In this Section the VSM will be applied to the question of how
Social Economy enterprises may join together to form a mutually
The Section begins with a number of case studies involving attempts by co-operatives in the UK to federate, and contrasts these with the example of the Mondragon co-ops in northern Spain.
Some conclusions are drawn in terms of the Viable Systems Model.
The question of design is then considered by using the preliminary work of Stafford Beer on a federation of Nation States in South America.
The Section concludes with some design consideration which will supplement the step by step methodology developed in this pack, for the specific case of federations of Social Economy enterprises.
Once Suma was in business the number of wholefood shops in the region began to grow and over a two year period around 60 retail co-operatives were set up, all buying from Suma.
The FNWC was the umbrella for all of these co-ops, and monthly meeting were held to discuss the kind of goods and services which Suma should offer, to welcome the new shops which had been set up and to attempt to direct the future course of the Federation.
The rapid growth and success of the Federation led to a mood of optimism, and it was not uncommon for people to express the feeling that co-ops had finally managed to make a real impact on society. At that time Co-ops were handling around 60% of the wholefood business in the UK (according to The Grocer trade magazine).
The Federation began to put a levy on all its sales and managed to collect several thousand pounds over a period of a few months.
The possibility of a number of regional warehouses was raised, as the number and geographical spread of the shops was growing. Clearly a local warehouse would provide the best service, but the economies of scale militated in favour of a large central warehouse, and Suma had just moved to a large new premises and needed the support of all the shops in the federation.
It was around this time that the FNWC began to decline. This was partly because Suma had become well established and thus one of the aims of the Federation had been achieved, but also because there seemed to be a lack of direction as to where to go next.
The money which had been raised all went to pay the debts of a restaurant in York, and thus the opportunity to invest in strengthening the FNWC was lost.
Over the next few years attendance at the meetings began to dwindle and it became grudgingly accepted that the loan fund was not operating successfully. After a couple of recipients got into financial trouble and were unable to complete the repayments, the loan fund was abandoned.
Currently, there is little left of the Federation. Suma has withdrawn its discount to co-operatives, and generally trade is the main area of contact.
In retrospect the collapse of the Federation was due to:
Consequently the Federation was formed without Suma, and thus was only able to offer its services to half the country. The ideal of a national federation of warehouse was rendered null and void.
Soon after it was established, one of the founder co-ops went out of business, further weakening the federation. Own-label products were produced, but some of these were in direct competition with Suma's products. Centralised buying and marketing never really happened as the member co-ops were loath to give up any autonomy.
Currently, two of the warehouses in Bristol are in the process of merging as they were operating within 12 miles of each other. And in Scotland two new warehouses have opened in order to provide a more local delivery service over a large and scattered market.
Generally all of these developments happen in a piecemeal fashion, and there is little sense of planning the distribution of wholefoods throughout the UK in a coherent manner.
There are still problems with the "right" to distribution areas. Suma has recently extended its weekly deliveries into South Wales which is close to the Bristol warehouses. And one of the Scottish warehouses is actively selling in Northern Ireland which has traditionally been part of Suma's area.
Without doubt the attempt to get the co-operative wholefood warehouses in the UK to federate and act a cohesive system has failed.
Everything about Mondragon is impressive: they turn over about three billion dollars; they re-invest vast sums of money in order to keep their buildings and machinery in excellent condition; they have their own research and development labs which are developing state-of-the-art computer and robotic systems They have their own schools, bank and social security system; and they are completely dedicated to the ideal of co-operation.
There is little doubt that the success of the Mondragon co-operatives is to some degree the result of their ability to form alliances and work together at both the geographical and trade-sector level.
The present diagnosis is concerned with the application of the VSM to the way in which they organise separate co-ops into a coherent system at the Sector Level.
In VSM terms, the complete autonomy given to each co-op may be a little excessive: a mechanism should exist which required the merger in the interest of system synergy. However, as everyone I spoke to at Mondragon seems more concerned with the good of the whole than an individual co-op, the system currently seems to work. It was also mentioned that the small co-op faced exclusion from the group if it failed to respond to the arguments for merger.
So while there seen to be no formal systems to ensure autonomy has to become subject to system cohesion, the social pressures are enormous.
The General Assembly consists of all members of the Sector's
co-operatives who are on their Board of Directors, or the Audit
Group, or managers. Their task is to approve the Sector's policy and
budgets, and to modify organisational rules.
The General Council is the Sector's higher management made up of between two and four members of the Boards of Directors of the members co-operatives.
The General Management: Its function is to predict, plan and stimulate the co-ordinated harmonious joint development of the co-operatives in the Sector.
The Audit Group: Also called the Account Control Board, they are charged with examining accounts as they deem necessary, alerting the Management of problems and obtaining information for the membership.
The Management Council is an advisory body to the General Management. It consists of the Director General, the Management of the member Co-ops the Central Services manager and anyone else who may be useful in helping the Council.
Note on Finance: The member co-ops have to meet the budget quota drawn up in the annual Management plan.
For this study, the System-in-Focus will be a collaboration of typically 8 co-ops in a single sector. Mondragon has several sectors dealing with domestic appliances, castings, food, service industries and so on. The principles on which the collaborations work are identical, although some of the details are different.
In general, it will be adequate to talk non-specifically about viability within a Sector, although specific examples will be given.
Within each co-operative, there seems no doubt that the organisational systems cover all of the aspects of VSM diagnosis that I have been involved with. The system of autonomous work groups and daily measurement of performance indicators (although not the concept of statistical filtration and thus automatically generated algedonics) has been up and running for a decade, and they find it leads to greater motivation, a more enjoyable work environment, greater productivity and higher standards.
SUMMARY: SYSTEM 1System 1 consists of about 8 autonomous co-operatives.
Each co-op functions within the same Sector.
Each co-op exhibits the essential property of being a Viable System embedded in the whole.
The Mondragon co-operative culture is focused on the whole group of co-ops, rather than the single enterprise. This provides the basis for federation.
However, the Eroski Food Group are building HyperMarkets which are taking trade from the smaller shops in the group. This seemed a potentially unstable situation (different co-ops fighting for the same market) and looked problematical to me. However, at Mondragon, they don't see a problem for the following reasons:
(Compare this situation with the UK wholefood warehouses. As each Co-op had its own wages system and there was no suggestion of mutual financial support, the interactions were unstable: there was conflict of interests due to competition for a limited market. The lack of any sort of System 2 to deal with this meant that the federation was doomed.)
The Mondragon co-ops, who share wage scales and profits throughout the Sector, have managed to dissolve all these problems. They see this as solidarity: in Viable System Model terms, it is an extremely effective System 2 which ensures the member co-ops can look beyond the survival of their individual co-ops and concentrate on the development of the Sector.
System 2 is a prerequisite for the articulation of an integrated Viable System.
Some examples of how they do this follow:
Generally it's accepted that there are enormous advantages to collaboration. At the level of the entire Mondragon organisation there are bodies called "superstructural". These include a research and development institute, a Social Security system, a Bank, a Technical College, and a training centre for co-operative and management skills. None of the services which these offer would have been possible without collaboration, and it is certain that Mondragon would not have developed so successfully if the member co-ops had grown as isolated businesses.
The systems they employ to encourage Sector synergy involve meetings of the general managers of the various co-ops in a Sector and the appointment of a Sector Manager. It should be noted that the power of decision is delegated up through the usual Mondragon system of General assembly, and that the member co-ops have to agree to the recommendations.
Clearly they take advantage of every opportunity to deal with Sector synergy.
System 3 is alive and working well.
The FAGOR group, which manufactures a complete range of consumer products, industrial components, and engineering equipment employs 8,000 worker-members with sales of around one billion US dollars. They produce 30% of the Spanish home appliance market. The 1989 annual report lists some of the System 4 planning activities which were realised.
Clearly they are performing the System 4 activities admirably: they are in touch with their environment and are planning at the Sector level to adapt to future threats and opportunities.
The Mondragon philosophy requires an unprecedented commitment from its members, and part of this is realised by the continuous re-investment of its profits both in R&D and in improvements to plant and buildings. It also results in continuous training and re-training.
In terms of the mechanisms required to accept the plans, Mondragon continues its emphasis on democracy. The plans are made by the Managers, but have to be passed by the Board of Directors. The system, they feel, is slower than in a traditional company but has the advantage that everyone agrees once a decision is made.
However, despite their perceived tardiness, the results of System 4 activity cannot be seen as inadequate in any sense.
Throughout Mondragon, attempts are made to involve the maximum number of members at the policy level. Currently the entire group is debating the wage differentials and the decision will be made at a meeting of over 1,000 people.
At the Sector level, the General Assembly is composed of the members who are on the Board of Directors of every co-op in the Sector together with the Audit groups and the Managers. Their tasks are described as "to approve the Groups general policy, approve the budget, and to modify organisational rules"
The Eroski group consists of both the 1928 worker members who run the shops and warehouses and the 152,000 consumer members. In this case the General Assembly is composed of 250 delegates from worker-members and 250 delegates from the consumers. In order to ensure everyone is informed of the issues, there are five preliminary meeting before the General Assembly.
The large number of notice boards throughout the factories that I visited, together with the interest that was shown in issues at all levels (currently wage differentials and restructuring to emphasise the Sectoral rather than the Regional groupings) indicated that everyone has an interest in policy at all levels and the means to express themselves.
SUMMARY - SYSTEM 5At the Sectoral Level policy is described as "The Will of the Members".
Everyone in Mondragon seems to be interested in policy decisions and there are mechanisms to express this.
Some reservations must be made on the year gap between meetings. From my experiences at Suma it seems clear that lots of policy issues are happening on a weekly time scale, and that to restrict the members by making a contribution once a year has to be seen as a limitation on their involvement in policy matters.
As a general point it should be noted that the Mondragon co-operatives were directed by Arizmendi, and his overview (or metasystemic view) was without doubt one of the main driving forces behind the growth of the co-operatives. For example, the establishment of the bank would never have happened as the co-operatives which existed at that time were preoccupied with their own growth, and had to be persuaded that diversion of resources to a bank was a good idea.
Without Arizmendi's vision, its likely that the co-ops would have developed in isolation.
It's also worth noting that Mondragon offered far more than employment. In post war Spain there was no social security, no health care and no pensions. The vision Arizmendi had of Mondragon was a complete way of life and thus he could ask much more of the people.
In the UK co-operatives exist in a culture where there are other jobs, and a well established system of social security.
The basic requirement is that they are prepared to give up some of their autonomy in the interests of coming together as a coherent larger whole, and here the differences begin.
In Mondragon it is obvious that commercial success has resulted from the synergy which comes from various co-ops working together In the UK the track record is very different: federations have achieved virtually nothing, and co-ops currently work in isolation with only loose trading links and occasional conferences.
Thus the willingness to divert funds and time into a federation, and to accept limits on autonomy in the interests of the greater whole is vastly different in the two countries.
This may be the fundamental difference, and the basis behind the differences in the Metasystem which are discussed in the following pages.
In the UK none of the services listed above have been funded by member co-ops. If they exist at all they have been set up independently, and then offered to co-ops for a fee.
The conclusion is clear: the Mondragon co-ops have allocated vast amounts of time and money into the creation of a Metasystem charged with "co-ordinated harmonious joint development". In the UK there is no such investment and consequently no Metasystem and no federal activity.
System 2 is a prerequisite of any Viable System and it should be noted that:
And (again) as the UK has never put resources into Sector Management, this kind of activity does not occur.
It should also be noted that The Mondragon co-operatives have also realised the need for the Federal System 3* (audit) channel which monitors the accounts of the member co-ops and alerts the various federal bodies as and when they deem it necessary.
From VSM perspective this is needed to ensure that System 3 has all the information it needs to deal with its internal environment.
The collapse of one the wholefood warehouses came as a complete surprise, and could possibly have been avoided if the Federation audit channel had been set up.
Had this occurred within a Mondragon Sector there would have been:
Whichever system you consider Mondragon has a clear articulation and several subsystems to carry out its overall task ... and in the UK it is hard to find any Metasystemic activity whatsoever.
Despite the differences in culture, if VSM theory is correct then UK co-ops must find some way of dealing with instability, optimisation and future planning at the Sector level.
Until this is done there is no possibility that a Federation will exhibit the basic requirements which will render it viable.
It is likely that the methods used in these countries will be different from those employed by the Spanish but nevertheless, it will be essential to find the resources needed to articulate the Metasystem.
It will also be necessary to design its capabilities to ensure they match the requirements of the System 1 co-operatives, but until the need for a Metasystem is accepted this remains nothing but a pipe dream.
The political events that followed (ironically caused as Beer notes by response to IMF pressures) ensured that the study was never concluded but preliminary studies were made and are of direct relevance to the present subject.
Clearly the System 1 Operational elements are the member countries and the mission is to provide a united challenge to financial oppression. However such a federation would also offer the possibility of synergistic interactions. Generally the purpose of the alliance may be defined as mutual benefit.
Beer begins with the 6 vertical channels which depict the interactions between the various System 1 units.
In Uruguay, information gathered on 3* about enhanced grain products led to special deals with Argentina and Brazil, initiated by a vestigial System 3 looking for synergistic interactions.
Beer feels that much could be done in the larger alliance with semiprecious stones, natural spring water, cottage industries in co-ops and so on.
This concludes Beer's discussion of the six vertical channels. His basic strategy is to shift the basis of control away from the central command channel.
The essence is to preserve the delicate balance between the autonomy of the countries in the alliance and the needs of the Metasystem to hold the whole thing together.
Clearly, for political reasons, this would have to involve minimal interference or the member countries would be likely to withdraw.
System 4 is charged with dealing with those issues of planning and adaptation which are appropriate to the alliance rather than the member countries.
Beer sees this as the greatest challenge of all. His diagnosis of the debacle in both the East and the West is that:
Viability of the Alliance requires it to go beyond this and to design an appropriate System 4 which can plan and adapt to the future.
Some preliminary work must be done to establish clearly the reasons
for proposing the Federation in the first place.
Whatever happens there will be a price to pay in terms of loss of autonomy and allocation of resources.
So be clear about the basic premises:
This particular application of the VSM assumes that you have read and understood the VSM pack and have made at least a preliminary study of your own organisation.
A VSM diagram depicting some of the issues which have been discussed
so far would look as follows:
(Note that the diagram shows only systems 1, 2 and 3 - Inside and Now).
Note also the new arrows forming a loop from System 3 to System 2 to the Operational units and back to System 3 via 3*.
The diagram gives an overview of the following issues:
Now fill in the environments of the of the member co-ops. This will include their markets, suppliers and so on. It is likely that there will be a large degree of overlap, and so the various environmental amoebas will reflect this.
You can now begin to look at the way the member co-ops interact in terms of
It seems highly unlikely that co-ops in the UK (who have a well established history of isolated development) would take seriously suggestions to normalise wages throughout a Sector and for profits from one Co-op to be given to another.
If these mechanisms are unacceptable, mechanisms must be found for ensuring the member co-operatives can work together in a stable manner.
System 2 is seen as a prerequisite for a viable system and presents a major challenge for UK co-operatives.
Its job would be to transform a currently competitive situation into a collaborative one.
It would need to look for the instabilities and conflict of interests which would arise between the member co-ops and to define ways of dealing with them.
This leaves System 3 to deal with its main function of Optimisation.
One of the major issues is bound to be the movement of certain functions from the Operational units to the Metasystem. In the case of the wholefood warehouses, it seems obvious that there is a great deal of synergy in moving the buying function to System 3. This would result in one team doing all the buying for all the warehouses, and looking for ways of maximising price-breaks, and moving goods from one place to another to minimise out-of-stocks.
There should be further advantages in using distributed stocks to minimise stock holding, as each warehouse could restock the others if there was a local surge in sales.
However all of this requires the member co-ops to relinquish their current complete control of the goods they buy.
An alternative would be to design a communication medium which would allow current buying departments to be continuously in touch with the each other. Thus, Suma may find a good price on apricots and let the others know. Someone else may have an even better price. There may be a glut of apricots in Scotland which needs to be sold quickly so that they don't approach their best before date. And so on. This would involve something like a computer bulletin board which all the buyers use regularly and a system to get immediate attention (a pleasurable algedonic) - "There are only five tons left and going fast - who wants them???"
This version of a distributed System 3 (which is nevertheless Metasystemic as it deals with the whole system) has the advantage of avoiding the relinquishment of local control.
It is possible that if it worked efficiently, local centres of buying excellence would appear and everyone would know that Bill in London gets the best deals in walnuts. It is also possible that one buying department proves to be better than all the other and effectively takes over the buying for the whole group. In this case some agreement would be needed to ensure that these buying didn't feel exploited by the other members of the federation.
It may decide that more warehouses need to be opened in areas which are not provided with a local delivery service. It may need to research new markets or new product ranges. It may produce a diversification plan if it feels that existing market areas are on the wane. It may decide to form alliances with other enterprises or take over other companies. It may decide to build its own retail outlets.
All of these are strategies for adapting to the future which affect the entire federation.
The question which must be answered are:
This generates some interesting challenges assuming that several hundred people could be involved, perhaps in several countries.
The Mondragon solution is a yearly meeting and several preparatory meetings.
My feeling is that policy requires more regular input, although perhaps less than the weekly meetings held by Suma.
Again the possibility of innovative design using computer communications exist. It may be possible to have continuous debates on policy issues like the debates which are currently conducted on global computer networks. Anyone can log-on at any time, read the previous contributions, and then add her own thoughts.
Such a system could only serve as a preamble to a membership vote and suffers from the lack of face to face discussion, however it would enable views to be aired. It also has the advantage of being available to everyone on the network regardless of separation.
HTML version constructed by John Waters at the Llanidloes Resource Centre. Last modified 30th October 2005.