Barriers to Exit Definition
Barriers to exit are restrictions that make it difficult for a company to make an exit from the industry in case they want to separate, or stop operating. The most common barriers to exit involve specialized assets that cannot be sold easily, big exit costs associated with writing off assets, thereby creating problem in selling a portion of it. Losing customer goodwill is considered to be another commonly known barrier to exit.
A Little More on What is a Barrier to Exit
There are many reasons due to which a firm can think of making an exit from an industry. Sometimes, the inefficiency of the company to have a strong market share, or inability to earn profits can influence its decision of exiting the market. Due to the changing scenarios of a specific market, a company can be left with the option of making an exit from the market. However, there are rules and policies that prevent them from taking such decision.
For instance, if a retailer identifies non-performing stores or showrooms in a particular location, especially if there is prevailing competition, then he or she may opt for exiting the market. Also, he or she can take an exit from one place, and switch to a new location that offers more profits, has a large customer base, and better opportunities. However, the retailer, having entered in a lease agreement, may not find it feasible to discontinue their operations in the existing places.
It is possible that tax exemptions provided by the government to do business at a specific location might be a temptation for a firm to open a store there. However, such privileges are followed by high penalty fees in case the firm plans to close its business prior to accomplishing the terms and conditions mentioned in the agreement.
Due to high barriers to exit, the company may have the only of continuing operating in the industry that ultimately makes competition stronger. For instance, in specialized manufacturing sector, a company needs to make huge investments for buying an equipment that is capable of performing one function. In case, a specialized producer wants to make a switch to another type of business, he or she may not find it feasible to do owing to large investments already made in purchasing the equipment. For switching to a new line, they need to at least cover their costs incurred in establishing the business.
Firms operating in heavy industry may find it challenging to leave the market because of high cleanup costs associated with the factory or manufacturing facility for using or producing materials that left stains onsite. The costs involved in cleaning up the site can be more than the benefits that the company would receive from relocating its operations or business.
Reference for “Barriers to Exit”
Academics research on “Barriers to Exit”
Market exit and barriers to exit: Theory and practice, Karakaya, F. (2000). Market exit and barriers to exit: Theory and practice. Psychology & Marketing, 17(8), 651-668. This article examines market exit, barriers to exit, modes and strategies of exit, reasons for exit, and the consequences of exit through a literature review of the academic literature and the popular press. There is very little empirical research in this area. The article attempts to analyze the applications of market exit and barriers to exit theories, and consequences of exit with recent examples taken from newspapers and popular business magazines. Despite the fact that there are strong barriers to exit, companies are sometimes forced to exit markets. Market‐exit or product‐elimination decisions influence employees, distributors, suppliers, and customers. This influence is usually negative and is in the form of cognitive dissonance. © 2000 John Wiley & Sons, Inc.
Please note location of nearest exit: Exit barriers and planning, Porter, M. E. (1976). Please note location of nearest exit: Exit barriers and planning. California Management Review, 19(2), 21-33.
Exit barriers and vertical integration, Harrigan, K. R. (1985). Exit barriers and vertical integration. Academy of Management Journal, 28(3), 686-697. When exit barriers trap firms in an industry, the result is destructive competition and reduced profits (Harrigan, 1981; Porter, 1976). Mobility barriers often prevent firms from changing their strategic postures so as to serve new customers (Caves & Porter, 1976). For the purposes of this paper, the term exit barriers will refer to both mobility and exit barriers. High barriers of either type are likely to keep firms operating within an industry without changing their strategic posture even when they earn subnormal returns on their investments. Vertical integration, the in-house production of goods and services that could be purchased from outsiders, has been regarded as a major source of exit barriers (Porter, 1980). No one has established the relationship between integration and exit barriers empirically, however, primarily because of an absence of appropriate variables in existing data bases (Caves & Porter, 1976; Harrigan, 1980). Moreover, a precise way of identifying and estimating the dimensions composing vertical strategies was lacking until recently (Harrigan, 1983a). Consequently, only a partial model of the forces that raise exit barriers has been tested. This paper brings together questions concerning exit and mobility barriers with those concerning vertical integration strategies in order to explore whether and when vertical integration constitutes an exit barrier. By identifying how the operative forces interact, it suggests how firms might cope with situations in which vertical integration can raise exit barriers. If firms can lower the height of exit barriers, they can reposition themselves to serve more attractive market segments or to exit with relative ease.
The effect of exit barriers upon strategic flexibility, Harrigan, K. R. (1980). The effect of exit barriers upon strategic flexibility. Strategic Management Journal, 1(2), 165-176. The conceptual construct, exit barriers, is expanded using both statistical findings and the results of field studies. The immobility of resources, it is suggested, can be overcome by helping marginal competitors to exit from potentially volatile businesses. The implementation of such tactics can be adapted to the firm’s own strategic commitment and to the nature of the business in question, although it is expected that firms which might consider purchasing the physical and intangible assets of competitors in order to help them to scale high exit barriers, must themselves perceive the business to be of sufficiently high strategic importance to do so.
Subjective barriers to prevent wandering of cognitively impaired people, Price, J. D., Hermans, D., & Evans, J. G. (2001). Subjective barriers to prevent wandering of cognitively impaired people. Cochrane Database of Systematic Reviews, (1).