Value-added Business Success Factors: The Role of Management and Operations

File C5-185
Written April, 2010

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There has been a surge of interest in farmer-owned business ventures that seek to capture additional value from commodities past the farm gate. Some of these ventures have been very successful, some marginally successful and some have failed. Supported by funding from the Ag Marketing Resource Center at Iowa State University, we conducted in-depth interviews with farmer-owned businesses to determine the key factors that influenced the relative success or failure of these ventures. A better understanding of why some ventures succeeded while others failed provides valuable insight for the success of future farmer-owned businesses. This article focuses on the role of management and operations for business success.

Research method

To identify factors having the greatest impact on the success or failure of farmer-owned business ventures, a cross-section of seven farmer-owned commodity processing businesses formed since 1990 in North Dakota, South Dakota, and Minnesota were selected. Extensive interviews were conducted with individuals who played, or continue to play, an important role in the formation and operation of the business. This included leaders in the formation of the business, key members of the management team, selected board members, lenders, local leaders and others.

Research results

Competent professional management is essential to a business venture’s success. The right Chief Executive Officer (CEO) and management team can mean the difference between success and failure.  Management needs to be involved very early in the business project. One successful venture we interviewed hired its CEO prior to the equity drive. The CEO was then able to lead the equity drive and provide input on plant design and oversee construction. The plant was up and running on schedule. 
While this example is more often the exception than the rule (the CEO often comes on board after a successful equity drive), all of the businesses we interviewed agreed the sooner the CEO is hired, the better the start-up process unfolds. Although board members are usually successful producers and community leaders, there is no substitute for good professional management.

It was also particularly helpful when the CEO had been involved in similar start-up operations. 

Management recruitment - The board should plan for a significant investment in the recruitment and retention of a CEO. Recruitment strategies varied among the business’s we interviewed, with several using executive placement (a.k.a. headhunter) firms.  One CEO responded to an ad in a trade magazine.  Another CEO of a successful venture was recruited because he was personally acquainted with one of the founding directors. While there appears to be no patented formula for successful recruitment, the board should make an appropriate investment in time, money, and networking to find, recruit and hire an industry savvy CEO. 

The CEO is the only member of the management team that the board hires. So, once the CEO is hired, the board should leave the remaining hiring decisions to the CEO. The CEO is responsible for building the management team. 

As was articulated in a previous article, the board of directors and the CEO must have a shared vision of the organization including its future growth and operations. This shared vision will enable the CEO to manage and build an appropriate management team and will help alleviate micro-managing by the board, which can be very detrimental to board/CEO relations. One CEO we interviewed reported that the board of directors must be committed to reinvestment and growth in order to attract top quality management. 

CEO compensation - Providing adequate compensation and incentives is absolutely necessary for attracting top management professionals. While often challenging for a fledgling organization, an appropriate compensation package will insure that the CEO has as much incentive for business success as the board and the owners. Two successful organizations we interviewed reported offering performance-based incentives described as ‘phantom stock’ to top management. 

Industry knowledge - The entire management team needs to develop and maintain market and industry savvy and awareness. Market and industry awareness is often a prime selection criterion for key positions. For the venture to succeed, it must remain competitive in its industry in terms of operating efficiency and cost of operations. It is the management team’s responsibility to be aware of industry standards and recommend investments and upgrades over time to insure that the venture remains competitive.

Operating margins and investor returns must also be competitive with industry standards and the management and the board must be aware of the margins and returns of other industry participants. This too will likely require ongoing reinvestment of some of the earnings to expand or upgrade facilities. In the absence of such industry awareness, the board and farmer-members may develop unrealistic expectations regarding the returns from their venture. Many farmer-owned processing activities are fundamentally commodity businesses characterized by thin margins.

Employee training - Finally, the new organization should plan and prepare for significant investments in employee training. This is particularly relevant if the facility is located in a rural area where manufacturing and processing industries are rare. New employees will likely need substantial training in areas such as safety, sanitation and quality control.

Another measure to enhance competitiveness is to maintain a lean management team.

 

Don Senechal. founding principal, The Windmill Group
F. Larry Leistritz, professor, Department of Agribusiness and Applied Economics, North Dakota State University
Nancy Hodur, research scientist, Department of Agribusiness and Applied Economics, North Dakota State University