Barriers to Exit are hindrances or barriers that stop a company from exiting a market in which it is considering a closure from where it wishes to separate.
The main barriers to exit include specific assets that are quite difficult to relocate or sell, and huge exit costs like closure costs and asset write-offs, and inter-related businesses. It makes it quite difficult to sell a part of it. One more common barrier to exit is the customer goodwill loss.
A company might choose to exit a market as it could be impossible to capture market share or get in a profit line or could be various other reason.
The business might be dynamic, or a market may change in a way that a company may see a spinoff at the affected operations and divisions. However, regulations, situations, or other obstacles may prevent such moves.
Consider, for example, a retailer who may wish to eliminate a failing store in a specific geographic market, when there no further growth. The retailer might also wish to leave a specific location to another location that provides high foot traffic or has access to customers with better financial condition.
Before making such move, the retailer might be locked into a lease with certain terms that make it excessive to shut down or leave into their current locations.
A company could receive many benefits like tax breaks and grants from local government that has encouraged it to set up its shop at a specific location. These kinds of incentives would have come with huge consequences in case the company attempts to update its operations before satisfying the obligations and terms that are set in the deal.
When a company sees a high barrier to exit, it might force itself to continue competing in the market by which means it can intensify the competition.
One example with high barriers to exit is specialized manufacturing as it requires a large up-front investment in equipment that could do only one task at a time.
In case a specialized manufacturer wants a switch in the business, they could be constraint with the money that has already been invested in the equipment cost. Unless those costs are recovered, there is a possibility that the company might not have any resources to take care of the new line of business.
Certain companies in heavy industries can face any extensive cleanup costs when they consider closing a production unit. The expense involved to remove that material might compensate for the benefit to relocating the operation.
In short, barriers to exit usually occur in a high niche or specialized industries.
Types of Barriers to Exit
Exit Barriers depends on the industry type and the reason for their exit. There are two main types of exit: Financial and Managerial.
1) Financial Exit Barriers
Consider the situation when the company has invested a lot of money in fixed assets, where it cannot be sold or transferred. In this case, the company will tend to struggle to get around this issue before they could pull out form the market.
On the other hand, the company also faces penalties from their contractors and suppliers as they end the agreement early. Even though it might not be expensive to the company, together it could be a hefty bill that might prevent the company from breaking agreements at the time of the withdrawal process.
2) Managerial Exit Barriers
When there is a winding down process, certainly the company must begin to lay off the employees. The package offered might be a great value in case the industry is specialized. However, it is a number game where individually the cost might not be great, but it can prohibit when the amount is tallied to a large amount.
How to Determine Exit Barriers?
There is a necessity to assess the exit barriers to exit after the assess of entry barriers. This is done by assuming that the business will have the chance at the time of starting first and is looking at the overall picture of the industry that the business will be competing against.
Even though it seems negative to look at it before the business has begun, it can be good to get an advanced warning of what is ahead in case you ever wanted to migrate to a new market and shift the direction of the business down the line.
Common Barriers to Exit
- Specialized assets – assets with values linked to a specific business or location
- Fixed costs of exit like labor agreements
- Strategic interrelationships – relationships of mutual dependence between a specific business and other parts of a company’s operation like shared facilities and financial markets access
- Emotional barriers like career concerns, the loyalty of employees, etc
- Government and social restrictions
Exit Barriers are very important aspects of the marketability to respond and to adapt to any circumstances. The flexibility is important for the effective performance of a market, especially where there is a substantial change.