Passion-driven management styles impact the bottom line

Numbers only go so far. Leadership ability and business passion are major factors in a dairy’s success.

By Mark Mapstone

Your personality and passion for dairy farming are critical to your business success. I know – we don’t feel comfortable talking about these things in dairy circles. We’d much rather talk about cow genetics, the latest corn variety or a design of a heifer facility.

For many years, we at Farm Credit have worked with progressive dairy producers to use financial data to figure out the keys to success. It’s been a wonderful endeavor and we have all learned a lot. We’ve also come to realize there was just so far you could go with the numbers. What we can’t measure is your leadership ability and passion for dairying, even though we know they are critical to success, and account for why some farmers just get by while others earn a very good return over time.

We all have a pretty good notion of what leadership is. It’s your personality coming through to the people who work with and for you. You don’t need much leadership when you’re doing all the work yourself. However, as your business grows and  adds employees and management, your leadership becomes a highly critical success factor.

Your passion for the business of dairying – especially certain parts of the business – will determine how well you and all your employees execute for success. For example, can you imagine someone who detested working with other people being a successful leader?

Leadership and passion shape decision making

I’ve had the opportunity to get to know many successful dairy managers over the years. What I’ve observed is how the individual manager’s business passion shapes their management decision making. I’m a firm believer the person’s area of passion shapes their perspective and influences how they make business decisions. In turn, their decisions have a major impact on their operation’s bottom line. In many cases, we can see the result of someone’s passion in their benchmark numbers.

There are four common management styles I see in my dairy clients, with typical impacts on results. Think about yours, and think about the management styles of your spouse, partners and others with whom you work closely.

1) All about the Cows. These folks tend to “live, eat and breathe” cows, are very production-oriented and achieve better-than-average milk production. If the cows are comfortable and milking heavy, they are happy. DHIA ranking is important, and farmstead appearance is a high priority. They tend to be the high component people, own registered herds and milk 3x. They put more emphasis on cow comfort and individual attention than the average manager. They tend not to enjoy bookwork.

All about the Cows management tends to lead to higher input costs and lower labor efficiency. These managers tend to invest more in facilities than the average. Decision making is heavily influenced by output, rather than cost. They tend to operate beyond the point of diminishing returns. As a result, cost of production may be higher than average.

Common Characteristics

Tend to spend more time and expense on cows because they enjoy working with them.

High input-high output mindset. Decisions are evaluated more on how the cows are milking than about cost.

Tend to be early technology adapters. Often use many combinations of technology at the same time.

Tend to operate on the right hand side of the point of diminishing returns curve, where a dollar of additional inputs returns less than a dollar of additional output.

Tend to put their nutritionists on a pedestal, no matter how high purchased feed costs or how low component test is.

•  Salesmen flock to this type management style because of the inherent profit potential.

2) Crop & Machinery Enthusiast. These folks generally love working outdoors growing and harvesting crops. Good soils, high yields, improving cropland and big shop facilities excite them. They tend to be grain growers, and many are still 2x milkers. They tend to work more acres per cow than the other styles. They will often work more ground or do custom work to be able to justify bigger or newer equipment. The potential of buying additional crop land is always in the back of their minds. Most with this passion are men – their wives tend to be the bookkeepers and chief financial officers.

When looking at the numbers, they tend to invest more in equipment and shop facilities than the average, so business overhead tends to be higher. Because they grow grain in addition to forages, lower purchased feed costs – but higher crop costs – result. Additional crop sales help offset additional costs.

Common Characteristics

•  Favorite honeymoon or family vacation is “attending a farm equipment show.”

•  A bigger-is-better philosophy when it comes to machinery size.

•  A common ailment is “new paint disease.”

•  There are often financial tensions between the husband and wife.

•  Tend to trade in equipment with lots of useful life still in it.

•  Tax problem? No problem! They tend to use accelerated depreciation as a way to reduce farm income tax liability.

•  Tend to take on marginal or distant crop ground, hurting efficiency. Will often rent additional ground “just because it’s available.”

3) All about the Numbers. At the end of the day, financial results are what motivate this person. They tend to act as the chief financial officer (CFO) and have more direct involvement with farm records than the other styles. Their general operating style tends to focus on “return on investment.” They understand lower input or investment levels require less output to make a good return. They tend to have less production per cow than “cow guys,” but with correspondingly less input costs. The result is better financial efficiency.

There is a definite range within this style, but most would label them “tight with a buck.” Often seen as strong willed or controlling, their decisions are often contrary to cow comfort, production per cow and employee morale.

When looking at the numbers, these farms generally own older facilities and equipment, but spend more on repairs than “crop guys.” Lower investment per cow is the result, and generally lower debt per cow, as well. This type of operator tends to leave money on the table in good years, but also loses less money in bad years. They tend to operate below the point of diminishing returns.

Common Characteristics

•  This type tends to know where he/she stands with the numbers at all times.

•  These folks have an internal fear of going beyond the point of diminishing returns on input costs. They tend to operate on the left side of the point of diminishing returns curve.

•  Their “new” equipment is the trade-in from the crop and equipment guy.

Favorite hobby is beating up on the feed consultant, and salespeople tend to avoid this type of management style whenever possible.

•  Due to their tight-fisted approach, they’re often viewed as inflexible or unfeeling by employees.

4) Outside Interests. This person tends to be less involved in the day-to-day operations than other styles, because their passion may be elsewhere. They tend to have the chief executive role in the business. Most have experienced business success – part of what has got them to their current position. The “day-to-day” no longer excites them, so they develop off-farm passions, including industry-related activities, like serving on boards, showing registered cows, doing research or being involved with politics. Some are mechanically or engineering oriented and spend time working on antique tractors, participating in tractor pulling, or with cutting-edge technology projects on the farm. Some have off-farm interests that regularly take them away from day-to-day activities.

Having outside interests is normal for someone near retirement age or in a later stage of a successful career. Generally, these managers have strong middle management in place to take care of  day-to-day activities. The problem comes when there is no capable secondary management in place.

An “outside passion” is harder to measure by looking at the numbers, but generally, business performance tends to be lackluster in certain areas. Outside interests often lead to higher machinery and equipment investment per cow and higher overhead costs. Lower labor efficiency may result., and the CEO’s interests may distract farm employees’ time and efforts from focusing on the core business. If the CEO is away from the business for extended periods, the business often lacks direction and focus, leading to lower performance.

Common Characteristics

•  Management attention and follow-through are often lacking.

•  Hard to get this dairy producer to focus on the little details. One of my Outside Interests clients was once described as a “hummingbird with attention deficit disorder.”

•  The business often supports the hobby in terms of additional operating expenses, i.e., cattle merchandising, tractor pulling, restoring tractors, manure digesters, etc.

What’s it mean for you

Each dairy producer has his/her own area of passion. There is no right or wrong to this. A business with four owners might have someone in each of the above categories. When a dominant passion drives a business, the resulting management style can pull the business out of balance, affecting profitability.

There are five keys to dairy business profitability:

1. Gross revenue (production and price)

2. Production efficiency (conversion of raw materials into finished product)

3. Capacity (effective use of plant and equipment investments)

4. Dairy husbandry (internal herd growth)

5. Cost control (tight with a buck in the right areas)

Each of these carries equal weight in contributing to the bottom line. Overly focusing on one – at the expense of others – can depress that bottom line. For example:

• The All about the Cows manager may excel at #1 and #4, but place little or no focus on #2 & #5. The result will excellent herd performance and production levels, but very poor profitability, due to very high costs.

• The All about the Numbers manager may excel at #2 & #5, but in doing so depress production and herd performance and leave profit opportunity on the table.

People don’t easily change management styles. A person could choose to change over time; be forced to change roles in the business; or simply evolve with their stage of life. You may be a combination of more than one style.

The key is to understand how your passion drives your style, and then assess if that style is pulling your business out of balance.

On farms with multiple key managers, balance can come from different passions/management styles contributing to decisions. Those differences may create tension, but when all are treated with mutual respect, the different styles can create balance and synergy that enhance the bottom line.

The key is finding a balance between the different styles. Many farms have found creative ways, including regular farm manager meetings, dairy profit teams and/or participating benchmark programs, like Farm Credit’s Large Dairy Benchmark and Dairy Profit Analyzer.

How is the balance between management styles at your farm? Do you have at least one person with the cow, cropping and numbers passion? If not, how will you go about finding or developing that passion in someone? Is the balance between management styles in a good place, or could your farm use some help? A business consultant can help you ask yourself these tough questions.

FYI

Mark Mapstone, CAC, is a business consultant with Farm Credit East, ACA, in New York. Contact him via phone: 315-841-3398 or e-mail: mark.mapstone@farmcrediteast.com.

Farm Credit East’s 2009 Northeast Dairy Farm Summary is available at a cost of $50. Contact your local Farm Credit East office (www.farmcrediteast.com) or phone Trudy Rouleau at 800-562-2235.

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