MEC and the Institution of Capitalism

The downfall of MEC has no doubt been a disappointing event. It has unfortunately been misinterpreted as a symbol for the inability of cooperatives and alternative modes of corporate governance to perform as well as the seemingly ubiquitous and touted capitalist model of private enterprise. Yet if you dig a bit deeper, it becomes quite clear that the institutional power of capitalism is a key explanation of MEC’s fall from grace.

Institutional theory is one useful lens to get one’s head around what happened with MEC. Institutional theory is a highly robust and popular academic framework in management. It has its roots in sociology and anthropology yet was developed by management scholars. In essence, institutional theory draws from constructionism, which suggests that the outside world is not predetermined or objectively set but is instead constructed by the decisions, attitudes and behaviours of actors within it. Institutional theory offers an alternative explanation to rational decision-making, a view that organizational members make deliberate and calculated decisions that reflect a sound analysis of the merits of a list of alternatives. Similar to how individuals have been shown to behave irrationally, organizations too have succumbed to irrational decisions and institutional theory helps us understand why this happens. A critical outcome of an environment with strong institutional forces is isomorphism, where organizations end up looking very similar to one another. As a consequence, institutional theory is kind of like the antithesis of strategic differentiation. In essence, institutional theory is made up of three forces that influence organizational behaviour – cognitive, normative, and regulatory.

Now back to MEC. MEC was an organization that was incredibly successful at targeting and meeting the needs of a niche market. Their core membership base was made up of adventurists, environmentalists, and gritty consumers of hard-core outdoor gear who were willing to pay a premium price for quality, durability, and exclusivity. Now, when we look at businesses that do well with a “sustainability” strategy (i.e. triple bottom line), those most successful are those who target carefully a niche consumer group. This makes sense; sustainability, while a common term now, is really only properly understood and taken to heart by a small segment of the broader population. Of my five sustainability strategy framework, they employ an embedded sustainability strategy because sustainability and their commitment to it, defines what they do.

But a persistent trend among businesses employing an embedded strategy is that they pursue a direction that not only undermines this positioning but severely impacts their financial performance. Ben and Jerry’s, Cooperative Bank in the UK, and Wholefoods are but three examples of firms following this trajectory. And now, MEC. A very common “next step” of these companies that effectively target the niche segment is to target the mainstream consumer, to ultimately steal market share from large incumbents in their industry. When you think about it, this is a highly irrational decision. Companies have spent so much time and resources carefully responding to a niche segment only to pivot to a very different consumer who is much more price sensitive and much less ubiquitous on their stance towards the company’s value proposition (e.g. sustainability).

So where does this logic come from? Let's apply the three institutional forces.

Normative: At its highest level, the fascination with growth in a capitalist economy is an important explanation. These sorts of businesses start to realize that their niche segment of the market is only so big. But rather than further entrench their place in this segment, they have a strong inclination to grow to other consumer segments, which then propels them into a myriad of product lines with which they are very unfamiliar. Business schools are replete with teaching cases where the underlying decision point is associated with where to take the business next. This, more often than not, comes with a question of how to grow. The goal of market power is a noble one, according to people in this camp. This is somewhat analogous with our inaccurate belief as a society that if we don’t continue to grow GDP, we’ll slip into economic despair. This is a fallacy no different than the fallacy that if a business doesn’t keep growing, it will die. But the view that business is always meant to grow, and the associated sanction by analysts if they do not, is such a strong institutional force that it compels them to grow for growth’s sake. Even still, we tend to think about growth in black and white terms where there is either growth or no growth rather than being very strategic about how to grow. What’s important here is that this norm of excessive growth and competitiveness usurps the foundation of a cooperative model because it disassociates the democratic elements of a cooperative from the structures required to grow in this way.

Cognitive: Another explanation that comes from institutional theory revolves around the type of people at high levels of the businesses that are recruited to fulfill this growth mandate. One can imagine conversations around the board room at MEC where there was a general sentiment that the board needs members who have expertise in a highly diversified retail strategy along with expertise at growing nationally in retail more generally. What often pushes this mentality is a growing dissatisfaction by the executive team that the board is much to slow and incompetent to truly understand the new MEC. As a consequence, rather than using the board as a proper governance mechanism that counters executive hubris, the board turns into more of a cheerleading squad because the members have a very similar way of thinking as management. Governance research has shown that companies pursuing an aggressive growth strategy prioritize directors with expertise in the intended future strategy and deprioritize expertise in governance and/or the roots of what made the company successful. What’s really important here is that the first group of directors, while successful in an incumbent firm, have no expertise in how to transition a firm from a niche to a mainstream market segment. Institutional theory would call this a cognitive explanation of the subsequent (irrational) behaviour because the collective behaviour of key decision-makers is driven by a highly subconscious perspective.

Regulatory: In addition to normative and cognitive forces, institutional theory also points to regulatory forces that lead to the downfall of these companies. By regulatory forces, it refers to structural changes that make it nearly impossible for the business to pursue an alternative. For instance, MEC’s decision to move into yoga mats, skis and snowboards, commuter bikes and Levi’s jeans meant that it was contending with a supply chain they were not familiar with and did not have the necessary relationships and market power to ensure consistent products on the shelves. Once MEC entered such a diversity of products, they were now forced to deal with the challenges of multiple supply chains. Another structural change that often takes place might be governance rules that are justified for the sake of growth yet undermine the democratic underpinnings of a cooperative. With MEC, this involved changes in board policy that allowed for greater independence of the board from its members. Other structural changes might include ownership changes where cooperatives become accountable to both members and shareholders, a tension that was meant to be reserved for private enterprise. The key point here is that the regulatory force is coercive in that there is a perception of little choice but to behave in a certain way. Put another way, the irrational becomes rational. What’s key is that these structural changes were a result of a series of explicit decisions over time.

What’s unfortunate about the above trajectory is that the signs of financial downfall are very delayed, which gives the business a false sense of success. It’s delayed because these decisions have a slow but enduring impact on culture and the values of the business. Think about it, if MEC starts to attract consumers of Levi’s jeans away from mainstream competitors, employees will shift their focus towards their needs which is quite far removed from the needs of the hard core mountain climber. It’s simply impossible for employees to have the bandwidth necessary to understand and tend to the needs of such a diverse group of consumers. Over time, sense of identity and cultural cohesion starts to weaken because employees are struggling to pin down who they are and what they do as an organization. On the consumer side, their perception of the value of MEC is increasingly questioned. On the one hand, the Levi’s consumer wonders why s/he is paying a premium for the same product they can get elsewhere. On the other hand, consumers of hard core adventurist products are noticing significant slippage in employee expertise and commitment to their needs. Lots of work in strategy has identified this outcome as being “stuck in the middle” where the lack of focus leads companies to being exceptionally good at nothing and okay at everything.

In conclusion, cooperatives in Canada face immense pressure to conform to private enterprise competitors. So while I understand that many have pinned down MEC's downfall to the abandonment of its cooperative roots, it's more important to understand what causes this trend. This is where institutional theory and the concept of isomorphism comes in. Senior management tends to come from those larger businesses that MEC ends up emulating. Board members similarly. The norm of growth pushes coops to abandon their roots under the guise of reinvention and modernization while the structural changes internally that come with such aggressive growth leads to a more coercive push to abandon these principles. The above really only scratches the surface of institutional forces that are at play. Put them together and MEC starts to look very much like its competition rather than different from it. Sadly, there is no course or specialization in cooperatives at my business school. Students leave business schools with a very poor understanding of cooperatives or, more simply, alternative modes of organizing for that matter. This speaks to the broader institutional environment enterprise exists in, one that leaves cooperatives like MEC climbing the proverbial waterfall to survive considering the army of business graduates trained for the alternative.

Image: "Festivague MEC Montréal 2015 (1)" by MEC Montreal is licensed under CC BY 2.0.