It’s fun to have fun but you have to know how.
--Mike Myers speaking about the lesson of his movie, The Cat in the Hat.
If only business executives were required to read The Cat in the Hat as part of their training. Today, a CEO has hundreds of options to choose from--suppliers, outsourcing, offshore developers, hardware, software...you name it. And some companies are clever enough to create their own options out of thin air. Remember Enron? However, with more than two options, people often have a hard time making a decision, much less the right decision.
In fact, you should run away from some options as fast as the Gingerbread Man runs.
That’s exactly what Mark Cuban did after creating a third uniform for the Dallas Mavericks at the start of this NBA season. After watching their beloved Mavericks take to the floor in silver uniforms, Dallas fans sent numerous emails to Mr. Cuban complaining about the ugly uniforms. To his credit, Cuban pulled the uniform from play after one game.
That’s one of the keys to dealing with options--fail fast. I've been told that an airplane pilot will make many small midcourse corrections during a flight. He doesn't wait until he's hundreds of miles off course and then start making corrections to the flight path. If he did, you'd never get to your destination.
If Mark Cuban is willing to listen to his customers, so can you. Don’t be stubborn and stick with a decision just because you made it. To avoid this trap, try using an option to learn. Make a minimum investment and learn from it, make additional investments if the option produces value. Investment bankers call this a staged investment; a great way to reduce risk.
The key to making correct business decisions is framing your problem correctly. The framework provided by Real Options helps you think about problems in the correct light.
As Enron execs found out, The Cat in the Hat isn’t going to appear on your doorstep to clean up the mess you made on that boring, rainy day--a mess that could've been avoided if only you knew how to have fun.