Lifecycle of a Family Business

1
Lifecycle of a Family Business

• Jay Penick
• President CEO
• Northwest Farm Credit Services

2
NWFCS Overview

• NWFCS is . . .
• A farmer-owned lending cooperative
• Serving Washington, Oregon, Idaho, Montana
  Alaska
• Providing 6.0 billion to 12,500 farmers,
  ranchers, agribusinesses, aquatic harvesters,
  timber producers rural home owners
• With a 39.3 share of real estate debt 19.8
  share of non-real estate debt30.5 overall

3
NWFCS Overview

• Vision
• To be rural Americas leader in strategic
  innovative financial products, services
  customer satisfaction
• Mission
• To advance rural Americas success through
  strategic innovative financial products,
  services customer satisfaction

4
NWFCS Overview

• Cooperative Organizational Structure

5
NWFCS Overview
Branch Structure
6
NWFCS Market Segments
7
NWFCS Overview

• (6/30/05)

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NWFCS Overview
9
Agricultures Changing Structure

• Farm numbers, size concentration
• Reflects growing productivity off-farm
  employment
• Diverse, very small farms with sales lt 10,000
  represent half of US farms 2 of all farms VFP
• 3 of farms with sales gt 500,000 represent 44
  of agricultural production
• Probably lt 200,000 farms represent the classic
  model
• 1,900,000 farms do not fit the classic model
  (tremendous diversity)
• But, only about 1 of farms accounting for 7 of
  US agricultural production are operated outside
  the family ownership model

10
Agricultures Changing Structure

• Farm numbers, size concentration
• Historic concentration
• In 1969, Americas largest 4,800 farms averaging
  530,000 each produced 25 of US farm output
• In 2002, the largest 3,600 farms averaging
  13,960,000 each produced 25 of farm output
• Between 1969 2002
• 25 fewer large farms
• 536 more real dollars per farm

11
Agricultures Changing Structure
12
Rural Development

• Growing disconnect between rural development
  agricultural policy
• Farms are more dependent on rural communities
  than rural communities are on farms
• Farmers are a declining percent of the rural
  population
• Production agriculture represents only 6.5 of
  rural economic activity
• Only 403 of 2,052 rural counties are classified
  as farming dependent

13
Rural Development

• US population on farms (1900 to 2000)

Source Lorraine Garkovich, US Department of
Agriculture, Population Rural Community in
Rural America. Prepared by Putnam for Farm
Credit HORIZONS.
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Rural Development

• Farm off-farm income
• The average U.S. farm family depends on off-farm
  income, dividends transfers for 90 of their
  income
• Closer to home, 2005 NWFCS customer research
  reveals
• 45 of households have some form of employment
  outside the agricultural operation
• On average 77 of household income is derived
  from the agricultural operation

15
Business Cycles

• Ongoing Change
• Businesses move through cycles
• Customers changing needs increasing
  expectations drive changes
• Success requires leaders recognize where their
  group is
• Change is inevitable ongoing

16
The Business Lifecycle

• Assessment
• Recognizing where an individual, organization, or
  business is positioned relative to its market
  competitive environment is key in understanding
  business cycles

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Assessment

• External market drivers
• Most compelling force driving change
• Internal environments must address external
  environments marketplace positioning

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Leadership Competencies

• Effective leadership requires
• Adaptation
• Recognizing leveraging core competencies
• Businesses are a portfolio of resources
• Management must multiply the effectiveness of
  resources

19
Vision

• Vision
• Leaders have vision beyond todays actions
  tomorrows results

20
Communication

• Leaders communicate vision
• Directing people to follow it to a successful
  conclusion
• Focusing on interpretation delivery mechanisms

21
Accomplishment

• The combined effect of assessment, vision
  communication
• Short term objectives support long term goals
  the overall vision

22
Action Results

• Leadership tests
• Following assessment, leaders take action
• Judged by tomorrows results rather than by
  todays actions
• Todays success is a function of former years
  vision strategies (good or bad)

23
Imminent Change

• 600 to 900
• Struggling, out of touch with customers demands
  the marketplace
• Survival requires aggressive leadership radical
  change

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Management Styles

• An autocratic management style is often most
  successful in times of business crisis
• Leadership
• Embraces change courageously takes required
  actions
• Employees will follow

25
Transition for Ongoing Success

• 900 to 1000
• Driven by internal need for change
• Autocratic management style is no longer
  effective
• Management styles must adjust
• Once initial successes are realized

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Optimal Success

• 1000 to 200
• Best period for running a business
• Policies procedures are established effective
• Employees are fulfilled desire a piece of the
  action

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Optimal Success

• Organization embraces a strong customer focus
• Operation is run at its greatest state of
  efficiency
• Cooperative membership expects dividends returns
• Business is viewed by the marketplace as
  successful

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Optimal Success

• Management is perceived as visionary effective
• Timeframe for success
• Active accurate assessment is key
• Sustainable success requires leaders challenge
  their organizations
• Continually reinventing themselves

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Transition to Breakdown

• 200 to 300
• Contentment, success and an internal (versus
  customer) focus are the most significant factors
  leading to business breakdown
• Key warning signals
• Complacency in Board, management staff
• Fear hesitation towards change
• Stagnant earnings stream

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Keys to Turnaround

• Leaders
• Recognize complacency
• Accept the risk of change
• Business reinvention may occur in one of
  several strategic alternatives

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Strategic Alternatives

• Focus/specialize
• Improve efficiency reduce cost
• Intensify/modernize
• More production through the same fixed asset base
• Expand
• Potentially overused
• Diversify
• Addition of new enterprises

32
Strategic Alternatives

• Replicate
• Copy existing operation on a different site
• Safe, most common
• Integrate
• Move forward or backward in the value chain
• Involves accurate assessment of new, required
  skills
• Higher risk
• Network
• Allows a group of smaller producers to look like
  a larger producer
• Requires strong communication people skills
• Reduces risk

33
Strategic Alternatives

• Delay/wait see
• Buying time
• Must have a decision trigger
• Not a substitute for not making a decision
• Highest risk
• Downsize
• Does not always mean exit
• Improve focus
• Enhance efficiency
• Remove non-productive or underperforming
  enterprises

34
Business Breakdown

• 300 to 600
• Changes necessary to move the business back to
  1000 to 200 are not made
• Chronic disconnect between the organizations
  operation/philosophies customers
  needs/expectations

35
Business Breakdown

• The cycle can not be reversed
• New outside management or business liquidation
  is required
• Fear or a retired management style strives to
  maintain the status quo
• Afraid to depart from former success, management
  creates a self-fulfilling prophecy

36
Ag Producer Example

• 300 to 600
• Business breakdown
• Agricultural producers encounter business
  breakdown when operations assume a mode of
  maintenance or decline
• Assets become the growth options for businesses
  positioned between 1000 to 200

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Business Cycles Key Points

• Recognition and action
• Leaders actively question the status quo take
  action in place of complacency
• Effective leaders answer this challenge, adapt to
  change are willing to take risk
• Specific application
• Business cycles may be applied to any individual,
  organization or business
• Care must be taken, though, in applying the cycle
  to an entire industry (e.g. commodities)

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Business Cycles Key Points

• Challenges in assessment
• Large organizations
• Management teams staffs afford leaders
  intellectual pools for assessment refinement
• Challenge resides in identifying individuals who
  will actively challenge the status quo
• Small organizations sole proprietorships
• Without a management team staff, sole
  proprietors must rely on their vision personal
  assessment of the marketplace
• A professional network is important in
  challenging assumptions proposed actions

39
NWFCS Perspective Tomorrow

• NWFCS Farm Credit System Horizons customer
  research suggests
• An optimistic future for U.S. agriculture rural
  America
• Great challenges ahead
• An exciting role for NWFCS in supporting an
  optimistic future

40
NWFCS Perspective Tomorrow

• Changing, segment-specific customer needs
• Flexible programs tailored to market segments
  /or individual customers
• Enhanced products, services delivery channels
• Programs for young, beginning, small minority
  producers
• New attention to country home owners part-time
  farmers needs
• Legislative programs
• Customer education, development and strategic
  planning services

41
NWFCS Perspective Tomorrow

• Total customer solutions

42
NWFCS Perspective Tomorrow

• 21st century opportunities
• Energy
• Ethanol
• Biodiesel
• Wind
• Niche designer foods
• Direct retailing
• Agri-entertainment

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NWFCS Perspective Tomorrow

• 21st century opportunities
• Value added domestic export products created by
• Farms
• Traditional hybrid cooperatives
• Rural entrepreneurs who do not farm
• U.S. food, fiber energy companies
• In both rural metropolitan areas
• Development
• Counties adjacent to growing urban areas
• Recreation
• Counties with scenic natural resources
• Retirement destinations
• Counties with retirement infrastructures
  (Sunbelt)

44
NWFCS Perspective Tomorrow

• Changing farm business models
• Efficiency focus
• Some larger some smaller
• Off-farm employment
• Diversified non-farm enterprises
• Value added ventures
• Integrated value chains
• Traditional hybrid cooperatives

45
NWFCS Perspective Tomorrow

• Rural entrepreneurship
• Producers are constantly adapting
• Only 16 of U.S. farms today earn gt50 of family
  income from farming
• 75 of NWFCS customers earn gt50 of family income
  from farming
• Young beginning producers are continually
  seeking new, non-traditional opportunities

46
NWFCS Perspective Tomorrow

• Agricultural producers strengths in rural
  entrepreneurship
• Business skills easily transferred from farm to
  non-farm enterprises
• Agricultural real estate equity can be leveraged
  to finance new ventures
• Farmers know a lot about collaboration through
  the cooperative model

47
Prospering Producer Characteristics

• Superior financial management systems
• Excellent time management
• Balance in work, family play
• Selective adoption of technology
• Complimentary partners/advisor teams
• Spouse, farm manager, father/mother, son/daughter
• Recognition of differences between 1000, 10,000
  100,000 decisions

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Prospering Producer Characteristics

• Proactive in changing environments
• Customer value chain focus
• Consideration of different perspectives
• Networks alliances with a strategic focus
• Excellent people human resource skills
  (coaches)
• Win win negotiations

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Prospering Producer Characteristics

• Coordinated production systems
• Qualified suppliers systems of traceability
• Solid risk managers calculated risk takers
• Balanced management, above average in most areas
• Reason emotional intelligence

50
Surviving Producer Characteristics

• Low overhead
• Sound debt amount structure
• Cost control
• Low cost careful watch of operating expenses
• Maintenance of a reasonable level of liquidity
• Marketing sufficiency
• Hasnt been burned in marketing the past two
  years
• But, doesnt allow for systematic expansion

51
Surviving Producer Characteristics

• Eventual entrance in new markets
• But, entrance after erosion of early adopter
  profits
• Reaction to knowledge/well informed
• Maintenance of a stable asset base
• Effective management of 10,000 decisions

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Struggling Producer Characteristics

• Below average soils infrastructure
• Dependence on government payments
• Excessive leverage/rapid expansion
• High cost operations
• Limited knowledge regarding costs of production
  breakeven market prices
• Failure to recognize maintain working capital

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Struggling Producer Characteristics

• No contingency plans/no back door
• Victim mentality
• No goals or performance analysis
• Poor communication no succession plan
• Pure production/plant managers

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Struggling Producer Characteristics

• Significant marketing weaknesses
• Price takers
• No brand identity
• High maintenance lifestyles (excessive killer
  toys)
• Too much time away from operation
• Too much time in making 1000 decisions

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Successful Producer Characteristics

• Product service based strategies
• Requires excellence in one or more area
• Marketing
• Quality control
• Human resource management
• Relationship management
• Ability to identify the next segment because the
  last one will eventually be commoditized

56
Successful Producer Characteristics

• Commodities based production strategies (e.g.
  program commodities dairy, wheat)
• Low cost production
• Size economies of scale
• Continuous early adoption of the right new
  technologies
• Low leverage in general
• Understanding of cost structure returns to scale
• Differential advantage in efficiencies affording
  profits growth