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.

  • It could have been a good marketing ploy if the extent of it was limited but this ended up to be just another good clear example of why this does not work.

  • I wonder how often this is the case in non-profits, too.

  • Lemme get this straight: One co-op run business fails, and we get to dismiss that model entirely? Not so fast!

    But there is one very important lesson in this tale, one that I learned myself the hard way.

    I was the co-founder of a co-op IT consultancy, founded by 3 people in 1997 which quickly grew to 20 people.

    We had constant growth and profit, even in the dot-boom years, and we had a lot of fun, motivation, energy and innovation, because everyone had a stake in ownership and decisions.

    We were doing really great. However: When some of us felt it was time to take the business in a different direction, we couldn’t.

    We found ourselves too comfortable with the status quo, too risk-averse and had too many different ideas for the future.

    We ended up going corporate as well and selling the company.

    Does this mean that co-ops can’t innovate, grow and change their business models? No. But it does mean that it requires more effort than in traditional companies where a top management can make the decision alone.

    I think the solution is to design change and innovation into the co-op from the beginning and, above all, have great tools to facilitate decisions, so you don’t fall into the trap of always trying to achieve consensus.