We now come to our fifth and final installment: Capitulation to Irrelevance or Death.

“Irrelevance” is a subtle touch.

It’s a fair bet that not too many readers of Adam Smith, Esq. see themselves as, or would be content to be, spending their working hours at an “irrelevant” firm. On a certain view, a firm’s “death” might even be preferable, having the virtue of clarity and forcing one to move on. Biding one’s time on the marginalized fringe isn’t my idea of a career, or a life, but I would invite you to ponder for a moment the various ways inertia, familiarity, distractedness, short-run ease, and subconscious reluctance to venture forth can effectively sentence some to that fate.

In a way, “irrelevance” is what’s afflicting a formerly iconic Silicon Valley company much in the news this very week—I refer of course to Yahoo, which back in its heyday was as much in the forefront of Americans’ online life as Google, Facebook, Amazon, and Netflix are today. Who would want to work there? Who among those who deem themselves in the cognoscenti would want to have an email address “@yahoo.com”?

Collins identifies two “basic versions” of stage 5: (1) those in charge come to believe that capitulation is more realistic than continuing to fight; or (2) they continue the struggle in desperation until they flat run out of options and the firm either collapses utterly or pales into (you guessed it) irrelevance. This is what Collins has to say about firms that get all the way to stage 5:

No company we studied was destined to fall all the way to Stage 5, and each company could have made different decisions earlier in the journey to reverse its downward slide. But by the time a company has moved through Stages 1, 2, 3, and 4, those in power can become exhausted and dispirited, and eventually abandon hope. When you abandon hope, you should begin preparing for the end.

Hope is great, don’t get me wrong. (I’m a blue-blooded American, after all.) But to paraphrase, “that and a Metrocard will get you on the subway.” In other words, you also need resources, namely cash. Bill Lazier, the late legendary Professor at Stanford Business School and then at Stanford Law School, taught a course, “What Lawyers Should Know about Business,” where he would push students to identify the “central issue in the case” of a failing company. Answers along the lines of “strategic choices,” “developing the brand,” “delivering value,” etc., were typically offered up until an improbably contrarian student would finally volunteer something to the effect of, “I’m not sure this is what you’re looking for, but they’re going to run out of cash.”

Bingo.

But the lesson of Stage 5 is not just one of a brutal end when the cash dries up and the lights go out. The real lesson is how to keep from getting to the point where you have run out of options.

To demonstrate, Collins contrasts Zenith, the once-upon-a-time iconic US TV manufacturer, with Xerox, the once-upon-a-time iconic US copier manufacturer.

Zenith

Had you invested $1 in Zenith in 1950, by 1965 it would have been worth $100. The company owned the US black and white TV market and soon overtook RCA to also be the #1 manufacturer of color TV’s. Entering “hubris born of success,” however, they dismissed the upstart entrants from Japan. (Collins reminds us of their famous slogan, “Zenith—the quality goes in before the name goes on.”)

They entered Stage 2 in the late 1960’s, investing in such an enormous increase in manufacturing capacity that their debt:equity ratio rose to 100%. Stage 3 was next, denial of risk and peril, when they suddenly found they had excess capacity, dropped prices in a battle for market share, took on more debt, and blamed their plummeting profit margins on everything from supposedly unfair Japanese trade practices to the 1973 Arab oil shock.

Stage 4, grasping for salvation, came in the late 1970’s when a senior Zenith executive told Business Week, “If we have any plan at all, it’s that we’ll take a shot at everything”—and they did: VCRs, videodiscs, telephones linked to TVs, cable TV boxes, PC’s, and more.

Salvation almost materialized: Jerry Pearlman, a cum laude Princetonian with a Harvard MBA (top 2% of his class), led the brand new Data Systems division to #2 maker of IBM-compatible PCs and even staked out a lead in the novel market for laptops. During the decade of the 1980’s, Data Systems’ revenue grew thirtyfold and accounted for nearly all the company’s profits. Unfortunately, the company had never jettisoned or simply shuttered the TV business. Cash on hand fell to under 5% of current liabilities and Pearlman (by now CEO) had no choice but to sell the computer business to French Bull Corporation—whose CEO later commented that when the deal was struck, Pearlman looked exhausted and relieved. After five CEOs in the next 10 years, Zenith collapsed into bankruptcy.