Exit Barriers Framework
Barriers to exit
The framework considers the barriers that prevent firms from exiting a declining industry, including durable and specialized assets, fixed costs of exit, and strategic exit barriers.
- Durable and specialized assets create exit barriers
- Fixed costs of exit can prevent firms from leaving an industry
- Strategic exit barriers can prevent firms from exiting due to interrelatedness with other businesses
- Assess durable and specialized assetsDetermine the level of asset specialization and durabilityPro tipConsider the impact of asset specialization on the liquidation value of the firmWarningSpecialized assets can create significant exit barriers
- Evaluate fixed costs of exitAssess the fixed costs associated with exiting the industryPro tipConsider the impact of fixed costs on the effective liquidation value of the firmWarningFixed costs can create significant exit barriers
- Consider strategic exit barriersAssess the interrelatedness of the business with other businessesPro tipConsider the impact of interrelatedness on the firm's ability to exit the industryWarningStrategic exit barriers can prevent firms from exiting due to the potential impact on other businesses
Acetylene industry
The acetylene industry declined due to the rise of ethylene as a substitute. The industry's specialized assets created significant exit barriers.
OutcomeThe industry's profitability declined, and firms were unable to exit the industry due to the high exit barriers
Rayon industry
The rayon industry experienced a decline in demand due to the rise of synthetic fibers. The industry's fixed costs of exit created significant exit barriers.
OutcomeThe industry's profitability declined, and firms were unable to exit the industry due to the high exit barriers
Underestimating durable and specialized assets
Failing to consider the level of asset specialization and durability can lead to poor strategic decisions
Misjudging fixed costs of exit
Incorrectly assessing the fixed costs associated with exiting the industry can lead to inaccurate predictions about the firm's ability to exit
Overlooking strategic exit barriers
Failing to consider the interrelatedness of the business with other businesses can lead to missed opportunities for exit
The framework is based on the concept that exit barriers can prevent firms from leaving a declining industry, leading to decreased profitability and increased competition.
Source · BOOK
Competitive Strategy