HOW CAN ENTERPRISES GROW AND SHRINK IN SUSTAINABLE WAYS?
Lessons from Mondragon
By IMD Professor Francisco Szekely and Zahir Dossa, Ph.D. - December 2014
Almost all companies today base their business strategies on the concept of growth, the assumption being that growth is always good. Few enterprises think about strategies for downsizing. So what is the best approach for companies embarking on the sustainability journey? Does growth matter for such firms, and what are the social implications if they shrink? In short, how can companies expand and contract and remain sustainable?
Our research shows that the answers to these questions are hugely important for sustainable enterprises. The cases of Ben & Jerry's, Seeds of Change, and The Body Shop show the challenges that sustainable enterprises face in trying to keep their social mission and core values intact as they get bigger. Likewise, the bankruptcies of ShoreBank and many other sustainable businesses highlight the drastic consequences when such enterprises are unable to deal with periods of decline.
The stakes are higher for sustainable enterprises, because they pursue social and environmental agendas as well as financial goals. Their success therefore hinges upon how well they perform across all three areas, not merely one. Financial success can sometimes jeopardize environmental and social objectives. Similarly, financial decline can threaten the social and environmental fabric that the sustainable enterprise has helped to sew.
An interesting illustration of these challenges comes from the Mondragon Corporation, a cooperative movement in Spain that was started in 1956 by Don José María Arizmendiarrieta, known as Arizmendi. Inspired by earlier social movements that empowered local populations through cooperation, Arizmendi developed a network of cooperatives, or worker-owned enterprises, to improve socioeconomic conditions in the Basque Country of northern Spain. In this article we highlight four lessons that sustainable enterprises can learn from Mondragon's experiences of growth and decline.
Lesson 1: Diversify
In order to develop a sustainable system, Arizmendi promoted cooperatives across a wide range of sectors including education, manufacturing, banking and retail.
To improve education in Mondragon, Arizmendi founded a technical school in 1943 with 20 students. This school evolved into the Escuela Politécnica Profesional (EPP) in 1952 and the Mondragon University in 1997.
Five of the school's first graduates were hired by the local factory in Mondragon but became frustrated because employees could not purchase stock in the company. So in 1956 Arizmendi advised the group of five to form a new white-goods manufacturing company, which they called Ulgor. This was the first of many industrial cooperatives within the Mondragon network.
To assist the growth of Ulgor and the formation of other cooperatives that would later join the network, Arizmendi helped found the Caja Laboral Popular (CLP) bank. The CLP provided low-interest loans and consulting services to cooperative members, helped new members form business plans, and established a social security system. Today, the CLP is a full-service bank with over 170 branches, some 1,800 employees and annual revenues of more than €330 million.
In the 1960s the Eroski supermarket chain joined the movement, becoming the first consumer-owned cooperatives—or organizations owned by their customers. Eroski now has over 1,000 supermarkets across Spain and sells products from many of Mondragon's industrial and manufacturing cooperatives.
Through its diversification, the Mondragon movement created a complete, self-sufficient socioeconomic system. Today, the Mondragon Corporation is the 10th largest company in Spain, employing about 74,000 people across 257 organizations.
Lesson 2: Achieve economies of scale through business groups
As sustainable enterprises grow, they often lose touch with their social mission and founding principles. To achieve the economies of scale that larger organizations generally enjoy, Mondragon cooperatives formed independent groups that were not allowed to compete with each other. And to ensure that cooperatives maintained their social missions and had a close-knit community of members, the group established a wage ratio between the highest- and lowest-paid employees. This allowed the Mondragon network to integrate horizontally and vertically without bloating any single business unit.
Lesson 3: Ensure the livelihoods of your core stakeholders
Although the Spanish recession in the late 1970s and 1980s had a sharp impact on various industries, particularly in the Basque Country, Mondragon escaped relatively unscathed. And whereas Spain lost nearly 20% of its workforce within five years, only 0.6% of members in the Mondragon movement were unemployed during the recession.
This was largely due to two important sustainable innovations developed by the Mondragon group. One was an employee transfer program, whereby organizations such as Ulgor that were forced to downsize could transfer members to other cooperatives. The other was an unemployment fund that was financed through a payroll tax and pay cuts for working members to help unemployed members find jobs elsewhere. Along with the diversification of the Mondragon network, this solidarity provided a further cushion in periods of decline.
Lesson 4: Accompany growth strategies with downsizing strategies
The best lesson from Mondragon was one it learnt the hard way. Ulgor, which later became Fagor, expanded rapidly during the 1990s and early 2000s with the increased demand for household appliances from the housing boom in Europe. After acquiring Brandt in 2005, Fagor became the fifth largest white-goods manufacturer in Europe, employing 11,000 people. But after the global recession hit in 2007-08, the Mondragon Corporation was unable to rescue Fagor from bankruptcy without significant ramifications for the other cooperatives in its group. And so in late 2013 Mondragon let Fagor file for protection from its creditors.
The fall of Fagor provides social enterprises with a critical lesson: in addition to a growth strategy, companies with a social mission also need a sustainable downsizing strategy. If a social enterprise can't downsize while keeping its social mission intact, then perhaps it should not pursue too much growth in the first place.
Francisco Szekely is Sandoz Family Professor of leadership and sustainability and Director of the IMD Global Center for Sustainability Leadership (CSL). He directs Sustainability Leadership in Action (SLA), a talent development initiative targeted at leaders committed to discovering new ways to increase their performance and deliver exceptional results.
Zahir Dossa is a postdoctoral fellow at the CSL. He earned a Ph.D. from MIT in Sustainable Development and is the founder and president of The Argan Tree.