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Taleb (who wrote the best-selling books Fooled by Randomness and The Black Swan) and his coauthors argue that conventional risk-management textbooks don't prepare us for the real world. For instance, no forecasting model predicted the impact of the current economic crisis. Managers make six common mistakes when confronting risk: They try to anticipate extreme events, they study the past for guidance, they disregard advice about what not to do, they use standard deviations to measure risk, they fail to recognize that mathematical equivalents can be psychologically different, and they believe there's no room for redundancy when it comes to efficiency. Companies that ignore Black Swan (low-probability, high-impact) events will go under. But instead of trying to anticipate them, managers should reduce their companies' overall vulnerability.

Today's sky-high personal debt levels portend a freeze in consumer spending and a rise in defaults. They could threaten your company - even if you don't sell to consumers. Two experts explain how to calculate your firm's risk.

In this edited conversation with HBR senior editor David Champion, Merton, a professor at Harvard Business School, casts light on the role of derivatives in the current financial crisis. Merton was awarded the Nobel Prize in 1997 for his part in developing a new method to value derivatives, and after publication of that development, the markets in derivatives exploded: Today, the estimated notional value of derivative contracts exceeds $500 trillion. Merton posits that derivatives themselves cannot be the cause of a financial crisis. They are simply tools that can be used either functionally (to reduce risk) or dysfunctionally (in ways that increase risk without offsetting benefits). He also offers prescriptions for making the financial markets safer.

With consumers tightening their belts, many premium brands are losing market share to low-price rivals. Their managers face a classic conundrum: Should they tackle the threat head-on by cutting prices and risk damaging their profits and brand equity? Or should they hold the line and lose customers who might never come back? Faced with those two unpalatable alternatives, companies often turn to a third option: launching a fighter brand. A fighter brand is designed to protect a premium offering by combating, and ideally eliminating, its cheaper competitors. The textbook example is Busch beer, which Anheuser-Busch introduced in 1955 at half the wholesale price of Budweiser. Busch fended off the inexpensive regional beers that were eating into Bud's sales and, even better, opened up a brand-new market segment for the company. Unfortunately, such victories are rare. Too many fighter brands inflict little damage on their targets and instead cause significant collateral losses for the companies that initiate them. What trips them up? Cannibalization of the premium product's sales, failure to create an offering that can compete, unprofitability, inattention to consumer needs, and drains on management's time and resources. With detailed accounts of campaigns lost - and occasionally won - Melbourne Business School's Ritson explains how to avoid those major hazards and launch an offering that wins on all fronts.

Evaluating a company's performance often entails wading through a thicket of numbers produced by a few simple metrics, writes the author, and senior executives leave measurement to those whose specialty is spreadsheets. To take ownership of performance assessment, those executives should find qualitative, forward-looking measures that will help them avoid five common traps: Measuring against yourself. Find data from outside the company, and reward relative, rather than absolute, performance. Enterprise Rent-A-Car uses a service quality index to measure customers' repeat purchase intentions. Looking backward. Use measures that lead rather than lag the profits in your business. Humana, a health insurer, found that the sickest 10% of its patients account for 80% of its costs; now it offers customers incentives for early screening. Putting your faith in numbers. The soft drinks company Britvic evaluates its executive coaching program not by trying to assign it an ROI number but by tracking participants' careers for a year. Gaming your metrics. The law firm Clifford Chance replaced its single, easy-to-game metric of billable hours with seven criteria on which to base bonuses. Sticking to your numbers too long. Be precise about what you want to assess and explicit about what metrics are assessing it. Such clarity would have helped investors interpret the AA ratings involved in the financial meltdown. Really good assessment will combine finance managers' relative independence with line managers' expertise.

People in professional services believe a 24/7 work ethic is essential for getting ahead - and so they work 60-plus hours a week and stay tethered to their BlackBerrys. This perpetuates a vicious cycle: Responsiveness breeds the need for more responsiveness. When people are always "on," responsiveness becomes ingrained in the way they work, expected by clients and partners, and even institutionalized in performance metrics. There is no impetus to question whether the work actually requires 24/7 responsiveness; on the contrary, people work harder and longer, without stopping to explore how they could work better. But four years of research conducted by the authors in several North American offices of the Boston Consulting Group suggests that consultants and other professionals can provide the highest standards of service and still have planned, uninterrupted time off. They can do this even in times of recession. In this article, Perlow and Porter outline the lessons from BCG's implementation of predictable time off - namely, impose a strict mechanism for taking days and nights off, encourage lots of talk about what's working and what isn't, promote experimentation with different ways of working, and insist on top-level support.

An international assignment can be among the most exciting and challenging transitions that an aspiring leader can undertake. With the right planning and attitudes, taking on that kind of leadership role can stretch capabilities, challenge assumptions, and steer both people and profits in a positive direction. But an expat assignment can also be a harrowing journey. Indeed, if they've never made an international move before, emerging leaders can fall into common traps that can severely stress their family bonds, negatively affect their performance at work, damage their businesses, and even lead to outright career derailment. In this article, Clouse, the managing director of Kraft Foods Brazil, and Watkins, the author of The First 90 Days: Critical Success Strategies for New Leaders at All Levels, offer three best practices for handling the personal-change challenges that go along with an overseas assignment. Settling the family in, adapting your communication style, and ensuring that you understand the new regulatory environment you're operating in are all critical for a successful transition, they advise.

The mergers that thrive postrecession will be those that focus not just on the numbers but on integrating and motivating employees. To extract lessons on how to manage the human side of M&A, Harvard Business School's Kanter studied a dozen deals that overcame the usual barriers to success: employee shock, protests, and anxiety, all of which can fuel supplier unrest, government disapproval, and customer defections. Procter & Gamble, for instance, faced the prospect of "blood on the floor" in its ranks when it bought Gillette, because headhunters went after Gillette managers. Yet P&G managed to retain a large percentage of them, and it enlisted employees in keeping suppliers, distributors, and customers happy. The company met cost and revenue targets within the first year, incorporated Gillette's superior go-to-market processes, and continued to position itself for growth even as the current recession loomed. Kanter highlights the key strategies behind effective integration by describing practices at P&G and two other companies: CEMEX, which needed to transfer know-how to acquired employees so they could absorb its processes quickly and meet global standards, and Publicis Groupe, which treated its mergers like reverse takeovers, allowing acquired talent to take the lead in building new capabilities.

For decades, General Electric and other industrial-goods manufacturers based in rich countries grew by developing high-end products at home and distributing them globally, with some adaptations to local conditions - an approach known as glocalization. Now they must do an about-face and learn to bring low-end products created specifically for emerging markets into wealthy markets. That process, called reverse innovation, isn't easy to master. It requires a decentralized, local-market focus that clashes with the centralized, product-focused structure that multinationals have evolved for glocalization. In this article, Immelt, GE's CEO, and Govindarajan and Trimble, of Dartmouth's Tuck School of Business, describe how GE has dealt with that challenge. An anomaly within the ultrasound unit of GE Healthcare provided the blueprint. Because China's poorly funded rural clinics couldn't afford the company's sophisticated ultrasound machines, a local team built a cheap, portable ultrasound out of a laptop equipped with special peripherals and software. It not only became a hit in China but jump-started growth in the developed world by pioneering applications for situations where portability is critical, such as at accident sites. The team succeeded because a top executive championed it and gave it unprecedented autonomy. GE has since set up more than a dozen similar operations in an effort to expand beyond the premium segments in developing countries - and to preempt emerging giants from disrupting GE's sales at home.

With an eye toward prevention, many companies are having their top managers undergo pricey, comprehensive physical exams, complete with full-body CT scans. As imaging technology continues to get better and safer, the day may come when screening healthy people is worth the costs and the risks - but we're not there yet.

Cisco Systems has plenty of experience developing new technology internally; it has also proved adept at growing its product offerings through targeted acquisitions of tech start-ups. Not too long ago, the company began running an internal innovation competition, offering cash rewards for the best new product ideas. After a few years, though, Cisco sought to reach beyond its walls to see what sorts of ideas - and different perspectives - the wider world had to offer. In late 2007, it announced the I-Prize competition. The goal was to build a new billion-dollar Cisco business around the winning idea to emerge from among many outside contributions. The contest called for an idea that would align with Cisco's strategy and take advantage of its leadership position in internet technology. A total of more than 2,500 people from 104 countries registered on the I-Prize website and submitted more than 1,200 ideas. After a challenging, nearly year-long process of winnowing and evaluation, an in-house judging panel chose an idea for creating a "smart" electricity grid - a natural fit with Cisco's competencies and long-term strategy. In this article, I-Prize impresario Jouret, chief technology officer of Cisco's Emerging Technologies Group, describes the experience of dealing with the unexpected complexities - and labor-intensiveness - of crowdsourcing: "The misconception about crowdsourcing is that merely by turning on a website and putting up a reward, in no time you'll have recipes for cold fusion by the bucket load. That's not what happens."

As a market, women represent an opportunity bigger than China and India combined. They control $20 trillion in consumer spending, and that figure could reach $28 trillion in the next five years. Women drive the world economy, in fact. Yet most companies do a remarkably poor job of serving them, a new study by the Boston Consulting Group reveals. BCG surveyed more than 12,000 women from a variety of geographies, income levels, and walks of life about their education, finances, homes, jobs, activities, interests, relationships, hopes, and fears, as well as their shopping behaviors and spending patterns. In this article, Silverstein and Sayre, two of the firm's partners, review highlights of the findings and explain the biggest opportunities. While any business would be wise to target female consumers, they say, the greatest potential lies in six industries: food, fitness, beauty, apparel, health care, and financial services. Address women's concerns effectively, and your company could see the kind of rapid growth that fitness chain Curves enjoyed. Most health clubs are expensive and designed for men, with lots of complicated body-building equipment. Curves, however, understood that time-pressed women needed quick, affordable workouts, and came up with the concept of simple, 30-minute exercise routines geared to women and offered in no-frills spaces. Companies that likewise successfully tailor their offerings to women will be positioned to win when the economy begins to recover.

When companies pursue sustainability, it's usually to demonstrate that they are socially responsible. They expect that the endeavor will add to their costs, deliver no immediate financial benefits, and quite possibly erode their competitiveness. Meanwhile, policy makers and activists argue that it will take tougher regulations and educated, organized consumers to force businesses to adopt sustainable practices. But, say the authors, the quest for sustainability can unearth a mother lode of organizational and technological innovations that yield both top-line and bottom-line returns. That quest has already begun to transform the competitive landscape, as companies redesign products, technologies, processes, and business models. By equating sustainability with innovation today, enterprises can lay the groundwork that will put them in the lead when the recession ends. Nidumolu, Prahalad, and Rangaswami have found that companies on the journey to sustainability go through five distinct stages of change: (1) viewing compliance as opportunity; (2) making value chains sustainable; (3) designing sustainable products and services; (4) developing new business models; and (5) creating next-practice platforms. The authors outline the challenges that each stage entails and the capabilities needed to tackle them.

Trying to keep up with the world's insatiable appetite for energy, scientists and entrepreneurs are exploring six innovative concepts: high-altitude wind turbines, genetically engineered algae for biofuel, wave power from the ocean, nuclear fusion, enhanced geothermal systems, and solar cells in space. They all have serious backing; not one is a sure bet.

Rapid advances in technology and enormously increased numbers of cell phones in use in emerging markets give urgency to Nokia's newly launched effort to expand its worldwide phone-recycling initiatives. Ambrish Bakaya explains, in this interview with HBR associate editor Andrew O'Connell.

When executives develop corporate strategy, they nearly always begin by analyzing the industry or environmental conditions in which they operate and the strengths and weaknesses of the players they are up against. They then set out to carve a distinctive strategic position from which they can outperform their rivals by building a competitive advantage. The underlying logic here is that a company's strategic options are bounded by the environment. In this structuralist approach, structure shapes strategy. But as Kim and Mauborgne, the authors of Blue Ocean Strategy, point out, history reveals plenty of situations in which firms' strategies shaped structure - from Ford's Model T to Nintendo's Wii. For the past 15 years, the authors have been developing this reconstructionist approach into the blue ocean strategy, which reflects the fact that a company's performance is not necessarily determined by an industry's competitive environment. In this article they explain the key differences between the two approaches, identify the circumstances under which each one is appropriate, and discuss cases of blue ocean strategies. The authors conclude by observing that most large and diversified businesses operating in multiple industries will need to learn to apply both approaches, depending on the strategic needs of their various units.

The value of information in the knowledge economy is indisputable, but so is its capacity to overwhelm consumers of it. HBR contributing editor Hemp reports on practical ways for individuals and organizations to avoid getting too much of a good thing. Ready access to useful information comes at a cost: As the volume increases, the line between the worthwhile and the distracting starts to blur. And ready access to you - via e-mail, social networking, and so on - exacerbates the situation: On average, Intel executives get 300 e-mails a day, and Microsoft workers need 24 minutes to return to work after each e-mail interruption. Clearly, productivity is taking a hit. Technological aids can help, such as e-mail management software for you, a message-volume regulation system for your organization, or even more sophisticated solutions being developed by Microsoft, IBM, and others. Yet, battling technological interruptions on their own turf only goes so far. You also need to change your mind-set, perhaps by seeking help from personal-productivity experts or by simply accepting that you can't respond to every distraction that flits across your screen. Similarly, organizations must change their cultures, for instance by establishing clear e-communication protocols. In the end, only a multipronged approach will help you and your organization subdue the multiheaded monster of information overload. The secret is to manage the beast while still respecting it for the beautiful creature it is.

As a business broadens over time, it can lose the operational edge that led to its original success. Core strengths atrophy, efficiency or quality suffers, and sharper rivals close in to take advantage of the loss of focus. In his classic article "The Focused Factory" (HBR May-June 1974), Wickham Skinner proposed that manufacturers whose product lines had proliferated create specialized units, each dedicated to a distinct task. To make this economically feasible, he suggested the plant within a plant, or PWP, model, whereby an existing facility is physically and organizationally divided into autonomous operations. Many organizations - from airlines to hospitals to department stores - have since adopted the model, in the form of focused units that share people, equipment, and other assets to some extent. But they've found it difficult to implement. That's because, the author writes, they don't give every unit narrowly defined objectives; they underestimate the challenges related to sharing resources; they don't fully consider to what degree best practices, knowledge, and talent should be shared; and they don't anticipate the political tensions that can arise. Huckman provides guidelines for setting clear objectives, getting the boundaries between units right, establishing rules for sharing, and customizing performance criteria. And, he says, leaders must continually remind units of their individual and collective goals and purposes whenever decisions about resources, performance measurement, and compensation are made.

Wall Street may have ignited the outrage over executive compensation, but it's now affecting all public companies. Believing that corporate pay practices encourage excessive risk taking, policy makers feel compelled to intervene, and shareholders are angrily demanding input. The battle will rage in boardrooms and annual meetings for years, and it won't be pretty. A bill that will give shareholders a "say on pay" is winding through Congress, and if passed, could affect how U.S. companies pay key employees - and perhaps open other operational decisions to shareholder approval. That would hamstring companies competitively, some argue. Complicating matters, the experts are deeply divided on how to tie pay to performance. Moreover, past attempts to regulate pay spurred companies to find loopholes, such as bonuses, deferred compensation, and huge hidden perks that weakened the link between compensation and company results. Though the answers aren't clear, the practices of household products maker Reckitt Benckiser offer a potential model. Reckitt has overhauled compensation throughout its ranks, linking performance-based pay for all executives to economic value added to the business. No one receives a bonus for individual performance; a separate long-term incentive program rewards individual performance with shares and options, which vest only if the company grows earnings per share by more than 30% for three years. This simple system helped Reckitt turn itself around and generate strong growth - and the executives, in turn, have been well paid for their efforts.

You are leading a negotiating team for your company. When you sit down with the other party, someone on your side of the table blurts out: "Just tell us - what do we need to do to get more of your business?" And in that moment, you know you've lost the upper hand. Gaffes like this are more common than most businesspeople would care to admit, management professors Brett, Friedman, and Behfar have found in their research. Even though team members are all technically on the same side, they often have different priorities and imagine different ideal outcomes: Business development just wants to close the deal. Finance is most concerned about costs. Legal is focused on patents and intellectual property. The authors recommend taking four steps, either singly or in tandem, to align those goals: Map out each person's priorities, work out conflicts directly with departments, employ a mediator if that doesn't work, and use data to resolve differences. Once you are all on the same page, you can take steps to make sure everyone is coordinated during the negotiations themselves. Try simulating the negotiation beforehand, assigning roles to team members that take advantage of their strengths, and establishing the signals you will use to communicate with one another during the session. The payoff from working as a cohesive group is clear. With access to greater expertise and the ability to assign members to specialized roles, teams can implement more complex strategies than a sole negotiator could ever pull off.