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Farmers can improve outcomes with a few decision-making tools

January 16, 2019

Farming requires making many decisions. The outcomes of your decisions often determine the success of your business. When we judge how good our decision-making is based solely on outcomes, it can be frustrating and stressful when a decision doesn't work out.

Farm managers have limited control over many factors and outcomes. Prices received, yields, feed quality and input costs are at least partially out of management’s control.

Management consultant Dennis Hoiberg believes that farmers can alleviate some mental stress by reframing their focus. Instead of focusing on the success of outcomes, something you have limited control over, change your focus to something you have more control over: continually improving your processes.

Sometimes luck is the deciding factor

Annie Duke, in her book “Thinking in bets: Making smarter decisions when you don’t have all the facts,” argues that it is a mistake to use the outcome to evaluate the quality of a particular decision. An experienced professional poker player with a Ph.D. in clinical psychology, Duke believes that the two factors that determine the outcomes of decisions are the quality of the decision and, just as importantly, luck.

Most people underestimate how much of a business’s results are due to luck. Duke argues that business managers often chalk up a bad outcome to bad luck. But, when the outcome is good, managers believe it was their superior decision-making ability that caused the result, even if the amount of luck involved was the same. This can lead to over confidence and excessive risk-taking.

Good decision-making processes can make all the difference

Focusing on using good decision-making processes instead of focusing on outcomes is counter intuitive, because good results are the ultimate goal. But two of the most successful football coaches, Bill Belichick of the New England Patriots and University of Alabama’s Nick Saben, attribute their success to focusing on processes.

Players indicate that the key to Belichick’s success is his ruthless preparation. Each week the coaching staff identifies three strategies the team must execute to win. They use film sessions and practice drills to perfect those strategies. At Alabama, Saben’s philosophy is that winning is a by-product of players focusing on continually improving.  

What these two coaches have in common is their focus on preparation, which results in players making good decisions during the game. They know that, in the long term, this strategy creates more wins than losses.

There are many similarities between successfully coaching football games, playing poker and farming. Many outcomes are beyond the control of management. Focusing on preparation and making the best decision possible does not guarantee positive outcomes, but greatly improves the probability of success.

Business tools to help make good decisions

Three tools that can improve decision-making include using a partial budget and business management strategies called pre-mortem analysis and red-team analysis.

A partial budget is a simple tool to look at the financial impacts of a decision.

  • This tool works well when considering decisions such as switching to milking three times a day or implementing a new reproduction synchronization program.
  • It simply compares the positive financial impacts (improved income and reduced costs) to the negative financial impacts (increased costs and reduced income).
  • It is sometimes difficult to identify and quantify all of the costs. If you need a partial budget spreadsheet template, let me know and I can send you a copy. 

Pre-mortem analysis is appropriate for large-scale projects such as a major expansion.

  • In a pre-mortem analysis, the management team imagines that a project has failed.
  • The team comes up with possible reasons for failure and discuss the likely risk of each reason occurring.
  • Management then creates potential risk mitigation plans.

Research shows that businesses that use pre-mortem analysis are often able to identify potential risks that allow them to develop contingency plans.

Similar to the pre-mortem analysis, red-team analysis is appropriate for large scale projects.

  • In this analysis, a team is identified to analyze the project. This team can be internal to the farm, but it is sometimes better if the red team is two or three competent, unbiased, trusted advisers that are willing to be brutally honest.
  • The red team identifies potential problems, risks and bugs in the plan.
  • The goal of this analysis is to help management see potential downsides and reasons their plan might not work.
  • The analysis allows management to make improvements to the project before investing in it.

Achieving the results that farm businesses desire is sometimes frustrating. Developing processes proven to lead to positive results is more productive than fixating on results. Using tools such as partial budgets, pre-mortem or red-team analysis can result in better decisions.

 

Jim Salfer is an Extension educator at the regional office in St. Cloud. Contact him at salfe001@umn.edu to request the partial budget spreadsheet or for more information about this article.

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