TRILOGY FARM

Michelle D. Lane Department of Management College of Business Administration Bowling Green State University Bowling Green, OH 43403 Phone: (419) 372-9512 FAX: (419) 372-6057 e-mail: [email protected]

Diana J. Wong-MingJi Eastern Michigan University Submission to the USASBE Conference 2004 Track: Case studies-Women Entrepreneurship

ABSTRACT Trilogy Farm illustrates the entrepreneurial struggles of a three-year-old business in the hunter jumper horse barn business. This case illustrates numerous assumptions made by a new business owner concerning expected outcomes and unexpected challenges from different directions within the organization. The central strategic issue lies in aligning internal resources and capabilities to compete in a competitive environment that is generally based upon ‘gentlemanly agreement’. Multiple conflicts among employees concerning the strategic direction of the organization have to be resolved such as the tension between quality service with the associated costs and cost cutting consciousness. The case provides a very realistic situation where the success of the organization is clearly dependent upon the success of the customers in real time competition. A clear vision was established for the strategic direction of the business. But significant challenges confront the implementation process of trying to achieve what appear to be competing objectives such as being fun and a serious competitor in the hunter/jumper industry. CASE SYNOPSIS Michelle Heine buys a hunter jumper barn business to fulfill her love of horses and riding. By the third year of being in business she is reconsidering whether the endeavor is worth all the unexpected difficulties that include splitting up with the partner she entered into the business with; constant conflict between her employees on how to fulfill the organizational vision; tensions between customers and staff; and unexpected costs that left her with increasing debt every month. Both the competitive environment and business cycle fluctuations have little impact on the business because of the upper income level of the customer base. As a small business, Michelle also began to engage in a related diversification activity to supplement the cash flow problem. She imports German horses to train and sell in the US market. This business moved very quickly from a local focus to a global one. But there are indications that the international angle provides worthwhile opportunities. The difficulty lies in determining how this aligns with the firm’s existing strategic direction and where value-added resources should be focused given the new directions that are emerging. Michelle Heine, the Owner and General Manager of Trilogy Farm, was out riding on one of her favorite horses when the cell phone rang. Terry, called to inform Michelle about the new saddles Jessica had just purchased. He was exasperated with expensive purchase and wanted to return the saddles for more economically affordable ones or wait until the winter season to make the purchase. As Terry vented his frustration about Jessica's extravagant buying habits, Michelle's could feel her own stress level rising. Was her horse farm, a hunter-jumper barn operation, worth all the trouble? The continuous dispute between Terry, the property manager and Jessica, the head trainer, was just one of many difficulties that Michelle was grappling with in her three year old business. BACKGROUND OF TRILOGY FARM Trilogy Farm is located in southeast Michigan. It is a hunter jumper barn that provides barding of horses, training riders and providing beginner and intermediate riding lessons, horse training and sales, as well as opportunities to compete at horse shows both at home and away. They generally have two types of horses – thoroughbreds and warm bloods. The previous owner 2

James Pullella used to keep twenty races horses in the barn. He is down to thirteen horses and owns six adjoining acres where he keeps the horses during the day. Michelle leases space in the barn to Jim who also continues to live on the property. Jim and his wife, Carol are very knowledgeable about horses and provide a convenient resource of information concerning the animals. Eventually, Michelle discovered that Carol continued to feel and behave as if she still owned the place. Michelle bought the business three years ago as an investment with an initial loan of $300,000. The purchase was a like-kind exchange of farm ground for Trilogy Farm' 36 acres and horse barns. Michelle loved horses and her 12 year old daughter was starting to compete. Michelle stated, "When you start a business, it needs to be something you love just because of the hours you have to spend dealing with it." At the time of purchase, the farm was in serious disrepair – broken down fencing, rusted buildings, and an old horse therapy swimming pool that was full of garbage. At one time, the property had four barns. But only two were useable when Michelle started into the business. The other two were piles of burnt debris from previous fires. One of the two useable barns had 46 stalls for boarding. The other barn with 32 stalls was not as nice. In addition to the two barns, there was also an indoor riding arena for lessons during poor weather conditions. She accrued more expenses that required a second loan for $40,000. After putting up the fencing, they started with 13 customers, which provided some cash flows. In addition to the physical facilities, Michelle bought four horses for the riding lesson program along with her daughter’s horse. There were also four horses that came with the purchase of the property. These horses were intended for sale. But Michelle only managed to sell two of them because one had to be put down and a buyer has not been found for the other one. It costs about two hundred dollars a month to maintain a horse. Today, the remaining horse is worth about $5,000. A NEW CLUBHOUSE The vision for Trilogy Farm was to provide a riding facility that was serious about training and horse care but casual, relaxed and a fun place to be. This reflects some of Michelle’s general philosophy and attitude in life. A new clubhouse can help fulfill the vision of Trilogy Farm. In addition to the repairs and clean up, a brand new heated and air conditioned clubhouse with 2000 square feet was built. This provided a space for the customers to relax and socialize, watch television, or play piano. It included a kitchen, play area for small children, large meeting room with lesson viewing area, and lounge space. Parents could watch their children ride without having to be outside in the elements. Michelle hoped the clubhouse would provide a distinctive feature to attract customers because most don’t have family areas to relax in. People would ride and go home. Customers used the clubhouse extensively. But having the customers hanging around too much created an unexpected set of problems. There was more gossiping. Some people picked on others they didn’t like. The rumor mills with the girls criticizing other girls and barn staff provided its own set of problems by creating conflicts amongst them. Also, the clubhouse was always messy because people left their food and related trash around. Michelle ended up having to constantly clean up the mess.

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THE PARTNERS Michelle formed a partnership with her daughter’s trainer, Pamela Wallace to enter into the business of a hunter jumper barn operation. Although Michelle did not have experience in running a horse farm, she was able to contribute and leverage the necessary capital resources. Pamela’s role was to be the head trainer and run a barn in the partnership. Although she did not invest any capital into Trilogy Farm, Pamela accumulated about 10-12 years of varied experience in the industry that included working as a trainer, running a barn, and engaging in a partnership. Also, she brought customers from a nearby stable barn to help get the business started. Pamela had a conflict with the owner of Classicala and left to go to Toledo Horse Sports Barn which preceded her move to Trilogy Farm. Michelle had known Pamela for fifteen months. Michelle described the partnership formation as follows: “My business partner felt that rather than putting money into the business her expertise was sufficient. I found out over time that if you don’t have your personal cash in the business, you don’t look at spending in the same way. I did not pursue or check references. Also, we could not agree on the operating agreement terms. So we never signed an operating agreement between us. She wanted half ownership of the operating company but it had no net value. I owned the land under a separate company. But the problem was that she had no assets for the bank as collateral. So I ended up having to take all the risks.” The two women worked together on the business plan and developed three scenarios. The worst case scenario was to keep the starting customer base and a small lesson program to create cash flow. The moderate case scenario was based on a 25% growth in the customer base and was to generate a 10% ROI. The best case scenario was filling the barn, basically tripling the number of boarders and having a full lesson program with three full time trainers . This generated a 25% ROI. However, most of the numbers provided concerning the cost of running the operations were significantly underestimated and the business quickly accrued a high debt load. Also, the projections for business growth did not happen. Although Trilogy Farm attracted many customers, they did not stay because of their dissatisfaction with the training. Subsequently, Michelle found out that Pamela did not have the capability to train beyond the beginner level. “Our girls beyond beginners were not doing well at horse shows because they were making the same mistakes,” said Michelle, “It became obvious that I needed to make a decision to end the partnership because Pamela’s qualifications were exaggerated.” After two years into the business, Michelle dissolved the partnership with Pamela and hired head trainer, Jessica Hogan. Pamela had moved out of town due to her husband being transferred and was too far for most of the customers to follow her to another location. At this point, Michelle became the sole owner of Trilogy Farm. She managed to regain all the customers who left with the exception of two. The business growth rose to a level that was much closer to the forecasted projections. But the cash flow was still a problem. After paying for variable costs, the income was insufficient to cover the fixed costs due to the high debt load accrued by the company during the first two years of operation. Michelle cannot afford to support the cash deficit of the horse barn for much longer. 4

SUPPLIERS Trilogy Farm deals with three major suppliers for grain, hay, and bedding. The grain suppliers vary because grains can be sourced from a wide range of suppliers. Hay is the largest variable expense, costing about $2 per day per horse. The additional feeding of hay at lunch-time, which was started by the new head trainer increased monthly expenses by $400. The hay supplier is one of the best. Michelle says, “He can always get me hay when no one else can get hay. When there is a drought or bad weather, he is always reliable. We may pay a little more, but he allows me flexibility when the cash flow is tight. At the worst, I was five months behind in paying.” Bedding suppliers are usually furniture manufacturers who provide wood shavings. When the economy is sluggish, wood shaving production is down because furniture purchases are decrease. As a result, supply tends to fluctuate with the business cycles. Michelle can always access shavings but she wants consistently better quality bedding for her horses. The quality of bedding is not always available from her supplier, the shavings being too fine & dusty. But switching bedding suppliers may be risky because a long term relationship with the supplier is important to accessing a consistent supply, regardless of the quality. In the meantime, Michelle also researched different alternatives to shavings such as compressed wood pellets that are dust free and become spongy. Some horses are allergic to dust and require medication as well as a hair net to filter the dust. The new bedding is easier to clean with no dust and less waste. So even though this bedding is more expensive to purchase, it saves significantly on labor costs, dust generation, and the amount of waste removed from stalls that must be disposed of. The problem is that the stall floor has to be in better condition and perfectly flat to prevent the horses weight from redistributing the wood pellets and ending up sleeping on the hard flooring. EMPLOYEES AND CONFLICTS As the Owner/Manager, Michelle manages the overall business and operations. She has a property manager, Terry Towner, who supervises seven part time employees, maintains the property, and sustains relationships with suppliers. Terry is very conscious about keeping costs down and knows how to cut costs. He is a hard worker with over ten years of extensive experience in the horse barn business, which includes running a barn and management and care of stables. In addition to his job at Trilogy Farm, Terry also has a landscaping and lawn care business during the summer months. His capabilities commonly referred to as a ‘motor-head’ for talented customer car builders are also useful at Trilogy Farm. Jessica Hogan is the head trainer. She is much younger than Pamela and has less experience as far as giving lessons. But Jessica is very eager and extremely talented, she has ridden & trained horses extensively and competed successfully at all levels. Jessica is responsible for handling all the horse care and supervises two other part time trainers, creates the lesson programs, deals with horse shows, horse sales and horse training. Her primary focus is on the well being of the horses. Jessica wants the best for the horses and her customers, which means feeding horses extra hay, grain, and buying more expensive supplies such as bridles, saddles, and related horse riding equipment. As a result, this is a constant source of a conflict with Terry’s cost consciousness. The difficulties between Jessica and Terry also spill over to the other employees. Jessica manages to influence other employees to dislike Terry. The tensions continue to ebb and 5

flow. Both Jessica and Terry often complain to Michelle about each other. LESSON PROGRAM AND RIDERS Trilogy Farm’s lesson program differs from other hunter jumper barns. The size of a lesson is limited to a maximum of six riders at one time while other barns allow as many as twenty in one lesson. Given the limitation of the indoor riding arena, the maximum capacity of the lesson program is about 75 riders per week. Originally, Michelle needed twenty boarders and 25 lessons per week to break even. The boarders provide a low margin after covering the variable costs. The pasture space allows for thirty-five horses. However, the higher costs mean that Michelle needs to increase the lesson program. At Trilogy Farm, the cost of lessons is competitive with nearby barns. The cost of a private lesson for half an hour is $35.00 and a onehour private lesson is $45.00. A one-hour group lesson is $25.00 per rider. Hence, the group lessons provide the best revenue source. But the lesson program at Trilogy Farm differs from other barns. Michelle describes the situation. “We limit the size of the lesson to no more than six riders at a time while other barns allow as many as twenty in one lesson. At one barn, there are no limits to the number of riders in a group lesson. People who come to our barn normally stay because we have small lesson groups and a nice facility.” After advancing beyond the intermediate skill level, the customers tend to leave because they compete at much higher levels than the existing riders. At Trilogy Farm there are not enough riders in the high caliber to support a horse show schedule to do the high level shows in the A circuit. Most of the riders come from middle to high-income households. Ninety percent of the customers are children between the ages of seven to eighteen years old, mainly girls. Most of the riders who are serious riders tend to live within a convenient distance to the barn because they are riding four to five times per week with about two group lessons per week. Serious riders enter into horse shows to compete and accumulate points to move up through the circuits from schooling shows to the national level. Consequently, the hunter jumper barn business is somewhat insulated from some economic fluctuations because of the high socioeconomic status of a significant portion of the customers and their commitment to advancing through the levels of competition. HORSE SHOWING Horse shows are integral to the hunter jumper barn industry. A barn’s status and reputation is closely tied to the accomplishments of training successful riders that move up through the different circuits by advancing with riding skills. A particular hunter jumper barn may focus on training for one or the whole range of skill levels. The skill level of riding is segmented into four riding levels or circuits – A, B, C, and schooling shows. The A circuit is the highest level of competition. It is closely monitored and regulated by the USA Equestrian organization. For example, random drug tests are conducted. The A circuit has national competitions in different locations around the country all year long. At the competitions, riders earn points and accumulate them during the calendar year. Once a rider achieves a certain number of points, they advance to the finals. An A circuit horse show generally lasts between 1-2 weeks and total costs amount to approximately $2000 per show for a competing rider. The final national competitions take place in locations such as Madison Square 6

Garden. The B and C circuits are state level competitions. The rules and policies differ from state to state. But the general structure still applies where the riders compete to accumulate a certain set of points to advance through the ranks. The difference between B and C is that C level riders are beginners who jump at heights of up to two feet nine inches. A ‘C’ circuit horse show costs about $150-200 for two days without including the cost of trainer or trailering – the transportation of the horse. Most of the C and B circuit competitions are as far as 200 miles away. A B circuit horse show lasts for three days the costs can reach about $500 total to the customer, including food and lodging. The lowest level of competing are schooling shows which are novice competitions that are held at individual hunter jumper barns. A few barns maybe linked together to compete. The competitions are for beginning beginners. Trilogy Farm does horse showing in the B and C circuit competitions, and conducts three of its own schooling shows each year. The customers are charged a flat rate of $50 for hauling the horses to local horse shows. Charges for hauling to B circuit competition are based on mileage. The net margin for doing horse shows is about 15%. HUNTER JUMPER BARN COMPETITORS Location proximity is important for customers who are riding multiple times per week and participating in lesson programs to advance through the competing circuits. Within the greater metropolitan area of Toledo, there are about 12 hunter jumper barns and numerous other horse stables of varying sizes. There are four other hunter-jumper barns within six miles of Trilogy Farm. But Trilogy Farm is the closest to Toledo, which has the major market with two of the highest income school districts in the area. Stonehaven Farm is Trilogy Farm’s closest geographical competitor being located a mile away. The facility is very nice with capabilities of handling forty boarders. Stonehaven has a very large lesson program with many lesson times through the week. They focus on beginners and intermediate levels. But they do not do external horse showing very often. Fox Meadow Farm is three miles away. It is by far the most prestigious hunter jumper barn. There is a beautiful barn and riding arena. The facility has 60 stalls. The horses are very expensive and meticulously cared for with a significant amount of attention. The riders are very wealthy. Riders from Fox Meadow compete at the highest level in the A circuit and has achieved a national reputation with substantial media attention. In the winter, the riders travel to Florida for competitions. The lesson program is quite large with 10-15 riders per group but there is no set limit in the group lessons for beginners. Fox Meadow has about 15 acres which is limits the amount of outdoor time for the horses. Hunters Run Farm is located next to Fox Meadow and has a 15-20 year history in the business. In some sense, Hunters Run is a spin off from Fox Meadow as a result of a divorce. Hunters Run is the closest competitor to Trilogy Farm with a similar lesson program, horse training and care, and horse showing. Hunters Run attends many of the same horse shows as Trilogy Farm in the B and C circuits. But Hunters Run is a larger operation with capabilities to manage 80 horses. There are two large barns plus two other smaller ones. They also have programs with the Scouts and the Sylvania Community Center, which is similar to the community involvement from Fox Meadow. 7

Competition Among the Barns Michelle explained the competitive relationships between the hunter-jumper barns. "Competition in hunter-jumper business is based on a gentlemanly agreement which means that we don’t actively seek out customers from barns in the area. If people want to switch barns, we normally talk to the other barn owner before the switch is made. When customers switch, we need to go to the competitor’s barn to pick up the horse and all the equipment. The exchange needs to be done with respect for the other business. Also, owners tend to see each other almost every weekend at horse shows. Moving from one barn to another is like switching from one team to another. It seems like there is enough business to go around so it doesn’t have to be cutthroat." Customers often make the switch when a trainer is absent. For example, when the first trainer was away for a couple of weeks, she brought in unqualified substitute trainers to teach in the lesson program. One substitute was a customer and another was a girl cleaning the stalls. During this time, two customers left Trilogy Farm. When customers began making an exodus from Trilogy Farm, they expressed unhappiness about the training. In addition to the two customers who left during the trainer’s absence, four others approached Michelle about leaving. During a horse show, a barn owner approached Michelle to inform her that customers were approaching her barn (Hunters Run) to leave Trilogy Farm. The barn owner advised Michelle to find out what was the issue. Her impression was that the customers were unhappy with the training. Michelle immediately met with all the customers face to face to discuss the matter. She said, “I discovered that they were unhappy with the quality and inconsistency of the training. They would give me another chance if I could fix the problem. I was even unhappy with my own daughter’s training.” CONCLUSION Towards the end of her third year in the hunter jumper barn business, Michelle is taking other measures to increase cash flow. She imports horses from Germany to train and sell because the market conditions are good for German horses and the margins are much more lucrative. A buyer helps to identify potential horses for purchase from Germany and makes the necessary arrangements for the purchase. However, Michelle has different challenges lie in managing a business that goes beyond the local community and into the international business arena. The imported horses have to be quarantined and meet regulatory requirements as well as a different set of transportation logistics. Michelle markets the German horses on a website and customers from across the country have made inquiries. A couple flew in from California to inspect one of the German horses as a purchase for their young son. They expressed a high level of interest and want to make arrangements for purchase. In a different direction, Michelle is approaching local schools and the YMCA to set up riding programs. However, the dilemmas and challenges continue to weigh heavily on Michelle’s mind as to whether her love of horses and riding are worth the stress of being in the business. Consequently, she is pondering whether to close Trilogy Farm or keep it operating to sell as an on-going hunter jumper barn at a later time. It may be very difficult to find a buyer for the business as well. The property itself does not have much road frontage making it unfeasible to subdivide and develop. 8