Exit Barriers

Definition

Exit barriers are obstacles or factors that make it difficult for a firm to leave a particular industry or market. These barriers can discourage a firm from exiting even when the industry or market is no longer profitable or desirable for the firm to operate in, as the costs and difficulties of exiting may outweigh the benefits.

5 Must Know Facts For Your Next Test

1. Exit barriers can include financial, strategic, and emotional factors that make it difficult for a firm to leave an industry or market.
2. Sunk costs, such as investments in specialized equipment or infrastructure, can be a significant exit barrier, as the firm cannot recover these costs if it decides to exit.
3. Asset specificity, where a firm's assets have little to no value outside of the current industry, can create a major exit barrier.
4. High switching costs for customers or clients can make it difficult for a firm to exit an industry or market, as the firm may lose a significant portion of its customer base.
5. Emotional factors, such as a firm's attachment to a particular industry or market, can also contribute to exit barriers and make it challenging for the firm to make a rational decision to exit.

Review Questions

• Explain how sunk costs can act as an exit barrier for a firm.
  • Sunk costs are investments that a firm has already made and cannot recover if it decides to exit an industry or market. These costs, such as investments in specialized equipment or infrastructure, can create a significant exit barrier for a firm. The firm may be hesitant to exit the industry or market because it would mean losing the value of these sunk costs, even if the industry or market is no longer profitable or desirable for the firm to operate in. The inability to recover these sunk costs can discourage the firm from making the rational decision to exit, as the costs and difficulties of exiting may outweigh the potential benefits.
• Describe how asset specificity can contribute to exit barriers.
  • Asset specificity refers to the degree to which a firm's assets are specialized for a particular industry or market. Highly specific assets can create exit barriers for a firm, as these assets may have little to no value outside of the current industry or market. If a firm has invested heavily in assets that are only useful in the current industry or market, such as specialized equipment or facilities, it may be very difficult for the firm to exit and find alternative uses for these assets. The lack of alternative uses and the potential loss of value associated with these specialized assets can make it challenging for the firm to make the decision to exit, even if the industry or market is no longer profitable or desirable for the firm to operate in.
• Analyze how high switching costs for customers or clients can create exit barriers for a firm.
  • High switching costs for customers or clients can create a significant exit barrier for a firm. If a firm's customers or clients would incur substantial costs or difficulties in transitioning to a different product, service, or supplier, they may be reluctant to do so. This can make it challenging for the firm to exit the industry or market, as it may lose a significant portion of its customer base if it decides to leave. The firm may be hesitant to exit because it would risk losing these customers, even if the industry or market is no longer profitable or desirable for the firm to operate in. The potential loss of a substantial customer base, and the associated revenue and market share, can act as a powerful deterrent for the firm to make the decision to exit, despite the industry or market conditions.

Related terms

Sunk Costs: Sunk costs are investments that a firm has already made and cannot recover if it decides to exit an industry or market. These costs can act as a significant exit barrier.

Asset Specificity: Asset specificity refers to the degree to which a firm's assets are specialized for a particular industry or market. Highly specific assets can create exit barriers, as they may have little to no value outside of the current industry.

Switching Costs: Switching costs are the costs a firm or customer would incur in order to transition from one product, service, or supplier to another. High switching costs can make it difficult for a firm to exit an industry or market.