SME-Cooperations and Mutuals as a Strategy for Growth and Survival

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Table of ContentsIntroduction................................................................................................................................................2Strategy for SME for survival and growth.................................................................................................5

Mutuals.............................................................................................................................................5Co-operations....................................................................................................................................6

Box 1. Service Station Cooperative - Capricorn Society Ltd., Australia, New Zealand, South Africa...........................................................................................................................................7

Differences between mutual and co-operatives................................................................................8Benefits of Cooperatives and Mutuals for SMEs.......................................................................................8

The Co-operative Principles.............................................................................................................8Direct Benefits of Cooperation among SMEs..................................................................................9Indirect Benefits of Co-operations among SMEs...........................................................................12Benefits of Mutuals.........................................................................................................................14

SME – Cooperations and mutuals as a stratey for growth and survival?

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Introduction

Small and Medium Enterprizes (SMEs) play a central role in the economy. They are a major source of entrepreneurial skills, innovation and employment. SMEs amount 99 % of all enterprises in EU. Different researches have different approach to define SMEs term. The features of SME definition depends on purposes of research and country which is examined. SME may range from a part time business with no employees to manufacturer employing hundreds of people. They may range from fast growing firms, to private family firms that have not changeв much for decades. The number of employees is the most common measure, though many definitions also use a monetary measures (such as capitalization, or sales). Even with the number of employed there is considerable diversity. In most economies an SME is defined as having less 100 employees, but in some of the larger economies this ceiling is raised to 300, or even 500 employees. Obviously a firm with only one or two employees is not the same as a firm with 499 employees. So in this research we will use the follow definition: SMEs are the firms having less 100 employees. SMEs includes micro (less 10 employees), small (from 10 to 49 employees) and medium (from 50 to 100 employees) firms.

Macro-economics variables include all economic, socio-cultural, and political-institutional factors. These economic factors present opportunities, threats and information affecting all SMEs within that environment, regardless of their background, education or business concept. Comparing to large companies, SMEs are more vulnerable to macro economic factors: inflation, interest rate, unemployment, exchange rate, competition, economic environment, work experience, industry-specific experience. Survival is the basic requirement for SMEs. The best way for survive is development. Development always considers growth.

Growth has been used as a simple measure of success in business. Also growth is the most appropriate indicator of the performance for surviving small firms. Moreover, growth is an important precondition for the achievement of other financial goals of business. From the point of view of an SME, growth is usually a critical precondition for its longevity. It was found that young firms that grow have twice the probability of survival as young non-growing firms. It has been also found that strong growth may reduce the firm’s profitability temporarily, but increase it in the long run.

The most frequently used measure for growth has been change in the firm’s turnover. Another typical measure for growth has been change in the number of employees. However, it has been found that these measures, which are frequently used in the SME context, are strongly intercorrelated. Such an intercorrelation may not exist among capital-intensive large companies.


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SMEs growth has specific features:

• Growth in small and new firms is the most important source of new employment;

• Younger firms grow more and faster than older firms;

• Firms in industries with high entry of new firms grow more than firms in more stable industries;

• Younger and smaller firms grow organically whereas older and larger firms grow through acquisitions;

• Growing firms have higher probability of survival than have non-growing firms;

• Only a small proportion of all firms grow at all;

• In order for the firm got grow, the owner-manager must want growth.

With that its is clear that SMEs can carry out the growth through two ways: organic and non-organic. In the economy, organic growth is usually associated with genuine job creation, whereas non-organic growth, i.e. growth through acquisition, is often considered as a shift of jobs from one firm to another. The organic growth is more typical for growing markets.

But usually SMEs deal with some obstacles. For instance, the management in a smaller business with about half-dozen employees can be fairly informal but when the number of employees reaches from 6 to 25 there is a need for both a delegation of tasks and a certain amount of and subdivision. Beyond this point there is a growth barrier due to the delegation of authority that has to take place to make the organizational work. Delegating management functions is not only closely linked to the owner’s willingness to let go of some control but also to realize her or his own limits.

The barriers for growth SMEs can be classified as:

• Macroeconomic environment: The establishment of a stable macroeconomic environment where business can be conducted is considered a prerequisite for entrepreneurs to invest and take risks. In economies where market reforms have been slow or only partial, the macroeconomic environment is unstable and it impacts the characteristics and behavior of enterprises at the micro level. Macroeconomic policy also affects the entrepreneurs’ decision


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to invest, especially in projects that require a longer time to produce a return.

• Legal and regulatory environment: The establishment of new commercial and contractual laws, property rights laws, bankruptcy and collateral law, real estate regulations and labor laws were all conducive to business relationships and facilitated access to external finance and principal-agent relations.

• Unfair competition, informal economy and corruption: In general, today’s business environment in transition economies is characterized by the informal economy, corruption and unfair competition that often jointly hinder SME growth.

• Financial obstacles: The growth-oriented small firms wishing to expand will need external sources of finance supplied by banks. External finance is usually not available to all small firms for a variety of reasons. There is a common view among economists that the capital markets are inefficient with respect to small business finance. The high cost of capital is another burden in terms of SME financing.

• Tax burden: Taxation is crucial to the development of businesses because policy makers can change the pattern and decision of entrepreneurs to invest through taxation.

After researching SMEs’ response on the issue of problems for growth the most frequent barriers to growth were found:

• Fierce competition

• Lack of scale and scope �

• Limited region presence�

• Lack of bank loans

• Lack of management and technical skills

• Background and access to resources

With these drawbacks, there are some popular strategies adopted by SMEs to counter the abovementioned barriers.


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Strategy for SME for survival and growth

Limited resources of SMEs and increasing international competition have forced small firms to search for new flexible and effective forms of organization. So to achieve new flexible and effective forms of organisation for growth and survival, SMEs, popularly, opt for cooperations and mutuals. Before heading on to describe and analyse benefits and failures of these forms of organizations, we must define what does mutual and cooperations signify.

Mutuals

The narrowest definition of a mutual is an organisation owned and governed by members who either are its consumers, producers, employees or suppliers. Other organizations, which are part of the public sector, public-private joint ventures, charities or even investor-owned companies, can embody a weaker form of mutuality if they are run with a mutual ethos. Less formal models of mutuality - which promote a culture of co-operative self-help - may be more flexible and dynamic. The most dynamic mutuals combine a common ownership structure with a mutual culture and management style that promotes a sense of membership and collaboration among staff, suppliers, partners and consumers.

Mutual organisations come in many shapes and sizes, exhibiting degrees of mutuality. Some are mutually owned by their members. Others exhibit a mutual ethos although they may not be owned by members. The distinguishing feature of a mutual is that the member-owners are more than investors. They usually have another relationship with the mutual either as consumers, producers or suppliers. The members create and own the organisation either to consume its services or to come together as joint-producers.

Many organisations adhere to mutual principles in the way they are run, without being mutually owned. Charities, trusts and clubs, for example, which have no owners can adhere to mutual principles by allowing volunteers or members a vote in elections for office holders and by involving volunteers in production. The Workers’ Educational Association follows mutual principles because many of it scourses are organised by volunteers who are former students. A public sector organisation can have a mutual ethos even if it is owned by the state. Even commercial businesses, owned by investors, can make profits by dealing with staff, suppliers, partners and community groups in a mutual manner to deliver mutual gains. This mutual approach to managing relationships between companies and suppliers, partners and employees is increasingly important.


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Organisations bring together financiers and investors, managers and workers, consumers and suppliers. All organisations, public, private or mutual, are sets of relationships. Mutuals create a set of relationships between owners, workers and consumers that is quite different from the ‘model’ investor-owned company. In practice the rights of shareholder owners are quite limited. Many investor-owned companies often fail to reap the advantages of this form of organisation. Mutuals are different because they handle relations between owners, staff and consumers in a quite different way. Mutuals are designed to serve their members, not potentially footloose investors.

In the case of ‘strong mutuals’, the owner-members are usually consumers, employees or suppliers. They should have a regular and reasonably close relationship with the organisation. That should make it easier for them to monitor the performance of the managers than it is for outside investors. Mutuals should stand out by the way they involve their members, not just in the formal procedures of corporate governance but in the day-to-day running of a mutual. The immediate goal of a ‘competitive mutual’ is to provide a service that matches the quality of competing offerings provided by the public and private sector, whether that is in financial services, housing, health care or childcare. In these situations mutuals are distinguished by the way they operate. Often in a consumer mutual, for example, the members are co-producers of the service they consume.

Co-operations

Cooperation refers to the practice of people or greater entities working in common with commonly agreed-upon goals and possibly methods, instead of working separately in competition. Cooperation is the antithesis of competition, however, the need or desire to compete with others is a very common impetus that motivates individuals to organize into a group and cooperate with each other in order to form a stronger competitive force.

The internationally accepted definition of a cooperative, as included in the ILO Promotion of Cooperatives Recommendation 2002 (No. 193), states that cooperatives are:

“…an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise”.

The Promotion of Cooperatives Recommendation 2002 (No. 193) thus gives a broad definition of what a cooperative can be. For example, it does not specify the need for registration as a cooperative.


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It is a legal entity in which the principal object is to satisfy its members’ needs and advance their economic and social activities, in accordance with the following principles:

• Its activities should be conducted for the mutual benefit of the members so that each member benefits from the activities of the co-operative in proportion to his/her participation,

• Members must also be customers, employees or suppliers or be otherwise involved in the activities of the co-operative.

• Control should be vested equally in members. The right to vote is vested in the individual and entails that members cannot exercise any rights over the assets of the cooperative.

• Interest on loan and share capital should be limited. In some circumstances, co-operatives may also have among their members a specified proportion of investor members who do not use their services, or of third parties who benefit by their activities or carry out work on their behalf

• The voting rights of investor members, if allowed, must be limited so that control remains vested in the user members.

• Profits must be distributed in proportion to the transactions with the cooperative, or retained to meet the members' needs.

Co-operatives are self-help organisations set up by citizens which are formally-organised and have autonomy of decision. In order to satisfy the needs of their members or conduct their business they operate on the market, from which they obtain their main source of funding.

For examples of cooperation and mutual, please refere to Box 1 below.

Box 1. Service Station Cooperative - Capricorn Society Ltd., Australia, New Zealand, South Africa

Capricorn Society Limited was formed as an unofficial buying group in the early 1970’s by a group of Western Australian service station proprietors and established as a cooperative to assist automotive repair and service businesses in 1974. Today, auto electricians, paint & panel shops, mechanical workshops, auto transmission workshops, service stations, among others and more use Capricorn to buy over three quarters of a billion dollars in parts at competitive prices every year from


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more than 1,300 preferred suppliers in Australia and also in New Zealand and South Africa.

In July 2003 Capricorn Mutual was established, as an initiative of Capricorn Society, to provide the members with an alternative to insurance. Capricorn Mutual provides business and personal risk protection to its members and has been granted a licence under the rigorous Australian Financial Services laws.

Differences between mutual and co-operatives

The main difference in behaviour between co-operatives and mutual societies is that the mutuals operate with own funds which are collective and indivisible, rather than with a capital represented by shares that are bought by the members. The members of mutuals pay a fee rather than acquiring shares, whereas share purchase is obligatory in the co-operatives. In the mutual societies, member and policy-holder are totally and exclusively one and the same, whereas it is possible for some co-operatives to have (a minority of) non-user members. Another point is that there is no undistributable equity in mutual societies, whereas this is a possibility for co-operatives in many countries. Only the savings and credit co-operatives and insurance co-operatives are placed with the mutual societies in institutional sector (financial corporations). All the other co-operatives are classified into the nonfinancial corporation sector. In all other respects, the operating principles of cooperatives and mutual societies are similar.

Benefits of Cooperatives and Mutuals for SMEs

The Co-operative Principles

The co-operative principles are guidelines by which co-operatives put their values into practice. These principles are accepted by an international non-government institution, International Cooperative Alliance (ICA). Currently, ICA has 249 member organizations from 93 countries, representing approximately 1 billion individuals worldwide.

Voluntary and Open Membership: Co-operatives are voluntary organizations, open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political or religious discrimination.

Democratic Member Control: Co-operatives are democratic organizations controlled by their


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members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. In primary co-operatives members have equal voting rights (one member one vote) and co-operatives at other levels are also organized in a democratic manner.

Member Economic Participation: Members contribute equitably to, and democratically control, the capital of their co-operative. At least part of that capital is usually the common property of the co-operative. Members usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any or all of the following purposes: developing their co-operative, possibly by setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the co-operative; and supporting other activities approved by the membership.

Autonomy and Independence: Co-operatives are autonomous, self-help organisations controlled by their members. If they enter into agreements with other organisations, including governments or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their co-operative autonomy.

Education, Training and Information: Co-operatives provide education and training for their members, elected representatives, managers and employees so they can contribute effectively to the development of the co-operative. They inform the general public, particularly young people and opinion leaders about the nature and benefits of co-operation.

Co-operation Among Co-operatives: Co-operatives serve their members most effectively and strengthen the co-operative movement by working together through local, national, regional and international structures.

Concern for Community: Co-operatives work for the sustainable development of their communities through policies approved by their members.

Direct Benefits of Cooperation among SMEs

By cooperating in a formalized way SMEs Cooperative members achieve what little fish do by swimming together in a “school” - they seem much bigger than they are, with the ‘school’ providing an environment that increases economies of scale and scope that leads to increased competitiveness and market share, while the ‘fish’ maintain their individual enterprise independence. The expectation


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to improve one´s own economic situation is usually the most important motivational factor that either triggers the birth of a cooperative or incites individuals to become a member of an existing cooperative. Members mainly expect that the cooperative will supply them with services and goods in an effective and efficient manner (Hanel, 1992: 58), in order to generate more favorable conditions than they could individually produce or obtain from markets, public institutions or development projects.

In industrialized countries Entrepreneur/SMEs Cooperatives thrive in competitive markets and although they do not only seek to maximize profits, they have achieved significant market share in sectors where capital-driven enterprises are very strong (such as insurance, food retail, pharmacy and various trades). Throughout Europe, Entrepreneur Cooperatives are growing fast in the sectors of health care, business services and in education (CEC, 2004: 3). Even professionals and public bodies in both Northern America and Western Europe are making increasing use of Entrepreneur Cooperatives.

The cooperatives may be a means for building or increasing economic power of Small and Medium-sized Enterprises (SMEs) in the market. The Cooperative is a form of company which allows SMEs to acquire some advantages of size, such as scale economies, access to markets (including participation in larger public tenders), purchasing power, marketing power, management-development, training and research capacity. Cooperatives offer an appropriate vehicle for enterprises to undertake joint activities and share risks, whilst retaining their independence. Cooperatives also enable vertical integration of product chains. This can be beneficial for small enterprises that are in a weak position in the supply chain and wish to gain for themselves the revenue from added value of their products or services. However most non-cooperative enterprises remain unaware that the cooperative form might be an appropriate vehicle for such common activities.

SMEs Cooperatives frequently offer one or a combination of the following services to their members:


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Furthermore even the erstwhile the Europe Commission also believes and adds:

“…. Indeed the co-operative form can be a useful way for smaller companies to gain the necessary critical mass or range of services to bid for public contracts.”

It also attributes positive knowledge building effects to cooperatives and – referring especially to workers’ cooperatives though- calls them “… schools of entrepreneurship and management for those who might not otherwise have access to positions of responsibility.”

Indirect Benefits of Co-operations among SMEs

Aside from the direct benefits to member enterprises, Cooperatives can also produce external benefits to whole economies and societies. Aside from their possible impact on employment and potential for poverty prevention, social dialogue and empowerment of disadvantaged groups, other indirect benefits, contributing to the development of the community.:

• Correct market failures and enable the efficient organization of markets by enabling those who are in a weaker market position to combine their purchasing or selling power;

• Unite small enterprising activities into bigger marketable and more efficient units whilst allowing to retain their autonomy;

• Give market power to lay people or small enterprises where homogenous products or services are needed;

• Enable those who have little capital to influence economic decision making;

• Enable citizens to affect or determine services they need;

• Take a longer-term view being based on maximizing stakeholder benefits rather than shareholder value. Members are less likely to “vote with their feet” than shareholders who seek maximum returns in global financial markets. For similar reasons a co-operative will be less likely to withdraw from a particular region or sector because its capital could be more profitably employed elsewhere. Co-operatives can therefore provide a cushion from structural change;

• Provide a school of management, particularly to people who might not otherwise have access


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to positions of responsibility;

• Integrate large sections of the population to economic activity;

• Abolition of child labor and bonded labor;

• Protection of natural resources;

• Prevention of rural-urban migration, and support of rural diversification;

• Defense against the flight of capital in the case of financial downturns;

• Capacity building;

• Benefit local markets and service local needs with close contact to citizens. Raising economic activity in the regions and sectors where co-operatives are active;

• Provide stability. Because the purpose of a co-operative is to benefit its members, rather than to provide a return on capital, they can often survive and succeed in circumstances where investor-owned businesses would be deemed unviable;

• Generate trust and create and maintain social capital due to democratic governance and economic participation.”

And last but not least the industrialized countries place a great deal of hope on cooperatives of any kind for the creation of employment and social security (thereby referring largely to social cooperatives and social enterprises but also including cooperatives), in regional development and public procurement, for employee ownership and the organization of work, as well as for development aid.

. All these effects can be expected not just inside the industrialized economies but to differing degrees all over the world, depending on the economic, legal and administrative environments faced by co-operations.

Economic theory (rather than business theory) suggests that cooperatives are particularly able to

• concentrate on the socio-economic needs of the members and their economic integration;


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• achieve economies of scale;

• break the power of local monopolies;

• show a particularly high level of flexibility and adaptability to changing market situations;

• promote local knowledge and understanding of democratic processes;

• build up own resources which make them truly autonomous, able to survive independently of external support and able to compete in the relevant markets;

• avoid the development of a recipient mentality on the part of members;

• instill a high level of identification of the group with the organizational aims;

• inspire innovation, diversification and specialization in their members' enterprises;

• lower information costs, abolish asymmetric information, decrease risk and make complementary investments attractive, thus significantly limiting transaction costs for both, members and organization;

• establish self-financed federative systems (eg. regional co-ops or national unions) for consulting, training, marketing and political representation.

Benefits of Mutuals

The membership base of a mutual should give it two advantages over traditional investor-owned companies and public sector organizations:access to deeper reservoirs of trust and know- how among its members. First, a mutual should find it easier to win the trust of its members,especially when there is a risk they might be exploited by a private or public monopoly. Mutuals often emerge in response to so-called “market failure”.

Life insurance was first sold in the United States in 1810. Until 1843 a number of well-capitalized, conservatively managed, investor-owned companies tried to sell life insurance. Despite their conservative credentials none of these companies sold more than a few hundred policies in more than three decades. Potential policy-holders did not trust the companies not to run off with their money, because the companies were responsible, in the last resort, to their shareholders. That changed in


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1843 when the first mutual life insurer was formed. By 1847 there were seven mutuals owned by their policy-holders and by 1849 there were nineteen. The original seven mutuals are still in business. Most of the investor-owned companies had stopped selling life insurance by 1853. Eventually life insurance spread to millions of people, largely because consumers felt they could trust mutuals in away that they could not, at the time, trust an investor-owned comp any.

Public sector monopoly can be as threatening as private sector monopoly. Mutuals often emerge in health, education, welfare and housing in reaction to perceived failings on the part of the state. Patients with special needs, for example, often complain that public services are too inflexible to serve them properly, while private provision is too expensive. As a result patients with special needs feel neglected and under-served. One response is to form a self-help organization with people with similar needs. Such mutuals are increasingly common in health care as a complement to st ate- run services. Mutuals, as we shall see, are often formed in response to “state-failure” rather than “market-failure”.

Mutuals prosper not just in the context of state or market failure but where organizations need to garner the tacit knowledge and commitment of consumers or producers. Linux became the world's fastest growing computer operating system because of its ability to draw upon the know-how and expertise of thousands of volunteer member programmers. This capacity to draw upon the diverse, often tacit and informal skills of members is at the heart of the role mutuals could play in tackling social and financial exclusion, deep-seated social problems which are often complex.

Mutuals are ideally suited to deliver a joined-up approach to community renewal and to reinvigorate traditional public sector organizations.


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Disadvantages of Cooperations

The potential of Entrepreneur Cooperatives to help their members to prevent poverty has to be judged on a case-by-case basis. As observed in the past, membership numbers and turnovers might be few, members might be too poor and their enterprises too small for an Entrepreneur Cooperative to really have an impact on the wealth of its members (Marburg Consult, 1989: 13; Hyden, 1982: 92). There might be a need for high amounts of external financial support and/or advice, which carries the danger that the cooperative becomes subject to the goals of an external authorities and is therefore no longer purely oriented towards the goals of its members.

Yet, many potential cooperators or entrepreneurs are not aware of the possibility of organizing in the form of a cooperative. The cooperative legal form is frequently perceived only to be applicable in sectors such as agriculture, banking or common production. (See for example Göler von Ravensburg, Pinkwart, & Schmidt, 2003: 40).

At the same time administration costs of using this corporate form sometimes surpasses the savings to be gained. This can be because the (public) administration entrusted with registering (and maybe auditing) is too centralized. The Entrepreneur Cooperative can be too closely supervised by the state or negatively discriminated through particular accounting requirements or heavy taxation. Central administration or state control can also contribute to the fear of losing entrepreneurial independence. Furthermore, the curricula for the management training of cluster organizations of MSME, professionals and other local development actors tend to be based on the predominant business models. It is therefore hardly surprising that young entrepreneurs, professionals or local governments rarely consider the “cooperative option”, even when it might be the most appropriate for their activities.

Also, in some countries the term ‘persons’ included in the ILO Promotion of Cooperatives Recommendation 2002 (No. 193) is understood to mean ‘natural persons’ only. However, in legal language the term ‘persons’ can mean both, natural as well as juridical persons, such as companies, associations or primary cooperatives.


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SME-Cooperations and Mutuals as a Strategy for Growth and Survival