I think you may need to use the Run Script action. It'll accept VBScript, JavaScript, Perl and Python. If you're on Windows, I would stick with one of the first two.
Your script would need to check the value of the flag, then have the appropriate cases set up with the logic to apply a new value (the full word) to either the same variable or a new one.
Here's a
crude JavaScript concept:
var flag;
flag = Watch.GetVariable("flag_local_variable_name");
Then do your logic... something like:
if flag = "f" then flag = "Fax"
and then update the actual PlanetPress Watch variable
Watch.SetVariable("flag_local_variable_name", flag);
As you step through the process you should see the value update in the Debug Information pane.