisfaction with their co-operativesand their participation in the member democracymight be related to:
1) The structure of the member democracy.2) The economic relations between the
co-operative and the members.3) The co-operative’s degree of diversified
business activities.4) The co-operative’s member communication
and member education.5) The member ’s dependency on the
co-operative.
The study was based on a survey amongmembers of the three largest Danish farmerco-operatives, all of them traditionally organised.The study indicates that farmers attach muchimportance to the member governance of theco-operative. This factor is crucial for membersatisfaction and for the co-operatives’ businesssuccess.
Empirical studies specifically focused onmembers’ view of co-operative financing areless common. Fahlbeck (2007), in a surveyamong members of a variety of Swedishco-operatives, found that the members have
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strong preferences for large unallocated funds.They do not want to have individual ownership,and they do not recognise either any horizonproblem, or any portfolio problem. The study byLaursen (2005) comes to the same conclusionas does the study by Borgen (2001). There isno study which has investigated how memberslook at the possibility of inviting externalfinanciers as co-owners of the co-operative.
Conclusions
The review of studies concerning co-operativemembers in terms of socio-psychologicalmatters in the preceding section indicates thatthe very large and very complex co-operativeshave difficulties in terms of member relations.Farmers demand ins igh t in to the i rco-operat ive’s business. If farmers feeluninvolved in or even alienated from theco-operative, they lose their co-operativeidentity and become solely suppliers.
Especially, the members consider theirgovernance of the co-operative to be crucial.Attitudes to ownership are less clear-cut, butprobably even this factor is considered to beimportant. This refers to collective ownership,while farmers seem to be less attracted byextended individual ownership of theirco-operatives.
All in all, the expectation presented at theoutset of the article seems to have somesupport. As the co-operatives are becoming very
large and very complex, the memberships havedifficulties following. The members feel that theyhave too little influence and they do not want toinvest sufficient amounts of capital. Hence, theco-operatives have no other choice than to inviteexternal financiers and perhaps also to allowcertain influence from the side of thesefinanciers.
It is to be seen how the separation ofownership and control can be maintained in thelong run. In a co-operative there is no objectiveway of deciding what is the proportion of theresult to be paid to financers and what is theproportion paid to the members as patronagerefund. If the former is too low, there is noexternal financing. If the latter is too low, theremay be no members and no supplies of rawproducts. At present it seems that thecombination of external financing with members’interest can function. However, long-runexperiences are still very rare.
The overall conclusion is that the structuralattributes of the co-operatives seem to bedecided by the need for strong market strategiesrather than by the members’ demands (seeFigure 1). If co-operatives do not fulfil the marketrequirements, they will hardly survive in today’sintense competition. On the other hand, firmsmay survive if they do not meet the farmer-members’ requirements, although they maysurvive in another business form than that of atraditional co-operative.
Jerker Nilsson is professor of Co-operative Business and Marketing at the Department ofEconomics as well as at the Department of Work Science, Business Economics andEnvironmental Psychology, Swedish University of Agricultural Sciences, Uppsala andAlnarp, respectively, Sweden. He has, together with K Karantininis, edited Vertical Marketsand Cooperative Hierarchies (Springer, Dordrecht 2007). Petri Ollila is associate professorin food marketing in the Department of Economics and Management at the University ofHelsinki, Finland. He has published several articles and other publications applyingInstitutional Economics to co-operative enterprises.
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