Chapter 8: Flexibility: Real Options Analysis Under Risk and Uncertainty

All aspects of business (similar to life) are filled with risk and uncertainty. The very actions associated with business in and of itself is quite risky to say the least. A company creates and initiates a business model and course of action to provide to the public that may or may not be profitable. While all hope to thrive in the marketplace, a certain level of flexibility must be present to assist in the re-organization, re-thinking or re-tooling of the product or service to acquire the profits truly desired. 

The textbook "Gaining and Sustaining Competitive Advantage" by Barney cites, 

Flexibility can take numerous forms in an uncertain strategic investment, including the option to defer, the option to grow, the option to shut down and restart, the option to abandon, and the option to expand. There often exist trade-offs between retaining these options and other business strategies. For example, a manufacturing plant designed to implement a low-cost leadership strategy may be very different than a plant designed to maximize flexibility. Thus flexibility should only be a strategic objective for a firm when it is likely to be valuable, that is, under conditions of high uncertainty.

Recently since Chipotle's Ecoli scare, the Mexican restaurant chain had to definitely maintain a great deal of flexibility within the company maintain its customer base and profits. When the first few illnesses occurred, Chipotle alerted the public, temporarily closed those locations, and pulled the alleged affected meat from the stores. While this was thought to potentially remedy the problem, this was not the case as another outbreak occurred in another location. Seemingly, after much analysis, investigation and deliberation the company asserted its flexibility and closed all of its locations (whether affected or not) on February 8, 2016. 

For one of the leading fast food restaurants to opt to lose profits across the country for a day in order to get in front of this continual problem exhibited a great deal of flexibility. All of the major fast food chains have experienced Ecoli or other food product related illnesses in their history. However, there has been no documented restaurant shutdown for an entire chain in United States history. If so, it was not of the magnitude of Chipotle.   

Seemingly, the shutdown and action taken by Chipotle was well received by consumers as revenue has begun to rise once again for the fast food chain. Analyzing the risk associated with this action was integral in the retention of customers who may have abandoned the chain as a whole due to safety concerns and has certainly paid off. 

Chipotle Announces Mass Shutdown for One-Day Food-Safety Conference

43 Washington and Oregon Chipotle restaurants closed after E. Coli outbreak

CHIPOTLE: A FOCUS ON FOOD SAFETY