Growing Pains at Commonwealth Dairy
You can’t justify optimism to a German board–it either is or it isn’t. There isn’t any maybe or hopefully.” Commonwealth Dairy co-founders Ben Johnson and Thomas Moffitt
On October 29, 2014, Ben Johnson and Thomas Moffitt, co-founders of Vermont-based Greek yogurt-maker Commonwealth Dairy, were sitting in Moffitt’s office, contemplating the future of their business and their role in the company they had created. Which new products should they introduce? Should they invest to boost productivity in the current process or enter a new product category with higher profit potential? How could they preserve the best of their corporate culture while hiring people to manage growth? Should they extend the employment contract with their owner or negotiate a buyout of their interests?1
Commonwealth Dairy, with operations near Brattleboro, Vermont, and also in Casa Grande, Arizona, made Greek yogurt that accounted for 70% of its $70 million in estimated 2013 revenues. Commonwealth made yogurt for private label retailers such as Wegmans, Costco, and others. They also sold the product under its own brand, Green Mountain Creamery. With help from YoYummy, introduced in late 2013 as children’s yogurt in a pouch, Commonwealth expected to reach $140 million in revenues by the end of 2014.2
Founders’ Stories
Massachusetts entrepreneurs Moffitt, president and CEO, and Johnson, vice president and CFO, co-founded Commonwealth in 2009. Both had left the same big-company employer, launching their startup at the depth of the global financial crisis, which made it difficult for them to raise capital for their yogurt-making venture.
Moffitt’s father was an entrepreneur and had inspired him. Moffitt majored in biology and creative writing at Colby College and entered the biology Ph.D. program at the University of Wisconsin, Madison. After two weeks, he realized he did not want to spend his life in the lab, so
This case was prepared by Peter Cohan, Lecturer of Strategy, and Sam Hariharan, Senior Lecturer of Management, both at Babson College. It was developed as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. It is not intended to serve as an endorsement, source of primary data or illustration of effective or ineffective management.
Copyright © 2016 Babson College and licensed for publication to Harvard Business School Publishing. All rights reserved. No part of this publication can be reproduced, stored or transmitted in any form or by any means without prior written permission of Babson College.
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he got a Master’s degree in Microbiology. While there, he started a small company distributing milk, juice, and soda. After a few years of “mediocre success,” he headed back east.3
He got a job at Daymon Worldwide, a Stamford, Connecticut-based food broker. This gave Moffitt exposure to the private-label industry, where he observed who was buying what and which categories were growing. From there, he took a job at Ahold, an international retailer headquartered in Amsterdam, sourcing dairy commodities and helping to manage the risk associated with purchasing the hundreds of millions of dollars of dairy it bought every year.
Johnson was a Boston-area restaurant veteran who had left that industry and returned to finish his Bachelor’s degree in marketing at the University of Alabama. He stayed at Alabama to continue studying marketing for his Master’s degree, then returned to Boston. He joined the buying office of retailer Filene’s as an executive trainee about a year before Macy’s acquired the company and closed the Boston buying office. This experience made Johnson want to start his own business. He quickly joined Ahold shortly after Moffitt had started there, working on dairy contracts. As Moffitt explained, “Ahold is where I met Ben. It had six retail banners and a food service business. Ahold had been an aggregator, found its strategy not working, and began to sell off products and downsize. Ben and I were sourcing dairy products and saw opportunity. Ahold was buying 30 million pounds of yogurt a year, demand was growing at 10%, and the product options were poor.”4
Company Development
The year 2008 was a time of duress in the global financial markets, but this did not deter Moffitt and Johnson. According to Moffitt, “A light bulb went off in our heads. We saw Ahold doing more downsizing and that there was an opportunity in yogurt. We started talking to people, including attorneys in Boston who introduced us to entrepreneurs. One of the founders of Staples helped us identify missing links in our plan. For example, we did not know how to make yogurt.”5
Said Moffitt, “We recruited a yogurt maker, an Austrian who was a vice president of Kozy Shack, a pudding-maker. He knew how to make yogurt and told us, ‘I was in conversations four or five years ago about this with a German firm. I will give them a call.’”6
They initially pitched their idea in New York City to two executives from Ehrmann AG, a billion- dollar, family-run international yogurt company based in Germany. Soon, they were invited to Germany for a meeting with the Ehrmann AG board. “In September 2008, the worst part of the financial crisis, we made our pitch. For three months, we heard nothing. So we kept trying to find other partners, but Ehrmann had the capital and knowhow. In September 2009, we signed with Ehrmann and started constructing our dairy in Vermont,”7 explained Moffitt.
Building a dairy cost between $25 and $30 million, which was more capital than they held. According to Johnson, “We had to finance creatively, seeking state, local, and federal grants, because private financial markets were closed. But the government was making money available to jump-start the economy.”8
They tried Massachusetts, hoping to locate in the western part of the state, but ended up in Vermont. As Johnson explained, “We were hoping to buy assets available near Springfield. But Governor Deval Patrick was focused on bringing biomedical companies to the state.”9
Vermont was more interested. The co-founders met the former agricultural commissioner from Vermont and found there was an opportunity to build in Brattleboro. They would be eligible for
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new market tax credits and other state-based incentives for committing to create 50 jobs and buy 32 million pounds of milk. They ended up exceeding that with over 100 employees and 100 million pounds of milk.10
Commonwealth began plant construction in 2010 and benefitted early from big trends, such as the growing popularity of Greek yogurt, thanks to their deep knowledge of the industry, particularly in Europe, where per capita yogurt consumption was higher than in the United States. Commonwealth planned to keep growing; however, Moffitt and Johnson did not expect that this growth would lead to an initial public offering because the third-generation Ehrmann family owners wanted to maintain control of the company. However, Commonwealth’s growth was attracting new competitors. Moffitt noted, “Everyone is getting into Greek yogurt now. For example, PepsiCo partnered with a German yogurt-maker. And we are moving to the next big thing, kids’ yogurt. We love the pouches because they are easier for kids and less messy for parents.”11
Key Strategic Choices12 Setting Goals
Moffitt and Johnson founded Commonwealth to seize opportunity and to jump before they were pushed. Their roles at Ahold had put them in direct contact with different manufacturers, granting them an early look at potential business opportunities, including a chance to add capacity to the Northeast yogurt market. Moreover, as a large conglomerate, Ahold was constantly being reorganized, which made them feel significant insecurity about their positions at the company. “We were very unsettled and felt we could lose our jobs at any moment as the $40 billion company made more structural moves,” they said.
In establishing the company, they aspired to help consumers, employees, and retailers. “We hoped to create a company with great quality yogurt and premier customer service that allowed stability and growth opportunities for employees. We wanted to be the vendor of choice for retailers when it came to producing their brand [of private-label yogurt], as we felt this was the intangible piece missing in the industry,” explained Moffitt and Johnson.
Due to ownership by a privately-held German yogurt company, Commonwealth expected to remain privately held as well. According to Moffitt and Johnson, “Our German partner is a third-generation, family-owned company which has created a positive legacy in Germany and Western Europe. They want to expand into new markets. We expect our company will be an important part of this strategy as an independent presence in the United States.”
After a period of rapid growth, Commonwealth Dairy was under pressure by 2014 to streamline its operations. To that end, according to Moffitt and Johnson, its key short-term goals for 2014 included:
· Improving operations and organizational structure.
· Expanding branded presence through new market opportunities to offset reliance on
private label manufacturing.
· Creating an organizational structure to support teams in Vermont and Arizona and to
align with overall size and complexity.
· Developing employees to make them better at what they do every day.
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Selecting Markets
When the co-founders started thinking about which products to sell, they initially focused on conventional yogurt. However, Moffitt and Johnson realized that the company would not be able to distinguish itself with that focus. As they said, “Greek yogurt was viewed as a niche market when we began our planning. We were highly focused on conventional yogurt and thought that organic yogurt and kids’ yogurt were possibilities for differentiation. We developed our Greek yogurt strategy on the fly.”
Accelerating demand turned them to Greek yogurt. They adjusted their plans to meet what they deemed the “amazing pace” of growth in demand. They specifically focused on the private-label segment of the Greek yogurt market. “Greek yogurt capacity was tighter than the market for conventional yogurt, which resulted in more attractive margins in that segment,” they explained.
At the same time as it was consolidating operations, Commonwealth Dairy was looking for new sources of revenue. “The market forced us to focus here. We are always looking for ways to diversify our production so that we are less reliant on Greek yogurt production,” noted Moffitt and Johnson.
Choosing the Location
For a yogurt company, location was a key strategic choice. In addition to differing tax regimes, financing incentives, and labor costs, the co-founders needed to consider geographic distance from plant to customers. They viewed the New England states and New York as possible locations and quickly narrowed the options to Massachusetts and Vermont, close to where they lived and to major retail customer targets.
They believed they were in a strong negotiating position because they were offering to create jobs when the economy was weak. They thought that they could get different states to compete with each other to offer Commonwealth the most compelling financial incentives. As they described their decision-making process, “We essentially carried out a strengths/weaknesses/ opportunities/threat, SWOT, analysis for each state to evaluate the probability of success if we were to locate there.”
Vermont offered Commonwealth Dairy the best terms. Noted Moffitt and Johnson, “We decided based on Vermont’s local, state, and federal incentive package. It had an incredibly engaged and motivated local economic development agency. Other decision factors were its proximity to milk, product distribution, and labor, and also the brand value of saying our product was made in Vermont.”
After choosing to locate in Vermont, the co-founders had mixed feelings. They received an enthusiastic welcome from the state, but it was difficult for them to attract talent there. The good news was that the company had the attention of Vermont leaders, and its brand resonated with consumers. Moffitt and Johnson explained, “Because Vermont was a very small state with a limited manufacturing base and relatively few large companies, we quickly became very important to political and economic forces. We have almost instant access to our senators, congressman, and governor. This type of support is invaluable. Made in Vermont has also had the expected resonance with our branded consumers.”
The co-founders found that Vermont had more significant disadvantages than they had initially thought it would, such as difficulty attracting talent and the high cost of living. “It is harder to recruit good talent than we thought it would be. Vermont is a small state with no major airport
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or large city nearby and limited job opportunities for spouses. It is challenging to convince people to move here. Vermont also has a very high cost of doing business—taxes, utilities, and health care,” noted Moffitt and Johnson.
Commonwealth Dairy decided to stay in Vermont to preserve the strength of its local yogurt brand. Commonwealth concluded that its Vermont brand would enable it to charge a high enough price to offset the higher costs of operating there. At the same time, they thought that expanding to Arizona to would give the company lower costs and an edge in its private-label business. As Moffitt and Johnson explained, “We built a new, larger plant in Arizona where the cost of manufacturing is much lower. We are producing more commodity private label products in that location.”
Raising Capital
When Commonwealth Dairy was trying to get off the ground, the capital markets were down. But Moffitt and Johnson were determined to try all capital sources. However, they only found money in two places: public financing and Ehrmann.
Explained Moffitt and Johnson, “We looked at a variety of sources: Angels, VC, and strategic partners. We quickly realized the amount of money we needed to raise in order to build and operate a plant was too much for angels. While we had VC interest, the main challenge was the 12-month time lag between investment to build a plant and generating cash flow.”
Despite these financing obstacles, Moffitt and Johnson were successful. “We raised over $20 million. Over 50% of our total capital needs came through public and quasi-public funding sources. The remainder was in the form of cash from our equity partner [Ehrmann],” they noted.
At the time, they believed Ehrmann would be a good partner because it understood the business and was in less of a hurry to cash out than a venture capital firm would be. The cofounders concluded that Ehrmann understood the yogurt business, the capital required to build and operate a new factory, and the long-term mindset required to build a sustainable company. They also concluded that the qualities that had made Ehrmann successful in Germany–“They were innovative and cost-efficient, and they appeared well-liked and established in their home market”–would help Commonwealth compete in the U.S.
Commonwealth Dairy cast a wide net to raise the substantial capital it needed to expand facilities to supply its growing customer base. Commonwealth was able to obtain financing from internally-generated cash flow, bank loans, government grants, and “internal transfers” from Ehrmann. They invested in new equipment for their Vermont facility “annual process improvements three-year packaging and product innovations,” Moffitt and Johnson said.
Building the Team
Commonwealth Dairy’s founders had skills in sales and purchasing, and they hired team members with experience in the yogurt industry. As part of their transition from founders to managers of a professional organization, they hired experienced functional executives and tried to build a structure that included a formal organization chart, experienced functional managers, and formal processes such as planning and budgeting. As Moffitt explained, “We knew we needed people who possessed the major skillsets for any new company. Ben and I understood the dairy industry from a sales, marketing, cost, and commodities standpoint, but we had never made yogurt and did not have extensive operational or new business experience.”
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Moffitt and Johnson first recruited a board of advisors to help them meet people and raise capital. This board comprised that they felt were the major skillsets a venture capitalist would want to see. The board members included a former secretary of agriculture, because they believed that the dairy industry was very political and there was a significant amount of government money for dairy companies, a former president of TCBY yogurt, a yogurt expert from the University of Wisconsin, a successful entrepreneur who was between startups, and the owner of a company that built food plants. This latter individual’s personal guidance and involvement was a game-changer for them. As Moffitt said, “These people meant that Ben and I could walk into any meeting and gain the respect of any audience we were speaking to.”
After confirming this board of advisors, the co-founders hired a manufacturing expert. “We partnered with a former co-founder of YoCrunch, who was a VP of operations at Kozy Shack at that time, a major east coast dairy manufacturer and brand. He completed the experience and skillsets we needed in a founding team in this space,” explained Moffitt.
In early 2014, Commonwealth Dairy employed at least 150 people, with over 100 in Vermont and over 50 in Arizona. Manufacturing people included hourly employees who did manual labor in the packaging department, a middle manager who oversaw a quality assurance team, and senior executives in finance, operations, sales, quality assurance, and R&D.
Moffitt and Johnson found that the skills required to run a startup changed as the company expanded. At the earliest stages of growth, the founders needed to make most of the decisions, but a bigger organization might fail if they did not delegate most operational decisions to others. As they explained, “The biggest challenge we faced is evolving from a hands-on founder and senior team, any of us would work on any problem in the office or on the plant floor at a moment’s notice, to a larger organization where structure, hierarchy, and clearly defined roles and responsibilities are critical to avoiding confusion and ensuring long-term success.” They continued, “We are undergoing the transformation from entrepreneurial startup to mid-size corporation. This has placed greater focus on building a competent and skilled middle management team with the ability to manage and lead their own teams.”
Another element of that transformation was to engage Commonwealth Dairy’s team in a formal process of defining its core values and vision. Moffitt and Johnson explained, “We established what we believed should be the core values and vision of the company at an off-site meeting with senior managers about a year after we started the company. We felt collaboratively identifying and drafting these would create buy-in among individuals who would have to incorporate them into their daily routines.” See Exhibit 1 for Commonwealth Dairy’s Mission and Vision.
They put in place a formal process to assure that all employees acted according to Commonwealth Dairy’s values. They said, “We have a comprehensive and robust annual review process for all employees who are management level or higher. Part of this review process is a vision and values assessment of how the employee performs and behaves relative to the vision and values of the company.”
Gaining Market Share
Commonwealth Dairy grew quickly with the Greek yogurt market, offering different value propositions to its two markets. Customers bought its branded product for the Vermont branding and small-producer packaging. Retailers contracted a private label for their own products due to their good quality and low price. As Moffitt and Johnson explained, “We are displacing larger competitors in New England because we are the local brand, and we are usually priced similarly.”
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They believed retailers chose Commonwealth Dairy due to what they saw as superior value compared to their competition. They commented, “Retailers choose us as their private label manufacturer because they believe we represent the best value, which is derived from cost and quality.”
Consumers bought from retailers due to Commonwealth’s better quality, locally-produced taste and texture, packaging, and competitive price. Said Moffitt and Johnson, “We are usually similarly priced, within 10 cents per unit of the largest brands. Our packaging isn’t as sophisticated as the major brands, but we believe ours conveys a more local, non-mass- produced impression. Our product is generally considered of higher quality for its better creaminess, mouth feel, and fruit quality.”
Adapting to Change
Commonwealth Dairy aspired to more than double in size by 2019 through a combination of product and geographic expansion. The company had set a 2019 revenue target “in excess of $250 million.” Explained Moffitt and Johnson, “We would like to be in a position where we continue to create innovative, market-changing products and grow our market share. We are actively looking at new markets in terms of geographic distribution and product categories.”
In order to reach the ambitious goal, Commonwealth Dairy acknowledged that it needed to keep innovating in response to changing customer needs, upstart competitors, and evolving technologies. In order to stay ahead of dairy industry rivals and preserve their profit margins, they needed to invent new products faster than their rivals did, while continuing to perform basic operations more efficiently. As Moffitt and Johnson explained, “Sophistication in products, packaging, and service is the name of the game.”
Commonwealth Dairy wanted to outdo competitors in delivering a better product. Moffitt and Johnson noted:
This means we must do three things: give our current customers the new products/flavors/ packaging that they want, or someone else will, while maintaining our focus on product quality and customer service; watch what our competitors are doing so that we don’t have any blind spots; and introduce new and/or improved products so we can stay ahead of our competitors and capture share from them.
While Commonwealth had not discussed growth plans in public, it was clear that its European partner would help the company grow. Moffitt and Johnson said, “We will focus on meaningful innovations and increasing efficiency. These are two things our European partner does very well, and this was a major driver in our decision to partner with them. We must make sure we execute on this premise.”
The company and its partner were in the process of deciding on the details of growth plans. “We have plans for new products, new distribution channels, new geographic markets, and new manufacturing and distribution capabilities, which are very confidential! We typically meet with our European partners on a monthly basis and several times during the year. These meetings are specific and focused on this type of planning,” noted Moffitt and Johnson.
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Market, Rivals, Trends
The Greek yogurt market took very little time to go from infancy, to rapid growth, to attracting many new competitors which presaged its maturation. The U.S. market for yogurt grew rapidly from $5 billion in 2010 to $7 billion in 2014. But Greek yogurt accounted for $2 billion of 2014 industry revenue was growing “at thousands of percent a year,” according to Moffitt. While U.S. consumers were behind Europe in yogurt consumption, they were catching up fast, increasing their consumption from “one-seventh the amount of yogurt that Europe does—to one-fifth,” he said.
This represented a growing revenue opportunity for commonwealth. According to Moffitt, “We will do $70 million in revenue this year and employ 150 people—and we think we will hit $140 million in revenue next year with help from YoYummy—tapping into the $1 billion kids’ yogurt market.13
But in 2013, the relative market share of industry leaders changed. Among the biggest rivals was New Berlin, N.Y.-based Chobani, launched in 2007, which makes tart, Mediterranean-themed yogurt, and which claimed to have boosted revenue by 32% in 2013, and expected sales above $1.5 billion in 2014. The company, run by founder Hamdi Ulukaya, had a 19% share of the $6.5 billion U.S. market for refrigerated yogurt according to Nielsen. And it controlled 38% of U.S. Greek yogurt market.14
Commonwealth Dairy competed in the yogurt market with heavyweights Danone, Yoplait, which was owned by General Mills, Chobani, and Fage. And as Moffitt and Johnson hinted, any advantages it enjoyed in the Greek yogurt industry were very short-lived.
An example of this short life span for any market advantage in this sector came from Danone, which claimed that, between April 2013 and April 2014, it had pulled up to equal Chobani’s share of the Greek yogurt market. In January 2014, Chobani claimed to control 37.6% of the Greek yogurt market, but by that April, Danone argued that it had 33% of the market to Chobani’s 35%. According to Danone CFO, Pierre-Andre Terisse, its two Greek brands, Oikos and Light and Fit, were the strongest performing brands in the category.15
That same month, Chobani made it clear that it would not rest on its laurels. Rather, Chobani marketing chief Peter McGuinness said that the company planned to introduce new products in the summer of 2014, including pudding-like desserts in raspberry dark chocolate and dulce de leche flavors that it hopes will compete with ice cream; yogurt dips to woo fans of hummus, guacamole and Greek tzatziki; full-fat yogurt that will come in larger containers, designed to be used as a substitute for sour cream and other cooking ingredients; and packages of yogurt mixed with steel-cut oats to attract consumers who like oatmeal and protein bars.16
The economics of the yogurt industry were challenging. As Moffitt explained, “Milk accounts for most of our cost—it represents 15% to 17% of the price consumers pay for yogurt—fruit represents another 10%. In Vermont, we pay that milk price—80% of which is set at the federal level—to a co-op that represents about 1,000 farms which, on average, have 150 cows. Retailers get high margins on our product—they can mark it up 40%.”17
Thanks to a rapid increase in demand, Commonwealth needed more milk, since Greek yogurt requires five times more milk than traditional yogurt. The company found, to its surprise, that Arizona was the place to be. According to Moffitt, “In Arizona, we work with two farms–each of which have 7,000 to 8,000 cows. There you can buy 27 acres of flat buildable land. We will be able to expand production efficiently in Arizona.”18
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Growing Pains19
Managing a growing company required its founders to take on new roles. In raising more capital for constructing new facilities, producing yogurt, and adding to current production capacity, new risks and opportunities challenged their ability to make good decisions. Moreover, Moffitt and Johnson felt out of touch with Commonwealth’s line employees as they tried to cope with a rapidly changing competitive landscape.
Giving up close connections with employees
The founders’ realization that they needed to give up their direct interaction with all of their employees was clearly difficult for them. “We are not capable of coaching, managing, and willing a particular individual or group to execute and perform in the way we once were. We used to roll up our sleeves and dive into situations or events on a regular basis, and in doing so, we were able to directly impact the outcome in a very personal and direct way,” said Moffitt and Johnson.
As the company grew, they had to let go of that direct control and hope that the people they hired could achieve the outcomes the founders sought. They lacked the detailed information needed to make the right decisions and felt internal conflict between their desire to get in and help tackle operational challenges themselves and their obligation to train the next generation of managers. As they said, “We must allow our teams to drive for solutions and improvement while supporting them with the resources they need to succeed.”
Moreover, Moffitt and Johnson also lost their personal connections with each employee. Once the number of employees topped 50, they were too busy to maintain close contact with all their employees. They suffered emotionally from the loss of those relationships but were convinced that Commonwealth’s future depended more heavily on their ability to focus on its growth strategy. As they explained, “we were shifting our focus to managing other aspects of the business that required attention due to our growth—customers, competitors, partners, community.”
Refocusing on growth strategy
However, Moffitt and Johnson could clearly see that rapid changes in their competitive environment required them to let go of operations and grab hold of the challenge of crafting a new competitive strategy. “We experienced an amazing growth curve but it wasn’t very long before the competition increased with significant and formidable organizations investing in the same space. We began to work hard on developing plans for further growth/expansion, diversification and margin protection,” they said.
Moffitt and Johnson seemed to be getting more comfortable with a new role. Rather than making operational decisions themselves, they had created a team of executives who made those decisions in collaboration with their teams. Moffitt and Johnson were gaining confidence that Commonwealth Dairy would operate more effectively if they set goals for their team and gave them the resources needed to achieve those goals.
As Commonwealth added more employees, the founders noticed certain managerial turning points where running the company changed. After hiring its 50th employee, for example, Commonwealth was growing rapidly and needed people right away. However, Moffitt and Johnson sought to avoid hiring people full-time who might not fit with the company’s culture, so they hired temps. As Moffitt and Johnson noted, “when we were forced to hire temporary
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employees to fill roles, things had clearly changed. Early on, we had avoided temps as we were concerned with the impact bringing these people in might have on our culture and that an us versus them situation might occur.”
Fortunately, their fears were not realized. As they said, “We ultimately learned to appreciate the results we have had utilizing temps. We definitely lost the personal nature of the hiring process that we had experienced for the first 40 to 50 employees and our involvement in managing the majority of our employees began to shift from a day-to-day involvement to a more tiered approach to management.”
Hiring leaders and delegating to them
Once Commonwealth got to this size, the co-founders realized that they could no longer make all of the decisions and needed to hand off that responsibility to managers. They explained, “At that point, there are too many people to know each directly and what each of them was doing directly. You must start to rely on strong managers to do this for you.”
And when they opened a facility in Arizona, the need to delegate became even greater. As they said, “The next big turning point was opening a second location on the other side of the country. Now, in addition to having a larger number of people you don’t know directly, you have a second facility and are more reliant than ever on the skills of those below you, because now you can’t even see directly what is going on.”
Moffitt and Johnson’s views about hiring were changing. For most of their time at Commonwealth, they hired smart people and tried to find a place for them. But with growth came a migration to defining the specific requirements of an open position and trying to find a strong person to fit that role.
Their new approach to hiring was a logical, if difficult, outgrowth of the increased formality of Commonwealth’s organization and their new roles. “We still view our recruiting in this way but we do have a stronger understanding of the specific roles we are trying to fill, particularly as the organization has become more structured, so our recruiting is much more targeted and we are much more inclined to have specific job titles with clear roles and responsibilities assigned before a hiring decision is made,” they explained.
As part of their new hiring practice, Commonwealth’s co-founders withdrew from interviewing job candidates, which they had done when they started the company. Johnson participated in interview the first 60 employees Commonwealth hired, but once the company started to hire temporary workers, he had to trust that others would make the right hiring decisions without his help. He also found himself spending time outside the office rather than “on the production floor working side by side with everyone,” Johnson said.
In another aspect of their tiered management, Moffitt withdrew from the details of dealing with Commonwealth’s internal and external stakeholders that had consumed his time in the company’s early day during which he said, “I attended every customer and supplier meeting and dealt with a lot of the minutiae.”
Johnson took the lead in Commonwealth’s U.S. expansion, working with government officials and outside advisors, and in formalizing the company’s organization and processes. He took charge of expanding its Vermont facility, seeking a west coast site, and obtaining permits and grants from local governments. He also spent time working with Commonwealth’s outside
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accounting and legal advisors. Finally, he worked on creating a management structure, improving Commonwealth’s culture, and streamlining its processes.
Moffitt similarly delegated many of the responsibilities that he used to manage. He delegated his sales and sourcing responsibilities to dedicated teams and assigned responsibility for innovation and new product development to the company’s R&D department. As he said, “I’ve largely had to hand over the daily/weekly interactions, negotiations and decision-making regarding managing our customer and supplier interactions.”
Moffitt spent less time in individual stakeholder interactions. “In fact, I have never interacted with a number of the suppliers that we use today. I also spend much less of my time involved in the mechanics of creating new item concepts and selling them to our customers, or trying to identify new suppliers and buying things for the best value,” he said.
These changes freed up his time to work on strategy. He now spends time setting long-term goals, building the company’s management structure, creating polices and putting them in place, and “reporting to the board and senior executive team on our progress against our budget and goals,” he said.
Both co-founders felt a sense of loss in giving up their more hands-on role in managing Commonwealth, but they saw that this evolution was necessary. Johnson explained, “There is a bit of discomfort experienced by letting go and relying on others to care for the baby.”
Moffitt and Johnson agreed that it was difficult to give up control of day-to-day operations. Moffitt said, “I believe the definition of a successful entrepreneur is somebody who finds a problem and solves it, and by nature, this means you are intimately involved in every aspect of what needs to be done to solve the problem.”
Formalizing the organization
Both co-founders saw the value in organizing Commonwealth more formally. Once a company grows and a more formal organization has been established, they observed that giving into their instincts to get into the details of operational decisions can backfire. As Moffitt explained, “I think that is a very perplexing challenge for entrepreneurs because your instinct has always been to jump in and just do it, and now that can be the worst thing you can do. You can undermine one of your executives or senior managers.”
Commonwealth added formalities typically found in large companies, such as organization charts for its Vermont and Arizona operations, performance measurement systems that track key performance indicators [KPIs], and more professional corporate processes with “particular focus on the processes that cut across multiple areas of responsibility such as new product development,” Moffitt and Johnson explained.
They also wanted Commonwealth to purchase raw materials in a more professional manner. “We have set up a Strategic Sourcing team to manage all of our Vendor relationships and ensure we are well informed buyers with clear authority for purchasing and not a company with lots of poorly trained buyers who buy at will and without a formal review of alternatives,” they said.
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In addition, Commonwealth established an executive team consisting of key functional leaders who meet monthly. This increased communication, but slowed down decision making. Explained Moffitt and Johnson, “We have an executive team that meets once a month to review all facets of the organization and it includes leaders from functions such as Sales, Finance, Supply Chain, Sourcing, and Operations. This team is intended to ensure strong communication and clear messaging throughout the organization.”
They also wanted to overcome the negative side-effects of the more formal structure, including slower decision-making and managers’ loss of access to Moffitt and Johnson. “The most apparent downside is that we have added a layer to the organization so that sometimes decision making is slowed. In addition, it generates some frustration among the early managers and team who used to have unfettered access to us, the ultimate decision makers,” they said.
The frustration was that the increased formality put an end to more spontaneous interactions Moffitt and Johnson had enjoyed in the past. As they continued, “18 months ago [key people] could walk into one of our offices and have us solve a personnel or managerial problem for them, and now our first question has to be ‘What did your boss or the head of the department say?’”
Moffitt and Johnson were torn between their belief that they could make Commonwealth better and their desire to start a new company. While they believed that they had made progress in building a formal organization that could sustain Commonwealth’s growth, they recognized that there might be a few more years needed before it was working at peak efficiency. At the same time, they felt that the needed to manage “the desire to do it again.”
Culture Clash
Perhaps the biggest challenge that Moffitt and Johnson faced was managing the powerful tension between their instincts as independent entrepreneurs and the very different formal control mechanisms demanded by their owner, a large family-run dairy in Germany. Managing this tension while trying to win in the highly competitive U.S. yogurt market put significant stress on Moffitt and Johnson.
Commonwealth’s primary investor, Ehrmann AG, was a third-generation, family-run company with Christian Ehrmann leading its day-to-day operations. Ehrmann had three board members supporting him as chairman and a supervisory board consisting of his father, his uncle, “and several retired Germans with different areas of expertise.”
Unlike Ahold, the Fortune 500 company where Moffitt and Johnson worked before starting Commonwealth, the co-founders increasingly found themselves carrying out decisions made by Ehrmann family members. They found this approach both challenging and helpful. Moffitt and Johnson explained, “The family is where the decisions are made and the dynamic ultimately shows a strong allegiance to the family legacy and hope for its future success.”
The challenges included giving up a sense of autonomy and the ability to make decisions which had highly uncertain outcomes. But the benefits were a sense of clarity of direction and comfort regarding the availability of capital and the firm’s long-term survival.
By contrast, their former employer used a much more complex decision-making process. Different business units had their own cultures and organization structures, and they did not collaborate effectively. Moffitt and Johnson devised a careful strategy of managing expectations and making fact-based decisions that worked within this atomized structure. As they explained,
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“We were one of a few teams that had responsibility for supporting multiple locations and retailing brands such as Stop & Shop and Giant.”
They observed similarities between the management approach at Ahold’s different operating companies and Ehrmann. A clear “old boy’s network” ran things at the operating company levels and shielded corporate from the details.
However, at Ahold, the operating companies always had “a handful of superstar/whiz kids who were pulled into the family and protected and fawned over,” they explained. However such rising stars were absent at Ehrmann which they found “both refreshing and terrifying.”
Moffitt and Johnson managed Commonwealth differently than the practices they observed at Ehrmann and Ahold. They were making the transition from getting involved in daily decision- making to delegating operating decisions to the appropriate members of their executive team. One of the biggest challenges they faced was encouraging their teams to take responsibility for solving problems, rather than just complaining about them and expecting senior executives to tell them what solutions to implement. As they explained, “We try not to allow this to become a non-stop bitch session but rather a continuous conversation about choices, issues and opportunities.”
Ehrmann was much more involved in Commonwealth’s business than Moffitt and Johnson originally expected, and they were working with a less entrepreneurial group of people than the one with whom they originally negotiated. “I think the biggest difference was that we expected more autonomy than we were actually granted. Ehrmann certainly is more involved in aspects of our business than we might like them to be. But I think they feel they were forced to do this as the company grew much bigger much faster than any of us imagined. They realized they had no choice but to get more involved,” they noted.
They were unpleasantly surprised that they did not keep working with Ehrmann’s president after their financing closed. Instead, after they received capital from Ehrmann, the company expected them to work with a highly bureaucratic German board rather than “Christian Ehrmann who is a young, entrepreneurial, atypical German,” they said.
Ehrmann’s management approach offered the co-founders advantages and disadvantages. They liked Ehrmann’s long-term focus, but they worried that Ehrmann’s need for clarity might not fit the realities of Commonwealth’s competitive environment. In particular, they saw that Ehrmann had no appetite for ambiguity; the company was uncomfortable, for example, in a situation that was currently grim, but that Moffitt and Johnson believed was likely to improve.
They were pleasantly surprised, however, by the company’s willingness to plan for the long term, to build an organization that will last, and to consider and implement new ideas. However, as Moffitt and Johnson said, “you just have to be prepared to argue passionately for [your ideas and] accept that sometimes, no matter how passionately you believe in something, they simply won’t agree and won’t go along with you. You can’t justify optimism to a German Board–it either is or it isn’t. There isn’t any maybe or hopefully.”
Ehrmann relied on Moffitt and Johnson to introduce formal human resources policies such as creating detailed job descriptions and well-defined organizational structures and procedures. Ehrmann also pushed them to delegate and follow accounting procedures required by SAP software.
While they initially had been frustrated by the expense of installing SAP, they were happy that they did, as the business had added locations.
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Ehrmann was more disciplined in its approach to decision-making than what they were used to, but its family structure made it possible to get a decision from the CEO if time was of the essence. According to Moffitt and Johnson, “Germans are very formal when it comes to running a business. Not just in a hierarchical sense, but in the methods of how things must be agreed to and carried out, formal meetings, formal votes, formal approvals, formal everything. This is the antithesis of what one often learns is required to be successful–nimble, fast decision making, just getting it done.”
They noted that Ehrmann had an escape hatch from that formality. If Moffitt and Johnson believed a decision was important and the German board was slowing them down, they could always pull “the emergency cord to expedite things, it’s speak to Christian.”
Preserving Existing Revenue and Investing in New Products
Moffitt and Johnson had built Commonwealth from scratch to reach nearly $100 million in revenue. They had expanded the company geographically, raised capital during a difficult time, built a more formal organization to fit the demands of its growth and the requirements of its owners, and had learned how to let go of day-to-day control.
Now Moffitt and Johnson turned their attention to sources of future growth for Commonwealth.
The challenge came from competitors who saw the growth in Greek yogurt and jumped in to grab their share. They explained, “Greek yogurt saw an amazing growth curve over the last five years and is still not quite mature yet. It has become saturated though and an increase in both branded and private label manufacturers. This has made it difficult for us to sustain our growth and profitability.”
Intense competition and rising input costs also took a toll on Commonwealth’s profitability. Noted Moffitt and Johnson, “Milk prices are at the highest levels in recorded history today which, when combined with the competitive pressures, has been a very difficult mix for us. We are focused on improving our operational efficiency and reducing our reliance on Greek yogurt by introducing a new kid-focused pouch product.”
Commonwealth was also trying to find new customer groups, distribution channels, and package formats including “food service, hospitality/travel industry, and bulk ingredient sales.”
Mulling Over the Future
The trees outside their office in Vermont had shed their leaves and winter was not far off. Moffitt and Johnson thought about Commonwealth’s future and how they would shape it.
What should they do about Commonwealth’s product lines? Should they add full-fat, organic, or indulgent yogurts with innovative packaging? Or should they add non-yogurt products such as dairy desserts or foodservice ice cream mixes such as McDonald’s shakes and ice cream?20
They also wondered about whether they should invest in boosting the efficiency of their current processes to boost margins or build new operations with high profit potential.
In addition, they struggled with how to manage a larger organization without losing the values with which they founded the company. They wondered how to add people, including outside executives, and organizational layers without becoming bureaucratic. And they contemplated
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how a larger organization that mixed new and veteran leaders could maintain Commonwealth’s values of innovation, fast response to changing market needs, and closeness to customers.
Finally, Moffitt and Johnson considered their own futures with Commonwealth. After all, Johnson had recently moved to become Commonwealth’s chief operating officer after negotiating the position for a year with Ehrmann. Would Johnson be able to satisfy Ehrmann’s desire for a more traditionally-developed dairy executive in this role? Where would this ongoing pressure leave Moffitt and Johnson? Would they each stay? If they did, would they individually or together extend their contracts? If they left, would they start another company?
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Exhibit 1: Commonwealth Dairy Vision and Mission
Vision:
We are a preferred national dairy supplier because we provide the highest quality products and service available. We are a preferred workplace because we operate and focus on our people, customers, and continuous improvement and innovation.
Mission:
Commonwealth Dairy, as an organization comprised of individuals, will always strive to:
· Efficiently produce World Class dairy products.
· Innovate and take risks to stay differentiated from our competition.
· Take a long-term view on everything we do.
· Treat our employees and community with respect.
· Empower our people to make good decisions and enhance their careers.
· Never settle for “good enough.” We will always strive to do things better.
Source: Ben Johnson and Thomas Moffitt, e-mail interview with casewriter, May 13, 2014.
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ENDNOTES
1 Megan Page, “Follow up on Commonwealth Dairy,” e-mail message to Peter Cohan and Sam Hariharan, October 29, 2014.
2 Peter Cohan, “Vermont’s Commonwealth Dairy Doubling On Greek, In-Pouch Yogurts,” Forbes, December 10, 2013, p. 1.
3 Ibid. 4 Ibid. 5 Ibid. 6 Ibid. 7 Ibid. 8 Ibid. 9 Ibid. 10 Ibid. 11 Ibid, p. 2. 12 Ben Johnson and Thomas Moffitt, email interview with casewriter, February 12, 2014. All quotations in the
following section come from this interview. 13 Ben Johnson and Thomas Moffitt, email interview with casewriter, February 12, 2014. 14 Brian Sozzi, “Chobani Prepares a Major Supermarket Invasion,” TheStreet, June 19, 2014,
http://www.thestreet.com/story/12749533/1/chobani-prepares-a-major-supermarket-invasion.html, accessed
November 18, 2014. 15 Rachel Arthur, “Watch out Chobani! Danone claims parity with Greek yogurt rival,” The Dairy Reporter, April 17,
2014, http://www.dairyreporter.com/Manufacturers/Watch-out-Chobani!-Danone-claims-parity-with-Greek-
yogurt-rival, accessed November 18, 2014. 16 Annie Gasparro, “Chobani Expands Into New Yogurt Products Greek-Yogurt Maker to Introduce Desserts and
Dips,” The Wall Street Journal, April 18, 2014, http://online.wsj.com/news/articles/SB10001424052702304626304579509243369295888, accessed November 4, 2014.
17 Peter Cohan, “Vermont’s Commonwealth Dairy Doubling On Greek, In-Pouch Yogurts,” Forbes, December 10, 2013, p. 2.
18 Ibid. 19 Ben Johnson and Thomas Moffitt, e-mail interview with casewriter, May 13, 2014. All quotations in the following three sections come from this interview. 20 Megan Page, “Follow up on Commonwealth Dairy,” e-mail message to Peter Cohan and Sam Hariharan, October
29, 2014.
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