Exit barriers are limitations that make it difficult for a business to leave the industry in the event that it wants to separate or cease operations. The most frequent exit barriers include specialized assets that are difficult to sell, significant exit costs related to writing off assets, or losing customer goodwill.
Common exit barriers
There are many common exit barriers to consider, including:
Environmental implications
There are times when a company leaving a certain industry has environmental effects that the company may need assistance to address. For instance, if a chemical company that makes herbicides decides to leave the market, there may be expensive cleanup costs. The business is likely required to pay any cleanup costs and fees associated with those cleanups from the Environmental Protection Agency, or EPA, if the company dumped waste in waterways or other natural areas. If damages occur, the EPA may impose sizeable fines that may serve as a barrier to the company’s ability to leave through financial pressure.
Tax or government incentives
Some companies are offered tax breaks or other government incentives to move to specific regions. Towns and cities may provide incentives to businesses in order to increase production and attract more jobs, which can be great reasons to establish a business there but can also act as an exit barrier. The company will no longer be eligible for those incentives if it exits that particular market. In some cases, tax incentives can have a significant impact on the earnings or salaries of a company and even help it stay in business.
Specialized equipment, tools or software
When a business has specialized hardware, software, or other resources for a particular market niche, those resources may act as a barrier. For instance, manufacturing businesses typically invest in or create specialized equipment to carry out only particular tasks. Because there is no possibility of repurposing this machinery, it typically requires a higher initial investment. This can be a barrier because the company might try to recoup some of the cost by renting the equipment to another company in the same industry, selling it, or dismantling it for parts.
Labor contracts or employee rights
When employees exercise certain rights or have long-term employment agreements, companies may encounter exit barriers. These agreements frequently include long-term payment guarantees and a certain volume of work. Normally, the business is forced to uphold such agreements because not doing so could lead to legal action or other problems. Employee rights may also prevent a business from quickly leaving a market, as they may be entitled to severance payments or notice of the business’s intention to leave.
Long-term contracts or project commitments
If a business accepts a long-term contract or project, it might not be able to leave the market until the project is finished. Project contracts specify the project’s completion and ensure that clients receive the services or goods they have paid for. Typically, breaking a contract or project agreement is not an option, particularly if the company’s executives want to keep in touch with any clients after leaving the sector.
Niche skills or products
Businesses occasionally develop specialized skills for designing or producing their goods and services. These abilities aren’t applicable to other industries, and they might prevent business executives from leaving a market due to a lack of alternatives. If company executives were unable to increase their market share, they might also have excess product stock, which would force them to stay in the market until they could find a buyer for the excess stock. To move inventory and get past the exit barrier posed by too much stock, leaders may turn to liquidation sales and discounts.
High fixed exit costs
Another exit barrier for businesses is high fixed costs. Included in this are any loans that the business takes out and eventually pays back, property and vehicle costs, as well as any investor and employee settlements. High fixed costs may prevent a company from leaving its industry until it can raise the money to pay the outstanding amounts or resolve any outstanding issues with investors or workers. This is among the most frequent reasons for businesses to stay in a sector, whether or not they make a profit.
What is a barrier to exit?
Any obstacles that prevent a company from leaving a market are known as exit barriers. For a variety of reasons, including a lack of innovation, a lack of employees, environmental concerns, or financial concerns, businesses frequently leave certain markets or industries. Businesses may encounter obstacles that call for specialized solutions to be overcome when leaving an industry, making the process of doing so a complex one.
Exit barriers as a positive opportunity
Exit barriers arent always a negative experience for a company. Some businesses restructure to become more market-adaptive when they are forced to stay in a sector by one or more exit barriers. This type of response can assist business executives in developing more specialized industry skills, becoming more adaptable, and utilizing the resources already at their disposal. For instance, if a manufacturer runs into exit barriers, they might restructure the business to produce a more specialized good, increasing their market share and luring new clients.
Examples of exit barriers
Here are some examples of exit barrier situations for context:
Example 1
In 2016, Tyran Steel LLC was established and started manufacturing steel rods for construction. Initial startup costs for the business were high due to the purchase of pricey steel-bending machinery and refinery equipment. Business leaders were unable to make a profit, so they decided to consider exit strategies. However, they ran into numerous obstacles, such as high fixed costs, specialized equipment, and employee labor contracts. Instead of going out of business, the company restructured its debt and devised a new strategy to start manufacturing steel drums for a nearby chemical company rather than rods.
Example 2
Drake Pesticides Inc. is a chemical pesticide company founded in 2002. It produces some herbicides and potent chemical pesticides for farmers in the area. The demand for Drakes products declined as these farmers gradually shifted to organic farming. Due to their pollution of the nearby waterways, the company thought about exiting but ran into a strong exit barrier. Its estimated $30 million in cleanup costs and EPA fines prompted a new filtration initiative to stop pollution. For the purpose of regaining its market share in agriculture, the company switched to producing organic fertilizers rather than pesticides.
Barriers to Exit Explained I A Level and IB Economics
FAQ
What are examples of exit barriers?
High exit costs, such as asset write-offs and closure costs, and highly specialized assets that may be challenging to sell or relocate are common exit barrier factors. If a company is heavily regulated or received tax breaks for relocating, the government may act as a barrier to exit.
What are the exit barriers of a company?
- Environmental implications. …
- Tax or government incentives. …
- Specialized equipment, tools or software. …
- Labor contracts or employee rights. …
- Long-term contracts or project commitments. …
- Niche skills or products. …
- High fixed exit costs. …
- Example 1.
What are the six barriers for entry exit?
Something that prevents or hinders a business from entering a market is known as a barrier to entry. Something that prevents or hinders a business from leaving an industry is known as an exit barrier.
