Published on July 7, 2014

The following are from best selling author and business guru, Jim Collins:

Stage 1. Hubris born of success. Insulation and momentum; arrogant and entitled to success. Decline often follows because executives underestimate the role of luck in their success, and overestimate their abilities. The smart managers know that any profits in excess of the industry average are anomalies that will soon disappear, and they better get strong today to fend off the inevitable competitors.

Stage 2. Undisciplined pursuit of more. Lack of discipline leads to attempts to grow beyond what is sustainable, given the company’s financial and organizational resources. Lack of discipline leads to deviating from the core values, entering lines of business not tied to the strategy, deciding on projects that benefit management, not the corporation.

Stage 3. Denial of risk and peril. Early warning signs are ignored. Subordinates who bring up the company’s financial or operational weaknesses are called “negative” and excluded from important decisions.

Stage 4. Grasping for salvation. Finally the company’s condition can no longer be hidden. How does management respond? Rationally? Or lunging from one extreme solution to the next, all of which depend on events with low probability of occurring.

Stage 5. Capitulation to irrelevance or death. Collins writes, “The longer a company remains in stage 4, the more likely it will spiral downward.” This often occurs when companies cannot pass the Viability Tests but still undertake the turnaround attempt. These firms waste their last remaining cash on an unrealistic business plan.

Read more: Practical Turnaround Management

Watch Tommy Boy illustrate the five points: