Ram Charan What Every Company Should Know

I often hear the same complaint from ambitious young business leaders: "My company doesn't take risks." In many cases, I see their point.

There's no shortage of companies that avoid risk and instead rely on a proven business model, a tried-and-true product mix, or a continued focus on a single, profitable market segment.

Still, when I hear this complaint, I counter with a question: "Let's talk about you as a leader. Are you really a risk-taker?"

Risk-Taking vs. Gambling

We've all heard stories of business leaders who took big risks and got big rewards, creating their own business empires. Think of entrepreneurs like Henry Ford, Fred Smith, Richard Branson, or Rupert Murdoch. All were willing to make bold decisions with uncertain outcomes.

Venture capitalists love the risk-takers, and we're all impressed by their accomplishments. But while the magnitude of the risk must match the potential reward, a "bet the company" mentality isn't necessarily something to strive for, however enticing the pot of gold.

Most successful business leaders take a balanced approach to risk. That is, they accept that risk is inherent in business, but they make a sharp distinction between risk-taking and gambling.

Living with Risk

You can take on risk and still sleep well at night by learning to manage it. Dealing with risk is, first and foremost, a thought process. You have to think through the risks you're taking, prepare for potential outcomes, and watch for the early warning signals that your beliefs and assumptions were wrong.

The following four tips can help you prepare for taking risks:

1. Anticipate the consequences

You have to be clear about your beliefs and assumptions and think through the potential consequences of any decision you make. Ask yourself what could go wrong under various scenarios, both internally and externally, and then evaluate the potential effect and magnitude.

Every risk involves untested assumptions. Henry Ford decided in the early 20th century to pay his workers $5 per day, more than twice the industry average, based on the simple belief that if his workers were paid a decent wage, they would become his customers. Had his judgment been wrong, the decision could've backfired and done irreparable damage to Ford's finances.

As you make your assumptions explicit, think about what will happen if they prove incorrect. What if a key project leader leaves the organization, for instance, or if the engineers can't make the technological breakthrough you're counting on?

On the external side, consider what would happen if interest rates rise. What if there's political unrest, a natural disaster, or a shortage of essential raw materials? What will competitors likely do? The more broadly you think, the fewer surprises you'll encounter.

2. Diversify to mitigate risk

Look at any risk you're considering as part of a broader portfolio. That way, you can offset risky decisions, ventures, or initiatives with more predictable outcomes.

Think of a typical CEO and the risk portfolio he or she might be managing at any given time. The company might be investing heavily to develop a new technology it hopes to use in a leading-edge product line (high risk); aggressively expanding its number of locations (medium to high risk); forming an alliance with a complementary company (medium risk); and incrementally changing its packaging (low risk).

If every initiative is highly risky, the CEO may be putting the entire company at undue risk -- especially if many of those risks depend on the same key assumptions. Unless the company is fighting for its life, it's best from an organizational standpoint to balance the higher risk pursuits with some safer bets.

3. Watch for early warning signs

If you've made your assumptions explicit, you're ahead of the game in detecting the early warning signs that things aren't working as you'd hoped. Make a point of monitoring the things your plan depends on.

This is where networks inside and outside the company and industry really help. Say you took a risk on a key person to head a new technology project. You'll need frequent communication to keep the person on track and to know early on if the person is falling short in the job.

If you based an investment decision on the expected expansion of a customer, watch what's happening to your customer's customers. The sooner you know that your assumption is proving wrong, the sooner you can act to stem the negative consequences.

4. Curb your psychological bias

Some people thrive on risk. Others avoid it at all costs (though risk will find them). You should have a sense of where you fall on the spectrum so you can guard against your own worst tendencies.

If you're overoptimistic, you're likely to gloss over the threat of things going wrong. If you're pessimistic at heart, you might dwell on the negatives. And if you're greedy, you might be so tempted by potential rewards that you overlook risk altogether.

A Tale of Risk Payoff

Are you slow to make decisions? If you need absolute certainty before you decide which way to go, you may be taking more risks than you think. In today's fast-changing world, standing still may be the greatest risk of all.

Consider how trying to play it safe has affected some players in the media industry while Rupert Murdoch's News Corporation made bold moves.

From his beginnings as a newspaper publisher in Australia, Rupert Murdoch took risk after risk as he built News Corporation into an international media empire. In the 1980s, he faced overwhelming odds as he launched the Fox network to compete with the established broadcast networks.

In the 1990s, he went against conventional wisdom by founding Fox News Channel to challenge CNN. Today, Fox News is the most-watched 24-hour news station.

And in 2005, Murdoch acquired the parent company of MySpace, the social networking web site popular with teens and young adults. News Corp. made the $580 million purchase despite the fact that business models in the digital world were still unclear.

Forward-Thinking, Not Thrill-Seeking

Many of Murdoch's newspaper publishing peers, meanwhile, have been slow to expand beyond the familiar realm of print. They ventured gingerly into the digital world by creating what are essentially online versions of their print newspapers, and now find themselves left behind as advertising dollars increasingly shift to digital media.

MySpace's membership, meanwhile, has more than quadrupled since its purchase by News Corp., according to Wired magazine. In summer 2006, MySpace was the No. 1 web destination.

A year after buying it for less than a billion dollars, News Corp. entered an agreement for Google to pay at least $900 million from 2007 to 2010 for the right to provide search services and sell advertising on the site. How hard will it be for a traditional newspaper company to catch up?

Keep in mind that even as News Corp. has expanded into television and then to digital media, it has continued to publish newspapers. While Murdoch is keen to spot opportunities for rich rewards and doesn't shy away from taking risk, he uses his head at all times. That's a sure sign that he's a business leader, not just a thrill-seeker.