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“Business is business,” notes Peter Cameron, Co-operative Development Manager at the OCA. Co-operatives pursue a triple bottom line but they still have to generate a return. The question is who controls it. In fact, many players in the traditional capitalist economic system have morphed in our direction, adopting a broader perspective that goes beyond shareholder value to embrace multiple stakeholders.”
Cameron added: “Credit unions are an excellent example of co-operative enterprises that have been successful in taking on the banks, by using all the best business practices available. Let’s examine some areas where co-operatives can introduce modern tools and techniques for greater productivity without undermining their basic business model.
Competitive Intelligence
Competitive intelligence (CI) is a vital activity that analyzes the external environment to support strategic and tactical decision-making. CI is not limited to researching competitors; it also examines markets, customers, suppliers, regulators and other actors and activities that impact an organization’s well-being.
CI is more than research, although that is a good place to start. Identify your peers and use publicly available data to benchmark their performance against yours on key metrics like revenue growth, return on shareholder equity, return on fixed assets, and expense ratio. As part of a balanced scorecard, co-operatives should also consider non-financial performance measures such as employee turnover, employee engagement, community investment and staff volunteer hours. This kind of research, measured over time, provides management with an unbiased assessment of the co-operative’s strengths and weaknesses.
CI is not just data gathering, however. Its usefulness as a tool is grounded in agility. The primary value of CI is the enabling of organizations to adapt earlier and faster to changing market conditions. It doesn’t focus on the past or the present; its role is to anticipate change. It serves as an early warning system for threats and opportunities arising from changes in technology, government policy, demographics and competitor actions that may disrupt market equilibrium.
Technology is certainly useful in gathering data but don’t overlook your own staff and other human sources. Any person with access to external information – employees, suppliers, customers, industry observers, the media – can generate valuable insights on market conditions. Remember, though, that CI is not industrial espionage. It has nothing to do with extracting secrets. Rather, CI is designed to equip organizations with an objective grounding for its strategic choices when adapting to shifting market conditions.
Enterprise Risk Management
Enterprise Risk Management (ERM) is a risk management framework that identifies and measures all activities that are material to the firm’s operations. It uses a combination of quantitative factors, such as the potential impact on revenue or income, and qualitative factors, such as damage to the firm’s reputation that could lead to a loss of business. It evaluates Inherent Risk, i.e. current risk before the application of any controls. It then assigns a level of materiality (Low, Medium or High) and the probability of occurrence (L, M or H) to each risk.
An example of a risk with high materiality but low probability would be a cyber security breach such as browser hijacking or cyber extortion. A risk with generally low materiality but potentially high frequency would be employee theft.
ERM examines the organization’s risk management policies, procedures and techniques to assess their quality and adequacy. The assessment scale ranges from Strong to Acceptable to Needs Improvement to Weak. Similarly, the ERM framework assesses the firm’s governance effectiveness, at the Board and senior management levels, in monitoring and dealing with the highest priority risks – again using a S, A, NI and W scoring matrix.
Finally, the framework helps management arrive at a rating for Net Risk, being a combination of the inherent risk and a realistic assessment of the adequacy of the firm’s risk management practices in dealing with it. Finally, the ERM dashboard encapsulates the direction of risk – whether it is decreasing, stable or increasing over time. An ERM dashboard is a living document; it is updated at least annually, preferably more often, and is continuously updated for changes in economic conditions and the firm’s own activities and prospects.
Unless it is supported by sophisticated data analysis, which is more challenging for smaller firms, an ERM framework won’t quantify the impacts of material risks on operations and the firm’s financial condition. But it will help identify areas where net risk is unacceptably high, either because: (1) the inherent risk is elevated, like cash custody in retail operations, which warrants special attention from management; or (2) because controls are inadequate, which should lead to more concerted mitigation efforts, like segregation of duties.
Other Elements in Operational Excellence
Stress Testing
For banks and other financial institutions, stress testing is a regulatory imperative. For other firms, it’s just smart business. How would you cope with an extraordinary, but plausible, event? The pandemic of 2020 was a valuable lesson in preparedness (or the lack thereof). The lockdowns caught many small businesses by surprise, unable to shift easily to online sales with curbside or delivery-based fulfillment. Scenario planning – dramatic shifts, both positive and negative, from your baseline – will help co-operatives ensure their sustainability under disruptive conditions.
Product Development
Small firms, like most co-operatives, lack the resources to conduct their own research and development. But they have the same imperative as larger firms to remain competitive. And in a fast-changing economy, that means keeping pace on new product development. If capital or human resources are an issue, co-operatives should consider alternative approaches to proprietary product development such as licensing from others or joint ventures.
Cost Control
Just because many co-operatives are not-for-profit enterprises doesn’t mean they should overlook any opportunity to improve productivity, such as reducing expenses by the application of labour-saving technology. An enduring path to a healthy bottom line is a vigilant focus on cost control. Regular audits of production processes, from the price of inputs to the efficiency of throughput and the quality of output, will help identify where costs can be taken out.
Quality assurance (QA) is another technique that modern firms use to prevent mistakes and defects in manufactured products and avoid problems in delivering products or services to customers. QA is a set of administrative and procedural activities, such as inspection and structured testing, to ensure the firm’s processes deliver the product quality that management wants and the customer expects.
Marketing
Smaller firms typically lack the resources to advertise on mainstream media or other conventional channels for building awareness. Yet co-operatives have a compelling story – one that appeals strongly to certain demographic and psychographic population segments. Co-operative values resonate with scrupulous consumers who want to make ethical and socially responsible purchase decisions. Social media platforms are well-suited for brand-building by enterprises which rely on trusted referrals from satisfied customers to grow an audience, energized by key influencers who have like-minded followers.
It’s a space that can’t simply be claimed, however; a reputation as an ethical enterprise has to be earned. Marketing of this nature probably needs to be legitimized by labelling or even certification to assure consumers of the bona fides of a product or service.
George Scott is an Associate Member of the OCA and a consultant in business and strategic planning, communications and recruiting based in Alliston, ON.
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