Don't Worry, Be Ready

THE UPSIDE

The 7 Strategies for Turning Big

Threats into Growth Breakthroughs

By Adrian J. Slywotzky with Karl Weber

Crown Business; 270pp; $27.50

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Editor's Review

Star Rating

The Good A thoughtful consideration of how risk can be managed for the good.

The Bad Some of this ground is quite familiar: Toyota, Apple, IBM.

The Bottom Line A persuasive case for an honest appraisal of strategic risks.

The cool design of the iPod is often cited as prima facie evidence of the product's greatness. But you hear less about the scores of little strategic decisions that were equally important in making it a phenomenon. For instance, Apple licensed key technologies for the gadget's guts; it acquired, rather than wrote, the software that became iTunes; and Chief Executive Steve Jobs set a demanding nine-month time line to get the first version done, which focused internal attention on the device and ensured speed to market. Altogether, those steps systematically "de-risked" the iPod launch and enabled the success of Apple's $100 million bet.

In short, Apple was a risk-shaper, not a risk-taker. That is the key lesson of The Upside: The 7 Strategies for Turning Big Threats into Growth Breakthroughs, a thoughtful, if slim, volume from Adrian J. Slywotzky, a director at management consultant Oliver Wyman. Slywotzky, author of such lauded books as The Profit Zone (1997) and Value Migration (1996), rejects the notion that companies must accept big downside risks to score big rewards. "Unmanaged risk is the greatest source of waste in your business and in our economy as a whole," he writes. At times, Slywotzky treads familiar ground—many of his subjects, including Apple, Toyota, and IBM, are hardly unknown. Yet The Upside's big point is well worth absorbing: Risk is something to be exploited, not feared.

The business environment has become increasingly hazardous. Over the past decade or so, Slywotzky points out, credit ratings have steadily deteriorated, swings in earnings have become more pronounced, and catastrophic market-cap slides have become more frequent. The half-life of a winning strategy has never seemed shorter. So, writes the author, taking smart advantage of risk will be the "crucial discipline for the first decade of the 21st century." (Apparently his colleagues agree, as Oliver Wyman subsidiary Marsh Inc. has made "Find the Upside" its new ad slogan.)

Slywotzky doesn't talk about risk management in the traditional insurance-industry sense of the term. He's concerned not with hurricanes or interest-rate fluctuations but with disruptions to a company's strategy. For instance: What if the big project fails? Or if customers' preferences change unpredictably? The Upside identifies five other such conundrums, including navigating a fork in the road, tackling a seemingly invincible competitor, overcoming overconfidence, avoiding profit-killing competition, and dealing with stagnation. The lessons are related in the form of company vignettes of both winners and losers and drawn from the author's research and journalists' accounts.

One theme resounds throughout the book: Prepared companies, which consistently keep their antennae tuned to looming risks, come out on top. Avid business readers probably don't need quite so many reminders as Slywotzky offers that Toyota (TM ), with its mantra of continuous improvement, does this better than most. More illuminating, perhaps, is his discussion of another Japanese company, music and entertainment retailer Tsutaya. Unlike U.S. counterparts such as Blockbuster (BBI ) or Tower Records, Tsutaya has learned to love sudden changes in its customers' behavior. When consumer preferences shift—as gleaned from membership cards and online purchases—Tsutaya doesn't see a crisis but another growth opportunity.

You can't exploit the upside without minding the downside. He singles out Blockbuster for its inept response to the rise of Netflix. The rental chain could have "double-bet"—that is, invested a modest sum in its own online-distribution model. Yet spoiled by its success and enamored of its pure-profit late fees, it ceded the category entirely. Slywotzky acknowledges it can be difficult to decide that you must spend time and money protecting against a strategic threat that may not materialize. "But done right," he argues, "it's the most valuable risk-reversal tool a leader can wield."

At times, the percentage values that Slywotzky assigns to particular "de-risking" moves seem somewhat arbitrary. Why, for example, did Apple's licensing of PortalPlayer technology for the iPod increase its chance of success from 15% to 18%? Still, even if such percentages seem a tad artificial, they illuminate how each little decision contributes. In the end, The Upside offers a persuasive case that managers must own up to an honest appraisal of strategic risks—both downside and upside. It's the difference between betting smart and just betting.

By Brian Hindo

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