Making long-run decisions in the current business climate, which is rife with uncertainty, is very difficult. When the future is so uncertain, one is tempted to just hope for the best. Hoping for the best is rarely a good strategy. In addition, remember that uncertainty creates opportunities as well as challenges. A farm operator’s task is to identify and exploit these opportunities.
Conventional planning typically assumes that managers can make projections using predictions from experiences and assumptions that remain relatively stable. This approach only works well when dealing with projects with limited uncertainty. When dealing with projects or new ventures that are uncertain, assumptions made at the beginning of the project do not hold over time, resulting in substantial adjustments to the plan.
An options framework offers a way to approach a project involving uncertainty. With this approach, learning as the project evolves and making adjustments to the initial plan are important aspects of the plan.
Using an options framework recognizes that strategic decisions can be structured using a multiple-step approach. It can work when initial financial and resource commitments are limited, insights are obtained from the results of the initial experiment, and time is managed to gather additional information before further commitments are made. The options framework is structured to reduce downside risk while still maintaining upside potential.
Options framework example
Let us use the options framework to analyze the addition of a new farm enterprise, organic crop production. First, we need to define success. Given the uncertainty with regard to profit potential, how much extra income is needed to engage in organic crop production? How many acres are you willing to devote to this new enterprise? Typically, it’s prudent to devote only a small percentage of the farm’s acres to a new venture or enterprise.
Second, do benchmarking. Given our expected costs and yields, what prices are needed to make the enterprise attractive?
Third, define operational requirements. How do field operations and timing of these operations differ between conventional crop production and organic crop production? Where are we going to obtain the manure needed for organic production? How long is the transition period between conventional and organic crop production?
Fourth, document assumptions. How do budgeted costs and yields, and organic crop prices change over time? Are adjustments in production practices needed as we obtain more experience in producing organic crops?
Fifth, plan to reassess at key checkpoints. Even though a farm may intend to produce organic crops on a portion of its crop acres long term, a natural checkpoint may be to re-evaluate before each crop year. During the checkpoint, a farm can decide whether to continue production or expand production, and to think about adjustments to production practices.
Sound strategic planning requires assessing strategic risk, which involves the sensitivity of a farm’s strategic direction, and the ultimate vulnerability and sustainability of the farm to uncertainties in the business climate.
In uncertain environments, the natural tendency is to continue down the same path you’ve been on and not spend much time evaluating alternatives. However, it’s important to remember that during uncertain times, opportunities often arise.
Langemeier is a Purdue University Extension ag economist, and associate director of Purdue’s Center for Commercial Agriculture.