Option Planning in Times of Crisis
By Eric Johnson
Option planning in normal times is never an easy task, so in times of a worldwide pandemic, it is acutely troublesome. In general, individuals are always hesitant to make predictions; when they are right, it is business as usual, when they are wrong, drastic consequences can arise and can potentially ruin reputations. That being said, future prediction is essential to every business as it required to move forward and have goods and services at the ready to meet customer demand. Simply put, we are forecasting; selecting the most advantageous options out of a pool of larger options within the capabilities of the organization for a given situation.
Understand your resources (finance), capabilities (operations), and the environment (stakeholders and forces)
- Finance and accounting can be used to set baselines and establish KPIs to create guardrails around specific decision points to conditions within the business. For example, if reserves hit “$X”, we will do “Y”. If returns reach “A”, then we will do “B”.
- Operations functions as the health of the goods and services being produced and the ability to produce going forward. If there are issues with the quality of the product/service, supply chain interruptions, etc., this will affect the interaction with customers and hence their satisfaction. It is very important to be aware of the business capabilities to the granular level in these times.
- Environment is the focus on the external market and the governmental/regulatory aspects that affect the organization. In normal situations, regulations exist to stabilize markets and prevent malfeasance. However, in the current state of affairs, government and regulatory aspects can represent the majority of variables since they have control over markets at this point. Keeping a significant thumb on the pulse of information from these outlets is vital moving forward. Stakeholders refer to all concerned parties that impact the manufacturing and delivery of goods and services. Components such as union representatives, regulatory bodies, customers, suppliers, all should be considered stakeholders regarding how information and actions can impact the business.
Establish a trusted portal for information
Information is a critical ingredient in scenario and option planning to account for all the variables that can affect the outcomes of your identified situations. The first issue most organizations face is the validity of the information they receive. The second issue is the timeliness of the information and its expiry. For example, information regarding a recent therapeutic discovery may be over-exaggerated based on the source of the news outlet, or a possible financial incentive. Or it can be considered old as newer information has supplanted its usefulness. This is compounded by the fact that news is often repeated through various public and social news domains, giving an indication that the sheer number of publications indicates veracity. Government sources should be considered the first line of objectivity, with varying degrees of trust placed in secondary sources. Social media should be considered a last resort as a general rule of thumb, but can point to direction of news on occasion.
Game Theory: scenario planning and application of probabilities to the best of your ability
Option planning simply allows the organization to create executable plans that can be instituted when the triggers for conditions are met. Game theory associates various possibilities with the associated payoffs and results. While we will not get into the specifics of the many aspects of game theory in this brief post, the applicable main concepts apply significantly here. In scenario planning, we list five primary stages. The first three are developmental, the last two are based in continuous improvement.
- Realistic identification and stepwise mapping of all potential scenarios (honesty is key here), including competitor expectations, consumer changes in preference, governmental actions, etc.
- Application of probabilities to the defined states.
- Development of plans to prevent or mitigate unfavorable outcomes using input from internal and possibly external parties if accessible and assembly of resources for execution if needed.
- Periodic updating of plans as conditions change and as probabilities and payoffs change.
- Continuous assessment of capabilities to execute.
Due to the complexity of probability assignment and the continuous nature of the need for monitoring, it is advisable to have a committee established to meet weekly or at a set period to monitor both the outbreak and the organization’s reactions to the outbreak. By being proactive in this regard, the organization reduces the opportunity for surprises and creates more time to focus on execution at the time of need.
