How do you hang on to your best people -- and keep the faith of your directors and investors -- when you take a business risk that doesn't pan out? You take on even more risk and be clear with everyone that part of winning big in business is reckoning honestly with the potential for setbacks and reversals.

That's the lesson that Steve Chaddick, 49, senior vice president of systems and technology at Ciena Corp., learned from a wild two-year ride at one of the new economy's highest-flying companies. Ciena was one of the first companies to stake a claim in the optical-networking sector. Chaddick's team was first to market with what is now a critical technology: dense wave division multiplexing (DWDM). Carriers such as Sprint and WorldCom quickly became converts to the technology, which essentially increases bandwidth-transmission capacity across fiber-optic cables. In 1997, Ciena enjoyed the best-performing IPO of the year, more than doubling its share price. Meanwhile, senior executives snared a merger deal with Tellabs, an old-line telecommunications carrier in the Chicago area. Chaddick was on the merger team that spent more than four months shuttling back and forth between Chicago and Ciena's Maryland headquarters to sort out details and cultural matches with Tellabs.

But literally minutes before the two companies' shareholders were scheduled to vote on the merger, AT&T (without testing the products) decided not to close an expected contract to use Ciena's more-advanced DWDM offerings. Ciena's stock price collapsed, from more than $55 to barely more than $31. The company's business was fine: It was on track to make its revenue estimates, even without the AT&T contract. Regardless, three weeks later, Tellabs called Ciena to say that the merger was off. The stock price plunged again -- this time to $8. "We were stunned and angry about the situation," Chaddick says.

Faced with such a difficult situation, lots of public companies would have retreated -- cutting costs, scaling back their ambitions. But Chaddick and the leaders of Ciena harnessed their anger to take on an even bigger target: building a full-scale optical network themselves. As a result, not a single engineer left Chaddick's team. Then Ciena took another risk. It decided to acquire two companies that had the customers and the technology that Ciena needed in order to grow. By early 1999, Ciena had acquired Lightera Networks and Omnia Communications to create a full-service optical network with an optical-switching system. "People thought we were nuts," Chaddick says. "My philosophy is, 'Don't be afraid to think big.' "

To be sure, rebounding from a disaster does not mean mistake-proofing your company. It means acknowledging that there will be more setbacks in the future. Case in point: the Omnia acquisition. One of Omnia's technologies promised to help the company move its increased bandwidth closer not just to businesses but also to homes. But the architecture was flawed. So Chaddick and his team shelved the technology. "Most business cultures aren't capable of accepting error," Chaddick says. "We teach from the top down that sometimes, we will be wrong."

But Chaddick and his colleagues have been right far more often than they have been wrong. Ciena is now winning contracts from customers like Qwest Communications International. Two years ago, Ciena was in the DWDM market. Today, it's in four markets. Its customers have nearly tripled in number since 1998. And its stock price (adjusted for a split) has been higher than $300 per share. "This has been an impressive revival from the dead," says Paul Silverstein, senior communications and networking analyst at Robertson Stephens. "The fact that they were a cohesive group helped a lot."

Chaddick doesn't think of Ciena's staggering comeback as a revival from the dead -- he views it as a sensible way to respond to a business challenge. "There are only two ways to act," he says. "Make bold moves, knowing that some will work and some won't. Or make no moves, which guarantees that you'll be an also-ran."

Rekha Balu (rbalu@fastcompany.com) is a Fast Company senior writer. We're still waiting for her first big setback.

Sidebar: Resilience Rules

Andrew Shatté and his colleagues at Adaptiv Learning Systems, a consulting firm based in King of Prussia, Pennsylvania, teach people at such companies as Ford and Nortel Networks how to stay resilient in the face of adversity. It's an important skill for leaders to have at any time, but in a period of challenge and change, it is especially crucial. Here are some of the principles that they teach.