Loyalty Management

A New Cooperative Paradigm in Theory and in Practice

By Daniel Côté, Professor of Business Strategy, HEC, Montreal

Introduction: How to Face an Identity Crisis

Cooperatives, particularly large and mature ones, face an identity crisis. This is initiated mostly by structural changes in their environment. For example, the size of the association of members increases for reasons of economic efficiency, which leads to free rider problems and weakens member's participation. This increasingly large number of members, especially in urban areas, undermines the relationship between members and their cooperative, making it more abstract and more individualistic. The association of members becomes a fictive community. In addition we should consider the increasing level of competition cooperatives are faced with. This makes it harder for members to recognize and appreciate the value of the co-operative difference.

Those structural changes force us to reconsider how we look at cooperatives. Two key questions need to be answered. First, do cooperatives still have the capacity to build and deliver to members and other stakeholders, a different outcome (from capitalistic organizations)? Secondly, is there a competitive advantage that we can build from the co-operative identity, its distinct nature and structure? Fundamental responses to those questions can be found in a “new cooperative paradigm” and in a search for a co-operative equilibrium. *

It is by revisiting the co-op distinctiveness that we can find answers to both of these questions, mostly to the second one. Instead of looking at the past, we can more fully appreciate the co-operative model by looking at challenges of the future. In this paper, we will focus essentially on the concept of loyalty, on which I have been working over the the last few years.

What about loyalty?

Loyalty is defined as a philosophy of leadership, and a strategy that allows building and maintaining satisfaction and fidelity of an enterprises's partners, its members, its employees, its network, and its community. It can be achieved by putting in place mutually beneficial relations, based on trust. Key principles required to build loyalty are: a world class value proposition based on ethics and integrity without compromise, mutual trust, transparent access to information, an enterprise being proximate to and coached by its customers, capable of acting on the enthusiasms of its customers, focusing on the unexpected, true interest long after sales, anticipations of future needs.

A proper management of loyalty requires equilibrium between collective and individual values. It builds on a managerial approach focused working in accord with the personal values of individual human beings. Most top loyalty drivers are relationship issues such as staff attitude, delivering on promises, etc. Loyalty is a source of competitive advantage, since it helps reduce costs and increase revenues. It is rare since very few organizations are capable of implementing it to their advantage. Finally, it is difficult to imitate, mostly because it requires a high level of legitimacy to be earned, and a capacity to meet “moments of truth” on a daily basis.

With this brief account of the foundations of loyalty management, we can turn to co-operative identity and question its advantages faced with the challenges of creating this sort of management. I believe that cooperatives are are better able to successfully accomplish this than conventional enterprises. But to do so, requires that they learn to fully appreciate their identity and its distinctiveness; it then becomes possible to link cooperative identity and competitive advantage.

Loyalty and cooperative identity

Cooperatives have an advantage with respect to loyalty for a number of reasons. First, the principles and values at the heart of their existence are strongly convergent with the principles found in a proper management of loyalty. The principles and values expressed by the International Cooperative Alliance clearly establish that— these include democratic functioning and participation, education, communication and transparency, engagement towards community, ethics based on honesty, social responsibility, and altruism. Clearly, on the basis of values, cooperatives have a strong “natural and inherent” advantage while capitalistic organizations have to transform themselves.

A second set of advantages relates to the “raison d'etre” of cooperatives. Fundamentally, they are being created to improve their members' socioeconomic condition and status. It is essentially for this reason people become members of co-operatives. Cooperatives don't exist to maximize profit and can therefore focus more specifically on people, which is at the heart of loyalty management. A third advantage cooperative shave here comes from their structure, since customers are also owners of the organization. Instead of having to build a client's interface from without, co-operatives have and can do so from within. They should have advantages in the necessary legitimacy process which is a key foundation in loyalty management.

Obviously, we could explore even further the advantages of cooperatives concerning loyalty issues, but those mentioned should be enough to renew our interest in the inherent competitive advantage of cooperatives to meet the challenges of hyper competition. It is important though to keep in mind the need to offer a world class value proposition to members and employees. Also, this co-operative identity needs to be managed and can certainly not be taken for granted.

Experimentation and action research with a “Caisse Populaire” in Quebec, Canada

It is already exciting and promising to revisit co-operative foundations and discover strong inherent competitive advantages. But this is not enough. There is a need to go from theory to practice. That is why I undertook an experimentation and action-research project with a financial co-operative aimed at implementing this loyalty managerial approach. Furthermore, I hoped to be able to support and demonstrate those inherent advantages mentioned previously. Also, there is a need to explore potential avenues (of business and democratic functioning) only cooperatives can significantly put in place in their quest to earn loyalty of members and other stakeholders. Traditional research is not enough to provide significant questions and answers on those key issues.

The first step in approaching the loyalty concept at the financial cooperative, la caisse Desjardins de Saint-Roch-de-L'Achigan, was to do a thorough diagnostic of its business practices in comparison with best practices known to support loyalty. This was conducted using a questionnaire supplemented by a case study. The result was shared (and confirmed) with all employees and elected officials. This exercise was conducted a second time one year later. From a previous score of 56%, the co-operative went up to 76% when compared with loyalty's management best practices. This diagnostic tool had become a clear focus to build cohesiveness around the concept of loyalty among employees and elected officials. They worked mostly on internal issues at first, slowly but gradually earning employee's loyalty. Managers and elected officials were able to gain their trust by being constantly capable of making decisions coherent with the understanding employees had of how loyalty worked and meant. This is what I call “meeting the moments of truth.” Failing on that count undermines seriously the process and its legitimacy which is essential since loyalty is fundamentally a voluntary process. No one can be forced into it.

The second step is focusing on key weaknesses (confirmed in the diagnostic), mostly through direct communication with members; in short, intelligence gathering. The cooperative established a proper segmentation based a micro-marketing approach. It is building a stronger dialogue with members using focus groups, surveys, and personal interviews. This is being conducted after a selection of 150 representative and voluntary members who have agreed to get significantly involved in this strengthening of the dialogue with their financial cooperative. It is pushing this dialogue one step further by putting in place a learning community process that will allow it to put key questions for debates with members in a very dynamic way. What will be learned in this process will be used to significantly enhance the value proposition to members segment by segment. Eventually, this dialogue will move from marketing perspective to democratic functioning perspective. Finally, it has taken a leadership role in addressing key problems faced by the community, delivering value to the members not only as individuals but also as members of a community.

This experiment has been strongly facilitated by the significant cooperative identity I found at Saint-Roch-de-L'Achigan. This cooperative clearly emphasizes strong values such as meeting the needs of members, contributing to the social and economic needs of the community, and educating members, employees, and elected officials to democracy. Honesty, equality among members, universality of access and transparency are at the heart of their business practices. Their approach aims at putting members first. They offer the best deal possible without members having to negotiate for it. They also manage risk in the most profitable way to benefit members, without jeopardizing the viability of the cooperative. Their strategy clearly builds around loyalty as they understand it. And they develop their business systems in the most coherent way from that strategy. Some employees were right to this strategy immediately, and felt loyal, while others took up to two years to get into this process. Finally, all became convinced of the legitimacy of the process. They realized they had those values in themselves all along. It was the (previous) organizational context that stopped them from expressing those values at work.

At the time I initiated this research in the fall of 1999, this “caisse populaire” had overall assets of around $50 million (Canadian). At the end of 2001, its assets were close to $110 million. It had doubled the average growth rate of its “comparables”while nothing of significance had happened in its community. It has substantially reinforced its strategic position within its community.

A new cooperative paradigm: centering our co-operative business model on loyalty

Having observed and participated in this experiment for just about four years now, I can report and document what is becoming a cooperative business model centered on loyalty. All key aspects of the business model, i.e., interface with clients, core strategy, core processes and competencies, and networks of partners are being fully integrated in and around the concept of loyalty. Furthermore, leaders of this financial cooperative are using their distinct identity as an essential leverage to enhance this loyalty. A loyalty committee was created, regrouping six elected officials and six employees. This committee manages the loyalty process. Values and purposes are fully in line with fundamental cooperative values. Democratic functioning is highly valued and significantly put to practice. Experimentation with the concept of communities of learning will allow them to deepen much further the use of democracy. Finally, they accomplish all of that without losing sight of the need to strengthen their efficiency and strategic position.

It is therefore a very good example of the concept of new cooperative paradigm put to practice. And given its doubling of assets over the experimental period, it is a very hopeful one as well—perhaps for all cooperatives.

*NOTE: For a more detailed analysis of this idea, see Côté, D., “Cooperatives and the New Millennium: the emergence of a new paradigm,” in Canadian Cooperatives in the year 2000, Memory, Mutual Aid and the Millennium , ed. by I. McPherson, B. Fairbairn, and N. Russel, pp. 250-266.

Daniel Côté teaches management at the École des Hautes études Commerciales of Montreal; his web site is www.hec.ca/en/profs/daniel.cote.html.