The New Mechanism for the Performance Evaluation of Cooperatives

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1 The New Mechanism for the Performance Evaluation of Cooperatives A. CHAMARU DE ALWIS Department of Management and Marketing Tomas Bata University in Zlin nám. T. G. Masaryka 5555, Zlín Abstract: - Cooperatives are the exceptional type of organization because of their purpose for existence. They run their business based on predetermine norms called cooperative value and principles. In point of fact, if they depart from this so-called value system, there is no cooperative continuation hereafter. The one of the special feature behind this body is the owner (member) plays a dual role with it, as the owner and foremost customer segment. Because of those surroundings they cannot construct profit maximization as an organizational objective. But they have to earn a profit for the survival and long term advancement. Because of this foundation and special purpose for existence, they can be recognized as cooperative business. This special entity performance must be measured through unique mechanism appropriate to the entity. Under this article suggests a new mechanism for that purpose by considering business and cooperative performances. Key Wards: - Cooperatives, Values, Principles. Performance Introduction The cooperative movement has a deep and distinguished history (ICA, 1996) and during this long last history a larger number of institutions, organisations, ideologists, authors and cooperative founders have defined cooperatives in different ways. It does not have a universally accepted definition (Book, 1992). To give an introduction to the cooperative, the article is brought definitions that have given by the International Cooperative Association in A cooperative society "is an association of persons, who have voluntarily joined together to achieve a common end through the formation of a democratically-controlled organisation, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in which the members actively participate" (ICA, 1996). Why cooperatives are special? A cooperative is a unique business entity that may be more comparable to a corporation with democratic control. Another unique characteristic of cooperatives is that the owners of the cooperative are also its primary customers. Therefore, a cooperative has dual responsibilities as a service oriented organization. They have to generate some profit for its owners to satisfy them. But the problem is the same group Owners has become a main customer segment of the entity. In other words they are selling their products and services to the owners. Then one can argue that the cooperatives cannot or do not generate profits. That is almost misunderstanding. They have to generate some profit for improving the service as well as survival of the organization. A cooperative or co-op is a business entity formed by a set of individuals who have a common goal or interest. A cooperative is a member-owned and democratically controlled, meaning the members have an equal say, and its purpose is to meet the needs of the members. As such, forming a cooperative can be a good choice when a group of people acting together can accomplish a goal that could not be accomplished by individual members acting on their own. The cooperative statement of identity, values and principles set cooperatives apart from other ISBN:

2 business entities. One major difference is that cooperatives are not an investor-oriented. The benefits of a cooperative are not distributed according to the amount of investment or percentage of stock owned. The members of a cooperative provide the financing to support the cooperative s operations and receive benefits in proportion to their use or patronage of the cooperative. The members main obligation is to use the services of the cooperative, and the success of the cooperative is tied to the members patronage. Cooperatives also differ from other business entities in their management. Cooperative members typically have one vote. This one vote per member ensures the principle of democratic control. Control of the cooperative is exercised through adoption of governing documents (i.e. Articles of incorporation and bylaws), and election of directors. The directors then set the basic operating policies according to the philosophy of the membership. Cooperatives are based on the cooperative value and principles. If they deviate from those this so-called values and principles, there is no cooperative stay alive. The cooperative is self-help, self-responsibility, democracy, equality, equity and solidarity. In the tradition of their founders, cooperative members believe in the ethical values of honesty, openness, social responsibility and caring for others. The ICA (1996) has recognized seven no of cooperative principles as a guideline by which cooperatives put their values into practice. A cooperative business generally has the following characteristics: It is owned and controlled by the people who use its services or buy its products (its "owner/customers"). Its primary focus is to provide its services or goods to its owner/customers and not to the general public. It is democratically controlled by its owner/customers, and each owner/customer has one vote regardless of the amount of services or products it purchases from the cooperative. The primary objective of the cooperative is to maximize benefits, rather than profits, for its owner/customers. Cooperatives are based on the cooperative values and principles. Objectives of the Cooperatives The primary objective of every cooperative is to provide goods and services to its members and thus enable them to attain increased income and savings, investments, productivity, and purchasing power and promote among them equitable distribution of net surplus through maximum utilization of economics of scale, cost-sharing and risk-sharing without, however, conducting the affairs of the cooperative for eleemosynary or charitable purposes. A cooperative shall provide maximum economic benefits to its members, teach them efficient ways of doing thing in a cooperative manner, and propagate cooperative practices and new ideas in business and management and allow the lower income groups to increase their ownership in the wealth of this nation. With different cooperatives develop their specific objectives based on the reasons for starting their cooperatives. Some cooperatives may provide multiple objectives for members while others are more specialized. Regardless of the type, size, geographical location, or purpose, all cooperatives provides at least one of the following: Improve bargaining power when dealing with other business Combining the volume of several members leverages their position. Reduce costs Volume purchasing reduces the purchase price of needed supplies. The earnings of the cooperative returned to individual members lower their net costs. Obtain products or services otherwise unavailable Services or products that would not attract private business are often supplied by cooperatives. Obtain market access or broaden market opportunities Value added to products by processing. Offering larger quantities of an assured type and quality attracts more buyers. Improve product or service quality ISBN:

3 Value added to their products, competition, and improved facilities and equipment increase member satisfaction. Increase income Cooperative or Cooperative Business A cooperative or co-op is a business entity formed by a set of individuals who have a common goal or interest. Their main objective is running some business activity for the assist their members to trouble-free their life and enhance their standard of living. Due to the unique features of the main customer segment (Customers are owners of the entity); society cannot construct profit maximization as an objective similar to other business organizations. But at the same time they cannot deviate 100% from profit earning objective. Because they have to earn some profit for their survival (to cover up day to day business expenditure) and to enhance the service to in the future. The cooperatives have to run their business under the framework has developed by members with the initiation of the society. In other words, they have to work without deviation cooperative values and principles. If they deviate those, hereafter, there is no cooperative existence there. By summarization those factors, cooperatives are running business on the foundation of cooperative values and principles for the betterment of member (owner customer). Therefore this entity cannot be recognized as a business entity, better to recognize as cooperative business. Performance Measurement Tools in practice There are no of performance evaluation tools can be seen with the profit oriented organizations. Most of these techniques directly related with the financial performance of the organizations. Profitability and Management efficiency indicators are mostly used among those. Net Profit, Return on Investment (ROI), Return on Assets (ROA), and Earning per Share (EPS) are some common examples of the profitability indicators. Effective use of capital, Management stability and Efficiency of operations are other most popular measurements. But the problem is whether those are suitable to measure cooperative performance. Because cooperatives are different up to some extend from this profit printed organizations. That means, cooperatives almost not differ from other business organization. They are doing business, but their objectives have some unique differences from other organizations. They have to provide goods and services to its members and thus enable them to attain increased income and savings, investments, productivity, and purchasing power and promote among them equitable distribution of net surplus through maximum utilization of economics of scale, cost-sharing and risk-sharing without, however, conducting the affairs of the cooperative for eleemosynary or charitable purposes. Because of that background, they don t have a profit maximization objective. Not only has that cooperative had to maintain cooperative identity when they perform day to day activities. In other words, they have worked without divergence from cooperative value and principles. If they do not concern cooperative itentity, hereafter, the cooperative can be seen there because of their registration under cooperative law, not the real practice. Values provide the basis for the enunciation of principles, since principles are guidelines for operationalisation of activities, (Taimni, 1989) long-term guideline for the cooperative practice and performance (Book, 1989). These form a bridge between values and the overall performance of the cooperative, Important and crucial functions help to make the development process for both the effective satisfaction of the material need of the members and overall performance of the principles are long term values (Book, 1989). The new mechanism for cooperative performances Author, here suggest using two main indicators to measure cooperative performances. That is cooperative business performance and cooperative principle performance. In other words, anyway, they are doing business (without profit maximization objective), therefore their business performance should be measured to get an idea about the performance. At the same time they have to protect cooperative identity. ISBN:

4 To reach this purpose, it should be evaluated cooperative principle practices. To be a real cooperative, decisionmakers have to direct the cooperatives to achieve these two performance criteria s at the same time (Davis, 1997). If they achieve cooperative value performances without considering business performances, it is not a successful organisation as a cooperative ( Pure value oriented ). Then they cannot fulfil members economical purposes and they will struggle for the survival in the market. If they achieve economic performance without considering value practices, it will be become another profit-oriented organisation ( Pure Business Organization ). If the Cooperative performs value practices as well as business activities successfully, it becomes an effective cooperative in this market environment. If they do not achieve these two performances, it is an Absolutely Failed society. Therefore, the cooperative must be successful in two different perspectives, business performance as well as cooperative value performances. Then it can be Cooperative Business organization. Two perspectives of the performance evaluation mechanism Business Performance Business performances can be measured through the indicators that are used to measure business performances of an organisation i.e., profitability and management efficiency indicators. To evaluate the business performances through the indicators shown in the table no 2. Table No 2: Business performance indicators Business Performance Variable Indicator Measurement Profitability Profitability Net Profit Average (NPA) Management efficiency Effective use of capital Stock Turnover (Consumer Section) (ST) Management Current Ratio (CR) stability Efficiency of operations Net Profit Average/ Assets Employed (NPA/E) Cooperative principle performances Cooperative value performance can be measured through the actions and programs implemented by considering cooperative values practise in day-to-day operations (Davis, 1997). Different type of cooperatives as the new Performance matrix Pure Business: They are running at a profit and their management efficiency is at an expected level. They have utilized the capital properly and the management stability of the organization and efficiency of operations is at an expected level, but their value performance is below the expected level. Pure Value oriented: They practise cooperative values in day-to-day operations, but they have failed as a business organisation. They are running at loss and management stability, efficiency of operations and efficient use of capital is below the expected level. Absolutely failed: They have failed in these two performance indicators. Their cooperative value practices and business indicators are below the expected level. There is no survival for the entity as well as cooperative. Cooperative Business: Under this stage cooperative are running at a profit and they have utilized their capital efficiently. Their management stability and efficiency of operations is in expected level. At the same time they practise cooperative values in day-to-day operations. This is the expected position with a cooperative organisation, because under this stage cooperatives are running successfully in a highly competitive market as a business ISBN:

5 organisation without destroying their To achieve real success in the cooperative identity. cooperative organisation, they must succeed in these two aspects. Figure no 1: Cooperative Performance Matrix High Business Performance Low Pupe Business Absolutely Failed Cooperative Businesss Pure value oriented High Low Value Performance Conclusion A cooperative is a unique business entity that may be more comparable to a corporation with democratic control. Another unique characteristic of cooperatives is that the owners of the cooperative are also its main customers of the entity. Because of that, cooperative cannot work for the profit maximization. Not only that, they have worked within the framework of cooperative values and principles that have been established with the initiation of the business. Because of this background, cooperatives can be recognised as special body as cooperative business. Under this References Böök S A., (1992), Cooperative values in changing world, In review of International Co-operation, ICA, New Delhi article, the main objective is to develop new mechanisms for evaluation cooperative performance under their unique background. For that researcher has developed new matrix, named cooperative performance matrix by considering business performance and value performance by taking main perspectives. By using this matrix, cooperatives can be categorized into four groups as Pure Business, Absently failed, Pure value oriented and Cooperative Business. The cooperative can be categorized in to Cooperative business is the successful cooperatives, because they have successful in both perspectives. Böök S A.,(1989), Co- operative values, principles and identity before the turn of the century, ICA, New Delhi Davis P., (1997), Cooperative identity and cooperative management, Report ISBN:

6 of the Special Workshop on ICA Cooperative, Identity Statement - From Theory to Practise, Aug,,Jaipur, India, pp International Cooperative Alliance - ICA., (1996) Report of the ICA committee on cooperative principles, Recommendations concerning the role of cooperatives in the economic and social development of developing countries, ILO, Geneva. Taimni K.K., (1993), Cooperative Development : The Next Phase, ICA, New Delhi ISBN: