The Failure of An Egalitarian Business Model

Here is an interesting story about a San Francisco adult novelty company called Good Vibrations. The company was run as a co-op, with everyone having equal decision making ability. The interesting part of the story is that even the co-op eventually decided to change to a different model.

Good Vibrations's co-op model effectively handcuffed expansion plans. Every employee had an equal share in decision-making and profits. Division managers reported to a general manager, who reported to a board of elected employees with little or no business experience. The result was predictably chaotic. Discussions about adding new stores or products turned into unresolved debates. "There was this feeling at meetings of having to fix everything in management before we could open another store or launch a website," Semans says. "We couldn't do any of it because we were so screwed up internally."

Good Vibrations brought in a CEO and had some successful years, but when the time came to change and grow, the co-op model again presented a problem.

Banks wouldn't give her unguaranteed loans. Investors, Doyle says, were leery of giving money to a co-op – especially this co-op. Worse, the all-employee board insisted on being involved every step of the way, despite having no experience in such matters. "We just came to loggerheads over whose job it was to develop this new model to expand the business," Doyle says.

Unable to make peace with the board, Doyle quit in April 2005. In the aftermath, the company saw 12 out of about 75 employees leave, including most of the five-member board. Sparks, Plotzker, and Crowe watched in horror. "Suddenly there was a recognition that people who had no business experience were running the company, and the person who had it had left," Sparks says. "There was a huge lack of confidence."

With the organization on the verge of collapse, Sparks stood up at an all-hands meeting last fall and asked her colleagues, "Is this a co-op that performs a business function? Or a business that is managed cooperatively?" If the business dies, she pointed out, the co-op will die too.

The remaining board members quickly appointed others to gain a quorum, and then named Sparks as the new GM. More important, they finally agreed to consider abolishing the co-op structure for good. "We researched Whole Foods, Ben & Jerry's, and others," Sparks says. "All these companies have progressive values, but they're not co-ops. Something had to give."

Things often work out in a certain way for a certain reason. Ideas that sound warm and fuzzy and cutting edge often turn out to be… unprofitable. This story can serve as a good case study for why some things are the way they are in business, even if we would prefer them to be different.