Here is an excerpt of an article co-authored by Ram Charan and Michael Sisk for strategy+business magazine (February 7, 2011), published by Booz & Company. To read the complete article, check out other free online resources, and obtain subscription information, please click here.

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Sooner or later, most global business leaders will have to put their entire enterprise at risk. Here’s how to do it successfully.

Anatomy of a Strategic Bet

A strategic bet is a big, bold move made either to transform a company and create a new growth trajectory or to create a totally new enterprise. Almost all strategic bets are potential game changers for the company, its industry, and sometimes adjacent industries; indeed, strategic bets are so comprehensive that they tend to alter most of the company’s staff, processes, and practices. Such bets require serious commitment from leaders and boards. In almost all cases, especially if the strategic bet involves a highly visible action, such as a large acquisition, there will be concerns about how the market, the analysts, and the rating agencies will react. Nonetheless, strategic bets work only if management and boards have the confidence and stamina to sustain themselves until the outside world sees the merit of their decision — a period that could last five or 10 years.

There are at least three basic reasons for making a strategic bet:

1. To acquire a controlling interest in, or even a stranglehold over, critical resources or competencies. For example, in late 2010, several strategic bets were under way in the mining and metals industry. They were driven by competition among Chinese and Indian companies for the kinds of rare elements needed for new technologies — such as lithium, a metal expected to be in greater demand for the next generation of car batteries.

2. To escape a declining industry before others see its demise. Typically, this approach is taken when a company’s leadership recognizes that part of the business is being commoditized or for some other reason is about to lose value and pricing power. Instead of riding the industry down, the company sells the business to cut its losses and puts its efforts into something with more promise.

In 1996, Allied Signal CEO Lawrence A. Bossidy made exactly that sort of clear-eyed assessment of the company’s auto parts business, which was responsible for almost 15 percent of its total sales. The company sold off the lion’s share of its car parts business for $2.1 billion, moving instead to concentrate on aerospace and chemical products. Two years later, Bossidy led the purchase of Honeywell, which was about half the size of Allied Signal, for a stock swap worth approximately $14 billion, creating a goliath in the global aerospace and chemical products markets.

The strategic bet to escape a declining industry must not be confused with selling a business to simply rationalize operations. For example, many companies sell divisions with the assumption that the acquiring company will run them more efficiently, and to gain some cash in the process. Such divestitures are worthwhile, but unless the fate of the company is riding on their completion, they are not strategic bets.

3. To practice a form of large-scale entrepreneurship. This typically means acquiring companies, technologies, or core competencies needed to be successful in an emerging form of enterprise. For example, consider Bharti Airtel Ltd. It is the largest cellular service provider in India, with more than 120 million subscribers. Its global expansion strategy has been based on scale and efficiency: that is, acquiring customers with very low asset intensity (requiring little capital per dollar of revenue). This type of expansion can be risky, because it often requires extensive investment to move rapidly to gain first-mover advantage.

In 2009, Bharti Airtel’s management negotiated for months to acquire MTN Group Ltd., a South Africa–based multinational mobile telecommunications company operating in many Middle East and African countries. The Bharti Airtel–MTN deal was an enormous strategic bet; it was championed by Chairman Sunil Mittal, but investors and analysts opposed it, in part because of the debt financing involved. Mittal eventually called off negotiations, in the autumn of 2009, but only when the South African government withheld support for the deal.

Nonetheless, Mittal was undaunted by his critics. In June 2010, Bharti Airtel acquired Zain Africa for $10.7 billion. This branch of the Kuwaiti telecommunications company Zain had operations in 15 African counties; Mittal thus gained the foothold on that continent that he had missed with MTN. At about the same time, Bharti Airtel announced a deal to purchase 70 percent of Warid Telecom International Ltd. of Bangladesh. Analysts threw cold water on the plans, pressuring management and the board to abandon the strategy. But Mittal has resisted the pressure to withdraw; he has assembled a topnotch team of managers to go into the Middle East and Africa, and Bharti Airtel is clearly in it for the long term.

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To read the complete article, please click here.

Ram Charan is a Dallas-based advisor to boards and CEOs of Fortune 500 companies and the author or coauthor of 16 books, including the bestseller Execution: The Discipline of Getting Things Done (with Larry Bossidy; Crown Business, 2002), Boards That Deliver: Advancing Corporate Governance from Compliance to Competitive Advantage (Jossey-Bass, 2005), and The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation (with A.G. Lafley; Crown Business, 2008). Michael Sisk is a writer based in New York. He was a contributing writer on Merge Ahead: Mastering the Five Enduring Trends of Artful M&A, by Gerald Adolph and Justin Pettit (McGraw-Hill, 2009), and the editor of The Whole Deal: Fulfilling the Promise of Acquisitions and Mergers (Booz & Company, 2006).