Exit Barriers
EXIT BARRIERS
Exit barriers are economic, strategic, and emotional factors that pre- vent companies from leaving an industry.9If exit barriers are high, companies be- come locked into an unprofitable industry where overall demand is static or declin- ing. The result is often excess production capacity, which leads to even more intense rivalry and price competition as companies cut prices in the attempt to obtain the customer orders needed to use their idle capacity and cover their fixed costs.10Com- mon exit barriers include the following:
● Investments in assets such as specific machines, equipment, and operating facili- ties that are of little or no value in alternative uses or cannot be sold off. If the company wishes to leave the industry, it has to write off the book value of these assets. ● High fixed costs of exit, such as the severance pay, health benefits, and pensions that have to be paid to workers who are made redundant when a company ceases to operate.
● Emotional attachments to an industry, as when a company’s owners or employ- ees are unwilling to exit from an industry for sentimental reasons or because of pride. ● Economic dependence on the industry because a company relies on a single in- dustry for its revenue and profit.
● The need to maintain an expensive collection of assets at or above some mini- mum level in order to participate effectively in the industry.
● Bankruptcy regulations, particularly in the United States, where Chapter 11 bankruptcy provisions allow insolvent enterprises to continue operating and re- organize themselves under bankruptcy protection. These regulations can keep unprofitable assets in the industry, result in persistent excess capacity, and lengthen the time required to bring industry supply in line with demand.
CHAPTER 3
External Analysis: The Identification of Opportunities and Threats
59
fixed costs
Costs that must be borne before the firm makes a single sale. exit barriers
The
Exit barriers are economic, strategic, and emotional factors that pre- vent companies from leaving an industry.9If exit barriers are high, companies be- come locked into an unprofitable industry where overall demand is static or declin- ing. The result is often excess production capacity, which leads to even more intense rivalry and price competition as companies cut prices in the attempt to obtain the customer orders needed to use their idle capacity and cover their fixed costs.10Com- mon exit barriers include the following:
● Investments in assets such as specific machines, equipment, and operating facili- ties that are of little or no value in alternative uses or cannot be sold off. If the company wishes to leave the industry, it has to write off the book value of these assets. ● High fixed costs of exit, such as the severance pay, health benefits, and pensions that have to be paid to workers who are made redundant when a company ceases to operate.
● Emotional attachments to an industry, as when a company’s owners or employ- ees are unwilling to exit from an industry for sentimental reasons or because of pride. ● Economic dependence on the industry because a company relies on a single in- dustry for its revenue and profit.
● The need to maintain an expensive collection of assets at or above some mini- mum level in order to participate effectively in the industry.
● Bankruptcy regulations, particularly in the United States, where Chapter 11 bankruptcy provisions allow insolvent enterprises to continue operating and re- organize themselves under bankruptcy protection. These regulations can keep unprofitable assets in the industry, result in persistent excess capacity, and lengthen the time required to bring industry supply in line with demand.
CHAPTER 3
External Analysis: The Identification of Opportunities and Threats
59
fixed costs
Costs that must be borne before the firm makes a single sale. exit barriers
The