Improving Decision Making
Bruce McGregor, Attwood
This Information Note provides a summary of a decision-making framework that has proved valuable for agriculture, for new landholders and for investors into new industries.
There are five important aspects to making a decision. The five aspects are: compatibility, observing, trialing, complexity and resource advantages. In combination, these aspects cover the main issues involved with the decision-making process and people's ability to avoid failure and disappointment.
Decision making framework
Experience has shown that the most important element of the decision process is the ability of people to assess any idea from their own self-interest. The aspects of an idea, industry or any decision need to focus on "what's in it for me?" After all you are going to have to live with the consequences of any decision you make.
Ideas that are compatible fit easily with existing practices, knowledge and skills. Compatible ideas require less change to the current household or farm system, and have lower costs. Compatible ideas have less risk of failure.
People are more motivated by ideas that minimise mental and social stress.
It is easiest to start an idea that is highly compatible with what is already being done. It is harder to diversify into a completely new idea that bears no relationship to what is being or has been done in the past.
The compatibility of a new idea is made more attractive if economies of scope exist. That is when the new costs of the new idea are less than the cost of producing it on its own. The opposite is true if there are no economies of scope associated with a new enterprise.
Simple ideas are easier to adopt.
The more complex the idea the greater are the changes needed to fit the idea into to an existing system. As complexity increases the risk of failure increases. As complexity increases the need for, and the costs of gaining additional knowledge increases.
There are many types of complexity including: technical; financial; and market information.
Historically many agricultural enterprises represent relatively low complexity and it has been easy for many people to get into a whole range of agricultural enterprises. What is happening is the complexity of agriculture is increasing and this complexity can become a barrier to entry for many.
The costs of entry on a seriously commercial scale for many enterprises, the cost of equipment, the length of the payback period all increase the financial complexity.
Resource advantages give one idea an advantage over other ideas or gives some people an advantage over other people.
There are many resource advantages that play important roles in new ideas including: financial, physical, legal, human, organisational and information resources.
Resource advantages may be occur at the farm, district or regional level or at the industry level. For example, a resource does not have to be on-farm to provide advantage. Being close to a market, a transport company providing refrigerated transportation direct to market, a highly competent supplier or a government research station providing small-scale research are resources that other localities or people may not have.
Ability to observe
Observing an idea increases knowledge and understanding and increases the ability to make good decisions.
An idea that is easily seen and that has been successful in other places is more likely to be success for you. Being able to see and talk to someone else who has already successfully undertaken an idea improves the confidence of people to adopt the idea.
Agricultural products, like many other products have life cycles. Decisions to diversify are improved if people consider the life cycle stage of the product and market. A mature industry that has been developing for many years is highly observable and much information is available.
The more people involved in doing an activity, the more observable it becomes. For example, more product is produced, more information is known about costs, prices, profits and the associated financial and market risks.
Ability to trial
A better decision can be made if a person trials ideas first.
In an agricultural sense being able to trial an idea means trying it out on a small scale to test it. By doing this a person can see if it will work for them and they start really understanding an idea. A small trial also reduces the financial risk of trying a new idea.
When an idea is trialled on a small scale it would have high average costs of production. As production increases average costs should begin to fall and can reach a minimum at the right scale. If a trial remains a 'trial' then cost disadvantages occur affecting profitability. Suitable scale to operate competitively needs to be considered at the early stages of the diversification activity.
Making a decision
A decision about an idea is made by considering on balance the issues of compatibility, complexity and relative advantage.
The observation that another person is successful at an idea does not mean you will be successful as the other person may have resource advantages that you cannot obtain or do not know about.
An idea might be supported by strong resource advantage but be rejected on the basis of complexity beyond what you are prepared to do.
When moving through the decision-making process a person reaches a point where a go or no go decision must be taken. Table 1 provides some examples of questions and supplementary questions that require a yes or no answer. If each question delivers a weak or no response then it would be unwise to make a decision to adopt an idea.
|Focus questions||Supplementary questions|
|Why adopt the idea?||What is the motive or reason to consider an idea?|
|What is our current situation?|
How well are we doing with what we already have?
If we are not positioned well why not?
If we are, why?
|How easy is the idea to add to our current activities?|
Is it compatible with the existing situation?
Is it complex or simple?
Does it significantly change the existing system?
Can the idea be observed somewhere else?
Can the idea be trialled on a small scale?
Can it be scaled up over time?
Do we have any resource advantages?
|How attractive is the potential idea / activity?|
What is the expected Net Present Value & Internal rate of return?
What is the payback period?
Can we achieve the necessary economies of scale?
Do we have some economies of scope?
Can a profit still be gained if:
Are there big players who could dominate?
|How sustainable is this idea?|
What essential competencies do we bring to this activity?
What are our resource strengths?
Are they sustainable?
What & where is the market for this product?
How do we get the product to market?
Who are our customer groups?
Do we have strong market demand for this product or do we have to create it?
Do we (or can) develop close relationships with other people in the supply chain?
Do we have a dialogue with our customer groups & know what they want?
Is this product going to be a commodity product with low prices and low profit?
Table 1: Questions that help make decisions on ideas based on the decision-making framework.
More information on each aspect of this framework is provided in other information notes. These notes provide examples of real situations that have arisen in agriculture.