My town's annual Easter egg hunt is next Saturday, and it got me thinking about how I could help my 3 3/4-year-old son prepare for the one-minute frenzy of hundreds of kids dashing across a field and scooping up as many plastic eggs as they can before all the eggs are gone. Ah yes, straight chaos!
A number of ideas came to mind, so I figured that this would be a great opportunity to apply some of the strategy and risk management techniques that we use to navigate the frenzy and chaos of business to both help my son prepare for the great egg-stravaganza and teach him a bit about what I do at work all day.
As with most challenges, we first set out to diagnose the strategic situation and environment. To do so, we use a couple of tools that we regularly apply to evaluate situations in business.
First, we break down the situation into the core elements of decisions, uncertainties and values.
Decisions: The choices that we can make in a given situation, or the variables that we can control.
-- Do we practice beforehand or not?
-- What do we wear (dress cloths with nice shoes or athletic gear with soccer cleats)?
-- What should we use to carry eggs (fancy wicker basket or a professional berry-picking satchel)?
-- How early should we arrive at the hunt (early or just on time)?
-- Where's the best position at the start of the hunt (near groups of kids or in less crowded areas)?
-- What's our plan of attack once the hunt begins (grab every egg you can in front of you or bypass eggs in front and sprint ahead to clusters of eggs in the field)?
Uncertainties: The variables that are not controlled by the decision-maker.
-- Weather conditions (sunny or rainy, warm or cold)
-- Location (outdoors in a park field or indoors in a gym)
-- The number of other kids who show up (a lot or just a few)
-- Egg distribution (clustered or dispersed)
-- The group of kids he will be placed with (3 and younger or 4- to 5-year-olds)
-- Other kids' plans of attack once the hunt begins (grab every egg you can in front of you or bypass eggs and front and sprint ahead to clusters of eggs in the field)
Values: The measure that we are ultimately trying to optimize for
-- Number of eggs collected, yet done so in a fair and ethical way (e.g., no pushing or stealing eggs from other kids' baskets when they are not looking).
Breaking down the situation into decisions, uncertainties and values enables us to more clearly and objectively understand the environment and focus in on the different combination of decisions available to use (a.k.a., "strategies"), how uncertain variables can both inform and influence the outcome, without losing sight of the primary value measure we are trying to optimize.
Next, using our clear understanding of the situation, we can do a differentiation assessment. This focuses on how we think my son will compare versus the competition, along what we think will be the key differentiators of performance. See this differentiation assessment here.
Overall, the differentiation assessment shows us that my son will likely be at a competitive advantage in his age group. In addition, it also helps us identify dimensions that we might be able to focus on improving in advance of the hunt. For example, if we make the decision to practice in advance of the race, we could likely extend his competitive advantage in "experience," as well as improve his competitive position in "coordination. At this point in the assessment, however, we question whether practicing would make a material difference or not given his clear overall competitive advantage.
Like any good strategic risk manager, though, we then use our understanding of the competitive environment to do some scenario planning. In evaluating the potential influence of each of the uncertainties on the ultimate outcome, we decide that the two most influential factors are, one, what age group my son will be placed in and, two, if the hunt will be outdoors or indoors. We then estimate probabilities for each possible combination of these two settings and evaluate my son's positioning under each scenario. See this scenario planning here.
The scenario planning helps point out that there was about a 35 percent chance that my son will be at a competitive disadvantage for the hunt.
Therefore, he and I have agreed that we should figure out either how to reduce the probability of those unfavorable scenarios occurring or practice to improve our competitive position in the event that these scenarios come to fruition. Enter the technique of war gaming.
War games are basically training for certain environments or conditions. In business, companies use war-gaming exercises to explore unprecedented or uncharted environments to help us better anticipate and identify opportunities and exposures that they may face in the future, especially when there is significant value (positive or negative) at stake.
In my son's case, we have decided that it would be prudent (and fun) to practice and train for the scenarios where he would be competing in the older age bracket. We enlisted my 6-year-old daughter and her friends and had them over to our backyard for some practice with my son. After a few rounds, we moved indoors to our basement to both practice in that environment, as well as test our theory that the age difference would be muted in a more confined space. After completing our practice rounds, we were confident that my son had clearly improved on both the "experience" and "coordination and agility" dimensions.
Finally, we could have also applied game theory to game-out the possibilities between my son's plan of attack versus other kids plans of attack. That seemed a bit extreme and over the top for an Easter egg hunt!
In the end, I hope that our planning and practice pays off and enables my son to perform well in the hunt. In addition to having some fun, we also got an important side benefit of him now having a better idea of what I do at work every day ... at least that is what I thought until I got home today and he asked me, "Dad, how is everyone at your work doing on practicing for their Easter egg hunts?"
DAVID M. WONG is director of enterprise risk management at CME Group, the world's largest and most diverse derivatives exchange.
April 18, 2011
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