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Exit barriers make it difficult for companies to leave an industry, creating a barrier to mobility and potentially hindering market adaptations. Fixed assets, unique equipment, and personnel can create substantial barriers to exit. Companies may create their own exit barriers, which can become problematic when market conditions change. Approaches to dealing with exit barriers include adaptable factories and changing regulatory boundaries.
Barriers to exit are obstacles that make it difficult to exit a particular industry, forcing a company to stay in the market even if it wants to transition to a different market or close altogether. These represent an obstacle to mobility that can limit movements within an economy or market. Exit barriers can also potentially create a barrier to entry, serving as a disincentive to enter the market due to the high costs associated with exit.
Leaving a market can be costly; businesses may have obligations such as rent and payroll to meet and may not be able to afford closing costs. In addition, a company may have highly unique equipment and personnel that cannot be transferred to a new market. It can be difficult to sell complex equipment in a limited market where most companies already have what they need and don’t want someone else’s used specialty equipment. These fixed assets can create a substantial barrier to exit.
Some companies create their own exit barriers. This can be a strategic move to alert competitors that a company plans to establish and maintain a position in an industry and does not intend to leave. When market conditions change or a company wants to change focus, the barriers it has created can become a problem; a company may be locked into a special purpose facility that it cannot sell, for example.
In an industry with barriers to exit, companies can enter a static state under some market conditions. Their inability to leave the market can interfere with market adaptations and make it difficult to take advantage of changes in the business climate. It can also create a situation where stagnant companies weigh on the market because they cannot exit, while newer companies may face barriers to entry created by these companies. The existence of a large number of established companies in an industry can make invasion difficult.
Approaches to dealing with exit barriers vary. In some regions, companies are working on measures such as adaptable factories and equipment that can be repurposed for other uses. If a car company decides to stop making a certain model, for example, the machines used in its production could either be sold or moved to a different production line. Regulatory boundaries can also be changed through lobe and new legislative proposals, to facilitate the transition of companies between industries and markets.
Asset Smart.
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